DISCLOSURE: FUNDAMENTAL LABS AND MEMBERS OF OUR TEAM HAVE INVESTED AND MAY HOLD POSITIONS IN TOKENS MENTIONED IN THIS REPORT. THESE STATEMENTS ARE INTENDED TO DISCLOSE ANY CONFLICT OF INTEREST AND SHOULD NOT BE MISCONSTRUED AS A RECOMMENDATION TO PURCHASE ANY TOKEN. THIS CONTENT IS FOR INFORMATIONAL PURPOSES ONLY AND YOU SHOULD NOT MAKE DECISIONS BASED SOLELY ON IT. THIS IS NOT INVESTMENT ADVICE.

If we were to pave a way forward for the decentralization of the internet, we would ultimately converge on three pillars: consensus, storage, and computation. If humanity succeeds at decentralizing all three, we will have fully achieved the progression to the next iteration of the internet: Web3.

Storage, the second pillar, is rapidly maturing with various storage solutions having emerged that suite specific use-cases. In this piece, we will take a closer look at the decentralized storage pillar.

This publication is a summary of the full piece, which can be downloaded directly from decentralized storage on Arweave and Crust Network.

The need for decentralized storage

Blockchain perspective

From a blockchain perspective, we need decentralized storage because blockchains themselves were not designed to store large amounts of data. The mechanisms used to achieve blockchain consensus rely on small amounts of data (transactions) being arranged in blocks (a collection of transactions), and these being quickly shared across the network to be validated by nodes.

First off, storing data in these blocks is very expensive. Storing the entire image data of BAYC #3368 directly on layer 1 networks can cost over $18,000 at the time of writing.

And secondly, if we were to store large amounts of arbitrary data in these blocks, the network congestion would increase heavily thus leading to an increase in prices for using the network through gas bidding wars by users. This is the result of the implicit time-value of blocks – if users need to submit transactions to the network at a specific time, they will pay more in gas fees to have their transactions prioritized.

Therefore, it is recommended that the underlying metadata and image data of NFTs as well as the dApp frontends be stored off-chain.

Centralized network perspective

If storing data on a blockchain is so expensive, why not just store the off-chain data on a centralized network?

Centralized networks are prone to censorship and are mutable. They require the user to trust the storage provider to keep the data safe. There is no guarantee that the operator of a centralized network can live up to the trust placed in them: data could be removed on purpose or accidentally, for example due to changes in policy by the storage provider, hardware failures or by being attacked by third parties.

NFTs

With the floor prices for some NFT collections exceeding US$100k and some having a value of up to US$70k per kb of image data, a promise is not enough to assure that data will be available at all times. Greater assurances are needed to ensure immutability and permanence of the underlying NFT data.

NFTs themselves do not actually contain any image data, instead they contain a pointer to metadata and image data that is stored off-chain. It is this metadata and image data that needs to be secured, as if it disappears, an NFT would merely be an empty container.

It can be argued that the value of NFTs is not primarily driven by the metadata and image data they refer to, but instead that it’s driven by communities that build a movement and an ecosystem around their collections. While that may hold true, without the underlying data the NFTs would have no meaning and without meaning communities could not form.

Moving beyond profile pictures and art collectibles, NFTs can also represent ownership of real-world assets, such as real estate or financial instruments. Such data holds an extrinsic real-world value, and the preservation of every byte of data that underlies the NFT is at least as valuable as the on-chain NFT, due to what it represents.

dApps

If NFTs are goods that live on blockchains, then dApps can be thought of as services that live on, and facilitate interaction with, blockchains. dApps are a combination of a front-end user interface that exists off-chain and a smart contract that exists on the network and interacts with a blockchain. Sometimes these also have a simple backend that move certain calculations off-chain to reduce the gas required, and thus costs incurred by end-users, for certain transactions

While the value of a dApp should be considered in the context of the purpose of the dApp (e.g., DeFi, GameFi, social, metaverses, name services etc.), the amount of value that dApps facilitate is staggering. At time of writing, the top 10 dApps by volume listed on DappRadar collectively facilitated transfers north of US$150bn within the last 30 days.

Although the core mechanics of dApps are executed through smart contracts, their accessibility by end-users is ensured through their frontends. Assuring dApp frontend availability is thus, in a sense, assuring the availability of the underlying service.

Decentralized storage reduces the likelihood of server malfunctions, DNS hacks or a centralized entity remove access to the dApp front-end. Even if development of a dApp were to cease, the frontend and access to the smart contracts through that frontend can persist.

The decentralized storage landscape

Blockchains such as Bitcoin and Ethereum primarily exist to facilitate value transfers. When it comes to decentralized storage networks, some networks employ this approach as well: they use a native blockchain to record and track storage orders, which represent a value transfer in exchange for storage services. However, this is only one of many potential approaches – the storage landscape is vast, and varying solutions with varying trade-offs and use-cases have emerged over the years.

Despite many differences, all the above projects have one thing in common: none of these networks replicate all data across all nodes, as is the case with the Bitcoin and Ethereum blockchains. In decentralized storage networks, immutability and availability of stored data is not achieved through a majority of the network storing all data and validating data that is chained in succession, as is the case in Bitcoin and Ethereum. Although, as mentioned earlier, many networks opt to use a blockchain to track storage orders.

It is unsustainable to have all nodes on a decentralized storage network store all data, because the overhead cost of running the network would quickly raise storage costs for users and would ultimately drive the network to greater centralization of a few node operators that can afford the hardware costs thereof.

As a result, decentralized storage networks have very different challenges to overcome.

Challenges surrounding decentralization of data

Recalling the previously mentioned limitations regarding the storage of data on-chain, it becomes evident that decentralized storage networks must store data in a way that does not impact the value transfer mechanisms of the network, while ensuring that data remains persistent, immutable and accessible. In essence, a decentralized storage network must be capable of storing data, retrieving data, and maintaining data while ensuring that all actors within the network are incentivized for the storage and retrieval work that they do, while also upholding the trustless nature of decentralized systems.

These challenges can be summarized in below questions:

• Data storage format: store full files or file fragments?

• Replication of data: across how many nodes to store the data (full files or fragments)?

• Storage tracking: how does the network know where to retrieve files from?

• Proof of data stored: have the nodes stored the data they were asked to store?

• Data availability over time: is the data still stored over time?

• Storage price discovery: how is the storage cost determined?

• Persistent data redundancy: if nodes leave the network, how does the network ensure data is still available?

• Data transmission: network bandwidth comes at a cost – how to ensure nodes retrieve data when asked?

• Network tokenomics: apart from ensuring that data is available on the network, how does the network ensure the network will be around in the long-term?

The various networks that have been explored as part of this research employ a wide range of mechanisms with certain trade-offs to achieve decentralization.

For a deeper comparison of the above networks on each of the challenges, as well as detailed profiles of each of these networks, please refer to the full research piece that can be found on Arweave or Crust Network.

Data Storage Format

Amongst these networks there are two primary approaches that are used to store data on network: storing full files and using erasure encoding: Arweave and Crust Network store full files, while Filecoin, Sia, Storj and Swarm all use erasure encoding. In erasure encoding data is broken down into constant-size fragments, which are each expanded and encoded with redundant data. The redundant data saved into each fragment makes it so that only a subset of the fragments is required to reconstruct the original file.

Data Replication

In Filecoin, Sia, Storj and Swarm, the networks determine the number of erasure-encoded fragments and the extent of redundant data to be stored in each fragment. However, Filecoin also allows for the user to determine a replication factor, which determines how many separate physical devices the erasure encoded fragments should be replicated on as part of a storage deal with a single storage miner. If users want to store files with different storage miners, then users must engage in a separate storage deal. Crust and Arweave let the network dictate replication, while on Crust manually setting a replication factor is possible. On Arweave, the proof of storage mechanism incentivizes nodes to store as much data as possible. As a result, the upper replication limit for Arweave is the total number of storage nodes on the network.

The approach used for storing and replicating data, will impact how data can be retrieved by the network.

Storage Tracking

After the data has been distributed across nodes in the network in whichever form the network stores it, the network needs to be able to track the stored data. Filecoin, Crust and Sia all use a native blockchain that tracks storage orders, while storage nodes also maintain a local list of network locations. Arweave uses a blockchain-like structure. Unlike blockchains such as Bitcoin and Ethereum, on Arweave, a node can decide for itself whether to store data from a block. Hence, if one compares the chains of multiple nodes on Arweave, they will not be identical – instead, certain blocks will be missing on some nodes that can be found on others.

Finally, Storj and Swarm use two entirely different approaches. In Storj, a second node type called satellite nodes act as a coordinator for a set of storage nodes that manage and track where data is stored. In Swarm, the address of data is embedded directly within the data chunk. When data is retrieved, the network knows where to look based on the data itself.

Proof of data stored

When it comes to proving how data is stored, each network employs their own unique approach. Filecoin uses proof-of-replication – a proprietary storage proof mechanism which first stores the data on a storage node and then seals the data in a sector. The sealing process makes so that two replicated pieces of the same data can be provably unique from one another, thus ensuring that the right number of replicas are stored on the network (thus, “Proof of Replication”).

Crust breaks a piece of data down into many smaller pieces which are hashed into a Merkle tree. By comparing the hashing results of individual pieces of data stored on the physical storage device against the expected Merkle tree hashes, Crust can verify whether files have been stored correctly. This is similar to Sia’s approach, with the difference that Crust stores the entire file on each node, while Sia stores erasure-encoded fragments. Crust can store the entire file on a single node and still achieve privacy, by using the nodes Trusted Execution Environment (TEE), which is a sealed off hardware component that even the hardware owner cannot access. Crust calls this proof of storage algorithm “Meaningful Proof of Work”, whereas the meaningful indicates that new hashes are only calculated when changes are made to the stored data, thus reducing unmeaningful operations. Both Crust and Sia both store the Merkle tree root hash on a blockchain, that acts as a source of truth for the verification of data integrity.

Storj checks whether data has been stored properly through data audits. Data audits are similar to how Crust and Sia use Merkle trees to validate pieces of data. On Storj, once sufficient nodes have returned their audit results the network can determine which of the nodes are faulty based on the majority response, instead of comparing against a blockchain source of truth. This mechanism in Storj is intentional, as the developers believe that reducing network wide coordination through a blockchain can lead to performance improvements both in terms of speed (no need to wait for consensus) and bandwidth usage (no need for entire network to regularly communicate with the blockchain).

Arweave uses a cryptographic proof-of-work puzzle to determine whether files have been stored. In this mechanism, in order for a node to be able to mine the next block, they need to prove they have access to the previous block and another random block from the network’s block history. Because in Arweave the uploaded data is stored directly in the block, proving access to the previous block proves the storage provider did indeed properly save the files.

Finally, on Swarm also uses Merkle trees, with the difference that Merkle trees are not used to determine file locations, but instead data chunks are directly stored within Merkle trees. When storing data on swarm, the root hash of the tree, which is also the address of the data stored, is proof that the file was properly chunked and stored.

Data availability over time

When it comes to determining that data is stored over a certain period of time, again, each network uses a unique approach. In Filecoin, to reduce network bandwidth, the storage miner is required to run the proof of replication algorithm consecutively over the period of time over which the data is meant to be stored for. The resulting hashes of each time period prove that that the storage space has been occupied with the right data over a specific period of time, thus “Proof of Spacetime”.

Crust, Sia and Storj run their verification of random data fragments in regular intervals and report the results back to their coordination mechanism – blockchains for Crust and Sia, and satellite nodes for Storj. Arweave ensures consistent availability of the data through it’s Proof-of-Access mechanism, that requires miners to not only prove they have access to the last block, but also to a random historical block. Storing older and rarer blocks is incentivized, as that increases the likelihood of the miner to be able to win the proof-of-work puzzle to which access to a specific block is a pre-requisite.

Swarm on the other hand runs raffles at regular intervals that reward nodes for holding not-so-popular data over time, while also running a proof of ownership algorithm for data that has been promised by a node to be stored over a longer period.

Filecoin, Sia and Crust require nodes to deposit collateral to become a storage node, while Swarm only requires it for long-term storage requests. Storj does not require upfront collateral, but Storj will withhold some of the storage revenue from the miner instead. Finally, all networks regularly pay out to nodes in certain intervals for the time periods that they have provably stored data.

Storage price discovery

To determine the price of storage, Filecoin and Sia use storage markets, where storage providers set their asking prices and storage users set what they are willing to pay, along with some other settings. The storage market then connects users with storage providers that meet their requirements. Storj applies a similar approach, with the key difference that there is no single network wide marketplace that connects with all nodes on the network. Instead, each satellite has its own set of storage nodes that it interacts with.

Finally, Crust, Arweave and Swarm all let the protocol dictate the price for storage. Crust and Swarm allow for certain settings based on the users’ file storage requirements, while on Arweave files are always stored permanently.

Persistent Data Redundancy

Over time, nodes will leave these open public networks and when nodes disappear, so does the data they store. Networks must thus actively maintain a certain level of redundancy in the system. Sia and Storj achieve this through replenishing missing erasure encoded fragments by collecting a subset of fragments, rebuilding the underlying data and then re-encoding the file to re-create the missing fragments. In Sia, users must regularly log into the Sia client for the fragments to be replenished, because only the client is able to distinguish which data fragments belong to which piece of data and user. On Storj, Satellites take over the responsibility of always being online and regularly running data audits to replenish data fragments.

Arweave’s proof of access algorithm ensures that data is always regularly replicated across the entire network, while on Swarm data is replicated to nodes that are in proximity to one another. On Filecoin, if data disappears over time and the remaining file fragments fall below a certain threshold, the storage order is reintroduced to the storage market, allowing another storage miner to take on that storage order. Finally, Crust’s replenishment mechanism is currently in development.

Incentivizing Data Transmission

After data is stored securely over time, users will want to retrieve the data. Since bandwidth comes at a cost, storage nodes must be incentivized to deliver data when asked for it. Crust and Swarm use a debt and credit mechanism, where every node tracks how their inbound and outbound traffic with each other node they interact with. If one node only takes inbound traffic, but does not take outbound traffic, it is deprioritized for future communication, which can affect its ability to accept new storage orders. Crust uses the IFPS Bitswap mechanism, while Swarm uses a proprietary protocol named SWAP. On Swarm’s SWAP protocol, the network allows nodes to pay off their debt (only accepting inbound traffic with insufficient outbound traffic) with postage stamps, that can be redeemed for their utility token.

This tracking of nodes’ generosity is also how Arweave ensures that data is transmitted when requested. In Arweave this mechanic is called wildfire, and nodes will prioritize peers that rank better and rationalize bandwidth usage accordingly. Finally, on Filecoin, Storj and Sia, users ultimately pay for bandwidth thus incentivizing nodes to deliver data when requested.

Tokenomics

The tokenomics design ensures network stability and also ensures that the network will be around for a long time, as ultimately data is only as permanent as the network. In the below table a brief summary of the tokenomics design decisions can we found, as well as inflationary and deflationary mechanisms embedded in the respective designs.

For a detailed introduction of each project’s tokenomics, view the full paper on Arweave or Crust Network.

Which network is the best?

It is impossible to say that one network is objectively better than another. When designing a decentralized storage network, there are countless trade-offs that must be considered. While Arweave is great for permanent storage of data, Arweave is not necessarily suitable to move Web2.0 industry players to Web3.0 – not all data needs to be permanent. However, there is a strong sub-sector of data that does require permanence: NFTs and dApps.

Ultimately, design decisions are made based on the purpose of the network.

What follows are summative profiles of the various storage networks comparing them amongst each other on a set of scales defined below. The scales used reflect comparative dimensions of these networks, however it should be noted that the approaches to overcome challenges of decentralized storage are in many cases not better or worse, but instead merely reflect design decisions.

• Storage parameter flexibility: the extent to which users have control over file storage parameters

• Storage permanence: the extent to which file storage can achieve theoretical permanence by the network (i.e., without intervention)

• Redundancy persistence: the networks ability to maintain data redundancy through replenishment or repair

• Data transmission incentivization: the extent to which the network ensures nodes generously transmit data

• Universality of storage tracking: the extent to which there is a consensus among nodes regarding the storage location of data

• Assured data accessibility: the ability of the network to ensure that a single actor in the storage process cannot remove access to files on the network

Higher scores indicate greater ability for each of the above.

Filecoin’s tokenomics support growing the total network’s storage space, which serves to store large amounts of data in an immutable fashion. Furthermore, their storage algorithm lends itself more to data that is unlikely to change much over time (cold storage).

Crust’s tokenomics ensure hyper-redundancy with fast retrieval speeds which make it suitable for high traffic dApps and make it suitable for fast retrieval of data of popular NFTs.

Crust scores lower on storage permanence, as without persistent redundancy its ability to deliver permanent storage is heavily impacted. Nonetheless, permanence can still be achieved through manually setting an extremely high replication factor.

Sia is all about privacy. The reason manual health restoration by the user is required, is because nodes do not know what data fragments they are storing, and which data these fragments belong to. Only the data owner can reconstruct the original data from the fragments in the network.

In contrast, Arweave is all about permanence. That is also reflected in their endowment design, which makes storage more costly but also makes them a highly attractive choice for NFT storage.

Storj’s business model seems to heavily factor in their billing and payment approach: Amazon AWS S3 users are more familiar with monthly billing. By removing complex payment and incentive systems often found in blockchain-based systems, Storj Labs sacrifices some decentralization but significantly reduces the barrier to entry for their key target group of AWS users.

Swarm’s bonding curve model ensures storage costs remain relatively low overtime as more data is stored on the network, and its proximity to the Ethereum blockchain make it a strong contender to become the primary storage for more complex Ethereum-based dApps.

There is no single best approach for the various challenges decentralized storage networks face. Depending on the purpose of the network and the problems it is attempting to solve, it must make trade-offs on both technical and tokenomics aspects of network design.

In the end, the purpose of the network and the specific use-cases it attempts to optimize will determine the various design decisions.

The next frontier

Returning to the Web3 infrastructural pillars (consensus, storage, computation), we see that the decentralized storage space has a handful of strong players that have positioned themselves within the market for their specific use cases. This does not exclude new networks from optimizing existing solutions or occupying new niches, but this does raise the question: what’s next?

The answer is: computation. The next frontier in achieving a truly decentralized internet is decentralized computation. Currently only few solutions exist that bring to market solutions for trustless, decentralized computation that can power complex dApps, which are capable of more complex computation at far lower cost than executing smart contracts on a blockchain.

Internet computer (ICP) and Holochain (HOLO) are networks that occupy a strong position in the decentralized computation market at time of writing. Nonetheless, the computational space is not nearly as crowded as the consensus and storage spaces. Hence, strong competitors are bound to enter the market sooner or later and position themselves accordingly. One such competitor is Stratos (STOS). Stratos offers a unique network design through its decentralized data mesh technology.

We see decentralized computation, and specifically the network design of the Stratos network, as areas for future research.

Closing

Thank you for reading this research piece on decentralized storage. If you enjoy research that seeks to uncover the fundamental building blocks of our shared Web3 future, consider following @FundamentalLabs on Twitter.

Did I miss any good concepts, or other valuable information? Please reach out to me on Twitter @0xPhillan so we can enhance this research together.

Full piece available on Arweave and on Crust Network.

#1 How Decentralized Organizations Win (And Lose)

Here are four very different kinds of organizations that have something to teach us about building DAOs:

• Valve, the company behind Steam

• the US Marine Corps

• intentional co-living communities

• Amazon

By looking at the commonalities in their principles, we can understand what makes decentralized organizations successful. Here are a some of the principles they all have in common:

1. Recruit the best people

   Companies like Valve and Amazon, elite military units like the US Marines, and co-living environments like intentional communities all draw boundaries around themselves and carefully evaluate who they let in. By constantly attempting to raise the bar, they can keep scaling without the need for more structure and rules.

   DAOs often attempt to be permissionless, allowing anyone to join the community. Maintaining openness, permeability, and an inclusive approach to newcomers allows DAOs to grow quickly, increase diversity, and progressively decentralize. But there’s a clear tension between bringing in the best people and maintaining an open and accessible community:

1. Maybe the best solution we have to solve for this balance is contributor proof-of-work. Proof-of-work, in this context, refers to the ability for new community members to demonstrate their capabilities and increase the scope of their work as they build trust within the community. By creating systems for self-organizing teams to publicly accomplish the organization’s goals, DAOs can build feedback loops for strong contributors to succeed and positively reinforce the organization's culture, capabilities, and scalability.

2. Help members self-organize

   Once you are surrounded by great people, you can work together to build systems for effective collective action. In order to self-organize, people need:

   • Clearly defined missions

   • Small groups executing at the edges

   • Information accessibility

   • Minimum viable self-governance

3. Empower mission-driven leaders

   There’s no such thing as a leaderless organization. Separation between decision-making and executive power is uniquely possible within capture-resistant structures. DAOs offer a unique solution to this problem: put direct executive power in the hands of all individuals in an organization.

   When we say mission-driven leaders, we mean it in two ways. First, it means that the best leaders are missionaries, not mercenaries. They believe in and are dedicated to the greater mission of the organization. Second, it means that leadership is a temporary, transient role designed to solve for a specific mission.

4. Have a bias towards action

   When everyone has an equal voice in everything all of the time, groups end up talking a lot and accomplishing nothing. One antidote to this problem comes from co-living communities, which are often organized around a principle called do-ocracy.

   This principle states that, generally, whoever actually does the thing makes the rules. The goal is to minimize governance and consensus decision-making by empowering individuals to make autonomous actions as long as they are reversible and inexpensive.

5. Play infinite games

   Vibes, reciprocity, and trust are infinite games. They are not played to win, but to keep playing. Infinite games are played for intrinsic rewards:

The most potent DAOs will follow a similar path—they will create intrinsically motivated communities that self-perpetuate memes and culture while simultaneously developing protocol hyperstructures that live indefinitely and create value without necessarily extracting profits.

Each of these organizations operates in decentralized ways that result in better outcomes than more centralized peers. They have created flexible, adaptable, creative, and capable evolutionary systems that can outperform more rigid hierarchies in rapidly changing environments.

Hot Topics

#1 Azuki set up their own Discord bot to minimize hacking risk targeting Azuki community

After several significant hacks happening in NFT communities, Azuki set an example and led the NFT communities by starting its own Discord bot to minimize hacking risk towards its community. Azuki has been a project trying to introduce innovative approach and create greater good to NFT communities, for example, the introduction of ERC721A, and we expect to see projects continuously setting rules and innovative measurements influencing the broader communities prevail and hold a strong position in NFT market.

#2 STEPN’s Active User Numbers Contract

StepN daily active users started to show contraction after hitting 100k. Daily new users also declined since end of May, which follows the price trend of $GMT and $GST.

Except from declining new users, StepN faced several headwinds, including DDOS attacks and blocking Chinese players. The decline of new user addition is a key challenge for StepN since the in-game economy will be hard to sustain considering what has happened to Axie Infinity.

Week's Recap

• Euler Raises $8M in Series A Funding

• Adim gains $5m seed

• Algorithmic Stock Adviser Delphia Raises $60M Ahead of Rewards Token Launch

• Ancient8 Raises $6M to Build Software Infrastructure for GameFi

• Samudai Raises Funding To Help Manage, Build Communities In Web3 Ecosystem

• PartyBid creator PartyDAO raises $16.4 million led by a16z

Indicator Tracking

Indicator Tracking

MVRV

Crypto Fear & Greed Index

Data of NFT Market

Total Value Locked of DeFi

Total Value Locked All Chains

Protocol Total Revenue

Editor: Philip

TL;DR

• We break up PoS staking into three parts: node providers, liquid staking pools, finance derivatives

• The big players have already dominated the market

• New players can enter the market by supporting long-tail assets, and better UX

• There are the following opportunities:

  • Data analysis tool

  • Toolkits for bootstrapping your node provider business

  • Long-term fix rate staking derivatives

  • Better tokenomics design

Intro

Ethereum is turning from Proof-of-Work (PoW) to Proof-of-Stake (PoS) for higher transactions-per-second (TPS) and efficiency. Most of the major blockchains that support smart contracts use PoS, such as Solana, Cardano and Avalanche.

Source: Staking Ecosystem Report 2021

Most blockchains turn to PoS because PoS empower them to embrace high performance, faster finality, environmental sustainability, scalability, low cost of security, and flexibility in architecture compared to PoW approach.

Source: Staking Ecosystem Report 2021

PoS gives users a new way to earn stable yields. Delegate the native assets to the staking node, users can earn 10%-20% yields. This is like the treasury bond of countries. It is stable and low-risk and it is much more profitable than stablecoin farming on popular DEXs and lending platforms.

Hopefully, these crypto treasuries can help investors overcome fiat currency inflation. The following chart illustrates the inflation rate around the world. The fiat currency inflation is around 3% to 6%.

Source: Staking Ecosystem Report 2021

Staking mechanism

Different blockchains have different staking mechanisms, differing in withdrawal period and slashing rules.

Ethereum

Ethereum is turning from PoW to PoS for sustainability and scalability.

Source: Delphi Digital

Ethereum describes staking on Ethereum as “Staking is the act of depositing 32 ETH to activate validator software. As a validator, you’ll be responsible for storing data, processing transactions, and adding new blocks to the blockchain. This will keep Ethereum secure for everyone and earn you new ETH in the process. This process, known as proof-of-stake, is being introduced by the Beacon Chain.”

In short, the user needs to stake 32 ETH and run a validator node to become a staker. Users can withdraw staked ETH at least after the merge.

Currently, users will get around 4.2% APR, not deducting the server cost. After the merge, Kraken expects the APR to increase to 8.5% - 11.5% in the report “The State of Staking Q1 2022”.

Source: The State of Staking Q1 2022

The Ethereum node doesn’t require high-end hardware. The server cost is relatively low. The recommended specifications are:

• 4+ cores CPU

• 16 GB+ RAM

• SSD with at least 500 GB of free space

• 25+ MBit/s bandwidth

Based on the node type, the disk space requirements varies from 400GB to 6TB.

In the ETH2 network, a proposer mints the new block, and the attester vote for this block to be part of the canonical chain.

Slashing means the validator violates rules and is forced to exit. There are three slashing conditions:

• As a proposer, the node sign more than one beacon block for one slot

• As an attester, the node signs more than one attestation on the same target

• As an attester, the node sign an attestation conflict with the history

If any of these behaviors is caught, the node is forced to exit the beacon chain around 36 days in the future. The penalties will continue to incur for around 36 days until the node can exit. The penalty number varies based on the network condition.

Slashing forces validators to exit the network, but penalties don’t. Penalties conditions can be put into the following categories:

• Attester penalties

• Inactive leak penalty

There are a total of 13,310,531 ETH staked and 396,982 total validators. The following charts illustrate the ETH 2.0 staking rate and staked ETH.

Source: CryptoQuant

Source: CryptoQuant

The inflow chart reveals some peak inflow time points. Some big inflow happened in Dec. 2020 and March 2022.

Source: CryptoQuant

Kraken is the 1st staker in ETH 2.0. CEXs still has an advantage in the market. They can turn their existing users into ETH 2.0 stakers.

