Layer 1 Chains Need to Evolve Beyond Speed: Insights from Sonic Labs CEO

In a recent interview with crypto.news, Mitchell Demeter, the new CEO of Sonic Labs, discussed how Layer 1 blockchains must innovate to remain competitive in a rapidly evolving market. As block space becomes more standardized, projects now face pressure to establish sustainable business models rather than rely on fleeting speculative trends.

Key Takeaways

The era of competition based solely on speed and low fees among blockchains is over.
Layer 1 chains must create long-term value and maintain user engagement to stay relevant.
Sonic Labs is pursuing protocol-level enhancements and exploring Ethereum Improvement Proposals (EIPs) to improve the developer experience.
A new fee model is being implemented, emphasizing value return to token holders and adjusting how fees are distributed.
The current crypto market is undergoing a shift towards more sustainable business practices and fundamentals.

Mitchell Demeter, CEO of Sonic Labs

Evolving Beyond Competition in Blockchain

Crypto.news: For years, Layer 1 networks focused on speed and cost reduction for blockchain competition. You claim that phase has ended. What should chains prioritize now?

Mitchell Demeter: The environment was different in 2020 and 2021. Speed and lower fees were crucial when chains were being compared to Ethereum. This attracted many developers and users to various Layer 1 and Layer 2 networks. The competition mainly revolved around who could provide the best speed and the user experience.

Now, that scenario has changed; there are plenty of fast and affordable chains available. Block space has essentially become a commodity. The real challenge today is attracting and retaining users and builders. It’s crucial to create a sustainable ecosystem that encourages them to stay.

Since I joined as CEO two months ago, Sonic has shifted its strategy. We need to set ourselves apart through protocol improvements and Ethereum Improvement Proposals to create a unique and engaging environment for builders. In today's world, developers, users, and investors can switch platforms easily; simply being fast and inexpensive isn’t sufficient anymore.

CN: What specific changes are you considering?

Demeter: There are many EIPs under discussion; however, the Ethereum ecosystem has grown so large that changes happen slowly. Conversely, smaller and newer chains like ours can adapt and innovate more rapidly. I'm currently working with our product and engineering teams to evaluate various EIPs, prioritize them, and have discussions with builders about their needs.

For instance, EIP-7903, which seeks to expand the smart contract size limit, is crucial. Currently, smart contracts are constrained to around 49 kilobytes, and if we can increase this limit, it enables developers to create more intricate applications. This improvement would make the platform stickier, as it becomes more cumbersome for developers to migrate their infrastructure to different chains.

This is just one example of how we work to enhance the developer experience.

Changes to Sonic’s Fee Model

CN: You’ve referenced modifications to Sonic's fee structure. How does it function now, and what will be different?

Demeter: People are now looking at how on-chain activities contribute to real value creation and how that value translates back to token holders. We’re emerging from a period where speculation ruled, and investors are now demanding more transparency.

One effective method we’re considering is a burn mechanism, which involves actively reducing the supply of tokens. I equate this to early tech firms like Tesla. They initially raised capital through stock issuance, then shifted to share buybacks once they achieved a market presence.

Many blockchains, including Sonic, are still in the phase of aligning their products with market needs. We must clarify the pathway: usage should lead to fees, those fees should enable burns, and that process ultimately delivers value back to token holders.

CN: How does your fee model integrate with this idea?

Demeter: At present, our fee model allocates 90% of fees to builders and 10% to validators. This model aims to keep applications user-friendly, allowing them to abstract blockchain complexities from users.

Through fee subsidies, applications can cover gas fees for users who then utilize an app similar to Venmo, without experiencing the blockchain’s intricacies directly. That said, this approach doesn’t benefit token holders. If everyone transitioned to on-chain services with this model, it wouldn’t generate any scarcity or exit from the existing supply.

We are adjusting to a sliding-scale fee model where builders will receive about 15%, validators get 10%, and the remainder will be burned. This adjustment ensures that increased usage translates into tangible benefits for token holders.

As we continue to grow, we’re also considering licensing our technology to exchanges, governments, and banks that want their own blockchains, using revenue generated to facilitate token buybacks and burns.

Competition with Ethereum and Layer 2s

CN: How do you perceive the competition with Ethereum and Layer 2s?

Demeter: Layer 2 solutions ultimately rely on Ethereum as their foundational layer. However, we operate our own network with a distinct validator set. This independence grants us greater flexibility and allows us to implement protocol changes and innovations more quickly.

CN: Ethereum directly finances public goods; what’s your view on this matter?

Demeter: We’re looking into this. In the past, we operated grant programs, but engaging builders can be quite challenging due to their transient nature. We’re cultivating partnerships with VCs to support businesses rather than attempting venture capitalism ourselves.

There might be circumstances where we directly fund public services; however, they must be sustainable, ideally supported by real business models and innovative entrepreneurs.

Priorities for the New CEO

CN: What were your immediate priorities upon becoming CEO?

Demeter: My focus has been on refining our tokenomics to ensure real value flows back to token holders, establishing a sustainable grants model with partners, and transitioning Sonic from a technology-centric organization to a business-oriented one, strengthening areas like marketing, communications, business development, and institutional sales.

Historically, technology was our main focus, but the market is now shifting away from pure speculation, making it the right time to emphasize sustainability.

Perspectives on the Current Crypto Market

CN: How do you currently evaluate the broader cryptocurrency landscape?

Demeter: We’re undergoing a significant transition. Liquidity has become tighter, investors are evolving, and builders and users have more choices. We can no longer depend solely on narratives; it’s essential to build actual businesses.

While I can’t predict the future, I believe that the most challenging times are behind us and that liquidity will recover. However, this recovery will be driven by fundamental values rather than speculative bubbles.