The ‘Ecosystem Society’ thesis, refers to an analytic framework helpful in making sense of blockchain ecosystems, and the social, financial, and technological levels of development inherent within each one. As blockchains have matured over time, the landscape of developing L1’s originally differentiated itself through fundamental ’technological design (EVM, Non-EVM, Modular, Sharded), from which different types of ‘ecosystems’ emerged. An ecosystem-society, refers to the collective development of the products, tokens, and people inside of the ecosystem. This may refer to an L1 blockchain, any Layer 2 or a protocol-dApp.
Haseeb Qureshi, Founder of DragonFly Capital, created the ‘city’ analogy, to help make sense of the evolution of different L1 ecosystems. Under his model, blockchains can be seen analogously to cities, specializing in different types of products and defined by particular cultures. The Lyrik Ventures ‘Ecosystem Society’ thesis is the evolution of Haseeb’s original ‘City’ analogy, and attempts to build upon his framework with additional analysis taking into account further developments in the sector.
The Ecosystem Society Thesis utilizes a framework which addresses the three main pillars of every blockchain ecosystem:
In this order, the thesis argues that ecosystem-societies, while only in their infancy, are the defining framework from which investors and builders alike can orient themselves in the landscape of blockchains, and repeatedly evaluate the tradeoffs of different L1 ecosystems or crypto based protocols.
In Haseeb’s original model of blockchain’s as cities, he uses the analogy of the city to help explain and predict the development trajectory of the landscape of blockchains. He explains how ‘roll-ups’ can be seen as a mechanism for ‘building up’ when space is limited, modular chains offer a ‘highway system’ of sorts between small towns, and, in Haseeb’s words, ‘new cities are opportunities to create different types of cities’ (implying different design structures, programming languages, and focus points). At the time of Haseeb’s writing (Jan. 2022) he limits his exposition to how these cities should evolve, to the following:
“Each new city requires another set of roads, another police station, a school, a hospital. In the same way, every new L1 requires another block explorer, another fiat onramp, a native AMM, an NFT marketplace. It’s redundant, but every L1 needs those basics to get off the ground.”
In context, most L1 ecosystems at the time of writing (Jan. 2022) were still relatively undeveloped, with many questions remaining as to the future product stack. In other words, we weren’t sure how a blockchain ecosystem might evolve, and what dependencies and infrastructure were essential in order for builders to bring dApps to market. Now, in 2024, we have a more robust landscape of L1’s and much deeper insight into what has or hasn’t worked for the evolution of different L1’s. This is the basis for expanding and improving upon Haseeb’s original thesis:
From Cities, we move to States…from preliminary infrastructure that helps differentiate blockchains from one another we move to define the three key sectors of every blockchain ecosystem that can help predict its level of development and long-term potential.
In our analogy, every blockchain can be seen as a ‘country’ in scale:
All of these different design points, provide a foundation for analyzing the strengths and weaknesses of a given ecosystem - focused on three core pillars of development:
This thesis attempts to articulate and justify why certain blockchains perform or evolve better than others. How does Cardano, a blockchain with minimal infrastructure and liquidity, reach a $21 billion dollar market cap? A strong service economy and soft power sector. Why does NEAR, a chain with the top three most active dApps in crypto, and the daily active users of any blockchain sit at a market cap that is roughly 10 times less than Solana? Because a poor service economy limits the growth potential of a burgeoning manufacturing base.
As we dive into the specifics and nuances of each sector, the predictive and analytical work ahead should become clear: Blockchains are countries, and ecosystems are societies, from which different ‘Levels’ of Development can be assigned. And just like in geopolitics, when societies ‘leapfrog’ entire technology progressions, we argue the same is the case for L1 ecosystems: A newer ecosystem can rapidly launch their DeFi or Gaming sectors by developing on-top-of innovation on other blockchains.
As the product stack of crypto has emerged in recent years, much discussion has revolved around ‘tech trees’ taken from the popular game Civilization. The logic of a tech tree is simple: In order for a product to be successful, it may presuppose or depend upon a prior technology or piece of infrastructure.
Here is a simple example: You need Oracles to make DeFi work, because without reliable pricing on-chain, no one can trade or lend in a timely manner. Conversely, you need token standards in order for third parties to issue different types of fungible, non-fungible, or semi-fungible value for their relevant dApps - No token standards and every builder is having to re-invent to the wheel to just build their dApp (not even bring it to market).
The manufacturing base of an L1 ecosystem, outlines the degree of technical development of the crypto product stack, in line with the dependencies inherent in every ‘tech tree’. Instead of designing the ‘tech tree’ in line with ‘use-cases’ we outline the product stack by order of dependency.
Level 1 refers to the most bare-bones essentials for any blockchain to be minimally usable. That refers to the following:
Base infrastructure is the level in which the blockchain becomes minimally usable to applications that can connect and interact with users, across different types of value:
Note: This foundational base infrastructure is often the basis of much more robust applications: Oracles for DeFi, Account Abstraction for User Onboarding, Non-Fungible Value and DAO Tooling for social / political components of any dApp, P2P Marketplace (as barter came before markets), a token generator for issuing tokens, and stable value to create the basis of liquidity.
