TL; DR

1. Vertical NFT trading marketplace is emerging, eating Opensea’s share

2. Game NFT trading market is expected to be one of the first successful verticalized platforms

3. The current game NFT trading market has already taken shape

4. Game NFT trading market will occupy a more critical position in the ecosystem

The NFT market in the past year has been crazy. It seems that since a certain moment, celebrities have purchased NFT, changing their social media avatars such as Twitter’s profile picture to these cartoon animals, coupled with the hype and wealth effect of the bull market most people also began to understand NFT from this time and participate in it. Many companies also use NFT as one of their marketing tools, such as Adidas, Li Ning, McDonald’s, Louis Vuitton, etc..

NFT has become a cultural phenomenon. People buy NFTs (especially avatar PFP NFTs), join a community that matches their personality, and connect with like-minded people through online and offline gatherings. nft becomes the key to a community and fills a psychological need to belong. Stimulated by celebrity and wealth effects, NFT starts to look like luxury and investment items.

The numbers speak for themselves: according to Nonfungible.com, the size of NFT transactions in 2021 is $17 billion, compared with just $82 million in 2020, an increase of more than 200 times. More than 2.5 million addresses hold or have traded NFTs in 2021, compared to 89,000 in 2020. The vast majority of these transactions take place on Opensea, the universal NFT trading marketplace, which at one point held over 98% of the market. With a 2.5% transaction fee, its highest monthly revenue has exceeded $350 million.

However, as the number of NFT users skyrockets, different demands for NFT will also arise and spawn further development of more types and functions of NFT. The NFT trading market that only serves a general purpose will gradually be replaced by some specialized marketplace, provided that the market capitalization of the segment expands. This is not new, we have seen similar things happen in the world of web2, such as eBay’s market share being eaten up by several specialized marketplaces with core categories.

The next cycle is the time for the splitting of the General NFT Marketplace represented by Opensea. We will see more verticalized trading marketplaces start to grab Opensea’s share. In my opinion, thanks to the real utility, the Game NFT Trading Marketplace is expected to be the first batch of successful verticalized platforms.

Time for the breakdown of generic NFT marketplace

The blockchain ecosystem now is like the Internet in 90s. When eBay went public in 1998, it had a GMV of just $105 million, but it already had the largest number of users of any e-commerce site in the world. In the United States, where less than half of adults had ever used the Internet and even fewer used e-commerce platforms, it was hard to imagine a platform surviving by selling just one category of items. But by 2013, eBay’s GMV had reached $83 billion, and almost everyone had learned to shop using online stores.

eBay remains the online store for everything, a place where you can buy clothing, books, electronics, furniture, real estate, hotels and even all sorts of weird and wonderful items. Despite its former dominance of the industry, its GMV growth has slowed dramatically over the past few years. One of the most important reasons is that more and more verticalized platforms are slowly eroding eBay’s market share and disrupting areas where eBay was dominant.

Justine and Olivia Moore describe eBay’s splitting-up trend in 2018. What was once the “to go” place for all kinds of needs, has gradually turned into more specialized platforms. Among these specialized platforms, Etsy, 1stdibs, Airbnb, Chegg, and Zillow have a total market capitalization of more than $130 billion, several times the current $30 billion valuation of eBay. What‘s the take here? In the early days of e-commerce, not so many users were in the space and eBay was already well positioned to meet the demand. With the influx of new users and the expansion of demand for specific categories, verticalized marketplaces can carry this part of the user base and thus create a bigger pie.

Much like eBay, Opensea is a general-purpose trading marketplace that dominates the NFT space. It was established in the last bull market and became the market leader in this round, having held 98% of the market share. If you look back in history you can see that it took almost a decade for verticalized platforms to overtake eBay, but the pace of business change within Web3 is much faster and we expect to see a much faster splitting for NFT General Marketplaces like Open Sea in the Crypto market for the following reasons.

1. Opensea is not an exclusive content provider, and the merchandise recommendation mechanism is falling behind

First of all, all NFT assets listed on Opensea are not exclusive to the platform. Simply put, since all NFT assets are on the chain, there are no NFT assets that are exclusive to Opensea and not available on other platforms. Other platforms can simply read the on-chain contract to display all NFT series.

In addition, Opensea does not have a perfect mechanism for discovering and recommending NFTs. Currently, it tends to take the form of “recommendations after the fact”, such as displaying transaction rankings and recent hot projects. It is difficult for creators to rely on Opensea’s recommendations to increase their sales, and users are not informed of interesting and suitable projects from the recommendation mechanism, but only of what projects are hot. The reason behind this is that it is difficult to make recommendation judgments for pure investment financial products, and only content-rich games and music NFTs are more suitable for the recommendation mechanism.

1. Less friction for user migration in Web3

Since all assets are on the chain, it is easy for trading platforms to read on-chain data and list NFT series. For NFTs, the core of liquidity comes from the seller’s pending orders, as many users search for low priced NFTs through aggregation platforms such as Gem. That is to say, the core to capturing Opensea’s liquidity is incentivizing sellers to list their orders. Currently, the cost for sellers to migrate to other trading platforms is to open an account and authorize the NFT gas fee. Compared to Web2 platform, which requires a lot of information, qualification audit and even deposit payment, Web3 has very little friction for migration. For buyers, connecting their wallets will allow them to buy on different platforms.

• Opensea’s liquidity barriers are not insurmountable

The lack of user incentives in Opensea has led to the gradual loss of liquidity business barriers established earlier. At the beginning of this year, OpenDAO, LooksRare and other projects emerged to launch vampire attacks on Opensea, using platform tokens to reward Opensea loyal users. LooksRare once surpassed Opensea in transaction volume. The emerging NFT trading market X2Y2 is grabbing Opensea’s market share with fast functional iteration, better UI/UX experience and extremely low transaction rates (X2Y2: 0.5%, Opensea: 2.5%). In order to avoid the misleading of transaction volume (calculated by transaction volume, Opensea’s market share is less than 20%), we can also see that Opensea’s share has a downward trend from the proportion of active people.

In addition, unlike Defi, one NFT can be listed on multiple exchanges at the same time, which means that the liquidity of NFT is easier to be transfered and decentralized. Professional traders often list NFTs on multiple exchanges at the same time.

• Poor management of Opensea, the brand value has not opened a significant gap

The mismanagement of Opensea has been criticized by users for a long time. Its security is also constantly being questioned, and the platform’s reputation is constantly damaged by vicious incidents such as theft, fraud, and contract bugs. Opensea has a large number of fake and counterfeit NFT series, the platform takes a long time to accept complaints, and the rights and interests of developers and users cannot be guaranteed. In May of this year, its homepage incorrectly recommended a series of NFTs counterfeiting PXN, and the transaction volume had reached as high as 3,600 ETH before the delisting. There was also a bug in Opensea’s contract, which caused many boring ape NFTs to be sold at a low price, causing losses to collectors. In terms of safety and credibility, Opensea does not lead the competition too much, and has not yet built a brand moat.

Vertical ecology of NFT trading market

We have observed the NFT trading market track for a long time, and have also found direct competitors such as Rarible, LooksRare, X2Y2 with similar positioning to Opensea (some of them also have good transaction volume), but we believe that in the future, those who can make a bigger cake and surpass Opensea is not necessarily or likely not a direct competitor of Opensea, but a package of vertical NFT trading platforms focusing on a certain segment.

NFTs aren’t just JPEGs. In terms of format, NFT is divided into JPEG, MP3, MP4, SVG, iframe, array, matrix, etc. In terms of categories, NFTs are divided into collectibles (PFP), pure art, virtual worlds, games, music, sports, equity and finance.

Tasha Kim summarizes the verticalization of the NFT trading market as follows. In the main categories, we can already see that the vertical ecology has been initially established, such as games (Fractal, Lootex, DMarket), music (Catalog, Glass, Roya), art (SuperRare, Sloika, Foundation) Wait. Some platforms have already achieved good results, and emerging platforms have also received a lot of financing.

So what are the motivations for users to migrate to vertical platforms rather than stay on generic platforms? Let’s go back and look at the reasons why eBay ended up lagging behind the vertical market under the vertical evolution path of the traditional Web2 platform:

1. Certification service: For some products, people have a strong demand for certification, reducing the risk of buying fake products. Items listed on eBay are not guaranteed to be genuine.

2. Quality control: eBay does not conduct quality control on the products on the platform, resulting in a large number of defective products and garbage flooding the platform, making it difficult to distinguish good from bad.

3. Price guidance: eBay does not classify the same kind of goods, and gives the lowest price reference, it is difficult for users to find a reasonable price in the tens of thousands of returned results.

4. Lack of community: eBay lacks a sense of intimate community, making it difficult to motivate users to repeat purchases and actively participate in both sides of the marketplace.

For specialized marketplaces to compete for Opensea’s market share, they also need to offer things that generic NFT marketplaces cannot, such as

1. Audit system to improve the quality of content: For subdivisions, it is necessary to appropriately increase the entry threshold, select high-quality projects for users, and reduce user losses.

2. Targeted design for subdivisions: the platform can optimize UI/UX for specific categories. For example, the art category can provide 3D immersive galleries, and for example, the music category can introduce player settings.

3. NFT pricing service: for some NFTs, such as equity, finance and games, they have the ability to generate interest and can be priced using the DCF model.

4. Building a community: NFTs targeting subdivisions are more likely to build a more cohesive community. For example, the game trading market guides players to exchange game experiences, and even facilitates the exchange of assets between different games.

The Rise of the gaming NFT Trading Market

What kind of platform might be the first winner before the upcoming explosion of the NFT verticalized platform? The gaming NFT trading marketplace is the most promising seed player.

Gaming NFT has always been the second largest NFT category in terms of transaction volume, except for collectibles. With the advent of the NFT bear market, trading figures of collectible NFT, where the hype value is greater than the actual utility, are likely to continue to decline. NFT is evolving towards a greater focus on intrinsic value. According to Nonfungible.com, in 2021, gaming NFT transactions reached $5.17 billion, and $5.68 billion plus virtual world NFT $510 million which can be attributed to the large category of games. Based on the 5% royalty, the profit generated by gaming NFTs is $284 million. According to Nansen’s estimation, by 2023, the total profit of the gaming industry will be about $200 billion, while the profit of the blockchain game can reach $5 billion, accounting for about 2.5% of the TAM (total addressable market).

Gaming NFTs are the most intuitive use case for NFTs. Gaming NFTs are nothing new. CryptoKitties was one of the first games to be deployed on Ethereum back in 2017. Although PFP NFT now occupies the main share, gaming NFTs have always been able to dismiss questions with practical utility when faced with hype.

For collectibles or artwork NFTs, the stories and collections behind them give them value. However, in addition to the value of telling storing and collection, gaming NFT also provides value of usability, and users can really participate and immerse in it. Usability is a sustainable development that expands the addressable market for NFTs.

Blue-chip PFP NFTs are also stepping into the narrative of gamification to provide them with more value support. The BAYC series launched the game brand Otherside, and BAYC holders can use NFT avatars in the game in the near future. In addition, series such as Cool Cat, Doodle, Pudgy Penguins, Azuki, etc. have plans to launch games.

While large game developers are more likely to establish an in-game NFT trading market, users might prefer to trade in the game rather than jump to other platforms to buy and sell. However, an open platform can also bring several advantages to games:

1. Game community: Platforms can provide a larger community than a game, on which can be seen gamers’ appreciation and rate of the game. The community leaderboard and achievement system make the platform a more immersive place than a single game.

2. Cross-selling opportunities: Platform-based data recommendations can also facilitate cross-selling of games and game assets. When different game assets are aggregated on one platform, with the interoperability of NFT, asset swapping across games and cross-game migration of assets can be achieved.

3. Asset pricing and comparison: Since Yield is the motivation driving users to play blockchain games in the short term, the open platform can make use of the rich attributes of game assets, and give price suggestions with reference to the prices of other interest-earning assets, which is convenient for users to compare.

4. Targeted improvement: The official market often has many disadvantages, such as restricted currency types, price caps, high rates, and no aggregate transactions and batch transactions. An open platform can make targeted improvements.

Even in the relatively closed ecosystem of Web2, there are dozens of third-party trading platforms built around CS:GO, such as CSGORoll, Skinchshier, CSmoney, SkinMonkey, DMarket, etc. In the Web3 world a trading market can cover multiple (theoretically unlimited) gaming NFT assets, the GMV of the game NFT trading market will be quite significant.

Gaming NFT trading marketplace ecological case

Eden Games: Gaming segment within a general NFT trading marketplace

Maigic Eden is a general NFT trading platform similar to Opensea, focusing on the Solana public chain. Eden Games is a one-stop platform launched by Magic Eden specifically for game developers and gamers.

Eden Games now has the following features:

1. Dedicated game listings: Each game introduction page contains a game trailer, and content showcase page displays the game’s social content and description, as well as the NFTs that game contains.

2. Content Center: The game content recommendation mechanism helps players quickly find the content they need.

3. Competition Channel: Regularly host game tournaments, invite community members to participate and offering rewards.

The platform provides developers with: NFT consulting, custom casting, promotion and marketing, user security and other support services.

Thinking: Magic Eden itself is the dominant NFT trading marketplace on the Solana chain (with higher trading volume in Solana than Opensea), the platform has 1.5 million daily active visitors and 10 million monthly active visitors. Eden Games is preparing to leverage the huge traffic that Magic Eden comes with to become a discovery layer and distribution platform for games and game NFTs. The giant itself has a natural traffic and liquidity advantage by coming down to be a game NFT trading marketplace.

Fractal: a verticalized game NFT trading marketplace

This platform was built by Justin Khan, co-founder of Twitch, and focuses on blockchain games and gaming NFT. It aims to create a more secure marketplace for trading NFT games, and provide marketing and distribution services for them.

Fractal’s value comes from:

1. High-quality game NFT Launchpad: Fractal adopts a strict vetting system and currently accepts only 5% of applicants, with over 20 projects in the pipeline of waitlist.

2. Fractal provides NFT-fi related services with game characteristics, such as lending, staking, fragmentation, etc.

3. Fractal will act as a management and discovery layer for the best games, empowering game developers to reach consumers.

Idea: Fractal itself does not develop games and is not backed by already established NFT giants (such as Magic Eden). Looking at Web2’s successful gaming platforms such as Steam, Epic and even TapTap, all have seed users brought in by the parent company’s own game bundles. Fractal’s desire to position itself as a management and discovery layer for games will require more resistance to overcome.

DMarket： Platform aggregating Web2 & Web3 gaming assets

DMarket aims to create a multi-billion dollar digital asset trading platform for game developers, players, anchors, and eSports clubs. Unusually, DMarket uses blockchain technology to access tradable game assets (not just NFT) such as skins in web2 games (e.g. CS:GO and Dota2) and web3 games (e.g. Decentraland).

Idea: In traditional games, the most profitable games are often the big DAU free-to-play games with a “skin economy” and billions of digital assets circulating in the secondary market every year. In fact, before 2016, there were platforms that traded game assets in bitcoin such as OPSkins, a third-party platform that uses Steam’s API to access other payment systems and bypasses many of the restrictions set by Steam (e.g., no more than $1,800 per weapon). These platforms contain a large number of traditional players and are an important entry point for converting web2 players to web3.

Looking Forward

After reaching a profit peak on August.6 last year ($17.5M in daily revenue), Axie Infinity is now earning less than $10K a day. The blockchain gaming narrative is shifting and the play-to-earn model is being questioned, and with Axie Infinity’s “failure” it’s even becoming an industry “consensus”.

But let’s also look at the bright side: Axie Infinity has total profits of $1.3 billion and its token $AXS FDV topped out at $43 billion. It’s also now at $3 billion after the market’s downfall. Without the cryptocurrency economy, Axie Infinity, which uses the Web2 development model, could never have achieved what it has today.

Despite the explosion of the NFT industry in the last two years, we are still in the early stages of the industry. According to Hootie Rashidifard’s research, data from June 2021 shows that only 13% of the US citizens have ever purchased cryptocurrency, a figure that is only 3% globally. The top-ranked Axie Infinity currently has about 300K DAUs, and that number only gets smaller after removing multi-wallet accounts. And Roblox, the highest DAU game on Web2, has 8.6M. This shows that there is still a lot of room in blockchain gaming.

NFT is the underlying element of the metaverse, the blockchain gaming, and the NFT trading marketplace is the cornerstone of the digital asset economic system. Focusing on games, the NFT trading marketplace is expected to be one of the first successful verticalized platforms in the future. But in addition to the basic trading function, we can see that the game NFT trading marketplace is expected to become more of a discovery layer in the game ecosystem. How to acquire users for Web3’s games has been a hotly debated topic.

Web2 game customer acquisition method and profit calculation is clear: advertising → user acquisition → user retention → compare LTV and CAC to calculate ROI. However, Web3 games are squeezed by regulatory compliance on the side of ad buying, low conversion rate on the side of user acquisition, and difficult to predict LTV on the side of profit, etc. It will encounter many challenges. Using the current web2 promotion method to push web3 games will encounter sky-high CAC, and it is difficult to recover the cost (unless free-to-play and blockchain is built in the bottom not to be discovered by users). The current mainstream promotion method and profit source of web3 is: community seed user accumulation → airdrop proliferation → Crypto traffic promotion → INO/IDO financing → NFT secondary transaction fee + token value (LTV).

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Let’s start by establishing terminologies that will be referenced throughout this article.

• Decentralized Identity (DID) or self-sovereign identity (SSI) is an open standard based framework that uses identifiers & verifiable credentials that are self-owned, independent and enable trusted data exchange.

• Credential / Attestation / Verifiable Credential (VC) / POAP / SBT is a piece of document in Web2 or on blockchain with details pointing at a qualification. These can be issued by an authority or self-issued.

• Issuers are entities, authorities or organizations issuing credentials, certifications, or qualifications.

• Verifiers are end-users who query credentials and conduct target marketing or engagement activities to the identity.

A quick example is “XYZ studio wants to airdrop their NFTs to all Uniswap V3 LPs”.

• Verifier is XYZ studio who will be engaging in targeted engagement activity i.e. airdrop.

• Credential is the Uniswap V3 NFT which is held only by Uniswap LPs.

• Issuers of the credential are Uniswap Labs.

• DID is the digital wallet participating in the Uniswap protocol.

The public wallet address is known to the verifier when they query all Uniswap V3 LP NFTs on the blockchain which is considered the “verifiable data registry”.

Now, we can focus on the article taking note of how much of the verifiable credential and identity stack exists on the internet / Web2 companies and whether web3 is even relevant.

Identities, VCs and Social Networks in Web2

Meta, Twitter, Instagram, Reddit, Quora, Weibo, TikTok are all social media platforms. They have coupled user identities, content and social networks in a clean pre-packaged platform which is easy to use and subsequently a great place to harvest user’s personal data such as their hobbies, activities, locations, interests etc.

The business model is simple — sell anonymized user data to advertisers who will use the information to conduct smarter campaigns. Meta & Google also enable an auction model enabling marketers to bid on ad slots.

This has been a highly profitable business strategy for platforms — top social media companies in the States made an estimated US$181.1B via ads. 81% and 97.9% of Google & Meta’s respective total 2021 revenues come from this channel.

When this volume of revenue is on stake, no company is incentivized to open source their identity database and make it more user-friendly. This is where Web3’ philosophy of decentralized, transparent, tamper-resistant and privacy preserving social solutions come into play.

Evolution on Web3 social infrastructure

Some main tenets of social infrastructure on blockchain are illustrated in the picture below. The data ownership of the utmost importance to end users who have full control over their digital identity.

Current state of social infrastructure in web3

The current on-chain social data market is divided into dStorage solutions, social graphs, credential issuers and a combination of issuers and social graphs.

The key challenge for the industry includes:

Lack of granularity of on-chain data

• on-chain data like wallet holdings (ERC20 & NFTs), transactions, dApp interactions, frequency of trading, etc. is the main data that can be collected.

• There is no access to personal data except for analyzing the type of NFTs bought by the wallet.

Lack of privacy-preserving ways to bring off-chain data on blockchain

• Bringing off-chain data on chains like Ceramic can expose the user data to public blockchain querying.

Lack of user retention on social networks like due to lack of applications who will continue to propagate the social graphs.

Role of ZKP in social infrastructure

Key challenge in bringing user data from social media networks like Meta or Twitter to blockchain is the lack of privacy. Even with encrypted data — storing on multiple anonymous nodes — is risky and prone to hacks or decryption of data.

ZK-based applications enable:

• Trustless verification of user data

• Privacy preserving of user data

With the use of ZK verification in DID systems, users can introduce more granular social data to the blockchain in form of ZK attestations or credentials which can be verified trustlessly without too many data leaks or central databases.

Sismo

ZK attestations by Sismo is an interesting experiment in this direction. Based on the user / wallet interactions, Sismo allows users to claim ZK attestations. Using Sismo’ SDKs, developers can now use the Sismo attestations to target a user demographic.

The alpha launch (unaudited at the moment) enables users to mint their ZK badges on Polygon. However, the attestations are of the wallet’s Ethereum activity. Picture below is an example of Ethereum Power Users ZK Badges. Each attestation/badge is in non-transferable SBT (ERC1155).

First Batch

First Batch brings off-chain social data from Discord, Twitter, Reddit etc; on-chain. They use Twitter’s OAuth to index user’s off-chain data which is run through their AI system. The AI will tag the user’s profile with attestations such as “coffee lover” and “sports fan” with further tags like “Nespresso” and “Lakers Fan”.

The tags are turned into ZK attestations on-chain that dApp developers can interact with at a smart contract level without revealing the true identity of the end user.

Trinsic ID

Trinsic’s flagship products include credential API for issuers, provider API for customers and wallet API for users & customers. To use Trinsic, end users must create a digital wallet and generate credentials in the wallet that are designed in the Trinsic Studio. Along with credentials, users must generate verification policies indicating several data points such as “user is over 21 years old”.

Provider APIs can access the VC and the wallet APIs to target their key user base and conduct on-chain engagements like airdrops.

Notebook Labs

Notebook enables users to set up a “notebook” with their personal data indicating they are human and other personal data like name, address, social security number (optional), country of residence etc. User notebook in its V1 is stored on an AWS server.

If a user wants to prove their personhood, they authenticate their wallet address and make a connection to their notebook. Client side generates a proof that they have a leaf in the merkle tree and sends the proof to the verification smart contract.

