Noteworthy developments included:

1. Bitcoin Ordinals: Empowering users to inscribe data directly onto the blockchain, Bitcoin Ordinals facilitated the creation of Non-Fungible Tokens (NFTs) and digital collectibles.

2. Bitcoin Stamps: Utilizing the Bitcoin L1, Bitcoin Stamps pioneered the minting of digital collections. The integration of the BRC-20 token standard further allowed for the creation of semi-fungible tokens on the Bitcoin network.

3. BRC-20 Token Standard Advancements: Enabling users to embed JSON code in an Ordinal, the BRC-20 token standard facilitated the creation of programmable assets on Bitcoin, enhancing the network's functionality.

4. BRC-721E Token Standard: This standard served as a bridge, facilitating the seamless transfer of NFTs from Ethereum to Bitcoin, and showcasing the interoperability between the two major blockchain networks.

5. RGB Protocol: Leveraging the Lightning Network, the RGB protocol introduced private smart contracts and tokenization to Bitcoin, enhancing privacy and expanding the possibilities for decentralized applications.

6. SRC-20 Tokens (Bitcoin Stamps): Representing digital collectibles stored as unspent transaction outputs on the Bitcoin blockchain, SRC-20 tokens, also known as Bitcoin Stamps, provided heightened security and immutability to the digital collectibles ecosystem.

Network Activity

Bitcoin Network Fees Spiked in December Due to Ordinals

In December 2023, Bitcoin network fees surged to over $37, the highest level since April 2021. This spike coincided with the growing popularity of "Bitcoin NFTs," more accurately known as Ordinals, which leverage the Segwit and Taproot upgrades to store text, images, and video data on the Bitcoin blockchain.

While Ordinal activity has decreased, leading to Bitcoin fees currently settling between $10 and $5, the reason for the sudden drop in October remains unclear.

Daily Active Users

This metric counts the number of unique addresses actively involved in the network as either senders or receivers on a daily basis.

Historically, the daily active users peak occurred in January 2021, with approximately 22 million users. As of January 2024, this number has decreased to around 17 million active users.

bitcoin-number-of-active-addresses

Bitcoin: Store of Value with Growing Transaction Volume

While Bitcoin is primarily viewed as a store of value, leading many users to buy and hold it long-term, we've also seen a significant increase in daily transaction volume. In 2020, the average daily transaction count was around 300,000, and it has grown to 500,000 per day in 2023. This increase benefits miners who collect transaction fees.

Transactions Count

Active Addresses Paint a Growth Picture

The total number of unique addresses used in Bitcoin transactions also paints a picture of growth. Currently, there are over 1.2 billion unique addresses on the network, compared to 800 million in 2021. It's important to note that not all addresses represent unique users, as individuals can have multiple addresses.

bitcoin-number-of-addresses

Bitcoin ETFs

It has only been a month since Bitcoin ETFs were approved, and already we have more than 33 billion dollars in holdings across these ETFs. The current market capitalization of Bitcoin is 1 trillion dollars. Grayscale Bitcoin Trust (GBTC) holds the largest market share with 23 billion dollars, followed by BlackRock (IBIT) with 6 billion dollars, and then Ark Invest/21Shares (ARKB), Bitwise (BITB), Franklin (EZBC), and others.

spot-bitcoin-etf-onchain-holdings-usd

However, when looking at the daily market share by volume for spot Bitcoin ETFs, GBTC captures 40%, IBIT comes in at 33%, FBTC holds 16%, and ARKB has 8%, followed by others.

bitcoin-spot-etf-volume-market-share

Lighting Network

River Financial estimated a minimum of 6.6 million routed transactions on the Lightning Network in August 2023, translating to roughly 213,000 transactions per day. This translates to Lightning processing at least 47% of Bitcoin's daily on-chain transactions, equivalent to 14 days of on-chain activity in one month. Lightning transactions are seeing growth in gaming, social media tipping, Online commerce, Exchanges withdrawals and deposits, and Micropayments.

As of August 2023, Lightning processes roughly 2.5 transactions per second compared to Bitcoin's on-chain average of 4.4 transactions per second.

