# Eth Denver 2023

**Published by:** [Zero Age Ventures ](https://paragraph.com/@zero-age-ventures-2/)
**Published on:** 2023-03-20
**URL:** https://paragraph.com/@zero-age-ventures-2/eth-denver-2023

## Content

Author: Lachlan BreakeyTLDR;Salient Thematics: ZK about ZK, capital efficiency, Why token? Not when, the exacerbation of blockspace supply and why middleware is no longer fruitful.With attendance exceeding 22,000 participants composed of devs, long/short hedge funds, VCs, and travelers with sub-optimal hygiene I was eager to put myself back into the fire of sourcing compelling deals and creating relationships likely to create a stream of opportunities into the future.That said, there was a juxtaposition between the proclaimed “builders event” and the sheer volume of new venture funds that (from surface level interactions) had a suboptimal informational edge into the distributed systems in which they invest (https://www.youtube.com/watch?v=mG38t1chZ5I). This signals to me that capital is starting to move further out on the risk curve as funds with little edge nor information asymmetry attempt to park their capital in risk-on assets. In alignment with the flavor of the year, I will keep the discussion ‘succinct’ and take the computationally heavy writing off-chain for readers to dive into on their own accord.Zero Knowledge of Zero KnowledgeAlthough the invention hails from 40 years ago, executing native bytecode within some form of VM continues to capture the most mindshare within the crypto realm, and it’s hard to undermine just how pertinent this ‘moon math’ is going to be- both from a fundamental and narrative vertical. However, to represent programs as circuits one must have knowledge prerequisites regarding constraints, polynomials, and finite fields, a scarce resource that far outstrips the zk knowledge base of current smart contract developers. This is the primary reason why EVM (VM in the context of R0 instance) equivalence or Type-1 zkEVM denoted by the prodigy Vitalik must be kept sacred. Equivalence enables smart contract devs with Zero zk cryptography background to leverage the compression power of zero-knowledge proofs (zkp) whilst having an undifferentiated developer experience. That is, perfect compatibility is experienced whereby there is no replacement of hashes, state trees, toolchains, libraries and precompiles. Put more simply, solidity bytecode executes as it would in native Ethereum. Seemingly, zkSync (in its next iteration), Scroll and Taiko are leading this race. Departing from the EVM based zkEVM, RISC-0 zkVM is a verifiable zk virtual machine that adopts the Risc-V architecture. By executing regular rust code in the zkVM, programmers can prove to untrusting parties that code’s output was faithfully generated and never manipulated. The benefit in the general purpose processor architecture is that the R0 instance can compile solidity code to LLVM. Note that this is not the immediate focus. R0’s Bonsai is a general-purpose zkp network that enables any chain, smart contract, dApp, and protocol in any domain-specific language (Rust, C++, Solidity via LLVM compiler) to execute algorithms and programs in a zero-knowledge environment. R0 is within the upper bound of zk leveraging projects due to a function that includes but is not limited to the following:moves gas-heavy code off-chain = succinct and light and simplified contracts. Solidity contracts on eth can write their main contract logic in rust and execute on the EVM.2) Native interoperability: shared execution layer via state proofs (both Nil, Lagrange and R0). State proofs were another noticeable theme from Denver. TLDR; state proofs are a cryptographic primitive that proves state changes have occurred in a set of blocks. The powerful factor here is that light clients can easily verify the state proof derived from a zkSnark, meaning the proof can be cheaply verified with strong security guarantees. When this standard is generally accepted, the scheme will enable native cross-chain communication. For more information regarding R0: https://dev.bonsai.xyz/learn-zkvm This approach does not preclude the perusal of others where there is no ‘VM’ and instead the program is represented directly as a circuit. This tenet is championed by the Nil Foundation. As discussed with Mikhail, =;Nil directly compiles the DSL via their zkLLVM to a custom circuit without the existence of a virtual machine, avoiding many proposed downfalls of a VM. That being;Simple code expressed in the Vm generates immense byte codeCircuits are hard to optimize for a VM meaning the execution trace adds overhead to the programDeclining performanceCompiler shortcomingsWith no standardization of the execution trace for ‘x’ application, this approach, in its current state, is limited because verifiers will not support the certain proofs from differentiated data samples (& thus also distinct execution traces) That said, the application of Zk based on its compression and scalability properties is inherently overcrowded and coupled with a premium. Countless DID, private CFMM’s (constant function market makers) and other protocols are sprinkling “zk” within their docs to bolster their valuation without any expertise in zk. Hence the subtitle “Zero knowledge about zero knowledge”. As a fund, we must be prudent in our deployments in this arena as it is still very much in the R&D era whilst being forward-looking to ride the wave of this megatrend.2. Striving Toward Capital EfficiencyAlthough the core tenets of Defi (and blockchains in general) were born with noble intentions of reducing the overhead of traditional finance, contemporary interactions on-chain are highly capital-inefficient. For instance, money markets such as Compound limit a borrower’s capacity by being constrained through depositing overcollateralized positions. Broadly, capital efficiency is the ratio of capital needed to generate amplified returns. The term may also be defined as the productivity of capital. It can be argued that before a ‘breakout run’, market participants in DeFi experience newfound mechanisms to rehypothecate idle assets into token-bearing outcomes. For instance, ‘Defi Summer’ was coupled with the explosion of highly leveraged and recursive yield farms that enabled users to deploy LP tokens as lego blocks into other outrageous yield-bearing opportunities. So