Source: Ethereum 2.0 Beacon Chain (Phase 0) Block Chain Explorer - Staking Pools Services Overview - beaconcha.in - 2022

For liquid staking, Lido dominates the market. Liquid staking derivatives help user liquid their staking assets and improve capital efficiency.

Source: Delphi Digital

ALT

Lots of smart-contract-enabled chains use PoS considering TPS and sustainability.

They have different rules. Some chains allow users to delegate their staking to active validators. These validators run the node and charge commission fees from delegation staking. To withdraw their staking, users need to wait a period of time before undelegating.

Currently, Ethereum 2.0 has the lowest staking ratio.

Source: Staking Rewards

Node providers

Running own staking nodes has lots of risks and needs a large amount of money to start. It is hard for individuals to maintain a 24/7 online server and not do anything wrong causing penalties. To help individuals easier to stake and earn rewards, there appears staking-as-a-service. Node providers will take care of the infrastructure and users only need to stake their funds.

Node providers provide node operation services. They provide service to individuals and liquid staking derivatives. To individuals, node providers charge a monthly node operation fee or commission fee. To liquid staking derivatives, node providers usually get a percentage of the staking rewards. Lido explains how they choose node operators.

There are lots of node providers in the market. They differ in the following aspects:

• Fee

• Supporting assets

• Reliability and safety

Source: Staking Rewards

Big players have already established large user groups, good reputations, and safe operation records. It is hard for new players to take a large market share. Big market players believe the opportunities for small players are the following:

• Better UX

• Supporting long-tailed assets

• Providing services besides staking, like ecosystem updates, simple financial engineer tools, information websites, and data analysis tools

Though small players are hard to compete with large players, large players do face some challenges:

• Risk of centralization

• Compliance

• Security and operation risk

Decentralization is the key to a network. If several node providers have a major stake in the network, these node providers are a stratum for cartelization. @djrtwo questions this in his passage “The Risks of LSD”.

To build a decentralized and permissionless product, compliance is a big problem. Stake.fish believes that “due to how staking looks like fixed income in some sense, this could invite regulators to consider validators closer to financial entities than miners. If this occurs, then there would be no way for validators to stay compliant without becoming a fully licensed custodian and guarding delegator access (which again, may technically be impossible to enforce)” in the “2021 staking ecosystem report”.

Node operators put safety first because the safety incident can cause asset loss. In Jan 2021, ETH2 validators got slashed due to a bug. Here is the recent slashing history for ETH2 validators.

Source: beaconcha.in

Node providers are trying to increase the stability of the infrastructure with new tech like SSV. The secret shared validator network is a tech that can reach active-active redundancy. All validators in the network actively produce new blocks. The mechanism is like a multi-sig wallet.

Source: OBOL

Other techs used for slashing prevention are the local slashing protection database which records messages causing slashing, and remote slasher which records all attestations and blocks received.

From the Staking Rewards survey, users do care more about reputation than cost, and node providers are trying to improve their reliability in order to build their reputations.

Source: Stake Rewards

Liquid staking pool

After choosing the best staking node providers, the next problem is capital efficiency. Users need to lock assets in the staking node but only yield 10% annually. In the crypto world, there are opportunities everywhere. The opportunity cost of locking assets in the staking pool is huge. Thus users are trying to increase capital efficiency. A liquid staking pool helps users get their liquidity almost instantly.

The liquid staking pool has two functions:

• Lower the staking requirement for users

• Greatly increase the liquidity of staked assets

To increase the liquidity of staked assets, the staking pool mint a new token for users. For example, after staking ETH in Lido, Lido mints stETH for users. Users can exchange stETH with ETH on DEX. Below is the pricing chart for stETH.

Source: Dex Screener

stETH is like a bond. 1 stETH can redeem 1 ETH in the unpredictable future. We are not sure when Ethereum will release staked assets in the staking node because releasing the staked assets needs a hard fork update after the ETH2.0 merge.

The next few charts show that Lido dominates the ETH staking market and secures a large portion of the market share.

Source: Delphi Digital

Source: Delphi Digital

However, Marinade dominates the Solana liquid staking market instead of Lido.

Source: Delphi Digital

Here is a fee breakup for liquid staking on Solana.

Source: Delphi Digital

Besides fee and reputation, utility is another major point. More partnerships mean deeper liquidity for liquid assets in DEXs and lending platforms. Marinade has the most partnership with DeFi projects.

Source: Delphi Digital

Source: Delphi Digital

Finance

Most DeFi users are APY addicted. Is there any way to push our staking yields, but still enjoy a low risk? Yes. Leverage farming can do this.

Most leveraged yield farms use 2x - 3x leverages and offer around 7% APY. They do have liquidation risks.

Basically, they deposit stETH on Aave and borrow WETH through Aave. Then they swap WETH for more stETH and repeat the steps above.

Another interesting project is SR20 by Staking Rewards. SR20 is an index containing the top 20 PoS assets weighted by total staked value. The index also accrues staking rewards on a continuous basis. The following charts demonstrate the allocation:

Source: Staking Rewards

The current index price is $304.41 and the reward rate is 6.54%. The staking returns YOY is 9.44%. Below is the price chart of SR20.

Source: Staking Rewards

To avoid slashing risk, there are also insurance products for validators. Lido partnered with Unslashed Finance to cover approximately $200M worth of staked ether from slashing in Feb 2021.

Source: Lido Medium

What’s next

The ecosystem of staking is established. Big players have already gained a strong position in the market. The total staking market will continue to grow because the ETH staking ratio is still low compared to other PoS assets. We are optimistic about the future of the staking market.

Staking assets is similar to buying treasury. Institutions and big whales are willing to buy these assets. One big difference between treasury and staking is that staking reward is not fixed. Staking rewards vary upon network conditions. To make the APR more stable, we anticipate fixed APR and long-term staking assets.

Source: Staking Rewards

Current tokenomics for liquid staking protocols cannot catch the true value. With rising revenue and TVL, the token price drops. We need a better tokenomics design to support the staking protocol. Currently, the protocol revenue does not share with the token holder. This makes the token a pure governance token.

Two opportunities for new players are better UX and long-tail assets support. Spinning up a node is easy with the help of an official document. The hard part is operation and customer management. To better support these new players, some toolkits are necessary. This is similar to the VPN market. Lost of small players entering the market with lower fees and better UX.

A specific data analysis tool is also necessary. For stakers, they care about the liveness history, staked ratio history, slashing history, etc. These data are different from the common dataset we use. The common dataset we use focuses on transactions. To better support stakers, a new data analysis tool is necessary.

Reference

• Rewards and Penalties on Ethereum 2.0 [Phase 0] | ConsenSys

• The Beacon Chain Ethereum 2.0 explainer you need to read first | ethos.dev

• Rewards and Penalties - Ethereum 2.0 Knowledge Base (beaconcha.in)

• The Risks of LSD - HackMD (ethereum.org)

• State of Staking (staked.us)

• 2021 Staking Ecosystem Report (stakingrewards.com)

• Eth2 Slashing Prevention Tips. This post regards information on… | by Raul Jordan | Prysmatic Labs | Medium

• Lido Dominates Liquid Staking - Delphi Digital

• Managing Expectations Heading Into "The Merge" - Delphi Digital

• The Race To Become Solana's Liquid Staking Winner - Delphi Digital

#1 Solana Network Outage

Solana suffered its second outage in a month and the 5th outage in 2022. Solana halted block production for over four hours on Wednesday due to a bug in recently newly added features. This caused $SOL to go down around 13%.

https://twitter.com/laine_sa_/status/1532130311152226304

Solana recently added durable nonce transactions. Durable nonce allows users to sign a transaction offline and does not require a recent block hash. Thus users can sign a transaction way before submitting the transaction. Durable nonce becomes popular these days. Exchanges are trying to use durable nonce possibly because of their cold storage settings. Their complex cold storage settings can't always catch up with the fast network.

On Wednesday, Solana double-count one durable nonce transaction in different blocks. This caused the failure of the Solana consensus mechanism.

#2 Could GameFi explore its own path in the Metaverse?

Any game has its own life cycle. While the GameFi circuit is growing rapidly, the current market is far from what was envisioned and there are still areas of the ecosystem that need to be optimized. What we can do is to select the viable solutions among these potential possibilities, and the potential alpha is out there waiting to be explored by practitioners.

What has GameFi changed? Why have thousands of people suddenly decided to make a living in these virtual worlds?

Blockchains and their underlying technology enable game developers to provide users with a secure way to prove ownership and trade with each other. They also allow for free pricing, free exchange, and free use of game materials and game currency. Virtual goods lead to a sustainable economy when combined with strong property rights, fundamentally free pricing of the economy, and unhindered transactions.

The game brings multiple experiences and internal value retention: developers should provide users with a better participation experience and reflect the entertainment value of the games, so that users are willing to pay time and money for the game. At the same time, in addition to the functional gold NFT, the game can also consider adding symbolic NFT to do value retention for the game ecology, which can reduce the speed of currency flow. This is conducive to the continuous growth of the game.

Optimize the economic model and control the supply of NFT/Reward Token: We acknowledge that "Play to Earn" has brought a lot of initial users to GameFi. However, as the game progresses, developers may be able to gradually optimize the model to suit the game's stage of development. At the beginning of the game, a strong APY is naturally necessary for "go to market", but as the game progresses, "Play to Burn" can be promoted in the form of round robin tournaments, rewards tournaments, etc. to maintain Reward Token and the NFT pivot in value. In addition, the use of differentiated revenue curve can be considered to allow different participants to enjoy the satisfaction brought by the game.

Introducing multiple parties to the game and forming an open Meta: The biggest advantage of chain games and online games comes from the fact that the decentralized network provides a completely open world for users, and players are more free to move around in the virtual world during the game.

Hot Topics

Optimism’s $OP Aidrop Launches

On June 1st, 2022 Optimism announced that claims for the #1 OP token airdrop were officially open, in which 5% (~215m OP) of the roughly total OP token supply is to be airdropped to users. Optimism is a Layer2 optimistic roll-up for the Ethereum blockchain network that helps to increase the transaction throughput of Ethereum.

https://twitter.com/optimismPBC/status/1531753646752268289

At time of writing, almost 62% of tokens have already been claimed by 47% of eligible addresses.

However, Optimism was not prepared for the thousands of claims that rolled in: only 5 hours after claiming was activated, their public RPC endpoint was overloaded and people could not use the official website to claim the token (see 19:00 below).

The Optimism team struggled for hours to expand resources to serve the public RPC client to make sure people could claim the airdrop through their official channels, instead of running the risk of scammers setting up fake front ends to trick unsuspecting victims.

https://twitter.com/optimismPBC/status/1531798279582666752

Roughly one and a half days after the airdrop campaign, we observe that a small majority of tokenholders opted to sell their token as token trading volumes continuously decline.

Optimism’s airdrop rules included various eligibility criteria that the Optimism team believe to be indicators of participation in the network and governance of the Optimism Collective, which functions similarly to the Ethereum Name Service (ENS) DAO: tokenholders must delegate the voting power of the claimable tokens before the claim is executed. That way, an active governance structure can be set up together with the launch of airdrop instead of relying on tokenholders to vote individually on governance proposals. Anybody can sign up as a delegate, and tokenholders can re-delegate their voting power at any point in time.

The various eligibility criteria are meant to ensure that airdrop hunters that use large amounts of addresses to farm dust-sized transactions are excluded from the airdrop, and instead addresses that have verifiably and actively participated in Ethereum and Optimism activities that help grow both networks are rewarded.

Week's Recap

• Utopia Labs Announces $23M Series A Financing led by Paradigm

• Binance Raises $500 Million Fund for Crypto Investments

• Dework raises $5M seed round led by Paradigm & Pace

• SIZE Closes $6M Seed Round

• Laevitas raised a $2.5M seed round

• A16z and Coinbase execs back new crypto VC fund Canonical

• Checkout.com founder backs DeFi platform Alloy in $3 million pre-seed round

Indicator Tracking

MVRV

Crypto Fear & Greed Index

Data of NFT Market

Total Value Locked of DeFi

Total Value Locked All Chains

Protocol Total Revenue

#1 Financialized NFTs: evolving opportunities in an early space

The technology behind non-fungible tokens unleashes a good chuck of untapped economy and enables ownership of digital assets. What we have today of our non-fungible tokens are mostly PFP, which is categorized in art and collectables, that so far have limited potential for yield generation but nevertheless great for building communities and social status. The technology of NFTs is much more versatile and the possibilities are endless when the technology is applied to different industries, both in the physical and virtual worlds.

In traditional finance field, securitization has been a long-time practice. Before modern era of securitization began in 1970, there were a number of precedents, including farm railraod mortgage bonds in the 1860s, the morgage-backed bonds in 1880s and a form of securitization of mortages before the 1929 Wall Street Crash. The Department of Housing and Urban Development created the first modern residential mortgage-backed security when the Government National Mortgage Association (Ginnie Mae or GNMA) sold securities backed by a portfolio of mortgage loans.

What is securitization?

According to Investopedia, securitization is the procedure where an issuer designs a marketable financial instrument by merging or pooling various financial assets into one group. The issuer then sells this group of repackaged assets to investors. Securitization offers opportunities for investors and frees up capital for originators, both of which promote liquidity in the marketplace.

In theory, any financial asset can be securitized—that is, turned into a tradable, fungible item of monetary value. In essence, this is what all securities are.

However, securitization most often occurs with loans and other assets that generate yields such as different types of consumer or commercial debt. It can involve the pooling of contractual debts such as auto loans and credit card debt obligations.

The benefit of securitization?

By transforming illiquid assets into tradable securities, securitization has helped channel cash flow to borrowers and fund significant economic development. Securitization has also helped issuers and investors diversify risk across asset classes and across the globe.

And how do we crypto builders and investors can learn from our fellow great minds from traditional finance? Let's take a look at our current market landscape of NFT Financialization and dig deep into how those protocol works in different verticals and where the opportunities we can all explore in this sector.

Stay tuned!

#2 How to construct a sustainable DAO?——Introduce a DAO construction model applying the collaborative economic framework

(based on the sustainable management of commons theory of Nobel Prize winner Elinor Ostrom)

This set of patterns is divided into six steps:

• STEP 1: Inspiration of a DAO

In the collaborative economic model, one person must first "centrally" put forward their own ideas before a DAO can be implemented.

• STEP 2: Build a Community

Take the dual-token system (reputation token and liquidity token) built by Token Engineering Commons (TEC, a company designing for Token Ecosystems) as an example.

The reputation token system can be understood as "impact hours", which are used to reward the contributions of labor and professionals in the community. The system adopts the method of self-recommendation. The members of the DAO publicly recommend people who have made important contributions in a decentralized manner. Those who are recommended will receive points, and the points can be exchanged for reputation tokens. Reputation tokens are illiquid——no transferable or tradable.

The liquidity token system is used to quantify the potential of capital to become an investor. Since capital is a “double-edged sword”, while increasing capital flow, capital exploitation may also occur . Therefore, in order to ensure the alignment of values between investors and organizations, TEC only accepts investments from a specific organization – The Trust Seed. The Trust Seed’s personnel list will undergo rigorous manual review to kick out profit-seeking speculators, leaving those who really want to create value to build a mission or value-driven community. The token corresponding to this system is called Seed Stack. The more Seed Stack tokens you hold, the more money you can invest.

• STEP 3: Mission, Vision, Values (MVV)

It is up to the community to jointly determine the mission, vision and values of DAO. The community will provide space for members to learn and discuss to reach an internal consensus. After that, two rounds of brainstorming about MVV will be organized in the community, and the MVV will be finally determined based on the quality assessment.

• STEP 4: Determine Economic Model & Visualization

For instance, TEC and The Commons Stack are in partnership, so they can directly use the economic models in The Commons Stack, such as augmented bonding curve and conviction voting. But for most other DAOs, it is still necessary to vote for the appropriate economic model.

• STEP 5: Design an Economic System

The collaborative economic mechanism needs to create fun to attract everyone to participate, instead of assigning homework in the classroom like a teacher, allowing members to claim and complete tasks individually. TEC provides a venue for members to encourage brainstorming parties. Of course, a party with "business boast" can't really solve any problem. Therefore, TEC provides guidance and education internally to help members improve their awareness, so as to form their own thinking and dare to refute and debate at the party.

A final economic system construction plan still needs to be finalized after all those brainstorming. TEC adopts a two-round voting mechanism to reduce time costs. For example, when the community needs to vote on 80 economic system proposals, the first round will use quadratic voting based on reputation tokens; the second round will use ranked-choice voting, and only There are 3-5 options, and everyone will vote after understanding the content of each proposal. It is equivalent to the first round as a preliminary election, and the second round is the real voting.

• STEP 6: Form a community culture

After the above five steps, a DAO finally has a dual-token system, which has determined the MVV of the organization, built an economic model and visualization tools and formulated an economic system. Most importantly, community members learned about and participated in the building of the system in an interesting way during a period of time, creating a cultural resilience against technocracy.

At this time, if there is a so-called "leader" who wants to stand up and take charge of the overall situation (even if some of them are well-intentioned), the members have the confidence to say no to him, refute the views they disagree with, and give them based on their own knowledge. personal opinion.

When every member of the community is personally involved and educated, technocracy is self-defeating.

"We need educated democracy, that's true democracy", and the collaborative economic model will help us achieve that.

Hot Topics

StepN Cleans Up Mainland China Users

https://twitter.com/Stepnofficial/status/1529863102006583311?s=20&t=V4Y-jX3DasUv-qSjrYo5Eg

On May 27th, StepN released an announcement to clear its users in mainland China, which stated that it would stop its service to mainland Chinese users on July 15th, 2022. After the announcement, its Token price dropped by more than 50%, then rebounded and is now stable around 1.1 USD.

In response to this announcement, user feedback varies, with some users believing that clearing out Chinese users will be beneficial to the long-term development of the project, while others believe that when Chinese users exit, they will sell off GMT, sending StepN into a death spiral. Up to now, GMT price has rebounded and has not fallen further, indicating that users and the market still have relatively high confidence in StepN.

Week's Recap

• Flowcarbon Raises $70M to Tokenize Carbon Credits and Build an On-chain Market

• Standard Crypto raises new $500 million fund: Axios

• Andreessen Horowitz raises $4.5 billion crypto fund to take advantage of bargains in down market

• Crypto tax startup ZenLedger raises $15 million led by ParaFi Capital

• StarkWare Reaches $8B Valuation Following Latest $100M Funding Round

Indicator Tracking

MVRV

Crypto Fear & Greed Index

Data of NFT Market

Total Value Locked of DeFi

Total Value Locked All Chains

Protocol Total Revenue

#1 ZK VM

Bobbin Threadbare made a great talk introducing Miden VM at ZK Summit. We learned a lot about ZK VM from it.

In general, we can write ZKVM as initial state + programs → ZKVM → final state and proofs.

ZKVM takes initial state and programs related data as input and outputs final state related data and proofs. At the same time, ZKVM also accepts private input as witness. The witness can be signature or tx data. Validators can verify the ZKVM execution without the witness. The public input is not the same. Some ZKVMs use initial state and programs commitment and take initial state and programs as witnesses.

Limitation

ZKVM has some limitations:

• Not every proving system can make a ZKVM

• The performance of ZKVM is not as good as specialized ZK circuits

Instruction set

Normally ZKVM uses WASM, RISC V, EVM, or customized ZK-friendly instruction set. WASM and RISC V are popular. EVM is more blockchain-focused. Customized instruction set is more flexible.

Design

Machine Type

• Stack Machine

• Register Machine

• Memory-memory Machine

Flow Control

• Harvard architecture

• von Neumann architecture

• Merkelized abstract syntax tree (MAST)

  • All programs can be reduced to a single hash (the root of the MAST)

  • Every internal node is itself a MAST of a smaller program

  • Leaves of a program MAST are linear programs(no control flow)

Program initialization

• Program hash

• Public inputs

Function calls

• Static call targets

• Dynamic call targets

Memory model

• Write-once memory

• Read-write memory

Native data types

• Field elements

• Regular integers

• Structs, arrays, sets...

Native field

• 64-bit

• 128 bit

• 256 bit

Designers need to balance performance, developer-friendly, ZK-friendly and proof cost. For example, memory operation is cheap on ZKVM. Memory-memory machine ZKVM will be a good choice if you want a cheap ZKVM.

#2 How to find the next Bluechip NFT?

In the conventional definition, Blue Chips are traditional industrial and financial stocks with long-term stable growth. For "Bluechip NFT", we prefer to simply understand it as an NFT that has built up volume and can retain its value over bull and bear time.

How to define a Bluechip NFT from the data? We can see from the market capitalization distribution that there is a clear head effect in the bluechip NFT market. BAYC and CryptoPunks account for about three quarters of the top ten in total market cap, and among the NFT data for all public chains, the top ten NFTs are almost all above $500 million in sales volume.

The traditional blue-chip definition of "sustained growth attributes" is more pronounced for NFTs. Non-blue-chip NFTs have price curves that are more volatile in the early stages and less volatile thereafter, while blue-chip NFTs have more stable growth curves with intermittent bursts of trading volume. Compared to the former, bluechip NFTs have more sustained activity.

In terms of holder distribution, the higher the “Bluechip degree", the higher the distribution of wallets. A wider distribution of holders indicates a higher degree of decentralization, avoiding the continuous trashing of the market, which will facilitate healthy long-term growth, and the more holders, the more active the community will be.

Long-term holders are known as "Diamond Hand", and the confidence they hold can often keep a project going for a long time. This is reflected in the bluechip NFTs, where the number of long-term holders has not only stabilized but also increased slightly since then, except for the initial mint phase when there were a lot of changing hands, indicating that more holders believe the project will appreciate over time.

In the traditional bluechip NFT, whether the team has sustainable operation ability, enabling NFT holders to have profits through continuous empowerment, such as airdrop, equity gift, etc., which is also the main reason to support the steady price increase. At the same time, there are many ways to empower the on-chain behavior, such as: reducing the circulation of NFT in the market by opening the staking function and turning short-term holders into long-term holders. BAYC, as a well-known bluechip NFT, takes empowerment to a new level by establishing DAO financing and issuing APE tokens. Transforming NFT into an ecology further enhances sustainable value growth.

#3 Why is decentralized storage important in a Web3 world?

Web3: Consensus, Storage and Computation

There are countless definitions and abstractions of what Web3 is and what Web3 strives to be. While definitions vary in terms of scope and depth, one definition by Nader Dabit, Developer Relations Engineer at Edge & Node, captures where most of these definitions intersect:

“Web3 is the stack of protocols that enable fully decentralized applications.” – Nader Dabit

Blockchain technology is what set off this decentralized revolution and brought about the emergence of the concept of Web3, representing the idea to not only decentralize consensus, but to use this technology to decentralize the rest of the internet too. Simply put, Web3 is the next stage of the internet and represents an on-going advancement from the information age to the age of decentralization.

Just like the Web2, Web3 is a complex amalgamation of a wide array of technologies that together form the Web3 ecosystem. Despite its complexity, we can break down the ecosystem into three key infrastructural pillars that need to be developed to achieve full decentralization of the internet: consensus, storage, and computation.

Arguably the hardest part was to figure out how to decentralize consensus, leaning on many decades of research, trial, and error. The first successful protocol to achieve decentralization on a global scale was Bitcoin – and that was only 13 years ago.

Over time attempts at decentralizing storage and computation have emerged and aim to complement the systems of decentralized consensus, or even subsume and combine their concepts to build something greater. Although in above illustration consensus, storage and computation are portrayed as three distinct pillars, they are in fact far more closely intertwined: Ethereum, Solana and Arweave are smart contract enabled (and soon FileCoin too), meaning they have certain computational abilities. Dfinity (Internet Computer), Holochain and Stratos also have storage and decentralized consensus mechanisms built into their protocols. Despite having capabilities across all three pillars, they are each champions in their specific domains, applying unique solutions to achieve decentralization of key infrastructural elements of the Web3 ecosystem.

In the next section, we will take a closer look at the decentralized storage pillar.

The need for decentralized storage

Decentralized consensus protocols were not designed for storing large amounts of data. On the Bitcoin network one block has a theoretical maximum size of 4 megabytes, and a new block is verified every 10 minutes on average. That means that every day a theoretical maximum of 576 megabytes of data can be stored on the Bitcoin network. In contrast, Facebook alone generated 4 million gigabytes of data per day in 2020. Adding to this the cost of submitting a single transaction with a theoretical maximum of 4mb to the Bitcoin network, very quickly costs start to escalate. Using blockchains to store data is not a feasible solution.

Given the maturity of cloud storage solutions such as AWS, Google Cloud and Azure, you might be wondering why use decentralized storage solutions in the first place. The answer is simple: immutability and permanence. In systems with centralized authority, they have the power to, at any time, alter your data, restrict access to your data or use your data for other means. Decentralized storage solutions provide owners of data with additional safeguards to ensure data is provably unaltered over a period of time, and in some cases, can be made to persist permanently.

NFTs (non-fungible tokens) and dApps (decentralized applications) are two innovations that benefit from decentralized storage in the Web3 ecosystem. If the metadata of an NFT is stored on a centralized storage service, they run mutability and impermanence risks: imagine having an NFT, but without the underlying data (such as images or files) that give it context.

For dApps, decentralized storage can enable permanent service availability. A dApp can be thought of an interface to more easily interact with smart contract of a blockchain, and consists of two parts: the smart contracts that live on the blockchain, and the dApp frontend that needs to be hosted somewhere. On decentralized storage networks where data is replicated many thousand times there is no single point of failure that attackers can use to take down a dApp front-end.

Closing

If the past is an indication of the future, we will see further expansion into increasingly niche use-cases, which will continue to expand the web of interconnected protocols and solutions across all three pillars of the Web3 ecosystem. We are still early on our journey to unlocking the full potential of decentralization and a decentralized internet, and we are optimistic to see what the future holds.

Stay tuned for an in-depth piece on decentralized storage, exploring the above concepts and digging deep into various decentralized storage technologies, to be released in the coming weeks!

Week's Recap

• a16z Investing in Metatheory

• Crypto management firm Ikigai raises $30 million for web3-focused venture fund

• Nansen acquires DeFi investment tracker Ape Board for undisclosed eight-figure sum

• Andreessen Horowitz raises $600M venture fund for games

• CyberConnect Raises $15M to Expand Social Graph Protocol

• Azra Games raises $15M to take Web3 games to mainstream gamers

• NFT-backed crypto loan startup raises $1.5m in seed round

• Blockchain gaming startup N3TWORK Studios raised $46 million in Series A funding

• Hackathon organiser and web3 incentive platform DoraHacks raises $20 million

• Voyage Finance secures $1M funding in a pre-seed round

Hot Topics

StepN

StepN has recently become one of the "most successful" DApps in the Move to Earn craze. StepN now has 240,000 total users and 10,000 new users per day. Its Token market value has reached $850 million.