Intermediate products emerged in the 2021 cycle, and demonstrated value creation and user-attraction with minimal design and dependencies:
Note: In Level 3 of the manufacturing base, the product stack is mature, but potentially not self-sustaining nor expansive. Many of these products are the basis from which more sophisticated and advanced solutions can be brought into an ecosystem.
Advanced products represent the current frontier of the crypto tech tree as of 2024. It refers to products that have multiple dependencies in order to be successful:
As an example: A successful network state most likely will require (1) DAO tooling, (2) Account Abstraction, (3) Fiat On and Off Ramps, (4) Non-Fungible Tokenization, (5) On-Chain KYC, and so forth.
A more practical example: Launching a Web3 Game seems to require a significant user-base, liquidity, and base-layer performance, not to mention on-and off ramps, as well as custody partners. And for that reason AVAX has seen tremendous growth in its Gaming sector, with deeply liquid stable coin markets, and strong institutional rapport.
The benefit of conceptualizing L1 ecosystems by development of their manufacturing base, is twofold: (1) For builders, it can help predict how a given dApp will perform in line with the level of development of the L1 in question. (2) For Foundations, using the manufacturing base model of development can help ‘centrally plan’ or ‘incentivize’ smart and efficient development of the ecosystem in question. In other words, it can be utilized to inform a potential development roadmap with supporting funding mechanisms.
A final important note has to do with the ownership of the different products in the stack: Many foundations have made the mistake in assuming that every piece of the product stack must be for-profit, independently managed teams that have to raise and build on their own. This is akin to ‘hyper-privatization’ in real-world economies. What would happen if a private entity controls the roads of a society, and the said entity goes bankrupt or becomes nefarious? There are similar parallels for the Stage 1 and Stage 2 Infrastructure of the blockchain tech tree. An ecosystem can prematurely destroy itself, by not guaranteeing access to base layer infrastructure for builders.
A final observation for Foundations interested in building out their ecosystem: Hire Urban Planners, Economic Historians, and 15 year olds who play Civilization. Bang for Buck it will be much more efficient and successful than MBA’s and CTO’s lacking social and political planning skills.
Many people in crypto have historically and still believe that the best tech (i.e. a strong manufacturing base) accrues the best market visibility, mind share, and eventually market cap. Economic history could not disagree more - especially in the early years of the rollout of a general purpose technology. The Service Economy sector refers to the token market, treasury management, and crypto-economic dynamics of a given blockchain ecosystem. It helps explain how Binance Smart Chain has performed so well since its launch (because of Binance’s close backing of Ecosystem tokens), or why Solana was able to astoundingly rebound from its deep market making ties with FTX.
The Service Economy section expounds an early framework for making sense of the ‘financial’ sector of every L1 blockchain (it is not hierarchical). It focuses specifically on the different ways in which the Native Token and any ecosystem tokens can be utilized to create more liquid and efficient markets into and out of the ecosystem in question.
The following checklist provides a high level overview of the different pieces of an ecosystem service economy:
Exchange listings: How accessible is the L1 blockchain token across exchanges around the world? Is the token positioned for a future ETF, index funds, or other structured products?
Liquidity: Inside the ecosystem, and in other ecosystems, how liquid and traded is the L1 blockchain token? This is akin to ‘currency reserves’ of modern state economies.
Custodians: How many custodians hold the base token of the ecosystem as well as the fungible, non-fungible, and semi-fungible standards? For builders to easily deploy tokens to investors and new users to safely interact with the blockchain, custody is essential.
Marketmakers: How well managed is the liquid token on exchanges, and is the token protected against downturns or sudden periods of volatility?
Token Volume: Across exchanges and DEX’s what is the 24 hour volume of the token?
Regulatory Planning: How is the token listed amongst regulators? Is there an active legal proceedings against the token deeming it a security? Has the token justified its existence for the long-term as a reliable asset, currency, or commodity?
Successful Ecosystem Tokens: What other tokens inside of an ecosystem have successfully fundraised, launched, listed, and currently trade at high volume on top tier exchanges?
State Finance: Is there an active Over the Counter (OTC) or Bond market (locked tokens) for the blockchain token in question? What does this say about the interest in the long-term value of the token over time?
Treasury Status: What is the balance of the ecosystem treasury? Is there diversification of other assets? How sustainable is the treasury management strategy in the event of a downturn?
Crypto-Economic Model and Design: How does long-term inflation or deflation impact token value? Is the token sustainably designed? Is there any event (lockup release, token issuance limit, etc.) that could affect the supply or demand of the token?
Decentralization of Network: How many nodes operate on the network? What is the reward rate for nodes? Is that sustainable over time, for development of the token price and interest in the network by node operators?
A final note on Service Economy Marketing: It is not the same as manufacturing base marketing. Every blockchain ecosystem must answer two questions: (1) Why Build On My Blockchain / In My Ecosystem? (2) Why Hold My Token? The second question is directly related to the service economy. Poor Service Economy marketing, can result in stagnant or poor token performance, in spite of marginal success in the other two key pillars of development.