While the capacity has more than doubled in the past two years, from 3,000 in 2022 to 5,000 BTC in 2023, it decreased in 2023.

lightning-networks-capacity

Interestingly, the River Financial report suggests a ratio of 8 custodial to 1 non-custodial Lightning user, highlighting the need for further development of user-friendly and secure self-custody solutions.

Bridges

BTC Distribution to Other Blockchains

• Ethereum: 160,675 BTC

• BNB Chain: 54,203 BTC

• Solana, Avalanche, Fantom, Arbitrum One, Optimism (less then 10K BTC)

Bridges

Wrapped Bitcoin Dominates the Bridge Landscape

Wrapped Bitcoin (WBTC) holds over 70% of the market share by bridged BTC. It functions as an ERC-20 token on Ethereum, backed 1:1 by actual Bitcoin held by Bitgo, Ren, and Kyber Network under a federated governance model.

Security Considerations for Wrapped Bitcoin

• Custody: Bitgo serves as the custodian, holding the wrapped assets and controlling the minting of WBTC tokens via smart contracts. However, Bitgo does not stake any collateral.

• Minting/Burning: Merchants like Kyber Network and Republic Protocol hold keys to mint or burn wrapped tokens, introducing additional trust assumptions.

Binance-Peg Token:

Binance-Peg Token (BEP2 BTC) holds over 25% of the bridged BTC market share. It represents Bitcoin held in Binance's reserves and is pegged to the value of Bitcoin. However, users must trust Binance with their funds and lose custody of their assets.

Security Assumptions:

• Users lose custody and trust their funds with Binance.

• Binance has no staked collateral - Users rely on Binance's reputation.

While a decentralized bridge not reliant on a centralized entity like WBTC & Binance-Peg is desirable, the entrenched position of WBTC and its widespread use in DeFi applications presents a significant challenge for any newcomer. Overcoming these network effects will be difficult for a newer bridge BTC token.

Bitcoin's Layer 2 Landscape: Challenges and Opportunities

Bitcoin's narrative as "digital gold" has led to many holders treating it as a long-term investment, rather than using it for transactions. This contrasts with Ethereum, where users can actively engage in DeFi and other applications. Layer 2 solutions seek to bridge this gap by enabling Bitcoin holders to utilize their assets without compromising security or decentralization.

While most current L2s for Bitcoin involve trust assumptions and operate as sidechains, they offer various benefits and hold potential for further development.

Key L2 Solutions in the Bitcoin Ecosystem:

• Rootstock (RSK): This sidechain pioneered smart contracts on Bitcoin, allowing users to convert BTC to RBTC for faster and cheaper transactions.

• Stacks Protocol: Formerly known as Blockstack, this L2 blockchain enables smart contracts and DApps on Bitcoin. It utilizes microblocks and a Proof-of-Transfer mechanism for speed and security.

• Liquid Network: This popular sidechain allows for faster and cheaper BTC transactions through a federation-controlled system built on the Elements platform.

• Drivechain: This project envisions altcoins functioning on top of the Bitcoin network, offering scalability, new features, and permissionless experimentation. However, it requires a soft fork for implementation.

Data Analysis and Challenges:

• Stacks Protocol: Total Value Locked (TVL) increased from $50 million on Jan 1 to $120 million on Feb 20, but this rise coincides with the price increase of its native token.

• Daily active addresses: As of Feb 12, weekly active addresses for Stacks are around 3.6k, indicating some growth.

• Liquid Network: Bridged BTC remained flat in 2022 and decreased in 2023 but started rising again at the end of the 2023 year.

While these solutions offer potential, some challenges remain:

• Overall TVL: Compared to Bitcoin bridged to other blockchains, the total value locked in these Layer 2 solutions remains relatively low.

• DeFi and Wallet Experience: The DeFi ecosystem and user experience on these Layer 2 solutions are currently less developed compared to mature offerings on other blockchains.

• Limited Data: Data on user activity and Total Value Locked (TVL) is currently fragmented and incomplete.