Indicator Tracking

MVRV

Crypto Fear & Greed Index

Data of NFT Market

Total Value Locked of DeFi

Total Value Locked All Chains

Protocol Total Revenue

Thanks@Eliade, @WenqingYu, @EricZhangfor their contributions and support to this article.

TL;DR

In this article we will take Venture DAOs as examples to discuss whether this market is worthy of joining in? We hope to figure out what factors benefit or damage Venture DAOs, and whether these problems can be solved in the future. Nowadays, in order to enter the cryptocurrency market, venture capital should target not only entrepreneurs, but also those in the investment world. We must increasingly participate in investment together with the overlapping roles of "community/investor/user". We believe that Venture DAOs will be a new venture capital paradigm worth practicing. We are more optimistic about two directions: small and precise quantitative Venture DAOs and broad, large Venture DAOs, which have the opportunities to integrate application layer resources to attain long-term value. So far, we cannot be optimistic enough to predict which of the many Venture DAOs will survive the test of time, and it may take more rounds of bull and bear market tests to screen out good projects that can really live through these cycles.

With crypto having boomed in 2021, there are now more than 180 DAOs managing over $10 billion in assets according to DeepDao, attracting nearly 2 million members. Just as the Limited Liability Company (LLC) has been the choice of organizational structure since the Industrial Revolution, the DAO  portrays a new paradigm of human organization in Web3. The first part of this article we will briefly review the origin, definition, and core governance elements of a DAO. The second part we will take Venture DAOs as examples to discuss whether this market is worthy of  joining in? We hope to figure out what factors benefit or damage Venture DAOs, and whether these problems can be resolved in the future.

1 Brief review: DAO Consensus and Formation Basis

In 2014 Vitalik Buterin described DAO as a decentralized organization, “not a hierarchical structure managed by a group of humans and controlling property through a legal system, but involving a group of humans interact with each other according to a protocol specified in the code and executed on the blockchain.” Julia Rosenberg and Maria Gomez of Orca also tried to refine the definition of DAOs. They believe that DAOs are built on: 1) open sources and blockchains, 2) a public membership, 3) a group of independent parties, 4) using tokens to manage protocols, 5) the allocation of internal capital for the purpose of automated markets without collusion, and 6) incentives of bottom-up community engagement.

The origins of a DAO will not be expanded upon here. The primary distinction between DAOs and traditional organizations comes from its unique structure: The essence of a DAO should be an automated software protocol surrounded by a community.

From the above, we expect that DAOs can empower the production of different industries in various forms. The operation details of each DAO, whose type, structure, rules and governance depend on the participants and their goals. So far, we have seen three main use cases in the market: Protocol DAOs, Investment DAOs, and Social DAOs. Although these are currently in the stage of practical exploration, we believe that researching the path of the forerunners will help to clarify a blueprint for the future. Next, we will focus on Venture DAOs and discuss:

1. How did Venture DAO arise?

   We will review the organizational structure of the DAOs and the development trends of VC in the new era respectively.

2. How does a Venture DAO work? What difficulties exist or what problems might it bring up?

   We will summarize how mainstream Venture DAOs capture market value in the field of investment, and then discuss about what problems exist and whether they can be completely solved in the long and short terms.

3. Discuss whether the establishment of Venture DAOs is "the revolution of the old allocation rules" or "the definition of new allocation rules" - is a Venture DAO an evolutionary paradigm to replace the traditional VC structure, or does it provide a new possibility of organization structure?

   1. Analysis of the motivation of traditional venture capital institutions transforming into Venture DAOs: Can Venture DAOs meet the existing needs of the venture capital market? Can DAOs solve the shortcomings of traditional VC?

   2. What are the irreplaceable OR absolute advantages of Venture DAOs? Do Venture DAOs satisfy with the development trend of venture capital in the new era?

4. How to define a successful Venture DAO in the future? Which application areas are we optimistic about?

   We will discuss whether Venture DAOs are worth practicing in the above paragraphs, and then discuss in what aspects they might be successfully practiced to achieve sustainable development.

2 Will Venture DAO be the new paradigm in the new era of venture capital?

2.1 How did Venture DAOs arise?

Before answering the necessity of the establishment of Venture DAOs, we try to review how traditional venture capital institutions meet market needs, as well as the current problems and possible trends for its future.

Venture capital (VC) firms are usually composed of a group of teams with professional knowledge and industry experience in diversified industries, for example technology, finance and capital operation, looking for startups with high growth opportunities. VCs provide startups with funds and resources in exchange for equity and ultimately bring them to the public market through an initial public offering (IPO), or they sell their investment and exit the company, often following mergers and acquisitions.

As early as 2017, a report by Pitchbook pointed out that due to the lack of long-term Limited Partnership (LP) in China, the average holding period of Chinese VC projects is only 3.3 years, compared with 8.2 years of that of the US. And in the US the identities of investors and entrepreneurs are often interchangeable. If VC institutions only focus on short-term profits and are oriented towards results with "low tolerance for failure", it will damage the incubation of a large number of basic research and innovation projects. Tian Xuan, a professor at Tsinghua PBC School of Finance, also pointed out that “it is necessary to have a higher tolerance for short-term failures of startup innovations." Under the current epidemic and the resulting difficulties in raising funds, the cost-effectiveness of venture capital merely pursuing short-term return incentives continues to decline. It means that the requirements for investment talent and the patience of investment cycles need to be further improved upon, and venture capitalists are increasingly in need of "entrepreneurial spirit".

At the same time, the continued influx of venture capital has pushed up the average valuation of projects in the market, with many seed projects now being valued close to their Series A valuations a decade ago. The average seed-stage valuation of a U.S. startup in 2021 is $3.3 million, more than five times the 2010 level (The Economist, 2021). This also means that the extensive investment strategy of the old venture capital giants such as "investing the entire track" is unsustainable, thus refining more targeted investment strategies is necessary.

On the one hand, reshuffling and polarization of venture capital institutions increased. On the other hand, excellent projects are never short of money and their premiums are often too high in the current market situation. With the expansion of various groups participating in venture capital, the market competition has gradually intensified. Apart from VC firms, corporate venture capital departments are being established and challenging the existing concept of VC. Traditional venture capital institutions are also undergoing self-innovation, by seeking differentiation (focusing on investment and research in vertical tracks), expanding scale (increasing post-investment management and incubation services), and refining teams (such as sole proprietorship venture funds) and introducing innovative business models (venture capital accelerators).

Through the above review, we can see a trend that the “short-term and excess” returns that were once celebrated in the venture capital industry are gradually decreasing, and the boundaries between venture capital and other investment institutions are further blurring, for example some large VCs are more akin to asset management companies. The relationship between founders and venture capitalists may not be as important as it once was. Especially as startups grow, it may not matter who is investing, but how much you are willing to invest.

As a result, a new field of venture capital has been proposed, combining both DAOs and VCs. Some people hope that venture capital will no longer be the "power" of a few elites, and it will no longer be a game unique to well-connected venture capitalist institutions. Joyce Yang, founder of Global Coin Research, believes that "Global Coin Research's DAO goal is to subvert the traditional VC model, to democratize investment in the crypto-track, and to provide opportunities for those who have never invested before."

2.2 Venture DAOs - How does it work? What problems may arise, and can they be completely solved in the short and long term?

As early as 2016, The DAO on Ethereum can be regarded as the earliest form of Venture DAO. After 2018, MetaCartel, LAO, Flamingo DAO, Stacker Ventures, Angel DAO, Honey DAO, Komorebi Collective and many more appeared one after another. Most of the Venture DAO models are still based on building a treasury and decentralized management of how funds are invested, but there are differences in the entry thresholds and governance mechanisms of members. In addition, not all DAOs issue governance tokens. Some organizations with higher thresholds will combine on-chain governance with  off-chain governance to promote the participation of community members, while some organizations with lower entry-thresholds involve token holders to be members in order to flourish the community.

In short, Venture DAO can be divided into two categories according to the degree of openness: public DAO and private DAO.

• Public DAO: Users can participate in the voting and governance of the community by holding tokens, and obtain the benefits of the project. Voting rights and income are related to the number of tokens held by the address. Retail investors and ordinary players can participate by purchasing tokens in the market, representing projects such as Whale and JennyDAO.

• Private DAO: Members need to be invited by other members to join the community. Most members of this type of DAO know the real identities of other members. The members gather together for a common belief or hobby (such as NFT), depicting what could be considered more of a high net worth player NFT "private club" for professionals. The community usually has its own native tokens, but most of them will not circulate in the secondary market and are only used within the community.

1 Can the “Wisdom of the Crowd” outperform the wisdom of a select few?

Investing is a highly professional activity, and high-return investment decisions are often counter-market consensus at the time of investment. At present, most of the Venture DAOs governance determines voting power by the number of tokens held, but that may easily lead to centralization of power among a certain group of tokenholders. Pursuing absolute democracy for individuals is not necessarily the optimal solution for decision-making. In addition to the "token stake" model, what better solutions might the market have in order to improve the above problems? The believability-weighted and radical transparency decision-making model derived from the Bridgewater Fund may provide a new perspective. Members are tagged with colleague and business partners’ comments, which might be permanently saved. We hope to see more Venture DAOs whose mechanisms allocate voting and member rights reasonably to preserve decision-making power.

2 How does the design mechanism of "proposal + voting" improve decision-making efficiency?

The trilemma in DAOs is "scale, quality, and access". In a small DAO, all members have enough energy to read all proposals and vote on them. "1 token = 1 vote" is enough. This supermajority principle with simple voting, quality and access can be maintained but is not scalable. To achieve both scale and quality, DAOs can employ more sophisticated vote weighting mechanisms, such as  “Holographic Consensus” or liquid democracy. This increases scalability while maintaining quality, but it is harder for voters to fully understand, which reduces accessibility and therefore legitimacy of decisions. They are also more difficult to implement, especially when voting takes place entirely on-chain.

Noticeably, there are hundreds of teams currently working on the above deficiencies, and DAO tools for governance, reporting, treasury management, and communication are thriving. In the short term, we feel that Venture DAOs governance is likely to remain chaotic. As the market matures, we believe truly effective DAO governance tools will show first.

3 Potential bribery and monopoly risks

These risks relate to the token distribution and voting right mechanisms associated with the tokens. As long as whales are large enough, they can manipulate proposals and votes by themselves or by conspiring with others, and thus monopolizing investment decisions . Whales can influence investment decisions by bribing guardians/voters, or launch a "Sybil attack" to pledge tokens in multiple wallets to vote, making DAO's investment decisions more in line with their own interests. The noise and disruption of DAO governance by short-term speculators is a test of the DAO's economic model design.

4 Technical Risks of Smart Contracts

At present, the DAO ecosystem is not perfect, and the possibility of hacking is a big risk. One of the largest crowdfunding projects, "TheDAO", lost a third of the 11.5 million ETH it raised due to the hack, losing nearly $60 million.If this happens, the absence of investor protection systems could lead to huge losses for individual investors.

5 Limited investment credit and investment scope?

Although investing in DAO can to a certain extent avoid the selling pressure of large institutions after the launch of investment projects, and the investment amount is relatively smaller than that of large institutions, the lack of endorsement by large institutions and the uncertainty of early projects are also worth considering. Excellent projects/entrepreneurs can usually find excellent venture capital. CultDAO has a very controversial ideology, which may discourage many excellent projects. If there is no high return on investment to turn the positive flywheel, only selling its ideology might lead to a “meme” VC DAO.

6 Risks to Legal Tax System Compliance

DAOs also need to overcome many potential regulatory and legal challenges. Whether the DAO can be accepted by the government as a qualified “investment subject” deserves flexibility, and whether a partner who is not regarded as a “corporate body” can become the subject of property registration is still a question; how will the investment be submitted for tax filing after income is obtained? Jeremy Coffey, a nonprofit expert at the Perlman law firm, said the new structure of the Venture DAO could lead to a range of issues, from jurisdictional oversight and tax issues to securities law. Regulatory uncertainty makes it difficult for DAOs to interact with brick-and-mortar companies, which is a headwind. While the U.S. state of Wyoming pushed for legislation that would allow DAOs to operate on the same legal basis as traditional LLCs, while allowing them to be governed by their own smart contracts, this was met with resistance from the U.S. Securities and Exchange Commission (SEC). While we've seen a16z‌ have some good advice on how to create a legitimate DAO entity as an unincorporated non-profit association, the standardization of DAO investments for the foreseeable future and improving their compatibility with existing legal/tax systems is critical.

7 Potential zero risk of issuing coins

An important element in DAO is the governance token. Token holders have the power to shape the future of the DAO, and they can influence decisions related to the projects, such as changing how the funds are used. Owning a governance token is a bit like taking an equity stake in the early days of a startup – if it succeeds in the future, the stake will be very valuable. But the risk is that these governance tokens might turn into zero value. Investors should do their homework and assess the losses they can afford before joining in. At the same time, Venture DAOs that choose to issue tokens also need to face compliance and regulatory issues.

We see that in terms of organizational structure, DAO-driven VC can indeed be described as a new organizational production model in the venture capital industry. At present, it mainly relies on the power of initiating KOLs and organizations to establish its own governance framework, incentive mechanism, project incubation and consensus culture. That is, a hybrid model of "on-chain + off-chain" governance. Most of them limit the issuance of tokens, or strip the rights and interests of the community and governance, or raise the entry threshold for members. But the unavoidable problem is that many DAOs will encounter resource dissipation problems in the process of development, such as deviation from the original intention, communication disputes and disputes in different cultural backgrounds. Especially in the early stage of DAO, it still needs a relatively centralized organization to promote it to be effective.

2.3 Is Venture DAO an evolutionary paradigm to replace the traditional VC structure, or a new structure of organizations?

From a dialectical point of view, why should traditional venture capital institutions have motivations to transform into Venture DAOs? Can the DAO meet the market needs and solve the problems under the existing structure, or meet the development trend in the new era of venture capital? We believe the answer is the latter, and the DAO provides more possibilities for VCs to operate in the future.

We have mentioned earlier that the “short-term and excess” returns of the venture capital market gradually declined, which means that the market requirements for making decisions should be more precise and time-sensitive. We doubt that the paradigm of Venture DAO can improve alpha returns better than the GP-LP system. Also, it might not improve decision-making efficiency in the way of Venture DAOs. Correct investment decisions are often anti-consensus at the beginning, and decision-makers should be elitist enough and have their own alpha capture strategies, which do not require democratic voting.

From the perspectives of “fundraising” and “selecting”, as the market liquidity gets better, startups can reach mutual investors in a more direct and fair way. Based on the decentralized mechanism, projects with sufficient fundraising can reduce the operation costs of intermediaries, and have competitive advantages against the platform effects and private networks.

Will future investment institutions necessarily “know the project better than the project owner”? Let us discuss it from a different perspective. For the crypto market, many blockchain projects from cornerstone investment, to private equity (equity investment + Token), and then to exchanges for initial coin offering (ICO), are particularly fast.

From this, we try to answer a key question: Must Venture DAOs issue tokens for governance? Our answer is YES. How Venture DAOs decide to hold or trade tokens that are already in the public market is different from the long-term holding of traditional VC funds. For a long time, large-scale venture capital institutions or investors have bought at a relatively low price in the early rounds and exited for profits after the project was launched. In many cases at present, projects in the crypto market have already been listed on chain after they have completed a round of financing with investors, and even no need of raising from VCs. There is no concept of Series ABCDE or Pre-IPOs as before. The barriers between "primary market" and "secondary market" in traditional cognition have been greatly weakened. As a venture capital fund, if it does not invest in the previous rounds, it is highly likely that it needs to openly trade with retail investors on the exchange.

It is worth mentioning that the ready-to-exit/enter funding model also brings more possibilities to the crypto market. Venture DAOs are able to capture a continuous funding to avoid the sell-off phenomenon of traditional VCs to a certain extent. This model may be more suitable for investing in infrastructure with high technical barriers. The short-term alpha might not be particularly obvious, however in the long-term cycle, it can capture the beta benefits of the market by building influence at the protocol layers and application layers.

In a word, Venture DAOs will not be a process to replace the traditional VC structure, but provide a new way of production organization structure. In the short term, operating investment DAO is just a model difference, trying to establish the influence of "media and communication" in the field of Web3 still relies on initial resources. The existing projects in the market have to be tested through multiple rounds of bear markets before we can conclude clearer criteria of judging the pros and cons.

2.4 How will the future Venture DAO be like in order to achieve sustainable development? Which application areas of Venture DAOs are we optimistic about?

"What is being reorganized? What needs to be decentralized?" The open source and decentralized nature of blockchain redefines the relationship between protocols and investors. Theoretically, it allows everyone in the world to come together and create a VC. We discussed in the first three sections that Venture DAOs might be a viable investment experiment. In this part, we will discuss its promising application fields.

One voice is that the Venture DAOs should be sufficiently "small and sophisticated". In a sufficiently liquid market, there should be no distinction between primary and secondary market. A Web3-native Venture DAOs can use DeFi projects to raise funds and tokenize the cash flow. All economic activities and rules based on DAOs are recorded on the blockchain, the assets invested by it are digital and traceable on-chain assets, and its investment performance is verifiable. This type of index-based Venture DAO, such as index coop, is an automatic trust mechanism based on simple (even complex) transactions, building direct indicators (economic value) to measure the benefits of decisions. In contrast, traditional venture capital without quantifiable attributes may be more uncertain.

Another voice is that a sufficiently large Venture DAOs may be an opportunity to integrate infrastructure protocols. The innovation of the infinite fundraising model may not be something that a small-scale, short-term organization can do, since its short-term alpha will not be particularly obvious. It is necessary to capture longer-term value at the application layers based on infrastructure protocols.

CONCLUSION

"What happens when you reduce the cost of setting up an investment fund by a factor of 1000?" The answer is that setting up an investment fund is as easy as tweeting - we don't recommend setting up an investment fund by tweeting. But when it's that simple, the world looks completely different because creativity is absolutely phenomenal. ”——Will Papper, Co-founder of Syndicate Protocol

We believe that Venture DAO will be a new venture capital paradigm worth practicing. Now to enter the cryptocurrency circle, venture capital should target not only entrepreneurs, but also those in the investment world. "Peers" are not just other venture capitalists. They must increasingly participate in investment together with the overlapping roles of "community/investor/user". We are more optimistic about two directions: small and precise quantitative Venture DAOs and broad, large Venture DAOs, which have the opportunities to integrate application layer resources to attain long-term value. So far, we cannot be optimistic enough to predict which of the many Venture DAOs will survive the test of time, and it may take more rounds of bull and bear market tests to screen out good projects that can really live through these cycles.

No matter what form of DAO, its biggest advantage may also be its biggest flaw: an ideal system design that can cooperate seamlessly without "trust" requires a group of "like-minded" partners to work together in the same original aspiration, gathered together under the guidance of the realization. If the advanced form of an ideal institution discards a key part of our human nature, then we have reason to maintain the necessary attention and vigilance against it. Only the production relations that adapt to the productive forces can promote the sound development of the economy and society. Perhaps the greatest value and significance of DAO is to establish a production relationship for us to meet the development needs of the new era, and to provide an appropriate social experiment. Tracheopteryx, a core contributor to Yearn Finance, said, “If you look at DeFi, it’s a bet on the future of finance; NFTs could be a bet on art, real estate, or any type of property. But DAOs are a bet on the future of how humans organize, which is a much bigger thing.” Thus, we need the pioneers of Venture DAO, and we need to keep studying them.

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#1 Cross-chain Investment Opportunites

The mission of the cross-chain bridge is to fix the gap between different chains and lower the entry barrier for beginners. Staying on one chain, the user can reach other Dapps and liquidity on other chains. Compared to multi-chain wallets which offer better UX, the cross-chain bridge unit all chains to one and the user doesn't need to figure out which chain he/she stays on. Aligning with this mission, below are opportunities in the cross-chain ecosystem:

• Inter-layer bridges: Inter-layer bridges are bridges between laye2 and layer1. There are not as many players in this market as players in the cross-chain bridge markets. This market is still early. In the future, we expect transactions in layer1 to move to layer2. This means more protocol revenues for protocols in this market.

• Bridges with new tokenomics: Nobody knows how to use tokens appropriately in the cross-chain bridge. Most tokens are used as governance tokens and secure the whole network. We often see TVL increases, but the token price decreases. The token price does not reflect the progress of the project.

• Bridge SDK: A toolkit or standard for building bridges. Developers can quickly construct their own bridges to extend their applications over more chains. Multichain is the future. With this toolkit, developers can expand to new chains fast and secure.

• Bridge Aggregator: The aggregator connects with multiple bridges and offers better UX and lower fees. The DeFi market proves the necessity of aggregators. After DEXs, lots of aggregators join the market. This will happen again in the cross-chain bridges market.

• ZK Bridge: ZK bridges can offer a better, cheaper, and safer cross-chain experience. Developers can easily build apps on top of the ZK bridge. Nil Foundation made significant progress in Solana and Mina, but it is hard to expand to other chains.

#2 The existance of LayerZero NFT

LayerZero, the Omni-chain Interoperability Protocol can be understood as a cross-chain protocol or tool. It is a convenient protocol that allows users to complete cross-chain processes with a low gas fee and fast transaction processing. The LayerZero protocol functions similarly to the “layer 0” IBC (Inter-Blockchain Communication) protocol of the Cosmos ecosystem. What stands out about LayerZero is its use of Ultra-Light Nodes (ULNs), which propose a new model for securely transferring information between chains on the premise of being cost-effective. They are implemented by performing the same authentication as light nodes on the chain. Omni-chain NFT does not require the holder to use the cross-chain bridge tool to achieve transfer. Omni-chain NFTs can be minted by calling the appropriate contract on the respective chain that the contract has been deployed on.

The concept behind cross-chain is to allow tokens or arbitrary data to be transferred from one network to another. They provide a compatible way for both parties to interoperate securely and provide key components for developing multi-blockchain networks. For NFT art collectibles, the opportunities may be limited. However, for practical NFTs, untapped usage scenarios and markets are likely to emerge.

Ethereum is facing challenges in continually scaling its NFT ecosystem as a result of its high gas fees. At present, the main solutions to this problem are to reduce network congestion through Layer 2 networks and to grow a multi-chain ecosystem model, pioneered by cross-chain protocols, such as Anyswap and Multichain amongst others, to redistribute the network load. With the development of multi-chain ecosystems, NFT assets on different public chains have also begun to grow across networks such as Polkadot, Solana, Heco, and Binance Smart Chain. While many projects have been deployed on cross-chain protocols such as Anyswap and Multichain, the emergence of the LayerZero ecosystem supported by the Omni-chain NFT appears to be ushering in a new turning point for cross-chain projects.

#3 How Axie infinity keeps value cycling around the ecosystem

The ways games monetise their user base has had three major phases over the last 20 years. First was the ‘Pay-to-Play’ genre dominated by the likes of Call of Duty, Minecraft, GTA, and many more. Second was the craze around ‘Free-to-Play’ (F2P) games like Fortnite, Farmville, Candy Crush and other mobile-casual games. We are currently seeing the emergence of the third phase known as ‘Play-to-Earn’ (P2E) which has been brought to popularity by Axie Infinity.

We tried to use 3 most important metrics that describe the transaction behavior of users in the GameFi ecosystem.

• Reach - The growth of new players.

• Retention - How many players does the game retain over time.

• Revenue - How much money is captured by the different parts of the ecosystem.

The visual above gives a high-level breakdown of how Axie infinity keeps value cycling around the ecosystem.

First though, the value must flow into a Ronin Wallet (center in the diagram above) and happens in three ways:

1. Bridge from Ethereum to Ronin.

2. Binance integration with Ronin.

3. Ramp Network allows users to deposit directly into their Ronin Wallet.

After a user has funded their wallet, they can buy and sell on the Axie marketplace. If a user is looking to battle in the arena they’ll need to buy at least 3 Axies. They can also trade or provide liquidity for SLP, AXS, and WETH on the Katana DEX.

Once a player starts battling, they begin earning SLP rewards which can only be redeemed every 2 weeks. Within this time, if a player shows exceptional skill they can be ranked on a global leaderboard to earn AXS as a prize.

As seen in the preceding diagram, these rewards (both SLP and AXS) are meant to flow into the breeding of more Axies. The SLP (which is generated when claimed) is burned upon the breeding of Axies. The AXS used in breeding is sent to the Axie Treasury and distributed as future rewards.

Retention comes from players wanting to play more to earn more, earn more to spend more, spend more to level up their team, and level up their team to earn more. Then the cycle starts over, theoretically capturing the value that enters the ecosystem. If SLP and AXS tokens leave the ecosystem and consequently aren’t used to breed more Axies, then they can’t be recycled back to pay the current players in the battle arena. For the Axie Infinity economy to remain sustainable in the long term, the SLP burnt from breeding needs to exceed, or equal, the amount of SLP minted through in-game rewards. If players redeem more SLP in the arena than what is burnt from breeding, then the supply of SLP increases putting downward pressure on the price of SLP. If token prices fall then the earning potential drastically decreases, and players lose the incentive to play the game.

To dig a bit deeper into the scholarship programs. We can look at the Yield Guild Games (YGG) - one of the largest Axie Infinity scholarship programs. According to the YGG 2021 Year End Retrospective, YGG reached 10,000 scholars by the end of 2021 and generated $13.6M in SLP revenue since the program began in April. According to the most recent YGG Asset & Treasury Update, they had 4,710 scholars in September, who earned a total of $1.24M through gameplay. This equates to $263 per user for the month of September. Based on a number of metrics that we will discuss below, it is not likely that YGG scholars are generating any more than this currently. Of that $263, 70% goes to the scholar, 20% to the manager, and 10% to the guild. This means the average scholar is making about $184 per month which annualizes to $2,209.

Week's Recap

• a16z Investing in Irreverent Labs

• Nyan Heroes Raises $7.5M to Develop Play-to-Earn Game

• Irene Zhao’s influencer platform SO-COL is raising funds at a $100 million valuation

• Chainflip Labs secures $10 million for cross-chain DEX

• 6th Man Ventures is raising $145 million for a second crypto fund

• Aurora launches $90 million developer fund to boost DeFi on NEAR Protocol

• A16z leads $25 million seed round for NFT infrastructure startup Co:Create

• Haun Ventures leads $11 million round for web3 community platform Highlight

• KuCoin Raises $150M in Round Led by Jump Crypto at $10B Valuation

Indicator Tracking

MVRV

Crypto Fear & Greed Index

Data of NFT Market

Protocol Total Revenue

What is LayerZero

LayerZero is a cross-chain communication protocol that allows applications deployed on different chains to communicate with each other. LayerZero does not require intermediate nodes or consensus mechanisms like cross-chain bridges require. Instead, it allows applications to complete seamless cross-chain communication. The first DEX on LayerZero is Stargate Finance, a project that enables cross-chain swaps of Omni-chain assets - more on that later.

