1. Macroeconomic Overview and Predictions

   • Interest Rates and Monetary Policy

   • Inflation Trends

   • Geopolitical Dynamics

   • Regulatory Environment

2. Predictions and Emerging Trends for 2024

   • Public Chain Developments

   • BTC Ecosystem

   • Enhanced UX for Mainstream Adoption

   • Web3 Application Renaissance in 2024

   • DeFi 2.0

   • AI Integration in Blockchain

   • DePin and Ownership Economy

3. Key Narratives 2024

   • New Infrastructure/Technology: AA, Intents, AI x Web3, DePIN, Modular Bridge, ZK, etc.

   • New Assets and Derivatives: BTC DeFi, LRTs, DeFi 2.0, etc.

   • Mass Adoption Dapps: Next-gen Onramp, Autonomous World, Institutional-grade DeFi, etc.

4. Trade and Farm Guide

   • Trading Strategies: Embracing Technology and Risk Management

   • Farming Airdrops: A Key Strategy

5. Appendix: Noteworthy Projects for 2024

Macroeconomic Overview and Predictions

Interest Rates and Monetary Policy

• Central banks' interest rate policies have a direct impact on crypto markets by influencing liquidity and investor risk appetite. The entire interest rate cycle, including the potential for a downturn, will significantly affect crypto valuations.

• Cryptocurrencies' value proposition as a hedge against inflation could be highlighted in an environment where global inflation or deflation trends intensify.

• Key Predictions:

  • Bitcoin halving and anticipated approvals of ETH ETFs could catalyze increased institutional adoption, potentially counterbalancing the tightening monetary policy's adverse effects.

Geopolitical Dynamics

• The likelihood of crypto-supportive governments emerging by 2025 and the potential impact of the 2024 U.S. Presidential Election could significantly influence crypto markets. These events might drive demand for cryptocurrencies as safe havens or disrupt markets depending on the geopolitical climate and policy outlooks.

Regulatory Environment

• The regulatory landscape is poised for significant changes, with the SEC's evolving stance on Ethereum and approval of Bitcoin ETFs suggesting a shift towards greater acceptance of cryptocurrencies as commodities.

• The implementation of the MiCA regulation in the EU, and broader regulatory clarity could renew institutional interest in cryptocurrencies, marking 2024 as a pivotal year for regulatory acceptance.

• Developments like the use of smart contract wallets and applications such as Worldcoin, which has attracted millions of new users, underscore the need for regulatory frameworks that support innovation while ensuring market integrity.

Predictions and Emerging Trends for 2024

Public Chain Developments

• L2 as a Central Battlefield: The explosion of the L2 ecosystem, driven by reduced fees and the dencun upgrade, will broaden the scope of DeFi, gaming, social, and DePIN applications. Competition among L2 platforms and between L2 and high-performance public chains like Solana will be a focal point. The introduction of economic mechanisms in zkSync and potential breakthroughs in StarkNet could initiate new growth avenues for fully on-chain gaming and other applications.

• Ethereum's Role: Ethereum's shift towards serving as a foundational B2B blockchain, with most user interactions moving to L2/L3 and select high-performance L1s, emphasizes its central role in the crypto ecosystem. The evolution towards modularity and Ethereum's position as a critical settlement layer highlight its significance in capturing ecosystem growth. Focus on main EIP Scheduled for 2024: ERC-4337 > EIP-4844 > EIP-3074 > EIP-5003

• Deflation and Staking: Ethereum's ecosystem is expected to experience significant deflation, enhancing its value capture. The focus on staking and re-staking will further reduce the circulating supply of ETH.

• Modularity and DA Competition: Modularization, especially in the DA layer, and the integration and competition between ecosystems like Cosmos and Ethereum, will be key narratives. The demand for third-party DA solutions underscores the urgent need for scalability and efficiency enhancements on L2 platforms.

• Appchain Emergence: The trend towards appchains—blockchains tailored to specific applications like gaming or DeFi—is growing. Tools like OP Stack and Arbitrum Nitro support this trend by enabling appchains to leverage liquidity from larger public networks. 2024 will likely see further adoption of appchain toolkits by major public chains, enhancing the "hub-and-spoke" model within the blockchain ecosystem. Rollup-as-a-service (RaaS) platforms such as Caldera and Eclipse could become critical in facilitating this architectural shift.

• Growth of Cosmos and Solana: Continuous development in the Cosmos and Solana ecosystems, along with their integration into the broader crypto ecosystem, highlights the ongoing evolution and potential for new market entrants to capture significant value.

• VM Innovation & Liquidity Fragmentation: Exploration of VM-agnostic solutions and liquidity fragmentation through Chainlink CCIP, Wormhole, and LayerZero, alongside the emergence of MoveVM, indicates a critical phase in virtual machine evolution and cross-chain liquidity solutions.

BTC Ecosystem

• Innovations and Integration: The BTC ecosystem is undergoing significant exploration, including decentralized indexing, evolution of Ordinals, cross-chain decentralization, zk-proofs, and L2 solutions. Progress in these areas could lead to the development of the BTC ecosystem and faster integration with Ethereum and other blockchain ecosystems.

• Modular and Cross-chain Advances: The advancement of modular blockchains and cross-chain technology could merge the ecosystems of Ethereum, BTC, and Solana, potentially unveiling numerous yet-to-be-known projects. A notable pathway could be Ethereum acting as a second layer for BTC, enhancing the integration between BTC and Ethereum.

• BTC Narratives Remain at the Forefront: The focus on narratives such as Ordinals/BRC-20, approval of spot Bitcoin ETFs, and the halving event in 2024 continue to position Bitcoin at the forefront of investor attention. The approval of spot ETFs could bring significant liquidity to the crypto market, marking mainstream acceptance of Bitcoin as a legitimate asset.

Enhanced UX for Mainstream Adoption

• Bridges, Bots, Wallets, and Oracles: Essential tools and middleware are evolving to improve usability, security, and efficiency. This includes advancements in cross-chain interoperability, automated trading bots, more secure and user-friendly wallets, and accurate decentralized oracles for real-time data.

• Strategic UX Enhancements: 2024 is poised to witness concentrated efforts on refining crypto UX, introducing innovations like Intents and sophisticated wallet solutions to streamline user interactions and enhance security protocols.

• Account Abstraction & Identity Solutions: Implementation of account abstraction wallets, such as Creso and Avocado, alongside ERC-725 for universal profiles and on-chain identity, marks significant strides towards simplifying user engagement with blockchain services.

• Intent-Based Transactions: Enhancement in transaction efficiency and awareness in both perpetual and spot markets through platforms like IntentX, SYMMIO, and CoWswap. Transitioning from basic trading bots to advanced trading terminals, we see a movement towards equalizing the playing field for traders, with notable advancements from Unibot to Thunder Terminal.

• Institutional DeFi Tools: Introduction of tools like Brahma signifies an evolution in managing multi-sig operations, indicating a broader institutional embrace of DeFi protocols.

• ZKPs as a Modular Interface: ZKPs are becoming a key interface between different components of modular blockchain architectures. This development promises greater smart contract composability and flexibility for developers, potentially leading to more privacy-centric applications.

DeFi 2.0: A Technological Leap Forward

• Restaking: Concepts like restaking are gaining traction, with 10+ LRTs competing for TVL. providing additional security to decentralized services and generating extra rewards for participants.

• Perpetual Protocols' Ascendance: DeFi's perpetual markets are poised for exponential growth in 2024, with platforms like Synthetix (SNX), GMX, Gains Network (GNS), and dYdX expected to quintuple their transaction volumes compared to 2023. Despite the bull market's narrative shifts, perpetuals are anticipated to remain among the best foundational sectors. Despite the perpetual market becoming increasingly saturated with new entrants, the demand for innovative and uniquely architected solutions continues, driving the need for differentiation and novel offerings within the space. The amalgamation of cutting-edge technologies like AI with the burgeoning DeFi sector, particularly in perpetual protocols, indicates a burgeoning marketplace for avant-garde financial instruments and services.

• Bitcoin DeFi: The success of platforms like Lido in the LSD space indicates a strong demand for Bitcoin in DeFi, potentially leading to a "DeFi summer 2.0" on Bitcoin.

• Real-World Asset (RWA) Growth: The acceleration of institutional adoption will likely drive the development of critical infrastructure components, such as decentralized identity solutions, oracles, and interoperability mechanisms, essential for a comprehensive RWA ecosystem.

• On-Chain Liquidity Dynamics: The market anticipates a surge in on-chain liquidity and financial activities. Innovations in liquidity management and Request for Quotation (RFQ) systems are set to optimize capital efficiency and mitigate challenges like impermanent loss. With RFQ systems fostering competitive pricing and MEV protection, the deployment of these high-efficiency models is expected to expand with the continuous advancement of on-chain trading infrastructure.

• Collaborative Ecosystems vs. Niche Chains: DeFi protocols are at a crossroads, choosing between creating bespoke chains for tailored needs or integrating within collaborative ecosystems like Arbitrum derivatives, showcasing platforms like GMX and Aevo, each carving out their niche in the perpetuals domain.

• Intention-Based Trading Platforms: Approximately 50% of Ethereum's decentralized exchange volume is projected to transition towards intention-based trading platforms, enhancing price discovery mechanisms and mitigating front-running risks.

Web3 Application Renaissance in 2024

• In the evolving landscape of public blockchains and L2 ecosystems, the competition among public chains for breakout applications is intense, capital are strategically focused on incentivizing application development and enhancing TVL to attract ecosystem participation. In this context, applications capable of creating breakthroughs and generating significant market excitement (FOMO) receive prioritization over those fully aligning with crypto-native thesis. Projects that can invoke user FOMO, have a solid product foundation, and retain users will be rewarded by the market.

• Growth of Fully On-chain and Web2.5 Games: The gaming sector continues to evolve, with projects exploring fully on-chain ecosystems, hybrid models, and autonomous worlds. This evolution could significantly impact user adoption and open new avenues for blockchain integration into mainstream gaming. While fully on-chain game logic may limit game types and playability, potentially increasing user barriers, composable NFT gameplay could be an early beneficiary in a not fully on-chain logic environment, offering a new growth vector for the market.

• Web3 Gaming on Layer 2/3: Anticipation builds for a breakthrough in Web3 gaming on Layer 2 and Layer 3 solutions (e.g., Arbitrum, StarkNet), with the potential for games surpassing one million users—a milestone yet to be achieved in 2023. The advent of game-centric chains on platforms like Arbitrum could spearhead this evolutionary leap, offering interoperability among a wider array of gaming experiences. Platforms like Immutable, XAI Games, and WINR operates as independent blockchains.

• Tokenized Social Experiences: Innovations in tokenized social experiences, such as those pioneered by friend.tech, highlight the potential for novel use cases in consumer engagement through blockchain technology. These developments suggest an expanding role for tokenomics and community governance in shaping online interactions and digital identities.

• NFT and Meme Revival: Platforms like Blur are expected to diversify into NFT derivatives and potentially penetrate L2, BTC, and Solana's NFT markets, positioning themselves as key disruptors in 2024. A resurgence in NFTs, memes, and inscriptions could catalyze trading volumes and foundational markets for NFT derivatives, underscored by celebrity forays into these domains.

• UI Layer Composability: 2023 unveiled significant advancements in UI layer composability, exemplified by Unibot. The forthcoming year promises expanded opportunities beyond Telegram chatbots, fostering a more integrated trading environment within the web. This evolution anticipates a richer composability landscape, not just for asset ledgers but also for social platforms, heralding a new era of interactive and immersive Web3 applications.

• Gaming and SocialFi Convergence: Immutable and Friendtech, alongside emerging platforms like Beam and LensProtocol, are setting the stage for a convergence of gaming, social interaction, and financial mechanisms within the Web3 ecosystem.

AI Integration in Blockchain: Catalyzing the Crypto Evolution

• AI and Blockchain Convergence: The integration of AI with blockchain, particularly through technologies like zero-knowledge proofs (ZKPs), is advancing. This integration could revolutionize data privacy, enhance decentralized decision-making, and create new incentives within the blockchain space.

• Emerging AI Protocols on L2 and High-Performance Chains: While AI's practical application within the blockchain remains nascent, its role as a pivotal narrative in 2024 is undisputed. Advancements are expected in the deployment of AI protocols over Layer 2 solutions and high-performance blockchains, indicating a confluence of AI capabilities with decentralized architectures.

• Transformation Across the Crypto Ecosystem: The fusion of AI with blockchain technology heralds a paradigm shift, promising to unlock novel functionalities and streamline efficiencies across the crypto sphere. This integration is poised to revolutionize various domains by decentralizing computational processes, enabling the monetization of decentralized AI services, empowering off-chain autonomous agents, and pioneering decentralized computing networks. Notable projects like Autonolas, Bittensor, Fetch.ai, and TauLogicAI exemplify the diverse potential applications of this synergy.

• Market Validation and Anticipated Developments: Initial ventures such as $OLAS, $TAO, $RNDR, and $AGRS have already demonstrated the market's receptivity to AI-integrated projects, achieving significant valuations and underscoring the sector's potential. The year 2024 is anticipated to be a milestone, showcasing the fruition of these initiatives and providing a clearer perspective on the transformative impact of combining AI with blockchain technology.

DePin and Ownership Economy

• Breakthroughs in DePin: The DePin sector, particularly on platforms like Solana and Arbitrum, is in its early stages of construction, with more exploratory projects expected to emerge.

• Decentralized Networks: Blockchain technology allows users to reclaim sovereignty over resources traditionally controlled by large entities. This shift towards decentralized physical network infrastructure (DePin) and decentralized social media (DeSoc) is gaining significant traction, driven by advancements in infrastructure development, increased awareness, and the growing user base in the crypto domain.

Key Narratives 2024

New Infrastructure/Technology

Account Abstraction & Intents-Centric Design

• Description: A move towards more intuitive blockchain interfaces focusing on user intentions rather than the complexities of blockchain operations. This simplification is pivotal for enhancing accessibility and fostering wider adoption.

• Projects/Concepts:

  • Intent-Centric Architecture: Solutions focusing on simplifying user interactions with blockchain technologies.

  • User Intent Focus: Platforms that prioritize the intentions of the user to streamline transactions and interactions, making blockchain technology more accessible to non-technical users.

AI X Blockchain

• Description: Integration of AI with blockchain is a top narrative for 2024, featuring decentralized AI training, inference, and the deployment of AI agents/bots in dApps. This convergence is expected to capture the attention of both the crypto community and traditional Web2 institutions.

• Projects/Concepts:

  • AI-Driven Blockchain Solutions: Projects leveraging AI to optimize blockchain operations, enhance security, or offer predictive analytics.

  • Decentralized AI Applications: Applications utilizing AI for a variety of use cases, including trading bots and automated decision-making within the blockchain space.