• Trust Assumptions: Most current Layer 2s rely on some level of trust, often through sidechains with federations.

• Limited User Adoption: While some user growth is present, it is still nascent compared to other ecosystems.

Final thoughts:

• The recent emergence of Bitcoin stamps, Bitcoin ordinals, BRC-721E, and RGB protocols represents a significant cultural shift towards innovation within the Bitcoin space.

• In recent years, the user experience of using Lightning Network has seen phenomenal improvements. However, while transaction volume has surged dramatically, the issue of limited BTC capacity persists. Nevertheless, Lightning Network’s established mind share suggests it still possesses the potential for widespread adoption.

• Spot Bitcoin ETFs are gaining increasing momentum.

• Compared to Ethereum, Bitcoin's layer-2 solutions are still in their early stages of development.

• Ordinals are expected to contribute to rising gas fees on the Bitcoin network in 2024.

Hard tech start-ups are those that many perceive as nearly impossible to build. They require extensive time and resources to develop the initial product. Consider SpaceX's reusable rockets: initially deemed unfeasible, they underwent years of rigorous development. Ultimately, SpaceX succeeded, creating rapidly reusable rockets that reduced the cost of launching by tenfold and significantly accelerated space exploration and the potential colonization of Mars.

What Is an Easy Start-up?

An easy start-up doesn't demand much time, effort, or skill to launch. However, its simplicity also means that it's easy for others to compete. Starting may be effortless, but maintaining a competitive edge becomes increasingly challenging. As competition stiffens, profits thin, turning the entrepreneurial journey into a constant battle for sufficient margins to fund innovation.

Why Opt for Hard Tech?

The most counterintuitive secret about startups is that it’s often easier to succeed with a hard startup than an easy one. Easy startups are easy to start but hard to make successful. - Sam Altman

1. Attracting Talent: Hard Tech projects attract individuals passionate about solving meaningful problems, ensuring a motivated and innovative team.

2. Innovation Moat: The complexity and innovation inherent in Hard Tech act as a barrier to entry, providing a competitive edge.

3. Barriers to Entry: Hard problems are difficult for a reason. They require more research, more expertise, and more resources to solve. This difficulty creates a natural barrier, discouraging others from entering the same space. Fewer competitors mean a company has more room to innovate and dominate the market once it achieves a breakthrough.

4. Support: If your hard tech startup is working towards a goal that resonates with others' values and aspirations, they are more likely to support you, whether through funding, partnership, or providing expertise.

The Challenges with Hard Tech Start-ups

1. Long Time to Fail: Hard tech startups often work on complex problems that require extensive research and development. This means it can take a long time to even realize that the approach isn't working, leading to prolonged periods of investment with no return.

2. High Personal Cost of Failure: Given the extended time, money, and emotional investment in hard tech ventures, the personal cost of failure is high. Founders and early employees often put significant portions of their careers and lives into the project.

3. Delayed Gratification: In hard tech startups, the time between starting the project and delivering a tangible, marketable product can be several years. This delay can be demotivating for both employees and investors, who may not see the fruits of their labor and investment for a long time, if at all.

Advice for Hard Tech Companies

Don't Be Afraid of Detours

While most founders resist straying from their primary vision, detours can be necessary and beneficial. For instance, Tesla initially produced the high-end Roadster to fund its ultimate goal of the mass-market Model 3. Start-ups thrive on momentum, and aiming for achievable, smaller wins can be the key to long-term success.

Establish a Strong Defense

Ensure you have a unique competitive advantage or "moat" that prevents others from easily replicating your product. This might be in the form of network effects, superior product design, patents, or a user base that enhances the product's value.

Free Yourself from Negative People

Surround yourself with individuals who not only share your vision but also provide constructive feedback. A positive environment is crucial for innovation and perseverance, especially in the challenging journey of a hard tech start-up.

Accomplish, Raise, Build, and Repeat

Adopt a step-by-step approach:

• Accomplish tangible milestones: Focus on achieving small, feasible goals that lead towards your bigger vision.

• Raise funds incrementally: After each accomplishment, seek funding proportional to your needs for the next phase. This approach keeps the company agile and responsive.