LayerZero may seem blurry at first - but once you notice it’s these lovely ghosts that you are seeing, you may begin to see things more clearly: Gh0stly Gh0sts is the first NFT project on LayerZero, and is also a so-called "Omni-chain" NFT project. Omni is defined as "all; of all the things", here referring to the ability to operate across multiple networks. For example, Gh0stly Gh0sts is deployed on seven chains, namely Ethereum, Binance, Avalanche, Arbitrum, Polygon, Fantom, and Optimism.

LayerZero, the Omni-chain Interoperability Protocol can be understood as a cross-chain protocol or tool. It is a convenient protocol that allows users to complete cross-chain processes with a low gas fee and fast transaction processing. The LayerZero protocol functions similarly to the “layer 0” IBC (Inter-Blockchain Communication) protocol of the Cosmos ecosystem. What stands out about LayerZero is its use of Ultra-Light Nodes (ULNs), which propose a new model for securely transferring information between chains on the premise of being cost-effective. They are implemented by performing the same authentication as light nodes on the chain. Omni-chain NFT does not require the holder to use the cross-chain bridge tool to achieve transfer. Omni-chain NFTs can be minted by calling the appropriate contract on the respective chain that the contract has been deployed on.

LayerZero and the underlying technology have two notable uses:

• Interoperability between chains: different blockchain architectures are no longer an obstacle to cross-chain communication. Both EVM-compatible chains and UTXO-based chains are compatible with LayerZero.

• Give birth to a new type of NFT: Omni-chain NFTs. These can be deployed across multiple chains simultaneously. For example, they can be born on Ethereum, put up for sale on Binance Smart Chain through LayerZero, and pledged on Solana.

Gh0stly Gh0sts is an Omni-chain NFT that shows off these strengths.

Will Omni-chain be the main choice for the application layer in the future?

I believe that Omni-chain will become a trend and transform the current application layer as we know it. LayerZero demonstrates the first implementation of Omni-chain technology and therefore may be able to capitalize on its first-mover advantage to drive projects to its protocol.

Is it necessary for Omni-chain NFT to exist?

In essence, the concept behind cross-chain is to allow tokens or arbitrary data to be transferred from one network to another. They provide a compatible way for both parties to interoperate securely and provide key components for developing multi-blockchain networks. For NFT art collectibles, the opportunities may be limited. However, for practical NFTs, untapped usage scenarios and markets are likely to emerge.

Other issues with the current state of NFTs:

• Most NFTs are on Ethereum, which is plagued with high gas fees. Gas fees can vary heavily and span from $10 to $100 in a short period of time, depending on how congested the network is.

• Using certain blockchains means users must have the right currency to process transactions (e.g., ETH for Ethereum, BNB for Binance Smart Chain, etc.)

• Smart contracts are not available on all blockchains. For contracts that exist between multiple chains, their functionality may vary from blockchain to blockchain.

More applications are deployed across multiple chains

Ethereum is facing challenges in continually scaling its NFT ecosystem as a result of its high gas fees. At present, the main solutions to this problem are to reduce network congestion through Layer 2 networks and to grow a multi-chain ecosystem model, pioneered by cross-chain protocols, such as Anyswap and Multichain amongst others, to redistribute the network load. With the development of multi-chain ecosystems, NFT assets on different public chains have also begun to grow across networks such as Polkadot, Solana, Heco, and Binance Smart Chain. While many projects have been deployed on cross-chain protocols such as Anyswap and Multichain, the emergence of the LayerZero ecosystem supported by the Omni-chain NFT appears to be ushering in a new turning point for cross-chain projects.

Omni-chain NFTs expand on the current foundations

At present, NFT projects are relatively fragmented across chains, and Omni-chain technology may become a beacon for new use cases.

Looking at the current state of the market, we can identify two types of NFTs:

• Art NFTs: encompass NFTs based on aesthetic value and emotional value, such as artworks and collectibles. Usually, the properties of these NFTs are static.

• Utility NFTs: include NFTs which provide utility or functional value. These NFTs have dynamic properties that can be changed according to specific criteria.

On the other side of the equation we have NFT communities, whose purpose is to establish, reach and aggregate consensus internally and externally:

• The internal is how the social utility of community members is satisfied.

• External is how market prices behave in the past, present, and future.

Do artistic NFTs need to be Omni-chain?

For art NFTs or profile picture (PFP) NFTs, one of the reasons why cross-chain compatibility is not implemented is because those projects are more suitable to stay on their native chains. Looking at Ethereum, for example: one problem is the barrier to entry created by the gas fees. The gas costs are relatively high, which excludes many users from participating in NFT communities built on Ethereum. Another issue is that of the NFT communities themselves: the atmosphere and feelings of belonging to the community occupy an important part in a PFP project, which is further solidified by the chain that the project is deployed on. Each chain has its own communities and demographics. Users on Ethereum that are of a certain demographic seldom turn to Solana or Binance Smart Chain for investment. By splitting this community across multiple chains, project owners may alienate and displace their own audience.

Looking at the underlying data of Stargate in Dune or at the data of cross-chain transactions in the Gh0stly Gh0sts project on Etherscan, we find that the transfer of NFTs from Ethereum to other chains is quite rare. The vast majority of Gh0stly Gh0sts minted on other chains mostly flow back to Ethereum. Looking at tokens transferred through Stargate we observe a similar trend; more tokens are moved from other chains to Ethereum than vice versa. This may be a result of smart contract interactions on Ethereum requiring far more gas fees than on other chains, incentivizing users to trade tokens on chains with lower gas fees and later move them to Ethereum.

Omni-chain NFTs are equipped to unleash untapped potential in the NFT ecosystem

Projects that tap into GameFi or the Metaverse can benefit from cross-chain technology, bringing us closer to a true “Meta” -verse - i.e., an interconnected landscape of blockchains between which assets and dApps can interoperate seamlessly.

Function-enabling NFTs

Game NFTs

Game NFTs exist to enrich the gaming experience. Some of these NFTs are valueless by design as required by the game, while others can be developed or expanded to grow in value in the game. This value can be purely aesthetic or through the creation of new abilities that help unlock or pass content. The ability to create truly unique NFTs that exist and function within a game world not only can provide users with increased extrinsic value but can also intrinsically grow on the individual as a personally customized NFT.

Music NFTs

Music NFTs allow fans to buy songs, albums, and event tickets. They also provide artists with more on the profitability of their names, likenesses, images and artwork.

DAO governance class NFT

DAOs use various forms of NFTs. For example, DAO members can make governance contributions to the development of the DAO through their NFT holdings. Members who have made outstanding contributions and have the necessary commemorative NFTs to prove it (such as POAPs), can also receive airdrops of DAO Tokens.

These Function-enabling NFT projects would be a good choice for the cross-chain protocols. Webb is a popular project on Ethereum, and many avatar NFTs are also connected to Webb, but will the STEPN shoes on the Solana chain be connected to Webb in the future? For some virtual-land-based projects such as Sandbox, the way to solve the high gas fee of Ethereum is to connect itself to Polygon, but I personally think that the two chains are still too simple. NFT worlds, which bypass the chain for NFT interaction and go directly to retrieve data from servers on Minecraft, use “Gasless” to attract everyone's attention.

Can LayerZero uphold cross-chain security?

LayerZero adopts double verification, which is a two-dimensional verification method. The first is based on the Merkle Tree hash number algorithm. The Block ID is provided by the Oracle, and the Proof of Transaction transaction proof is provided by the Relayer. At the same time, multi-signature verification is performed. The message needs to be verified by the contract. The verification process relies on two parts: Block ID and Proof of Transaction, and each message will be signed by multiple parties. When both are verified as correct, cross-chain operations can be performed. In this case, the on-chain contract fully trusts the signed message, and the authenticity of the message is guaranteed by the signer.

Code:

• UserApplication - Calling LayerZero for cross-chain communication

• LayerZero EndPoint - LayerZero's on-chain contract

• Oracle - Sends the Block ID of Chain B transaction to Chain B Chain

• Relayer - Sends the Proof of Transaction on Chain B to Chain B

There are already many DeFi and NFT projects being deployed on multiple chains. Since the users and token holders of the protocol are scattered across different chains, governance can be cumbersome, while at the same time there can still be security issues arising across chains. LayerZero distributes the rights to the projects in each chain to maintain their security themselves. The biggest risk for any application is that fraudulent cross-chain messages can deplete all their liquidity, such as Wormhole hack. These prevent many protocols from achieving any cross-chain integration. LayerZero solves these problems by simplifying integration without the need to change existing protocols and without risking the protocol's own liquidity pool. All risk is borne entirely by the project itself, as all the relayers are from their own chains. In fact, this is no different than any other project in terms of maintaining security issues. We know that exposure is the beginning of danger, and cross-chain bridges are safe until they have been attacked. In any project we need to submit a certain amount of security risk to the appropriate protocols, so LayerZero's security is not "fully centralized" in the sense that it is unbeatable, nor is it fully trustworthy.

Thanks Edward & Philip for their contributions and support to this article.

Special thanks to Dominator008@Celer, Outprog.eth@everFinance, Zhixiong Pan.

TL;DR

The multichain ecosystem is booming. cross-chain bridges are the base for the multichain ecosystem. There are lots of opportunities in the cross-chain market. In this report, we will explore the potential of the cross-chain market.

There are generally three kinds of technique approaches:

• Local Verification

• External Verification

• Native Verification

Cross-chain bridges have four functions:

• Asset-specific

• Chain-specific

• Application-specific

• Generalized

When reviewing a bridge, we care about the following characteristics:

• Capital efficiency

• Connectivity

• Security

  • Trustless

  • Insured

  • Trusted

• Speed

• Statefulness

There are lots of players in the cross-chain bridge markets. New players face fierce competition, security risks, and need to collect enough TVL. Following are opportunities in this area:

• Bridges between layer2s, bridges between layer2 and layer1

• Bridges with new tokenomics

• Bridge SDK

• Bridge Aggregator

• ZK Bridge

Market Overview

We are entering a multichain era. The Ethereum dominance decreases. Alt chains take more market dominance. After Ethereum, there are Solana, Avalanche, Polkadot, Terra... These chains are becoming mature and have a complete ecosystem. There are over 115 active blockchains (data from Layer1 Blockchain Protocol). The below chart describes the market dominance of different chains.

Source: https://coin360.com/

Blockchain applications are powerful because of their composability. After entering the multichain era, developers are exploring the possibilities of cross chains.

Developers start with the simplest case, transferring assets between different chains. CEX is the first tool to help people move assets between chains, but this is not an open and crypto native solution.

Now cross-chain bridges have iterated over several generations. Lots of competitors are polishing their products in this area. There are over 80 different bridge projects (data from DecentralizedFinance).

Source: DefiLlama - DeFi Dashboard

Intuition about Cross-chain

The key idea of cross-chain bridges is passing some information from the source chain to the destination chain. It is a simple idea, but how to make it cheap, secure, and extensible is a big problem.

When stepping into cross-chain bridge protocol design, the two main issues for developers are:

1. How to effectively verify the cross-chain transactions?

2. How to judge the data consistency on target and destination chains?

For these two questions, developers have different answers and we will introduce several mainstream solutions.

Technical design of cross-chain

Based on how developers verify cross-chain transactions, there are three main solutions:

• Local Verification

• External Verification

• Native Verification

In the cross-chain protocol, there are mainly four steps:

1. Monitor: Monitor the state and smart contract function call in the source chain.

2. Consensus (Optional): Relay nodes reach a consensus on the correctness of the relaying message.

3. Signing: Relay nodes sign the message.

4. Relay: Pass the message from the source chain to the destination chain.

Local Verification

Hash Time Lock Contract (HTCL) is the most common method for local verification. The is one of the oldest solutions and the easiest one to implement.

Suppose Alice wants to send assets cross-chain to Bob. Alice generates a random number Ka and Bob generates a random number Kb. Alice sends hash(Ka) to Bob and Bob sends hash(Kb) to Alice. They use the received hash to lock their assets with an expiration time. After the lock expires, Alice and Bob can use the random number to unblock the assets.

HTCL is easy to implement, supports the atomic transaction, and, most important, it is trustless. It does have a few limitations. HTCL faces scalability issues because it is P2P. In real-life, users will be hard to transfer a large number of tokens to another chain, because the user cannot find his/her counterparty. Another problem is that it cannot support complex use cases like cross-chain messages.

External Verification

The cross-chain protocol relies on external relayers to pass messages from the source chain to the destination chain. To increase the decentralization, robustness, and safety, there is a relayer network to deliver the transactions. After reaching the consensus in the relayer network, the message will be passed to the destination chain. The whole relayer network performs like a multi-sig wallet.

The problem with this approach is decentralization and safety. The users need to trust the relayer network. The nodes in the relayer network are often bonded. However, the slashing condition is hard to calculate. Thus safety is not guaranteed.

Native Verification

In this model, there is a light client running on the destination chain which can validate and read events or states on the source chain. After the block headers and transactions relaying to the destination chain, the light client can verify the validity natively on the destination chain.

This approach is relatively safe and trustless. Users don’t need to trust the intermediary entities, because the light client can verify the validity. However, this approach costs a lot, especially running a light client on Ethereum. Also, it is development intensive. The cross-chain protocols need to build light clients for every supported chain.

Most technique designs can fit into these three approaches. However, there are some novel approaches. ZKLink and ZKCross use a hub and ZKRU to achieve cross-chain function. Users deposit funds from the source chain to the ZKRU and withdraw the fund from ZKRU to the destination chain. This looks like a ZKRU with multiple base layers. The ZKRU node operators generate proofs for batches of txs and put them into ZKRU smart contracts on all these base layers. An oracle network will ensure data consistency among all ZKRU smart contracts on all these base layers.

Another approach is similar to Tornado Cash. The user makes a deposit on the source chain and generates ZK proofs. Then the user withdraws the token on the destination chain with his/her ZK proofs.

Functions of Cross-chain Bridges

There are roughly four types of bridges:

• Asset-specific

• Chain-specific

• Application-specific

• Generalized

Asset-specific

This kind of bridge only helps specific assets to be used across all chains. This kind of bridge collects collateral on the source chain and proved wrapped assets on other chains.

Asset-specific bridge is easy to implement and has unlimited liquidity because the bridge mints wrapped tokens. One common example is most bridges for BTC. Users get the wrapped version, like WBTC on other chains.

Chain-specific

This kind of bridge is built to cross assets from one chain to the other. The bridge will lock tokens on one side and mint native or wrapped tokens on the other side. This kind of bridge is popular in the bridge ecosystem and it is meaningful for chains. For example, when Secret Network launches, it has multiple chain-specific bridges. Users can easily bridge assets from outside to Secret Network.

Application-specfic

This kind of bridge is designed for application expansion to multiple chains. With the application-specific bridge, the developer does not need to deploy the full dapp on every chain. Instead, the developer only deploys a light and modular adapter on each chain. However, it is hard to add more complex functions in the future. Examples are Compound chain and Thorchain.

Generalized

This kind of bridge can be used to deliver messages between chains. Dapps can use this kind of bridge for cross-chain communication purposes, like calling another smart contract on the other chain. Based on this cross-chain communication protocol, developers can increase the user experience in multi-chain scenarios. Staying on one chain, users can reach anything on other chains. Users will not feel the gap between chains.

LayerZero ignites the generalized bridges market. Some chain-specific bridges are implementing their own cross-chain communication protocols like Celer and Anyswap.

Bridge Evaluation

Similar to the trilemma in blockchain, the cross-chain bridge also has its own trilemma. Most projects can only get two out of three.

1. Unified liquidity: This means the bridge has only one pool on chain A. This one pool is tied to all the other chains.

2. Instantly guaranteed finality: Before the transaction resolves on the source chain, the cross-chain tx will resolve on the destination chain.

3. Native assets: The bridge mints native assets to users on the destination chain, not wrapped assets

Besides the cross-chain bridge trilemma, there is interoperability trilemma:

• Trustless

• Extensible

• Generalizable

Most solutions can only get two out of three.

• Local Verification = Trustless + Extensible

• External Verification = Extensible + Generalizable

• Native Verification = Trustless + Generalizable

When reviewing cross-chain bridges, there are five important aspects:

• Security: What is the security assumption of the bridge. Do users need to trust anyone? If the fund is lost, what is the backup plan?

• Speed: How long users will wait to get their funds on the destination chain.

• Connectivity: How many different chains do the bridge support.

• Capital efficiency: The efficiency of the liquidity and tx costs.

• Statefulness: Ability to support cross-chain communication.

Featured Bridges

Multichain

Multichain is a generalized bridge with external validation. The SMPC network secures Multichain. Multichain has 32 running nodes with 0 stakings.

Multichain currently supports 44 chains, 2090 bridges, and $5.66B TVL. Multichain supports asset transfer, cross-chain communication, and NFT bridges.

For cross-chain communication, the developer needs to implement the following two interfaces:

function anyCall(address _to, bytes calldata _data, address _fallback, uint256 _toChainID)
function anyExec(address _from, address _to, bytes calldata _data, address _fallback, uint256 _fromChainID)

Currently, the anyCall is permissioned. Developers need to contact the Multichain team to whitelist their contracts and deposit some fees in the destination contract. It has poor functionality and docs compared to other competitors.

cBridge

cBridge is developed by Celer. cBridge is a generalized bridge with external validation. The State Guardian Network (SGN) secures cBridge. There are a total of 18 validators and 1.2B $CELR staked, around $36M to secure $700M TVL. If there are any security problems, the staked $CELR in SGN will be slashed.

Source: The SGN as a cBridge node gateway and Service Level Agreement (SLA) arbitrator - Celer cBridge

cBridge has $45M daily transaction volume and 3k daily txs. It has $700M TVL across 28 chains.

Besides transferring fungible tokens, cBridge also supports NFT cross-chain transfer in two ways:

1. Wrapped NFT

2. Native NFT

For wrapped NFT, cBridge will lock the original NFT and mint a wrapped version on the destination chain. However, for native NFT, cBridge will burn the original NFT on the source chain and mint a new one on the destination chain.

Only NFT following this template can be used as native NFT.

cBridge also offers SDK for developers. Developers only need to care about two steps:

1. Get quote.

2. Send transactions onchain.

Besides cross-chain assets, Celer supports cross-chain communication. The whole workflow with token transfer looks like the following diagram:

Source: Celer IM Design Patterns - Celer Inter-chain Message (IM)

The token transfer will go through cBridge and the message will go through SGN and executor.

Similar to LayerZero, the developer only needs to add two functions to the smart contract. Compared to LayerZero, Celer additionally supports token transfer.

// Send message
MessageSenderLib.sendMessageWithTransfer()
MessageSenderLib.sendTokenTransfer()
// Receive message
executeMessageWithTransfer

LayerZero

My colleague Iris wrote a dedicated report for LayerZero.

In short, LayerZero mixes native verification and external verification to achieve a generalized function bridge supporting cross-chain communication.

LayerZero is especially easy to use for developers. Developers only need to implement two functions:

function send(
    uint16 _dstChainId, 
    bytes calldata _dstContractAddress, 
    bytes calldata _payload, 
    address payable _refundAddress, 
    address _zroPaymentAddress, 
    bytes calldata _adapterParams
) external payable;

function lzReceive(
    uint16 _srcChainId, 
    bytes calldata _srcAddress, 
    uint64 _nonce, 
    bytes calldata _payload
) external;

LayerZero has an active community. The LayerZero team implemented Stargate, a cross-chain asset bridge on top of the LayerZero protocol. The community implemented ERC-721O for the NFT cross-chain.

ChainPort

ChainPort is an external verification, chain-specific bridge. It supports 7 chains and has a $208M TVL. The settlement time is around 2.5 minutes. Listing new tokens on ChainPort is permissionless. In the future, ChainPort will release insurance and use ML to detect unusual activities.

Developers can integrate ChainPort into their smart contracts with the following functions:

function depositTokens(
    address token, 
    uint256 amount, 
    unit256 networkId
)
function burnTokens(
    address bridgeToken, 
    uint256 amount
)
function crossChainTransfer(
        address bridgeToken,
        uint256 amount,
        uint256 networkId
 )

Nil Foundation

Nil Foundation recently released one Demo, verifying Mina states on Polygon and Ethereum.

In one word, this infra allows smart contracts on Polygon or Ethereum to verify the validity of Mina state. With this infra, smart contracts have the ability to recognize invalid cross-chain tx.

This infra can generate Mina state proof and smart contracts on Polygon and Ethereum can verify the proof onchain. In the future, cross-chain apps can directly verify the cross-chain tx validity with this infra. For example, apps can use this infra to verify the tx validity passing from the relayers. We are moving from using game theory to math to ensure the validity of cross-chain tx.

In the demo, it takes around 1 min to generate the proof and costs 2.5m gas to verify it. If the gas price is 80, this costs 0.5 ETH for verification on Ethereum.

We can use this infra to build a bridge from Mina to Ethereum with the following steps:

1. The bridge locks $MINA on Mina.

2. The infra generates Mina state proof.

3. The infra put Mina state proof it onto Ethereum.

4. Ethereum checks if the state proof is valid.

5. Ethereum accepts and stores the proof in case it is valid and rejects otherwise.

6. The bridge checks the state and releases WMINA on Ethereum.

In the future, more EVM chains will be able to verify the Mina state proofs onchain. However, it is not feasible to generate Ethereum state proofs and verify on the Mina onchain.

Cross-bridge Ecosystem

LI.FI

LI.FI is a developer-friendly aggregator for cross-chain bridges and DEXs. Users can exchange one token on the source chain for another token on the destination chain. LI.FI now supports Connext, Hop, cBridge, Multichain, Hyphen, Optimism, Polygon, Arbitrum, and Avalanche cross-chain bridges. For exchanges, LI.FI supports Parawap, 1inch, 0x, Dodo, Uniswap, Sushiswap, Quickswap, Honeyswap, Pancakeswap, Spookyswap, Spiritswap, Solarbeam, Beamswap, and ubeswap.

Based on LI.FI SDK, LI.FI team implements transferto.xyz. Users can customize slippage, which bridge, and DEX to use. Users can find lots of mainstream tokens on transferto.xyz.

For developers, LI.FI provides different ways to integrate LI.FI. If developers don’t need any customizations, developers can use iframe to integrate the trading widget in 5 minutes. Besides iframe, developers can use Node.js API to send cross-chain transactions.

Source: LI.FI

LI.FI has over $250M daily swapped and 186 daily transactions.

Tokenomics

Most tokens in the cross-chain bridge are used as governance tokens. Few tokens can be staked to share the whole protocol revenue. These tokens are also used to incentivize the liquidity providers as mining rewards. Plus, the rewards are used to rebalance the liquidity pool, guiding the liquidity to the appropriate pool.

XY Finance, a cross-chain bridge, raises $12m, but its ATH market cap is $8m. Now its market cap is $3m. In most cases, we can treat cross-chain bridge tokens like DEX tokens, which always perform badly because of the emission. Developers are still looking for specialized scenarios for cross-chain tokens. As investors, we need to be cautious about the cross-chain bridge tokenomics.

Source: coingecko

Security Risks

In one year, the total loss of bridge in hack events is around $1.2B. The fee for the bridge is around 5‱. Multi is the big player in the cross-chain bridge. Thirty days volume for Multi is $5B. One year is around $70B volume with $35M fee. It is certain that the whole revenue of the cross-chain bridge market is still less than the loss fund.

It is hard for cross-chain bridges to stay safe. After reviewing major security issues in these hack events, we found that these issues are all different. Hackers are able to find problems in different parts of the system.

In the Polynetwork hack, the hacker utilized privilege-related vulnerabilities:

1. The executer contract doesn’t check the input. The executer contract executes arbitrary cross-chain transactions without verification.

2. The executer contract has the privilege to change the keeper role, which is crucial to the whole system.

The hacker passed the cross-chain transaction which changes the keeper role. Although the hacker didn’t have the permission to change the keeper role, the privileged executer contract helped the hacker to do this. Thus the hacker successfully stole $6B funds.

After the Polynetwork hack, developers remove any privileges of the executer contract and add whitelists for the allowed cross-chain transactions.

In Ronin cross-chain bridge hack, the hacker stole the private keys of admins by hacking the RPC server.

Hackers are discovering different attacking vectors. We don’t know what will be the next security issues of cross-chain bridges. Cross-chain bridges are complex. Thus it is hard to keep them safe. Besides, there are no standards for cross-chain bridges. Developers are implementing their own bridges with their own ideas. It is similar to developers making tokens without using ERC20 library from Openzeppelin. If there is a safe and easy-to-use cross-chain library, the cross-chain bridges will be much more secure.

Wrap Up

There are generally three kinds of technique approaches:

• Local Verification

• External Verification

• Native Verification

Cross-chain bridges have four functions:

• Asset-specific

• Chain-specific

• Application-specific

• Generalized

When reviewing a bridge, we care about the following characteristics:

• Capital efficiency

• Connectivity

• Security

  • Trustless

  • Insured

  • Trusted

• Speed

• Statefulness

There are lots of players in the cross-chain bridge markets. New players face fierce competition, security risks, and need to collect enough TVL. Following are opportunities in this area:

• Bridges between layer2s, bridges between layer2 and layer1: There are not as many players in this market as players in the cross-chain bridge markets. This market is still early. In the future, we expect transactions in layer1 to move to layer2. This means more protocol revenues for protocols in this market.

• Bridges with new tokenomics: Nobody knows how to use tokens appropriately in the cross-chain bridge. Most tokens are used as governance tokens and secure the whole network. We often see TVL increases, but the token price decreases. The token price does not reflect the progress of the project.

• Bridge SDK: A toolkit or standard for building bridges. Developers can quickly construct their own bridges to extend their applications over more chains. Multichain is the future. With this toolkit, developers can expand to new chains fast and secure.

• Bridge Aggregator: The aggregator connects with multiple bridges and offers better UX and lower fees. The DeFi market proves the necessity of aggregators. After DEXs, lots of aggregators join the market. This will happen again in the cross-chain bridges market.

• ZK Bridge: ZK bridges can offer a better, cheaper, and safer cross-chain experience. Developers can easily build apps on top of the ZK bridge. Nil Foundation made significant progress in Solana and Mina, but it is hard to expand to other chains.

Find us

You can find more cross-chain bridges on decentralized finance.

I am the tech associate in Fundamental Labs. You can find me on Twitter and find FL here.

If you like this report, feel free to like and share this report with your friends. This helps us a lot.

Reference

What's wrong with bridges？ - The Anti-Ape (substack.com)

Blockchain Bridges: Building Networks of Cryptonetworks | 1kxnetwork (medium.com)

LayerZero Labs: Building the Future of Cross-chain and Solving the Bridging Trilemma with Stargate (notion.site)

#1 Technique design of bridges

There are three kinds of bridges:

• Local Verification

• External Verification

• Native Verification

Local Verification

Hash Time Lock Contract (HTCL) is the most common method in local verification. The is one of the oldest solutions and the easiest one to implement.

HTCL is easy to implement, supports the atomic transaction, and, most important, it is trustless. It does have a few limitations. HTCL faces scalability issues because it is P2P. In real-life, users will be hard to transfer a large number of tokens to another chain, because the user cannot find his/her counterparty. Another problem is that it cannot support complex use cases like cross-chain messages.