DePIN

• Description: Decentralized Physical and Digital Infrastructure Networks (DePIN) are gaining VC interest, bridging the gap between speculative crypto applications and tangible impacts on real-world systems.

• Projects/Concepts:

  • Decentralized Data Storage and Physical Resource Networks: Projects like decentralized WiFi networks, ride-sharing platforms, and IoT networks that utilize blockchain for management and operations.

  • Decentralized WiFi and Energy Grids: Blockchain platforms managing decentralized networks for physical utilities.

  • Decentralized Computing and Storage Solutions: Utilizing blockchain for distributed computing power and data storage, highlighting Solana's role as a prominent network for such applications.

Cross-Chain & Modularization

• Description: Focus on creating flexible and interoperable blockchain ecosystems that can easily interact and exchange data or value, with modularization seen as the end goal for platforms like Ethereum.

• Projects/Concepts:

  • Omnichain Solutions and Layer 3 Innovations: Technologies and platforms designed to facilitate seamless interactions across different blockchain networks, enhancing the composability and efficiency of the blockchain ecosystem.

ZK and Cryptography

• Description: Advances in zero-knowledge proofs (ZKPs) and cryptography are crucial for improving privacy and security in blockchain transactions.

• Projects/Concepts:

  • ZKML (Zero-Knowledge Machine Learning): Innovations that leverage zero-knowledge proofs for privacy-preserving machine learning applications on blockchain.

  • Decentralized Identity Solutions: Platforms offering secure and private identity verification methods, Utilizing ZKP for privacy-preserving transactions and interactions on the blockchain. potentially revolutionizing how personal information is shared online.

New Assets and Derivatives

RWA/LSD Derivatives

• Description: The tokenization of Real World Assets (RWA) and the development of Liquidity Staked Derivatives (LSD) indicate a significant expansion of blockchain's utility in traditional finance (TradFi), potentially leading to more institutional funds flowing into the space post-BTC ETF approval.

• Projects/Concepts:

  • Innovative Restaking Token: Innovations that allow staked assets to be reutilized within the ecosystem, enhancing liquidity and yield opportunities.

  • Tokenized Treasuries and Credit Instruments: Platforms offering tokenized versions of traditional financial assets, enabling on-chain investment in real-world assets.

  • Synthetic Assets Platforms: Creating blockchain-based representations of real-world assets, allowing for broader exposure and participation in traditional markets.

DeFi 2.0

• Description: Evolving sophistication of blockchain-based financial products, providing users with advanced options for risk management and speculative investments.

• Projects/Concepts:

  • Structured Products and Options: Development of on-chain options, futures, and other derivative products that offer hedging and speculative opportunities.

  • Intent-Based Trading Platforms: Enhancing market efficiency by aligning trading with user intentions, thereby streamlining transactions.

  • Perpetual Contracts Growth: Platforms such as SNX, GMX, GNS, and dYdX leading the charge in expanding DeFi's derivatives market, indicative of the sector's maturation and increasing demand for sophisticated financial instruments.

BTC Ecosystem and Ordinals

• Description: Expansion of Bitcoin's utility through innovations in DeFi, NFTs, and other applications showcases the evolution of the largest cryptocurrency by market cap.

• Projects/Concepts:

  • Bitcoin-based NFTs and Digital Assets: Projects exploring new use cases for Bitcoin, including NFTs and decentralized finance applications.

Mass Adoption Dapps

Next-Gen Gateway

• Description: The development of more user-friendly and versatile crypto trading and storage solutions is essential for mass adoption.

• Projects/Concepts:

  • Cutting-Edge Crypto Wallets and On-Chain Prop Firms: Innovations in wallets that offer improved usability and advanced features for a broader user base.

Gaming

• Description: Gaming is seen as a key gateway to mass adoption, with the potential to onboard new users and facilitate microtransactions through engaging and immersive experiences.

• Projects/Concepts:

  • Game Engine, SDK, and Developer Tooling: Platforms and tools that enable the development of blockchain-based games, ranging from fully on-chain experiences to hybrid Web 2.5 games.

Global Payment Solutions

• Description: Innovations in payment technologies aim to revolutionize cross-border transactions, making them more efficient and accessible.

• Projects/Concepts:

  • Blockchain-Based FX and Remittance Solutions: New stablecoins and payment platforms that offer modernized solutions for global transactions.

SocialFi and Identity

• Description: The emergence of decentralized social media and identity solutions emphasizes user sovereignty and privacy, marking a significant shift in online interactions.

• Projects/Concepts:

  • Decentralized Social Media and Privacy: Platforms like Friend.tech that explore decentralized social networking and identity management, leveraging blockchain to empower users.

Trading and Farming Guide

Trading Strategies

Identifying and Capitalizing on Emerging Ecosystems

• Investment in Early-Stage L1 and L2 Chains: Focus on Layer 1 and Layer 2 tokens that have shown significant performance but whose ecosystems are still developing. These projects are poised for growth as their increased valuations enable them to attract liquidity, protocols, and users through incentive programs.

• Strategy Playbook:

  1. Spot trending L1/L2 chains with a strong community and upcoming catalysts.

  2. Use resources like DeFillama to discover protocols within these ecosystems.

  3. Invest in innovative projects or those established as go-to protocols within their category.

70% Long-Term Investment + 30% Rotational on Narratives & Meme

• Strategic Portfolio Allocation: Dedicate a substantial portion (at least 70%) of the crypto portfolio to long-term holdings. The remaining 30% can be utilized for trading based on news, narratives, and potentially high-reward memecoins.

• Selective Narrative Investment: Concentrate on narratives with the highest potential for retail and institutional interest, including alternative L1s & Modular Ecosystem, Gaming, crypto AI, and DeFi2.0 (RWAs, LSD/LRT, Perps)

• Rationale: Projects within these sectors are accessible to retail investors and have historically performed well in bull markets. AI and real-world assets, in particular, are attracting attention from traditional finance and institutional investors.

• Narrative Lifecycles: Understand that narrative dominance is fleeting; a narrative's peak performance is usually followed by a significant downturn.

• Profit Optimization: Timing is crucial; knowing when to enter and exit investments based on narrative cycles can significantly impact profitability.

• New vs. Established Narratives: While new narratives often offer the highest rewards, established ones with solid technology and product-market fit can provide steady returns.

• Innovation Leaders: Projects that initiate new narratives often maintain their dominance, underlining the importance of not dismissing opportunities based on perceived lateness.

Farming Airdrops: A Key Strategy

• Anticipating Airdrops: With several significant airdrops announced in 2023 and expectations of more in 2024, actively participating in airdrop farming can be a lucrative strategy. Given the market conditions to continue to improve and retail investors to start coming back, I anticipate several even bigger airdrops this year. Key airdrops to watch include Eigenlayer, LayerZero and other notable projects.

• It’s time to farm airdrops🧑‍🌾

  • Staking $TIA, $PYTH, $INJ & other tokens for list of projects airdrops

  • Restaking LST on EigenLayer via LRT Protocols (Kelp, EigenPie, EtherFi, etc.)

  • Use tokenless protocols of popular Eco for Airdrops

Appendix: Noteworthy Projects for 2024

1.1 Execution Layer

Function and Responsibilities

• Primary Role: Executes transactions by applying the State Transition Function (STF) to the rollup's state.

• Responsibilities:

  • Transaction Ordering: Central to managing transaction sequences.

  • Execution of Transactions: Involves processing transactions according to predefined rules or smart contracts.

  • Data Posting: Involves posting transaction data on the Data Availability (DA) layer for transparency and verification.

  • Proof Creation: Generating fraud or validity proofs to ensure transaction integrity.

  • User Interaction: Acts as the user-facing component of the rollup stack, where users interact and transact.

Economic Aspects

• Transaction Fees (Gas): Users pay a fee, which is a margin over the costs incurred by the execution layer.

• Maximal Extractable Value (MEV): An additional revenue stream derived from the strategic ordering of transactions.

1.2 Settlement Layer

Role and Importance

• Validity Verification: Ensures that the proofs generated by the execution layer are valid.

• Canonical State Definition: Establishes the definitive state of the rollup, crucial for smart contract rollups.

Economic Considerations

• Low Cost: The cost of utilizing a settlement layer is generally low, with platforms like Optimism incurring minimal daily expenses for settlement on Ethereum.

• Viability: Despite its critical role, the settlement layer does not capture high economic value due to low operational costs.

1.3 Data Availability Layer

Purpose and Functionality

• Data Broadcasting: Key role in distributing ordered transaction data to the network.

• State Reconstruction: Enables anyone to reconstruct the state of the rollup using the broadcasted data.

Economic and Technical Challenges

• Cost Factor: DA is a significant expense in the operation of rollups, especially when using secure layers like Ethereum.

• Emerging Alternatives: Protocols such as Celestia, Avail, and EigenDA offer cost-effective and faster DA solutions.

• Trade-offs: While building an independent DA layer can reduce costs, it may introduce complexities in bootstrapping and interoperability.

2. Value Capture and Interoperability of the DA Layer

2.1 Why DA Layer Captures Large Value in the Modular Stack

Central to Network Integrity

• Data Integrity: Ensures that all transaction data is available and accurate, which is critical for maintaining the reliability and trustworthiness of the network.

• Security: By maintaining a comprehensive and accessible record of transactions, the DA layer enhances the overall security posture of the blockchain.

Economic Importance

• High Operational Costs: Posting and maintaining data on secure layers like Ethereum incurs substantial costs, making it a significant economic factor in the modular stack.

• Revenue Stream: DA layers can generate substantial revenue through fees charged for data posting and availability services, reflecting their value in the blockchain ecosystem.

• DA Economic: This assumption is made by Jon Charbonneau, a research associate at delphi, and based on Polygon Hermez’s prediction that they will eventually need only 14 bytes per transaction in Danksharding. Also the above EIP-4844) specification at 1.3 MB/s, L2 can reach around 100,000 TPS, then the projected revenue will reach the staggering figure of $30 billion. Under such a huge cake, the future disputes in the DA market will be very fierce. In addition to the three major solutions, Stark’s Layer3, zkPorter, and several modular DA projects will join the fray. So from the existing Layer2 project, the universal chain is fully inclined to use Ethereum DA. And application chains and long-tail chains will be the main customers of “unorthodox DA”. My personal opinion is that modular DA and soon Layer3 will be the mainstream choice in the future.

2.2 Facilitating Interoperability and Cross-Chain Communication

Enabling Seamless Transactions Across Chains

• Data Sharing: By providing a reliable source of transaction data, the DA layer enables different blockchain networks to access and verify cross-chain transaction information.

• Inter-Chain Trust: Establishes a foundation of trust for transactions that span across multiple blockchains, essential for interoperable ecosystems.

Overcoming Fragmentation in Blockchain Networks

• Unified Data Reference: Acts as a central point of data reference, helping to overcome the fragmentation of blockchain networks and ecosystems.

• Standardization: Facilitates a standardized approach to data availability, which is crucial for developing interoperable protocols and applications.

Enhancing Blockchain's Scalability

• Scalability through Modularity: By offloading the responsibility of data availability from the main chain, DA layers contribute to the overall scalability of blockchain networks.

• Support for Layer 2 Solutions: Plays a pivotal role in the scalability of Layer 2 solutions by ensuring data availability without overburdening the main chain.

Promoting Innovation and Growth

• New Opportunities: A robust and efficient DA layer opens up new opportunities for developers to build innovative cross-chain applications.

• Ecosystem Expansion: Contributes to the growth and expansion of the blockchain ecosystem by enabling more complex and varied use cases that require cross-chain functionalities.

3. DA Layer Controversy and Solutions

3.1 Overview of the DA Layer Controversy

The blockchain community has been engaged in a debate ignited by Ethereum Foundation researcher Dankrad Feist's tweet, which suggested that rollups not using Ethereum's DA aren't true Layer 2 solutions. This highlights the evolving nature of DA solutions in the modular blockchain ecosystem.

3.2 Main Solutions for DA

Public Chain as the Settlement Layer (E.g., Ethereum)

• Fee Structure:

  • Execution Fee: Charged for computational resources in executing transactions.

  • State Fee: Incurred for updating the state on the main chain.

  • Data Availability Fee: The most significant expense, for publishing data to Layer 1.

• High Cost: Illustrated by Arbitrum's significant Ethereum gas fees.

• Ethereum's EIP-4844: Aims to reduce these costs by introducing a more cost-effective Blob transaction format.

Validiums DA Mode

• App Chain Usage: Preferred in app-specific rollups for low-cost, high-throughput needs.

• Centralized Data Management: Raises concerns about fund security.

• Data Availability Committees (DAC): Introduced to mitigate trust issues but highlights reliance on entity security over blockchain security.

Modular DA

• Diverse Implementations: Various projects, like Celestia, are exploring modular approaches to DA.

• Economic Potential: Significant projected revenues indicate the high value of DA in blockchain ecosystems.

• Future Trends: Shift towards modular DA and Layer 3 solutions, focusing on non-Ethereum DA solutions for specific segments.

3.3 Comparative Analysis of DA Solutions

3.3.1 On-Chain Solutions: Proto-Danksharding (EIP-4844)

• Cheaper Data Availability: Aims to provide cost-effective data availability.

• Ethereum's Role: Remains significant in DA, settlement, and consensus.

3.3.2 Off-Chain Solutions: Validium, DAC, and Volition

• Trade-offs: Unique advantages and challenges in terms of cost, security, and centralization.

3.3.3 Universal DA Solutions: EigenDA, Celestia, and Avail

4. Competitive Dynamics in DA Solutions

4.1 Market Trends and Evolution

• Rapid Growth: The DA market is evolving with an emphasis on cost-effectiveness, scalability, and security.

• Innovative Approaches: Solutions like Celestia and EigenDA are becoming prominent due to their novel methods.

4.2 Comparison of DA Approaches

• Celestia: Offers modular blockchain solutions with a strong focus on DA and scalability.

• EigenDA (EigenLayer): Utilizes Ethereum's security via re-staking and offers high DA throughput.

• Avail: Integrates DA within the Polkadot ecosystem, enhancing interoperability and multi-chain support.

4.3 Key Success Factors for DA Solutions

• Technical Robustness and Scalability: Essential for managing large data volumes.

• Network Security and Decentralization: Critical for trust and adoption.

• Community Support and Ecosystem Integration: Vital for solution growth and acceptance.

• User-Friendly Design: Important for both developers and end-users.

• Token Utility and Incentives: Clear utility and incentives for network participation and growth.

4.4 Projects Benchmarking

4.5 Competitive Dynamics

4.5.1 EigenDA - EigenLayer

• DA Bandwidth: Increases linearly with DA nodes.

• Functions: Focuses on increasing DA throughput without ordering.