• Build iteratively: Use the funds to create better versions of your product or to reach the next milestone. Each iteration should be an improvement, informed by feedback and learning from previous stages.

• Repeat: Continue this cycle, ensuring each step is as small and manageable as possible, reducing risk and maximizing learning and adaptation.

Leverage Cost-Effective Strategies for Fundraising

• Utilize simulations and models: Before building the full-scale product, consider creating simulations or smaller models. This can be a cost-effective way to demonstrate your concept and attract early interest or investment.

• Initiate presales: If your product has a market, consider preselling it. This not only generates early revenue but also validates the market demand.

• Showcase a prototype using minimal resources: Use a fraction of the actual product cost to create a working prototype or demo. This demonstrates commitment and capability without necessitating extensive resources

Maintain a Lean and Agile Operation

• Iterate quickly: Fast iteration cycles help in rapidly improving the product based on user feedback and market demand.

• Build a resilient team: Ensure that your team is adaptable, skilled, and aligned with the start-up's goals. A team that can pivot and persevere through challenges is invaluable.

all kinds of startups usually work best when initial costs are low and iteration cycles are fast. It’s relatively easy for a software startup to take short cycle times and low-costs to an extreme, but hard tech founders are often surprised by how effectively they can do this, too.- Sam altman

Current Hard Problems and References

• Top Hard Tech Startups 2024 | Y Combinator

• Top hard tech start-ups | VentureRadar

In contrast, layer 2s only require a single honest "Sequencer" to guarantee network integrity.

This asymmetric trade-off suggests that layer 2s will consistently deliver high throughput and significant performance advantages, even when the same hardware is employed by both layer 1 and layer 2. This is due to the inefficiencies of synchronization time between 1000s of nodes and the processing time of the slowest node in monolithic execution layers.

While monolithic execution layers can theoretically optimize performance by utilizing high-end hardware, this approach comes at the cost of limiting the number of nodes that can participate in the network. This reduction in node count can diminish the network's overall security and decentralization.

Layer 2s, on the other hand, are inherently more scalable and can effectively utilize high-end hardware without compromising decentralization.

• For example, ZK execution layers require only a handful of powerful machines to handle transactions, generate proofs, and submit them to the mainnet. These proofs can then be verified on thousands of low-end devices.

• While optimistic execution layers are not as efficient as ZK execution layers, they still offer significant performance advantages over monolithic layers. optimistic execution layers require more than a handful of nodes to recompute the data submitted to the mainnet. because of this, we need to keep hardware requirements in check, so we cannot use supercomputers.

What about the economics of Monolithics and Layer2s?

Monolithic execution layers demand 1000s of nodes to reprocess all transactions, Let’s say a monthly cost of $2000 per node. This translates to a total economic cost of $2 million per month.

In contrast, validity-proven execution layers only utilize a handful of supercomputers (let's say ten), each costing $20,000 per month. This results in a significant reduction in the computational network cost, from $2 million to $200,000 per month.

The proliferation of validity proofs has already started and is inevitable. This is the only currently known way for the blockchain world to achieve global scale. Monolithic blockchains cannot scale.

However, these technologies will take time to develop and implement, which is the only drawback to this approach.

Tl;dr: Validity proofs make execution layers faster, cheaper, and easier to verify than monolithic execution layers and optimistic rollups.

Ref:
The efficiencies of validity proofs — polynya

How Do Layer 2s Work?

Layer 2s operate by executing transactions off the main Ethereum chain (off-chain) and then submitting essential transaction data to Ethereum (on-chain). This approach increases transaction throughput while maintaining Ethereum's security.

Types of Layer 2s

1. Optimistic Rollups:

   • Assume transactions are valid but allow for challenges if fraud is suspected.

   • If a challenge occurs, a fault-proof is run to verify validity.

2. Zero-Knowledge Rollups:

   • Use validity proofs to prove transaction validity without revealing underlying data.

   • Transactions are computed off-chain, and compressed proof is submitted to Ethereum.