External Verification

The cross-chain protocol relies on external relayers to pass messages from the source chain to the destination chain. To increase the decentralization, robustness, and safety, there is a relayer network to deliver the transactions. After reaching the consensus in the relayer network, the message will be passed to the destination chain. The whole relayer network performs like a multi-sig wallet.

The problem with this approach is decentralization and safety. The users need to trust the relayer network. The nodes in the relayer network are often bonded. However, the slashing condition is hard to calculate. Thus safety is not guaranteed.

Native Verification

In this model, there is a light client running on the destination chain which can validate and read events or states on the source chain. After the blocker headers and transactions relaying to the destination chain, the light client can verify the validity natively on the destination chain.

This approach is relatively safe and trustless. Users don’t need to trust the intermediary entities, because the light client can verify the validity. However, this approach costs a lot, especially running a light client on Ethereum. Also, it is development intensive. The cross-chain protocols need to build light clients for every supported chain.

Native verification is the most promising one and the ZK bridge belongs to this category.

Nil Foundation is working on the frontier of ZK bridges. It recently published the cross-chain infra from Mina to Ethereum and Mina to Polygon.

In one word, this infra allows smart contracts on Polygon or Ethereum to verify the validity of Mina state. With this infra, smart contracts have the ability to recognize invalid cross-chain tx.

This infra can generate Mina state proof and smart contracts on Polygon and Ethereum can verify the proof onchain. In the future, cross-chain apps can directly verify the cross-chain tx validity with this infra. For example, apps can use this infra to verify the tx validity passing from the relayers. We are moving from using game theory to math to ensure the validity of cross-chain tx.

In the demo, it takes around 1 min to generate the proof and costs 2.5m gas to verify it. If the gas price is 80, this costs 0.5 ETH for verification on Ethereum.

In the future, more EVM chains will be able to verify the Mina state proofs onchain. However, it is not feasible to generate Ethereum state proofs and verify on the Mina onchain.

#2 Ape into the journey of BAYC

The beginning of this magic trip

Yuga Labs is a Web3 company and BAYC consists of 10,000 programmatically generated, exclusive NFT collectibles consisting of 170 different combinations of features. The "BAYC" went on sale on April 23, 2021, at a price of 0.08 E. At first, BAYC did not receive much attention. On May 1, when Pranksy, a well-known collector, took notice of the project and announced that he had purchased more than 250 apes. From the moment he posted his twitter, the number of sales and users of BAYC skyrocketed. After only 117 minutes, BAYC sold out.

ApeCoin is an ERC-20 Token used for governance and buying and selling within the Ape ecosystem. Holders can participate in the ApeCoin DAO, buy and sell with other participants, and gain access to exclusive ecosystem services, game events and items. In the Ape Foundation, the foundation layer of the ApeCoin DAO is responsible for the usual governance and project management within the ecosystem. The fund pays the Ape Foundation's costs as directed by the DAO and serves as the infrastructure for ApeCoin holders to participate in the governance process. Yuga Labs has limited the availability of ApeCoin to 1 billion Toekn, which are gradually unlocked over a 48-month. 150 million Toekn are airdropped directly to BAYC and MAYC holders at launch, while a total of 470 million Toekn are airdropped to BAYC and MAYC holders at launch. A total of 470 million Tokens will serve as the DAO's vault and ecosystem resource. Initially, 117.5 million Tokens will be unlocked, and 730W Tokens will be unlocked each month for four years.

De-Collab Business Model

The team uses the De-Collab business model, with an ongoing commitment to bringing utility to community members. The decentralized collaborative model grants full business commonsense rights to individual BAYC holders. It allows holders to use, copy, display and produce derivative works of the NFTs they purchase. Thus, holders do not need to obtain any approval from the issuer and can fully commercialize their intellectual property rights. Through this approach, innovation is prioritized rather than horizontally controlled. This bottom-up approach has led to multiple spin-off projects that appear in a wide range of entertainment, music, fashion, games, and virtual worlds.

A sense of community belonging

BAYC's rapid progress cannot be separated from what uses the community has. Since its release in April, the BAYC project has grown into a large community in a short period of time by leaps and bounds. For the players who hold BAYC, it is more than a collector's item, it is a clubhouse. BYAC represents a network culture of crypto preferences who believe in the scope and see many applications of the technology in industries such as art, music, gaming and entertainment. This belief makes people want to join a community that shares the same values and beliefs. Belonging has always been a vital human need and BAYC members are currently the most dedicated and valuable NFT brand, at the forefront of innovation in the NFT range. In addition, it is a great feeling to share the same aesthetic and values with many celebrities.

#3 Talking about the DAO Valuation Framework: DAO as a form of state

What is a state - a group of people with a constitution and economic system? The same goes for DAOs or any Web3 community! Let's make an analogy to make it sound more convincing:

A country relies on its people to create "value" or "GDP" - DAOs rely on its community.

· States draft a constitution to make land laws. For DAOs, this charter is written into the rules of the smart contract.

· The state determines its political structure, and the associated governance and distribution of power, just as the Web3 community determines its governance and token distribution.

Now, let's try to demystify all these components and draw some analogies:

(C) Consumer Expenditure: In a country, every citizen spends money on their needs and luxuries. In the Web3 community, people usually spend their fiat/tokens to buy NFTs, transact on DeFi protocols, and these can essentially form the consumption part.

(I) Investing: Just as individuals and companies invest in a country, community members invest in community projects.

(G) Government spending: The government spends money for national welfare, just like DAOs can spend money to upgrade community functions, perform airdrops, etc. The DAO’s treasury balance can serve as another measure.

(XM) Exports minus Imports: Just like a country's exports or imports, Service DAOs may export their services, Investment DAOs may import services, etc. We can see a lot of transactions happening between DAOs in the near future.

Another way to measure a community’s GDP is to measure the “output” of the community:

• Distribution (how big is the DAO’s reach)

• Opportunities (how many DAO members have access to opportunities)

• Capital (how much capital is deployed)

Depending on the type of DAO, the output value will vary greatly, for example:

1. Protocol DAO: The metrics here will be protocol specific, for example:

DeFi -> Total value locked

L1/L2 blockchain: unique wallets, transaction volumes

Consumer applications: revenue generated

1. Service DAO: total revenue generated through services

2. Social DAO: Collectibles Vault, Membership Income

3. Investing in DAOs: Return on Investment (ROI), AUM (Assets Under Management)

4. Media DAO: Channels that cover DAO, such as Podcast, Newsletter, etc.

Overall, the ratio between opportunity, distribution, and capital depends heavily on the type of DAO. For Media DAO, the distribution (influence) ratio is very high, while for Investment DAO, the capital ratio is very high.

Week's Recap

• Founders from a16z, Solana and more back new billion-dollar crypto fund

• Dragonfly Capital Raises $650M for Third Crypto Fund

• Decentralized exchange infrastructure provider 0x Labs raises $70 million

• Peter Thiel's Founders Fund co-leads $20 million Series A for Ondo Finance

• Gate Ventures on Track to Close $200M Crypto Fund by Q3

• Apeiron Secures 13.5M Seed Funding with Core Anchor Hashed

• Argent Raises $40M to Make Crypto Wallets Easier to Use

Indicator Tracking

Crypto Fear & Greed Index

Data of NFT

Data of NFT Maketplaces

Protocol Total Revenue

#1 ERC-721 Variant

Projects are customizing ERC-721 based on their use cases. Azuki released ERC-721A to further reduce the costs of minting NFT sacrificing read speed. There are more than 40 projects using ERC-721A, like Cereal Club, X Rabbit Club, and The Women of Crypto. Here is a gas fee comparison:

From the chart, the base minting fee halves. Minting multiple NFTs only increases few gas.

We discussed LayerZero and Omnichain NFT last week. This week, we saw ERC-721O boosting the development speed of Omnichain NFT. ERC-721O adds multiple cross-chain features integrated with LayerZero. Here is a comparison between ERC-721O and existing Omnichain NFT.

The improvements of ERC-721O are in security, functionality, and transparency. The purpose of this design is greatly different from ERC-721A which only slightly optimizes ERC721 and adds no additional features. Here are additional features for ERC-721O:

• Approval Transfer Support

• Pick your destination address

• Pay crossing chain fees with tokens

• Send NFT with native tokens

If you are also trying to implement an Ominchain NFT, ERC-721O will be a good starting point.

#2 Omni-chain NFT may be the next

Most NFTs are on ETH with high gas fees. Using certain blockchains means having the proper cryptocurrency to process transactions, such as ETH for Ethereum, BNB for BSC, etc. Smart contracts are not available on all blockchains, and those contracts may vary from blockchain to blockchain if it does have functionality. The essential role of cross-chains is to allow tokens and arbitrary data to be transferred from one network to another. They provide a compatible way to allow both sides to interoperate securely and provide a key component to develop a blockchain multi-chain network. In fact, for a fully interoperable metaverse, a stable bridging ecosystem is a key factor for success. For artistic NFTs, there may be a limited market, for practical NFTs, there are bound to be scenarios and markets for their use. As ETH itself cannot carry a large-scale NFT ecology, the current solution to this problem is mainly to adopt the Layer 2 approach for scaling, and another is to develop through multi-chain models, such as using cross-chain protocols like Anyswap and Multichain. With the development of multi-chains such as Solana, Heco and BSC, NFT assets on different public chains have started to grow.

One popular solution is LayerZero. LayerZero is a cross-chain communication protocol that allows applications deployed on different chains to communicate with each other. Unlike cross-chain bridges that require intermediate nodes or consensus mechanisms, LayerZero allows applications to seamlessly communicate across chains. The first DEX on LayerZero is Stargate Finance, a project that allows Omni-chain assets to be swap across chains. Omni-chain is the trend for the application layer currently. The implementation of Omni-chain is LayerZero. Therefore, LayerZero may be the solution to deploy the project on multiple chains at the moment.

#3 Will network structures replace pyramid structures as the dominant form of human organization?

DAOs (and crypto-economics more generally) promise the ability to build collective intelligence at scale, but creating innovative organizations is not as simple as hiring intelligent people. Counterintuitively, sometimes the brilliance of the members does not affect the brightness of the team. More critical to collective intelligence is the relationship between members and how their interactions can effectively present and "compute" information.

The incentives opened up by smart contracts allow individuals to coordinate without a designated leader or any clear control structure. Each participant can make decisions based on their interests, and shared protocols tie them together, forming a swarm intelligence.

If guided by the right incentives, the self-decision of each member can be aggregated into a collective intelligence that far exceeds the capabilities of any hierarchical decision-making mechanism. Not only can each participant make decisions, but there is also fundamentally more information that can be processed within the DAO's network organization.

Hierarchy processes information linearly, making decisions from the top; network structures process information in parallel, where each node can contribute its intelligence.

The table contrasts the traditional hierarchical institutional paradigm with the emerging network of organizational structures. Note: If access and information within an organization are open rather than closed, then the entire economic paradigm shifts from competition to cooperation. Since DAOs generally cannot hide or legally protect their innovations from being adopted by others, the only way is to keep moving forward.

Therefore, the DAO's winning strategy becomes further and faster innovation rather than building a "defensive moat" around past creations. It also motivates the members of the DAO to collaborate rather than compete with each other continuously.

Week's Recap

• Flipside Raises $50M

• Mintbase Raises $7.5M Series A + $5M Grants Pool to Pioneer Utility NFT Infrastructure

• The Sandbox gears up to raise $400 million at a $4 billion valuation: report

• Framework Ventures unveils $400 million fund with a special focus on blockchain gaming

• BATTLEBOUND SECURES $4.8M SEED ROUND + $3M IN NFT SALES

• Pantera Joins $3.7M Round for Solana Lending Protocol Hedge

• Ethereum scaling project Scroll raises $30 million from Bain Capital and others

• LimeWire raises $10 million in private token sale to grow music-linked NFT platform

• Bastion Raises $9M Series A Led by Three Arrows Capital

• Investors Poured $2.5B Into Crypto Games in Q1 2022: Report

• Vietnam’s NFT Project Secures USD2.5 Million Investment

• Solana DeFi Protocol Delta One Raises $9.1M to Offer Crypto Yield Farming

• Ethereum scaling project Scroll raises $30 million from Bain Capital and others

• NBA Top Shot Whale Launches NFT Lending Platform With $4.5M in Funding

Indicator Tracking

MVRV

Crypto Fear & Greed Index

Data of NFT Market

Protocol Total Revenue

SocialFi is currently the hottest term on the market. SocialFi is literally a combination of Social+Finance. Social refers to a decentralized situation, while Fi is a social token system added for social behavior management and incentive, thus naturally forming a combination of social and financial.

1. Why do we need SocialFi?

1.1 People have dissatisfaction with Web 2.0 social platforms

YouTube, Tiktok, and other video platforms not only have video resources purchased by the platform but also have abundant original videos from users. Users upload videos and share their life, and the click-through rate of the videos translates into advertising fees, which motivates users to continue creating, forming a very good economic loop. So we can see that in addition to YouTubers, ins creators, game players who are not traditional creators in common sense, such as educators, salespeople, chefs, etc., have created Tiktok accounts to transform themselves into the form of digital media. But there is a structural problem with the revenue model of Web 2.0 social. The mainstream social platforms that currently exist, such as YouTube, TikTok, Reddit, and Facebook, have adopted an ad-subsidized free product model, meaning that content consumption on the platform is free so that they can rapidly scale their users, and on the other hand, they rely on paid revenue from advertisers to subsidize the creators on the platform. The fundamental problem with this model is that the revenue eventually flows to the head creators, while most long-tail creators do not get a share. The revenue that should be theirs is actually diluted by the head power, and the principle of digital equity is affected to some extent.

1.2 Shortcomings of Web 2.0 traditional social

The emergence of SocialFi is an inevitable product to combat the shortcomings of traditional social platforms. In the Web 2 era, traditional social platforms were controlled by major social operators, and operators continued to profit from the underlying social data, while users hardly benefited.

In the traditional social platform, users' social data is saved in the form of fields on the operator's server, and the data belongs to the platform. SocialFi works with blockchain technology, and the data are more conducive to solving the confirmation problem of users' data.

Under the algorithmic mechanism of traditional social platforms, there is a problem of an unbalanced distribution of interests between users and platforms in terms of realization, which is not conducive to protecting users' rights and interests. SocialFi is a way for users to gain revenue through the financialization of social influence, without the problem of third-party draws such as platforms.

The registration of all accounts in traditional social networks requires users' real identity information, which is stored in the backend of operators and is highly vulnerable to leakage; SocialFi is based on blockchain technology, and the anonymity of users' identity information helps protect privacy and security.

1.3 Social is a necessary component of Metaverse and Web3.0

After nearly 30 years of development, the reason why new hotspots continue to emerge in the social circle is still rooted in people's pursuit of social identity, as evidenced by the development of Meta (formerly Facebook), the world's social giant with 1.93 billion daily activities. At the beginning of the Internet's development, the emergence of equality and anonymity due to opposition to traditional thinking made the Internet an unregulated world, where information on the Internet was mixed and individuals could not feel the true temperature. Meta, on the other hand, introduced the real-name system and distinct personal identity for the first time in the Internet world, so that the Internet began to intersect with the real world and greatly enhanced people's Internet experience.

Today's crypto world has also come to this juncture. While we pursue the data sovereignty brought by technology, we are equally eager to gain our own unique identity and positioning and to establish a real emotional connection with others. In the transition from Web 2.0 to Web 3.0, Internet users need to build some middleware to migrate from the simple to the complex. And it is impossible to move from the real world to Metaverse overnight. The realization of the metaspace concept requires starting from the existing Internet world and using a series of Web 3.0 components to send Internet users to the metaspace world in batches and phases. After trying out DeFi's decentralized asset stream, NFT's digital work value discovery, and GameFi's fun P2E, decentralized opinion publishing, and the personal display becomes the next Web 3.0 component to be explored and developed. As we can clearly see in the past history of Internet development, socialization can be said to be a rigid demand of Internet users.

2. The Classifications and Value of SocialFi Token

The current social tokens are based on the reputation, profitability, and brand influence of an individual or organization. Social tokens are usually issued to encourage users to contribute to that community, or tokens are used to motivate users to contribute valuable content, and personal tokens are also dedicated to exploring the added value of individual content creators. In general, social tokens can be divided into three categories.

2.1 Personal tokens

2.1.1 What are personal tokens?

Personal tokens are mainly issued and governed by individuals. It is mainly used for exchange, where users on the chain can exchange tokens for jobs that match the average productivity of the community, as long as they have recognition of the community. A typical example of a personal token is Roll, a community currency layer protocol developed based on Ethereum.

2.1.2 What is the value of personal tokens?

The value of personal tokens must stem from the project's sensible mechanics. In general, personal tokens have the following roles.

Access

Access to a personal or exclusive community is valuable. People are social animals and always want to join a niche collective of like-minded people, and this is most evident in the fan economy. For example, a fan support group that can only be accessed after purchasing a token/NFT of a celebrity.

Financial Benefits

Exchanges like Binance, whose platform tokens have revealed the potential value of tokens. Individual tokens can come with similar discounts for merchandise, events, NFTs, and anything else sold by creators, brands, etc.

Financial Rewards

As the token increases in value, early holders receive financial rewards.

2.1.3 SocialFi in Personal Tokens

Whale (https://whale.me/ )

Whale is issued by an individual buyer, WhaleShark, based on the Roll platform. Its token value is based on the NFT assets held by WhaleShark himself, and the Whale vault is regularly audited by NonFungible.com. Whale allocates 50,000 tokens per month for NFT acquisitions, donations to artists, team salaries, community events, etc., which are recorded through Discord, one of the leading social media platforms overseas. In addition, creators can earn WHALE by pledging their NFT creations, and can also sell their work on Opensea with a Whale price tag.3.2 Community tokens

Community tokens are mainly issued and controlled by groups and are usually managed by decentralized autonomous organizations (DAOs). Community tokens are mainly used to motivate members to contribute to the community. For example, community tokens are used to gain access to telegraph groups, special messages, etc. Community tokens are also used to encourage deeper participation by community members, such as when the community launches a contest where token holders can vote on who will win at the end.

2.2.1 What are community tokens?

Community tokens, similar to individual tokens, have a token value that reflects the expectation of the value of the community. Communities are generally divided into two categories, content communities and DAOs, with the former generally assigning value to content created within the community, whether it be articles, tweets, images, etc., or some kind of behavior, either by making it NFT or by rewarding it with tokens, in order to incentivize the creation of content and its consumption within the community. There is no better example than Mirror, a decentralized content creation platform similar to Medium, where articles posted can be made as NFTs and can be kept on the chain for decentralized access.

Others are managed tokens that serves the purpose of DAO creation, such as Friends with Benefits, which has received investment from many top VCs such as a16z. FWB is a private social platform based on the Discord private server that brings together a group of creators and thinkers in the crypto space. Its token $FWB has a constant supply of 1 million, and participants need to hold a certain amount of the native token $FWB to join the social circle.

The line between community tokens and personal tokens is sometimes less clear, and personal tokens will naturally transition to community tokens as they grow in size and popularity. For example, WHALE, which was started by an individual, later evolved into a collective whose treasury is controlled by the community. The most prominent role of community tokens, in addition to having the value of individual tokens, is to give the token holders community governance and voting rights.

2.2.2 SocialFi in Community Tokens

RALLY (https://rally.io/ )

RALLY, one of the earliest and most well-known social token issuance platforms, features the ability to combine its native governance token, RLY, with the creator's social token and mint it into a new personal token, which must be converted through RLY. The platform covers the entire process of issuance, channeling, funding, and trading, and Rally uses Layer2 solutions to optimize mechanisms such as instant trading. The token holder has management rights to the Rally Network.

BitClout (https://bitclout.com/)

BitClout, a decentralized social platform, benchmarked against Twitter, aims to create a decentralized alternative to Twitter through proof-of-work and blockchain construction. The platform adds to the community hype by passively issuing social tokens to Twitter KOL celebrities, and individuals can own and trade their own Creator Tokens. In addition, BitClout has a POW blockchain designed to run social media and a built-in dedicated DEX. BitClout social media platform revealed a lavish investment camp including Sequoia, a16z, and Coinbase Ventures, which gained traction in the industry and subsequently, as several Twitter celebrities claimed BitClout accounts. BitClout's wealth effect increased, pulling away from other blockchain social media projects. After BitClout changed its name to Decentralized Social (DESO), DeSo is the underlying public chain of BitClout, which is an application on top of the Deso blockchain.

Chilliz (https://www.chiliz.com/)

Chilliz is a social token in the fan economy, focusing on the sports. CHZ is a sports and entertainment fan incentive platform based on blockchain technology. Socios currently works with 48 clubs or partners including AC Milan, Manchester City, Arsenal, Barcelona, Paris Saint-Germain and Juventus to issue fan tokens. users of Socios.com can purchase club fan tokens by holding Chiliz. By holding Chiliz, users of Socios.com can have the right to vote in the community, make decisions and other benefits. In this community, fans with fan tokens can vote on matters such as the club's jersey colors, stadium music and logo, friendly matches, charity lineups, entrance songs, etc.

Friends with benefits (https://www.fwb.help/join)

Since its birth as a social experiment in September 2020, FWB is a community that drives the cultural value of Web3 now. DAO members have launched a token-gate application, a gallery of NFT tools, a Web3 editing enterprise, a virtual music studio, and a live community dashboard, in addition to a series of gatherings around the world. FWB's next project is FWB Cities, which aims to expand the DAO's IRL footprint by partnering with city-specific spaces, communities and experiences to bring real-world benefits to FWB members. to represent community membership in the DAO. Received investment from a16z in October 2021.

2.3 Social Platform Tokens

2.3.1 What are Platform Tokens?

Platform Token represents the Token of control over the platform. Platform Token is mainly to facilitate creators to issue and manage Tokenized communities. The most iconic social platform token is Rally, which provides the primary tool for creating social tokens, and is where the live gaming site Twitch creates its own social tokens, primarily to reward creators and members on Twitch. The platform encourages non-primitive crypto traditional media platforms to connect with mainstream audiences by issuing tokens.

2.3.2 SocialFi in Platform Tokens

Mirror (https://mirror.xyz/)

Mirror is a decentralized content distribution platform built on Arweave, created by Denis Nazarov, former partner of a16z crypto. Mirror starts from a content financialization perspective, providing a platform that gives each article the property of "NFT+Governance", where the content can be invested, traded and governed. Creators who meet the requirements can launch a crowdfunding campaign under the article, and users can participate in the crowdfunding campaign to receive NFT share tokens. In addition, invitation tokens WRITE are used to create columns, and holders have voting rights. mirror's NFT token minting is done with the help of the Zora platform.

RSS3 (ss3.io/#/)

RSS3 is a new generation of decentralized social and content protocol that returns data, including relationships, content, and portraits, to users through built-in mechanisms for commerce, recommendations, and storage. rss3 aims to promote efficient and free information delivery, secure and decentralized data storage, and emphasizes inclusiveness, supporting not only different types of applications but also opening up modules with different functions, which provides for its future This provides flexibility and feasibility for its future development. RSS3 is platform-less media, so if for some reason a creator wants to change platforms, he or she just needs to bring his or her ID and migrate to the new platform, and all the content and followers will follow the migration in parallel. together with Mask Network to create SuperFollow Dapplett on Twitter, which will add Patreon functionality on Twitter for all Mask and RSS3 users.

Showme (https://showme.showme.fan/ )

ShowMe is a Web 3.0 NFT subscription social platform, part of Gryffindor Labs, where creators can attract and accumulate followers through flexible subscriptions that allow users to enter the club, including free, paid, hold NFT, and Token subscriptions. The core functional modules are subscriptions, NFT membership and NAAS (NFT-as-a-service). ShowMe first introduced the concept of PONA (Proof of NFT Achievements). ShowMe hopes to help creators classify and categorize users through a gamified social NFT achievement proof method so that creators can reach precise users through the layering of information and content.

3. Is Socialfi about to break out?

The theory of value accumulation in the social token ecosystem is quite intuitive. Social token platforms with a strong token economy model derive value directly from social tokens and will have the greatest opportunity to accumulate revenue and value from individual and community token offerings. In this vertical, social platforms with new public chains capture even more value, but back to what was discussed, we currently do not have enough user base to support large social applications, and crypto-native inside-out scaling is limited by user habits, user experience, regulation, learning costs, content richness, privacy safeguards, and other factors.

The experience of the exponential growth wave of the Internet and mobile terminals shows that once the user base of a new technology reaches one billion, the gravitational pull of mass market applications begins to explode. The explosion of the Internet came in the Web 2 era, when every household began to own a computer and generate a range of behavioral data in forums. By comparison, Ether now has only 180 million addresses. At the current growth rate, which is representative of Web 3 penetration, it will take another 5 years to reach 1 billion users.

The number of users and the non-financial data on the chain are what we need to focus on. Looking back to the Web 2 era, WeChat surpassed MiChat precisely because it reached the network effect in social, and the emergence of social usage scenarios required the massive popularity of new technologies. the explosive growth of Web 2 social media emerged after 1 billion users. The current popularity of cryptocurrency is not enough to support the explosive growth of applications like Bitclout. At this point, the transformation of traditional social self-traffic represented by Twitter will have a huge first-mover advantage. the founders of Soundwise believe that SocialFi may underperform in 2022, with Creator token seeing a boom in early 2021. While explosive growth will eventually occur, it is still a few years too early. With a limited crypto user base, the number of people supporting individual creator token issuance and the number of social platform users will be discounted again.

4. Which direction is more likely to capture the most value in SocialFi?

In SocialFi, things haven't really started yet. Personal token offerings are also likely to converge to a unified standard, which means social networks will have to provide value to users in other ways than just helping creators make their own initial public offerings, and those values will add value to the platform.

Personal tokens may have the greatest potential for percentage growth, but they are also the riskiest in terms of investment. They appreciate in value based on the accomplishments of the individual creator, so they can be asymmetrically lucrative for early investors. Still, the accumulation of total value is limited. It is difficult for individual influencers to reach tens of billions of dollars because they are limited by their personal brands.

What a group can accomplish is larger in scale than an individual, and therefore has correspondingly greater potential for growth. Unlike ICOs, which are widely criticized for issuing coins out of air, community tokens are issued based on certain value underpinning either the profitability, popularity, popularity or reputation of their creators, and the open and permissionless nature of crypto-economic primitives can facilitate the formation of a fan-driven value discovery market. This value, native to the Internet community, is easier to capture than physical assets on the chain. Until a real-world asset uplink solution is perfected, community tokens may become one of the most promising incremental markets to the real world.

Most social tokens are more likely to succeed with tokens that have cash flow or other financial attributes than those that do not explicitly provide revenue to token holders. All three social token categories have the potential to be financially successful as the social token movement continues to evolve. For the earliest users, there is likely to be a larger percentage return at the individual or community token level, while distribution and aggregation platforms will yield higher returns. Finally, tools, incubators and a number of other businesses serving the growing social token trend will create significant value. the transition from Web 2.0 to Web 3.0 becomes particularly important, whether it is better compatibility with user habits, user experience, content richness, learning costs, and regulatory exploration. Middleware like Mask Network is undoubtedly able to capture some value, and middleware may also bring bright performance in this transition process.