• Security Checks: Proof of Custody and local retrieval fee markets ensure data storage and serving integrity.

• Target Market: Ethereum L2s and L3s.

• Cost and Latency: Aims for low cost and latency, requiring Ethereum compatibility.

4.5.2 Celestia

• Offerings: Provides ordering and DAS.

• Technology: Uses fraud proofs, slower due to mandatory challenge periods.

• Finality and Validator Set: Single slot finality but limited validator set due to Tendermint.

• Community and Backing: Strong community support and backers.

4.5.3 Avail

• Development: Originated from Polygon, built on Polkadot stack.

• Launches: Testnet followed by Incentivised Testnet and planned mainnet.

• Approach: Aims to serve sovereign rollups seeking ordering and DA guarantees.

• Solution: Combines DA, Nexus, and Fusion Security for a comprehensive approach.

• Technology Alignment: Built with future-proof ZK technology.

5. Investment Thesis Framework for DA Products

5.1 Investment Thesis

• Investment decisions should be based on a combination of factors: customer alignment, market scenario analysis, revenue model sustainability, community support, and valuation considerations.

• Prioritize DA solutions that demonstrate robustness, scalability, strong community backing, and strategic partnerships, ensuring a balanced approach between technological innovation and market realities.

• Valuation analysis must be an integral part of the decision-making process, taking into account the project's market positioning, revenue potential, and the utility of its token in the broader ecosystem.

5.2 Due Diligence Checklist

1. Customer Alignment Evaluation: Assess DA products based on their alignment with potential customers (L2s, Appchains, Sovereign Rollups, RaaS Companies).

   • Key Consideration: Alignment with Ethereum and readiness for upcoming upgrades like Danksharding.

   • Strategic Investment Direction: Favor DA solutions with a clear alignment strategy and potential for wide-scale adoption.

2. Market Scenario Analysis: Evaluate DA products against bull and bear market scenarios for app chains.

   • Bull Scenario Strategy: Identify DA products poised to benefit from a surge in app chains and on-chain gaming.

   • Bear Scenario Contingency: Focus on DA solutions with diversified use cases beyond app chains to mitigate risks in a bear market.

3. Revenue Model Assessment: Scrutinize the business models of DA solutions.

   • Investment Criteria: Sustainable revenue streams, scalability, and token utility.

   • Action Plan: Prioritize DA products with a robust and scalable revenue model.

4. Community and Partnership Evaluation: Consider the role of community support, narrative building, and partnerships in the success of DA solutions.

   • Key Focus: Strong community engagement, narrative crafting abilities, and strategic partnerships.

   • Investment Directive: Lean towards solutions with strong community backing and strategic industry partnerships.

5.3 Valuation and Token Utility

Celestia vs. EigenLayer

• Market Positioning: Celestia's pioneering role in modular blockchains and EigenLayer’s Ethereum security extension create distinct market positions.

• Valuation Implications: Celestia’s FDV of $15-20 billion sets a benchmark. EigenLayer's diverse services could command a similar valuation.

EigenLayer Valuation

• Utility and Market Dynamics: The utility of EIGEN in collateralizing AVS and its efficiency in providing security.

• Projected Valuation Range: $10 billion to $20 billion, considering its less direct utility compared to Celestia's TIA token.

• Airdrop Potential: A significant airdrop could enhance EigenLayer’s market positioning and investor interest.

Avail Seed Round Valuation

• Growth Potential: Raising at $400m to $800 million indicates confidence in its interoperability focus and DA solutions.

• Investment Implication: High valuation suggests market confidence in its future-proofing with ZK and comprehensive solutions.

6. Deep Dive into Key Projects

6.1. Celestia

Overview

• Nature: Modular data availability network.

• Scalability: Scales securely with user growth.

• Revenue Sources: Payment for blobspace and gas fees from rollups.

Key Components and Functionalities

• Native Consensus Mechanism:

  • Structure: Full nodes and light nodes.

  • Architecture: Scalable Proof of Stake (PoS).

• Light Nodes and Data Availability Sampling (DAS):

  • Function: Validate block data availability.

  • Process: Sampling small random segments of block data.

• Data Availability Fraud Proofs:

  • Role: Notify light clients of anomalies.

  • Focus: Only on consensus and data availability.

1st Question: “Fat Protocol” or “Fat Application” ?

1.1. Why 'Fat Protocol' Previously?

1.2. Core Value Propositions

• 1.2.1. Permissionless Shared Data Layer

• 1.2.2. Positive Feedback Loop for Token Value

• 1.2.3. Value Capture from Application Layer 1.3. Challenges to 'Fat Protocol'

• 1.3.1. Abundance of Blockspace

• 1.3.2. Rise of Modular Blockchains

• 1.3.3. Ease of Multi-Chain Operations 1.4. The 'App Chain Thesis'

• 1.4.1. Value Accrual Mechanism

• 1.4.2. Customizability 1.5. Evolving Blockchain Landscape with Web3

• 1.5.1. Ethereum Layer 2 Popularity

• 1.5.2. Potential Shift in Liquidity Distribution

2nd Question: For dApps, Monolithic chain or Modular Rollups?

2.1. Decision Landscape for dApps

• 2.1.1. Array of Choices

• 2.1.2. Key Decisions

2.2. Control vs. Connectivity

• 2.2.1. Benefits of App-Specific Rollups

• 2.2.2. General-Purpose Chains

• 2.2.3. User Experience Impact

2.3. Economic Considerations

• 2.3.1. Rollup Adoption Factors

• 2.3.2. Future Trends

2.4. Infrastructure Development and Cost Strategies

• 2.4.1. Rise of Infrastructure Services

• 2.4.2. Economizing Rollup Costs

2.5. Appendix: Detailed Economic Analysis

• 2.5.1. Recurring Fee/Revenue Structure

• 2.5.2. Initial Development and Deployment Fee

• 2.5.3. Rollup Operation Fee

3rd Question: Does Rollup has to be on Ethereum? Will Ethereum Dominance challenged by new DA Layer?

3.1. Current Blockchain Landscape

• 3.1.1. Single-threaded Monolithic Blockchain

• 3.1.2. Parallel Processing Monolithic Blockchains

• 3.1.3. Single-threaded Modular Blockchain

• 3.1.4. Parallel Processing Modular Blockchains

3.2. Monolithic vs. Modular Architectures

3.3. Ethereum's Dominance and New DA Layer Challenges

3.4. Implications for Ethereum's Layer 2 and Layer 3

3.5. Conclusion

4th Question: Does dApp need a RaaS? (How) does RaaS make money?

4.1. The Role of RaaS in dApp Ecosystem

4.2. Economic Model of RaaS

• 4.2.1. Execution Layer as a B2C Model

• 4.2.2. Data Availability and Settlement Layers as B2B Models

4.3. Revenue Generation for RaaS

• 4.3.1. Sequencer Hosting

• 4.3.2. Additional Infrastructure Services

• 4.3.3. Technical Support and Consulting

4.4. Cost Structure for RaaS

4.5. Profit Sharing and Framework Value Accrual

4.6. Conclusion

1st Question: “Fat Protocol” or “Fat Application

Why 'Fat Protocol' Previously?

• Core Value Propositions:

  • Permissionless Shared Data Layer: This feature of 'Fat Protocols' significantly lowers the entry barriers for new participants, fostering a more competitive and dynamic ecosystem. It enables composability among protocols, propelling their growth.

  • Positive Feedback Loop for Token Value: The increase in the native token's value attracts developers and investors, leading to more capital and manpower investment in the ecosystem. This cycle enhances the protocol's speculative value.

  • Value Capture from Application Layer: Protocols can capture value generated by application layers, primarily through gas fees. Theoretically, the more transactions applications generate at the protocol level, the more value the protocol captures.

Challenges to 'Fat Protocol':

• Abundance of Blockspace: The proliferation of alternative Layer 1 protocols has led to an abundance of blockspace. This saturation dilutes the value retention capability of any single protocol as competition drives down transaction costs.

• Rise of Modular Blockchains: The modular approach divides blockchain functions into execution, data availability, and settlement. This development offers cheaper solutions for data availability, reducing the fees paid by users and impacting the original value proposition of 'Fat Protocols'.

• Ease of Multi-Chain Operations: The advent of interoperability tools, like LayerZero, allows applications to easily operate across multiple chains, diminishing the once strong loyalty to a single protocol and weakening the positive feedback loop.

The 'App Chain Thesis':

• Value Accrual Mechanism: In the 'App Chain' model, native network tokens can be staked for security purposes, creating a supply sink. This model also derives value from the blockchain's business model, offering a more robust and sustainable economic structure.

• Customizability: Developers have the freedom to customize configurations in the technology stack for specific purposes, such as optimizing throughput and finality. This flexibility allows for better trade-offs tailored to the application's needs.

Evolving Blockchain Landscape with Web3:

• Ethereum Layer 2 Popularity: Ethereum's Layer 2 solutions are currently popular due to widespread recognition and trust in the Ethereum blockchain, leading to abundant liquidity. However, if future Web3 developments, focused on 'Intent', abstract away the underlying infrastructure, new users might not be familiar with specific protocols like Ethereum or Solana.

• Potential Shift in Liquidity Distribution: In such a scenario, liquidity might be directed more by the applications themselves rather than the underlying protocols. This shift implies that the 'Fat Protocol' model might not hold in the future. Instead, in a blockchain world centered around 'Intent' and full-chain operations, users might only interact with the DAPP front-end, leading to a fundamental change in how value and liquidity are distributed across the blockchain ecosystem.

2nd Question: dApps Development - Monolithic or Modular Approaches?

Decision Landscape for dApps:

• Array of Choices: dApp developers now have a broad spectrum of options including Layer 1s (L1s), general-purpose rollups (optimistic and zero-knowledge (zk)), advanced Inter-Blockchain Communication (IBC) infrastructure, Rollup-as-a-Service providers, and appchains. Each option presents unique advantages and challenges.

• Key Decisions: Choosing the right infrastructure involves considering the deployment on a general-purpose rollup vs. an app-specific rollup, selecting the right SDK/rollup-as-a-service, determining the data availability layer, and considering tools like EigenLayer for optimization.

Control vs. Connectivity:

• Benefits of App-Specific Rollups:

  • Greater Control: Allows abstraction of gas costs, minimizes onchain congestion, offers the flexibility to experiment with token utilization, and provides the ability to build custom execution environments and implement access controls.

  • Trade-off: This control comes at the cost of reduced connectivity with the broader ecosystem.

• General-Purpose Chains:

  • Connectivity Advantages: Offer access to existing liquidity, composability with other apps, and attract dedicated user attention.

  • Reduced Engineering Effort: Building on a general-purpose chain often requires less internal engineering compared to running an independent chain.

• User Experience Impact: The decision largely depends on the severity of the trade-off between control and connectivity. The key is balancing enhanced user experiences with the potential loss of ecosystem integration.

Economic Considerations:

• Rollup Adoption Factors:

  • Cost Dynamics: Rollups have both fixed and variable costs. Applications with high transaction volumes or fees are better suited for rollups due to their ability to amortize fixed costs more effectively.

  • Financial Models: Tools like Discounted Cash Flow (DCF) analysis help evaluate the financial viability of launching a rollup.

  • Cost Reduction Initiatives: Efforts to lower both fixed and variable costs of rollups are critical for their wider adoption.

• Future Trends:

  • Inflection Point: The true adoption inflection point for app-specific rollups might occur in 6-12 months, particularly in sectors like gaming and social apps, which benefit from custom rollup features.

  • Collective Adoption: The concept of multiple apps pooling resources to launch a shared chain could emerge as a new trend.

Infrastructure Development and Cost Strategies:

• Rise of Infrastructure Services: The increasing availability of services like Caldera, Sovereign SDK, Eclipse, and others, offering low-lift solutions for rollup creation, indicates a trend towards easier rollup setup and reduced costs.

• Economizing Rollup Costs:

  • Aggregation for Economies of Scale: Collaborating with other rollups to share fees and reduce costs.

  • Outsourcing Tasks: Employing external service providers for specific tasks, leveraging the division of labor principle.

Appendix: Detailed Economic Analysis

• Recurring Fee/Revenue Structure:

  1. Revenue Streams:

     • User Fees: Composed of the Layer 1 (L1) Data Posting Fee, Layer 2 (L2) Operator Fee, and L2 Congestion Fee. The challenge is to balance these fees against expenses to avoid making rollup use prohibitively expensive.

     • Miner Extractable Value (MEV): A significant revenue source derived from the transaction value on the chain. Strategies for optimizing MEV include:

       • Partnering with established MEV searchers.

       • Employing Proposer-Builder Separation (PBS) auctions to foster competitive MEV extraction.

       • Utilizing shared sequencer layers or solutions like SUAVE for aggregating cross-domain order flows, enhancing cross-chain MEV opportunities.

  Expense Breakdown:

  1. Initial Development and Deployment Fee:

     • Setup Complexity: Despite the availability of open-source SDKs like Opstack and Rollkit, rollup development requires substantial time and expertise for installation and debugging.

     • Customization Requirements: Integrating specific Virtual Machines (VMs) into an SDK, aligning them with various interfaces, adds to the complexity and resource demands.

     • Role of RaaS Providers: Services like AltLayer and Caldera can significantly alleviate these challenges, offering streamlined processes and encapsulating the benefits of division of labor.

  2. Rollup Operation Fee:

     • Ordering: The cost of transaction ordering can vary. Decentralized solutions like Proof of Efficiency could lower costs by minimizing operator margins. Centralized solutions, while simpler, might not offer the same cost benefits.

     • Execution: Involves full nodes using VMs/EVMs to execute state changes. Efficiency can be enhanced through alt-VMs like Fuel and Eclipse’s Solana VM, which enable parallel execution. Balancing EVM compatibility and security is critical.

  3. Proving:

     • Prover Market: Utilizing a dedicated prover market, such as Risc0 or =nil, instead of a proprietary network, can be more cost-effective due to increased competition and optimized hardware usage. However, this approach may have downsides like reduced token utility and reliance on external performance.

     • zk Rollup Specifics: Different zk rollups might require varied hardware for proof generation, posing a challenge in a unified prover market.

  4. Layer 1 Data Posting:

     • Cost-Effective DA Layers: Choosing a DA layer other than Ethereum or using a DAC solution can reduce expenses. This is particularly relevant for applications like gaming and social media, where bandwidth and scalability are prioritized over security.

     • Protodanksharding and Dansharding: Utilizing these Ethereum-based solutions can offer cost efficiencies. However, balancing cost against delay is essential, especially considering blob posting fees and transaction arrival rates.

  5. L1 Settlement Fee:

     • Optimistic vs. zk Rollups: The settlement cost varies between rollup types. Optimistic rollups like Optimism have relatively low settlement costs, whereas zk rollups incur higher costs for zk-proof verification.