This application would be a great way to pre-approve KYC AML and integrate them easily into dApps in the future. Using ZK-based DIDs are great at preserving user privacy and allowing the user control to edit their data without storing the entire data on-chain.

Humannode

Human node is a sybil-resistant Layer 1 blockchain that uses proof of uniqueness and proof of existence as its base consensus layer. The blockchain is an EVM compatible substrate chain. Each node has equal voting rights and are blacklisted in case of malicious activity. According to the team, they have collected data of over 10,000 humans.

Human node team specializes in cryptobiometric authentication combination of cryptographically secure matching and liveness detection mechanisms to verify the uniqueness and existence of real human beings. They use ZKP to deliver proof of uniqueness and liveliness to the protocols.

Polygon ID

Polygon recently announced their polygon ID product and works similar to Sismo. They’re focusing on attestations for the wallet’s polygon chain activities and helping generate ZK proofs as the verification mechanism. The key product on user side is the Identity App as shown above and the ID client toolkit with relevant API and SDKs for developers / dApps / customers to integrate.

Worldcoin

Last but not the least is Worldcoin developed by Sam Altman, the CEO Co-Founder of Open AI. Worldcoin is positioned to provide privacy preserving proof of personhood protocol and is powered by Semaphores (a ZK implementation developed by AppliedZKP). They have integrated with an optimistic rollup called Hubble to implement their “airdrop to a billion people”.

They have created a product called the “Orb” that captures an image of a person’s eyes, which is converted into a short numeric code, making it possible to check whether the person has signed up already. If not, they receive their free share of Worldcoin.

Conclusion

Social infrastructures are key to building any form of sustainable social network or application on web3. Privacy, security and data ownership are key to the infrastructure space and there are multiple companies working on solving this problem. Almost all companies that focus on privacy in the context of identity, work with zero knowledge proofs as the source of verification.

As the industry develops, the key challenge for the companies would be to capture the market — this is predominantly user data which can only be scaled via social applications requiring users to “sign up”. Worldcoin is an exception in their go-to-market but besides them; all companies are actively competing for developer and dApp attention. Creating a functional SDK to onboard developers would be of the utmost importance to these infrastructure providers. They may have some gamifications on their own frontends but this has limited scale as mass user migrations occur for the concept of “entertainment”, “content” or “speculation” in crypto.

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TL;DR

• The main reasons why dYdX left StarkWare: long development cycle of Stark technology, L2 solution sequencer/prover network decentralization still need time, for the sake of composability, Cosmos SDK providing a pretty solid development tool

• In addition to transaction speed and cost, the imagination of appchain is also reflected in token empowerment.

• Appchains have better flexibility in terms of fast iterations compared to those generalized public chains.

• The multi-chain narratives have changed: quality applications present a weak dependance to the underlying chain, while the underlying chain presents a strong dependance to them.

• In the past, applications would think about how to do user retention, but now it is the turn of public chains to think about “application retention”.

Foreword

On June 22, dYdX announced that its v4 version will be launched as a Layer1 blockchain based on Cosmos SDK and Tendermint, featuring a fully decentralized off-chain order book and matching engine capable of increasing throughput by several orders of magnitude. In addition, $dYdX is proposed as the native token for dYdX v4 (depending on the community though). The team plans to open source dYdX v4 by the end of 2022.

To make it easier to understand, let’s start with an analogy: Ethereum Rollup is like an old building in the city center, with the advantages of the proximity to shopping malls and transportation facilities (composability), and the disadvantage of dilapidated decoration (slow infrastructure iteration), and no owner renovation allowed (no support for application self-customization nodes).

dYdX is a big tenant of this building, who usually has no social life (less dependent on composability), so he decided to move to the suburbs to build a villa. He happened to meet a nice renovation team (Cosmos SDK) that had a big production in the suburbs (Terra), so he hit it off and left Rollup behind.

The Reason Behind

Decentralized derivatives markets hit a bottleneck in terms of trading volume

Take Binance, the largest centralized exchange, for example, whose trading volume of derivatives far exceeds its spot trading volume. (Taking data from 2022.6.26, its contract trading volume for BTC/USDT, for example, is about 8 times higher than its spot trading volume)

The situation is different on the decentralized market. Comparing spot and derivatives trading volumes, Uniswap V3, the largest spot trading marketplace for long-tail assets on Ethereum, however, outpaces mainstream derivatives trading protocols such as dYdX/Perpetual protocol.

This means that there is still a lot of untapped potential for decentralized derivatives on chain. The biggest impediment to decentralized derivatives trading at the moment, which is also the reason why pro traders prefer to use centralized exchanges, is still mainly because the on-chain infrastructure cannot support the throughput required for derivatives trading. This is why dYdX chose StarkWare in the first place — from a protocol perspective, the off-chain zero-knowledge proof generation + on-chain proof mechanism ensures the high-frequency transactions needed for derivatives protocols, and from a user perspective, Rollup offers a much lower fee compared to Ethereum L1 (about $0.03 in fees per transaction).

And StarkWare makes it. By taking advantage of its validity Rollup, it has achieved real-time reporting in the update of the prediction machine and greatly improved the trading mode advantage of dYdX by separating logic/execution. Compared with L1, the L2 version has achieved a huge jump from 10X to 25X in terms of leverage. — It is the reason we’ve are long-term bullish on Rollup.

StarkWare brings a lot of performance benefits to dYdX, but what exactly caused it to leave StarkWare?

There are 4 reasons:

1. The development cycle of Stark technologies takes time

2. It will take some time for the sequencer/prover network of the L2 to be fully decentralized

3. dYdX’s exploration of future composability

4. Cosmos SDK provides a developer-friendly soil

1. The Development cycles of Stark technologies is too long

Zero-knowledge proof has always been the most difficult subject in cryptography, not only crypto. And one of the biggest problems with a zero-knowledge proof is the generation of a zero-knowledge proof — how to translate computational integrity (a provable statement), through a succinct and transparent circuit, to a verifier-friendly proof, has always been one that academics strive to achieve. (succinct/scalable and transparent here is used to describe Stark, which is the technology underlying StarkWare’s Rollup.) Stark is supposed to be the end game of zero-knowledge proof, but it’s also naturally the most time-consuming and expensive to develop at the practice level.

This also seems to be the case when it comes to practice — dYdX Founder suggests that Rollup’s nodes are not performing enough to support the TPS they need (TPS is critical for orderbook)

It is interesting that the original sentence quoted in the blog is off-chain and decentralised, but the only way to achieve both off-chain and decentralised is through ZK technology. So is dYdX going to leave StarkWare completely in the future? Even whether dYdX will return ZkSync belonging to the same ZK faction is a question mark. Or dYdX tries to build a ZK chain on Cosmos, but that’s not very logical.

2. Time still Needed for a fully decentralized Node Operator

Currently, Rollup network has the problem that Node Operator/Sequencer is not decentralized enough, and Vitalik has proposed some solutions to this problem, such as sequencer auction, random selection from PoS set, DPoS voting, etc. (see: An Incomplete Guide to Rollups).

This is also a problem in the StarkWare network, where the number of sequencer is very small and deployed by the StarkWare labs themselves, although this is a common status quo in Rollups, but in reference to the previous incident where the arbitrum sequencer went down, the dYdX team is not comfortable with this very centralized sequencer setup, as it represents a huge risk for both traders and protocols. Traders are profit-oriented, and if any security concerns arise, the retention rate of the platform will face a big challenge. Of course, in the long run zk Rollup + Ethereum L1 brings much higher security than Cosmos. But the security, although guaranteed, is completely dependent on StarkWare (development progress).

At the beginning of this year, dYdX showed its determination and confidence in wanting to be decentralized in its roadmap outlook at the beginning of the year. This explains why dYdX is not going to another Rollup solution that is currently also relatively centralized.

3. dYdX’s exploration of future composability

Currently dYdX is built on StarkEx, which does not support composability between dapps. StarkNet, on the other hand, is a general virtual machine that not only allows dapps within the ecosystem to be composable, but also allows interaction with smart contracts on Ethereum L1 (currently known forms of interaction are relatively simple asset interactions), but dYdX has not yet migrated to StarkNet.

In addition, with the development of DeFi, a series of composable products based on decentralized derivatives trading market, such as structured products, are the new direction in the future. dYdX naturally does not want to miss such an opportunity because of the current technical limitations of StarkWare. (There are currently arguments that the derivatives market relies more on the oracle to provide real-time value updates than on composability. This theory makes some sense, and composability may not be as high a priority for the derivatives market as tps)

4. Tendermint is regarded as a very complete set of tools for developing L1, which greatly helps developers lower the threshold for developing public chains. There are some excellent Layer1s developed based on this, both the relatively independent Terra and EVMOS within the cosmos ecosystem. In addition, IBC has opened up a bridge for communication between heterogeneous chains, and established a foundation for dYdX to use BTC as collateral on the Cosmos chain in the future.

Most importantly, dYdX can ensure the professionalism of the autonomy, which are the nodes owned by the public chain itself, provided by Tendemint. Compared to StarkWare self-owned nodes, dYdX can ensure that these nodes have a certain professionalism (specialised) rather than StarkWare kind of generalised, because prover nodes have to deal with the need for off-chain proof for not only one project, but other projects as well, and there is currently no strong proof indicates that StarkWare intends to provide technical support for dYdX’s needs — orderbook matching.

Moreover, in terms of token value capture, the value positioning of L1 tokens far exceeds that of a dapp, while at the same time the nodes can capture a large amount of MEV value that is captured by the native nodes of StarkWare in L2’s economic model and has no value for dYdX tokens.

Another possible reason: No strong sense of belonging natively to the StarkWare ecosystem

Cairo and Solidity are two completely different programming languages. Logically there is no interoperability: one is mainly to write zk circuits, and one is to write smart contracts. To attract more developers, StarkWare engaged a third-party compiler, helping complete the compilation from Solidity to Cairo. At that time, basically, StarkWare labs helped dYdX finish writing the whole Cairo code (Cairo is the language developed by StarkWare itself). Therefore, from the project’s perspective, there is not much sense of belonging to the language and even the ecosystem.

What impact will the dYdX’s exodus have on Ethereum and Layer2?

Ethereum’s powerful traction lies in its composability and network externality, in addition to its first-mover advantage.

Composability is a system design principle that deals with the inter-relationships of components. A highly composable system provides components that can be selected and assembled in various combinations to satisfy specific user requirements.

Different from the walled gardens built by traditional Web2 oligarchs, composability is the core innovation of DeFi. For example, yield aggregators like Yearn rely on complex composability (lending, liquidity mining, yield farming, etc.) to build strategies that optimize capital efficiency. Imagine if these protocols were distributed across different chains, the complexity and risk of the strategies would grow exponentially.

Whereas dYdX’s main product is a perpetual protocol, the dependence on external parties is limited to oracle’s price feed. The combinability use case for dYdX may be those derivatives aggregators that build structured products based on existing derivatives DEXs, for example, using dYdX’s order book to launch new products, just as Perpetual Protocol takes Uniswap’s trading information as references. However, composability is not indispensable for dYdX when compared to protocols like Yearn, or those more basic ones like lending protocol and DEX.

Network externality refers to the fact that the utility each user receives from using a product is positively related to the total number of users. The larger the number of users, the higher the utility each user receives. The network externality is particularly evident on Ethereum, where a solid user base has made Ethereum the choice for application development over a long period of time.

Similarly, with the consideration of trading depth and slippage, dYdX itself has a network externality, since more users will bring good depth and low slippage; but it does not depend on that much on Ethereum’s network externality. As the top perpetual protocol, dYdX has already accumulated a certain user base, and the trader is a relatively fixed group, which can maintain good user retention. Therefore, it is speculated that after migrating to Cosmos, with further optimization of transaction speed and cost, dYdX may gradually attract more users in addition to the original user migration.

Also, Ethereum’s enormity makes its pace slow, and the development progress is often unknown. After Vitalik proposed the “A Rollup-centric Ethereum roadmap” and “Endgame”, the Ethereum roadmap has shifted to focus on optimizing the base layer to serve Rollup, and proposed a new sharding solution, Danksharding (expected to be implemented in 18–24 months) and an intermediate solution, Proto-Danksharding (expected to be implemented in 6–9 months). In the crypto world, time is money. This is obviously too long, and the development process is still accompanied by many uncertainties.

As the generalized public chain involves many many things, it is impossible to take too big and too fast steps in upgrading and optimization, which is a constraint for projects that need to update and iterate quickly. Appchains are more flexible, and developers are more free to optimize their DApps rather than rely on the underlying chain.

By the same logic, games are other kinds of applications that do not depend on composability. Games have their own self-running ecosystem, and the requirements for external parties are often just related to joining in and leaving the ecosystem. Moreover, user experience is the top priority for games, and if the underlying chain cannot meet the performance requirements, the games themselves have strong incentives to go away.

As for Layer2, let’s look back at the logic of its narrative: Ethereum itself does not have enough throughput to support large-scale applications, and the high transaction costs and low speed hurt the user experience. But under bearish market conditions, gas fees and transaction speeds remain in a relatively reasonable range, which somewhat undermines user demand for Layer2.

In addition, dYdX was originally the top and native project of Ethereum, and as an application that adopted Layer2 very early, its practice of building an appchain will affect other projects. Why do we use Layer2 when we can do it without Ethereum? With this in mind, we may have to lower our expectations for Layer2’s valuation if many top applications follow dYdX and build their own appchains.

Where will the application chain go in the future?

Before dYdX, some projects were already exploring the direction of appchains.

Back in June 2020, Axie Infinity proposed the idea of a Ronin chain in Medium and officially launched Ronin in February last year, with a peak TVL of nearly $1.5 billion since then. However, in April this year, the Ronin bridge was hacked to steal $625 million worth of assets.

In March this year, DeFi Kingdoms launched DFK Chain based on Avalanche, validated by Avalanche’s subnet, and was compatible with EVM.

In addition to transaction speed and cost, the imagination of appchain is also reflected in token empowerment.

Nascent co-founder Dan Elitzer tweeted about the UNIChain idea: current Uniswap users’ costs are mostly in transaction fees, gas fees and potential MEV spend, the latter two of which are paid to Ethereum miners. If UNIChain is launched, could these two expenses be empowered to $UNI, which has been underperforming despite Uniswap’s $5+ billion TVL and absolute leadership in DEX? Achieving value capture for $UNI through appchains is indeed a good idea.

Of course, Uniswap as a DEX still has strong dependence on Ethereum, after all, most tokens are still based on the ERC-20 standard, and unless cross-chain facilities are perfect enough, UNIChain may only stay in the conception stage.

But this vision can be extended to other protocols. DeFi Kingdoms, which we mentioned above, has gone a step ahead and extended the use case of $JEWEL further from governance tokens to gas fee payments on DFK Chain. In this case, 25% of the $JEWEL collected as gas fee will be rewarded to the validators, 50% will be burnt, and the remaining 25% will be given to the community. As we can see, the adoption of the appchain allows for a broader scope for project’s native tokens.

In addition, security is an issue that appchains have to consider. For example, Aave’s TVL is nearly 7 times its token market cap; it will pose a great risk to the chain’s assets if Aave is separated from the security guarantee of Ethereum.

Therefore, for applications with strong security needs, joining Polkadot or Cosmos’ multi-chain ecosystem is a good choice. At the same time, Polkadot and Cosmos also provide integrated security assurance compared to the potential security risk caused by building chains by themselves.

Developers can develop blockchain based on Substrate, and if they want to join the Polkadot ecosystem, they need to stake DOT to participate in parachain auction or rent parathread to enjoy the shared security provided by the relaychain.

On Cosmos, developers can build appchains based on Cosmos SDK and access to Cosmos ecosystem through IBC. As for security, Cosmos offers Interchain Security, where multiple chains in the ecosystem can share the same validators set, allowing new networks that are weak (the low market value of tokens may raise security risks) to rent the security of mature networks.

Application retention problem: weak dependence of quality applications to the underlying platform

Let’s simply talk about public chain narrative logic: as early as 2017 and 2018, we wanted to build generalized, large public chain, proposed to do the “Ethereum killer”, to achieve “one million TPS”, but those once killers eventually disappeared, or even become helpers; and then since DeFi summer in 2020 the scalability of Ethereum has become a very urgent need, so scaling and multi-chain narrative emerged at that time. Today, after two years, we found that these valuation monsters either postpone or crash, do not seem to be very reliable — and finally applications started to build their own chains.

From the chart above, excluding games, there are still few applications that capture more than 1,000 DAU on Ethereum. For applications, it is more appropriate to have a certain volume and user accumulation first before going for appchains. For applications of small scale, many current public chains can meet their demand for throughput. For new applications, the backing of large public chains can provide certain exposure and convenience (in terms of user learning costs and convenience). Going for an appchain before having a certain scale also brings unnecessary costs.

If the native applications on Ethereum come out to build appchains, they need to consider the migration cost — are the users willing to migrate when the application migrates? What is the replaceability of the products on the original chain? (Just like Uniswap can be replaced by Sushiswap) If more application chains start to emerge in the future, the whole ecosystem will become fragmented, and good cross-chain infrastructure will be needed.

Further, if we look at the relationship between the underlying chain and applications outside the context of Ethereum and dYdX, the best case is that applications enjoy the composability provided by a strong underlying chain, while quality applications will feed the underlying chain and bring user growth to it.

However, we believe that quality applications present a weak dependence on the underlying chain, while the underlying chain presents a strong dependence on them.

Firstly, in the current multi-chain ecosystem, if the application is good enough, it is not difficult to find a landing point; secondly, the interaction between the underlying chain and the users is mainly reflected in the application layer, other than that, the users’ perception of the underlying chain is only reflected in the speed and cost. If there is only good infrastructure but a lack of quality applications, the value of the underlying chain cannot be fully reflected.

In the past, applications would think about how to do user retention, but now it is the turn of public chains to think about “application retention”.

For light-client data availability, there is little disagreement that erasing codes are used to solve the problem, the difference being how to ensure that the erasing codes are properly encoded. KZG commitments are used in Polygon Avail and Danksharding, while fraud proof is used in Celestia.

For Rollup’s data availability, if DAC is understood as a consortium blockchain, what Polygon Avail and Celestia have done is to make the data availability layer more decentralized — providing a “DA-Specific” Layer1, thereby increasing the level of trust.

We believe that in the next 3 to 5 years, the blockchain architecture will inevitably evolve from monolithic to modular, with each layer showing low coupling. Rollup-as-a-Service (RaaS), Data Availability-as-a-Service (DAaaS), and many other modular components may emerge in the future to make the composability of blockchain architecture ‘LEGO’ possible. Modular blockchains are one of the key narratives underpinning the next cycle.

Among them, the behemoths of the execution layer (i.e. Rollup) have already divided the cake with few latecomers; the consensus layer (i.e. each Layer1) is quite crowded. Since those upcoming Layer1 such as Aptos and Sui started to emerge, the Layer1 competition landscape has not yet settled, but its narrative is like old wine in new bottles, making it difficult to find reasonable investment opportunities.

And the value of the data availability layer is still to be explored.

Modular Blockchain

Before we talk about data availability, let’s take a moment for a brief review of modular blockchain.

There is no strict definition of modular blockchain layering, with some layering approaches starting from Ethereum and others leaning towards a generalized perspective, depending mainly on the context in which they are discussed.

• Execution layer: Two things happen at the execution layer. For a single transaction, the transaction is executed and a state change occurs; for a transaction batch, the state root of the batch is calculated. Part of the work of the execution layer of Ethereum is distributed to Rollup, which we know as StarkNet, zkSync, Arbitrum, and Optimism as of today.

• Settlement layer: It’s the process of verifying the validity of state roots (zkRollup) or fraud proofs (Optimistic Rollup) for Rollup contracts on Ethereum Layer1.

• Consensus layer: Whether PoW, PoS, or other consensus algorithms are used, in short, the consensus layer is to agree on something in a distributed system, i.e., to reach consensus on the validity of state transitions. In the context of modularity, the purpose of the settlement layer and consensus layer are somewhat similar, so some researchers have also unified the settlement layer and consensus layer.

• Historical state layer: proposed by Polynya (for Ethereum only). After introducing Proto-Danksharding, Ethereum only maintains on-chain data availability for a certain time window, after which it prunes and leaves this job to others. For example, Portal Network or other third parties that store this data can be classified in this layer.

• Data availability layer: What are the problems with data availability? What are the solutions to each? This is the question that this article will focus on, so I will not generalize about it here.

Back in 2018 and 2019, data availability was more in the context of light client nodes; while in the later Rollup perspective data availability has another spectrum of meaning. In this article, we will explain data availability in two different contexts of “Nodes” and “Rollup” respectively.

DA in Nodes

Let’s first look at the concept of full nodes and light clients.

Since full nodes download and verify each transaction in each block themselves, they do not require honest assumptions to ensure that the state is executed correctly, which gets good security guarantees. However, running a full node requires resources for storage, computing power, and bandwidth, and there is no incentive for ordinary users or applications other than miners to run a full node. Moreover, if a node just needs to verify some information on the blockchain, running a full node is non-essential.

This is what light clients are doing. Light clients are a term that distinguishes them from full nodes in that they often do not interact directly with the blockchain, but rely on neighboring full nodes as intermediaries to request needed information, such as downloading block headers, or verifying account balances.

A light client as a node can quickly synchronize the entire blockchain, as it only downloads and verifies block headers; and in the cross-chain bridge model, the light client acts as a smart contract — the light client of the destination chain only needs to verify that the tokens of the source chain are locked, rather than verifying all transactions of the source chain.

What’s the problem?

However, there is an implicit problem: since light clients only download block headers from full nodes, rather than downloading and verifying each transaction themselves, then malicious full nodes (block producers) can construct a block containing invalid transactions and send it to light clients to fool them.

It is tempting to think of a “fraud proof” solution to this problem: it only needs one honest full node which monitors the validity of the block, constructs a fraud proof, and sends it to light clients to warn them if an invalid block is found. Or, after receiving the block, the light client takes the initiative to ask the whole network whether there is fraud proof. If it does not receive that after a while, it can assume that the block is valid. In this way, light clients can achieve almost the same level of security as full nodes (but still rely on honest assumptions).

However, in the above discussion, we assume that the block producer will always publish all the block data, which is the basic premise for generating fraud proof. However, a malicious block producer may hide some of the data from the block when it is published. At this point, the full node can download the block and verify that it is invalid. But the nature of the light client prevents them from doing so. Full nodes are also unable to generate fraud proof to warn light clients due to lack of da ata.