#1 ZK Hardware

In the last week, we released a research paper about opportunities in zero-knowledge industry. Customized chips for ZK mining would be a huge opportunity. This week, Paradigm released a blog about hardware acceleration for zero-knowledge proofs. Let's continue the discussion on ZK chips.

We are optimistic about ZK chips because we believe most transactions that happened on Ethereum will happen on layer2. More users and transactions on layer2 mean more value on layer2. Layer2 miners will be greatly incentivized. They will compete with each other and try to get the transaction package right. The key to winning this competition is computation power. Miners need a more efficient way to calculate the ZK proof.

Following what happened in the Ethereum mining industry, miners will first use the most accessible hardware, CPU, and GPU to generate ZK proof. This requires developers to do some optimizations for CPU and GPU. Then FPGA will appear on the market. It will be 1-2 years later than CPU and GPU because the design and produce FPGA need time. FPGA is Field Programmable Gate Arrays. It contains lots of configurable logic blocks. FPGA can be reprogrammed for different tasks. After FPGA, we will see ASIC. ASIC is application-specific integrated circuit. ASIC can be customized for the particular usage, but it costs a lot to produce. ASIC has the best performance and lowest power consumption. After massive production, the high cost of production ASIC will not be a problem. The biggest problem of ASIC is that it can only be used for specific tasks. If the task changes, the ASIC can no longer be used. Nowadays, ASIC miners are popular in bitcoin mining because the performance and the bitcoin consensus do not change. However, in ZK mining, there are new ZK prove systems every year. The layer2 may switch between different ZK proof systems for better performance and features. However if layer2 switches to new ZK proof systems, layer2 needs to rework zkEVM. ASIC or FPGA in the future? It is based on the layer2 strategies for ZK proof systems.

https://twitter.com/gakonst/status/1441134922127724554?ref_src=twsrc%5Etfw%7Ctwcamp%5Etweetembed&ref_url=https%3A%2F%2Fwww.notion.so%2Fglazec%2FIncomplete-Guide-to-ZK-Why-ZK-Matters-74faa88838604298ac64a02541b20eb1

#2 How to better understand how DAOs work? Three interesting analogy perspectives

We can compare them with existing organizational structures. Although fundamentally different, we can take a step closer to understanding DAOs by thinking of them as companies, cooperatives, and networks.

1 Companies are still a useful framework for understanding DAOs.

Larger DAOs often operate in a company-like fashion, with well-defined "departments" such as product, marketing, engineering, and community. Each department usually has a team leader who directs and supports the work of other members, similar to a manager.

DAO leadership tends to be fluid and non-hierarchical, akin to a "Teal organization." Management researcher Frederic Laloux defines a Teal organization as autonomous and spontaneous. They also encourage employees to devote their full energy to the organization.

2 DAO as a cooperative

From an "ownership" perspective, a DAO is very different from a corporation, and a cooperative might be a more apt analogy.

Cooperatives are owned and controlled by workers who contribute to them, similar to DAOs. In a DAO, stakeholders receive tokens that grant governance and distribute ownership, much like co-op workers get paid for grocery shopping. The difference is that DAOs are not limited by physical distance.

3 DAO as a network

The DAO assigns ownership not only to the organization's contributors (which are equivalent to employees in a certain dimension and are members of the organization), but other such as users (if the DAO is building a product), strategic partners, suppliers, and mission-aligned community members A series of stakeholders, etc., may be assigned to the ownership of the DAO.

This distribution model also makes a difference between DAOs and pure cooperatives, DAOs become more network-like, members can interact freely, and their roles are changing frequently and naturally and smoothly.

In many dimensions, the "network" is the most useful framework for understanding DAOs.

The "web" is not a new concept, but it is especially applicable in the Web 3.0 era. Networks are an effective form of organization when the scope of coordination is large, both in the public sector and in the private sector. As DAOs grow in size and complexity, the network model allows organizational reconciliation to move forward in a scalable manner.

Does the above framework make sense two years from now? What about in five years?

Even today, there may be a dozen or more ways to understand and perceive DAOs, and given the rapid innovation in the field, we may see DAOs very differently in a few years time. But in the long run, the basic goal of DAO shared value creation will likely remain unchanged.

#3 Omni-chain NFTs on LayerZero

LayerZero is a cross-chain protocol that allows applications deployed on different chains to communicate with each other. LayerZero does not require an intermediate node or consensus mechanism like a cross-chain bridge but allows applications to seamlessly communicate across chains. The first DEX on LayerZero is Stargate Finance, a project that allows Omni-chain assets to swap across chains.

Recently a lot of Omni-chain NFTs have appeared in the market. But Omni-chain NFT maybe not be suitable for PFP. The reason why this NFT has not reached a kind of cross-chain for PFP is really that it is more suitable to stick to that chain of its own.

The most popular Omni-chain NFT on LayerZero now is Gh0stly Gh0sts. When an NFT transfer, will first burn the NFT on this chain and then in another chain mint a new one out, then it seems to be changed to burn compared to the traditional cross-chain bridge locking action. One problem is the price threshold. ETH gas cost is relatively high, so it has filtered out part of the consumer base. For example, the amount of money and the pace of users rushing meme coins on BSC and on ETH are not the same. The second point maybe because of the NFT community. For PFP, the atmosphere and community building of the community occupy a large part. Of course, in addition to these, whether the code is NATIVE is also important. Each chain has a corresponding community, people who love the ETH chain may not go to SOL or BSC for NFTs, and their community may be more sticky. But if land-based projects, such as Gamefi or Metaverse, then I think they may need more cross-chain.

Week's Recap

• Uniswap Labs Ventures

• Improbable raises $150 million to build an interoperable 'metaverse' network

• CertiK reaches $2 billion valuation with new funding from Goldman Sachs and others

• HBAR Foundation launches a $250M metaverse fund to enhance consumer brand adoption

• Porter Finance Raises $5M to Bring Credit to DAOs

• Announcing Investin’s $1.2M Funding Round

• White Star Capital Raises $120M Crypto Fund for Metaverse Investments

• Volt Protocol Raises $2 Million for 'Inflation-Resistant Stablecoin’

• Pantera to close Blockchain Fund soon after raising $1.3B — double the target

• SoftBank leads $70 million round for DeFi infrastructure firm BloXroute

• Web3 'follow' app Context announces $19.5 million seed round

• Ethereum Push Notification Service raises $10 million in Series A funding

• Avalanche developer raising $350 million at $5.25 billion valuation: report

Indicator Tracking

Crypto Fear & Greed Index

Data of NFT Market

Protocol Total Revenue

#1 Potential Opportunity in ZK Industry

• Since all Layer2 use the same base layer, it would be safer to construct cross-layer2 apps. For example, aggregate the fragmented liquidity between layer2. Starkware proposes dAMM to solve this. dAMM allows layer1 LPs to expose to layer2 traders.

• Development kit to help developers quickly construct app-specific layer2. This may look like Cosmos SDK and Substrate from Polkadot. The idea is that if an app grows bigger, it will consume more resources on the base layer. To reduce computation cost, it either builds its chain, moves to layer2, or builds its layer2. We see Axie Infinity face the same problem. At that time, building its chain was the only solution. However, a separated chain is isolated and cannot benefit from the base layer ecosystem. Migrating to layer2 looks good, but it is not flexible. The app faces the same constraint as in the base layer. Thus the most promising solution is having its layer2. If the cross-layer2 is convenient and integrated well with the base layer, the app does not lose anything from moving away from the base layer.

• ZK bridge. Almost all the bridges are not trustless. We at least need to trust someone, like an oracle, to network participants. Although network participants have deposits, it is hard to calculate the slashing condition. The ideal trustless bridge is the ZK bridge. The light client captures the block and generates the proof. In this way, we don’t need to trust what the oracle says. We can verify the proof with a small cost due to SNARKs. The current problem is how to build a block verifier in the ZK circuit. Also, the extensibility sucks. The light client is coupled with blockchain consensus. Thus developers need to build different circuits for different chains.

• Chips and cloud computation. If more users move to ZKRU, there would be a growing demand for computation power. Node operators need more computation power to compete for packaging transactions, which is profitable. Dedicated chips can give node operators more computation power and lower power consumption. Cloud computations can give more users to access ZKRU node operations. This growing demand for dedicated chips and cloud computation may look similar to what we see in the Ethereum mining industry. Miners first use CPU and GPU. Then they change to dedicated FPGA and ASIC. Cloud mining has existed in Ethereum and Bitcoin mining industry for a long time. Another example is AI chips. Now every iPhone has dedicated AI chips. If ZK is the new standard tech for privacy, there will be a SNARK ASICs for every iPhone.

#2 Web3 empowerment of future streaming media is worthy of attention

Today, video content has replaced text and pictures as the core content disseminator in the post-Internet era. Cisco predicts that by 2022, 82% of Internet content will be video. Mediakix reports that the streaming media industry is expected to reach $124 billion by 2025. The rise of streaming media (audio, music, movies, content, etc.) has further increased the need for a robust video processing infrastructure.

Video transcoding is the process of reformatting the original video into a viewable file based on users bandwidth (2G-5G) and device. Video transcoding is essential for streaming video (live or static). Any content consumption scenarios that users are familiar with, such as Fortnite concerts, Twitch gamers, YouTube podcasters, and GenZ TikTokers, have to go through the video transcoding process.

As the video streaming market expands, building new infrastructure using encrypted networks offers opportunities to increase scale, reduce costs, and eliminate centralized points of failure.

LivePeer essentially solves the pain point between infrastructure providers and application developers or streaming applications that need video processing services.

In Web2, with cloud services like Amazon, video processing costs about $3 an hour, a media server can cost up to $4,500 a month, and up to $1,500 a month before providing bandwidth to a content delivery network. In contrast, with LivePeer, the entire process (transcoding, LivePeer server, content delivery) can be 10 times cheaper than existing services for a single streamer.

The key for LivePeer to offer a cheaper streaming service is that it doesn't compete for large cloud resources such as AWS or other video transcoding providers. It offers pricing based on transcoding usage instead of server space. Its protocol needs to address the actual distribution of live video from original materials to a large number of consumers.

As the creator economy grows, the need for cheap and seamless processing will continue to grow. Additionally, the digital events and e-sports industries are young but very promising, opening up potential avenues for Livepeer to plug into the infrastructure of them.

Besides Livepeer can support at a cheaper price than traditional cloud service providers, moreover, the long-term growth of 4K video, UHD, virtual reality and augmented reality streaming will provide new opportunities. The expansion of 5G will affect online gaming and live video streaming, requiring more robust and cost-effective video infrastructure.

Currently, Web3 is in the infrastructure phase -- splitting each existing service -- until those services become powerful enough to aggregate into a unified platform. Web3 protocols are more efficient than existing services and platforms because they split services by creating networks that are owned and operated by users. We are quite optimistic about the empowerment of Web3 technology in this domain.

#3 Layerzero NFT is on the way

Gh0stlygh0sts got its free mint this week. This first omnichain NFT on LayerZero ran to a high of 0.75 on the first day, with crazy gain and rocketed price. LayerZero integration introduces a plethora of possibilities: chain-dependent traits, and traversal-tied utility.

Omnichain means the NFT is chain agnostic. It resides across several chains simultaneously as opposed to being native to any one chain. Previously some NFTs have been minted on L1 Ethereum and then bridged to an L2 solution for scalability while maintaining the security from decentralization on Ethereum. But the difference in Gh0stlygh0sts is that: “Both the origin chain (background) and current chain the NFT resides on (border) will affect its appearance. When a Gh0stlygh0sts is transferred, it burns the existing NFT and mints it on the destination chain, making it native to that chain.”

The Gh0stlyGh0st team executed really perfectly with stealth launch, free mint, mint from contract, and available on any LayerZero-enabled chain. With the LayerZero narrative pumping, all the DeFi lovers knew the first NFT project to launch on this technology would make history. With Nansen, we can see that smart money has been accumulating with a significant number of transactions.

In fact, it is not the first time that this idea came into people’s mind. Cobie also expressed the idea and expectation of similar Omnichain narratives on March 31.

But this is not the first project that using the Omnichain. In January, there was a project deployed in 9 chains, the onpication background theme, but there is not much spark.

CC0 are helpful for projects. Part of the value stems from the fact that they can be integrated into future games/applications. In addition, the unique advantage of Gh0stly Gh0sts is that the potential for future integrations is no longer limited by specific blockchain domains.

Which one will be the next Blue chip on LayerZero? It is worthy to see......

Week's Recap

• Pudgy Penguins NFT Collection Looks to Next Chapter With $2.5M Sale

• Lightning Labs unveils new protocol for Lightning Network stablecoins as it raises $70 million

• Boba Network Closes $45M Series A Round at $1.5b Valuation

• BATTLEBOUND SECURES $4.8M SEED ROUND + $3M IN NFT SALES

• Justin Kan’s Fractal raises $35M for game-focused NFT marketplace

• Terra-based NFT Marketplace OnePlanet Raises $3.3M Round Led by Hashed

Indicator Tracking

MVRV

Crypto Fear & Greed Index

Data of NFT Market

Protocol Total Revenue

Intuition about ZK

One sentence for ZK: ZK is a way for a prover to convince a verifier that some statement is true but reveals no additional information except that the statement is true. ZK is designed for anonymity. Imagine that we can prove we have a valid ID without verifiers knowing our real name or ID.

Here is a more vivid example. Alice and Bob are playing Sudoku. Alice would like to show Bob that she found the answer. However, she did not want to reveal any information about the answer since Bob was still working on it. How will you design this proof?

The answer is simple. We write down the Sudoku into cards, facing down. Bob can randomly choose one column, row, or block. Alice takes that column, row, or block of cards and shuffles it. Bob can verify the correctness by checking cards with 1-9. By constantly performing this step, Bob can say that Alice knows the answer, but Bob does not know the answer after the verification.

If you still can’t get the idea, view this video. The UCLA CS professor will explain ZK on five different levels. You will definitely get it.

Common ZK Proof Systems

Before examining the ZK proof systems comprehensively, notice that ZK-SNARK is a name of a class of schemes, and ZK-STARK is the name of a specific scheme.

Let’s start with ZK-SNARK. SNARK stands for Succinct Non-Interactive Arguments of Knowledge. SNARK is unique from other ZK proof systems because of its trust setup phase, what ‘N’ stands for.

• Succinct: The proof size and verification time are smaller than the original computation (statement).

• Non-interactive: The provers and verifiers do not need to communicate back and forth for each round. Instead, the provers and verifiers need to finish the initial setup phase. Even if they miss the setup phase, public verifiers can also join the verification later.

• Arguments: Provers with extremely large computation power can cheat the verifiers by generating wrong proofs. When this happens, the public/private key encryption is also broken.

• Knowledge: The prover needs to know something secret to make the proof.

The problem with ZK-SNARK is the trust setup phase. The trust setup phase generates a reference string. If the reference string is leaked, anyone can make the fake proof. Also, coordinating such a trust setup phase between multiparty is complex. The reference string can only be used in one program (Circuit). Thus it is impossible to have ZK-SNARK with a single trust setup for general computation. Another problem is that the reference string is not upgradable. If we upgrade the program, we need to rerun the trust setup phase.

To solve the problem, there are two approaches:

• Transparent Setup: The trust setup phase sets a CRS (Common Reference String). If the CRS is leaked, the ZK proof systems will not be hurt. Fractal, Halo, SuperSonic and ZK-STARK use this approach. The problem with this approach is that the size of the proofs may be in kBs. This would be too large for the blockchain area.

• Universal Setup: The setup creates a secret reference string, but it is structured. Thus it can be used in not only one program. Marlin, SuperSonic-RSA, and Plonk use this approach.

The following ZK proof systems are commonly used in the industry:

• Groth16: This is used in Zcash. It is fast and has a small proof size and constant verification time, but the trust setup phase needs to run for every program.

• Sonic: Support universal setup. The SRS(Structured reference string) is linear to the size of supported programs. The proofs size is fixed, but the verification is expensive. On the other hand, it makes general computation possible.

• Fractal: Allow recursion. The proof size is big.

• Halo: Support recursion. It is not succinct because verification time is linear. Most ZK application is based on Halo2.

• SuperSonic: The first practical transparent ZK-SNARK.

• Marlin: Structured reference string (SRS); Universal and updatable; Better prover and varication time than Sonic, but slower than Groth16.

• Plonk: Universal setup; Multiparty joins the setup phase sequentially. This makes it easy for many participants to join the trust setup phase; PLONK uses Kate commitments instead of polynomial commitments ( Recall that the first step in ZK-SNARK is to transform computation into a polynomial problem). Plonk is modern and popular today. Lots of ZK proof systems are based on Plonk and they are named Plonkish.

Here is the benchmark based on this research. CRS is common reference string. SRS is structure reference string generated in the trust setup phase. The proof size determines the storage cost in the base layer—the runtime for the prover and verifier influence the computation resource.

You can find more benchmarks in the following research:

• Benchmarking Zero-Knowledge proofs with isekai

• Zero-Knowledge Proofs: STARKs vs SNARKs

• Community Proposal: A Benchmarking Framework for (Zero-Knowledge) Proof Systems

• Comparison of Different zk-SNARKs

A quick wrap-up, if you see a new ZK proof systems, what number should you care about?

• Prover time for 1tx and 10 txs

• Verifier time for 1tx and 10 txs

• Proof size for 1tx and 10 txs

• Trusted setup phase

• Reference string size

• CRS(common reference string) support

• Upgradable

• SRS(structured reference string) support

• Recursion support

• Post-quantum secure

• Cryptography assumptions

ZK has been applicable in recent years. The two main theses of ZK is a rollup, which improves computation efficiency and privacy. For the private thesis, it is intuitive since ZK shares no knowledge with the verifier except the statement itself. The rollup thesis heavily relies on two characteristics of ZK: succinct and recursion. Succinct characteristic helps verifiers save many computation resources instead of rerunning the whole program. Recursion characteristic helps to save storage space. With recursion, the blockchain can keep a fixed size. This is also beneficial for decentralization since the tiny blockchain node does not require high-end hardware.

ZK Application Development

To develop a ZK application independently, a developer needs the following research and development skills:

• Algorithm and low-level optimizations of arithmetic skills. Developers need this skill to tackle problems in finite field arithmetic, polynomial commitments, and elliptic curve.

• Cryptography knowledge about ZK proof systems like ZK-SNARKs, Plonkish, and trust setup process. Developers need to choose appropriate ZK proof systems and they may need to customize them.

• Circuit programming skills. Developers need to develop constraints for some cryptography primitives like Merkle Trees, and Hash.

• Application and cryptographic protocols development.

Effective development tools can not only speed up the development process but also reduce the complexity. For example, tools like Circom takes care of the low-level algebra and proof systems. Developers can ignore algebra and ZK proof systems, and focus on circuit programming and application development.

What is Rollup

Mechanism

The concept of rollup is simple. Since on-chain computation is expansive, rollup puts computation off-chain and only stores the result on a chain.

The state root of the Merkle tree is stored at the rollup contract. The root can be used to verify the existence of the leaves. The smart contract knows how to update the state with the info in batches, and the state root switches to the new state root.

ZK rollup uses ZK proof in batches to verify that the new state root is correct. The ZK proof can be used to verify that after executing txs in batches, we can get the new state root provided in batches. Verifiers can verify the correctness of computations without having to execute them, and verifiers will not even learn what was executed. The characteristic of succinctness helps the ZKRU (ZK rollup) scale-up.

Optimistic Rollup is not as perfect as ZKRU. For example, ORU has fewer TPS and has a longer withdrawal period since it relies on fraud proof. Therefore, some ORUs are integrating ZK into their solution. In this way, they can improve TPS and shorter the withdrawal period. For example, they can add ZK to state transition to create a short fraud-proof time.

Roles

There are three roles in rollup:

• User: Users submit txs on Layer2. They deposit assets to Layer2.

• Rollup operator: Rollup operators keep the network running. They generate proof, execute txs, put txs into batches, and challenge fraud proofs.

• Base layer: This layer ensures the security of Layer2 and is where consensus lies. The most common base layer for Layer2 is Ethereum

Economic Structure

The most important things for the economy of Layer2 are costs and revenue.

For Layer2, we can break down the cost into the following:

• Proof Cost (for Layer2)

• State Transition

• Base Layer Tx Cost

• Data cost on the base layer

One main cost for the network is data storage. This chart illustrates how data is stored. First, users send data (txs) to rollup operators. Then rollup operators package lots of data (txs) into batches and publish it to the base layer.

This chart illustrates how much are rollups paying for the base layer and their revenue.

The common revenue for Layer2 is fees and MEV values. Fees vary based on the network status, and MEV varies based on users’ txs. Also, Layer2 may issue new tokens. Tokens will be the reward for rollup operators.

Common ZK Rollup

This graph shows the status of different Layer2. Arbitrum dominates the whole market.

This graph illustrates different tech used by different chains. Here is a short explanation:

• State Validation

  • Fraud Proofs: Fraud proofs allow whitelisted actors watching the chain to prove that the state is incorrect.

  • ZK proofs (ST): ZK-STARKS are zero-knowledge proofs that ensure state correctness.

  • INT: Interactive proofs (INT) require multiple transactions over time to resolve.

  • SN: Require trust setupExits only: Exits from the network are subject to a period when they can be challenged. The internet network state is left unchecked.

  • 1R: Single round proofs (1R) only require a single transaction to resolve.

• Data availability

  • On chain: All of the data needed for proof construction is published on chain.

  • External DAC: Proof construction relies fully on data that is NOT published on chain. There exists a data availability committee (DAC) that is tasked with protecting and supplying the data.

  • External: Proof construction relies fully on data that is NOT published on chain.

• Upgradability

  • Yes: The code that secures the system can be changed arbitrarily and without notice.

  • 21 day or no delay: There is a 21 days delay unless it is overridden by the 9/15 Security Council multisig.

• Sequencer Failure

  • Transact using L1: The user is able to submit a transaction through L1 and force its inclusion on L2.

  • Force trade/ exit to L1: The user can force the sequencer to include a trade or withdrawal transaction by submitting a request through L1. The user is required to find a counterparty for the trade by out of system means. If the sequencer is down, the user can use the exit hatch to withdraw funds.

  • Force exit to L1: The user can force the sequencer to include their withdrawal transaction by submitting a request through L1. If the sequencer is down, the user can use the exit hatch to withdraw funds.

  • Propose blocks(ZK): The user needs to run their own node and use it to propose new blocks that include otherwise censored transactions. Proposing new blocks requires creating ZK proofs which are very computationally expensive.

  • Exit to L1: The user is only able to submit an L1 withdrawal request . After that, the user exits the system with their funds.

• Validation Failure:

  • Escape hatch(MP): Users are able to trustlessly exit their collateral by submitting a merkle proof of funds. Positions will be closed using the average price from the last batch state update.

  • Propose blocks: The user needs to run their own node and use it to propose new blocks to replace the validator.

Here are the pros and cons listed on Ethhub for ZKRU:

Pros:

• Reduced fees per user transfer.

• Faster than Optimistic Rollup and Plasma.

• Blocks will be computed in a parallel computing model, which encourages decentralization.

• Fewer data contained in each transaction increases the throughput and scalability of layer 2.

• It does not require a fraud game verification like Optimistic Rollup, which can delay withdrawals by up to two weeks.

Cons:

• The difficulty in computing zero-knowledge proof will require data optimization to get maximum throughput.

• The initial setup of ZK rollups promotes a centralized scheme (see Security Considerations).

• The security scheme assumes a level of unverifiable trust.

• Quantum computing poses a threat to hacking the blockchain.

Currently, most available ZK Layer2 only has limited functionality like payment. ZKSync is one payment layer used by Gitcoin. There is also ZK Layer2 with custom VM enabled. These custom VMs are non-EVM compatible, such as (StarkEx + Cairo, zkSync 1.0 + Zinc).

ZKEVM is the next milestone for all ZKRU. There are three levels for ZKEVM solutions:

• Consensus level: At this stage, the ZKEVM is equivalent to EVM on Ethereum. It generates proofs for state roots on Ethereum.

• Bytecode level: The ZK proof systems play a big role in this ZKEVM. In this stage, state roots generated by ZKEVM are not compatible with the Ethereum EVM. This approach is taken by Scroll, Hermez.

• Language level: In this state, there is no real ZKEVM. A transpiler transforms Solidity into ZK-friendly VM that is totally different from EVM. zkSync and Starkware take this approach.

In the Ethereum roadmap, Ethereum will integrate a consensus level ZKEVM.

Justin Drake from EF expects to see a bytecode level ZKEVM, like Hermez or Scroll to deploy in 2022, but with some limitations:

• Small gas limits compare to the current gas limit on Ethereum.

• Centralized provers due to computation difficulty. Users may start to run their provers in 2023 with GPUs and SNARK proving ASIC by 2024. The development of the hardware will change from CPU, GPU, FPGA to ASIC.

• Due to development complexity, there will exist bugs.

To further reduce the cost, some ZKRUs are implementing Volition, changing their base layer. They plan to store the data off-chain or on their chains.

There are 16 ZKRU in the market and 7 of them have released the token. The total market cap is $15B, around 0.67% of the total crypto market.

Polygon

Polygon currently works on 4 ZK products:

• Miden: Experiment general computation ZKRU with 1k+ tx/sec; 15min withdraws; 5 secs block time; Privacy enabled.

• Nightfall: Nightfall is an ORU with ZK enabled to provide private transactions. Around 9000 gas/tx and 110 TPS. It is designed for Ernst & Young.

• Hermez: EVM compatible ZKRU; 2k TPS. The network is currently live. The average txs per batch is 1. The daily tx number is nearly zero (data from explorer).

• Zero: General Computation ZKRU with recursion enabled; 0.17s to generate proof; 45kb proof size; one account only occupies 5 bits.

zkSync

zkSync started in Dec 2019. zkSync is a ZKRU built by Matter Labs. It is based on Plonk and the trusted. Currently, it supports payment function and limited smart contract function with customized programming language Zinc.

zkSync 2.0 testnet is live in Feb featured ZKEVM. Matter Labs makes most OPCODE into circuits to achieve EVM compatibility. For now, it does not support ADDMOD, SMOD, MULMOD, EXP, CREATE2, and KECCAK256. In this approach, Solidity will be the first-class citizens.

The gas in zkSync 2.0 will fluctuate based on the current Layer1 gas price (data storage on Layer1 cost) and ZK proof generation costs.

To further improve the TPS and lower the cost, zkSync will launch ZKPorter. Users can choose to store their account data on ZKPorter, which can cost much less than the base layer. If an account is stored on ZK Porter, all its tx can only be stored on ZKPorter. They can not be stored on Ethereum. ZKPorter will be secured by zkSync token holders.

Starkware

Starkware was started in May 2018 by core team members of Zcash.

Starkware has two solutions: StarkEx, StarkNet.