Current State of Layer 2s

Scalability:

Eth Mainnet gas fee

Layer2 fee

• Layer 2 transaction fees are approximately 10 times lower than Ethereum's.

• However, fees on layer 2s can still spike during periods of high Ethereum use.

• Fees of $0.5 per transaction, remain high for users in developing countries.

Centralization Challenges:

• Sequencer Centralization: In popular rollups like Arbitrum and Optimism, sequencers (which order and batch transactions before submitting them to Ethereum) are currently operated by centralized entities, often the rollup development teams themselves.

• Governance Centralization: Foundational teams behind Layer 2s often hold significant influence over governance decisions, leading to concerns about centralization.

• Single Proof Scheme and Client Software: Reliance on a single proof scheme and client software introduces the risk of bugs or vulnerabilities affecting the entire chain.

So, in the current state layer2s are not as cheap as desired and not decentralized with many single points of failures.

Where we want to go:

Gas Fees: Achieve transaction fees as low as possible, ideally below $0.001 for basic operations such as swaps, lending, and other essential DeFi transactions.

Decentralization: Maximize decentralization of Layer 2 networks to ensure that transactions on Layer 2 are as secure as those on Ethereum's mainnet.

How can we get there?

Gas Fees: Roadmap for Reduction

Current Cost Breakdown: Approximately 90% of Layer 2 transaction fees are attributed to storing calldata on Ethereum's mainnet.

Proto-Danksharding (2024):

• Introduces data blobs (temporary storage spaces) that can be attached to Ethereum blocks. Blobs are automatically deleted after a set period and are cheaper to use since data is not stored forever.

• Enables Layer 2s to store data more cheaply, reducing transaction fees by 10x or more.

Full Danksharding (Several Years Away):

• Full realization of rollup scaling.

• Expands data blobs from 1 in Proto-Danksharding to 64.

• Utilizes data sampling techniques to reduce rollup costs further by avoiding full downloads of blob data for verification.

• Requires updates to consensus clients to manage large blobs effectively.

Decentralization: We need Multiple permissionless sequences, Multiple fault-proof schemes, and Multiple client software.

What are the current roadmaps for the projects?

Base Roadmap for 2024

• Except for Arbitrum, all other general optimistic and ZK rollups are currently in stage 0. We anticipate that the most optimistic rollups will also progress to stage 1 in 2024, accompanied by a 10x reduction in gas fees due to blob upgrades.

• All layer 2s are actively working to address security and scalability challenges.

Layer 2s are moving in the right direction.

Which layer 2 will win? What are the key metrics to track?

While tracking revenue, treasury, and profitability is beneficial, it's not paramount at this stage, as leading layer 2s can still raise substantial funds if necessary.

TVL & Stablecoins

TVL on Layer 2s

• Arbitrum leads the pack, followed by Optimism (OP), Base, and zkSync. While TVL is an important metric, it can be easily manipulated. Therefore, let's compare stablecoin market capitalization, which is more difficult to influence.

StableCoin Market Cap

• Arbitrum leads the pack, followed by Optimism (OP), Base, and zkSync.

• Even when combined, the stablecoin market capitalization of all layer 2s reaches just 3 billion. In contrast, the stablecoin market capitalization on Ethereum stands at 71 billion. This indicates that the current stablecoin presence on layer 2s lags significantly behind Ethereum's.

• A better perspective lies in considering which layer 2, Ethereum users will trust to move their funds. Most Ethereum Users prioritize security first and then gas fees.

• Of the current layer 2s, Arbitrum is the only one at stage 1 (stages), with all other general-purpose optimistic and ZK rollups remaining at stage 0. This places Arbitrum in a clear lead, significantly ahead of other layer 2s.

Daily Active Addresses: A Useful, Yet Imperfect Metric
DAUs are susceptible to manipulation through Sybil attacks, where fake identities inflate the active address count.

As shown below, zkSync Era leads with 51% of DAUs, followed by Arbitrum (ARB), Linea, Optimism (OP), Base, and Scroll.

DAU of Layer 2s

Comparing TPS or DAUs is like counting the number of bills in your wallet but ignoring that some are singles, some are twenties, and some are hundreds.