     • zk-Proof Aggregation: Aggregating proofs from multiple rollups can save on verification costs. This method is most effective when rollups use the same ZKVM or a shared prover scheme.

3rd Question: Does Rollup has to be on Ethereum? Will Ethereum Dominance challenged by new DA Layer?

Current Blockchain Landscape:

1. Single-threaded Monolithic Blockchain: Examples include Ethereum, Polygon, Binance Chain, and Avalanche. These blockchains process transactions sequentially and are evolving towards Rollups or horizontal scaling to address their inherent limitations.

2. Parallel Processing Monolithic Blockchains: Solana, Monad, Aptos, and Sui exemplify this category, processing multiple transactions simultaneously for higher throughput.

3. Single-threaded Modular Blockchain: Projects like Arbitrum, Optimism, zkSync, and Starknet fall into this category, focusing on modular designs while processing transactions one at a time.

4. Parallel Processing Modular Blockchains: Represented by platforms like Eclipse, Fuel, and those built on Celesitia, they combine modular architecture with parallel transaction processing.

Monolithic vs. Modular Architectures:

• The debate between monolithic parallel processing and modular architectures centers on their respective advantages and disadvantages.

• Monolithic architectures, although centralized, provide a unified and streamlined system, while modular architectures offer flexibility and scalability but may have issues like cross-chain insecurity and complex system flows.

Ethereum's Dominance and New DA Layer Challenges:

• Ethereum's Ecological Moat: Ethereum remains dominant due to its massive ecological moat, decentralization advantages, and the vast developer community it has nurtured.

• New Public Chains: Emerging public chains often struggle to differentiate themselves significantly from Ethereum's ecosystem, facing issues like lack of liquidity and homogenization.

• Rollup Flexibility: Ethereum's rollups offer a high degree of adaptability, potentially matching the advantages of non-EVM chains.

• Future Infrastructure Trends: The inclination towards modularity in Ethereum suggests a strategic move towards a more scalable and diverse ecosystem.

DA Layer Debate:

• The discussion around which DA scheme rollups should adopt has gained prominence, with suggestions that rollups not using Ethereum's DA layer might not qualify as true Layer 2 solutions.

• Ethereum vs. Third-Party DA Layers: While Ethereum's DA layer ensures security and consistency, third-party DA layers like Celestia offer alternatives that might reduce costs or provide different functionalities.

• Celestia's Role: Celestia, not following the conventional path, targets Ethereum's ecosystem, potentially altering the dynamics of Ethereum's Layer 2 landscape.

Implications for Ethereum's Layer 2 and Layer 3:

• Shift Towards Diversification: Ethereum's Layer 2 is likely to see a proliferation of diverse solutions, addressing various challenges and needs within the ecosystem.

• Layer 3 Development: The evolution towards Layer 3 application chains, facilitated by platforms like OP Stack and ZK Stack, indicates a move towards a more open and inclusive blockchain environment.

• Celestia's Impact: While Celestia introduces new dynamics, it may ultimately reinforce Ethereum's position by diversifying and expanding the Layer 2 and Layer 3 markets.

Conclusion:

• Ethereum's Continuing Influence: Despite the rise of alternative DA layers and modular architectures, Ethereum is likely to remain a central player in the blockchain ecosystem. Its ability to adapt and integrate new technologies while leveraging its established community and infrastructure positions it to benefit from the evolving blockchain landscape.

• Layer 2 and Layer 3 Market Growth: The ongoing development and diversification of Layer 2 and Layer 3 solutions, whether based on Ethereum's DA layer or alternative platforms, are poised to enrich the overall blockchain ecosystem, with Ethereum likely to remain at its core.

4th Question: Do dApps Need RaaS and How Does RaaS Generate Revenue?

The Role of RaaS in dApp Ecosystem:

Rollups as a Service (RaaS) play a critical role in the dApp ecosystem, particularly in the context of blockchain scalability and efficiency. For dApps, especially those not backed by large teams or resources, RaaS can significantly lower the barrier to entry in implementing complex rollup solutions. RaaS providers offer expertise and infrastructure, allowing dApp developers to focus on their core application rather than the nuances of rollup technology.

Economic Model of RaaS:

1. Execution Layer as a B2C Model:

   • The execution layer, operating in a B2C model, interfaces directly with the end-users, offering them transaction execution services. It generates revenue primarily through transaction fees (gas costs) paid by the users. This layer also incurs costs, including operational overhead, compute costs, and costs related to data posting and proof generation.

2. Data Availability (DA) and Settlement Layers as B2B Models:

   • The DA layer sells block space to the execution layer, while the settlement layer provides necessary verification and bridging services. These layers operate on a B2B model, forming the backend infrastructure that supports the execution layer's direct interaction with users.

Revenue Generation for RaaS:

1. Sequencer Hosting:

   • One of the primary revenue streams for RaaS providers is hosting the sequencer, which is responsible for ordering transactions and posting data. This service is crucial for the operation of rollups and often forms the bulk of RaaS revenue.

2. Additional Infrastructure Services:

   • RaaS providers may also offer additional services like block explorers and bridges, contributing to their revenue streams.

3. Technical Support and Consulting:

   • Providing dedicated support and consultancy on infrastructure decisions further adds to RaaS revenue. This could include advising on sequencing strategies, MEV optimization, and other technical aspects of rollup operation.

Cost Structure for RaaS:

• The costs for RaaS providers primarily involve infrastructure maintenance, development of new features, and support services. These costs are balanced against the revenue from sequencer hosting, additional services, and consultancy fees.

Profit Sharing and Framework Value Accrual:

• While RaaS providers can operate independently without sharing profits with the underlying rollup framework, some arrangements involve revenue sharing, especially when the rollup framework offers unique advantages or network effects.

• Rollup frameworks can accrue value indirectly through increased adoption and ecosystem development, semi-directly through revenue-sharing agreements, and directly through deploying their own rollups or RaaS services.

This research aims to present a comprehensive analysis of the evolving synergy between AI and Web3 landscape. It explores current trends and narratives, and maps out key technological stacks across :

1. Infrastructure Layer: general-purpose GPUs, ML-specific GPUs, and GPU aggregators;

2. Middleware Layer: data collection&management&privacy, AI model development, platforms for AI inference and validation.

3. Application Layer further divided into horizontal and vertical segments: bots and agents, AI for intents, blockchain analytics, on-chain games, decentralized social media, DeFi protocol testing, and AI-generated NFTs.

Each area is dissected into subcategories with a focus on investment feasibility, key success factors (KSFs), and notable examples.

The document also provides a nuanced KSF analysis for Web3 use cases in AI and AI use cases in Web3, highlighting the importance of scalability, data security, interoperability, and innovation.

An appendix offers additional insights from industry discussions and references to relevant articles. Intersection with DePIN is also explored.

Trend / Narrative

The seamless integration of artificial intelligence and blockchain technology represents a pivotal advancement in both sectors. This combination is not just a mere fusion of two cutting-edge technologies, but a transformational synergy that redefines the boundaries of digital innovation and decentralization.

As we look toward the future, it is evident that the convergence of AI and blockchain will play a crucial role in shaping various industries. From enhancing data security and integrity to creating new models of decentralized autonomous organizations, this amalgamation holds the promise of more efficient, transparent, and accessible technologies. Particularly in the realm of decentralized finance, the emergence of decentralized AI (DeAI) could democratize access to AI technologies, breaking down the barriers that have traditionally favored large corporations. This could lead to a more inclusive digital economy where individuals and smaller entities can leverage AI tools and services that were previously out of reach.

Furthermore, the integration of these technologies is poised to address some of the most pressing challenges in both domains. In AI, issues like data silos and the immense computational resources required for training large models can be mitigated through blockchain's decentralized data management and shared computational power. In the blockchain space, AI can enhance efficiency, automate decision-making processes, and improve security mechanisms.

Key Narratives Going Forward

1. Fighting Deep Fakes with Blockchain

• Invest in platforms focusing on digital authenticity and origin tracking.

1. Democratizing AI Innovation

• Opportunities in decentralizing AI resources and data platforms.

1. Enhancing Transparency in AI

• Blockchain solutions making AI processes more transparent and auditable.

1. Data Ownership and Privacy

• Startups that enforce data privacy using blockchain in AI applications.

1. Shift towards Open-Source AI

• DeAI Platforms: Investment in decentralized AI access platforms.

• Decentralized AI Agents: Platforms enabling autonomous AI agent interactions.

• Cloud Service Disruption: Decentralized cloud services catering to AI.

• AI in DAOs: Integration of AI in decentralized autonomous organizations.

• Data Management and Security: Collaborative AI research platforms using blockchain.

Mapping by Tech Stack

Infrastructure Layer:

• Overview: Blockchain-based ecosystems for sharing computational resources across a distributed network. Encompasses physical and virtual resources required for AI and decentralized computation, with overlaps with DePIN.

Subcategories:

• Decentralized General-purpose GPU: Crypto-incentivized marketplaces for general GPU computing, suited mainly for model inference.

  • Examples: Akash, Render Network, Nosana

• Decentralized ML-specific GPU: Crypto-incentivized marketplaces specialized in ML applications, usable for training, fine-tuning, and inference.

  • Examples: Bittensor, Gensyn, BP-FLAC

• GPU Aggregators: Aggregates GPU supply, offering complete solutions for all LLM workloads with ML software overlay.

  • Examples: Io.net, Together

Middleware Layer:

1. Data Collection, Management, and Privacy

• Overview: Addresses AI's need for high-quality data, emphasizing gathering, storing, and securing data, with a focus on privacy and integrity.

Subcategories:

• Automated Data Harvesting: Tools and systems for collecting data autonomously, ensuring a steady flow of information for AI analysis.

  • Examples: Grass, Zettablock, Synesis One

• Decentralized Data Storage: Secure and distributed systems for storing data, leveraging blockchain for enhanced security and immutability.

  • Examples: Filecoin, Arweave, Masa Network, Ocean Protocol, Nevermined_io, Tableland, Bacalhau

• Data Privacy Technologies: Implementing advanced techniques such as ZK to maintain data privacy throughout AI processes. Or Federated Learning: A machine learning approach that enables collaborative model training while keeping data localized.

  • Examples: Synesis One, Proof Market by =nil; (an Ethereum development company)

• Digital Authenticity and Provenance: Ensuring the origin and authenticity of digital assets are verifiable and secure.

• Decentralized Identifiers (DIDs): Creating a verifiable and secure identity layer for data contribution and management.

  • Examples: Worldcoin

2. AI Model Development: Pre-training & Fine-tuning

• Overview: Focuses on developing and refining AI models, with blockchain-based platforms supporting deployment and execution.

Subcategories:

• Decentralized Model Training Platforms: Facilitating collective AI model training on distributed data sets and computational resources.

  • Examples: Bittensor, Gensyn, Together, Modulus Labs, BP-FLAC, Hyper Oracle / HyperspaceAI

• Automated Machine Learning (AutoML): Streamlining the model development process, making AI more accessible to non-experts.

• Collaborative AI Development Environments: Platforms that enable multiple stakeholders to jointly develop and refine AI models.

  • Examples: Bittensor, Ritual.net

• Blockchain-based Model Validation: Utilizing blockchain to independently verify and validate AI training processes.

  • Examples: Hyper Oracle, Bittensor

3. Hosting Models for Inference, Management, and Assetization

• Overview: Involves deploying AI models for operation, including platforms for hosting, managing, and running AI inference and assetizing AI-generated content.

• Subcategories:

  • Decentralized Inference Services: Offering AI model inference capabilities in a distributed and decentralized manner.

    • Examples: Ritual.net, Hyper Oracle, SpectralFi

  • AI Model Management Tools: Providing the necessary tools for maintaining and monitoring AI models in production.

    • Examples: Ritual.net, Hyper Oracle, Fetch.ai

  • Secure Inference with ZKML: Enabling private and secure AI inference using zero-knowledge proofs.

    • Examples: Modulus Labs, EZKL，Giza

  • Decentralized AI Marketplaces: Creating spaces for buying and selling AI-generated content and services.

    • Examples: Bittensor, Nevermined_io

  • AI-Blockchain Orchestration Tools: Middleware that seamlessly integrates AI into blockchain technologies.

    • Examples: Lovo AI (text to speech), Ritual.net, MyShell, Fetch.ai

  • AI Intellectual Property Management: Managing the rights and ownership of AI-created content and algorithms.

Application Layer:

• Overview: Bridges AI and blockchain to enhance applications in various domains, especially within the burgeoning Web3 space.

• Horizontal:

  • Bots and Agents: Agents with identity and ownership infra automatically interact on-chain, such as trading bots for DeFi aggregation and exectution, and agents API to build customized agents.

    • Examples: MyShell, Fetch.ai, futureverse, Autonolas

  • AI for Intents: Creating user friendly interaction, enhancing the connectivity and interaction between different blockchain networks with AI. Overlaps with Intent-centric narratives.

  • AI-driven Blockchain Analytics: Using AI to analyze and interpret blockchain data for insights and trend forecasting.

    • Examples: Zettablock, Nansen, Kaito AI

• Vertical:

  • On-Chain Games: Implementing AI to create dynamic and responsive non-player characters and scenarios.

    • Examples:Parallel Colony

  • Decentralized Social Media: Leveraging AI for personalized content curation and user interaction.

  • DeFi Protocol Testing: Using AI to simulate potential threats for enhanced security testing.

    • Examples: UpshotHQ

  • AI-Generated NFTs: Producing unique NFTs with evolving characteristics powered by AI.

    • Examples: Stability AI

KSF analysis

Web3 Use Cases In AI

Leveraging Blockchain, ZK and etc. in AI Deep Learning Process (data, computing, inferencing, etc.)

KSFs:

• Scalability of Decentralized AI Solutions: Scalability of blockchain infrastructure, efficient use of computational resources, and robust data handling capabilities.

• Data Security and Privacy: Advanced encryption methods, secure data sharing protocols, and compliance with data privacy regulations.

• Efficient data storage and retrieval systems, decentralized data governance models, and data provenance tracking.

• Integration of Blockchain and AI Technologies: Compatibility, interoperability of systems, and minimal latency in AI-blockchain interactions.

• Utilization of Zero-Knowledge Proofs (ZK) in AI: Effective implementation of ZK protocols in AI algorithms, maintaining a balance between data privacy and model accuracy.

AI Use Cases In Web3

Leveraging AI in smart contracts, and dApps.

KSFs:

• Autonomy and Decision-making: Advanced AI algorithms enabling bots to make intelligent, autonomous decisions.

• Scalability and Adaptability: Ability to scale and adapt to different blockchain environments and user demands.

• Dynamic Content Generation: AI algorithms create evolving game scenarios and content.