StarkEx is a SaaS that designs ZKRU for projects like dYdX, DeverseFi, Immutable, Sorare. dYdX is quite successful. Here are some metrics about dYdX. It has around 4k weekly active traders.

StarkNet is the permissionless version. StarkNet is not EVM compatible. It uses Cairo to write smart contracts.

Starkware is also working on ZKEVM. However, they have a different approach. They use Warp to transpile smart contracts written by solidity to Cairo on StarkNet. This approach is not as good as zkSync.

StarkNet alpha with EVM compatible launched in Nov 2021. Currently, the daily transaction number is 1033 (data from Explorer).

Similarly, Starkware is also working on off-chain storage. Users can choose to process their tx on Ethereum or off-chain.

Loopring

Loopring is a ZKRU DEX featuring low fees for spot trading with 2k TPS.

Loopring released its tokens LRC in 2018. Currently, the market cap of Loopring is $1.3m. Loopring has total 65k users, 167 unique users increment everyday, and 10896 txs everyday (data from explorer).

dYdX is a strong competitor of Loopring. In the future, when ZKEVM becomes popular, there would be more competitors joining this market, because development on ZKEVM is faster than developing a new Layer2 DEX.

Current State

Blockchain space has entered the multichain era. Different chains have different concentrations and have their features, not only look good on paper. We see lots of new chains featured with high TPS in the past. Now, these chains have a strong ecosystem and featured apps. Making a new chain with high TPS is easier than before because of the development tools. Thus now we emphasize more on featured apps, not paper numbers.

Moonbeam is such a good example. It has some kind of similar base layer Polkadot and high TPS. This looks similar to most Layer2. Before launch, moonbeam collaborated with lots of projects, like sushi. It launches with a complete ecosystem like top-tier DEX, Lending, and bridges but lacks concentration and featured apps.

Thus layer2 needs to have features to compete with other chains with high TPS. There would be several potential opportunities in layer2 ecosystems:

1. Apps that utilize high throughput and lower fees of Layer2. One example is dYdX. As a DEX, it offers CEX like experience.

2. Since all Layer2 use the same base layer, it would be safer to construct cross-layer2 apps. For example, aggregate the fragmented liquidity between layer2. Starkware proposes dAMM to solve this. dAMM allows layer1 LPs to expose to layer2 traders.

3. Development kit to help developers quickly construct app-specific layer2. This may look like Cosmos SDK and Substrate from Polkadot. The idea is that if an app grows bigger, it will consume more resources on the base layer. To reduce computation cost, it either builds its chain, moves to layer2, or builds its layer2. We see Axie Infinity face the same problem. At that time, building its chain was the only solution. However, a separated chain is isolated and cannot benefit from the base layer ecosystem. Migrating to layer2 looks good, but it is not flexible. The app faces the same constraint as in the base layer. Thus the most promising solution is having its layer2. If the cross-layer2 is convenient and integrated well with the base layer, the app does not lose anything from moving away from the base layer.

4. Better integration with the base layer. Users don’t feel any difference between layer2 and the base layer. This includes asset bridges and protocol communication.

5. Different kinds of VM. More powerful ZKEVM or ZKWASM.

6. Layer2 on other chains. Different chains have different concentrations. A ZKRU is also promising to them. ZK Link team has implemented Groth16 in Solana. Solana focuses on onboarding traditional finance institutions. These institutions need ZK to protect their customer's privacy.

7. ZK bridge. Almost all the bridges are not trustless. We at least need to trust someone, like an oracle, to network participants. Although network participants have deposits, it is hard to calculate the slashing condition. The ideal trustless bridge is the ZK bridge. The light client captures the block and generates the proof. In this way, we don’t need to trust what the oracle says. We can verify the proof with a small cost due to SNARKs. The current problem is how to build a block verifier in the ZK circuit. Also, the extensibility sucks. The light client is coupled with blockchain consensus. Thus developers need to build different circuits for different chains.

8. Commercialize ZK algorithm. There are many commercialized algorithms for professional problems, like advanced solvers for linear programming and GPT-3 from Microsoft. However, if ZK is highly professional and only selected developers can do this, there is room for a commercialized algorithm. Currently, most ZK practitioners are highly educated and hold a Ph.D. degree in CS, Math, or Cryptography.

9. Chips and cloud computation. If more users move to ZKRU, there would be a growing demand for computation power. Node operators need more computation power to compete for packaging transactions, which is profitable. In the Ethereum roadmap, Ethereum will integrate ZKEVM, which means Ethereum miners also need to compute ZK proofs. Dedicated chips can give node operators more computation power and lower power consumption. Cloud computations can give more users to access ZKRU node operations. This growing demand for dedicated chips and cloud computation may look similar to what we see in the Ethereum mining industry. Miners first use CPU and GPU. Then they change to dedicated FPGA and ASIC. Cloud mining has existed in Ethereum and Bitcoin mining industry for a long time. Another example is AI chips. Now every iPhone has dedicated AI chips. If ZK is the new standard tech for privacy, there will be SNARK ASICs for every iPhone.

10. Recursion enabled ZKRU. Blockchain needs to balance security, decentralization, and TPS. Size plays a big role here. In traditional blockchains, bigger size means centralization, because the node requires advanced hardware. However, smaller size means lower TPS. It is hard to balance TPS and decentralization. Now recursion will change this. Recursion can minimize the blockchain size without harming TPS.

Privacy

ZK has already been used in lots of privacy projects. For example, Tornado cash, Zcash, dark forest.

There are three stages for privacy projects:

1. Transaction privacy: Users can hide their txs

2. General computation privacy: Currently all the computation process on Ethereum is public. Anyone can see the inputs, outputs, and state transition.

3. Function privacy: Sometimes functions’ names leak info. For example, mint() often means mint tokens.

The total market cap of the private sector is around $10B, around 0.45% of the total crypto market. The daily trading volume is around $1B.

Tornado Cash

Tornado Cash is a smart contract-based privacy transaction tool. It is used to hide the cash flow. It now supports Ethereum, BSC, Polygon, Optimism, Arbitrum, Gnosis, and Avalanche.

It achieves privacy for the sake of usability. Deposit, wait and withdraw, the user can get the clean money.

ZK is used in users’ deposit and withdrawal processes.

Zcash

Zcash is a blockchain that use zk-SNARK to achieve private transactions. Unlike Tornado Cash, Zcash customize the blockchain to achieve privacy transaction.

Zecrey

Zecrey is a privacy payment application supporting Ethereum, Polygon, BSC, Near, and Avalanche. It is on the first level of privacy, transaction privacy. Zecrey offers a browser wallet to help users privately transfer and swap tokens. To swap and transfer privately, users need to deposit tokens into Zecrey layer2, powered by Plonk. Everything that happens in layer2 can be private. Zecrey layer2 also supports cross-chain swap.

Currently, Zecrey has around 10 txs everyday (data from explorer)

Suterusu

Suterusu is a private payment application supporint Ethereum, BSC, Fantom, and Polygon. It uses layer2 to protect users’ transaction privacy. It also has a cross-chain bridge, which transfers $SUTER between ETH and BSC.

Suterusu has total 15k users and 24k deposits. The user increment stagnates. Its market cap is around $10m.

Dark Forest

Dark Forest is an MMO. Players need to send energy to other planets to occupy them. The location of planets is kept secret. Players need to find these planets themselves (hash collision). The ZK is used to prove locations related operations:

• Planet Initialization

• Planet resources movement

In v0.6 round 1, 1700 players joined the game, and 700 got the next round. During this round, players made 2 million txs, spending around 1.5 trillion gas. Suppose it is on Ethereum, with an 80 gas fee. So the total gas will cost 120 ETH.

Stealth Airdrop

The stealth airdrop allows users to get airdrop anonymously. The user first uses their airdrop wallet to generate proof. Then they can use other wallets to get the airdrop token with the proof.

A16z also implements something similar a16z/zkp-merkle-airdrop-contracts (github.com).

This example shows the application of ZK in voting.

zkProof of Buffiness

This project is on ETHDanver. Users can generate ZK proof to show that they have a buffiness without revealing anything about themselves other than the user’s Buffiness.

This is an application of ZK in Identity.

Wrap up

1. Small privacy market. Privacy projects started very early. Zcash started in 2016. However, the whole privacy market only takes 0.45% of the total crypto market.

2. Benefit from higher privacy standards. Users are pursuing stronger privacy protections without sacrificing usability. Especially in the mobile phone industry, Google and Apple are pushing stricter privacy standards. EU proposes regulations to protect consumers’ privacy. Infrastructure companies like let’s encrypt which offer SSL certificates benefit from this. In the future, ZK may be adopted by these giant companies and there would be huge opportunities for ZK infrastructures.

3. A must for onboard institutions. Big institutions have the responsibility to protect customers’ privacy and some blockchains are trying to onboard these big institutions. ZK will be a must for this scenario.

4. Benefit DAO governance and Identity. Anonymity is an important aspect of democratic governance. ZK can empower privacy preserved governance and let participants make their own decisions without distracting by others’ decisions. Identity can also benefit from privacy. Users can reveal their identity without showing their actual address.

5. Ignore ZK, focus on product usability. ZK can better protect privacy, but a product is not all about ZK. ZK is more tech focus and we need to emphasize the usability of the product. Normally more privacy means bad usability, but usability is the most crucial compatibility. Thus focus more on usability, market, and the team.

Other interesting project

ZKRepel

ZKRepel appeared in GR13 and got $5k. This is an online playground for ZK circuits. Developers can quickly write and test circuits in ZKRepel without setting local development environments. It is similar to Remix.

We see a paradigm shift from local development to cloud-based development. There are famous products like Codesandbox, Codepen, Codespaces. With these products, developers can continuously work anywhere anytime and set up a new development environment quickly. Development environment as infrastructure is a big trend today. This is proposed by Github, and Github practiced it with Codespaces.

There are no clear statistics about ZK developers. However, from the data on Github, it is over 500x less than solidity developers.

Find more ZK project

There are VCs or grants there focusing on ZK projects:

• ZKTech Gitcoin Grants: The first round matched $100k among 19 projects.

• 0xPARC Grants: Supporting application level innovation on Ethereum and other decentralized platforms.

• zkDAO: Newly launched $200M backed by zkSync and BitDAO to support zkSync ecosystem. 7.5% of $200M will be used in grants.

• Polygon ZK Fund

• Aztec Grants: Current focus on bridges, tooling, and analytics.

• Harmony ZK Fund: $10M fund for ZK and privacy research.

• ZK Validator: Fund focusing on ZK. Featured investments are Aztec, Penumbra, Ironfish, Anoma, zkSync, Aleo, Diversfi

• ZPrice from Aleo

Conclusion

ZK is a really promising technology that can bring impossible things to possible. In recent years, there have been lots of breakthroughs happening here. These breakthroughs like stronger performance, upgradability and no need for trust setup push ZK to the applied stage. So if we are going to look at a ZK project, we need to care about these theoretical numbers:

• Prover time

• Verifier time

• Proof size

• Trusted setup phase

• Reference String Size

• CRS(common reference string) support

• Upgradable SRS(structured reference string) support

• Recursion Support

• Post-quantum Secure

• Cryptography assumptions

ZKEVM is the next milestone for ZKRU. There are three stages for ZKEVM:

• Consensus level

• Bytecode level

• Language level

ZK just enters the applied stage. The ecosystem is still empty. Not every characteristic of ZK is well used and applied to new products. People can still get inspiration from this cutting-edge theory. The following direction can best be beneficial from ZK tech:

• Apps that need high TPS and lower fee

• Cross Layer2 communication protocol/apps

• Aggregate fragment liquidity in Layer2

• Development kit/framework

• Cloud-based development tools

• Cross Layer2 Layer1 apps with unique features

• Different zkVM

• ZK Bridge

• Applied ZK on other chains

• Layer2 with recursion enabled

• ZK in DAO and community governance

• Commercialize ZK algorithm

• Chips and cloud computation

• Recursion in ZKRU

There are two main theses for applying ZK: Rollup and Privacy. Rollup is more promising than privacy. Privacy does not make sense because it is designed to be transparent. The privacy culture is somewhere against the transparent spirit. Also, privacy may have compliance problems. In Web2 era, we do not see the prosperity of privacy apps. In the same category, the top product does not heavily focus on privacy, although more and more institutions have improved their privacy protections. Privacy does have a tradeoff. Most of the time is availability, which is the key to users.

When looking at ZK applications, the following points are important:

• ZK is a fancy term. Without ZK, is the real product still competitive and has good UX.

• ZK is complex and does an extra burden on the development speed.

• ZK benefits DAO governance and identity

• ZK will help institutions onboard the blockchain

Learn more

If you would like to learn more about building a ZK project, check out this tutorial and Awesome-zk. Also, keep an eye on this.

I worked as a tech associate for Fundamental Lab. You can find me on Twitter here and Fundamental Lab here.

Reference

An Incomplete Guide to Rollups

The ultimate guide to L2s on Ethereum

Understanding rollup economics from first principles

Ethereum Rollup Call Data Pricing Analysis - Research

How to fund your ZK Project?

zkSNARKs in a nutshell

ZK-STARKs

Understanding PLONK

Introduction to zk-SNARKS

Comparing General Purpose zk-SNARKs

Zero-Knowledge Proofs: STARKs vs SNARKs

Comparison of Different zk-SNARKs

Compare zk-SNARKs in practice

Episode 221: Funding the Next Wave of Zero Knowledge Tech

How Zero Knowledge Proofs Are Changing Blockchain (in non-technical terms)

[AMA] We are the EF's Research Team (Pt. 7: 07 January, 2022) : ethereum

https://blog.matter-labs.io/zksync-2-0-hello-ethereum-ca48588de179

Will the emergence of Web3 mark the subversion of the creator economy in the centralized and advertising-based Web2? We try to first briefly describe the business model and core pain points of creators on mainstream Web2 platforms, and then prove that the arrival of Web3 will be a golden era for the creators. We hope that in the near future the technology based on Web3 will create new business and economic opportunities as a new golden era of creation.

1 Tracing the history of internet

1.1 Iteration from web1 to web3

Two most important outputs of the 21st century are code and content. Code creates powerful tools benefiting content creation. Content underpins a strong narrative and helps put more economic activities at the mercy of software tools. Both are designed to make abstract ideas actionable. According to the characteristics of different stages of the Internet era, we can mark the development process of the Internet as the era of Web 1.0, 2.0 and 3.0. The advent of the mobile internet has shifted the gatekeepers of the old media — publishers, record labels, and movie studios — where web1 controlled content creation and distribution — to creators on the web2 platform who grab consumers’ attention. During the golden decade of web2 (2005-2015), we lived in a time when ownership was concentrated in a few centralized technology platforms that had data ownership, user relationships, and the means to distribute and monetize content.

1.2 Why creator economy & creators

The digital media landscape has changed dramatically over the past decade. In China, for example, live watching time exceeds TV watching time. In the U.S., users under 25 also spend more time on Twitch and YouTube Live than on TV. The core creators of content in the web2 era, such as KOLs and celebrities, are grabbing the attention of consumers from traditional media, creating new consumption models such as content e-commerce and live broadcast e-commerce. Until 2021, the creator economy is a multi-billion dollar market with a creator community of more than 50 million, attracting more than $1.3 billion in funding. According to estimates from mediakix, the creator market will be worth between $5 billion and $10 billion over the next 5 years.

2 The creator monetization models and pain points of mainstream web2 platforms

As mentioned in SignalFire's creator economic market map, among the estimated 50 million creators, there are about 2 million full-time creators (less than 5%) and about 46.7 million amateur creators. It is necessary to emphasize that the creators in web2, who rely on mainstream social media distributing content, accumulating fans, and from sponsorship or advertising to make money, rather than trading directly with audiences (users).

We roughly divide existing creators of web2 into the following categories:

• Content consumers: Refers to the vast majority of content consumption audiences. Interactive people who consume content on a daily basis or participate in likes, comments and forwards for three consecutive times have lower content production willingness than consumption and interaction willingness (but have the potential for conversion).

• Content hobbyists: A general term for people who create content based on hobbies or part-time jobs. With various multimedia tools helping to lower the threshold for creation, anyone can publish improvised content on a centralized platform.

• Professional creators: Broadly defined as people who have specialized skills in content production and who can devote full-time jobs to making ends meet. Such creators often settle in multiple mainstream platforms and accumulate fans through content production. The monetization model mainly includes advertising monetization, platform subsidies, content e-commerce, user payment and IP authorization. They are more professional and have higher creative standards, and the platform will also dump corresponding traffic to support creators to attract more content consumers to retain.

• Head creators: generally refer to those who have deep influence or have a wide audience in certain vertical fields among professional creators. They usually have more bargaining power than platforms, and form cooperative relationships with multiple external platforms or brands, such as media companies, record companies, MCN agencies, etc.

The huge scale effect brought by the Internet is destined to make web2 an era of merely several centralized platforms. This business model relies heavily on closed networks, where each platform owns its accumulated user data. As a powerful party that can determine the way of web traffic and revenue distribution, large platforms are the biggest beneficiaries, then top creators.

We conclude that the core pain points of the web2 creator economy are:

1. The existing cake distribution can be more reasonable: the stock creators are in the market, and the distribution of interests of all parties is not fair enough

   The platform masters all user information preferences and dominates content ownership and distribution rights rather than the content creators themselves, triggering a vicious circle of unfair benefit acquisition;

   KOLs have attracted the attention of a stable group of content consumers thanks to the early growth dividends, the attention of high-quality creators after a run, and continued to gain benefits beyond the value of their content production. Although there is room for substitutability and optimization in its content creation, considering the limited attention of users and the inertia of relying on information distribution, the algorithmic feedback of advertisers and centralized platforms is biased towards those creators who have already gained attention. The result is Only a handful of creators can climb to the top and make a living.

   In the long term, caudal creators can only scrape by. Take YouTube as an example, most small channels are not really active and are bullied by YouTubers in a higher food chain. German researcher Mathias Bärtl proved that in 2016, the top 3% of channels received 90% of the viewership. That means 90% of YouTube creators are competing for the remaining 10% revenue.

2. Where is the new cake? : Achieving continuous content growth and quality enrichment requires new creators

   Non-existent creators (potential consumers and small and medium-sized creators) have not been fully tapped, and have not been absorbed into the closed loop of creator ecology;

   Uncreated creation has no viable business model. Influenced by advertisers and algorithm recommendations, creators are forced to seek the widest possible audience in order to create content that appeals to ads and brands. Originally fresh creative content was not produced because there was no viable business model.

3. Unfair distribution of rights to data information:

   The opaque process of big data collection, sharing and circulation has led to frequent problems such as privacy leakage and data abuse in recent years. The distribution of data ownership essentially affects the right to use data and the subsequent distribution of benefits.

   Despite the insufficient proportion of consumers who are sensitive to data rights (the “revolutionary” momentum is insufficient), there is an increasing emphasis on rights and privacy management by the general public, governments, and platforms. The centralized platform's closed management of user data is in urgent need of change.

In general, the head platform of web2 has realized the above pain points and tried to reform by introducing innovative ways. For example:

• Facebook CEO Zuckerberg announced that Instagram will build a suite of influencer tools, including a creator store, local affiliate links and a marketplace to connect influencers with brands, to capitalize on these opportunities.

• Twitter launched a super-follow feature that lets avid Twitter users charge for exclusive tweets and pay for audio chat rooms.

• TikTok has built a local marketplace to connect advertisers with creators and launched a $200 million fund to invest in its top creators.

• In addition to paying for ad revenue, YouTube has also taken the creator fund route, giving creators a $100 million fund on its product, Shorts.

It is worth mentioning that in the mature stage of web2, some new platforms try to replace giants to attract creators with more direct subscription methods and higher incentives:

• Authors of Substack, the popular subscription communication platform this year, will get 90% of the subscription revenue;

• Streamers of Twitch, a game streaming platform, can get 50% of the subscription fee;

• The creators of the content creation platform Patreon can get 88% ~ 95% of the subscription fee;

• Content subscription platform OnlyFans creators get 80% of their revenue.

Whether it is the rise of third-party monetization tool platforms or the implementation of incentives for mid-to-long-tail and emerging creators by big manufacturers, a major trend is that creators need to explore the persistent demand for "fresh and delicious cakes" from consumers. A richer and more benign content monetization path can create "more and more delicious cakes", and the traditional and single advertising monetization model needs to be broken. We see an opportunity for creators to make money by selling premium content, merchandise, coaching, consulting, and more, in addition to advertising. This lets creators focus on pleasing their biggest fans and producing more unique niche content, rather than desperately finding the largest audience possible and producing mass content.

At this time, some people may question whether the existing content ecology of web2 can complete its own iteration through a mild "decentralization" revolution? Must the empowerment of web3 create a better creator ecosystem? We try to discuss dialectically, is it a relationship of zero-sum competition or win-win coexistence?

Let's try to make a guess on this question. The self-revolution of Web2 giants is not as simple as imagined. Data about user preferences and behaviors is a platform’s most valuable asset, so big players have chosen to shut down their own ecosystems and lock users into their network effects in order to accumulate their proprietary data corpus. Since company managers are accountable to shareholders and stock prices, partial deregulation of data rights is the biggest compromise they can make. Although most users don't really care about many things about privacy and data rights, the revenue right behind data ownership is the most important thing. With the continuous iteration of technology and the iteration of the cognition of consumers and creators, the unfair distribution of data ownership will inevitably lead to the problem of unfair distribution of income rights.

In the short term, the content ecology of web2 and web3 will not be a zero-sum game situation, but more like a compatible and concurrent ecology. After all, the current penetration rate of Crypto users is much lower than that of Web2. The moderate revolution and innovative attempts of Web2 giants can be regarded as a positive incentive for web3 to accelerate its entry into user cognition. And we believe that the Web3 model brings not only a fairer distribution of content power, but more importantly, new creators who make the cake.

3 Where is the intersection of the creator economy and Web3?

In the second part, we discuss the issues of privacy and data collection, the incentive imbalance between platforms that rely on advertising revenue and user needs, and the lack of content innovation and creation in the Web2 era, which have led to the bottleneck of content creation and dissemination. One of the reasons why the public is excited by the arrival of Web3 is that by introducing NFTs, the power is restored to the people, and producers directly can link to consumers. In an ideal state, independent content creators will no longer be at the mercy of companies or platforms, and can publish their own original content and earn money through decentralized platforms or communities. The creator economy includes independent content creators, creative teams and planners. It also consists of community builders, as well as financial and software tools designed to help these creators make money and grow.

3.1 Web3 brings new ways of content production and consumption

In the process of tokenizing a work into an NFT, creators are able to create a verifiable on-chain record of the ownership and provenance of the work. This process will eventually mint a uniquely asset (NFT) that can be traced back to the creator. Overall, we hope to move from a world where creators need to depend on platforms to earn income, to one where they can create wealth on their own or with the community. Two of the most notable changes Web3 will bring to the creator economy are:

1. Changed the benefit distribution mechanism

   The blockchain network itself is just a "gallery". The creator owns and retains the copyright, and can directly upload the work to the public chain to complete the commercialization, and there is no middleman to share the profits. Creators can use NFTs to create a variety of ways to pay and interact with fans.

2. Changed the traditional trust mechanism

   In the era of web2, we rely on intellectual property law, a blunt tool, to protect creators and their copyrights. In web3, we hope to do so based on smart contracts. Digital assets have better rights protection from creation to consumption, creators will obtain reasonable distribution of benefits and content ownership rights, while avoiding various copyright prosecutions and rampant piracy and other issues.

For example, creators can issue exclusive NFTs with "sense of limitation" and "scarcity". The NFT held by a creator, as a proof of joining a DAO, can be used to express and display oneself and confirm each other's unique identity "badge". Create value in the following scenarios:

• Win the NFT issued by your favorite band, you can get the opportunity to meet and interact with the performance backstage;

• Obtain NFT as a certificate for idol kryptonite to prove your economic contribution to idol;

• When creators buy their NFTs when they are in their infancy, they can sell them at a premium after they become popular in the future, and get content investment "bonus", etc.

We imagine the future, maybe two star-chasing enthusiasts can scan each other's QR code (or in any other form) to see each other's collection of NFTs before meeting to understand his interests and contributions. Or work in a shared community – creating content, consuming content, investing in content – ​​based on identity and content consumption concepts.

3.2 Can the new model solve the unfair allocation of interests and content rights of creators?

1. We believe that the introduction of Web3 can achieve a fairer distribution of power and more creative possibilities for platform (community) co-construction.

   1. Content ownership: The creator's work exists independently of the platform and is not subject to strong restrictions and restrictions on the platform.

   2. Community ownership: Creators and fans establish a direct communication relationship through new interactive methods. Fan groups can come from different platforms and are not distributed and distributed by the platform.

   3. Revenue Ownership: Allows creators to mint their own creator tokens. The creator revenue model is not determined by the platform, nor does it rely solely on advertisers or sponsors, and can be defined by their own diversity.

      Content will be stored in a public database. This gives creators and consumers complete flexibility in how data is used, and means that creators no longer have the same strong dependencies on a particular platform as they did in the Web2 era. For example, a decentralized incentive mechanism can reduce the cost of customer acquisition. Creators can increase user stickiness through the incentive method of issuing social tokens to loyal fans, and even allocate a part of the income rights of copyright to the community to promote the community co-creation model. Market transparency can give creators the ability to regulate the market, allowing them to truly transition from a platform-driven copyright monetization model to a self-dominated monetization model. Works created in the future may also become social portals and exhibit multi-functional attributes at different stages of the life cycle.

2. It helps to rebalance the risks and benefits of the creators economy market. “The lower the concentration of wealth, the less risk for potential competitors to poach top creators and threaten the entire business.”

   1. Content creators no longer need to have millions of fans or depend on the traffic protection of big platforms to make a living, and have more opportunities to survive on the funding of a few passionate people. Fans who are passionate about a creator's work will be willing to pay more for such authoritative work, allowing creators to better capture fans' willingness to pay. For example, the booming music NFT market demonstrates this effect. On streaming platforms, a piece of streaming music contributes the same amount of revenue every time it is played (on Spotify, each song is played by a paid account generates $0.004 in royalties), no matter how much fans love the singer.

   2. The platform does not need to spend much to manage medium and long tail content (illegal and gray-produced content) or incubate and support medium and long tail authors, and the content ecology of each community will be responsible for itself.

3.3 Can Web3 bring new creators and new creative content?

We can see that in Web3, the boundaries between fans and creators are blurring, and the nature of creators has changed significantly. Various developers and fans can be involved in the business of content creation, and are able to do more extensions based on content (such as IP re-creation, content investment and circulation, etc.). While expanding the value of existing works, it also brings more profit sharing to creators and consumers through more commercial gameplay.