what will it be this time? One must remember… history doesn’t repeat itself but it rhymes.EigenLayerEigenLayer is a set of smart contracts on Ethereum that enables stakers to opt into additional slashing conditions to increase the economic security of actively validated services including oracles, execution environments, data availability layers, and bridges. In exchange for ‘decentralized trust’ stakers can generate additional yield on top of the Eth staking rewards. There are multiple innovations at play here but I will focus on the enablement of capital efficiency for home stakers and delegators. EigenLayer provides Ethereum stakers additional revenue streams that they would otherwise be unable to participate in. Furthermore, stakers reuse existing capital across multiple services, meaning costs are amortized and yields maximized. This is the very definition of capital efficiency.Liquid staking derivatives: “LST Summer”Liquid staking services including LDO, RPL, and Stakewise allow users to deposit/delegate their eth to a staking pool and receive an LSD token that represents their claim to Eth plus the staking yield. This dramatically reduces the opportunity cost of providing economic security to Ethereum while unlocking the ability to use these claims within DeFi (such as providing liquidity) and earn an additional yield on a constant input of capital I have also observed forks of RPL and Lido with added parameters. This is a signal that market participants are going further out on the risk curve; what is the least work I can do with the most visible upside? This has similar implications to the countless forks of Uniswap back in Defi Summer. Perhaps this will be the breeding ground for speculation on this next run. Coupling (1) and (2) with the visible escape velocity of dYdX and GMX (tools of leverage and capital efficiency) it is becoming increasingly obvious that new trends in DeFi are born from pertinent innovations in capital efficiency. I argue that the next growth pocket will be from options protocols such as Lyra (https://docs.lyra.finance/overview/how-does-lyra-work) that generate leveraged upside with a limited downside (long call). Options are a multi-trillion dollar market in TradFi and to think that would not convert to DeFi would be ill-informed. With Lyra currently trading at $44m there is an opportunity to be early and enjoy the profits that accompany this position. Furthermore, real-world assets are becoming a burgeoning theme in DeFi. That is, tethering off-chain assets (“real world” lol) with on-chain utilities. The reason I’m so bullish on this trend is two-fold;Defi in its current state is highly secular and correlated, meaning if Eth liquidity declines so do all yields and returns within DeFi. By enabling an asset such as commodities or value stocks to be used as collateral, users can generate delta neutral or “all weather’ returns that are not dependent on yields within Defi.Unlocking capital efficiency. Use existing equity and commodity positions in DeFi to generate amplified yields on idle assets.Another interesting point of discussion that attained less of a mindshare at Eth Denver was NFTfi (financialization of property in an automated form). This is even more compelling due to the unlock of Blur price discovery and liquidity. Again, this is an innovation in cap efficiency but is beyond the bounds of this piece.3. Why Token? Not When TokenOne of the more differentiated takes from the release of Coinbase’s L2 built with the OP stack is that it challenges the need for a project to deploy a token and further threatens the value accrual for L2 native tokens. This notion is usually confronted with the need to decentralize the sequencer via enforcing slashing and alignment of economic incentives with a native token. However, other assets such as Eth and USDC can easily participate in this role. Governance and bootstrapping the cold start problem (incentivizing growth) via emissions are also natural uses of a native token. From an investment perspective, governance tokens are generally worthless and emissions result in constant dilution unless the market participant are running a sequencerAs illustrated via the above graphs, Arbitrum has been able to generate organic economic throughput (transactions) despite not having a liquid token. Perhaps the volume discrepancy is explainable by airdrop hunters front running the future expectation of the ARB drop, but it is still an intuitable data point nonetheless. Furthermore, if you look at the ‘top dApps’ by market cap and fee procurement they have the common trait of sound tokenomics. By sound, I don’t mean financial engineering to hide the product itself, but simple token designs that follow these guiding principles;4. The Exacerbation of Supply in BlockspaceThe movement to commoditize blockspace has left many general smart contract platforms with empty space within the blocks. For instance, Arbirtum operates at a real TPS of 10 with a much higher theorized/capable TPS. With the explosion of zkEVMs, Sovereign rollups, app-chains and alternative layer 1’s, this trend will largely continue until there is an application with visible product market fit that is not tethered to the token going up and to the right. . Discussed above is a number of vehicles this demand may develop. Although GameFi has lost its allure, there are well-capitalized and ‘fun games’ that incorporate the magic of web2 gaming with the ancillary benefit of secondary market liquidity and the ability to permissionlessly recoup in-game capital contributions. This vector is likely to relate to a wider TAM given the level of financial fluency required to interact with options vaults (e.g Gamma straddle strategies) and Eigen Layer. Many vectors of infrastructure are currently highly overcrowded (attached premium) and as Chris Burniske puts it “I’m not going out there to compete, I’m going out there to ride the best wave with the least people ‘’. Furthermore, the justification for a token in middleware (SDKs, APIs, and other dev tooling) is deteriorating. With no incentive to hold (reduce the velocity), these tokens collapse as supply outstrips demand (look at Biconomy). Other VectorsTrustless bridging leveraging ZKMEV vs Payment for Order flow modelSovereign roll-appsAccount AbstractionL2s in general

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