Only you can carry the fire. Only you can stop the rain. - xh3b4sd

In this Powerlaw Memo we are going to take a look at utility functions and pricing models with respect to Ethereum's scaling roadmap. And this time we are going to frame our problem statements through the lens of Gravitropic Topologies. People are still losing their minds about ETH's value accrual, and as long as this is the case, we are going to cover the topic like a ballerina in the wind. Just with our mechanism designer glasses on, of course.

Let us rehash some basics first. Ethereum's scaling roadmap is based on networks of networks. Like the internet, many networks of computers interact with one another in complex ways, as if the entire thing was a single organism. In that sense, Ethereum mainnet is a network, which we call the base layer, or L1. And all the L2 rollups are also networks, all settling to Ethereum mainnet. This is the mechanism by which L2s can optimize their own networks based on their own preferences of tradeoffs, while enjoying the best kind of economic security.

All of that economic security is provided at a relatively small cost, which all L2s happily pay for today, because they are getting a pretty good deal. The unit economics involved here make up a pretty big chunk of the motivations for any blockchain network to join the party. We could argue that the utility to cost ratio is extremely high. And we could further argue that any well designed system would operate exactly like that.

But now ETH didn't pump to infinity and a lot of people who thought they could get rich quick based on the efforts of others are writing angry tweets on the platform that used to be known as twitter dot com. And as we can imagine, everyone has an opinion about possible solutions for our ETH value accrual problem. This is not to disparage the marketplace of ideas. We need to have many ideas in order to find the right path forward. This is especially true because most ideas aren't really that good if you make the effort to think them through. In any event, our differences are not what divides us, but what makes us better as a community. This is what we must thrive for, for the base layer and for the social layer alike: antifragility.

Those are the days of US tariffs, because the US government tries to balance its own household deficit. One of the lesser useful ideas thrown around now is to impose something like tariffs on L2 rollups, so that they pay their fair share for the sake of value accrual back to ETH the asset. On the surface we see an imbalance, and the first emotional reaction is to cut off the arm that is already bleeding anyway. Who doesn't fondly remember the good old days during which doctors, the beacons of society, commonly practiced bloodletting in order to rid us of all the evil spirits tormenting our bodies. Tinkering with price controls like a real communist is exactly the same kind of energy in my book. This is not how anything works.

Countries are not blockchains. And so geopolitical tensions may require different approaches than ordinary business decisions. That is especially true for the technological industry which caused mechanism design to become a real thing in the first place. At this point we are entering the realm of gravitropic topologies, which allows us to view any complex system based on a simple question. Where are all the gravitational centers?

What we are looking for are local pockets of energetically dense behaviour. In other words, we are looking for some kind of inflection points within tensions or dichotomies. Thinking about our problem statement, we can then quite quickly see that there are at least five correlated dimensions of interest. Those dimensions describe our centers of gravity in terms of gravitropic phenomena. The mentally challenged may already bamboozled. But fred you not kunpan. We are going to splain. Our five dimensions to consider right now are price, demand, utility, cost and loyalty.

Price is easy. That is the thing we care about, because price is the dimension telling us how much worth ETH is at market rate. We want number to go up. Demand is easy too. That dimension is the only thing apart from supply that is directly mechanistically linked to price. We want demand to go up too, because the positive correlation between price and demand tells us that more demand increases price. Then we have utility. This dimension describes how useful something is, which is linked to demand with another positive correlation. That means something is in higher demand the more useful that thing is. Cost is our fourth dimension, which is the property that the L2 tariffs crowd is talking about so passionately. An ugly but pretty important detail here is that cost is negatively correlated with demand. That is to say that people want less of something if that thing becomes too expensive relative to the perceived utility. And the fifth of our gravitropic dimensions is loyalty. The degree to which an L2 is aligned with Ethereum and ETH describes whether there is ultimately demand at all. So loyalty is the end boss here. Loyalty is not only very sticky, but it also shapes utility functions and pricing models, until its gone. If we push loyalty over a certain threshold, then all demand will be lost forever.

Now that we established the relevant centers of gravity, their connections and correlations, we can go over the implications of pricing models and get an idea about the efficacy of L2 tariffs. People want to increase costs now. Increasing costs reduces the gravity of demand and loyalty. In the case of L2s we can see a very special relationship between demand and loyalty, because loyalty forces demand to be sticky too. The problem here is two fold. Loyalty can only inhibit the gravitational effects on demand for so long, because increased costs deteriorate loyalty itself. And loyalty is a force that doesn't come easy. Once it is broken it is incredibly hard to heal.

At this point we should also have noticed something else. Increasing costs hasn't increased price at all. If anything, all we have achieved with price controls was to reduce the hardness of the system by way of reducing loyalty and increasing trust assumptions. Once the door opens for the incompetent to play god within a system that they don't understand, it's downhill from there. We are being told that L2s must pay their fair share. We are being told that making Ethereum more expensive will be good for ETH. But that is frankly not how anything works. Because I am old enough to remember that we set out to scale Ethereum exactly because it was too expensive to use.

Utility functions and pricing models are negatively correlated. Price controls are the worst kind of interventions because they attack the integrity of any given system. So instead of taking something away from somebody else, instead of tinkering with forces beyond our control, we need a better approach for ETH to make number go up. The optimal solution for our problem can of course also be explained by gravitropics, and for some readers the answer we are looking for may be shockingly obvious.

The conclusion, the optimal solution, is the approach of maximizing the utility function of our system. Utility is the dimension that market participants are willing to pay for voluntarily. And utility is the thing that increases demand universally based on pure market dynamics. Utility is the thing that caused L2s to become aligned with Ethereum in the first place. And make no mistake. What can be corrupted, will be corrupted. That is a tale as old as time. Utility is positively correlated with demand and loyalty. If we make something more useful then it will simply be more sought after. That is the attack vector we should all be focusing on. Make that damn thing more useful. Nothing else matters.

Once again most people seem to have the right insight but draw the wrong conclusions. And it is so irritating to me how common it is for people to invert their shallow conceptions of the world by simply confusing inputs with outputs. We need our systems to become ever more competitive, because that is the gravitropic dimension that is most energetically dense after all. In other words, the same kind of competitive dimensions are inversely correlated against one another, because one gravitational center of competence forces another to higher the bar, or perish within the free market.

Even further, the colloquial gravity of the matter is that the world around us is changing. It always does, whether we are here or not. And entropy is changing only in one direction within the competitive dimension, which is upwards. And it doesn't matter whether you like that or not, or whether you want to remove yourself from those forces all together. Sure, you can sit back and let others carry the fire. But it goes without saying. If you don't come to war, then war will come to you. I hope that this will never happen to anyone, ever. In any event, it is better to be a warrior in the garden, than to be a gardener in war.

90% is our number of the week. This is the share of tokenized treasuries that BlackRock's BUIDL fund has issued on top of Ethereum mainnet. That is 1.8 billion USD in nominal terms. It looks like the big boys find Ethereum pretty useful after all. And maybe that has something to do with utility too. I mean, just maybe, you know. Don't forget that our plans are measured in centuries. The world needs the most credibly neutral base layer for global coordination. NASDAQ onchain is an app. Ethereum is the world computer.