Moreover, some data may be uploaded at a later time due to network congestion, and we cannot even tell if the missing data is due to an objective condition or an intentional act by the block producer — then the ​​reward and punishment mechanism for fraud proof will not work.

That’s what we’re talking about in terms of data availability in nodes.

There are two cases in the figure above: First, a malicious block producer posts a block with missing data, at which point the honest full node warns, but then the producer republishes the rest of the data; Second, an honest block producer publishes a complete block, but then a malicious full node issues a false warning. In both cases, the block data that others in the network see after T3 is complete, but someone is doing evil in it.

In this sense, the use of fraud proof to ensure data availability for light clients is flawed.

The Solution

In September 2018, Mustafa Ai-Bassam (now the CEO of Celestia) and Vitalik co-authored a paper that proposed the use of multidimensional erasing code to check data availability. The light client simply downloads a random portion of the data and verifies it to ensure that all data blocks are available, and reconstructs all data if necessary.

There is little disagreement about using erasing code to solve data availability problems for light clients, with Reed-Solomon erasing codes used in Polygon Avail, Celestia and Danksharding for Ethereum.

The difference is how to ensure that the erasing code is correctly coded: KZG commitments are used in Polygon Avail and Danksharding, while fraud proof is used in Celestia. Both of them have advantages and disadvantages. KZG commitments are not quantum-resistant, while fraud proof depends on certain honest assumptions and synchronization assumptions.

In addition to the KZG commitments, STARK and FRI (proposd by Vitalik) can also be used to prove the correctness of the erasure code.

DA in Rollup

Data availability in Rollup is: In zkRollup, everyone can rebuild the states in Layer2 on their own to ensure censorship resistance; In Optimistic Rollup, it should make sure that all data from Layer2 is published, which is a prerequisite for building a fraud proof. So what’s the problem?

When we look at Layer2’s fee structure, in addition to the fixed cost, the variables related to the number of transactions per batch are Layer2’s gas cost and the cost of on-chain data availability. The former has little impact; The latter requires a constant payment of 16 gas per byte, accounting for as much as 80%-95% of Rollup’s cost.

(On-chain) Data availability is expensive. How to deal with this?

One is to reduce the cost of storing data on chain: this is what the protocol layer does. In IOSG’s Insight 「The Merge Is Coming: A Detailed Catch-Up For Ethereum Roadmap」, we have mentioned that Ethereum is considering introducing Proto-Danksharding and Danksharding to provide a larger block for Rollup, that is, larger data availability space, and adopting erasuring code and KZG commitments to mitigate the burden for running a node. But from the perspective of Rollup, it is unrealistic to passively wait for Ethereum to adapt itself.

The other is to put data off-chain. The following figure lists the current off-chain data availability solutions. The generalized solutions include Celestia and Polygon Avail; the user-selectable options in Rollup include StarkEx, zkPorter, and Arbitrum Nova.

(Note: Validium originally refers to the scaling solution combining zkRollup and off-chain data availability. For convenience, Validium used in this article refers to the off-chain data availability solutions, and will be compared with the others.)

Let’s take a look at these options in detail.

DA Provided by Rollup

In the simplest Validium, a centralized data operator is responsible for ensuring data availability, and users need to fully trust the operator. Under this scenario, low cost is the benefit, but practically no security guarantees.

As a result, in 2020 StarkEx further proposed the Validium maintained by Data Availability Council (DAC). The members of the DAC are well-known individuals or organizations within the legal jurisdiction, and the trust hypothesis is that they will not collude and do evil.

Arbitrum proposed AnyTrust this year, which also adopted DAC to ensure data availability, and built Arbitrum Nova based on AnyTrust.

zkPorter, on the other hand, proposed that data availability should be maintained by Guardians (zkSync Token holders), who are required to stake zkSync Token, and if a data availability failure occurs, their funds will be slashed.

All three solutions provide an option called Volition: users can choose on-chain or off-chain data availability as needed, according to specific usage scenarios.

General DA Scenarios

The above solutions are proposed based on the idea that since the reputation of ordinary operators is not high enough, a more authoritative committee should be introduced to improve its credibility.

Is a small committee safe enough? The Ethereum community raised the issue of Validium’s ransomware attack two years ago: if enough committee members’ private keys were stolen to make off-chain data availability unavailable, users will be threatened — only when they pay enough ransom can they withdraw their money from Layer2. Given the previous cases of Ronin Bridge and Harmony Horizon Bridge, we cannot ignore such a possibility.

Since the off-chain data availability committee is not sufficiently secure, what if a blockchain is introduced as a trusted party to ensure off-chain data availability?

If we take the DAC as a consortium blockchain, then what Polygon Avail and Celestia do is to make the data availability layer more decentralized — equivalent to providing a “DA-Specific” Layer1 with a series of validators, block producers, and consensus mechanisms to enhance trust.

In addition to the improvement of security, if the data availability layer itself is a blockchain, then it can also be used as a generalized solution, not limited to providing data availability for a specific Rollup or blockchain.

We explain this with the example of Quantum Gravity Bridge, which is Celestia’s application on Ethereum Rollup. In the scenario, the L2 Contract on Ethereum Layer1 verifies the validity proof or fraud proof as before. The difference is that the data availability is provided by Celestia. There are no smart contracts and no calculations performed on the Celestia Layer1. Celestia only ensures that the data is available.

L2 Operator publishes the transaction data to Celestia Layer1, and the validators of Celestia sign the Merkle Root of DA Attestation, and send it to DA Bridge Contract on Ethereum Layer1 for verification and storage.

This actually proves all data availability with DA Attestation’s Merkle Root, and the DA Bridge Contract on Ethereum Layer1 only needs to verify and store this Merkle Root, so the cost is greatly reduced.

(Note: There are some other data availability schemes, including Adamantium and EigenLayr. In Adamantium, users can choose to host their off-chain data and sign to confirm their off-chain data availability after each state transition, otherwise, the funds will be automatically sent back to the main chain to ensure security, or users are free to choose their data availability provider. EigenLayr is an academic solution, proposing Coded Merkle Tree and data availability oracle ACeD.)

Wrap it up

After discussing the above solutions one by one, let’s do side-by-side comparison from the perspective of security/decentralization and gas cost. Note that this chart represents the author’s personal understanding and serves as a vague and approximate division rather than a quantitative comparison.

Pure Validium has the lowest security/decentralization and gas cost.

Solutions we mentioned above are put in the middle part. In my opinion, the security/decentralization of zkPorter with validators set is slightly higher than DAC, while the DA-Specific blockchain solution is slightly higher than zkPorter. At the same time, the cost of Gas increases accordingly. Note that this is only a very rough comparison.

We also have the on-chain data availability scenarios here, which have the highest level of security/decentralization and gas cost. All three schemes have equal security/decentralization since their data availability is provided by the Ethereum Layer1. The pure Rollup scheme has lower gas cost compared to monolithic Ethereum, and with Proto-Danksharding and Danksharding, the cost of data availability will be further reduced.

Note: Most of the data availability contexts discussed in this article are under Ethereum. It should be noted that Celestia and Polygon Avail are generalized schemes and are not limited to Ethereum itself.

We conclude with a summary of the above schemes in a table.

Closing Thoughts

After discussing the above data availability issues, we find that all the solutions are essentially trade-offs under the mutual constraints of the scalability trilemma, and the difference between the solutions lies in the “granularity” of the trade-offs.

From the user’s perspective, it makes sense for the protocol to offer the option of on-chain and off-chain data availability. This is because the user’s sensitivity to security and cost varies among different application scenarios or user groups.

We discussed more about the data availability layer support for Ethereum and Rollup. In terms of cross-chain context, Polkadot’s relay chain provides native security for data availability for other parallel chains; while Cosmos IBC relies on a light client model, so it is critical to ensure that light clients can verify data availability for both source and destination chains.

The benefit of modularity is the pluggability and flexibility to adapt protocols on-demand: for example, to unburden Ethereum of data availability while ensuring security and trust; or to increase the security level of the light client model and reduce trust assumptions in a multi-chain ecosystem. Not only limited to Ethereum, data availability can be useful in multi-chain ecosystems and even more application scenarios in the future.

We believe that in the next 3 to 5 years, the blockchain architecture will inevitably evolve from monolithic to modular, with each layer showing low coupling. Rollup-as-a-Service (RaaS), Data Availability-as-a-Service (DAaaS), and many other modular components may emerge in the future to realize the composability of blockchain architecture ‘LEGO’. Modular blockchains are one of the key narratives underpinning the next cycle.

Among them, the behemoths of the execution layer (i.e. Rollup) have already divided the cake with few latecomers; the consensus layer (i.e. each Layer1) is quite crowded. Since those upcoming Layer1 such as Aptos and Sui started to emerge, the Layer1 competition landscape has not yet settled, but its narrative is like old wine in new bottles, making it difficult to find reasonable investment opportunities.

And the value of the data availability layer is still to be explored.

Key Takeaways

Last week, a successful merge was achieved on Ropsten testnet, where PoS was officially enabled.

• The merge on the Sepolia and Goerli testnet will take place in a few weeks.

• The merge on Ethereum mainnet is expected to be executed in late August to November, if everything goes well.

• To coincide with the eventual mainnet merge, EIP-5133 proposes to activatet the mainnet's difficulty bomb in August.

• Since Layer 2 scaling is well-developed, the focus of Ethereum has now shifted from sharding to The Merge, while sharding is expected to be supported in 2023.

  Over the past few years, we have seen a lot of community discussions about PoW and PoS. Regardless, it is already a fact that Ethereum, the largest ecological network in the crypto world today, will soon migrate from PoW to PoS. With the merge successfully completed on the Ropsten testnet, the community is even more confident about it.

Ropsten Merge

In the early hours of June 9, 2022 Beijing time, the merge on Ropsten was successfully completed. Launched in 2016, Ropsten is the longest running Ethereum testnet to date. According to the Ethereum core developer, about 14% of the validators experienced downtime during the merge of Ropsten, but most of them were caused by incorrect node configurations, which were quickly resolved. Moreover, the merge on Ropsten was considered almost perfect and became an important milestone in the migration of Ethereum to PoS.

The Merge will be executed on Sepolia (after about 3 weeks) and Goerli (after about 6 weeks) testnet one after another in the future. If all goes well, the merge of Ethereum mainnet is expected to complete between late August and November.

Despite criticism of high energy consumption and environmental impact, PoW has sustained the longest stable operation in history. PoS, by contrast, has not been tested for a long time, especially for a huge ecosystem like Ethereum. We have to seriously consider the potential impacts after migrating to PoS.

It is also important for Ethereum developers to make sure that their applications will work as normal after The Merge. According to official guidance from Ethereum, The Merge will have minimal impact on a subset of contracts, but given the potential impact on other components such as the front-end and tools, developers are suggested to perform a full testing and deployment cycle on Ropsten and provide feedback on potential issues.

The Path to The Merge

The characteristics of an ideal blockchain include sufficient transaction bandwidth, decentralization and security, and energy efficiency. To achieve these goals, Ethereum has planned the consensus mechanism upgrade based on PoS and scaling based on Layer2 and roll-ups. The Merge, which recently took place in Ropsten, is a monumental upgrade for Ethereum to address energy efficiency and improve decentralization and security.

There are two key milestones in Ethereum’s migration from PoW to PoS to achieve energy efficiency, namely The Beacon Chain and The Merge.

The Beacon Chain

The beacon chain supports nodes to become verifiers of the network by staking ETH tokens. The Beacon Chain is the consensus layer underlying the Ethereum PoS network, which officially launched in December 2020.

Before The Merge, the beacon chain and the actual execution layer are separate. The state of the PoS consensus layer is maintained separately by the nodes in the beacon chain but actually left unused by the blockchain.  PoW nodes maintain the states in the execution layer while serving the actual functionality of blockchain consensus.

The Merge

The Merge will activate the beacon chain as the functioning network for the Ethereum consensus layer, replacing the consensus mechanism that was actually controlled by the network of PoW nodes. The third block shown in the figure below is the key point where The Merge happens: the state of the execution layer in the block is inherited from the original PoW network, while the consensus layer state is inherited from the PoS network. After that, Ethereum switched to PoS mechanism smoothly.

Ethereum has designed a difficulty bomb mechanism to assist the switch from PoW to PoS. When the difficulty bomb is activated, the mining difficulty of the PoW network will increase exponentially and eventually freeze. As seen from the figure below, there have been three difficulty bombs that raised the difficulty of producing blocks in the history of Ethereum.

After the completion of the Ropsten merger, Ethereum will follow the path to start the Mainnet merge. According to EIP-5133, the difficulty bomb used to assist the Ethereum Mainnet Merge will be activated in August 2022.

It is worth noting that the goal of The Merge is to upgrade the consensus mechanism, which will not have a direct impact on tps. In the L2-centric scalability roadmap, the protocol layer is responsible to ensure decentralization and security. The task of reaching scalability will be placed on sharding and L2.

Final Thoughts

For narratives, the most intuitive impact of the transition from Pow to PoS is better sustainability (over 99% reduction in energy consumption) and scalability from sharding, which will be implemented in 2023.

PoS will at least help mitigate criticism of cryptocurrency from mainstream discourse since it’s environmentally friendly, and with the adoption of sharding, complemented by Rollup, we can expect to see a more scalable Ethereum in the future. We are entering the phase of a new narrative for Ethereum.

A year and a half have passed since the launch of Beacon Chain. There have been several dev delays during this journey, but with the successful merge of the Ropsten testnet, we are getting closer to The Merge.

The Merge is by far the most complex upgrade to Ethereum. In the image above, we can see that we’re very close to success. While reviewing the Ropsten Community Call, we really felt the excitement from the developers.

While the market may be in a continuing downward trend, we are still excited about this milestone and are confident in the future of Ethereum.

• On May 21st, OpenSea announced the launch of its own open-sourced NFT marketplace protocol - Seaport, attracting public attention. 

• The current protocol that OpenSea adopts is Wyvern v2, which has certain flaws that can be potentially fixed by Seaport.

• Seaport will achieve gas fee optimisation by deploying Solidity Assembly, reducing gas fee by nearly 50%.

• Seaport is more developer-friendly and empowers developers to build their own NFT trading marketplaces.

• OpenSea will open up a new paradigm in which NFTs can be exchanged for NFTs, increasing the liquidity of NFT on the secondary market. 

• Open source and decentralization are megatrends in Web 3.0. We will definitely see more innovation and competition in NFT marketplaces.

On May 21st, OpenSea announced the launch of Seaport - an open-sourced NFT marketplace protocol, attracting lots of attention on Twitter. Some people predict that OpenSea is going to become the Uniswap of NFT, others state that the launch of Seaport can kick off another NFT Summer. I would also like to take this opportunity to address some of the issues regarding Seaport.

• What is the protocol that OpenSea currently adopts? What are its strong points and drawbacks?

• What are the advantages of Seaport over Wyvern? How can Seaport achieve these advantages?

• What are the implications of the Seaport launch for Opensea and the whole industry?

The old Wyvern Protocol

Friens who have looked up NFT transactions on Etherscan may have noticed a small line in the upper right corner of the smart contract overview, OpenSea: Wyvern Exchange v2. This is the protocol that OpenSea is now using, the Wyvern Protocol. Like Seaport, Wyvern is an open-source protocol. It can be used to enable P2P trading of digital assets, including Tokens, ENS domains, land, and even smart contracts themselves, and through Wyvern, developers can build their own marketplace on any EVM-compatible chain.

How exactly does Wyvern realize the functionality of the NFT trading marketplace? In short, Wyvern is a set of smart contracts. When sellers and buyers create buy and sell orders on OpenSea, these orders are stored in a centralized database. When buy and sell orders match, these orders are sent to Wyvern's smart contract for on-chain settlement. Wyvern will verify that these orders are properly signed and matched and then execute the transaction.

Wyvern’s performance has already been proven since it can support such a large trading volume on OpenSea. However, Wyvern also has limitations. First of all, Wyvern is not very developer-friendly and does not provide rich developer tools to simplify the development process. More importantly, Wyvern does not optimize gas, making transactions very expensive. To date, Wyvern hasn’t been upgraded for a long time, the last time the developer docs was updated was three years ago. To address these issues, OpenSea decided to switch to its own protocol, Seaport, to replace Wyvern v2.

Seaport -- a real haven for developers?

If you are a coder, source code of Seaport can be found on Github, go check it out. For those who can’t or don’t want to read the code, stay with me and I’ll explain. 

The most exciting upgrade is gas optimization by coding with Solidity Assembly. Assembly language is a low level programming language. Let’s keep it simple, the core of the computer can be broken down to 0 and 1. The closer to 0 and 1, the lower level of the programming language we use, and the faster our commands can be executed. However, coding with low level programming language is painful for developers because the low level code is not that human-readable. Therefore, developers generally prefer to code with high-level languages, with the cost that running programs written in high-level language is less efficient and more expensive.

OpenSea developed Seaport directly in the Solidity assembly language to reduce computation costs (the transition cost between Solidity and Solidity assembly) and thus lower the gas fee. With Seaport integrated, the gas fee can reduce by the estimation of 50%, and speed and performance are greatly improved. 

As mentioned above, assembly language is very abstract and difficult to comprehend. In order to improve efficiency without bringing many obstacles for developers, Seaport has upgraded the Solidity assembly language. For example, Seaport defined some constants to replace the hard-to-read memory numbers to improve the readability. Also, to keep the code free of vulnerabilities, Seaport has launched a $1 million bonus pool to incentivize developers to find flaws and improve the security of their code.

A future with infinite possibilities？

What are the changes of OpenSea after upgrading to Seaport?  First of all, the gas fee will be significantly reduced and the time taken to complete a transaction will be shortened. OpenSea may also introduce a new UI to support new features such as NFT barter and combined transaction. Suppose a user wants to sell BAYC, he can bid 100ETH, or bid 50ETH + 4 Azuki. Another example is that the user has 20 NFTs with poor liquidity, and the user can choose to pack 20 NFTs to exchange for a recent hot  NFT from other sellers. This "combined transaction" and "barter" approach to a certain extent can improve the liquidity of some NFTs in the secondary market.

For the whole industry, open source code will definitely lead to more imitators in the industry to compete with OpenSea. Therefore,from a common perspective, it is not wise for OpenSea to launch an open source protocol. In fact, we have already seen similar scenarios where Uniswap imitators such as SushiSwap and PancakeSwap did take away some of its users, but did not shake Uniswap's leading position. I think the launch of Seaport will increase OpenSea's voice in the industry and strengthen OpenSea's position in the NFT marketplace, a move that is very much in line with the vision of Web 3.0 - open source to meet the challenges of the market. Decentralization and open source must be the megatrend of the industry. An open competitive environment can greatly stimulate innovation, and more innovative NFT trading markets are bound to emerge in the future.

What is more expected is that OpenSea may issue tokens after the launch of the open source protocol. However, most of the tokens on the market that have been issued for the NFT marketplace are mainly governance tokens without many use cases other than voting. Will OpenSea issue a token, and if so, how will the token model be designed, and will OpenSea share a portion of the transaction fees with token holders like DEX? IOSG has been a strong supporter and early explorer of Web3.0, and will continue to focus on and support the innovative trading market built on Seaport. For more information, please stay tuned to IOSG.

We are living in an increasingly connected world. The so-called Web2.0 brings creators and consumers of information together, allowing us to enjoy peer-to-peer interactions on a global scale. However, the Internet we have today is broken. The data architecture is still based on standalone servers, where data is centrally stored and managed. We have no control over our data. A mismatch between a centralized and trust-enhanced Internet and urgent demand for interconnected and user-controllable data stirs up tons of conflicts. We don’t want the social media, e-commerce, or content publishing platforms to dictate all the rules and control our data. Instead, the ownership of data should be given back to us.

In this context, blockchains seem to be a driving force of the next-generation Internet. There are a few widely-spread arguments on why building social platforms on top of blockchains solve existing problems. Industry pioneers have already initiated their exploration, building blockchain-based decentralized social media since 2017. However, Web3.0 is a back-end revolution, and average users can’t feel or just don’t care about the architecture and technology behind the applications. Thus, these decentralized social platforms have little competitive advantage over Web2.0 incumbents with strong network effects. For two reasons, 1) Existing players have not yet unlocked new ways for people to interact and self-express; 2) Excessive development costs and switching costs hinder innovation and mass adoption.

For the longest time, I have been imagining an open Internet, where I can migrate my contact list from Wechat to Telegram seamlessly with one click. And the tacit teammates I meet by chance in one game can receive my invitation to play together in another game directly. However, it remains an idea that doesn’t get off the ground, since I have neither the knowledge nor the ability to realize the vision. However, things changed at the IOSG 8th Old Friend Reunion, where I met Wilson Wei, the founder of CyberConnect. Wilson, a bold leader with strong conviction and a brilliant mind, presented CyberConnect and the way it is going to disrupt the Internet to hundreds of audiences on site. From that moment I knew that this young man and his team would bring on a revolution, and IOSG has to be part of it.

The new form of social interaction for users

At present, SNS(Social Network Service) is the most mainstream form of social platform. People may not be familiar with the term. In fact, Facebook, Instagram, and Twitter are all SNS. SNS are developed for people to create social networks with other people who share similar interests. However, many SNS have deviated from the essence of “social”, turning into advertising platforms. For one, Web2.0 SNS prioritize monetization and compromise the user experience. For two, a closed environment and mindset hinder further development.

CyberConnect is here to break down the silos and unlock new ways for users and developers to create value in the irresistible Web3.0 era. Today, with CyberConnect’s decentralized social graph, we can together take a bottom-up approach to define the Web3.0 social landscape, unbundling social relationships with centralized platforms.

CyberConnect has already taken the first step, migrating our social connections to blockchains, where data is secure, tampered-proof, and cannot be manipulated by third parties. CyberConnect has accumulated over 12 million on-chain connections in the past few months. A rich dataset paves the way for constructing Web3.0 user-profiles and advanced recommendation algorithms.