• Creativity and Uniqueness: Producing distinct and appealing NFTs using AI.

• Cross-Platform Compatibility: Functionality across different blockchain platforms and applications.

• Monetization Strategies: Implementing AI to aid in fair and effective monetization models.

• User-Friendly Interface: Simplified user experiences for non-technical users to leverage AI-blockchain benefits.

• User Engagement and Retention: Providing value-added, engaging experiences to retain users.

• Smart Contract Optimization: AI-driven optimization for efficiency and cost-effectiveness in smart contracts.

• Error Detection and Prevention: Advanced algorithms to identify and rectify potential vulnerabilities or flaws.

Comprehensive Projects Mapping

👇 Google sheet tracking of projects, mkt cap, FDV, investors https://docs.google.com/spreadsheets/d/1b1HQEN3KVwRP4zS7wwQdrMzipyyb_gYKqibR4jaMa3o/edit#gid=0

Appendix

Call with Google AI X Web3 team

Inference Compute in AI

The demand for inference computing in AI transcends training, particularly with larger transformer-based models used in NLP and computer vision. Despite the preference for traditional machine learning models on smaller machines, overall inference demands remain higher.

AI on Blockchain and Web3 Challenges

Within the Web3 landscape, the adoption of AI on-chain is limited. Companies grappling with AI integration face ambiguity regarding distributed computing's precise role, leading to a niche market with few firms exploring AI and blockchain integration. Challenges include scalability, bandwidth limitations, and traction struggles. Factors Influencing Compute Platform Choice Beyond cost considerations, factors influencing compute platform choice encompass speed, ease of use, scalability, and performance. Optimization strategies for hardware and software are critical for efficient inference and training tasks in AI.

AI's Potential Use Cases in Web3

The potential applications of AI in Web3 span various domains, from analyzing smart contracts, ensuring transaction understanding, to targeted advertising based on wallet tracking. Enhanced transparency in gaming, payment systems, remittance, and automated governance tools within the Web3 ecosystem presents a significant opportunity for AI. Optimization for AI Workloads Optimization for AI workloads involves hardware-level and software-level enhancements. Specialized hardware and tailored software backbones are pivotal in streamlining AI tasks, enabling more efficient training and inference processes.

Conclusion

The amalgamation of AI and Web3 presents both promise and complexity. AI's potential applications in smart contract analysis, enhancing transparency in transactions, and automated governance tools illustrate the vast possibilities. However, challenges such as scalability limitations and the need for optimized compute platforms persist.

Reference Articles

Blockchains and the Future of AI

AI Belongs Onchain — Placeholder

Intersection of Crypto and AI

AI叙事火热，寻找AI与加密交汇的潜力项目 Web3 + AI 赛道全景盘点：130 多个项目，还有哪些未被发掘的宝藏？

Autonomous Agents in Autonomous Worlds

DePIN research and intersection

• DePIN (Decentralized Physical Infrastructure Networks): A concept that involves token incentives to encourage users to deploy hardware devices, providing real-world goods, services, or digital resources.

• Two Key Areas:

  • Physical Resource Networks (PRNs) offering services like WiFi, 5G, VPN, geospatial data, and information sharing.

  • Digital Resource Networks (DRNs) providing digital resource infrastructure like broadband, storage, and computational networks. DePIN Tech Stack Overview

• Physical Resource Networks (PRNs)

  • Wireless Networks: Helium

  • Video Streaming: Theta Network

  • Mapping Services: Hivemapper

  • Ride-Sharing: Teleport

  • IoT and MachineFi: IoTeX

• Digital Resource Networks (DRNs)

  • Storage: Filecoin, Arweave

  • GPU Rendering: Render Network

  • Decentralized Computing: Gensyn, Proof Market Use Cases and Target Company Examples

• Decentralized Wireless Networks

  • Use Cases: IoT connectivity, 5G services.

  • Examples: Helium (IoT, 5G networks).

  • KSF: Network coverage, low operational costs.

• Video Streaming

  • Use Cases: Decentralized content distribution.

  • Examples: Theta Network.

  • KSF: Bandwidth optimization, user experience.

• Mapping Services

  • Use Cases: Decentralized mapping, data collection.

  • Examples: Hivemapper.

  • KSF: Data accuracy, update frequency.

• Ride-Sharing

  • Use Cases: Decentralized transportation services.

  • Examples: Teleport.

  • KSF: User adoption, regulatory compliance.

• IoT and MachineFi

  • Use Cases: Smart devices, IoT infrastructure.

  • Examples: IoTeX.

  • KSF: Device security, ecosystem integration.

• Decentralized Computing

  • Use Cases: AI computations, blockchain computations.

  • Examples: Gensyn, Proof Market.

  • KSF: Computing power availability, speed.

• Decentralized Storage

  • Use Cases: Data storage, NFT metadata, archival services.

  • Examples: Filecoin (Cloud storage), Arweave (Permanent storage).

  • KSF: Cost efficiency, data security.

• GPU Rendering

  • Use Cases: 3D rendering, video processing.

  • Examples: Render Network.

  • KSF: Resource utilization efficiency, scalability.

• Narratives and Trends

  • Decentralization and Tokenization: Moving from centralized infrastructures to decentralized, token-incentivized models.

  • Integration with Established Chains: Projects like Helium transitioning to Solana for enhanced scalability and ecosystem benefits.

  • Consumer-Facing Applications: Projects like Teleport exploring real-world applications of DePIN technology.

  • Focus on Data Infrastructure: Emphasis on the collection and monetization of decentralized data, as seen in Hivemapper.

  • Increasing Demand for Decentralized Solutions: In response to high costs and inefficiencies in traditional services like storage and computing.

• KSFs

• Scaling Performance Capabilities to Match Centralized Players

  • Hardware/software specifications, addressable demand, and location sensitivity are crucial.

  • Example: Helium's growth post allowing third-party hotspot manufacturers.

• Ease of Onboarding and Adoption

  • Simplified onboarding processes attract a broader audience.

  • Examples: Sensecap's easy hotspot setup for Helium, Spexigon’s complex drone setup.

• Alignment of Tokenomics and Incentives

  • A well-structured token model is vital for incentivizing stakeholders.

  • Example: Chainlink’s effective token utility model

• Intersection with AI: Decentralized Computing Power Market Overview

  • Focus: Addressing the shortage of computing power and high costs, which are significant challenges in both AI and blockchain industries.

  • Drivers: Increased demand for computational hardware due to factors like the AGI era, Bitcoin ecosystem booming, and the need for ZKP hardware acceleration. Market Definition

  • Equivalent to Decentralized Cloud Computing: Emphasizes the creation of an open market for computing power.

  • Target Clients: Primarily serves B2B clients and developer communities.

  • Examples: Render Network (decentralized GPU rendering) and Akash Network (distributed peer-to-peer marketplace for cloud computing). Emerging Markets within this Track

• AGI Computing Power Market:

  • Example: Gensyn, aiming to solve decentralized deep learning computation challenges.

  • Approach: First-layer proof-of-stake protocol on Polkadot, utilizing idle GPU devices for machine learning tasks.

  • Challenges: Verification and incentive layers, game-theoretic aspects, and implementation details.

• Bitcoin Computing Power Market:

  • Driven by increasing demand for computational power due to Bitcoin-related developments.

• ZK Hardware Acceleration Market:

  • Focus: Building a computational power market around ZKP generation.

  • Example: Proof Market by =nil; (an Ethereum development company), focusing on trustless data accessibility and generation of zero-knowledge proofs.

  • Application Scenarios

    • Primary Uses: Protocols operating outside Ethereum Layer 1, such as zkRollup and zkBridge.

    • Machine Learning: On-chain inference requests to zkML applications.

    • Ethereum Data Processing: Using zkOracles for historical or processed data from Ethereum.

    • Data Transfer: Direct data transfer requests through zkBridges.

    • Fraud Proof and Data Updates: Verification and proof of correct data updates. Market Potential and Challenges

    • Blue Ocean Market: The ZKP computational power market is in its nascent stages with substantial growth potential.

    • Design Space: Opportunities for combining algorithm optimization, application scenario optimization, hardware optimization.

    • Future Prospects: ZK's importance in blockchain and potential in non-blockchain fields, as emphasized by Vitalik Buterin.

Eclipse offers a customizable, modular architecture that provides scalability and interoperability for decentralized applications (dApps), enabling a no-code and more adaptable development experience. It serves as both a settlement layer and a hub for rollups, providing a high degree of flexibility and compatibility with multiple layer-1 blockchains, offering flexibility and adaptability in virtual machines and data availability layers, coupled with IBC-enabled composability, can tailor towards different needs of dApps and making it an adjustable architecture that is ideal for high-throughput dApps. Eclipse aims to transform the deployment of layer 3 networks and become a universal layer 2 for modular ecosystem.

Investment Thesis

Market Potential for Modular Rollups-a- a-Service (RaaS): Investing in the RaaS vertical presents an opportunity to capture value in the growing demand for scalable and customizable execution environments. Eclipse's modular architecture enables projects to make trade-offs and create tailored solutions, addressing the needs of developers seeking flexibility and autonomy. As more decentralized applications migrate to their own blockchains, Eclipse's role as a settlement layer and rollup provider tailored to developers’ need positions it to capture value in this evolving market.

Product-Market-Fit: Eclipse stands out as the go-to choice for RaaS solutions due to its versatile infrastructure layer and support for computationally intensive and high frequency tasks. The platform's compatibility with various data availability layers and adaptability for execution environments (Ethereum, Solana, Move, ZK and OP rollups), as well as deep customer know-how enhance its value proposition. Eclipse offers the speed, flexibility, and composability necessary for developers building high-throughput Web3 applications while maintaining shared security, such as gaming and decentralized finance (DeFi) projects, enabling new use cases and driving traffic to the network.

• Eclipse offers a highly customizable and adaptable development experience, enabling developers to choose their preferred virtual machine, settlement layer, and data availability layer for their dApps.

• Eclipse offers a highly customizable and adaptable development experience, enabling developers to choose their preferred virtual machine, settlement layer, and data availability layer for their dApps.

Proactive Use Cases and Partnerships: By collaborating with top projects in the ecosystem, including Solona, Polygon, Celestia, EigenLayer, and RISC Zero (ZKEVM), Eclipse expands its network effect and drives adoption. The integration with Cosmos infrastructure enables interoperability within the Eclipse network and wider Cosmos ecosystem. This positions Eclipse as a prominent settlement layer for application-specific rollups and contributes to its potential as a universal layer 2 solution.

Investment Risks and Mitigants

Adoption Risk: There may be limited market appetite for RaaS from a settlement layer as dApps can go to generic large scale rollups with scalability and cost efficiency. However, Eclipse's customizable and versatile architecture, combined with its partnerships and proactive developers support, mitigate this risk by offering tailored solutions and addressing specific needs.

Technology Risk: If ZK technology or optimizations of Optimistic rollups improve to the point where they can charge negligible fees, the need for a settlement layer may diminish. Eclipse can mitigate this risk by staying at the forefront of technological advancements, adapting its offerings accordingly, and leveraging its modular architecture to integrate emerging technologies (already collaborating with ZKEVM integrations)

Competition Risk: Developers could choose other RaaS providers with similar product offering but cheaper pricing. To mitigate this risk, Eclipse should focus on establishing deeper verticals know-how for gaming, DeFi, and other dApps to accommodate their needs, with continuous technological innovation, strong partnerships, and providing competitive pricing models to retain developers.

Conclusion

Eclipse's customizable rollup solutions, combined with its role as a settlement layer and strong partnerships, position it as a promising investment opportunity within the RaaS vertical. The company's focus on proactive use cases with deep end user know-how, and adaptive modular architecture provides a competitive advantage in capturing value in the evolving blockchain ecosystem. While there are inherent investment risks, the mitigants, along with continued technological innovation and security measures, enhance the potential for long-term success.

Appendix I – Due Diligence

Future DD Area and Question Lists

Market and Competition:

· What is the current demand for Rollups-as-a-Service (RaaS) solutions in the market, and please kindly provide data or projections on the potential market size and growth for RaaS?

· How does Eclipse differentiate itself from competitors in terms of target market segments and use cases? What’s the key attributes of out wining the fragmented market?

Product Strength and Technical Infrastructure:

· What is the roadmap for ongoing product development and improvement? Are there any upcoming milestones or planned updates?

· Is the technology open-source or proprietary? How secure is the infrastructure, and have there been any audits or security assessments conducted?

· What is the transaction throughput and latency of the 10 testnets?

User Traction and Go-to-Market Strategy:

· Apart from the 10 testnets launched with partners, how many dApps or projects expressed interest?

· What is the go-to-market strategy and ways to retain developers on the platform? Are there any incentives or benefits for developers to build on Eclipse?

· How does Eclipse plan to address the network effect and grow adoption?

· Are there any undisclosed strategic partnerships in place to accelerate market penetration?

· What are the most active communication channels for users and investors to stay updated? How engaged and supportive is the community around Eclipse? How responsive is the team to community inquiries or feedback?

Financials and Revenue Drivers:

· Please give breakdowns of current revenue streams and key drivers for each

· Please discuss pipelines of clients and pricing structure including associated fees (if any)

· Please share anonymous contract with projects and partners regarding contract term, fees, revenue split, IP rights and etc.

Governance and Tokenomics:

· Is there a token plan and tokenomics whitepaper available?

· What is the utility of the native token within the Eclipse ecosystem? How does the token align incentives and drive value within the platform?

· What is the token distribution & allocation and any vesting schedules for team and early investors?

· How is governance structured within Eclipse's ecosystem? Are there mechanisms for community participation and decision-making?

Regulatory Compliance and security:

· What is the project's approach to regulatory compliance? What are the regulatory considerations and compliance measures that Eclipse has implemented?

· Are there any legal or regulatory risks associated with Eclipse? Has the project sought legal counsel or engaged with regulators to ensure compliance?

· Are there any legal or regulatory risks associated with the use of Eclipse's RaaS solution?

Appendix II – Valuation

Valuation Framework

I suggest using a SOTP valuation method to value Eclipse as its business model is a combination of 2B SaaS-like service and a L2 blockchain.

For 2B business, we can adopt a P/S multiple referring to SaaS and Cloud companies. Topline is forecasted using both top-down and bottom-up methods:

• Top-down: Forecast total # of dApps and growth rate of dApps, apply Eclipse penetration in respective verticals of Gaming, DeFi and others, multiply by ARR (Annual Recurring Revenue) or a take rate on total transaction volume. IBC fees can be calculated as % of total transaction volume.

• Bottom-up: Due Diligence on contract pipeline and forecasting contract by contract.