A final observation on the Service Economy: Much of the ‘heavy lifting’ with launching and growing a token has to do with tedious listings, partnerships with market makers & custodians, planned treasury management, and dealing with market cycles and long-term token planning. The traditional CFO does not entirely fit this role as much as the Macro-Economist, Equity and Commodities Trader, or HedgeFund Manager. Every L1 treasury is essentially a Central Bank, despite also being the basis for developing the ecosystem itself. A diverse economic team, familiar with both the monetary and operational side of the token economy appears to be essential.
Investors and builders alike have heard through the grapevine that ‘community’ matters, and that ‘it is important to build a strong community for your project’. Yet very frequently, these same stakeholders are not explained why ‘community’ matters and on what timeline a community should be developed. The cultural soft power sector connects the role of community – from retail, to traders, to institutions – in its capacity to strengthen both the manufacturing base and the service economy of an L1 ecosystem.
Similar to how ‘brain drain’ to America, has ensured a ripe pool of talent for US industry over the past 50 years, a strong cultural soft power sector guarantees interest in both building inside of the L1 ecosystem (Manufacturing Base), as well as buying and holding the L1 token in question (Service economy).
This is the most intangible and under-developed sector of the ‘ecosystem society’ thesis, as few studies have been done on the development and success of a given community. Nevertheless we can indicate how soft power in L1 ecosystems impacts the brand and visibility of the ecosystem in question:
On A Retail Level: Every cycle newcomers look at Coinmarketcap and wonder what tokens they should hold, and why. They usually get their news from Twitter, but sometimes TikTok, Telegram, and Discord. In this social atmosphere, certain token narratives emerge above and beyond others. The L1 rotation of 2021 between Terra, Solana, and Avalanche is a case in point. The Twitter / Doge narrative is another example. While many narratives are manufactured, there is still a process by which invested stakeholders find a way to socialize with one another in persuading each other about the value of said ecosystem or token. This power of persuasion is well documented in economic history (see Deirdre McCloskey) and leads to tangible results. It almost always begins with grassroots enthusiasm (retail) - at hackathons or conferences - and traditional marketing approaches generally have much less of an impact than most think.
On An Institutional Level: In the middle of 2023, CNBC Money came on the Television, and Bitcoin and Ethereum charts were on the screen, next to… Solana. Anyone in crypto at the time would have been surprised: An L1 that took the brunt of the FTX collapse by both market cap and mindshare, still remains relevant in the eyes of investors? Why? Perhaps because Chamath discussed Solana back in the day on The All-In Podcast (among many others) , and FTX for all of its troubles did build a strong network of institutional exposure to a high performing and successful asset. The institutional level of soft power development in an L1 ecosystem combines the service economy sector with the ‘community’ when directed to institutions and investors. Today, thousands of family offices, hedge funds, and institutions are beginning to look at Coinmarketcap - just like retail: Why do they see value in some tokens over others? What determines that visibility on a community level? Who in the industry do they talk to, to inform their decisions? How do their decisions impact the influence they hold over builders and the teams they invest in?
Amongst Builders and Founders: If you worked in crypto during the 2020 - 2022 cycle, you were probably familiar with a time when everyone talked about going to build on Terra, or Thorchain. It was a migration of sorts, driven by an enthusiastic following of Do Kwon, or the unique potential of RUNE, respectively. In both cases, a community of token holders, founders, and investors helped build an image of these ecosystems that took on a life of its own.
While this pillar of our thesis remains in its infancy, we can say the following about catalysts that drive strong communities:
A final observation for developing the soft power sector of an L1 ecosystem, is to focus on the entertainment value of the personalities at the helm of an L1, or the vision of the ecosystem. Hiring TikTok influencers, and Twitter Anons, will likely go much farther than Web2 Finance and Tech bro’s, interested in spreadsheets and budgets. This speaks directly to the upcoming generation that is most actively engaged in crypto: Gen Z.
Importantly, the cultural soft power pillar is difficult to fully analyze due to the number of intangibles: It is the pillar in which the ‘straight line’ doesn’t bring the desired results, and the more sportive, visionary, and ‘weird’ an L1 can get, the better for its soft power and mindshare in the eyes of everyone.
This framework is meant to be practical in its application. Much work remains to be done in mapping out the existing L1 ecosystems to their relevant levels of development, and using hard metrics to evaluate and ‘score’ each sector's development. While that was not the goal of this initial thesis framework, we intend to complete a supplemental and additive metric driven analysis in the coming year.
Overall, the thesis surrounding ecosystem societies remains the same: Layer 1 blockchains, like States, possess manufacturing, service economy, and soft power components – all of which play a fundamental role in helping the development of the ecosystem. The original ‘Cities’ model, can be upgraded with this model to enhance both the predictive capacity of how this industry moves forward, and to help guide builders, foundations, and ecosystem market participants alike in successfully developing their L1 blockchain from both a technical and a financial perspective. This ‘New Era of Ecosystem Societies’ will hopefully improve every blockchains pathway to success, and create a diverse landscape of ecosystem-societies each inhabited with its own unique tech-tree, service economy, and community.