Just imagine, CyberConnect is like a fertile ground on which a great variety of applications can grow. These applications are built upon an open and shared CyberConnect database. Users interact with each other and create new social networks on applications, and these data points will enrich a universal open social graph, which in return can empower more applications to grow. For example, if you start to follow a bunch of NFT enthusiasts on one platform, these new relationships are added to the open social graph. Other projects can capture users’ new preferences in time and start to push NFT-related content to users. Thus, the broken Web2.0 silos are disrupted and the Internet landscape is reshaped. In Web3.0, we have a whole ecosystem of applications built on CyberConnect, with one app being built on top of another, which facilitates a fundamental turn from an adds-centric system to a truly user-centric network

With this user-centric network, CyberConnect aims to improve user experience by prioritizing data ownership and portability, which unlocks new ways for us to self-express. We can truly own and benefit from the data points we create, we can interact with the underlying data however we see fit. Moreover, CyberConnect builds a graph database that runs advanced algorithms to find meaningful but implicit connections that enrich our social network, taking the user experience to the next level. Most importantly, a revolutionary “relational identity” is created. Our identity is not just about who we are, but also how we become who we are through how things and people around us shape us into. And our relational identity can be seamlessly migrated across platforms. No matter where you go and which platforms you use, the bond among us will never be broken. We are truly connected.

The powerful booster for developers

The excitement CyberConnect brings us doesn’t stop here. As I mentioned above, the high development and bootstrapping cost is another major impediment to innovation. Numerous examples prove that start-ups seldom gain upper hand against incumbents with strong network effects. Many projects even fail before they are eligible to join the competition because they cannot get off the ground. There are much more than technical issues to iron out, the biggest challenge, in general, should be user acquisition. How to attract the first 100 users and kickstart the flywheel? While in Web2.0, acquiring initial users is extremely difficult. Placing ads on users is the most common way to bootstrap a project. However, this is extremely costly and inefficient.

Fortunately, with CyberConnect, the story is rewritten. How can CyberConnect change the current situation? Imagine if you are a developer of a social platform tailored for crypto believers, who are your target users? The most common practice is to check Vitalik or other OGs’ follower lists. With one single query using CyberConnect’s API, all the wallet addresses that follow Vitalik are listed for you to explore. Moreover, CyberConnect is also building link3.to, which offers richer details and helps you precisely target a subset of followers. Once you get the whitelist of wallet addresses, launch an airdrop or even a vampire attack, and kickstart your early community.

To decentralize the protocol along the way and make the data more accessible to everyone, CyberConnect is building a democratized recommendation indexer, where data can be transformed, organized, and shared across applications for anyone to query with just a few keystrokes. However, democratized indexer does not come together at scale easily. Blockchain, by nature, is not designed to optimize indexing and filtering data, leaving developers more work to do. To truly empower Web3.0 builders, a collectively-defined standard must be created for social data. Simple functions like

1. Call Vitalik’s followers

2. Call Vitalik and cdixon.eth’s shared followers

3. Call Vitalik’s followers that meanwhile have more than 5000 followers

4. Call Vitalik followers that holds BAYC

...

requires a well-designed standard that can be used to fetch data efficiently and manage data collectively. CyberConnect has taken the lead in this initiative and helped define the follow/follower standards, and has always been welcoming the joint efforts from our community to build the Web3.0 social.

The incredible Future

Web3.0 is not a journey of one team, CyberConnect and IOSG team have a strong conviction in a collaborative and collective act of value-creation. CyberConnect has aggregated social graphs, thus making our data more self-owned and meaningful. But our bigger dream cannot be realized without people working together to build the infra. CyberConnect will open up the indexing and embrace the community to create even more value, which requires brilliant minds, guts, and coordination.

We are still early in terms of having a definite idea of what Web3.0 Social will be like, but we need pioneers to first tap into the uncharted world. CyberConnect answers the call. Right now, we need more dwellers to build with us. Whether you are avid builders, crypto believers, dreamers, degens, or thrill-seekers, everyone is welcome to be part of our journey and co-define Web3.0. Let’s CyberConnect, WAGMI!

Oracle is usually reckoned as the bridge and window of on-chain and off-chain data. In short, oracle is a middleware providing real-world data services for blockchain projects.

If we recognize the definition that blockchain is the trust machine, then oracle can be essentially referred to as the trust-maintenance machine. As a matter of fact, the trust generated by blockchain itself is usually not sufficient to support all the demands of upper layer applications. More trust is needed to be fed in from the oracle and the vast majority of blockchain projects cannot survive without oracles because it will directly make them blind.

As we all perceive, blockchain is a closed black box with no capability to initiate network call, but smart contracts are required to validate the data by third-party according to the consensus mechanism. To use a simple analogy, the role oracle played is the ambassador between two civilizations, like “Sopho” between the humans and the three bodies in “The Three-body Problem ”. Only by the data feed of oracle can smart contracts access the deterministic information from the Internet and real world, including the stock price, exchange rate, final results of presidential election, etc.

Family tree

In terms of format, oracles can be classified as software oracle, hardware oracle, centralized oracle and decentralized oracle:

1.Software Oracle

Software oracle is connected to the Internet and can access, transmit and input data and information from any third-party servers or websites by API, such as commodity prices, weather index, flights number, into smart contracts in real-time.

2.Hardware Oracle

Hardware oracle is widely adopted in IoT, working as the electronic sensor and data collector. It transfers physical events into digital values so that smart contracts can understand them. Barcode scanners, bank card POS machines, medical equipment for collecting all kinds of medical data, etc can all be identified as hardware oracles.

3.Centralized Oracle

Centralized oracle is a type of oracle with single-source data, usually backed by trustworthy third-party like government or reputable corporations. It can make data tamper-proof and loss-proof by separating data from untrusted operating systems of local equipment. Yet the sole source of data also brings certain vulnerabilities towards smart contracts.

4.Decentralized Oracle

Decentralized oracle refers to an oracle with a distributed consensus mechanism, also known as consensus oracle. It is more reliable and trustless since it achieves data from multiple external sources rather than a single source. Regarding to the data processing methods, decentralized oracles can be categorized into 4 sectors based on the theory of Huawei Lab:

• Aggregation-based processing: It eliminates single malicious data impact by multi-data source aggregation, i.e. Chainlink

• Staking-based processing: It requires participants to hold assets for greater credibility, i.e. Band

• Game-theory-based processing: It provides non-adversarial economic incentives, i.e. NEST

• Reputation-based processing: It restricts adversarial nodes by reducing their reputations, i.e. Witnet

Compared with centralized oracle, decentralized oracle is less likely to bring security risks since it defused the sing-node failure issue, though its operation efficiency is relevently lower. Most DeFi applications prefer running on decentralized oracle based on such concerns.

Oracle in web3.0: Transcending DeFi infra

Based on the cognition above, we have an essential understanding towards the significance of oracle adopted in blockchain. But when it comes to the application value of oracle in web3.0, we are somehow still viewing it through a blurred lens.

Last year, the concept of DON (Decentralized Oracle Network) was first introduced in the Chainlink2.0 whitepaper. DON is a network maintained by a group of Chainlink nodes and can bootstrap any oracle services flexibly, so that in the near future Chainlink would be able to provide external data to the blockchain via completely trustless off-chain computation. To realize this vision, Chainlink has launched a series of products and services such as VRF, Keepers, CCIP and the deployment of those services opened up our imagination to the application scenarios of oracle in web3 to a large extent.

To better demonstrate the immense potential of oracle in future web3 world, we briefly illustrate here with a few examples and discuss them based on different scenarios:

Defi

Though nowadays native cryptocurrency and stable coins are the mainstream in DeFi, predictably a novel market based tokenized real-world assets will be more and more appealing. For example, foreigners without legal identity in the US in such scenarios are able to purchase tokens pegged to certain US stocks. Also, users can extract liquidity by mortgaging tokenalized properties.

Another emerging usecase of oracle in DeFi is the fair sequencing. In the existing transaction regime, transactions are censored and ordered by the miners, which leaves great arbitrage and manipulation space to make use of. By exploiting information about upcoming transactions submitted to the mempool but not yet on-chain, miners and validators can modify the transaction sequence to benefit themselves. The term MEV(miner extractable value) is consequently generated to describe such phenomena.

Hence, to sort such issues out, oracles like Chainlink has developed certain solution called Fair Sequencing Services (FSS). FSS is poised to help DEX achieve fair transactions by designing deterministic algorithms so as to prevent MEV, front-running or any other schemes causing transaction disorder. It mainly consists of three sections: transaction monitoring, transaction sequencing and transaction posting. You can get a quick peek at the FSS mechanism via the schematic below:

NFT & Gamfi

The NFT issuing mechanism and gamefi user experiences can also be enhanced significantly by the adoption of oracle. A typical usecase is the generation of verifiable random numbers based on the off-chain external data. In one case, artists could generate NFTs with varying rarity based on a verifiable random number and ensure fairness in airdrops. In another, game vendors could also use random numbers to generate more diversified combat gear and battle scenarios.

Academically speaking, random numbers are usually recognized as statistically randomly generated numbers, playing an integral role in cyber security, games, scientific simulations and many other critical fields. The generator that produces random sequences is called Random Number Generator (RNG). According to the nature of the random sequences generated, it can be divided into two categories: True Random Number Generator (TRNG) and Pseudorandom Number Generator (PRNG).

TRNG generally utilizes uncertain physical phenomena such as noise, chaos, and quantum stochastic processes to generate true random sequences. Whereas, PRNG is a definitive algorithm that requires an initial external input to act as seed. Algorithms including Linear congruential, Cryptography, ANSI X9.17, Mersenne twister, etc. are relatively popular ones.

Apparently, the random number generated on-chain is the pseudorandom number. Also, given the transparent nature of blockchain content, random numbers generated on-chain are prone to be attacked by dishonest nodes and thus face considerable security risks. Typically, miners can gain comparative advantages in gambling by dropping unfavourable blocks through “Block Withholding Attacks”.

Apart from boosting the cost of miner attacks through repeated hashing, the most expedient solution is to employ oracle as a TRNG to produce verifiable true random sequences by integrating off-chain data, and so as to ensure the confidentiality and impartiality of random numbers. At current stage, except approaches like Randao’s Commit Reveal and BLS contract, the VRF(Verifiable Random Function) provided by decentralized oracles are the most common services, which can be simply demonstrated in the following workflow:

SocialFi & DAO

In some cases, oracle can also act as a Decentralized identity (DID) tool in application scenarios of socialfi and DAO. By summoning DON to assemble Internet and off-chain activity data, users are empowered by oracles to verify and manage their own identity credentials with legacy compatibility and privacy preservation. For example, by integrating off-chain information on the activities participation and accreditation of DAO members via oracle, DAO administrators are capable to issue the corresponding POAP (proof of attendance protocol) and certify the competence qualifications of members.

And CanDID is the inside tool that helps DON to realize such functions. By adopting an oracle, CanDID allows users to import their identities from existing systems securely and prevents the possible duplication of identities. For instance, Alice and Bob can use their Social Security Profile pages to generate a certificate attesting to their Social Security numbers. In terms of mechanism, CanDID is mainly composed of two subsystems: identity system and key-recovery system.

In the identity system, CanDID can enable secure identity migration across existing web services such as social media, e-banking accounts, etc. by leveraging oracles especially like DECO or Town Crier. Additionally, CanDID doesn’t require data vendors to explicitly create DID-compatible credentials, which tremendously facilitates the convenience of the credential ecosystem.

In the key-recovery system, CanDID allows users to exploit existing network authentication schemes to recover keys through agile and simple workflows. Users can store keys on whatever device they use regularly and pre-select recovery policies and pre-store them via secret-sharing. The brief recovery process is shown in the following figure:

Looking forward

To conclude, it’s well perceived that oracle has opened a new chapter in the web3 era, ready to go beyond its restricted envision and obsolete functions. Whilst discussion on oracle’s burgeoning applications in web3 is still sparse, we expect that as the technology continues to evolve and crypto gradually engulfs the world, more and more savvy players will acknowledge the potential value of oracle and its significant contribution to web3.

Discover the undiscovered. Imagine the unimagined. More usecases and scenarios like data feeding innovations, and cross-chain solutions will be elaborated in our subsequent research.

(Acknowledgements: Chainlink China)

BitTorrent might sounds new to many people. But when it comes to downloading "seeds", I'm sure many of you will recall the days when you used to "request seeds" from all over the internet to play games or watch movies. A seed file is an index file that contains metadata such as the location and size of the downloaded file, the address of the download server, and the address of the publisher. In simple terms, BitTorrent is a P2P downloading protocol that is much more efficient than the traditional method of downloading from a web server. To give a straightforward example, back in the days when I was still a student, it was common that we gathered around to copy the homework which was completed by one single classmate. In this way, each student has to do the copy work by themselves with only one hard copy available. The process cannot scale.

The common practice is to delegate students to different copy works, for instance some taking care of the multiple choice questions and the others responsible for filling in other questions. Such methodology is way more scalable and efficient.

The intuition adopted by BitTorrent is somewhat similar to the above practice. While downloading, the computer acts as a server and then transfers the proportion of file which has already been downloaded to other users. With that being said, we are downloading and uploading at the same time. And thus, where there are more users downloading this file, the more seeds will be available out there and consequently faster the synchronization will take place, as well as for the speed of the download.

The pioneer of decentralized storage: IPFS

Despite the significant increase in downloading efficiency, BitTorrent still has some problems. In order to optimize these problems, we can’t avoid mentioning IPFS, which many readers might be more familiar with. It is where those famous decentralized storage projects such as Arweave and Filecoin are built upon. IPFS, which translates as the InterPlanetary File System, is an Internet communication protocol that allows distributed storage and file sharing. To download using BitTorrent, you must use a seed file, which contains the addresses of all the content you download.

One of the significant advantages of IPFS is that it leverages a DAG data structure to store data, which means that IPFS stores and searches files using content-based rather than address-based mechanisms. This suggests that when we are searching for a file, we are only required to keep in mind of what it contains instead of where it is exactly located at. IPFS generates a unique hash for each file (e.g. QmSNssW5a9S3KVRCYMemjsTByrNNrtXFnxNYLfmDr9Vaan) and when the user needs to retrieve this file, they simply ask IPFS who has this hash (QmS...Vaan) and then can retrieve the file as they wished. Because hashes prevent repetitive storage, files with the same content will not be processed by IPFS, which optimizes storage and improves network performance as well.

The solution for dynamic storage: Ceramic

If you pay close attention so far, you will probably notice that IPFS has a huge flaw. In IPFS, once a file is stored, it cannot be modified on the system because calibration changes the hash and then the user cannot retrieve the file by using the original hash value. This is the pain point that IPFS has been criticized for: not an optimal solution for storing files that need to be updated or upgraded from time to time. Therefore, there is an urgent need for an efficient and decentralized solution for storing dynamic data.

The Solution of Dynamic Storage:

According to the description of Ceramic above, attentive readers may reveal a huge flaw in IPFS. Once stored, documents cannot be amended in IPFS considering that modifying the content of the file changes the hash value of the file and users cannot find the amended documents through the original hash value. This is a sore point that IPFS is criticized by everyone: Not good at storing files that need to be updated and upgraded at any time.

Hence, there is an urgent need for an efficient and decentralized solution for storing dynamic data. Fortunately, the exploration of this track has been set out. Buddies interested in Web 3.0, Social Fi, or DID must have heard the name of the project——Ceramic. Ceramic is a decentralized open source platform established  for creating, hosting, and sharing data. Numerous DID and Social Graph projects are built based on it. As mentioned earlier, IPFS is doing well in storing static files, but it lacks the computing and state management capabilities and thus cannot realize more advanced database-like capabilities, such as variability, versioning, access control, and programmable logic. The occurrence of Ceramic provides a certain solution towards the problems above. ** **

Efficient Versioning

In Ceramic, each storage message can be represented as a superposale log (a log file on a computer recording the operation of a program), referred to as a Stream。Stream is similar to Git in concept. Git is an open source distributed versioning system that efficiently and quickly processes large and small project version management, which is the most popular version control software available today to store code, track revision history, merge code changes, revert to earlier versions of code, and so on. Git handles data like a "snapshot", similar to sharing documents and viewing historical versions with Google docs. Whenever you submit an update or save data status, it creates a snapshot of all the files at the time and saves the index of the snapshot. If documents are not amended,Git then will only save one link to previously stored files, rather than restore the document, which  improves efficiency to a large extent.

In fact, IPFS can also adopt Git to store dynamic data. However, developers are required to create a new hash-log file to record the mapping table for each Git log and IPFS hash update and are required to keep synchronization dynamic manually, or use the IPNS naming system to keep dynamic updates. Such operations are time-consuming and inefficient. Ceramic uses a "superimposed log" approach, and StreamID does not change consistently with the content change. As a result, it can easily store modified or backtracked versions without changing hash values frequently. Besides, Ceramic builds a new layer on top of other storage protocols, indicating it is highly combinable. Users can choose where to store their data, including decentralized Arweave, Filecoin, centralized AWS, etc. by themselves and realize automated versioning via Ceramic. Also, given each Stream only stores log instead of data, a global ledger to globally synchronize data states is not necessary, in which case Ceramic's lateral scalability is rather high.

Convenient Identity Verification and Access Control

Apart from the advantages of versioning, Ceramic also provides very convenient identity verification and access control. When new data is added in the Stream, modifiers need to verify their identities or the data can not be modified. Different Streams can require different identity verification mechanisms, and Ceramic provides very powerful embedded identity verification mechanisms——DID. Specifically, it provides 3ID DID for end users, key DID for developers, NFT DID that supports verification with NFT, Safe DID that requires multi-identity verification for DAO and many others to ensure data security. Meanwhile, Ceramic empowers the Stream programmable logic. For instance, if Stream A changes status, then Stream B can be accessed and upgraded, etc. The emergence of Ceramic empowered the construction of Web 3.0 enormously. Nowadays, there are various DID as well as Web3.0 social platforms under development in Ceramic. Project like social graph middleware platform - CyberConnect, Web3.0 Twitter - Orbis, instant messaging platform - The Convo Space, etc. are worthing paying attention to. We are looking forward to the new possibilities that Ceramic's infrastructure could bring to the application layer.

END

In my previous article ‘P2E is not sustainable - seeking the next Axie Infinity’, I predicted that gen 1 P2E games will likely collapse in the short term. The prediction has been validated with Axie Infinity’s revenue dropping over 95% from the peak. I believe as an industry, we are slowly entering the ‘build phase’, I’m incredibly long on crypto games in 3-5 years. After talking to more than 200 crypto game founders in the past 6 months, I'd like to share some insights. 

To quickly refresh our memory why we invest in crypto games:

1.We believe interactive entertainment will dominate attention economy in next decade

2.We believe crypto games will lead to prosperous in-game economy and creator economy due to incentive alignment

With such a thesis in mind, we make the following proposals to every P2E founder who shares the similar vision, to avoid some predecessor's pitfall.

TLDR:

• Iteration mechanism with token economy

• Remove NFTs from the core economy loop, design the economy around whatever token the team and investors are holding.

• Decouple play and earn. Make the game free to play, core gameplay loop should not be gatekept by a large upfront investment

• Distribute value granularly based on player’s individual performance and risk tolerance(stake level). 

• Embrace permissive IP, and build a vibrant creator economy around it

Iteration mechanism with token economy

‘The Lean Startup’ by Eric Ries is a book that in a way set the internet revolution in motion. The concept of ‘Agile development’ was first introduced by Eric in 2011. Why did internet companies grow so fast in the past decades? Because they abandoned the traditional waterfall model, and started embracing techniques such as MVP and A/B testing. Instead of avoiding mistakes, internet companies welcome them. They dramatically reduced the time to discover a mistake, as a result, they were able to quickly improve their products. When I worked at Tencent, a version every week was considered normal.

When it comes to crypto games, we can safely say that the industry is nascent, the best practice has yet to emerge, and founders are bound to make mistakes in their pursuit of success. One thing crypto that poses challenges on agile methodology is the immutable nature of the token economy. The dilemma is that it is virtually impossible to get the in-game token economy right on the first attempt, yet most games only get one chance. In fact, games such as Axie Infinity and Thetan Arena are already feeling the pain. Take SLP as an example, the token was initially designed to attract initial users as an alternative user acquisition channel. After the P2E narrative took off, the SLP token economy has been proven to be no longer sustainable for a large user base. Yet, Sky Mavis needs to be extremely careful if they were to make changes, as they would be seen as messing with people’s assets.

I believe iterative development is critical, yet as founders we should also take responsibility for people’s assets. How do we resolve this conflict? I propose an alternative approach here.

In traditional games, there are different servers. For MMORPGs, each server is similar to a nation, and they have an independent economy and player dynamics. A lot of Asian games, such as MIR, are forked with many private servers where the publisher and owner of that server is completely outsourced.

As crypto game developers, what if we only issue governance tokens that represent the collective ownership of the game’s IP and management, and let publishers/guilds/whales run their own economy with their own token that complies with the rules of the master DAO? Think of the game as layer 0, publishers/guilds/whales will be the layer 1. For instance, if YGG is bullish on the game, they would be able to spin up a server and manage that server with their own MIRYGG token, the same with MC, Perion or others. The guilds are ultimately responsible for making the rules on what’s the barrier of entrance, how much money can players earn, etc.

There are two main benefits with such architecture: 1.By allowing guilds and publishers to run their own instance, we create a coopetitive dynamic between them, we also allow much faster iteration to find the best token economy. For example, if Perion’s innovative design on revenue sharing gains traction, we would expect new servers adapting to similar design to be spun up quickly by other guilds. 2.This architecture offloads a great amount of liability away from game projects. The game developer’s primary emphasis should be on creating fun and engaging experiences. If the co-founders are sweating day and night over community complaints on who earns what, their attention to game development will likely be spread thin.

Issues with NFTs in game

-NFT is now a major part of almost every game’s core economy, and my contrarian opinion is that I see great peril with the way NFTs are being integrated nowadays. Our thesis for investing in crypto games is that they align incentive between players and developers. Ironically, in today’s landscape, the incentive is largely misaligned, considering that developers and private investors are holding primarily governance tokens while guilds and players are holding NFTs that is the result of aggressive money printing.

Solution: Games should build their economy around their core governance token. Players should be able to earn such a token just like the founders, and the amount of token rewarded should be correlated to their contribution. (Axie Infinity is moving to this direction by rewarding players AXS rather than SLP) Player’s earnings shall be subjected to vesting period. NFTs could be used more creatively in the game. Vitalik pointed out the inspiration of ‘soul-bound item’. Permadeath and Achievements are also mechanisms worth exploring with NFT design.