L2 Blockchain valuation can be challenging using traditional methods, as the source of value extends beyond transaction fees. Hence we can adopt a P/S ratio of listed blockchain token, applying a premium or discount taking into considerations below:

• Network Effects and Adoption: As more developers build on the platform, the network becomes more valuable and attracts a larger user base. The size and activity within the ecosystem can be indicative of the project's value.

• Tokenomics: Analyze the tokenomics of Eclipse, including its token supply, distribution, inflation rate, and potential token burning mechanisms. The scarcity or abundance of tokens and how they are designed to align incentives can influence the token's value. The token utility may have various use cases within the ecosystem, such as transaction fees, staking, governance, or access to specific features. Assessing the token's utility and its potential demand in the market can provide insights into its value.

• Interoperability and Partnerships: Eclipse's interoperability with other blockchains and partnerships with key projects can enhance its value. The ability to connect and transact with different ecosystems expands its reach and potential user base. Evaluating the quality and impact of these partnerships can contribute to the valuation.

The key is to evaluate the key drivers of demand for the Eclipse native token, and its potential share in the Rollup (L2) ecosystem.

In addition to traditional metrics like P/E and P/S ratios to evaluate the network's actual revenue, we can also focus on developer activity (as tracked by Electric Capital and Geometry by Aztec), Network Value to Transaction ratio, daily active users, and other factors such as issuance ratio and rate. The Monetary Equation of Exchange (M=PQ/V) is also relevant.

Company description and business model The Sandbox is an Ethereum-based metaverse and gaming ecosystem where users have absolute ownership over their in-world creations and can move assets freely across platforms, creating a decentralized UCG ecosystem that incubates potential for large valuation creation and different monetization.

Business Model / Revenue Stream • LAND sales o Primary sale: Sell land by batches in land auction  Average land price is ~$3000 and there are a total of 166K lands – among which they sold ~70% so far  Revenue for land sales in 2022 is ~$40M according to Opensea and Delphi Digital o Secondary sale: sandbox charges 5% transaction fee for secondary land sales  Secondary LAND price has seen inflation over 3x vs primary  Resell ratio is roughly 40% of total accumulated sold LAND • NFT experience o Brands or individuals that have purchased LANDs, will build gaming or shopping experience on top o For any in-game purchases or whatever GMV generated in these experiences, Sandbox take 5% of it  Except that for Tier 1 brands eg. Nike/HSBC – take rate is 50% as Sandbox co-build the experiences o Similarly, virtual goods purchased in these experience can also be resold and Sandbox takes 5% transaction fees on these resells in its built-in market place o This part of business is still in early shape as the whole metaverse is not fully opened to all o Revenue in 2022 is ~$7M according to public information and CEO/COO sharings on Twitter • Reserve sales o At launch, sandbox reserve 20% total uncirculated token – SAND (which is 600M out of 3B according to its Whitepaper) o SAND at its highest was worth 4 USD and now 0.6 USD o Sandbox makes revenue by selling its reserve at appropriate time – and made $100M in 2022 according to public news o Currently there are still 400M+ unsold SAND in its reserve • Potential Future Monetization o monetization potentially through ads, creator tool under SaaS model and data services o Ongoing royalties fee through transactions that happen on each land such as "Game-in-Game", Billboards, ticketing, online stores, live-streaming and etc., which will grow to be the key driver in the long term

Investment thesis • Best positioned as leading decentralized metaverse with expanding TAM and deeper wallet share o Ture digital property ownership is a paradigm shift of traditional gaming experience, unlocking huge runway for value creation, leading to creation of many new business and services

• It is expected that digital consumption will reach the same level of physical consumption

• From rental to ownership, business model change from monetizing on MAU data to transaction fee

o Sandbox being a gaming-first, no-code platform, with play-to-earn elements, make the user experience the most appealing amongst competitors. With a MAU ~350k, Sandbox has 900k+ followers on Twitter and 280k+ members in Discord, boasting one of the largest communities in Web3 (compare to Decentraland 560k/160k Twitter/Discord)

o Land sales have generated ~$200M of cumulative revenue which is a testament to the ecosystem’s belief in management execution and platform potential, strong demand for land plots

• UGC ecosystem fosters a long-lasting game lifecycle as new “Game-in-Game” experience evolve

o Sandbox offers game developer tools (VoxEdit, Game Maker) which is leading to strong ecosystem development, giving creators more earnings potential (receive 95% of money spent when playing UGC games comparing to 28% on Roblox) o Sustainable content with enduring lifecycle: Given the open source and UGC nature, it is less predicated on Sandbox management to create hit game but rather their ability to foster a budding ecosystem of third-party developers. “Game within a game” creates sustainable and lasting lifecycle

o Ever-growing community of players and creators, with more and more renowned names joining. Virtual land owners include high profile crypto companies and communities, and continue building the pipeline of AAA talent, brands, IP and companies

• 165+ partners: i.e. Walking Dead, Atari, Deadmau5, Dapper

• Virtual land owners: Binance, OpenSea, Bored Ape, MakerDAO, etc

• Imaginary monetization methods and compounding royalties fee from value creation

o Sandbox monetizes today by selling LAND in its metaverse, as well as selling NFTs with IP partners (~50% share) and marketplace fees from secondary sales. Now still majority is from LAND sale o Future monetization potential through ads, creator tool under SaaS model and data services

o Ongoing royalties fee through transactions that happen on each land such as "Game-in-Game", Billboards, ticketing, online stores, live-streaming and etc., which will grow to be the key driver in the long term

• Highly scalable business model and high margin financial profile

o Better margin profile as the economics bypass the 30% take rate from platform like google/APP Store o Instead of heavily rely on advertisement, Sandbox incentivize user acquisition through NFT airdrop and Seasonal Passes, user can benefit from value creation by engaging in the community, which is a win-win solution for both the platform and the players/creators

o Once get to a point where land owners can build little metaverse of their own on LANDs, the business can be scaled at an exponential speed, making it a highly scalable and profitable business model

Investment risk and considerations

• User acquisition less than expectation: LAND tokens are way out of the price range for the average person and so are ASSETs. It still feels like a pay-to-win game

• Lack of active recurring users and extremely over valued compare to Web2 games

• Diversified Paths to Monetization is TBD

o User engagement does not reach levels required to incentivize businesses to develop experiences and goods on the Sandbox platform

o DD revealed limited NFT market activities and transactions for UGC NFTs o Editor functionality falls back than Roblox and Unity

• Revenue highly related to token value and potentially highly volatile

o Regulation risk: Government regulations on cryptocurrencies would have material impact on monetization

o SAND price drop: if token price keeps dropping into a death spiral, players will lose confidence

• Competitors risk: Centralized players may open up crypto capabilities stifling decentralized metaverse adoption, those gaming studio with 3A capabilities will attract whales once they enter into web3

• Landowners’ issue

o Landowners become middlemen between creators and players – create barrier to creation and friction to the experience

o Economic allocation to landowners(early ecosystem players) is too much

Appendix – Potential risk & mitigants and Future DD areas

Industry

·       Competitive landscape of the metaverse industry, what is Sandbox key competitive advantage comparing to Decentraland, Axie Infinity, Upland, Illuvium, Metahero, Star Atlas, Bloktopia, Otherside, and potential new metaverse incomer from Centralized platform?

o   How do your in-game mechanics and builder tool (VoxEdit) compare to these platforms?

o   How do you continue to compete for user engagement as more and more metaverses enter the scene with their own economy and game play

·       Industry expert view on Gamefi/Crypto industry short-term trend and potential risks? What is the outlook for crypto market and how will the volatility affect company’s sustainability

·       Expected floor price/trend of LAND and SAND in the next 3 years? How does company cope with market volatility and retain user confidence?

Business

·       Latest strategy on company roadmap, please briefly describe potential events in the pipeline

·       User/creator acquisition plan and marketing budget, expected growth of MAU?

·       While user engagement has increased from Season 1 to Season 3 (600% increase in total hours played and 789% increase in total experiences visited), we see that based on on-chain data total transaction volume has declined (decreased 67.8% in SAND terms and 94.3% in USD terms) as a result of decline in DAU-to-Payer conversion ratio (decrease from 6.7% to 4.3%)

• As a comparison, Roblox’ DAU-to-Payer conversion ratio has been around 20-25%. Do you have a target in mind and what are some of the levers to achieve that?

• How is user engagement translating into ARPU? What were ARPUs for the 3 seasons?

·       The current NFT marketplace has little to no activity / transactions – what needs to happen to improve user engagement?

·       Potential revenue stream rollout plan including subscriptions, 2B services, Ads and etc.

Financial

·       How many SAND is sitting on company’s balance sheet? What’s company’s plan each year in partial sell of the reserve?

·       What’s the accounting treatment for LAND/SAND/NFT (similar to Roblox – should adopt a deferred schedule to recognize revenue for these durable assets)

·       Current cap table and are investors granted warrants/options on tokens?

·       Does company has any debt on balance sheet? What are the instruments and cost of debt?

·       Future Use of Proceeds plan and expected R&D investment in next 3 years

·       What’s the key cost driver? Revenue split with Partners on primary NFT/ASSET sales? What are incentives from creator fund?

Technology

·       How vulnerable is the underlying code? What audit and test process has company went through?

·       How NFT connect to crypto and if the bridge is hackable?

Legal and regulation

·       What is the expectation for major end market roll out regulation on crypto activities?

·       What is the contract with Partners/creators on IP right authorization?

Executive Summary

Investment Rationale

Competitive Analysis

Risk Consideration

Valuation Analysis

Arbitrum Deep Dive and Layer-2 Industry Analysis

Industry analysis and competitive benchmarking

Framework of evaluating Layer 2

Benchmarking Different L2 solutions

Current state of L2 solutions

Competition from Alt Layer 1

Arbitrum vs. Optimism

Conclusion

Operating Performance

Business Model and Financial Stats

Key Revenue and profit drivers

Financial statements

Tokenomics

Financings and investors

Team

Technical Analysis

Go-to-market strategy and Dapps ecosystem

Key application deep dive – GMX & TreasureDAO

Arbitrum Investment Memo

Executive Summary:

• Offchain Labs, Inc. is the developer of Arbitrum, an optimistic rollup solution for Ethereum scalability that enables fast, cheap and secure transactions on layer 2.

• Arbitrum has achieved significant traction and adoption since its launch in May 2021, with over $2 billion of total value locked (TVL) and over 3 million users (DAU 227K), capturing over 50% market share of all L2 market.

• Arbitrum has a strong competitive positioning in the layer-two scaling market, as it offers a superior technology, a vibrant ecosystem and a favorable valuation: o Arbitrum’s technology uses multi-round fraud proofs that are cheaper and more efficient than single-round fraud proofs used by Optimism. o Arbitrum's compatibility with Ethereum's virtual machine (EVM), flexible and modular design allows for developers customization and innovation o Arbitrum’s ecosystem has over 300 DeFi, NFT, gaming and social media projects that leverage its platform, such as GMX, Uniswap V3, AAVE V3, Curve, SushiSwap and TreasureDAO. o Arbitrum’s valuation is relatively low compared to its competitors and peers in the Layer-2 space, as its market cap is around $1.76 billion USD, while its TVL is around $2.2 billion USD. Its token ARB is trading at around $1.38 USD, while its all-time high was $11.80 USD in March 2023. Its revenue multiple is also lower than other layer-two solutions like Optimism and Polygon.

Investment Rationale

• Market Opportunity: Arbitrum is well-positioned to benefit from the growing demand and adoption of Layer-2 scaling solutions in the blockchain industry. o Layer-2 solutions are essential for addressing the challenges of scalability, cost and performance that limit the potential of Layer-1 blockchains like Ethereum. EIP-4844 will be officially implemented in the Cancun upgrade after the Shanghai upgrade of Ethereum. The most direct benefit of the EIP-4844 scheme implementation is the Layer-2s and ecosystem built upon them. Higher TPS and lower cost are very suitable for high-frequency applications on the chain. We might imagine that some “killer applications” will be born o The current TVL of all Layer2s is ~$9 billion. From August 2021 when the first optimistic rollup was launched on the mainnet, to April 2022, the market grew by 10-fold increase in eight months. From April 2022 to now, excluding the impact of the blackswan events (Luna and FTX), the growth rate of Layer2s is still considerable o Currently Arbitrum holds over 50% market share in all L2 solutions and have superior metrics over its peers in terms of TVL, daily active addresses and transactions, average fee per transaction. The race to attract and retain developers and users is well underway and poised to intensify. Given that Optimistic Rollups have already deployed EVM-compatible general-purpose virtual machines, they are well positioned to continue to support the rapid migration of applications and users to layer-2 networks

• Product Market Fit: Arbitrum is one of the most advanced and widely adopted layer 2 solutions for Ethereum scalability. It uses optimistic rollups, a technique that assumes transactions are valid by default and only verifies them if challenged by a fraud proof. This reduces the amount of computation and data required on layer 1, while preserving the security and finality of Ethereum o Arbitrum is compatible with EVM, leveraging the dominance and compatibility of Ethereum, which has over $70 billion of TVL and over 1.6 million daily active users o Arbitrum’s technology uses multi-round fraud proofs that are cheaper and more efficient than single-round fraud proofs used by Optimism o Arbitrum also supports arbitrary state transitions, which enables developers to create custom features and functionalities on layer 2 o Moreover, Arbitrum has a modular architecture that allows for different components to be upgraded or replaced independently, such as the sequencer, the aggregator and the validator

• Traction and Adoption: Arbitrum has achieved impressive traction and adoption since its launch in May 2021 o It has attracted more than 300 projects to deploy on its platform, including some of the most popular dApps in DeFi, NFTs, gaming and social media. Some notable examples are Uniswap, Aave, MakerDAO, Chainlink, SushiSwap, Balancer, Compound, Curve, Synthetix, Yearn Finance, Opensea, Rarible, Axie Infinity, Decentraland and Reddit o Arbitrum retains over half of its users after airdrop with daily transaction volume continues to show an upward trend and number of protocols deployed on the Arbitrum ecosystem continue to grow o As of April 2023, Arbitrum has over $2 billion of total value locked (TVL) and over 3 million users (DAU 227K), capturing over 50% market share of all L2 market

• Business Model and Profitability: Tokenomics and valuation: Arbitrum has a favorable valuation and tokenomics framework

  o Its market cap is around $1.76 billion USD, while its TVL is around $2.2 billion USD. Its token ARB is trading at around $1.38 USD, while its all-time high was $11.80 USD in March 2023. Its revenue multiple is also lower than other layer-two solutions like Optimism and Polygon

  o Even though the protocol currently does not distribute cash flows, they accrue to the treasury to be reinvested. $ARB token has value through its cash flows, governance, and security o In the long term, Revenue will improve as adoption grows. EIP-4844 will also likely reduce costs by 10-100x

• Team and Vision: o Offchain Labs is led by a team of blockchain experts and researchers with strong backgrounds in computer science, cryptography and distributed systems. The co-founders are Ed Felten (Chief Scientist), Steven Goldfeder (CEO) and Harry Kalodner (CTO), who are all affiliated with Princeton University's Computer Science Department o Arbitrum has an ambitious roadmap for 2023, which includes launching its own layer-three solution called Orbit, enabling developers to deploy programs written in popular languages like Rust and C++, expanding its validator set to include more independent validators, and moving its protocol to Layer-2 with Arbitrum One

Competitive Analysis

• Arbitrum vs Optimism: Both are optimistic rollup solutions that offer EVM compatibility, fast transaction confirmation and low fees. However, Arbitrum has a more flexible and modular design that allows for customization and innovation on layer 2. Arbitrum also has a larger and more diverse ecosystem of projects and users than Optimism.