Notably, the zkSync Era has dominated since August 2023, which is impressive and could be attributed to the anticipated airdrop.

Total Fee Paid by the Users:

Fee Paid by the Users to layer 2

The fees paid by users are very important metrics, as they help differentiate legitimate users from spam activity. In terms of fee amounts, Arbitrum clearly takes the lead, followed by zkSync, Era, StarkNet, Optimism, and Base.

Developers Experience: Developers using Arbitrum, Optimism, Polygon zkevm, Scroll, zkSync, or Linea chains benefit from different levels of Ethereum Virtual Machine (EVM) compatibility. On some chains, smart contracts can be deployed directly without modification, while others require minor adjustments. This compatibility with existing tools and wallets allows developers to focus on improving their code rather than rewriting everything from scratch, giving these EVM-compatible layer 2 solutions a significant advantage over non-EVM alternatives.

Collectives: Layer 2s part of Collectives like OP Stack, and StarkEx have an unfair advantage over independent L2s. Benefits

• Regular scalability and security updates

• Compatibility with developer tools

• Simplified bridging

A powerful example is Base's core devs collaborating with the OP Stack team to turbocharge the Superchain's development.

Final thoughts:

In the Layer 2 race, prioritizing trust over gas fees could be key. While lower fees attract users, the Ethereum community values security more. Degens, not mainstream users, drive TVL and stablecoin adoption for now. Optimizing for their needs can attract capital and developers. However, most Layer 2s will likely lower fees soon, making lower gas fees less of a differentiator. Arbitrum's early focus on security puts it in a strong position.

While ZK rollups offer a more efficient scaling solution than optimistic rollups (OP rollups), they are currently less mature. Furthermore, OP rollups are accruing strong network effects from users, developers, and dApps.

ZK rollups may face difficulties overcoming these well-established network effects, but their potential for greater scalability should not be underestimated.

As the protocols grow, it becomes harder for new protocols to gain market share due to the Network Effect of existing protocols associated with Developers, TVL, users, community, and economies of scale. we can already see this effect in action in Areas such as liquid staking, lending/borrowing, stablecoins, derivatives, and prediction markets where few protocols dominate.

In liquid staking, LIDO dominates and has a 58% market share followed by Coinbase, Rocketpool, and Eigenlayer.

TVL of liquid staking

In decentralized exchanges, Uniswap has nearly 50% market share in TVL followed by Curve, PancakeSwap, and Balancer.

Dexs TVL

In lending/borrowing, Aave has nearly 55% of the market share followed by Compound, Spark, and Morpho.

TVL of lending and borrowing

In stablecoins, USDT has nearly 70% of the market share followed by USDC, and DAI.

StableCoin market share

In derivatives, GMX+DYDX controls 75% of the market share. Protocols for betting with leverage

derivatives TVL

In prediction markets, Azuro + Polymarket controls 60% of the market share.

TVL prediction markets

Why does this happen? The primary reason is the presence of network effects.

A network effect refers to the quality of a company or system where the value for each user increases exponentially as more people join the network. It serves as a robust economic advantage, creating a significant barrier against competitors.

Examples of Network Effects:

1. One-Sided Network:

   • With two telephones or "nodes," there's only one possible connection.

   • Three telephones (A, B, C) result in three connections (A to B, A to C, B to C).

   • For four telephones, there are six possible connections, and for ten telephones, it jumps to 45 connections.

   • The telephone is a one-sided network, allowing users to connect with each other, with each node being the same.

1. Two-Sided Network:

   • Two-sided networks involve distinct types of nodes. For instance, type "a" nodes seek connections with type "b" nodes but not with other type "a" nodes.

   • eBay (EBAY) is an example of a two-sided network that gained immense value by attracting both buyers and sellers.

Making native use of the internet was the 10x better usage that allowed newcomers to disrupt existing networks. Email disrupted physical mail, e-commerce disrupted physical commerce, Airbnb disrupted the Rental market, and Uber disrupted taxis.

Use of Blockchain will be 10x better for many applications to disrupt existing networks.