F2P isn’t perfect, but it’s still the only road to mass adoption

-Web3 is all about fair, granular and linear distribution of value that promotes network effect of healthy behavior. However, that’s currently not the case with today’s crypto games. Take Axie(origin) for instance, a user receives zero reward before they are granted a scholarship(or spend thousands of dollars on NFT). After they receive a scholarship, they get a certain amount of reward per day based on the quality of assets that’s given to them. As a scholar, the growth of earning only hikes once (when they receive scholarship) in their entire lifespan, and the growth thereafter is non-existent(maybe from 50slp to 60slp). The binary gatekeeping is disastrous for user acquisition.

Solution: crypto games should consider free-to-play and pay-to-earn. Everyone should have a fair chance to access and master the game. Their ability to earn reward should be linearly correlated to their mastery of the game and their risk tolerance. An optional ticket-based arena built on top of an intrinsically fun and fair PVP game is a good example. 

This design has several benefits:

• It engages players to meaningfully participate in the economy, as opposed to merely acting as cogs in a machine.

• It organically layers granular financial stake into the player’s game “flow”. Investing can also be part of the game.

• Having players staking into a game is far better than having speculators staking into a game. Games can build loyalty with the former, not the latter.

• Combined with ‘governance-token-centric game design’ mentioned previously, this could significantly increase buying pressure, as token investment is far more welcoming than NFT investment for most players with a small budget.

Do not sacrifice player experience to make economy work

-From the game design perspective, the player's gameplay experience is largely sacrificed in crypto games because of poor coupling between economy and gameplay. Take TCG(trading card game) as an example, there are generally two major parts that constitute the core player experience:

• Loot Box opening + deck building

• Playing with the deck

However, in most crypto TCGs, the organic symbiosis is torn apart. Guilds managers took the former while players are left with the latter. Managers purchase the loot boxes, open them, and build decks(axie team) around them. Managers then distributed decks to scholars, leaving scholars with the only task to farm using the given deck. This makes the players disconnected from the core game loop, it also makes them feel hopeless when they soon reach the skill cap with such a deck. The gacha(loot box opening) mechanism is arguably the most critical cornerstone of TCG monetization. As an ex-guild-manager, I also found the process of resource management quite fun and engaging. However, it is a shame to deprive players of this experience, it also dissuades the players from investing directly into the game.

Solution: Once again, I emphasize that the player experience shall not be compromised by the financial implementation. The game should decouple the core gameplay and the economy. Traditional games actually have faced similar issues. In the early days, F2P games made their premium items overly powerful, which boosted sales yet led to poor experience for the vast majority of free players, resulting in the quick death of the ecosystem. Modern F2P games have learnt their lessons. Take Genshin Impact for example, Genshin designed the game statistics in a way both free players and high-paying players can easily beat the game, only that the free players will have to spend slightly more time grinding in the later phase.

Crypto games need to make the same transition. There is no reason to deny free players access to the (almost)full game as they bring tremendous value both in terms of CCU, free publicizing and future potential purchase. If every football cost 500 dollars, we would not have a 700 billion sports market today. 

A real world case is Sky weaver, although sky weaver hasn’t revealed their complete token design, they haven made it clear that players will be able to access every single card in the game without upfront investment.

Wager based PVP could be the holy grail

Players feel obligated to ‘play’ upon attaining assets due to constant depreciation and opportunity cost.

Solution: Granularity of player contribution should be rewarded instead of punished. Players should have the rights to opt-in and opt-out high risk high reward competitive gameplay. This can also be achieved via removing ‘infinite yield’ from the NFT. One approach is to set durability on the NFT like Thetan Arena. Another approach is to completely discard NFT and design the game around fair and wager-based PVP.

Come for the game, stay for the party

BAYC is a great example of permissive IP working in reality. Similarly, Mihoyo also embraced an extremely tolerant policy around Genshin Impact’s IP. Mihoyo allows third party developers to leverage characters from Genshin to develop games, Mihoyo even allows them to monetize off the derivatives. As a result, Genshin quickly built an active and impactful community. For web2 companies, I respect them a great deal for the bold attempt. I believe every crypto game should think deeply about ways not only allowing people to build, but also encouraging and rewarding them to do so.

Currently, most crypto game’s P2E relies either on the Ponzi model or the Casino model, and both are zero sum games. Unlike those, the creator economy on the other hand is a positive sum model. If we can help players transition into becoming creators in game, we can navigate to a truly sustainable economy where people can earn sustainable income off their service and creativity. MixMob is a good example of that, they are designing carefully to empower players to create meaningful game assets, which will likely become the cornerstone of their game.** **

Appendix

Existing:

Alternative:

END

** **

**

**

Financializing NFTs was the much-anticipated hype of Q3 — Q4 2021 but its adoption has been on a standstill. While the NFT markets continue to have a good year in 2022 (not as good as 2021), financializing them hasn’t worked as well as previously anticipated. Foundational problems like oracles for NFTs, appraisals and instant liquidity for NFTs are yet to be solved which is base layer to any DeFi protocol.

The full infrastructure stack for NFT Fi has grown from primary marketplaces to a full-fledged ecosystem across multiple blockchains (some illustrated below).

NFT-Fi 1.0 waiting for adoption

As the NFT asset class grows, it also possesses risks to its investors. Risk of illiquidity and volatility would be at the top. NFTs are inherently illiquid asset and their denomination in ETH makes them volatile and exposed to currency risks. Investors measure profit/loss in a single method of accounting which is either US Dollar or their local currency.

While it’s difficult to change the denomination of NFTs for the entire industry, NFT enthusiasts were determined to create fungibility protocols such as NFTX, Unicly and Fractional. The mission is to bring in liquidity to these markets; but they ran into liquidity troubles themselves:

• NFTX tracked the price floor of collections which meant their vaults garnered interest from low value NFTs which were being deposited as a “short” against the floor price of the NFT. Majority of NFT investors would not use the protocol unless they wished to speculate on the floor prices of NFTs which were driven by market sentiments and/or prone to floor sweeping.

• Fractional and Unicly provide a more flexible approach and doesn’t require floor price tracking. However, it relies heavily on a large number of investors and whales to speculate on the price of the NFT collection. Acquisition of an entire collection is also difficult (but not impossible!) since it required coordination of deep pocket whales / investors for the collection’s ERC20 holders to make any meaningful exit.

Majority of the assets deposited in the fungibility protocols are also PFPs and are largely considered to be non-productive assets — there is no real reason to borrow NFTs except for vanity.

Productive NFTs

The concept of productive NFTs came forth with the rise of guilds such as YGG and IP rights to collection holders like BAYC.

Royalty backed NFTs

Royalty-backed productive NFTs are still on the rise and the wave will likely be pioneered by Yuga Labs and music NFTs. This is a category of NFTs to watch out for the next couple of months as they earn revenues from commercially licensing the NFTs and distributing the earning back to the collection holders.

Royalty-based NFTs are productive yet unlikely to be borrowed/leased since there is no PoW for holders — royalty will be collected as long as the underlying IP is being licensed commercially. Typically, the deal-making process will be initiated by a creative studios such as Yuga Labs or Recur Forever. As holders, royalties collected are passive incomes.

Gaming NFTs

Gaming NFTs provide a core utility (access to games and rewards)to its holders which subsequently spawned the entire industry of P2E games and guilds. They are unique in that to earn yield, owners must provide a “Proof of Work” which is through playing the game and winning PvP tournaments.

Guilds are asset managers and allocators who buy gaming NFTs in bulk which are then leased out to a group of players (aka scholars) who use the NFTs to play games such as Axie Infinity. The rewards earned in the P2E games are then distributed back to the players, guilds and middlemen called managers.

An access issue arises for gaming NFTs where the supply is scarce with an unlimited demand (players). The NFTs also don’t generate passive income — they need to be utilized in the games to earn rewards aka Proof of Work. To make the NFT productive, owners now have an incentive to lend/lease the NFT. Scarcity of supply and earning potential are incentives for players to borrow/lease from the owners. Some players will likely buy directly from the market; but through Axie’ case study, we know that most scholars are not crypto natives. They don’t own ETH to begin with and are primarily motivated by the income earned in $SLP.

Till date, majority of the crypto game players have been money players. As “play and earn” and guilds become mainstream, it is apparent that more “time” and “fame” players will enter the market. A new group of players will inevitably emerge in the future too — fame players aka esports teams in crypto games who play high stakes PvP games for high token rewards.

As games mature, they will onboard new players. Subsequently, their player compositions will change — skewing away from money players to time players. However, just like in today’s F2P games where majority of revenue is earned by a small percentage of players, the money and fame players will be responsible for trading activities on the marketplace and eligible for in-game rewards via PvP tourneys.

As this happens, guilds and asset owners will need to allocate their premium NFTs to the right players. We expect the decision making process to become more data-driven than it currently is, which is driven by key metrics showcased in the diagram below.

Guild Ops (Centralized)

Centralized avenues for a guild’s operations management has been on the rise. A case study below shows how a guild would manage its Axie assets.

Managers Ronin wallets have with Axies with the ability to natively assign the NFT to Scholars via QR codes. The codes are distributed to scholars. The sub-account can play the game using the NFT but can’t move the underlying asset. They manage frequent pay-days as well where the guild managers manually transfer earnings.

The key problems highlighted here includes

• Excess operational work for managers to manage QR code distribution and paydays.

• Scholars have to trust and rely on managers / guild to pay back their % of earnings on time.

This has inspired guilds and founders to create their own smart contract solutions. Larger guilds such as YGG and Merit Circle will likely create their own customized solutions but micro-guilds (defined as guilds with <100 players) will migrate to general purpose SaaS platforms like GuildFi, GuildOS, 0xAdventure, Blockchain Space, etc.

Assuming data becomes the next key commodity, all guilds will likely want to gain an advantage over the others and will subscribe to means that will track player data (off-chain). Platforms like GuildFi enable this via their Guild ID and Leaderboards — features that are prominently seen in Mobile Games such as Clash of Clans. While centralized platforms are efficient, they require players to have a provable track record or allow platforms to collect required information. Although a common practice in Internet companies, tracking player data to the crypto-native folks might not be a feasible solution.

Path Forward

While the centralized solutions are already a game changer for most guilds, tracking player data and the centralized nature of the services creates single points of failure which becomes crucial when platforms evolve from an SaaS platform into a DeFi hub for NFT lending, leasing, mortgaging solutions.

• Player data once used by guilds for making allocation decisions will be used as credit scores for players who want to borrow ERC20 or NFTs against their future yield as loans / mortgages.

• Leasing out NFTs occurs in a custodial manner and as a result, any hacks or restrictions by the platform on players will lead to loss of funds and assets for the player. This can especially become a high risk situation for players from sanctioned countries.

• Heavy reliance on platforms as exchanges or fiat off-ramps.

Road to decentralization

The hope is that lending, leasing, mortgaging solutions will be available on-chain with minimal human intervention. The exoskeleton for most of these solutions are already being built out and will continue to develop as the entire industry becomes infrastructurally scalable by using L2s and faster L1s.

• As more games embrace on-chain features such as Blockchain Monster Hunt or DeHorizon, most of the player data will be accessible on-chain via Dune, Graph or CyberConnect.

• NFT borrowing and leasing can be accessed using vaults such as ReNFT or IQ protocol. Pegaxy is a game on Polygon which already has in-house lending capabilities eliminating a big need for guilds as asset managers.

• NFT mortgage protocols which allows players and guilds to buy NFTs, use them to play & earn rewards and use the yield generated to repay the debt (Alchemix model).

Let’s deconstruct some of the major challenges that currently stand in the way of DeFi for Guilds / Games:

Third-party NFT lending/leasing protocols

These are solutions such as ReNFT and IQ Protocol who take on the role of the middleman for a small facilitation fee. The P2P leasing/lending protocols will allow asset owners to deposit & lock NFTs in a vault which is then leased out to an interested party in exchange for a small rental fee. The actual NFT never leaves the vault but the playing-rights (utility) of the NFT are forwarded to the renter’ address.

Key challenge to third party protocols is that they require games to integrate with their protocol. The games don’t accrue any material benefit from enabling third parties to do so. Due to the open-source nature of crypto, games can easily spin out their versions of Ronin QR codes / ReNFT’s vaults. Ronin’s recipe for this is currently fully closed source and the key barrier for games to develop their own versions is lack of resources and effort in building auxiliary modules that don’t directly contribute to gameplay.

Some games however like Pegaxy have built this functionality. Technically, they don’t require guilds but continue to work with them to ensure community engagement and as a means of customer acquisition. We can expect more games to continue down this path in the future.

Mortgaging solutions

Mortgaging solutions for gaming NFTs have a unique positioning in the market. As free to play business models continue to prevail, premium NFTs will continue to remain a paid service. Premium NFTs = boosted gaming rewards and hence, guilds and asset owners will continue to buy the NFTs.

Using debt to finance NFT purchases as opposed to cash or revenue sharing models (guilds) will be preferred for fame players aka esports teams. Due to the fact that players have differing play styles, when playing MMO or TCG games, esports teams are sensitive to ownership of their assets. Potential rugpull of these assets by guilds or centralized guild platforms or asset owners on ReNFT is a threat to their income and hence owning these assets make the most sense.

A decentralized mortgaging solution will continue to have several factors that require heavy governance / human oversight and this is due to the nature of NFTs and game economies. Creating smart price oracles for NFTs in different price tiers is an unsolved problem and a bottleneck for all DeFi projects looking to use NFTs in their systems.

Summary

We saw the birth of GameFi and Guilds in 2021. A lot of new primitives, ideas, incentive structures are being experimented with and the space is early but ripe for NFT financialization. GuildFi will likely start with centralized systems until we solve some of the structural problems like price oracles for NFTs, smarter appraisal and analytics and better risk models for the games and their economies. Once these three have been solved for, the industry will start its road to decentralization which might take a few years to see mass retail adoption.

Some things to look out for:

• On-chain game plays

• On-chain player identity systems

• Trustless NFT delegation

• Transparent credit scoring for game players

END

The data analyzed in the article refers only to the Ethereum on-chain activity.

Drawing a parallel to Web 2.0. Why do we need aggregators?

One thing that is consistent across both Web 2.0 and Web 3.0 is the demand for products and tools that improve convenience for the end-users and reduce the cost of finding the right product and service.

For example, Amazon has built an empire by creating a convenient experience for customers to purchase goods and services online, optimizing the cost and delivery time, while creating a global marketplace that benefits both buyers and sellers. Lowering the barriers of entry and increased competition goes at the expense of traditional business models, however, benefits the general economy as it increases productivity and purchasing power of the retail customers.

In the parallel world where Amazon-like applications don’t exist, customers looking to purchase a particular product online would have to browse through different stores, interact with multiple frontends, spend time to compare the prices and quality offered by different providers, etc.

For similar reasons customers prefer to interact with Amazon rather than individual stores, Web 3.0 users prefer interacting with aggregators rather than individual smart contracts. The more complex the on-chain spectrum becomes, the larger the demand for the aggregator layer.

The main functions of aggregators

Essentially, aggregators perform two simple functions:

• Search convenience

• Execution quality

The former one refers to the situations where some user may be interested in purchasing a token that is not necessarily listed on the exchanges he/she is used to interacting with. Instead of repeatedly going through the process of finding the venue where new tokens are listed, a user can simply skip this step and purchase any on-chain token through Matcha or a 1inch-like aggregator.

Not only that these engines help users find the newly listed tokens, but also ensure any transaction is executed in an optimal way.

For example, below is a transaction executed through 1inch. Instead of simply exchanging more than 20 WBTC for USDC in one transaction, 1inch did the conversion through multiple exchanges, several hops including four different tokens, in order to provide the trader with the optimal slippage and gas fee.

The example above illustrates that aggregators are particularly useful for whales. This should not be neglected, considering that whales are facilitating almost 90% of the on-chain volumes, despite representing less than 4% of DEX users.

At present, how significant are the aggregators?

As illustrated above, roughly 20% of monthly on-chain volumes have been generated through DEX aggregators, with a clear growth tendency. This figure is even more significant knowing that aggregators mainly represent non-bot volume (more than 70% of aggregators’ volume is generated by non-bot traders). On the other hand, bot volume accounts for roughly 50% of the total on-chain volumes, implying that almost 1/3 of the trading volume generated by ordinary traders already goes through DEX aggregators.

To support this claim, we use trading frequency as a proxy for bot trading. The assumption is that bots are trading much more frequently than ordinary traders, thus we believe it is reasonable to assume that addresses trading less than 25 times a day are most likely ordinary traders, while it is relatively safe to assume that the others are bot traders.

Following this classification, as shown in the pie charts below, about 73.2% of the aggregator trading volume is generated by non-bot addresses. On the other hand, around 53.5% of the total on-chain trading volume is due to non-bot trading.

Who are the leaders in the aggregator space?

Prior to comparing the performance of different DEX aggregators, we shall reflect on the difficulties in benchmarking them.

As aggregators are using a different methodology to record the on-chain data it would be wrong to compare their performance prior to standardizing metrics.

For instance, a user may choose to buy $1000 worth of ETH, however, due to the hop trades this trade may generate more than $1000 volume. As a result, we have two different approaches to measuring the volume:

1. Some aggregators would measure the volume from the user perspective only, or in the above example, they would account for $1000

2. The others would account for all the hop trades as their volume

Since we are concerned with the potential business models, pricing power, and revenue potential of aggregators, we standardize the data according to the first method. The reason is that aggregators will be able to monetize only the volume that is user-generated, whereas hop trades will be outside of their pricing scope.

Therefore, we first attempt to clean the data for the aggregators having somewhat inflated metrics. Then, we make a distinction between protocols such as 1inch, 0x API, and Paraswap vs end-user-facing products such as Cowswap, Metamask, and Matcha.

The former group of protocols, besides offering the API for various applications to interact with DEXs, also build applications themselves. Hence, 1inch and Paraswap support a frontend under the same brand name, while 0x created another brand Matcha which is relying on 0x API to facilitate trading activity.

While it is possible to differentiate between Matcha activity vs total 0x API activity, at the moment it is not possible to differentiate the activity of 1inch API vs 1inch frontend, or Paraswap API and Paraswap frontend. As such, when we refer to 1inch and Paraswap in the following text, it assumes aggregate activity generated through their APIs.

0x API, 1inch & Paraswap

On a high level, 0x API, 1inch, and Paraswap provide channels for end-user-facing applications to easily connect to the on-chain liquidity, as well as optimization algorithms focused on finding the best terms for individual trades.

As illustrated below, in terms of the user number, 1inch has generally been the dominant player. However, since December, 0x API has been attracting a larger number of users than 1inch API. On the other hand, losing the dominance in terms of the user number hasn’t affected 1inch’s position as the aggregator with the largest trading volume, indicating that larger traders i.e. whales still prefer using 1inch.

Metamask Swap, Matcha & Cowswap

While Metamask, Matcha, and Cowswap have different underlying mechanisms we benchmark them against each other as they are all end user-facing. For the purpose of this analysis, it is enough to note that Metamask and Cowswap can be thought of as meta aggregators as they are utilizing all of the existing APIs, as well as the primary liquidity sources. On the other hand, Matcha is a project incubated by 0x, thus it is primarily a front-end to the 0x API.

As illustrated below, the results are quite peculiar. Metamask’s user base is far beyond any other end-user-facing aggregator in the space, however, Metamask’s trading volume is consistently lower than Matcha’s, suggesting a significantly different user profile.

We dive deeper to understand the average user of Matcha vs Metamask. As presented below, Matcha volume is driven by whales, where we classify whales as those trading more than $100k on a daily basis. On the other hand, Metamask has less reliance on whales, where most of the volume, generally, comes from small and medium traders.

We find that Matcha’s largest 10, 25, and 50 users generated roughly 35%, 47%, and 58% of the total Matcha volume over the past 30 days, respectively, with one address alone (Tetranode) generating roughly 17% of the volume during the same time period. When it comes to Metamask, the top 10, 25, and 50 users account for approximately 10%, 15%, 19% of the total Metamask Swap volume over the past 30 days.

Which user base is more desirable?

The fact that power users are choosing Matcha over Metamask speaks in favor of Matcha, however, from the monetization standpoint, Metamask has a more desirable user base. In more detail, Metamask volumes are more healthy as there is less reliance on a small number of addresses. Moreover, power users are likely much more price-sensitive than ordinary users, hence it may be harder for Matcha to maintain current volumes if it introduces unreasonably high fees.

Metamask, being the most popular Ethereum wallet, has a larger moat than any other user-facing aggregator in the space, thus their ability to charge relatively high 0.875% transaction fees. However, the question remains whether with such a business model it can scale Metamask Swap to millions of users and generate volumes on a similar scale to some of the larger CEXs.

The risks for the DEX aggregators

Uniswap.

Uniswap has been the dominant on-chain liquidity source even prior to the introduction of v3. Nevertheless, since v3 deployment the market share of Uniswap in certain months has almost reached 80%!

For a large number of pairs, Uniswap v3 is offering the best pricing. Furthermore, Uniswap has implemented smart order router which executes trades across several pools in order to optimize the final price while ensuring the extra gas cost doesn’t outweigh the benefits.

Hence, it adopts similar logic as aggregators with a more limited tradable universe. However, in a scenario where Uniswap takes 80% of on-chain volumes and still has a growing tendency, are aggregators necessary?

How much of the volume aggregators source from Uniswap?

Looking at the liquidity sources of some of the larger aggregators such as 1inch we can see that Uniswap accounts for up to 60% of the volumes, with other significant players being Curve, Sushiswap, Balancer, and DODO.

We can read this data as follows: despite the chart confirming Uniswap is the most competitive liquidity source, it suggests that more than 40% of times users would lose value if they were to interact with Uniswap directly instead of using DEX aggregators.

Moreover, we should bear in mind the fact that aggregators’ smart order routing engines do not yet take into account MEV-generated slippage in their calculations. With the upgrade in the routing logic, it is expected that the volume exported to the slippage-free liquidity sources such as RFQs increases significantly at the expense of AMMs.

The best-case scenario

In summary, the fact that there exists one dominant DEX does not neglect the need for DEX aggregators. On the other hand, a complete monopoly of one DEX would bring into question the value of aggregators, however, it is almost impossible to imagine such a scenario realizing in practice considering the open-source character and low barrier of entry in the crypto space.

Quite the contrary, it is likely that the on-chain environment will keep getting more complex, creating additional value accrual potential for the layers abstracting the complexity for end-users.