• Arbitrum vs ZKSync: Both are rollup solutions that offer EVM compatibility, fast transaction confirmation and low fees. However, ZKSync uses zero-knowledge proofs (ZKPs) instead of optimistic rollups to verify transactions on layer 1. This means that ZKSync has higher security and finality guarantees than Arbitrum, as it does not rely on fraud proofs or challenge periods. ZKSync also has lower gas costs than Arbitrum, as it can compress more transactions into a single proof. However, ZKSync is still in development and has not launched its full EVM support yet. Arbitrum has a more mature and robust technology and ecosystem than ZKSync.

• Arbitrum vs Polygon: Both are layer-2 solutions that offer EVM compatibility, fast transaction confirmation and low fees. However, Polygon is a hybrid solution that combines sidechains and rollups to achieve scalability. Sidechains are independent blockchains that run parallel to Ethereum and use their own consensus mechanisms and validators. Rollups are similar to Arbitrum's approach of moving transactions off-chain and settling them on-chain periodically. Polygon offers more scalability and flexibility than Arbitrum, as it can support different types of sidechains and rollups for different use cases. However, Polygon also has lower security and decentralization than Arbitrum, as it relies on its own validators and bridges to secure its sidechains and rollups. Polygon also has more complexity and fragmentation than Arbitrum, as it requires users to switch between different networks and tokens.

Conclusion:

• Arbitrum has a competitive edge over other layer-2 solutions in terms of its flexible and modular design that allows for customization and innovation on layer 2. It also has a larger and more diverse ecosystem of projects and users than most other layer-2 solutions.

• Arbitrum faces competition from other layer-2 solutions that offer different trade-offs between scalability, security, usability and cost. Some of these solutions are still in development or have not launched their full features yet.

• We believe that Arbitrum has the potential to become a dominant layer-2 solution for Ethereum and capture a significant share of the growing blockchain market.

• Even if ZK technology matures, Arbitrum could still have a place in the L2 ecosystem, especially for applications or users that value compatibility, flexibility, or decentralization over speed or cost. Of course, this also depends on how Arbitrum adapts and innovates in response to the competition and demand from the market.

Risk Consideration

• Competitive risk: Arbitrum faces intense competition from other layer-two solutions, mainly ZK rollups, as well as from alternative layer-one platforms, such as Aptos, Sui, Solana, Avalanche and Terra. Arbitrum may lose its market share, user base and ecosystem if it fails to deliver superior performance, user experience and innovation compared to its competitors. Arbitrum with its long withdrawal times, reliance on bridges and the possibility of technical obsolescence may underperform other ZK rollups solutions when ZK Rollup matures o Mitigants: Arbitrum can diversifying and expanding to different market segments and niches, such as DeFi, NFTs, gaming and social media and all other applications or users that value compatibility, flexibility, or decentralization over speed or cost, its technological edge, expanding its partnerships and collaborations, providing incentives and benefits to its users and builders.

• Regulatory Risk: Arbitrum operates in a complex and uncertain regulatory environment, as different jurisdictions may have different laws and rules regarding cryptocurrencies, smart contracts, decentralized applications and governance tokens. Arbitrum may face legal challenges or sanctions if it violates any applicable regulations or fails to comply with any requests or demands from authorities o Mitigants: Arbitrum can mitigate regulatory risk by closely monitoring and complying with the relevant laws and regulations in different jurisdictions. Arbitrum can also engage with regulators and policymakers to educate them about its technology and its benefits for the blockchain industry and the society. Arbitrum can also leverage its partnerships and collaborations with reputable and influential organizations, such as Reddit, Chainlink and EY, to gain credibility and legitimacy in the eyes of regulators and stakeholders. Arbitrum can also seek legal advice and guidance from experts and professionals to deal with any legal disputes or liabilities arising from its optimistic rollup design

• Technical Risk: Arbitrum relies on complex and novel technology that may have undiscovered bugs, vulnerabilities or limitations that could compromise its functionality, security or performance. Arbitrum may also face technical challenges or difficulties in developing, upgrading or maintaining its technology and infrastructure. For example, Arbitrum may encounter scalability bottlenecks, network congestion, interoperability issues, compatibility problems or cyberattacks that could disrupt its service or cause loss of funds. Arbitrum may also face competition or obsolescence from other technological innovations or solutions that could offer better scalability, security or usability than Arbitrum. Arbitrum relies on bridges to connect with other layer-1 and layer-2 networks. Bridges are not trustless or decentralized, as they require users to deposit their assets into smart contracts controlled by bridge operators. Bridges may pose security risks if they are hacked or compromised by malicious actors. Bridges may also pose usability risks if they are congested or unavailable due to technical issues or network conditions o Mitigants: Arbitrum can mitigate technical risk by conducting rigorous testing and auditing of its technology and infrastructure. Arbitrum can also adopt best practices and standards for security, reliability and performance. Arbitrum can also seek feedback and input from its community and users to identify and resolve any technical issues or difficulties. Arbitrum can also invest in research and development to improve and innovate its technology and infrastructure. Arbitrum can also keep abreast of the latest technological trends and developments and adapt to changing market needs and expectations. Arbitrum can also support multiple bridges to ensure redundancy and availability. Arbitrum can also educate its users about the risks and trade-offs of using bridges and encourage them to use caution and due diligence when transferring assets between different networks

Valuation Analysis

Valuation Framework: To value Arbitrum and its native token $ARB, can adopt discounted cash flow (DCF) model based on the expected future cash flows generated by Arbitrum's platform. Assuming that Arbitrum's main source of revenue is

• Transaction fees

• MEV (maximum extractable value)

• Token sale

  Main cost is the gas paid to Ethereum for posting transaction batches on layer 1. We can project Arbitrum's revenue and cost based on its historical and current performance, as well as its expected growth and market share in the layer 2 space. We then divide Arbitrum's enterprise value (EV) by its total token supply to derive its token value.

In the long term, Revenue will improve as adoption grows. EIP-4844 will also likely reduce costs by 10-100x.

Key valuation uplift drivers:

• Steadily increased total transaction volume, which is driven by o Crypto market development and total market transaction volume o Arbitrum market share  Overall L2 development (competition with ZKP)  Dapp and user adoption on Arbitrum o Flagship Dapp like GMX and TreasureDAO developing in the ecosystem

• Transaction fee charged increase due to less intensified competition (unlikely)

• Cost paid to L-1 decreasing

• Other new business streams such as more 2B service model, latency and etc.

Valuation downside risks: Regulatory changes, user adoption barriers, and competitive pressures.

Arbitrum Tokenomics Analysis:

$ARB utility can be summarized as below:

• Chains upgradeability & technical future

• DAO treasury

• Token inflation

• Sequencer profit

• Arbitrum social media accounts

With a total supply of 10Bn, $ARB is distributed as below:

Even though the protocol currently does not distribute cash flows, they accrue to the treasury to be reinvested. It would seem as though the $ARB token has value through its cash flows, governance, and security.

Relative valuation for $ARB & $OP

Overall Arbitrum has superior scale, performance and adoption than Optimism, and it also has lower multiple in terms of Mkt cap over revenue, profit, TVL, daily transactions and active addresses. With just a 20% premium, $ARB is clearly undervalued compared to $OP.

Valuation Relative to Peers: To compare Arbitrum's valuation with its peers, we use two metrics: price-to-sales (P/S) ratio and price-to-earnings (P/E) ratio. We calculate Arbitrum's P/S and P/E ratios based on its projected revenue and earnings for 2023, as well as its current token price and supply. We then compare Arbitrum's P/S and P/E ratios with those of other layer 2 solutions, such as Optimism and Polygon.

Project Fees ($M) Revenue ($M) Token Price ($) Supply (B) Market Cap ($B) FDV ($B) P/F (Mkt Cap) P/F (FDV) P/S (Mkt Cap) P/S (FDV) Arbitrum 109.56 29.87 1.35 1.275 1.76 13.46 16.1x 122.9x 58.9x 450.6x Optimism 53.99 13.34 2.12 0.69 1.2 9.11 22.2x 168.7x 90.0x 682.9x Polygon 62.16 44.5 0.98 6 9.06 9.8 145.8x 157.7x 203.6x 220.2x

Source: Token Terminal

Future Price Trend of $ARB: To forecast the future price trend of $ARB, we use a combination of fundamental analysis and technical analysis. Fundamental analysis evaluates the intrinsic value of $ARB based on Arbitrum's underlying business performance, growth prospects and competitive advantages. Technical analysis evaluates the market sentiment and price movements of $ARB based on historical patterns, trends and indicators. We use various fundamental and technical factors to estimate the future demand and supply of $ARB, as well as its expected price range and volatility. We also consider the potential catalysts and risks that could affect $ARB's price in the short term and long term. Based on our analysis, we expect $ARB's price to increase gradually over time, as Arbitrum continues to grow its user base, ecosystem and market share in the layer 2 space. However, we also expect $ARB's price to experience significant fluctuations along the way, as Arbitrum faces various challenges and uncertainties in the regulatory, technical and market domains.

Arbitrum Deep Dive and Layer-2 Industry Analysis

Industry analysis and competitive benchmarking

Framework of evaluating Layer 2

• Technical Design

• execution environment

• throughput and finality

• on-chain & ecosystem data o TVL o daily active addresses o daily transactions o average fee per transaction

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Benchmarking Different L2 solutions

• Different L2 solutions have different trade-offs between speed, security, cost, and compatibility. • Plasma sidechains and state channel networks offer faster finality and higher throughput than rollups, but they also have higher withdrawal fees and lower security guarantees. • ZK rollups have the following advantages over optimistic rollups: o Higher security: ZKPs guarantee the correctness of transactions without relying on any assumptions or trust. Fraud proofs, on the other hand, depend on the availability and honesty of validators and challengers, who may be corrupted or censored. o Higher privacy: ZKPs hide the details of transactions, such as the sender, receiver, and amount, from anyone except the parties involved. Fraud proofs reveal these details to anyone who can access the main chain data. o Lower latency: ZKPs allow transactions to be finalized as soon as they are posted on the main chain, without any waiting period for disputes. Fraud proofs require a challenge period, which can range from several minutes to several days, depending on the network congestion and security parameters. • Optimistic rollups have the following advantages over ZK rollups: o Higher scalability: Fraud proofs allow more transactions to be processed per second, as they do not require complex computations or large proofs. ZKPs are computationally intensive and generate large amounts of data, which limit the scalability of ZK rollups. o Easier implementation: Fraud proofs are compatible with any Ethereum smart contract, as they use the same virtual machine and programming languages. ZKPs require specific cryptographic libraries and compilers, which are not widely available or standardized. o More maturity: Fraud proofs have been tested and deployed on Ethereum for longer than ZKPs, which are still relatively new and experimental. Optimistic rollups have more support and adoption from developers and users than ZK rollups. • A hybrid approach may combine the best features of both rollups, such as using ZKPs for data availability and fraud proofs for execution, or using ZKPs for some transactions and fraud proofs for others. Some examples of hybrid projects are zkSync Lite, Polygon Zero, and StarkNet

Current state of L2 solutions

Source: DeFiLemma

Competition from Alt Layer 1 For now, layer-2 scaling solutions place additional burdens on users compared to most alternative layer-1 platforms. While some third party protocols have emerged and are already reducing withdrawal times for users, long withdrawal times persist at the core of both Optimistic Rollup and ZK-Rollup technologies. Additionally, many layer-2 user experiences start with having to bridge assets. Bridging takes time and requires upfront spend from users to get their assets onto layer-2. Crypto exchanges such as Binance and FTX have begun offering withdrawals directly to layer-2 networks from their platforms (i.e., no need to bridge) and alleviated some of this friction. However, the introduction of a new layer will, for at least the near to medium term, require additional effort on the part of users to transport assets across networks. While layer-2 networks are frequently contextualized in terms of cost savings compared to Ethereum, the market for general-purpose computation is already highly competitive due to the rise of alternative layer-1 plaftorms. Solana, Avalanche, and Terra already have hundreds of different projects building on top of and around their respective ecosystems and have a sizeable head-start in terms of user adoption compared to layer-2 networks.

Ethereum’s current throughput is ~15 TPS. Competing layer-1 networks such as Solana have achieved as high as ~60,000 TPS in testnet environments. However, recent network downtime and degraded performance caused by high demand on many alternative layer-1 platforms have cast a shadow of doubt over their maximum throughput in a production environment Under current implementations, it is estimated that Ethereum’s layer-2 networks could collectively execute ~5,000 TPS on their respective networks (if Ethereum layer-1 was exclusively used for storing rollup data and excluding any performance gains attributable to EIPs). Rollups are expected to achieve their second scaling gain with the advent of increased data availability space on layer-1: data sharding will bring layer-2 throughput to an estimated ~100,000 TPS.

Arbitrum vs. Optimism

Source: Layer 2 Dashboard: Arbitrum and Optimism (dune.com) L2 Comparisons & Benchmarks - Usage, Growth, Fees, UX - Optimism, Arbitrum (dune.com)

Overall Arbitrum has superior scale, performance and adoption than Optimism, and it also has lower multiple in terms of Mkt cap over revenue, profit, TVL, daily transactions and active addresses. With just a 20% premium, $ARB is clearly undervalued compared to $OP.

Conclusion

The race to attract and retain developers and users is well underway and poised to intensify. Given that Optimistic Rollups have already deployed EVM-compatible general-purpose virtual machines, they are well positioned to continue to support the rapid migration of applications and users to layer-2 networks. While ZK-Rollups are not EVM-compatible by default, they have made substantial strides towards compatibility or pioneered their own development frameworks and seen significant levels of traction and community support

Operating Performance

• TVL

Source: DeFilemma

• Daily transactions

Arbitrum’s daily transaction volume continues to show an upward trend. • The average daily transaction volume at the beginning of the year was 159,000, and now it is 1.2 million per day. • This is higher than Ethereum, which processes 935,000 transactions per day.

• Daily active addresses: The number of daily active addresses has increased by 470% since the beginning of the year, and is expected to permanently surpass Ethereum.