In the context of Web3, network effects play a crucial role, especially due to the open-source nature and easily representable ownership structure of Web3 companies.

Let's take LIDO as an example to illustrate the network effect. LIDO exhibits a two-sided network effect, benefiting both Ethereum users with ETH who prefer not to run an Ethereum node and Ethereum users who want to run a node but lack the required 32 ETH. As more ETH is added to LIDO, more node operators join the network, enhancing its overall value. LIDO leverages these network effects and economies of scale to achieve various advantages.

When evaluating a Web3 protocol, consider key factors:

1. Community: In the blockchain realm, where most data is open, a competitive advantage is challenging to establish. A community-first approach is vital in Web3, going beyond marketing to embrace community-driven projects. Building and managing a community requires effort but can attract developers, users, evangelists, and enthusiasts, creating a positive feedback loop and driving exponential user growth.

2. First-Mover Advantage: Recognizing that network effects take time to establish, some projects aim to launch early to bootstrap these effects, even if competitors offer superior services. Established network effects can provide a first-mover with a lasting competitive advantage and economic moat.

3. Composability: Due to the benefits of permissionless composability, the Web3 ecosystem may generate stronger network effects than existing counterparts. Interconnecting decentralized applications allows for unprecedented product combinations, fostering innovation that centralized models struggle to match.

In conclusion, while blockchains have created a small number of dominant players across various categories, these players must give back ownership to users to maintain their competitive advantage. In Web3 most of the data and code is open source, making it easier to create substitutes (forks) and this increases the importance of community.

Within one year, Ethereum's Layer 2 solutions (L2s) are expected to consolidate to 2-3 dominant players, measured in value. Similar to the trend in decentralized exchanges (DEXes), where Uniswap, Pancake Swap, and Curve accounted for 78% of volumes in 2023, the L2 market is likely to see consolidation. Leading contenders for dominance are Arbitrum and Optimism.

USDC to Surpass USDT 💵

Tether's market share may decline following U.S. Department of Justice (DOJ) enforcement against Justin Sun & Tron for KYC infractions, terror financing, and/or market manipulation.

Stablecoin Adaption

The total value of stablecoins on the chain is expected to reach a record high exceeding $200 billion. 🚀

DePin: Helium's Milestone 📡

Helium, the decentralized network of wireless hotspots, is set to achieve 100k paying subscribers for its nationwide US 5G plan, up from the current 5k. Helium's innovative incentive system, powered by native tokens, provides key advantages such as being capital-light, turning hotspot providers into advocates, and enabling real-time network improvement. Helium claims to deliver data at less than 50% of the cost of legacy networks.

Dencun Upgrade: Proto-Danksharding

The Dencun Upgrade, introducing proto-dank sharding, is anticipated in late Q1 or early Q2 2024. This is expected to trigger a fundamentals-driven rally across L2 tokens and their ecosystems as net profit margins grow.

Coinbase Outperformance

COIN is predicted to be the top-performing crypto equity, driven by its role as custodian for multiple approved ETFs, international market growth, and the launch of new exchange products in the U.S. Additionally, potential upside is foreseen from developing an L2, replacing Binance as a leader due to the DOJ's indictment against former CEO Changpeng Zhao. 🏦

NFT Trading Volume Recovery 💎

NFT trading volume is expected to gradually recover.

NFTs will become ubiquitous brand assets.

Privacy Chains: A Major Narrative 🔒

Privacy-enabled smart contract platforms, including Aztec, Aleo, and Mina, will be a major narrative throughout the year as they launch fully featured smart-contract-enabled Mainnets.

Uniswap Hooks and KYC-Enabled Apps 🔗

2024 is projected to be a record year for institutional adoption due to mature infrastructure and new opportunities for yield. More crypto-savvy institutions are expected to use innovations like smart contract hooks to interact with their chosen counterparties.

Solana's Growth 🚀

Solana is anticipated to significantly grow in its ecosystem and market capitalization, solidifying itself as the new number 3 instead of BNB Chain. Solana will host new types of decentralized applications (dApps) and trends that are more retail-focused and not possible on Ethereum.