As mentioned earlier, the improvements in routing technology should favor alternative liquidity sources e.g. RFQs. Besides, cheaper chains and rollups could benefit the development of the RFQ mechanism and hence create even more fierce competition at the primary liquidity layer. The reasons are twofold.

1. On rollups, market makers will be able to quote more aggressively than on Ethereum due to the faster block finality.

2. Rollups and cheaper chains are expected to create a positive feedback loop, increasing the on-chain order flow and attracting more market makers to participate in on-chain trading through the RFQ mechanism.

The first point is relatively simple, as RFQ guarantees zero slippage, the longer it takes to settle the transaction the more risk market makers have to assume, thus Ethereum Layer 1 requires the quotes to be much more conservative than what would be possible on Layer 2s.

As for the second point, a more extensive explanation may be required. Namely, once the gas fees are less of a problem we should expect a larger number of the end-user-facing applications connecting to aggregators’ APIs.

That is to say, we may see an increasing number of localized, centralized, and compliant frontends customized for different geographies that source liquidity through decentralized sources — aggregators’ APIs.

These apps would be analogous to the regional centralized exchanges, with the difference that launching such an app is relatively easy as there is no need to worry about underlying infrastructure but focus solely on improving UX and creating a loyal user base.

The increasing order flow routed to aggregators’ APIs will create an additional incentive for market makers to plug into the RFQ mechanism, further improving the pricing and competition among primary liquidity sources.

Moreover, not only that scalability solutions will lead to more competition at the DEX layer due to the above-mentioned dynamics, but also the anticipated decrease in gas cost would allow aggregators to split a trade between various sources at negligible cost, further enhancing the value proposition for the end-user.

In summary, all these factors are expected to strengthen the positioning of aggregators as critical pieces in the on-chain trading hierarchy.

It is not hard to imagine a future where a large majority of the manual traders rely on DEX aggregators such as Matcha, 1inch, Cowswap, and other similar applications to execute the transactions, making DEXs a backend that should be focused on capital efficiency while aggregators take care of UX. Looking at the current landscape, this is probably something resonating the most with Curve.fi vision.

In this layout, aggregators could become even more valuable than the dominant liquidity sources, having a presumably loyal user base willing to pay the convenience fee, while primary liquidity sources engage in a race to the bottom to attract the order flow.

Acknowledgments:

Thanks to the 0x Labs team for providing valuable feedback.

Disclaimer:

0x Labs, Consensys and 1inch are IOSG portfolio project.

🦄 About IOSG

IOSG Ventures, founded in 2017, is a community-friendly and research-driven early-stage venture firm with offices in China and Singapore. We focus on open finance, Web 3.0 and infrastructure for a decentralized economy. Our portfolio covers more than 60 projects, including Layer 1 (NEAR, Polkadot, Cosmos), DeFi (1inch, Synthetix, UMA, Dodo, Liquity, Gelato). We commit ourselves to work alongside various developer & DAO communities and helping the most aspiring founding teams to achieve success. As a developer-friendly fund with long-term values, we have launched Kickstarter Program which offers capital and resources for innovative and courageous developers. Since we consistently cooperate with our partners and connect with communities, we work closely with our portfolio projects throughout their journey of entrepreneurship.

If you would like IOSG Ventures to consider your project, please send a summary of your project along with a pitch deck and/or white paper to hello@iosg.vc

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Let's assume a simple experiment: you are in a closed room with a small hole in it, and a mysterious visitor in another room connected by the small hole. By your side, there is a pile of paper and a pen. You can write down any question on the note, stuff it through a small hole and the other person will hand back the note with the answer written on it.

Then the question arises, how can you tell whether the person is a real person or a computer by means of paper and pen? This is the classic (and simplified) "Turing Test", also known as the "The Imitation Game". Turing believed that a computer could be described as intelligent if it was able to impersonate a human being and make the questioner believe that he or she was actually a human being. As early as four hundred years ago, Descartes, the proponent of dualism, had also suggested that machines could in fact interact with humans. And the philosopher Diderot even remarked, slightly tongue-in-cheek, that "if they found a parrot that could answer all questions, I would not hesitate to declare that it has intelligence".

The Turing Test was considered by many to be a fantasy for half a century. Even today, most people would still laugh at Siri for being too rigid, as if AI that could pass for the real thing was still a long way off.

AI development in the gaming sector

As a veteran gamer, my first contact with AI in a game was in StarCraft. Twenty years ago, the bandwidth resources were very limited and real-time online battles were unattainable. Starcraft, as a strategy game, developed the earliest AI for the player. I remember clearly the time when the AI was so clumsy and slow to react to the player's strategy that the game company had to give the AI extra in-game resources to make them an even match. No one fails to tell if their opponent is an AI or a real person, because they are just too dumb. Interestingly, despite the fact that Blizzard (the company behind Starcraft) has since made a fortune on Starcraft and Warcraft, and Blizzard has continued to pour profits into R&D with funding that would make even many academic institutions envious, the AI development of Blizzard's games has been very slow and stagnant.

Why is the development of AI under the big tech companies so slow? Apart from the theoretical bottleneck of the hardware, we also should talk about the business model of Starcraft. In the early gaming market, due to the lack of online payments, the vast majority of gaming products were profitable through offline buyouts. Since it was a one-shot deal, game companies naturally lacked the economic incentives to optimize the gaming experience in the long term.

The advent of the mobile era has significantly accelerated the development of gaming AI. Thanks to the widespread use of online payments, mobile games have tapped into a more efficient business model - the in-app purchase system. In games like Arena Valor or Game for Peace, game companies can bury payment points at many nodes in the user lifecycle. The one-shot deal becomes a long-term repurchase, and the game's DAU (Daily active users) becomes the most crucial business metric. In order to improve player retention, game companies need to find ways to create mind-flow and excitement for players. Specifically, game companies need to interfere with and control the user's gameplay. In the case of Arena Valor, for example, each player's first game is critical, and if a player fails in the first game, there is a higher probability of losing that player outright. As a result, game companies need to deploy carefully designed bots for the first game, or even the first few dozen games, so that players win more than they lose, and are always able to meet comparable 'opponents' and win by neck in thrilling encounters.

What converges with the new business model is the rapid development of hardware and machine learning theory. The creation of Tensorflow has made it possible for even the most mundane programmer to efficiently train AI. with dramatically reduced development costs and exponentially increased benefits, the invisible hand has driven the development of AI to new heights. To give an example from my side, my wife rarely engages in gaming, but I recently took her through Arena Valor or Game for Peace. She quickly caught on and even became somewhat addicted. As a diehard gamer and gaming investor, I was naturally aware that most of our opponents were bots, but she was oblivious. To give an example from my side, my wife rarely engages in gaming, but I recently took her through Arena Valor or Game for Peace. She quickly caught on and even became somewhat addicted. As a diehard gamer and gaming investor, I was naturally aware that most of our opponents were bots, but she was oblivious. It probably didn't occur to Mao that "it's fun to fight with (a) robot" as well.

Crypto is the golden age for AI

During the last ten years of mobile gaming development, we witness how in-game economic exuberance impact on AI. When it comes to crypto, AI will definitely be growing in an exponential way.

A few points will be discussed as below:

The application layer/entity is enormous in scale: for a non-official AI, using a less proper analogy, it is much easier to make profit out from Axie Infinity if comparing to Fortnite

Technically speaking, KYC is classified as off-chain data, which cannot effectively interact with blockchain

The excess computational power due to the transformation from PoW to PoS will lower the bar of AI development

As I mentioned in previous passage, the P2E model represented by Axie Infinity is fundamentally a short-term business strategy to compensate users. The underlying revenue supposedly collected by traditional gaming companies is redistributed to active gamers by Axie Infinity, effectively lowering the threshold to attain new comers. Meanwhile by such mechanism, user stickiness is expected to realise in business valuation within long-term horizon. For instance, when Sky Mavis (team behind Axie) launches new game, users will be more likely to pay for subscription if he/she was previously a loyal gamer of Axie. Even if gamers refused to do so, revenue can be compensated substantially in other ways such as ads and streaming services. However, if it is bots who are playing behind these unique addresses, then the above assumptions are no longer valid. On one hand, bots will not pay any subscription fee. On the other hand, other revenue streams will be net zero. An real example is the recent price crash of SLP, which could be explained by the claim that roughly 30% of the SLP is drained by bots and dumped by then.

From project’s perspective, how to distinguish bots from real users is always tricky. Axie Infinity is the first unicorn dApp, but will not be the last one, that has to put real thoughts on Turing test, if reflecting on latest game named Sunflower Farmers which is destroyed holistically by bots. In web2, such moat is established by ID card and Bank account which are guaranteed by national credit system, preventing AI from largely involving in economic activity. Not to even mention that the generalised AI has been rapidly replacing human beings. For instance, quant bots have made numerous traders redundant. The absence of KYC in crypto makes it even easier for AI to claim their territory.

The thing can even get worse. When Ethereum transitioned to PoS, a large amount of GPU will be idle. A proportion of it will flow back to individual computer, while another proportion will be consumed by bots, through Tensorflow or RandomForest.

Defend humans, starting from Proof of Personhood

The rapid growth of AI will put most of the xx-to-earn model in threat. From a crypto gaming investor’s perspective, we keep a close watch on DID and POP protocols. DID will not be addressed in details in this article given it is not a new idea anymore, As below I will dive deeper into the POP development.

Before we understand POP, we need to reach a consensus on why Poof plays a huge part here. First of all, within any distributed network, Sybil Attack is disastrous - malicious act targeted towards distributed network, by attaining fake and ineffective accounts. A quick imagination can play out - if Bitcoin network no longer requires hash computation, and thus any node can participate in block generation, which makes hackers can easily run hundreds of thousand of nodes with little cost and in turn attain control of the whole network. We can tell from the above example that for either PoW of Bitcoin network or PoS of Ethereum 2.0, only one goal is deemed to meet - raise the cost of Sybil Attack and effectively resolved the problem of bots and any other problems associated with manipulation of fake accounts.

However, POW and POS both brought up a serious side effect, which is plutocracy. Rich people has much more control over distributed network comparing to average people, which contradicts to the narrative of web3. web3 intends to strive for equality and inclusiveness, while the situation for now is another story.

Maybe Proof of Personhood is the best answer to the prevention of Sybil Attack and promotion of average people. POP derives from the distributed network, built on biological definition. Two criteria has to be met for a POP network - 1. only human can attain identity and become a node operator 2. each one of human can only claim one identity. When the above two criteria are met, a native web3 Dapp can be successful globally.

POP is still developing at nascent stage. Majority of people don’t smell the urgency yet while builders have been committing in establishing POP network already. Except Proof of Humanity which is raised by Vitalik lately, there are many other excellent projects out there leaving their own mark down the road, such as Idena Network, Humanity DAO, Kleros, Upala, BrightID, Duniter, Equality Protocol, etc...

It becomes harder and harder to establish an effective POP network, considering the fast-paced development of AI technology. Here we go again, facing same problem raised by Turing half an century ago - how to see through the real identity via screen. Without any doubt the above POP protocols mentioned adopt unique designs and technologies, while they all encounter the trilemma of decentralisation, privacy, and scalability.

Congratulations if you make this far. To make people’s life easier, more is expected to delve and explore in the next research paper.

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TL; DR

On December 19th, the Value factory at Shekou Shenzhen has witnessed the grand success of the 8th Old Friends Reunion event. The two-day event covered the themes of Scaling Summit and Metaverse Carnival, two of the most heated topics within the current crypto world. The event saw over ​​2000 onsite visits signed from Huodongxing.com & Eventbrite.com, among which actually there were 2000+ people who joined the two-day events there onsite, and 150+ top-tier industry experts as well. Around 5000 views via live streaming on YouTube. With 10+ top-tier media coverage, we have seen 500k+ social media engagement & impressions, the event came to a perfect end!

On the first day of “Scaling Summit”, we have co-hosted with StarkWare, imToken, Arbitrum, and received support from partners including MatterLabs, Optimism, Aurora, Aztec, Polygon, Celer, xDai, deBridge, Hop Protocol, Chainlink, the Graph, Synthetix, ChainNews, and Cointelegraph. The day had 15 keynotes and panels, which generated impressive insights including technical and theoretical discussions on the feasibility of different L2 scaling solutions covering the topics of scaling solutions Rollups, Cross-chain Bridge, EVM, Scaling DeFi, MEV, App-specific Layer2, etc. Thanks again for the support and engagement to the event from our co-hosts and partners! 💗💗

The second day of the event focused on “Metaverse”, partnering with M7e, Axie Infinity, Illuvium, YGG, Aavegotchi, Roll, Flow, Big Time Studios, Alethea AI, MetaverseLabs, the attendees received insightful presentations and discussions on topics of Identity, GameFi, Community, DAO, Creators economy, NFT, crypto art, etc.

IOSG Ventures has always believed in the positive cycle of the “technology-capital” paradigm that started with infrastructure and technological revolution. Our investment strategy remains unchanged, which is to invest in long-term fundamental value creators in the industry. Namely, based on the macros of the industry, we pursue our investments by formulating research-driven theses and backing some of the most innovative ideas in the space. In the past two years, we have been studying and supporting the Layer2 infrastructure projects, and among our Layer2 portfolios, we have invested in the leading Rollup projects including StarkWare, Arbitrum and Aztec. We also prioritize and believe in the potential of Metaverse. In the new year ahead, we will keep looking for opportunities among the top-tier projects and supporting the emerging spaces.

We appreciate the insights and visions shared by the founders, developers, industry experts, etc., during the two-day event. Allow us to extend our sincere gratitude and appreciation to all of you!

More About the Event

YouTube Wrap-up Video & Event Photo:

1. Day 1 Collection: Highlight, Full Episode

2. Day 2 Collection: Highlight, Full Episode

3. Day 1 Photo Gallery & Day 2 Photo Gallery

A Quick Look At the Event RECAP

Day 1 _ Keynote

• Eli Ben-Sasson — STARK Validity Rollup-An Ultimate Scaling Technology

Eli Ben Sasson, Co-founder of StarkWare, pointed out that there are two systems in the world today, one is a centralized system, and the other is a decentralized system, which is a blockchain system. In a centralized system, all computers and nodes are controlled by a large centralized entity, with high capacity but this will result in a sacrifice of privacy. On the other hand, under the blockchain system, thanks to the principle of ‘inclusive accountability’ everyone is given the right to check the validity and accountability of the system, but the privacy and scalability of these systems have been questionable. The emergence of ZK can solve this situation. Simply put, this is a redefinition of the trust mechanism. ZK is the trust in mathematics. When a large number of transactions are processed by the computer, the trust mechanism is based on the trust in mathematics and cryptography, not on the computer itself. Based on Zk technology, StarkWare launched StarkEx to solve the problem of scalability. StarkEx consists of the prover and the verifier. The off-chain prover is responsible for processing a large number of transactions and generating Stark proof to update the status of the rollup and confirm the mathematical correctness of these transactions. Then the verifier on the chain will carry out the transplantation of the whole process on the Ethereum main chain and verify the correctness of the transactions.

This approach provides scalability and integrity at the same time because instead of all the nodes in the system verifying each and every transaction, all they need to do is to run a lightweight verifier. By doing that, they can check the system maintains its integrity and the new state is valid. StarkEx is one of the leading L2 in terms of many parameters, such as cumulative trading over $270 billion. It has settled over 65 million transactions and has over $1 billion locked in total value. An average transaction on StarkEx costs less than 500 gas, which is roughly 100 to 1000 times cheaper than what it would cost on Ethereum. The brand-new product Starknet has been online for three weeks. Its form is no different from that of Ethereum and way more scalable than Ethereum while smart contracts can be deployed at will. A series of related tools will be launched in the future, including ERC20 contracts, L1 and L2 cross-chain bridges, and compilers from Cairo to Solidity.

• Jocy Lin — Scaling & Metaverse: The Beginning of Web 3.0 Era

Jocy Lin, the founding partner of IOSG Ventures, has presented his thoughts and the team’s investment focuses in the past year. Key takeaways as below:

5 years ago, we started envisioning how exciting a Web 3.0 world could be. Fast forward to 2021, witnessing the impressive tractions gained by different crypto Apps, we can now proudly announce that what we hold to the era of Web3 has finally arrived!

From infrastructure to the application layer, our main focus areas in this year include L2 scaling, DeFi, GameFi and SocialFi.

Read more on Cointelegraph

For L2, IOSG thinks highly of the future of modular blockchain. Not to be too forward, but L2 is very likely to replace 80% of the transaction volume on L1 in the coming year. Our investment logic on L2 covers leading rollup L2 infra and middleware (cross-chain bridges) and ecosystem dApps opportunities. The key to solving the scalability problem is to separate the execution layer from data availability. In the public chain market, we heavily support Polkadot because we believe it will be the Layer0 meta protocol that has interoperability in the heterogeneous blockchain world.

In the past 2 years, we have been investing in infrastructure projects such as Starkware, Aztec, Arbitrum. Going forward, we will be investing in other middleware such as cross-chain infrastructure, data platforms, etc that make it easy for developers to deploy on layer-2s. We will also be investing in a new generation of dApps that are enabled by the unique advantages of L2 tech.

For DeFi, Ethereum is still the most diverse DeFi ecosystem. While this year the whole market is getting more mature on Ethereum, IOSG thinks in future innovations will still happen on Layer 2 DeFi protocols based on primitives. Besides, multi chains’ primitives opportunities and Financialization of NFTs are new areas to explore. The most critical are the three characteristics of decentralization, composability and permissionless. Derivative CEX will be gradually replaced by DEX in the future. We have seen a lot of success with aggregators in Web2, and as Web3 users hit the 100 million mark, web3 aggregators will become very important as well. The most important reason why IOSG invested in 1inch/matcha is its efficiency and user experience.

For GameFi, first of all, we think the core of Gamefi is not a game, it is a fundamental shift from a centralized supply of entertainment to a decentralized, collaborative, and democratized paradigm of producing&consuming fun. Guild is the first stop for Web2 players to enter gamefi. At present, the market is quite fragmented by local guilds.

In Gaming, we invest in visionaries who strive to revolutionize relations of production by empowering and incentivizing individuals to make meaningful contributions to their community.

SocialFi, one of the hottest topics in crypto this year. We see an opportunity for Web3 SocialFi in the predicament of Web2. Ownership is the key to the problems. In the booming era of ownership economics, we have invested social token/NFT issuance platforms, such as Roll, JennyDAO, which allow direct tokenization of social influence. Recently we are focusing on projects that boost the creator economy. IOSG invested in platforms such as MintSongs, Pianity, and CreatorNFTs. We believe Web3 social platforms will soon take off. We are the seed investor of Galaxy, and we continue to explore in this direction, whether it is infra, middleware or application layers.

Data Analytics is the last direction we shared and it’s also one of the most undervalued markets. We predict that the market size of the Crypto & Blockchain data service market will experience exponential growth by 2025.

• Chang-Wu Chen — Now and Future in L2 — from Wallet’s Perspective

Chang-Wu Chen, Chief Scientist of imToken brought us a deep insight into the current L2 landscape, DeFi development, future outlook, and ways of building up a wallet belonging to the next generation using underlying technologies. Firstly, Chen mentioned that L2 offers a high TPS while low gas fee scalability solution, through which wallet can deploy more assets and thus more users will be attracted. He then further compared the different scalability solutions between Optimistic and ZK-rollups, in dimensions of developer-friendliness, composability and UX. Also, he introduced the application of cross-chain bridges and the corresponding solutions, and he suggested imToken’s effort put in generalization from both end-user and developer perspectives, including the easy access for a developer to retrieve off-chain data in a standardized way with EIP-3668. Meanwhile, another interesting point he mentioned was that the standard to have a universal interface for wallet access for the betterment of UX shall be redefined in the near future.

• Harry Kalodner — Solve Scaling without Compromise

Arbitrum’s co-founder and CTO, Harry Kalodner introduced Arbitrum’s technical solutions and future plans. Arbitrum is based on Optimistic Rollup technology and is expected to reduce the transaction fees to only a fraction of the Ethereum main chain, while maintaining high composability and decentralized security. The Beta version of Arbitrum One launched at the end of August and has processed more than 4 million transactions and has supported more than 200 dApps. The security of Arbitrum is based on Ethereum. All transaction data is posted on the Ethereum main chain, while the transaction execution takes place off-chain. Arbitrum’s interactive fraud-proof guarantees the safety of users’ funds. In case of malicious activity, everyone can raise disputes during the challenge period to ensure that the correct transactions are included on the rollups and Ethereum chain. Arbitrum Nitro, which will be launched soon, will provide a more compatible user experience with Ethereum applications and will decrease the transaction fees by posting a smaller call data on Ethereum L1, making L2s competitive with some of the cheaper L1s out there. This will be the most important upgrade of Arbitrum in the future.

• Sandeep Nailwal — Polygon — Suite of Ethereum Scaling Solution

Sandeep Nailwal, Co-founder of Polygon, illustrated the specialties of their scaling solution from the underlying infra. Polygon is an L2 scaling aggregator that integrates various solutions and is committed to integrating various technologies such as ZK Rollups, Optimistic Rollups, PoS sidechain and Plasma, etc to their existing solutions. Polygon’s ecosystem has been thriving in the past year with growth in their TVL, the number of transactions and ecosystem applications building on it. The Polygon POS chain has become one of the most popular solutions in the world. A current trend is that each different application has its own requirements. Some require higher decentralization and security, while others require faster transaction speeds and lower costs. Each has its tradeoffs. Sandeep believes that Polygon provides more options than any established layer1 L2 solution, and will ultimately allow the market to choose the solution they want. While providing high-speed transactions and low cost, it creates a more complete framework for Ethereum’s expansion.

• Philip Fei — Oracle Computation: Improving Blockchain Networks via Data Feeds and Off-chain Computation

Regarding scalability, Philip Fei, Chainlink’s China Lead, shared their visions, products & services, and current progress. He first talked about Chainlink’s contribution to data transmission, that they have provided price feeds, proof of reserves, and abundant on-chain data availability. Moreover, through Keepers, developers are able to use off-chain computation in a decentralized, secured and simple way. Philip emphasized that by using CCIP(Cross Chain Interoperable Protocol, Chainlink will be able to provide multi-chain computation and interoperability between public blockchain, private blockchain and consortium blockchain, which will bootstrap the adoption of smart contracts.