• Unique contracts Deployed:

In the past year, the number of protocols deployed on the Arbitrum ecosystem has grown exponentially, with no signs of slowing down. Since the beginning of the year, the number of protocols deployed on the Arbitrum ecosystem has increased by 156%, and it seems to be accelerating. It is about 10 times that of Optimism.

• Arbitrum user retention numbers after Airdrop:

o 56% on a 1-month time frame and 40% on a 1-week timeframe, performing extremely well relative to their peers, a decent sign of sustainable growth and adoption o Active addresses ranging ~150k to 190k, higher than the ~120k range before the airdrop o Daily transactions ranging around ~850k to 1M, higher than pre-airdrop days as well

Business Model and Financial Stats

Arbitrum's business model can be summarized in three parts:

• Transaction fees

• MEV (maximum extractable value)

• Token sale  Transaction fee income simply means that they buy block space on L1, use it efficiently and sell it to users at a premium on L2. The net revenue is the difference between the fees they charge users and the fees they pay for block space on Ethereum.Profit is shared with sequencers and other stakeholders.  MEV is a way of rent-seeking, where block producers can achieve it by specially reordering transactions. Different Layer2s have different attitudes towards MEV. Optimism incorporates MEV into auctions, believing that it is fundamental to blockchain and can generate income through auctions. Arbitrum, compared to profiting from MEV, hopes to minimize MEV in its system and reduce the amount of MEV extracted, making it more attractive to users and builders.  Generating income from its token holdings or investments. Offchain Labs may hold a portion of its native token $ARB or other tokens that are used or supported on its platform. Offchain Labs may also invest in other projects or platforms that are aligned with its vision or mission.  The Arbitrum DAO Treasury was allocated 42.78% of the initial supply. At today’s prices this is equivalent to $5.13b USD. Most of this will be used to support ecosystem projects. This is very bullish for Arbitrum growth.

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Profitability Benchmarking Of the top 3 L2s by TVL (Arbitrum, Optimism, and zkSync), which is most profitable?

To find this, we simply take the spread between the fee revenue generated and the L1 call data security costs (plus verification costs for zkrollups).

Over the past 12 months, Arbitrum has net profits of ~5,200 ETH, which is 80% above that of Optimism. Considering zkSync Era just launched, it doesn’t make sense to include it in this comparison, but for reference, zk has generated ~50 ETH in profit since launch.

So from a raw profit perspective, Arbitrum substantially trumps that of Optimism. But is it simply a product of heightened volume? Yes and no.

Although Arbitrum has 80% higher profits compared to Optimism, it only has 54% more transaction volume and 28% more revenue. So, in short, Arbitrum is cheaper to transact on, which has led to less revenue on a per tx basis.

The answer really lies within the L1 security costs, Arbitrum only has 20% higher security costs in comparison. On a per-transaction basis, Optimism is paying nearly double that of Arbitrum for L1 call data.

The demand for rollups is clear. As the L2 ecosystem continues to evolve and grow, so will its profitability metrics. As for now, Arbitrum is considerably more profitable in comparison to Optimism and zkSync due to higher throughput and cheaper security costs.

Key Revenue and profit drivers

• Steadily increased total transaction volume, which is driven by o Crypto market development and total market transaction volume o Arbitrum market share  Overall L2 development (competition with ZKP)  Dapp and user adoption on Arbitrum o Flagship Dapp like GMX and TreasureDAO developing in the ecosystem

• Transaction fee charged increase due to less intensified competition (unlikely)

• Cost paid to L-1 decreasing

• Other new business streams such as more 2B service model, latency and etc.

Financial statements

Source: Token Terminal

Tokenomics Offchain Labs has launched its governance token ARB in March 2023, which is used to participate in the Arbitrum DAO and secure the Arbitrum networks.

Offchain Labs plans to ensure its long-term sustainability and governance by decentralizing its Arbitrum networks and empowering the community to shape the future of Arbitrum. Offchain Labs has created the Arbitrum Foundation, a non-profit organization that oversees the development and governance of Arbitrum. The Arbitrum Foundation also controls a treasury of ARB tokens that can be used to fund grants, bounties, and other initiatives to support the Arbitrum ecosystem.

Category Subcategory Percentage Amount (in billions) Community Airdrops to users 11.50% 1.15 Community DAOs operating on Arbitrum 1.10% 0.11 Community Treasury 43.40% 4.34 Investors Seed 20% 2 Investors Series A 10% 1 Investors Series B 10% 1 Team Team members 4% 0.4 Total 100% 10

Utility $ARB is the governance token for the Arbitrum DAO, controlling:

• Chains upgradeability & technical future

• DAO treasury

• Token inflation

• Sequencer profit

• Arbitrum social media accounts

ARB performance

Source: Dune Dashboard as of Apr 25, 2023

Financings and investors

Time Round Financing Amount Valuation Investors 2019 Strategic Investment N/A N/A Coinbase Ventures March 2019 Seed Round $3.7m N/A Pantera Capital (lead), Compound VC and others April 2021 Series A $20m Unknown Unknown August 2021 Series B $120m $1.2b Lightspeed Venture Partners (lead), Polychain Capital, Ribbit Capital, Redpoint Ventures, Pantera Capital, Alameda Research, Mark Cuban and others

Team Arbitrum was founded by Ed Felten, Steven Goldfeder and Harry Kalodner. The project was initially run by Offchain Labs and the Arbitrum foundation. In March 2023, the Arbitrum DAO was launched to govern the Arbitrum One & Nova chains.

Technical Analysis

Rollup is a technology that processes transactions on Layer-2 Rollup, while a node called a sequencer aggregates and uploads transaction state data to Layer1. Optimistic Rollup uses dispute resolution mechanisms to ensure transaction security (i.e., report and resolve errors after they are discovered, otherwise they are considered correct), while ZK Rollup uses zero-knowledge mathematical proofs for transaction verification. So what is the difference between Arbitrum and Optimism, which both use op? The core difference is that Optimism uses a single-round fraud proof executed on Layer1, while Arbitrum uses a multi-round fraud proof executed off-chain. Compared to single-round fraud proofs, Arbitrum’s multi-round fraud proofs are cheaper and more efficient. In addition, from the perspective of ecosystem development, Optimism uses Ethereum’s EVM, while Arbitrum uses its own Arbitrum virtual machine (AVM). This results in Optimism having only Solidity compiler, while Arbitrum supports all EVM compilation languages. From the current scale of the ecosystem and TVL, Arbitrum is in a leading position.

Go-to-market strategy and Dapps ecosystem

The top applications in Arbitrum's ecosystem are mostly DeFi projects, which is related to Arbitrum's advantages. On the one hand, Optimistic Rollup, which Arbitrum adopts, has lower implementation difficulty and more mature infrastructure. On the other hand, it is compatible with EVM, which allows applications on Ethereum to migrate to Arbitrum directly.

Project Category TVL Active Addresses TVL/Arbitrum TVL GMX Derivatives $574.44m 1,234 24.64% Uniswap V3 DEX $298.12m 2,345 12.79% Radiant N/A $132.68m 345 5.69% Stargate Cross Chain $106.78m 456 4.58% AAVE V3 Lending $145.07m 567 6.23% Curve Dexes $93.06m 678 3.99% Camelot N/A $105.72m 789 4.54% Sushi DEX $102.41m 890 4.40% Balancer V2 DEX $74.4m 901 3.19% Beefy Yield Aggregator $51.13m 1,012 2.19% Abracadabra CDP $43.96m 1,123 1.89% Ramses Exchange DEX $41.14m 1,234 1.77% Convex Finance Yield Aggregator $40.34m $1,345 $1.73% Gains Network Derivatives $41.37m $1,456 $1.78% Wombat Exchange DEX $50.11m $1,567 $2.15% Arbitrum Exchange DEX $49.19m $1,678 $2.11% Jones DAO Options Vault $29.13m $1,789 $1.%25 Source: DefiLlama as of Apr 14, 2023 and Arbiscan as of Apr 15, 2023

In the long run, Arbitrum could expand its go-to-market strategies in following methods:

• Leveraging its partnerships and collaborations with reputable and influential organizations, such as Reddit, Chainlink and EY, to gain credibility and legitimacy in the eyes of potential users and investors.

• Providing incentives, rewards and benefits to its users, such as airdrops, staking, governance and fee discounts, to increase its user acquisition and retention.

• Catering to different market segments and niches, such as DeFi, NFTs, gaming and social media, by supporting various projects and applications that deploy on its platform.

• Expanding its user base and ecosystem beyond Ethereum by supporting multiple bridges to ensure interoperability and availability across different networks.

• Investing in research and development to improve and innovate its technology and infrastructure, as well as adapting to changing market needs and expectations.

Key application deep dive – GMX & TreasureDAO

GMX

GMX can be said to be one of the best performing defi in 2022, its GLP (GLP is a pool of funds composed of USDT, BTC, ETH and other stablecoins and cryptocurrencies, the proportion of tokens will maintain a relative balance) APR has been 20%+ for a long time, which is particularly outstanding in the bear market. So what are the innovations compared to other protocols?

1. In traditional Perp exchanges, users are each other’s counterparties. But in GMX, users trade with the GLP pool. This involves two types of participants on the GMX platform, one is leverage trading users, and the other is LP. LP does not need to provide trading pairs (such as ETH/USDT) but uses single token (including common tokens such as ETH, BTC) to buy GLP to provide liquidity for the platform. Users who hold GLP can get 70% of GMX platform fees. For leverage trading users, they can open positions by depositing margin, and in fact, when users open long ETH, they are equivalent to lending ETH to the GLP pool, and opening short is equivalent to lending stablecoin assets. On the one hand, it maintains the stability of the pool by having a larger proportion of stablecoins (basically stablecoins: non-stablecoins are 1:1), and on the other hand, we can see the concept of weight in the pool. When the proportion of a token is too high, the price of buying GLP with that token will be higher, which will make people start to invest in other tokens to maintain balance.

2. GMX uses oracle feed prices instead of AMM, so that traders can achieve zero slippage trading. Whether it is minting GLP or burning GLP, they can be exchanged without slippage.

Treasure DAO Treasure is a decentralized video game console/publisher that fosters the growth of indie Web3 games. It is not a GameFi, nor is it an NFT marketplace, it is like a Nintendo of Gamfi based on NFT. Treasure’s thesis is to unite games and players to forge a dynamic meta-ecosystem, unlocking innovative experiences, open economies, and compound network effects. I

• It has its own Token which is Magic, serves as the unifying factor connecting metaverses, users, and assets. Third-party teams can integrate MAGIC into their game economies and lore, and benefit from its emissions and incentives.

• It has its own Market Place - Trove, where NFTs related to ecosystem projects can be traded, priced in ETH or Magic.

• It has its own Dex – magicSwap. As a Dex, it currently supports trading two token pairs MAGIC/Gfly (Gfly is the governance token of BattleFly) and MAGIC/ELM (ELM is the governance token of Tales of Elleria).

• Bridgeworld is a flagship game by the Treasure team that involves strategic trading, resource collection and crafting, social coordination and geopolitics. It is like a gamified DeFi protocol that utilizes MAGIC (power), Treasure NFTs (resources), and Legions (players). Bridgeworld is the core economic hub of Treasure DAO, as a resource coordination game, it integrates many DeFi gameplay around mining, farming, summoning, exploring, etc., to make players Magic. Unlike other P2E games that attract players by issuing coins, BridgeWorld requires players to spend more time playing games to get more Magic, thus increasing player stickiness.

• It has a bunch of GameFi projects, such as the early star Realm, BattleFly, the recently hot Beacon… From simulation, card, action, RPG… Everything is available, currently all projects seem to have not issued coins, are using Magic. o Treasure offers many benefits for game developers who want to join its ecosystem. It has impressive metrics such as being one of the largest recipients of ARB tokens from Arbitrum, having more than 400k gamers in its community, and accounting for more than 95% of all gaming and NFT transactions on Arbitrum. It also supports developers with grants and low revenue share compared to Web2 platforms. It has features like TreasureTags that incentivize holders to contribute and allow Treasure to promote or phase out cartridges as needed. It also has interoperability as a unique selling point that creates synergistic effects among games and players. o The Beacon - Treasure DAO’s phenomenal product. The Beacon is an RPG type game, the gameplay is relatively simple, players choose a basic weapon to enter the dungeon exploration, upgrade weapons to better fight along the way. The game modes include home mode, single player PVE and tavern quiz. Home mode is used to edit houses, single player PVE mode is to explore the dungeon successfully within a specified time and get rewards, tavern quiz is mainly to answer npc questions. 17 The Beacon launched on Arbitrum only a month’s time, the number of players has nearly reached 26000+, the game’s creation character NFT purchase number as many as 65000 times, The Beacon’s popularity also drove up Treasure DAO data , pulling Treasure DAO’s weekly active users from 5000 to around 20000 , directly turning nearly four times. After experiencing the decline in early January , there has been a budding trend recently. How does Treasure DAO achieve this decentralized gaming ecosystem? Universal currency Magic and three carriages Trove , Bridgeworld , MagicSwap . TreasureDAO already has more than a dozen different types of games under its belt, with Magic user transactions reaching 400 ,000. Although in the early stages of the ecosystem, but the community’s activity and loyalty have already emerged, everyone can play games, participate in governance and so on, very consistent with its vision, forming a decentralized, co-created by players and builders community gaming ecosystem. Its two core features: First is through liquidity innovation, different from other games by issuing coins and APY attract players - TreasureDAO one hand need to spend time playing games in order to get magic, on the other hand through POW, Magic half-life characteristics will make Magic more and more scarce, attracting users to spend more time playing games to get magic. Second with the increase in game types, players and TreasureDAO binding relationship deeper, web3 users influx in the future demand for vertical games will also increase. The ecological LP incentives are NFTs, which allow users to use NFTs to play games, unlock tasks, not lead to direct pressure on Magic, to build a slow but steady growth model. In this process, gradually absorb play for fun users, to increase stickiness. Analogy web2 game look at TreasureDAO endgame TreasureDAO as web3 Nintendo, Steam , QQ game hall, in business model still can provide development and distribution services for game developers or publishers, ultimately become a bridge between players and games. In Steam player word-of-mouth self-propagation and viral marketing scenarios may also be reproduced in TreasureDAO , as $Magic also in continuous rise . In the long run , TreasureDAO has become a backbone force in Arbitrum ecology. Treasure establishes a unified ecosystem where games utilize the reserve currency MAGIC for in-game purposes and cross-game trading. It serves as an excellent case study in creating interoperability for Web3 game developers. in the future OP and ZK competition , if TreasureDAO can have a continuous stream of explosive games emerge, Arbitrum may be able to further stand out, currently very optimistic about Arbitrum ecology development.