Imagine that the curve of the secondary growth of creators is based on the radiation of active followers of existing channels. Take YouTube as an example:

• Full-time creators (~2M+)

YouTube: Out of 31 million channels on YouTube, about 1 million creators have more than 10,000 subscribers

Instagram: Of the 1 billion accounts on Instagram, about 500,000 have over 100,000 followers and are considered active influencers

Twitch: Of the 3 million streamers on Twitch, about 300,000 have partner or affiliate status

Others: Including musicians, podcasters, writers, illustrators and other full-time creators totaling about 200,000

• Amateur creators (~46.7M+)

YouTube: Of the 31 million channels on YouTube, about 12 million have 1-10k subscribers

Instagram: Of the 1 billion accounts on Instagram, about 30 million have 50-100,000 followers

Twitch: Of the 3 million streamers on Twitch, about 2.7 million are not in a partner or affiliate status

Other: Includes musicians, podcasters, writers, illustrators, estimated to be around 2 million in total

From the above model, we can reasonably expect that in the Web3 era:

1. Existing creators can co-create with their fans to add new content;

2. Content consumers can be included in the closed loop of production and creation and become new content creators;

3. The content cycle model of creation can be enriched: content is not only consumed, but also invested.

As long as each high-quality creator radiates 10 influential fans to create collaboratively, the new creators and content will grow exponentially. This can adjust the incentive mechanism of authors and fans by introducing Tokens. One example is Shibuya, a "Web3 video platform that allows users to participate, fund, vote on results, and become owners of long-form content." The idea is that fans can buy NFTs called Producer Passes and use those NFT passes to vote on decisions about the plot and characters of animated episodes. By doing so, fans can earn a $WRAB token that represents proportional ownership of a series of NFTs.

The latest issue of The Quibbler How Web3 Impacts Creators examines the impact of Web3 on creators by comparing the different ways of getting traffic in Web 2.0 and Web 3.0. To quote a paragraph:

"The main income of creators is no longer advertising and platform subsidies, but the "money" mentioned above. This "money" is created by the creator and used to motivate the dissemination and will keep a part of it, but this "money" is not similar to the legal currency we use every day, but more like a stock: if you do more for the creator Things, such as sharing his works, making effective suggestions, etc., can get this "stock". As the creator's works become more and more popular, the probability of becoming a successful project in the future will gradually increase. If you want to More and more people will get this "stock", and the price of this "stock" will also rise, creating a more cohesive fan community in this way. Under this logic, how "stocks" operate becomes a crucial part, and thus a vertical field such as Token Economics was born. The goal is to design a system that allows "stocks" to operate healthily, which is also an evaluation of a project reliability is the most important factor. "

To sum up, the new features that Web2→Web3 brings to the creator economy:

1. New creator groups:

   1. Decentralize power to individuals rather than platforms. That is to weaken the intermediary, or even go to the intermediary;

   2. Not limited to the size of productivity, everyone has the opportunity to win corresponding benefits and attention through the dedication of interests and skills.

2. New creative content:

   1. New creators bring new content;

   2. Added creative gameplay such as digital products and virtual services.

3. Optimizing the business model of the creator economy: Based on the development of smart contracts and encryption technologies such as Defi, creators

   1. There are more direct and diversified realization methods;

   2. Create more interesting and diverse content distribution methods.

4 Various controversies about web3 creators economy

From the perspective of historical events, a large number of SocialFi projects in 2017 were short-lived (ONO, QunQun, GSC, YeeCall, NRC, SwagChain, Huoxin, and TTC Protocol were launched successively). However, due to problems such as the early encryption market, the limited number of participating users, and the limitations of the ecological model, most projects have now disappeared. In 2020, the liquidity mining model has gradually been built into a variety of ecosystems. With the blessing of DeFi, a number of mainstream SocialFi concept projects have emerged, such as Whale, Chilliz, RALLY, Fyooz, Zora and other projects.

We need to think dialectically, is the creator economy market based on web3 just a flash in the pan or a real outlet? And when and what fulfillment of the conditions will be the precursor to the outbreak?

The experience of the exponential growth wave of web2 Internet and mobile terminals data shows that once the user base of the new technology reaches 1 billion, the gravity of mass market applications will begin to emerge explosive growth.

By comparison, Ethereum now has only 180 million addresses. Taking this as a proxy for the popularity of Web 3, at the current growth rate, it will take another 5 years to reach 1 billion users.

From this, we believe that the creator ecology of web3 failed to accumulate enough non-financial NFT data and behaviors and information on the chain to activate the network effect, so it did not reach the key node of the socialfi outbreak.

What are the obstacles to the realization of the combined application of Web3 and social? Will it bring new problems? For example, the ownership of content created under the legal category is not fully developed, and the trade-off between decentralization and centralized platforms are worthy of our vigilance.

At present, SocialFi is in the early stage of development. Most of the ecological participants are mainly based on social tokens (Social Token) for concept divergence and technical update. There are intersections with other concepts. Analysis around the development of creator economy:

From the perspectives of original content and IP creation, content storage and distribution technology construction, community communication and audience interaction, and business realization, we are more optimistic about tool-type products in vertical industry for users migrating from web2 to web3 , such as companies that support creation or monetization. For example, starting a paid blogging business requires signing up for Substack, writing with Google Docs, making (beautiful) graphics with Figma, registering a collection account with Stripe Atlas, setting up a bank account with Mercury, recording and editing podcasts on Descript, Post on Anchor and promote it on Twitter. Together, these companies focus on helping creators create, grow, manage and monetize their audiences. This is very important, and the necessary tool for individual creators to enter the business closed loop lies in their ability to build user relationships and distribute content, and earn revenue along the way.

CONCLUSION

In the golden decade of the mobile internet, we lived in a time when ownership was concentrated in a few centralized technology platforms that owned data, end-user relationships, and the means to distribute and monetize content. While content creation has exploded during this period, it has also led to the overwhelming majority of creators' reliance on centralized platforms, the dilemma of the information cocoon, and the burnout of innovative creation.

The root cause of inequality in the creator field is the excessive control that platforms exert over creators and their works through ownership of production methods and content distribution. The most direct way to challenge this control is to change who owns the means of production. Fortunately, we're seeing the emergence of web3 that may shift the balance of power in favor of creators.

The creator ecology of Web3 has begun to take shape, whether it is relying on the blockchain, the underlying economic system of NFT, or the self-built currency system within the platform. Creators can use ecological tools to complete content production, and realize revenue realization through platforms, trading markets, communities and other channels. However, which innovations can truly provide value to creators requires a long search and trial and error. We believe that web3 has the potential to bring incredible opportunities to everyone who contributes and creates on the Internet: this is the golden age of true content creation we've been waiting for. Quoting the speech of the founder of the IPFS protocol at the DLD International Conference,

"Web 3.0 will be (implemented) in the next few years, if you want to set a time, 5 or 10 years, but now the Web 3.0 movement has begun. “

Works Cited

https://li.substack.com/p/the-web3-renaissance-a-golden-age?s=r https://www.hongruimy.com/a/54124 https://news.sina.com.tw/article/20211116/40574954.html https://mirror.xyz/justinemoore.eth/nn6BBrdywYLEKMqiSdDH2Qzq6USTZPsQBzIiQeFLUpc https://mirror.xyz/bitwhalecapital.eth/q97NEE-_Wb3J2w99X7MRCgZKXpFIt1wO9BZIyJHxsR8 https://mirror.xyz/0xyuwei.eth/sQWucMVt6h3xJg3rjhKL0SqJvb_ekx2bxqA6tpAiVFk https://www.zvstus.com/article/news/1/75d87ffffe8325ceff242fbb55b20000.html https://www.zvstus.com/article/news/1/75d87ffffe808dc014919b1e2bba0000.html https://stratechery.com/aggregation-theory/ https://future.a16z.com/creator-economy-levels/ https://geekplux.com/newsletters/7 https://www.36kr.com/p/1499719964048257 https://m.bimama.com/news/9986.html https://mirror.xyz/bitwhalecapital.eth/q97NEE-_Wb3J2w99X7MRCgZKXpFIt1wO9BZIyJHxsR8 https://kk.org/thetechnium/1000-true-fans/ https://www.tubics.com/blog/number-of-youtube-channels http://jiangngyjf.com/火币下载官网/832.html https://www.armthecreators.com/mapping-the-creator-economy/ https://twitter.com/ljin18/status/1408103658097623049

#1 Zero-Knowledge Application

ZK is applicable in recent years. The two main thesis of ZK is rollup which improves computation efficiency and privacy. For the private thesis, it is intuitive since ZK shares no knowledge with the verifier except the statement itself. The rollup thesis heavily relies on two characteristics of ZK: succinct and recursion. Succinct characteristic helps verifiers save lots of computation resources instead of rerunning the whole program. Recursion characteristic helps to save storage space. With recursion, the blockchain can keep a fixed size. This is also beneficial for decentralization since the tiny blockchain node does not require high-end hardware.

The ZKRU(ZK Rollup) offers higher TPS and lower fees. This sounds familiar? Back to 1-2 years ago, we see lots of chains with higher TPS and lower fees. They call themselves “Ethereum Killers”. Most of them died and survivors find their own directions. Some focus on social applications and some focus on GameFi. Thus chains with higher TPS and lower fees are not competitive today. What about “Ethereum Killers” with a complete ecosystem？ Moonbeam is one example. It launched with first-tier DeFi infrastructure last year. Its TVL decrease till today.

Thus we are more excited to see app-chains, chains with featured apps. Both Cosmos and Polkadot are heading in this direction. For Ethereum Layer2, dYdX would be a good example of app-chains. Here is the TVL graph for dYdX.

Another main thesis for ZK is privacy. The total market cap of privacy sector is around $10B, around 0.45% of the total crypto market. The daily trading volume is around $1B. However, Rollup is more promising than privacy. Privacy does not make sense, because the blockchain is designed to be transparent. The privacy culture is somewhere against the transparent spirit. Also, privacy may have compliance problems. In the Web2 era, we do not see the prosperity of privacy apps. In the same category, the top product does not heavily focus on privacy, although more and more institutions improve their privacy protections. Privacy does have tradeoff. Most of the time is availability, which is the key to users.

#2 SocialFi is On The Way

In SocialFi, things haven't really started yet. Personal token offerings are also likely to converge to a unified standard, which means social networks will have to provide value to users in other ways than just helping creators make their own initial public offerings, and those values will add value to the platform.

Personal tokens may have the greatest potential for percentage growth, but they are also the riskiest in terms of investment. They appreciate in value based on the accomplishments of the individual creator, so they can be asymmetrically lucrative for early investors. Still, the accumulation of total value is limited. It is difficult for individual influencers to reach tens of billions of dollars because they are limited by their personal brands.

What a group can accomplish is larger in scale than an individual, and therefore has correspondingly greater potential for growth. Unlike ICOs, which are widely criticized for issuing coins out of air, community tokens are issued based on certain value underpinning either the profitability, popularity, popularity or reputation of their creators, and the open nature of crypto-economic primitives can facilitate the formation of a fan-driven value discovery market. This value, native to the Internet community, is easier to capture than physical assets on the chain. Until a real-world asset uplink solution is perfected, community tokens may become one of the most promising incremental markets to the real world.

Tokens with liquidity or other financial attributes are more likely to succeed than those that do not explicitly provide revenue to token holders. All three social token categories have the potential to be financially successful as social tokens continue to grow. For the earliest users, there is likely to be a larger percentage return at the individual or community token level, while distribution and aggregation platforms will yield higher returns. Finally, incubators and a number of other businesses serving the growing social token trend will create significant value. The transition from Web 2.0 to Web 3.0 becomes particularly important, whether it is better compatibility with user habits, user experience, content richness, learning costs, and regulatory exploration. Middleware like Mask Network is undoubtedly able to capture some value, and middleware may also bring bright performance in this transition process.

#3 Does the creator economy necessarily need a better token incentive model?

SocialFi, as the name suggests, combines the concepts of content creation with token mechanism. But creation and mining are two completely different directions, one is heavy and the other is heavy. The so-called 'Write to Earn' is nothing new at the present. Using a money-making mechanism to incentivize junk data creation, which may largely damages the user experience. Though benefiting growth in the short term, it will harm long-term development interests. This has been verified in the web2 era (i.e. Qutoutiao). In addition, compared with GameFi’s clear rules and simple purpose of making money, “content mining” is more difficult to manage because it involves many problems such as plagiarism and grouping mutual comments and likes. Then it is more difficult to build a benign economic environment. Under the threat of the "wool army", it is difficult to achieve a long-term profit-making.

As the head of the Bluesky project mentioned, content monetization probably makes user behavior driven by monetary incentives and gradually their creation becomes unnatural. Once the financial attribute is overemphasized, SocialFi will often go into a death cycle. The financial attribute is so obvious that a large number of invalid social content increases, and further the phenomenon of bad money driving out good money will strengthen. This monopoly will continue to strengthen under the blessing of “DeFi attributes”, which will make the project unsustainable. Ideally, money should be a facilitator, not a driver of interaction.

Regardless of whether the token incentive models such as Steemit have been falsified, we can’t help thinking: Does the creator economy necessarily need a better token incentive model? If the essence of SocialFi is still based on the value precipitation and benign circulation of content, will the introduction of Defi help the sustainable development of the content community? If we urgently need a long-term stable and flexible token incentive model in the future, how can the real "Data to Earn" be realized? Perhaps from the common failure cases of a generation of SocialFi, we can make it clear that the real "Data to Earn" must be based on valuable content communities, and the introduction of the Defi mechanism should be icing on the cake rather than distracting. We guess that the social application of traditional Internet web2 will be transformed/integrated through web3, and the advantage of SocialFi will be more obvious.

Weekly Recap

• Riot Blockchain Bitcoin Mined Rises to 511 in March

• NFT Market Rebounds After Weak March as Q1 Trading Tops $12 Billion

• Terra wallet Leap raises $3.2 million in a private token sale

• Lightning Labs Raises $70M to Bring Stablecoins to Bitcoin

• MicroStrategy buys an additional $190 million worth of bitcoin

• Announcing Footium’s $3.35m Seed Round

• Monetized Memes: Dank Bank Raises $4.2M

• Twitch co-founder's NFT startup nets $35 million in seed funding

• Composable Finance Raises $32 Million in Series A

• Nearly $7M of Hacked Ronin Funds Sent to Privacy Mixer Tornado Cash

• Inverse Finance got flipped for ~$15M

Indicator Tracking

MVRV

Crypto Fear & Greed Index

Data of NFT Market

Protocol Total Revenue

Opensea is under threat?

In recent news, you may often see such news, "XX platform trading volume exceeds Opensea...", "Opensea's status is under threat...".

As mentioned below, Opensea has always been threatened or challenged by many competitors.

The news might not be the truth...

LooksRare's recent high trading volume is due to the fact that the platform is engaged in trading mining. However, after digging into some data, we find that the actual situation might not be so ideal. As shown in the following two figures, in terms of user volume, LooksRare and Opensea have almost a 10-fold gap.

In terms of trading volume, most of the users who use LooksRare trade by high-value NFTs. Therefore, in terms of trading volume , there is also a difference of more than 10 times.

Recent frequent transaction mining is the main reason for LooksRare’s exploding trading volume. In order to minimize mining costs, all participants of trading mining choose NFT projects with zero copyright royalty. Removing the trading volume of those parts, the remain is shown in the figure below. Other platforms are still far from trading volume of Opensea.

Through the above analysis, it is not difficult to conclude that Opensea is in a dominant position of NFT trading platforms. As shown below, Opensea occupies more than 90% of the NFT trading market. Since the current NFT market is still in an early stage and the following chart data may be incomplete, the statistical results are still very useful for reference.

In fact, not only monopolizing in the trading market, in the multichain chain Opensea is still the boss. As shown below, the market value of NFTs on Ethereum accounts for more than 90% that of the overall.

Although Opensea owns an absolute monopoly in the NFT market, it is certain that the market is too large to be dominated forever. Its competitors are still worthy of attention. Maybe when the next opportunity comes, Opensea's challenger will born. The current NFT trading platforms with high attention are shown as below.

Where are Opensea's challengers or collaborators? When do they appear?

Looking back at the history of Cryptocurrency exchanges, we will find some clues. In the figure below, the lower, middle, and upper layers respectively state the establishment, closure or bankruptcy of representative exchanges in different periods, as well as Chinese policies affecting the industry.

From the timeline, the development history of traditional cryptocurrency exchanges can be divided into three periods.

The first period - the age of Bitcoin. After launched in 2009, Bitcoin gradually attracted the attention of the geek, and the transaction demand gradually increased. In 2010 and 2011, exchanges such as Mt.Gox and BTCC (Bitcoin China) were established successively to meet the growing demand for trading. However, altcoins such as Litecoin, Dogecoin, and colored coins also appeared in that period, most of which were Fork of Bitcoin. In the mid-to-late 2013, the market gradually reached a climax. China became the market with the largest Bitcoin trading volume, and BTCC surpassed exchanges such as Mt.Gox to become the largest exchange in the world. That caught the attention of the Central Bank of China, which issued the "Notice on Preventing Bitcoin Risks" on December 3, 2013, opening the first bear market in the Bitcoin market. It is worth noting that cryptocurrency exchanges such as Bitfinex, Huobi, OK, and Pixiu Exchange (later renamed Yunbi) were established during that period. In 2014, Mt.Gox declared bankruptcy after losing ten thousands of bitcoins due to security issues. BTCC has ranked first in the world in terms of bitcoin trading volume for the next three years.

The second period - the ICO era. After two years of bear market, Ethereum went online in 2015. Smart contracts had realized for the first time and issuing ERC20 Tokens become very simple, The era of ICO ushers. A large number of altcoins appeared at that time, and Yunbi was the first to list ETH and other altcoins among many exchanges. By seizing the opportunity of the altcoin outbreak, Yunbi became the largest exchange in the world at that time. In this process, it is worth mentioning that BTCC, due to its focus on Bitcoin trading, missed the golden time period for the outbreak of altcoins, and then lost the "throne" of the world's largest exchange. At that time, although exchanges such as Huobi and OK were not as radical as Yunbi, they changed thoughts in time and maintained their status as the top exchanges. The market culminated in 2017, when China remained the largest market for cryptocurrency trading, and Binance went live on July 14 of that year. On September 4, 2017, seven ministries including the Central Bank of China banned ICOs and characterized them as illegal fundraising. In the following month, Yunbi and BTCC announced their closures. The cryptocurrency market rallied sharply in the three months that followed, reaching an all-time high in December before kicking off a two-year bear market. Fcoin is a small episode in that period. It was announced on May 21, 2018. Through transaction mining, it took only half a month to reach a market value of 60 billion, becoming the world's largest exchange in terms of trading volume. However, it only took 100 days for transaction mining until Fcoin announced its closure on February 18, 2020.

The third period - the DeFi era. In 2020, the market began to recover after a two-year hiatus and a “March 12th” crash. Binance, Huobi, OK and other exchanges moved their headquarters overseas to continue their trading business after the central bank stopped ICOs in 2017. Among them, Binance was the most aggressive, it only took two years to become the world's largest centralized exchange (CEX). And it has maintained its monopoly until now.

Since 2021 the market gradually gets hot, and DeFi has become the fuse of this bull market. Among them, Compound started the DeFi Summer through liquidity mining. Uniswap has also become the world's largest decentralized exchange (DEX), but looking back on the history of Uniswap, its rise is not directly due to "decentralization". After 2018, most of the centralized exchanges have high listing fees. Many small and medium-sized projects cannot afford this part of the cost, but their trading needs still exist. Uniswap has greatly lowered the threshold for token listing and trading through the AMM algorithm with no listing fees, thus capturing the trading demand of a large number of long-tail assets and gradually growing into the world's largest decentralized exchange. Since then, various types of DEXs such as Curve, 1inch, and dYdX have risen. The daily trading volume of DEX, as shown in the chart above, has reached $3.7 billion. Since the marginal cost of DEX's growth is almost zero when the performance of the public chain allows it, it is foreseeable that with the resolution of the performance of the public chain, DEX and even the entire DeFi will gradually replace CeFi.

The following table briefly summarizes the key conditions or reasons why each representative exchange can become a head.

After reviewing the history of traditional cryptocurrency exchanges, it is easy to see that the real giants are usually born in the midst of change, and the specific reasons for this can be divided into two main categories.

I. The fall of the previous generation of giants

There are both internal and external reasons for the fall of giants, such as Mt.Gox, which went bankrupt due to its own security issues. Although BTCC did not become a global exchange because of Mt.Gox's bankruptcy, its bankruptcy also left BTCC with a very strong rival. And like Yunbi and BTCC belong to external reasons to close, and their closure gives the opportunity and space for exchanges like Binance and Huobi to rise.

II. The emergence of new opportunities or tracks

Throughout the history of traditional cryptocurrency exchanges, the rise of each group of exchanges has been due to the emergence of new trading needs or tracks. To summarize, Mt.Gox and BTCC seized the demand for Bitcoin trading, Cloudcoin seized the opportunity of the explosion of ethereum and cryptocurrency, and Binance and Huobi seized the growing demand for trading after the closure of Cloudcoin and BTCC. The rise of Uniswap is due to the advancement of smart contracts and other technologies and the improvement of AMM algorithm, which has captured the demand for coin and transaction of long-tail assets.

Returning to NFT, we have to ask if Opensea can stay on top of the NFT market forever? And where are its challengers, or partners?

We can try to solve several of the above problems from the Cryptocurrency exchange development experience. I think we first need to understand which points seem important, but actually not the points worthy of attention in the process of finding new giants.

First, decentralization. The word decentralization is one of the most frequently featured words in the Crypto industry, and players are using decentralization as a key indicator of their projects. But it is also the reason why decentralization became the standard for various projects, especially after the rise of DeFi, where the feasibility of smart contract development was fully validated. As a result of this, the vast majority of NFT exchanges born after this period are decentralized. On the other hand, decentralization is an influence that is deep, and decentralization is often not directly responsible for whether a project can truly explode. For example, before the outbreak of Uniswap, there have been several DEX attempts, most of which ended in failure, because in terms of user experience, DEX and CEX at that time did not have a fighting chance, and even now, there is still a big gap between the user experience of DEX and CEX. Therefore decentralization should not be a point to focus on in the process of finding a new giant.

Second, micro-innovation. There are some NFT exchanges claiming to have better rates and more user-friendly features than Opensea, hoping to attract more users this way. But the results have been very obvious, there is no NFT exchange through micro-innovation to shake Opensea's position. Looking back at the history of FT exchanges, it is easy to see that during the "peaceful" period, the position of the giants was very difficult to shake. The essence of the reason is that micro-innovations are usually small improvements in user experience or low-barrier improvements, but the user habits themselves are very difficult to change, and it is difficult for most users to switch to other platforms because of small changes.

Third, short-term high incentive. In the chart at the beginning of this article, it is easy to find that while LooksRare has achieved a bright performance in terms of trading volume through liquidity mining, it is easy to see from other data that there is a huge gap between its real user base and Opensea. Looking back at Fcoin's history, trading mining has only allowed its trading volume to surge in the short term. The reason why short-term high incentives do not create giants is that high incentives attract mostly woolly parties, not the real target users of the platform. So the platform still needs to consider the retention of users, how many real users remain after the incentive is the most important thing to consider. And in the early stages of the platform, short-term high incentives will instead pull up user expectations in advance, making the platform into a kind of Ponzi bubble, when this bubble burst, but will cause permanent damage to the platform.

Of course, it should be emphasized that high short-term incentives are not a negation of liquidity mining or transaction mining. On the contrary, appropriate "mining" incentives at different stages can be beneficial to a project's development, such as Compound's liquidity mining, which has led it to take the top spot in the DeFi lending protocol.

So what do we need to look for when looking for a challenger for Opensea?

It is easy to find out from the above analysis that unless there is a major opportunity or change, it is extremely difficult to challenge the status of the giants, and the pattern of the NFT market will probably follow the same rule, if the NFT market is stable and Opensea does not close down or fall due to internal and external factors, it will be very difficult for new giants to challenge Opensea's status. However, as mentioned at the beginning, the NFT market is still very small, and NFT has great potential as an important crypto medium, so there are still a lot of opportunities and changes in the direction of NFT in the future, and Opensea will probably not be the only one forever, after all, there is a common problem that it is hard to turn around when the boat is too big for the giants.

Therefore, if we are looking for a challenger to Opensea, we should look for new opportunities and changes. There are currently the following opportunities:

GameFi: Although the market experienced a wave of "GameFi" bubble at the end of 2021, in fact, most of the GameFi in 2021 are DeFi projects or funding plates in the guise of games, and cannot be called GameFi in the real sense. I personally believe that the core of GameFi is still Game, and gameplay is still the goal of GameFi, while Finance is more of a transformation of Game's original game mechanics and financial system. It will take time for projects with strong gameplay and Crypto attributes to emerge, so I believe there will be more and more GameFi projects in the real sense in the future.

It is worth noting that most GameFi projects come with their own trading market, and such trading market is usually customized according to the game itself, so it is difficult for third-party projects to get a piece of the cake. However, as the number of such projects increases, and based on the combinable nature of the blockchain,asset trading exchange between games will likely become a new demand, future projects for this track are worthy of attention.

Multi-chain ecology: Eth 2.0 has been slow to land resulting in Eth not meeting the growing demand, giving other public chains room for significant growth in 2021. With the popularity of blockchain, the future will definitely be a state of multiple chains co-existing. Although the majority of valuable NFTs are currently concentrated on Eth, the volume of NFTs on other public chains will inevitably grow as their ecology grows. Along with the prosperity of multi-chain ecosystem, the cross-chain demand for NFT will also grow accordingly. Therefore, the NTF market of other public chains and the demand for cross-chain transactions are worth paying attention to in the future. For example, Mintbase on Near, Metaplex on Solana, etc. With the prosperity of multi-chain ecosystem, these platforms will have the opportunity to challenge Opensea.

In addition to the above two areas of concern, as Web3 continues to evolve, new opportunities or changes are sure to emerge in the future, so we need to continue to follow up and discover Opensea's challengers.

Opensea's collaborators or followers are still worth watching

All of the above has been about what it takes to challenge Opensea to become the next generation of giants, and what opportunities to watch for. But as mentioned at the beginning of this article, the NFT market is still very much in its early stages, and while there are huge gains to be made by challenging Opensea to become a new giant, it will also be much more difficult. In the history of traditional cryptocurrency exchanges, Coinbase, Huobi, OK, Bitfinex, and others have not become the top one, but they have also made significant profits as the industry continues to grow.

Opensea is an universal NFT exchange that does a great job in the breadth of project types, supporting Art, PFP, Music and other types of NFT, but it may not be able to take care of some of the deeper features, such as Genie, a project that enables bulk buying and selling of NFT as well as pending orders. Similarly, the current NFT rarity property is still underutilized, for NFT rarity pricing and trading may also be a good opportunity.

In addition to complementing Opensea's functionality, there are still large gaps in the NFT derivatives, lending and other markets, and there are still huge opportunities in this part of the market, for which Opensea can act as a source of information, providing them with information on floor prices, pending orders, etc.

In conclusion, with the development of the NFT circuit, there are still many opportunities waiting to be explored in the future, and both Opensea's challengers and collaborators will have significant earnings in the future, as long as they can grow with the industry.