Outside Context Problems

“An Outside Context Problem was the sort of thing most civilisations encountered just once, and which they tended to encounter rather in the same way a sentence encountered a full stop.”

– Iain M. Banks, Excession

My last piece on where prediction markets break down made me realize I hadn’t written about outside context problems here yet.

Outside Context Problems are the most interesting situation one can encounter, when considering pure innovation.

No Layer-2 Bets

I don’t currently see a clear path towards making a bet on undifferentiated Ethereum layer 2s.

Generally speaking…

• The whole selling point of EVM layer 2’s is that they are fully compatible with the base layer;
• This means that it’s trivial for mercenary liquidity and projects to move between them (or for well-meaning projects to jump if there’s uncertainty);
• If that is the case, then there is no clear way to make a long-term bet on any of them, and you’d need to be actively involved in that particular space to feel the winds changing, and switch accordingly.

So unless one is fully involved on ETH L2-land, it seems like the best way to bet on L2s winning (as opposed to fast L1s) would be an ETH bet.

One can make short-term bets based on TVL, where there is a clear power distribution emerging, but that’s it - and chances are that by the time there is a clear winner, it will be relatively late to make a bet.

The main outlier seems to be Polygon, who keeps striving to be something more than just an L2, so at least one could make a bet on one of their efforts surviving whatever L2 extinction level event is likely to hit eventually.

Counterargument

The only reason to invest in them is that they will likely have a higher beta, but that also means you can pick the wrong horse and underperform.

The only sensible way I see is some sort of portfolio that invests in the Top N and skews the amount based on TVL, rebalancing every so often.

Otherwise, I think if you aren’t involved in the communities you may miss moves that could cause them to bleed devs and TVL in a “gradually, then all at once” way.

Bridges, not platforms

(Update: This is an older view on the potentials for bridges for crypto. For an updated perspective, check my thoughts on The Spelunking Podcast Ep. 21 about how we are moving to a “zero-knowledge everything” world, or this piece on ZKP Bridging.)

Cosmos and Polkadot, which were both born to ensure interoperability among different chains, are in a race to maintain their relevance.

Global Latin America thesis

Last year, after seeing this Washington Post chart, I became convinced that we were likely headed into a Global Latin America.