• Alex Shevchenko — ETH as a Base Currency: Why It Matters and How It Works

Aurora is a solution that allows executing Ethereum smart contracts on top of the more performance environment, which is the shared Near blockchain. Alex Shevchenko, CEO of Aurora, stated that for Ethereum, it allows for the scalability of the decentralized applications that are running there and allows to cover additional markets for these DApps. For Near, on the other hand, it allows to quickly bootstrap the Near ecosystem and helps to scale the amount of the applications and the different operations that are available on top of the Near blockchain.

The thing that is different for Aurora is that the base token or the token that is used to nominate the fees for the user transactions is not a fancy Aurora token. We are using ETH as a base token. Now Aurora has a partnership with Consensys and they are working with the Infura team on the integration of Aurora in the set of Infura products. They believe that the choice of Aurora to use ETH as a base token is very important for mass adoption.

Day 1 _ Panel

• Different Flavours of Rollups: Optimistic and ZK (Validity)

Regarding the two hottest flavours of L2 solutions, ZK-Rollup and Optimistic Rollup, Benjamin Jones, co-founder and chief scientist of Optimism, Zachary Williamson, Co-founder & CTO of Aztec, Harry Kalodner Co-founder & CTO of Arbitrum, Alex Gluchowski, Co-founder & CEO of MatterLabs, and Avihu Levy, product director of StarkWare, had a thought-provoking discussion. In response to the most overlooked aspect of their projects, Avihu Levy pointed out the lively developer ecosystem that is forming around StarkWare. StarkWare is bringing some interesting development issues to the community, and the entire problem-solving process is displayed in discord to help developers better understand their ecosystem. Harry Kalodner believes that the long-tail effect of the system is very interesting, where the community steps up and uses the tools provided by Arbitrum that weren’t conceived in that way when they were designed. He believes that because of the ease of deployment and open development features of Arbitrum, they are expecting more and more developers to use their platform and express their creativity. Alex Gluchowski said that zkSync’s long-term commitment to building a truly decentralized ecosystem should receive everyone’s attention. According to him, there will be a dedicated Security Council to handle matters related to system upgrades for zkSync, which is an important factor for decentralization. Zachary from Aztec mentioned that with Aztec Connect, users will be able to interact with Layer-1 applications without sacrificing their privacy. Finally, Ben from Optimism mentioned that the traction of EVM chains shows the adoption of EVM by the developers. As L2 infrastructure providers, they should have the responsibility to make it easier for developers to deploy their smart contract without additional overhead and this is only possible through EVM equivalence.

• Beyond EVM Compatibility: Next Milestones for Multichain Adoption

Mandy Wang, Founder of Odaily, as the MC she raised a series of questions about use cases and public chain development. Wilson, Avalanche’s Asia lead, said in the past few years, the improvement of industry infrastructure and supply chain will set the foundation for the outbreaks of more Dapps next year. Yaoqi Jia, Asia lead of ParityTech China, believes that multiple chains, especially heterogeneous chains, will be leading the future because when using different apps, whether it is NFT, games or other emerging forms of Web3, heterogeneous chains can be used for these applications to provide a better execution environment. Yuanjie Zhang, Co-founder of Conflux, gave a different view on the competition caused by the rise of Layer 2 and ETH 2.0. He believes that Layer 2 and the capital side did not reach some kind of agreement on interests. He was bullish on EVM compatible chains and some top-tier CEX chains. Yuki, Moonbeam’s China community lead, believes that more and more capital is flowing into the market, and due to the high transaction fee and blockage of Ethereum, the capital outflow resulted in the current sharp competition environment among different public chains.

• How to See the Trade-offs among Different Cross-chain Bridge Solutions

Focusing on different cross-chain bridge solutions, Gokhan, the investment director of IOSG, Mo Dong, CEO of Celer Network, Arjun Bhuptain, Founder of Connext, and Vaibhav Chellani, Founder of Movr Network and Philipp Zentner, Founder of Li.Finance, Chris Whinfrey, Founder of Hop Protocol and CEO&Co-founder of deBridge, Alex Smirnov, have discussed very interesting topics. In response to the current cross-chain problems that need to be solved most urgently, Chris believes that with the rapid development of L2, moving liquidity between different chains is undoubtedly the most urgent problem to be tackled. Other types such as cross-chain smart contracts and cross-chain NFTs are also the future development directions. Alex believes that the ultimate solution to cross-chain is the transfer of arbitrary information, arbitrary contracts, and arbitrary data; the development of that will enable new kinds of cross-chain dApps. While Phillip Zentner reckons that the biggest problem at present is that the current bridge solutions are not decentralized enough, and another problem is the lack of unified standards, such as standard synthetic assets and consistent APIs. Mo Dong added that we also need to pay attention to the token economy and incentive mechanism in the cross-chain ecosystem, as well as liquidity management, data transmission and processing, and cross-chain smart contracts call. Arjun and Vaibhav have reached a consensus on the user-friendliness of future products. They believe that we will soon enter a world where all applications default to cross-chain. This will give birth to new cross-chain services and products, so that users do not need to understand the underlying principles of the blockchain, just use the applications to meet their needs.

• Scaling DeFi: Could Scalability Solutions Trigger another Wave of DeFi Innovations

Kain, Robert, Yenwen and Rune from Synthetix, Liquity, Perpetual Protocol and Maker DAO, respectively, have discussed DeFi and the implication scalability solutions can have on DeFi protocols. This panel was hosted by Deniz Omer, Founder and CEO of Ethereum Central.

Talking about the blockchain trilemma between security, decentralization and security, Rune Christensen, Founder of MakerDAO pointed out that no compromises should be made on the decentralization of the blockchain, and for those prioritizing scalability over decentralization, there are already centralized exchanges that provide incredible scalability. Rollups are the only solution that resolves scalability issues without sacrificing decentralization and security.

Kain Warwick, Founder of Synthetix pointed out the difference between scaling up and scaling out. For instance, platforms like Solana are pushing boundaries regarding the throughput of one single chain, hence increasing the requirements for the node or node operators on the system which may impair decentralization because it’s not open for everyone running a node at home, however, at the same time it is a neat solution as you don’t need to care about atomicity as it doesn’t produce frictions like sharding solutions.

Yenwen Feng, Co-founder of Perpetual Protocol believes that among layer 2s, it will be the winner-takes-all type of market. The primary reason is the network effect of L2; the need to be composable with other projects will push protocols towards one L2 solution. Thus, the first L2 that gets the network effect will be the winner that takes all, while the others may split a smaller market share.

Rune believes that projects would eventually choose L2 solutions based on whether they prefer cheap transactions or composability with other DeFi applications. It is possible to see a spectrum of different rollups that specialize in being higher cost and higher composability or lower cost and lower composability.

Scalability solutions will have a profound effect on lending solutions and complementary solutions such as automation tools, as L2s will allow for faster reaction, hence supporting lower collateral requirements without sacrificing the security of the protocol. Another thing that will re-emerge will be on-chain order book trading.

Yenwen shared concerns about on-chain order book protocols, even on Solana, as there are still costs to update order book, hence he believes AMMs will dominate DEX market long term.

Robert Lauko, Founder and CEO of Liquity, concluded that L1s will have an advantage when they apply sharding techniques to offer an out-of-the-box neat and easy solution to the end-user because they can try to at least make the impression from the outside that it’s just one monolithic system while under the hood it could be composed of different sub-networks.

• New dApp Design Spaces Opened Up by Layer-2’s: What’s Possible

Zhixiong Pan, Co-host of ChainBreaker Podcast invited guests to have a wonderful discussion about the new application built on Layer 2 and its user experience. Philip Fei, head of Chainlink China, said that the biggest problem using L2 is the issue of cross-chain asset(user experience), which is restricted by factors such as lock-up period, liquidity, and asset transfer time. However, the good news is that some exchanges already supported Layer 2 asset transfer. Ryan Chow, Co-founder of Solv Protocol, pointed out that Layer 2 has narrow and broad definitions, but no matter how it is defined, it is characterized by lower handling fees and faster speed. Among them, there are several interesting phenomena that Arbitrum’s gas fee is slightly higher than Polygon’s, followed by xDai’s surprisingly low fee. Loopring’s CTO Steve Guo believes that with the improvement of ZK Rollup, the derived ZK Rollup DAO also has certain potential, such as being able to solve problems happening in asset withdrawal.

• How Big is the Future Space of NFTs & Games-focused Blockchain

Jesse Johnson, Co-founder of Aavegotchi, Dieter Shirley, CTO of Dapper Labs, Robbie Ferguson, Co-founder of ImmutableX, Jiho, Co-founder of Axie Infinity, Andrew Gross of Xdai, and Daren Frankel of Palm discussed the current situation and future development of NFT and Gamefi. Andrew said that in addition to conglomerates, government agencies have also started to use blockchain technology; Dieter predicts that there will be more innovations in the NFT space in 2022. Frankel believes that NFTs have changed the lives of many people and have given a platform for creators and artists to showcase and distribute their work efficiently. Jiho and Robbie both believe that in addition to Axie, more game teams will emerge and become unicorns in the industry.

• New Layer, Same Old Problem: MEV Prevention on Layer-2's

Mangata CEO Peter Kris, Flashbots founder Stephane Gosselin, Automata’s co-founder Deli Dong, Matcha’s co-ceo Amir Bandeali, and Cowswap’s tech lead Felix Leupold revolved around the idea that many people think arbitrage is exploitative. During the discussion， Stephane believes that all arbitrage is exploitative, but it is indeed not user-friendly in defi. Deli looks from different angles of MEV, and shares solutions of setting up a channel to patch this loophole. Amir holds the view that the nature of arbitrage is not bad, but certain methods such as sandwich attacks, are purely squeezing users, or even deceiving users. Regarding the differences in MEV between L1 and L2, Felix believes that there is no essential difference. One phenomenon he observed is that POS verifiers are more inclined to use/understand MEV than POW verifiers.

• How Investors Involved in Scaling Opportunity

Regarding the topic of the expansion track hosted by ChainNews editor-in-chief Feng Liu, investors shared different ideas.

Jocy Lin, the founding partner of IOSG Ventures, believes that the development direction of the entire Layer 2 is low handling fees, high TPS, and the proposal of the modular blockchain concept, which further confirms that L2 makes the entire blockchain network more efficient and higher performance. In addition, side chains and cross-chain liquidity aggregators are also worthy of attention, as well as a large number of native and derivative applications that will be generated in the L2 ecosystem in the future.

Deng Chao, MD of HashKey Capital believes that Layer 2 is the same as other blockchain concepts. The emergence of its technology can be traced back to three or four years ago, but the continuous participation of developers and communities must be required in the process to make it enter the next stage of development.

Dovey Wan, the founder of Primitive Ventures, said that the outlet is made by entrepreneurs, not by investors. She looks at L2 investment more from a developer-friendly perspective, and she believes that the future parallel to Rollup is the application chain (modular chain). Any Web3 leading applications will build their own chain somehow considering the cost and returns.

Vincent Niu, the partner of Sky9 Capital, holds a similar view. He believes that the explosion of Layer 2 and side chains is inseparable to the continuous innovation of basic technology and the actual application.

Frank Li, the investment partner of SNZ, summarized at last that the winner of Layer 2 applications mostly depends on whether they have built a prosperous ecosystem, it has nothing to do with the TPS.

Day 2 _ Keynote

• Jean — Welcome speech

In 2021, the year of Metaverse, we have witnessed amazing innovations sweep the industry. The iteration and development of new ideas can’t be without the sparkles of different thoughts. Jean Chen, the founder of M7e, has addressed the opening speech for the Day 2 Metaverse Carnival and shared his thoughts regarding the new wave of markets.

Jean suggests, in the history of traditional economic development, it is the series of regime reformation, i.e. property rights protection, that promoted a series of inventions and applications and ushered in a new era; likewise, for the establishment of the future digital world, independent identity, data and asset system behind it is the key element to drive it. Blockchain and NFT provide the technical foundation on which the metaverse truly has the basis for perpetual prosperity.

Metaverse Carnival invited industry pioneers to bring exciting keynote speeches and panel discussions from NFT, Web3 identity, DAO, social, gaming, digital world, crypto art, etc., presenting the audience with exciting insights from different angles in building the metaverse.

• Sid Kalla — Social Tokens: User-generated Capital for a Web3-first World

Roll’s Co-founder & CTO Sid Kalla states that crypto tech transforms user-generated content into user-generated assets, and Roll helps users create capital around the community. Today, Roll has issued about 400 different social tokens, of which about 10% have an active trading market, and the total market capitalization of these is about $2250 million to $300 million. Through social tokens, communities can easily interoperable between different platforms without being bound by the underlying platform. Sid believes that they, as an important new asset class, will redefine social networks in the next decade.

• Bruno Skvorc — Kanaria Metaverse: Home to the Most Advanced NFTs in the World

Bruno Skvorc introduced RMRK, a new NFT system in the Polkadot ecosystem and called it an NFT Lego. Bruno introduced the powerful technical principles of RMRK. It allows for composability amongst NFTs; the interaction of expressions (emojis) on-chain on NFTs; conditional rendering, etc. RMRK has transformed NFTs from simple images in the past to feature-rich collection resource aggregators. The team is putting these new NFT elements into production based on the RMRK ecosystem to produce the best metaverse game ever.

• Quinn Campbell — Bringing Axie to Everyone

Quinn Campbell, Chief Marketing Lead of Axie Infinity, pointed out that there was huge potential in the innovation of Web3 gaming economy and introduce the current progress of Axie: Over 3 million daily active users. Axie will carry out a series of ecosystem expansion strategies: cooperating with KOLs, governments and communities; launching the first free game accelerating the process of acquiring and monetizing users; expanding the market to the rest of the world, e.g.India and Africa.

At last, Quinn believes that Axie does beyond itself, which means “Play2Earn” and GameFi evolution bridging people and the crypto world, and lead constantly with the help of infrastructures such as wallets. It fundamentally changes the economic paradigm of our generation.

• Dan Wang — How SubDAOs Are Delivering Web3 to the World’s Hardest to Reach Communities

Dan Wang, Co-founder of YGG SEA (The first SubDAO of YGG), explained the mechanism of play-to-earn. For blockchain games, users have the absolute say on assets, time, and skills. Besides, Dan mentioned how guild evaluates games from various perspectives, how to tap into markets in Southeast Asia and why SubDAO is so important to boost Web3.0. Moreover, Dan showcased the scholarship system for the audience to obtain NFT and also explained the big role of DAO in asset management.

• Wilson Wei — Building the Social Graph Protocol for Web3

Wilson Wei, Co-founder of CyberConnect suggested that social relationships in Web2 are the basis of digital identity, and the various problems faced by the current Web2 social graph, including centralized control, data monopolistic, migration costs, etc. Wilson further introduced how CyberConnect’s product portfolio empowers developers and users in Web3, starting from the two most fundamental social attributes of the account system.

CyberConnect provides the decentralized social graph protocol that will serve as a data Layer for all social applications. The social graph module is the main part that CyberConnect will focus on. Users can make all the back-end needs in the front-end with two lines of code in a very easy way.

Day 2 _ Panel

• GameFi: Bringing the Next 10M Crypto Users?

Alex Liu from IOSG ventures moderated the discussion around crypto gaming. The panel discussed the current landscape of crypto gaming, the role of DAO and guilds in the long-term roadmap of this space, as well as the sustainability of P2E and the potential squeeze.

Jason Brink from Gala Games expressed that the fundamental value of crypto games is decentralized ownership. Jason took a strong stance against guilds gatekeeping crypto gaming space as the thesis of Web3 Gaming is to yield power back to the players from a small group of privileged parties. Gabby Dizon from YGG on the other hand argues that guilds are not gatekeeping the gaming space, on the contrary, guilds actively help educate and onboard traditional players into Web3 gaming space. As a DAO, a guild is owned and governed by real players. Ryan Yang from BigTime Studios also embraces the idea of DAO. Although BigTime currently is not driven by a DAO, the team is testing methods to let the community heavily participate in game development.

Kieren Warwick from Illuvium pointed out that many indie games on the market lack playability and well-thought economy, this fact combined with the speculative momentum in the market resulted in great risk. He believes that quality games take time to develop, and it is crucial to align incentives between players and developers with means such as DAO and treasury.

• What Can Crypto Art Contribute to Metaverse?

In response to the moderator Judy Yang, **VP of IOSG Ventures **about the relationship between crypto art and metaverse; how crypto art and NFT promote Web3 to the mainstream:

Crypto Artist REVA pointed out that NFT is the most basic concept of metaverse items. The visual effect design of each item is what the creators of encrypted art will do in a broad sense in the future. The current “crypto artists” will also be divided, and at this stage, it is necessary to create more.

Sylvia Wang, China Lead of TR Lab, believes that the institutions of the traditional art world will also appear in the meta-universe world. In addition, because there are more expression media in the meta-universe, the forms of encrypted art will be richer.

Bohan Sun, the founder of BCA Network, believes that helping Web3 “out of the circle” is the core goal of crypto art, and introduced the four major sections of BCA Network: virtual space, digital gallery, VR trading, encrypted art exchange; and emphasized content and IP assets are commodities with unique ideologies, which are the core assets of metaverse, and they are the key elements that lead the cold code world to a wider group.

• How Community Build Metaverse with Legos?

Mandy Wang, the founder of Odaily, led in-depth discussions among the guests on the definition of metaverse, and why the creator economy is the centerpiece of this new paradigm. Mary Ma, the co-founder of MixMarvel (Loot Rangers), took game artists as an example and pointed out that NFT distribution can avoid the deprivation and exploitation by middlemen, resulting in a more efficient, productive and accelerated game development environment. Kant, the founder and CEO of Nash Metaverse, has two perceptions about Metaverse: one is that the current computing power and hardware are not enough to support commercial use; one is that the social influence of the great narrative of the blockchain cannot be ignored. He also pointed out that the current model of traffic distribution and rewards based on the attention economy has led to the vulgarization of content and an unhealthy creative environment in web2; the emergence of the creator economy essentially stimulates meaningful creativity, which is expected to shape an economy. Kant concluded that the mission of the game is to provide a testing ground where successful models can be rapidly tested, screened and grown out of this open economic system. Xiao Wu, the founder and CEO of ChainIDE, believes that only the metaverse is the metaverse supported by blockchain. Blockchain allows countless metaverses to be connected together, which is stronger than any metaverse made by Web2 giants, and there must be a consensus. K Erica, the founder of RhizomeDAO & Guild W, believes that the most important value of blockchain in Metaverse is its composability and permissionless ownership. As the model on the whole chain gradually matures, everyone can truly own the metaverse. And all will share the opportunities and challenges in the creator economy.

• How Identities are Core to Web3?

This panel around the topic of web3 identities moderated by Dwight Torculas, CEO of Mint Songs; Panelists include Kaspar Tiri, Co-founder of Ready Player Me; Leo Chen, VP of Engineering of Harmony (BAYC Community); Harry Zhang, Co-founder of Project Galaxy and Kevin Primicerio, Co-founder & CEO of Pianity. The difference between Web2 and Web3 identities is that in Web2, identities are fragmented due to the independence of platforms while the aggregation effect in Web3 will ensure the completeness of identities. These Web3 identities will be aggregated and independent of applications, which will bootstrap the innovation of applications as well as efficiency. Meanwhile, another interesting point is with respect to technology innovation, that all of the infrastructure and SDK enables users to have control over what and how they want to convey those messages. However, there’s one thing we cannot ignore — we are still early, web3 is still in an immature stage, and it’s full of uncertainty about how it is going to evolve in the future. One possibility is that physical and digital identities gradually merge until an ultimate balance is reached.

• World Building — the What, Who and How?

The mainstream is trying to accept the fact that ‘blockchain will be influencing people’s understanding towards ownership.’ This panel, moderated by Jean Chen, the founder of M7e; Panelists include Navigator, Senior member of DCL Community; Jacky Jiang, Co-founder of MetaEstate; Runchen, Investment Associate of Republic Realm and Mo Gu, Scene Developer of Metaverse Labs.

They share opinions in terms of the new business opportunities and economic models within the metaverse. Two things matter here, ‘scarcity’ and ‘demand’. In metaverse, scarce resources will no longer be water, food or anything that in reality people cannot live without. As a result, people’s demands will change and thus business models will experience reforms and redefinition. Common sense is that the economic landscape and business models will be much more abundant and innovative in metaverse compared to that in the traditional world. They share imagination towards the upcoming challenges that metaverse will be facing.

• Designing Fun 2 Earn Games

Chase Freo, CEO@ OP Games, has led the discussion to put forward insights from the perspective of economics and entertainment around crypto games. Jesse Johnson, Co-founder@ Aavegotchi, pointed out that Aavegotchi is an NFT running on Polygon. Besides the metadata, visual effects are as well completely stored on the chain. Gotchiverse, a meta-universe game created around these NFTs, will launch a public beta version in early 2022. Planetarium CEO Kijun Seo hopes to develop fully decentralized open-source game supported by the community, such as the 100% open-source RPG chain game Nine Chronicles, and emphasizes that constructing a dynamic scenario in the game ecosystem not only allows users to make money but also promotes user consumption is the focus of the next few years. Simon Vieira, the co-founder of MixMob, believes that more financial attributes have been added to the current games, which puts forward higher requirements for players’ financial and strategic capabilities; in addition, he said that the current types of games are relatively single, and there is still a lot of potential in the industry in the future. In view of the biggest challenges currently facing Web3 games, everyone shared their views on infrastructure, capital and talent, regulations and user experience.

• 1000 Metaverse in 1000 Eyes

This panel revolves around the theme of the social networking space in the metaverse. Alen shared his positive attitudes towards two major scenes as an investor: low-cost UGC scenario, and the other is the scenario of constantly low-cost UGC yet can also generate consumable social relationships. Then, Wilson and Josephine shared their opinions as practitioners, emphasizing that the biggest difference between Web3 and Web2 is the ownership and privacy of digital assets. Guests also expressed their views on the Web2 giants’ foray into Web3: the bloated organizational structure of the Web2 giants is no longer suitable for the Web3 entrepreneurial environment, and they are now undoubtedly compelled to share their cheese with others, which may create potential conflicts inside the company.

