Learning Our Terms: "Layer-1" & "DEX"
Platforms and Casinos
I used to teach entertainment business executives in Tokyo, Japan. During my tenure in this position, the organization with which I worked invited the executive from Sony who brought Dragon Ball Z and Sailor Moon to the West to speak with my students about the importance of developing and investing in media platforms. He discussed how it was important that Japan step up its game in regard to creating its own platforms for content like movies and television shows instead of relying on platforms imported from other countries, like Netflix. He discussed how investing in platforms - or the infrastructure for distributing media (or other content and services) in the digital age - was where the real money was to be made.
The world of blockchain protocols has many important and valuable platforms, as well. They are called “Layer-1” networks, and they include the likes of Ethereum ($ETH), Solana ($SOL), Avalanche ($AVAX), Cosmos ($ATOM), and Fantom ($FTM) among many others.
Layer-1s
To really understand what these Layer-1 platforms are, though, we need to zoom out even further than the “Netflix level”. Layer-1 blockchains like Ethereum are like Amazon Web Services (AWS), the computing cloud that hosts Netflix. Netflix then, in a way, could be considered like OpenSea, and the NFTs for sale on OpenSea would be like the movies and television shows broadcast on Netflix. (I recognize that this analogy isn’t perfect, but I’m trying.) Actually, the better analogy is probably that Audius is a decentralized version of Spotify (though, Audius is still in its infancy).
Where Ethereum differs from Amazon Web services, though, is that it is an open source protocol, which means that anyone who wants to develop an app on top of the Ethereum layer can do so, and the apps that get developed on this base layer are often referred to as “DAPPS”, or Decentralized APPlications. Now, I don’t really have much of a taste for NFTs, partially because I don’t really like to collect things; therefore, I don’t have much to say about dapps like OpenSea (other than that, again, you should check out my friend’s work on the site), but you can think of it as a platform built on top of a bigger platform. The dapps or platforms that I do find interesting, though, are the DEXes, or Decentralized EXchanges, built upon these Layer-1 protocols.
DEXes
DEXes are important instruments in the world of DeFi, or decentralized finance. DeFi is a system of finance that removes the middleperson from transactions. In TradFi, or traditional finance, when you take part in an exchange or a trade, a person or a human-run institution mediates it. These centralized systems, which feature human gatekeepers, can slow the speed of transactions, and even halt them for whatever reason they please. In the world of DeFi, the only people involved in the transactions are you and the party with whom you do business, and said business is done via smart contracts, which makes both building and doing business on Layer-1 protocols and the dapps built upon them permissionless acts.
I like to think of DEXes like casinos, or “the house”. Let me explain. I took an MBA-level course in financial derivatives about three years ago. The professor for this class used to repeatedly say something to the effect of “Don’t play with these financial instruments [ironically, he was talking about the ones about which he was teaching us]; you won’t win. Work for the house; the house always wins.” In other words, he warned us not to gamble with financial instruments like options, but, instead, to work for the casino, or the institution that creates these options contracts. Now, I don’t have any interest in working for a casino or for a financial services company, and I took my professor’s advice and I never play with options. However, I have chosen to invest in these decentralized “casinos”, because people come into the world of cryptocurrency expecting to get rich, and DEXes are where the real degens “gamble”. Technically speaking, DEXes are where people come to trade using cryptocurrency browser extension wallets. I’ll discuss why they use these wallets in an upcoming edition of the newsletter. Some of the more well-known DEXes on some of these different Layer-1s include include:
Uniswap ($UNI) on Ethereum
Raydium ($RAY) on Solana
Trader Joe ($JOE) on Avalanche
Osmosis ($OSMO) on Cosmos
Spooky Swap ($BOO) on Fantom
As I mentioned, DEXes tend to be where the more hardcore crypto users go to trade. If you’re new to cryptocurrency, you’ve probably only used a CEX (get your mind out of the gutter), or a Centralized EXchange like Coinbase, Gemini, FTX or Binance. But just give yourself some time; with some luck, you might just become a full-blown degenerate like me, someone who uses DEXes for DeFi services like yield farming, but more on that in an upcoming edition of the newsletter.
Casinos Selling Casinos
The original title of this piece was going to be “Casinos Selling Casinos”, as you can buy tokens for DEXes on CEXes. For example, you can buy Uniswap tokens ($UNI) on Coinbase. And you can think of buying this $UNI token, in a way, like buying a share of Coinbase ($COIN) through traditional markets (AKA the Boomer Casino), though, shares of a stock are not technically the same as DEX tokens. (DEX tokens are way better. More on why I think so in an upcoming edition of the newsletter.)
So, if you are new to this, what I’ve shared above might be a little overwhelming to you. It surely was for me at first. I’m actually still wrapping my head around it all. At first, I even shied away from getting involved in this new world of DeFi, because it just seemed too complex. However, thanks to some coaxing and coaching from The Russian (remember, the guy who provided us with a breakdown of staking rewards on Atomic Wallet), I’m now a dedicated DeFi user. After learning how things in this space work, I kind of don’t understand how the entire world isn’t focused on these new decentralized financial services. To think that DeFi won’t dramatically alter the world of finance as we currently know it is true and actual insanity.
In the next edition of the newsletter, I will share some resources to help you get started in this new (and absolutely incredible) world of DeFi, which is a key feature of Web 3.0. In the meantime, I highly recommend that you listen to the interview below if you’d like to understand better what DeFi and Web 3.0 are.
Lastly, if the analogies about Layer-1s that I provided above don’t make sense to you, you might want to check out my girl Natasha Che’s piece on how to value Layer-1 blockchains.
Interesting Thought for Today
“People dig in on the thing they know are aren’t willing to kill the thing that got them there...You’re not willing to kill the thing that got you to the dance when it is no longer the thing. And so you start justifying; and so you starting shitting on the new thing, which gets you deeper in the hole. Then, you feel even further behind. That’s the game.” - Gary Vaynerchuk
Big love to everyone and Happy Friday!
Best,
Frank
Twitter: @frankcorva
Current Listening To: The Wolf of All Streets Podcast: 50% of His Students Own Bitcoin | This Finance Professor Has Taught Crypto since 2014 / David Yermack, NYU Stern