VCs Rebound Due to ETFs 📈

Venture capital funding for Web3 startups is expected to rebound, reaching all-time highs throughout the year.

The Rise of the Modular Tech Stack 🔧

Monolithic architectures have initial performance advantages, but the rise of an open-source, modular tech stack unlocks permissionless innovation, encourages specialization, and fosters healthy competition.

Stablecoin adaption in hyperinflation countries.

More money will settle using stablecoins than Visa.

Few other things to Add.

• Eigen layer will get great adoption.

• Defi protocol integrating Eth staking to increase ROI rates.

• New memes Coins

• New RWA on chain

• Alt-layer1s moving to become Ethereum Layer2s.

• Prediction markets adaption to increase.

• Institutional crypto adoption will accelerate in 2024.

Frontend applications like Uniswap, for instance, allow users to swap tokens but only on their pools. This can lead to higher slippage for certain token pairs than users might find on other DEXs with larger pools for those specific pairs.

To address this issue, aggregators like 1inch have emerged. Aggregators enable users to select the tokens they wish to swap and the amount, and the aggregator then suggests the optimal route across multiple DEXs for that token pair. This significantly enhances the user experience. In this scenario, the only applications that can collect fees from the user are the aggregator itself (1inch in this example) and the DEX ultimately used for the swap.

Aggregators have also become prevalent in other DeFi operations such as lending and staking.

The most prominent user-facing application in cryptocurrency, however, is the wallet. Wallets can easily incorporate aggregator UIs for staking, bridging, swapping, and lending, thereby collecting a small percentage fee for these services. This poses a challenge to standalone aggregators unless they offer additional value to users that incentivizes them to choose the aggregator over their wallet, even when the wallet displays the best DeFi options.

MetaMask Revenue collected

MetaMask exemplifies this trend. It collects a monthly fee of $3 million by enabling users to seamlessly swap, bridge, and stake tokens directly within the wallet. MetaMask efficiently routes user requests to the optimal options in the protocols, taking a 0.875% fee in the process. To date, MetaMask has accrued $60 million in fees.

Uniswap and 1inch have responded to this trend by releasing their crypto mobile wallets.

The 80/20 rule also applies to cryptocurrency, where roughly 20% of individuals control 80% of the wealth. Interestingly, many of these high-net-worth individuals continue to use MetaMask despite its subpar user interface. This is likely due to MetaMask's emphasis on security, which outweighs the inconvenience of its interface for these users. Additionally, since transaction fees are typically calculated as a percentage of the transaction size, even if other wallets capture a larger market share, they may not necessarily collect more fees than MetaMask.

To succeed in this landscape, applications must either:

• Surpass existing protocols in terms of quality or target a new market by providing unique value.

• Offer a user interface so compelling that users prefer to interact with its frontend.

• Develop a protocol so efficient and cost-effective that aggregators route user transactions through it.

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Your Paragraph publication is blazing-fast, SEO optimized, and combines the best parts of both web2 and web3 to help you create content and grow your community better than ever.

Getting started

What you're looking at right now is the Paragraph editor. We support markdown, callouts, code, and rich media embeds like Twitter and YouTube.

paragraph.xyz

@paragraph_xyz

On http://paragraph.xyz, all posts are stored on @ArweaveTeam. This means they're immutable, uncensorable, permanent, and composable ✨

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05:12 PM • Aug 18, 2022

When you publish a post, you'll have the option of sending it as a newsletter or storing it in the permanent & uncensorable Arweave.

Helpful links

Here's a few helpful pointers to customize your publication & get the most out of Paragraph:

• Theming & customization. Change your publication's font & colors; truly make this space your own.

• Set up a welcome email. This is the email your readers receive when they subscribe to your newsletter.

• Configure your publication's settings. Add links to your homepage, set up a custom domain, configure Google Analytics & more.

Need help or have feedback?

We've put together some documentation here, but if you still have questions you'd like answered we’d love to hear from you.

You can reach us via email at hello@paragraph.xyz or subscribe to our newsletter here. We're also pretty active on Discord.