• Defining Successful DAOs and Community Building

In response to a series of questions about DAOs raised by MC Ishanee, the investment associate at IOSG Ventures. Several DAO leaders shared their views：

The founder of JennyDAO, Benjamin Rameau, believes that the criteria for DAO success are multifaceted, including token price performance, execution efficiency, and degree of decentralization; JennyDAO’s success lies in creating a truly decentralized framework that grants ownership to every token holder, and compared with off-chain assets, on-chain NFT can more easily adopt a decentralized governance approach.

Gitcoin’s Revenue Lead, Connor O’Day pointed out that Gitcoin is changing from a private entity to a DAO, and believes that user engagement and creation in the community, not token prices, are the core indicators for measuring DAO success. When it comes to the difference between DAO and listed companies, Connor believes that the essential difference between the two lies in the user’s ownership of the company’s assets and the right to make rules.

Instigator of Seed Club, Jess Sloss, believes that DAO comes from a pragmatic strategy. Its success is based on clear organizational goals. It is imperative to better organize to allow more people to join the DAO. Among them, user experience issues should not be resolved through product design compromises, but through community education. Although the on-chain governance of DAOs is subject to smart contracts, for most DAOs, their token holders do not have the custody or control of DAO assets.

Stephan Zhang, CTO of UTU. one, said that DAOs need to consider availability and cost efficiency, and there is no need to pursue decentralization too much. Different types of DAOs require different degrees of decentralization. It is also pointed out that at present, DAO only radiates to 5% of the population, and it is the key to attract the other 95% of the population to join and participate in DAO in a natural way.

• Metaverse the Future — BUT NOT FOR WHAT YOU THINK?

Everyone is talking about Metaverse today but in addition to the valuation of related projects and the frequent exposure of this word on social media, not many people think about what makes it so popular and what’s the key value behind it.

Panelists include Vincent from Sky9 Capital, Eraser Li from SevenX Ventures, Jerome from EVG, Poseidon from Outliers Fund and Colin from Zonff joined this panel moderated by Ray Xiao, the principal of IOSG. Vincent thinks that crypto and blockchain are necessary for metaverse because they are the radical thing for the whole ownership economics rather than those centralized entities like Facebook simply changed the company name but all the ownership of users’ data still belong to centralized servers. Eraser and Jerome both believe that Metaverse is still in a very early stage so as investors we should be open-minded for it while focusing on how actually the product is designed and what problems it can resolve is very important.

Dragon City Demonstration

During this event, we’ve also invited the Dragon City team to demonstrate the virtual event scene built on Decentraland. They’ve explained to participants about virtual world-building and how to play there, which was such a fantastic experience when trying themselves. Dragon City is a community district consisting of 6,485 parcels of LAND contributed by hundreds of members worldwide in 2017. It is the first metaverse community on Decentraland to display traditional Chinese culture by combining emerging technologies, reconnecting the past with the future. It is a portal into the metaverse, where people can experience the virtual city they built.

GM: “New Adventurer” Crypto Art Exhibition

“New Adventurer” is the crypto art exhibition that is co-organized by IOSG & BCA & SuperRare, which brings together all the adventures that lead the tide in the global crypto art campaign all over the world. The Great Mercy Universe, the first Chinese digital auctioning his works at Sotheby’s, will join the exhibition with his thoughts and a new series of “Virtual Butterflies” on site.

About Co-hosts

IOSG Ventures

IOSG Ventures, founded in 2017, is a community-friendly and research-driven early-stage venture firm. We focus on open finance, Web 3.0 and infrastructure for a decentralized economy. As a developer-friendly fund with long-term values, we launch the Kickstarter Program, which offers innovative and courageous developers capital and resources. Since we consistently cooperate with our partners and connect with communities, we work closely with our portfolio projects throughout their journey of entrepreneurship.

StarkWare

StarkWare invented, and continually develops, STARK-based Layer-2 Validity Proof scaling solutions over Ethereum. StarkWare’s solutions, which rely on Ethereum’s security, have settled over $250B, and over 60M transactions, serving hundreds of thousands of users. StarkNet, StarkWare’s permissionless general-purpose scaling solution, is live (Alpha) on Ethereum Mainnet. StarkEx, a custom standalone scaling service, has been powering applications since June 2020, including dYdX, Immutable X, Sorare, and DeversiFi.

imToken

imToken is a decentralized digital wallet used to manage and safeguard a wide range of blockchain- and token-based assets, identities, and data. Since its founding in 2016, it has helped its users transact and exchange billions of dollars in value across more than 150 countries around the world. imToken allows its users to manage assets on 12 mainstream blockchains and all EVM chains, it also supports decentralized token exchange and open DApp browser.

Arbitrum

Arbitrum is a leading Ethereum Layer-2 scaling solution developed by OffchainLabs. Based on the Optimistic Rollup scheme, Arbitrum enables ultrafast, low-cost transactions without sacrificing the security of the Ethereum ecosystem. Launched on August 31st, 2021, Arbitrum has attracted 100+ ecosystem projects. Arbitrum is currently EVM-compatible to the bytecode level. In the next upgrade, Arbitrum Nitro, Arbitrum will further increase developer experience by incorporating WASM support.

M7e

M7e aims to build a community of entrepreneurs, investors and early users who believe in and devote themselves to metaverse. It is promoting the early completion and implementation of the metaverse supported by NFT through media, activities, community, investment and ecological incubation.

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On December 19, 2021, at the 8th Old Friends Reunion Metaverse Carnival, we are pleased to have invited Sid Kalla, the Co-founder & CTO of **Roll **to give us an inspirational keynote speech !

Overview

How social tokens are a new asset class? What kinds of Web3 primitives are useful for social tokens? Let’s hear Sid touch upon how social tokens fit in with some of the larger themes like NFTs, metaverse, and DAOs and continue to dive into the different types of value sources for social tokens.

We’ve captured the full learnings and video from Sid’s sharing below. Fairly high level with enough technical details that you don’t want to miss out!

Hey, everyone, this is Sid Kalla, the co-founder and CTO at Roll. Today I’m going to talk about social tokens as user-generated capital for a Web3 first World. Let’s rewind like 20 years towards the start of the online social world. Pretty much everything we know about the social world today, from sending tweets, posting images, sharing videos, all of these activities very broadly can be classified as user-generated content. In that world, the value that’s generated by individual creators or communities or groups pretty much mostly gets captured at the platform later. That’s why companies like Facebook are valued at close to a trillion dollars. Yet users obviously don’t nearly make as much. We’re now entering a world powered by blockchain technology. That’s pretty much like based on the ethos of Web3 that we ride on. This really allows creators not just to make content, but really to make their own capital. Crypto is leading the shift from user-generated content to user-generated capital.

We can now create capital around content, which is pretty much the world of NFTs that you might be familiar with, and you can create capital around community. That’s the world of social tokens. So crypto uniquely enables digital scarcity by owning social tokens in a community - you own a piece of that community in perpetuity. Social tokens are becoming pretty much increasingly necessary as we enter into new computing paradigms like the Metaverse, for example. We cannot make the same mistakes that we made with traditional Web2 platforms where the platforms have all the power and the community pretty much has none.

It’s pretty devastating if Facebook were to become the dominant metaverse platform. It’s just too much power with a single entity. Instead, what we really want, what we really need, is communities to easily be able to flow between different metaverse platforms really without losing their identity so that you’re not tied to the platform, the underlying platform itself. Social tokens allow communities to capture most of that value that they create and then move it across the web. Whether it’s traditional Web2 platforms up and upcoming Web2 platforms, Web3 platforms or even the newest metaverse platforms. How cool with that?

Let’s talk about some basic economics of social tokens. The first thing that we talk about is to ensure that there’s a supply cap again, like with the ethos of crypto enabling scarcity. This is in contrast to some doubts that have chosen to mint as many tokens as they deem necessary based on governance. But we believe this is a flawed model for the long-term success of a community because it’s not respecting basic property rights because a majority of the people in the DAO can vote to essentially make someone else’s stake worthless. That’s not a good guarantee for someone to be able to invest their time and money into something instead of having a fixed supply.

What we’re really ensuring is that you can own a piece of this community forever. As an example, all the social tokens that we issue at Roll have a maximum supply of 10 million units. So say we are minting like a dollar IOSG token on Roll for this amazing community that IOSG has curated over the years. What this means is that if you were to own, say, ten thousand of these IOSG tokens with a given cap of 10 million, that means you will own 0.1 percent of the supply and no one can take this away from you. Social tokens are also fungible tokens, which means that one IOSG token in our example, is the same as any other IOSG token. They’re also divisible up to 18 decimals, usually. So this means that they are a superior form of money inside the community. This is as opposed to some other primitives like nonfungible tokens(NFTs), which are unique per token and therefore become very hard to divide and then also transfer value between one to the other. Once a social token is established inside a community, it can very easily function as a medium of exchange pretty much as money inside a community, both for large and small transactions. So, for example, the original promise of the web was around microtransactions that never panned out, but that will be possible with social tokens inside of each community that adopted. The initial distribution of social tokens is also a pretty important primitive.

So you want to reward people who have already contributed to making your community valuable. After that, you want to incentivize behaviors that the entire community generally deems valuable. So in our example, that would be people who have already made IOSG successful up to this point, including the community that they are curating around themselves. The founders and many other investors, the teams, everyone. Going forward, the community can then decide who to reward. For example, let’s say a new project comes into the fold. You know, they can reserve certain tokens for that project. Or if someone were to put an event like this together for the broader community, that’s pretty valuable. They earn some IOSG tokens. We also found that vesting is a pretty key economic primitive for social token communities. This ensures that the creator is in it for the long run because most of the economic value that’s created is in the future and not the present. It really just like helps reduce short term thinking from community leaders, encourages building for the long term health of the community, just aligns incentives for the long term essentially. At Roll, the default duration right now is about one year, but we let the communities choose their own vesting period at launch. So again, like in the IOSG token, they can decide to invest for 1 year or 5 years or even like 10 years.

Once that’s set, that cannot be changed so that people know exactly the whole distribution and supply schedule over time. Once that initial distribution is figured out and you have some ways to get that into the community to earn social tokens, what really comes after a very fascinating thing is markets. This is really where the power of decentralized finance (DeFi) really shines. You can plug your social money into all of these DeFi protocols, like an automated market maker (AMM), something like Uniswap, for instance, to provide some initial liquidity. This creates a market that can then give your social token a dollar value in the traditional world, you would need a professional market maker, like Citadel or someone to be a market maker. But in the DeFi world, we can use these automated market makers where everyone can become a Citadel essentially. You’ll also earn a small trading fee that’s typically zero 0.3% while taking on some risk of impermanent loss. But this is also something of value you’re contributing to that community. To give you just a sense of what the markets really are like, just at Roll, we’ve issued about four hundred different social tokens, about 10 percent of them. So about 40 of them right now have an active market in this way. The total market cap of all of these is about 250 to 300 million dollars, depending on the market. Now this is just with 40 social tokens, right? So think of a world in which the scales to tens of thousands or even millions of different communities.

So it’s a very valuable primitive that people can use in the traditional social world. Things like “likes and retweets” are really the currency of these platforms. But in this new world that is enabling like liquidity is what matters. You can incentivize your community to start providing liquidity to your social token by rewarding them with additional social tokens for the people who provide liquidity. What this really enables is creating deeper liquidity pools. The market makes it easier for people to enter and exit the community by buying and selling the social tokens of that community. But at the end of the day, ultimately the price is, of course, determined by the market. Even if you set the price too high or too low, people are going to buy and sell and make decisions based on that. There’s more liquidity on the price will just converge to the market consensus quicker.

Another thing, we’re kind of hearing a lot about DAOs (decentralized autonomous organizations) and social tokens really are the most basic form of DAO that you can really form. Over time, you can progressively decentralize this DAO while you have the time to set the direction that the community should go in, especially in the early days, which is really important and also integrates very well with NFT communities that have capital assets in the form of a piece like art or gaming. So people with the social tokens get the voting to decide, for example, at what price to list or what kind of NFT to buy and so on. Once their social token has a dollar value, you can send a portion of that to the DAO under the community’s control. The community will then collectively decide where and how to deploy this value. Remember, now there’s a dollar value with the markets. In our example, an IOSG DAO can then decide to buy tokens in another DAO or swap tokens with another DAO. Or you could purchase some high-quality NFTs that the community believes in. We’ve even seen does in a social token does invest in equity in startups. So pretty much how the treasury is used is very specific to each community, but it’s a very wide-open canvas. The assets of the DAO hold are, of course, not limited to social tokens, it can hold ETH, NFTs or other tokens. What matters is that the community collectively governs this over time. The IOSG which was initially in control, can pretty much completely decentralize the system right by giving a majority of the IOSG tokens to the DAO, just letting the community thrive pretty much independent from that initial issuance that we saw. A big part of what really makes social tokens valuable is, of course, also the ability to use them on existing platforms, right? So that’s your Facebook and Twitter.

But also, like future platforms, we strongly believe that the next billion users in crypto are going to come through these existing communities that already exist on platforms today, right? The future generation of the platforms will natively integrate social tokens. So all this is to say that the infrastructure layer becomes extremely important. This is why a company like Roll, for example, is really building those APIs for Web2 platforms. If you’ve ever seen things like sign in with Twitter or sign in with Facebook in the future, you’ll see like sign in with Roll, you can connect your Roll wallet and all of a sudden that Web2 APPs pretty much can behave in these Web3 primitives that we just talked about.

In conclusion, social tokens really allow you to create capital around the community. It’s not tied to the underlying platform like Facebook. They can move from the physical space for the digital space to the metaverse, to any other future computing spaces, all while retaining their economic value. They can trade freely on the open market. They can plug it into DeFi primitives like automated market makers. They’re very interoperable with DAOs and NFTs and they can really move the capital from one platform to another very easily. Whether it’s a Web2 or Web3 platform, social tokens really are a new asset class that we believe will redefine the social web over the next decade. Thank you all very much.

❄️ About Us

IOSG Ventures, founded in 2017, is a community-friendly and research-driven early-stage venture firm. We focus on open finance, Web 3.0 and infrastructure for a decentralized economy. As a developer-friendly fund with long-term values, we launch the Kickstarter Program, which offers innovative and courageous developers capital and resources. Since we consistently cooperate with our partners and connect with communities, we work closely with our portfolio projects throughout their journey of entrepreneurship.

On December 18, 2021, at the 8th Old Friends Reunion Scaling Summit, “Scaling DeFi”, as the recent talk of the town, has been brought to the table by these pioneers. They are Deniz Omer, Founder & CEO of Ethereum Central; Kain Warwick, Founder of Synthetix; Robert Lauko, Founder & CEO of Liquity; Rune Christensen, Founder of MakerDAO; Yenwen Feng, Co-founder of Perpetual Protocol.

🎤 Moderator — Deniz Omer (Ethereum Central)

Hello to all our viewers. Thank you for joining this IOSG 8th Old Friends Reunion event. Today we’ll be exploring scaling DeFi and whether and how scalability solutions can trigger the next wave of DeFi innovation. I have the pleasure of being joined by four distinguished guests from the world of DeFi, from the world of Ethereum. They’ve been building products for years and really know the challenges of building on these open decentralized platforms and the challenges around scaling and scaling while trying to keep it as open as permissionless as possible.

Today I’m joined by Kain from Synthetix, Robert from Liquity, Yenwen from Perpetual Protocol, Rune from MakerDAO. Guys, thank you for joining us. Could you maybe briefly give a very short introduction of yourselves to our audience? Kain, maybe we can start with you, going clockwise.

Kain Warwick (Synthetix)

Sounds good. I’m Kain from Synthetix. We are a derivatives platform on Ethereum, now also running on Optimism as well. So we allow people to get exposure to a range of different assets like gold, silver, Bitcoin on the Ethereum blockchain and the Optimistic Ethereum blockchain.

Robert Lauko (Liquity）

I’m Robert Lauko. I’m the CEO and founder of Liquity. Liquity is an interest-free borrowing protocol that allows you to borrow LUSD, which is a stablecoin against Ether, and the main selling point is that the loans are interest free. Also the collateral ratio is relatively low at 110%.

Yenwen Feng (Perpetual Protocol）

Hi, I’m the co-founder of Perpetual Protocol. So we are building a decentralized perpetual contract on-chain. Our v1 is built on top of xDai. We are working on v2 right now. The v2 will be on Optimism.

Rune Christensen(MakerDAO)

I’m Rune Christensen. I’m the co-founder of MakerDAO, which is a stablecoin platform and a DeFi protocol. I used to be the CEO of the Foundation, but I’m not anymore, because that’s has dissolved because Maker at this point has become so decentralized, that basically the community took over, hiring people running the whole the whole thing, which is pretty cool, because it’s a very advanced stablecoin system, but it’s not controlled by a single team. The thing that makes it unique is that it’s primarily backed by Ethereum, but it’s also using a bunch of different collateral assets, including centralized stablecoins that allow one-to-one pegged to the dollar with unlimited liquidity. Also we’re moving into using what we call real-world assets, which would be actual financial assets, like real estate in the real world. Even with that, we are even moving towards trying to focus on sustainable finance.

🎤 Moderator — Deniz Omer (Ethereum Central)

It’s pretty cool that all those products that’s heard in 2017 and 18, we’re saying, decentralization is a journey. Over time, you’ll get more and more decentralized. You guys are showing that in action over time, it has become gradually more decentralized. It’s really cool to see that. Now, before we jump into what kind of innovation we can see, once we do manage to scale up, maybe we should go back to the root of the question and think about how we scale, because at the end of the day, we’re all bound by this blockchain trilemma, which says you can have scalability, decentralization and security, you can improve one or two different aspects but it always comes at the price of the other. When we do try to decentralize Ethereum, decentralized what’s happening in DeFi, how should we be thinking about this trilemma? What kind of compromises are acceptable? How should we be thinking about this for the long-term sustainable growth of this? Who would like to kick us off?

Rune Christensen(MakerDAO)

I want to make a point on this trilemma. I think another way to talk about this is this common argument of decentralization. It is a spectrum, right? You get it here all the time. My opinion on this has always been that it’s a spectrum, but I think it’s quite limited, how useful it is to really look at all these different points in let’s call it the middle of the spectrum. I actually believe that for a very long time, we’ve had the combination that in my opinion works the best, which is you have blockchains that are actually decentralized. You can actually count on to even handle very negative scenarios. So we’ll be talking about the Ethereum mainnet and Rollups, which is this type of scalability technology that doesn’t compromise in security. If you don’t want that, if you don’t want absolute best in class security, then you’re probably better off using a regulated centralized exchange, like Coinbase, Binance. They have incredible scalability. They’ve had that for while it’s not exactly new technology. It’s been there for a decade at this point.

I actually think the combination of these two things that already handles the trilemma really well, because it allows users to pick the spot where they’re most comfortable with, which for most people, that is, in many cases, a stable centralized exchange. You have to really know what you’re doing to actually use the real bare bones of blockchain technology, and then the risks that comes with it in terms of user error. I think in order to know where you’re supposed to go in the middle of the spectrum, I actually think that requires even more knowledge, because how exactly is a user supposed to know, okay, this is not as secure as Ethereum, but there’s still all kinds of risks around my own knowledge and skills. But I’m also not getting the protections of a centralized regulated platform. So in my opinion, that it really comes down to what’s appropriate for the user. There’s more to it than just what often is presented like it’s a blockchain. It’s the same thing, but it’s faster. There’s some simple security tradeoffs, you don’t have to worry too much about.

Kain Warwick (Synthetix)

So I have a slight counterpoint maybe to that. I think we get confused sometimes about who the users are of the systems. We talk about users not understanding the tradeoffs of decentralization and security, etc. I think the users that we’re referring to when we talk about the scalability trilemma are actually engineers who are building things. It’s the people who are the user of a blockchain, is the person who wants to build a platform on it. How much trust do they believe the platform needs? What are they trying to achieve? How much censorship resistance, etc.? All of those things, the conversation about users not caring about decentralization, is fairly true. They just want to use platforms that are safe, secure and transparent. All of the things that we’re trying to achieve in DeFi. I think people using centralized platforms, Binance or whatever, or even centralized blockchains, Binance Smart Chain and something like that. It’s a tradeoff that a user might make, without really understanding to your point, where on the curve they lie. They’re foregoing security, maybe for some benefits in cheaper transactions or whatever. I do think that this situation we find ourselves in right now is very confusing for an end user, but users like engineers who are building these things, I think they are much further along in this education process of understanding where these tradeoffs lie and what makes sense to use in terms of which blockchain to deploy on.

Robert Lauko （Liquity）

I largely agree with that view. I also think that decentralization and security are maybe not at the same level, because you can have security without the centralization, but decentralization on its own is not really useful if the system is not secure. So there is this difference between the two aspects. Some users, they might just not care because they are fine, as long as the system is secure. They don’t care whether the security is derived from a legal entity that’s just trustworthy or the system of decentralized nodes. That’s one aspect, but another one I’d like to emphasize here is from a technical point of view that the difference between scaling up and scaling out. There are platforms like Solana that are just trying to push the boundaries regarding the throughput of one single chain. So they are also pushing the requirements for the node or node operators on the system which may impair decentralization because it’s not open for everyone running a node at home in his cellar, but at the same time, it’s a very neat system in the way that you do not need to care about atomicity about cross-chain In transfers because on the other hand those other endeavors which try to shard the system like the L2 solutions for Ethereum. They just become complicated and segregated. Then you lose this easy way to have atomic and composable transactions.

🎤 Moderator — Deniz Omer (Ethereum Central)

There are multiple scaling solutions coming out there as well. When we do have technologies like zero knowledge proofs coming out, it expands the boundary of what we can do. So over time, we’re just increasing that toolkit that we have. That’s really cool to see as well. One question to you guys. Because all your products kind of touch on liquidity, they do require some kind of capital or ERC20 tokens, or whatever it might be, to function efficiently. We’re seeing multiple L2 solutions coming out there. We have side chains like Polygon. It’s really expanded. We’re seeing the TVL grew up there. So do you guys see a risk of fragmenting that liquidity with maybe fragmenting usability? How’s it going to look like in a few years down the line? Do you see a few dominant L2 solutions being out there? Or is it going to be just hundreds of different ones? Or do you think it might be more like the winner-takes-all? How do you guys see what will play out in the near future?

Yenwen Feng (Perpetual Protocol）Yenwen Feng (Perpetual Protocol）

Yeah, I think I will go first. I personally believe that it will be the winner-takes-all, just like Ethereum takes the most of the market by now. I think the network effect of L2, if you want to be compostable with other projects, you have to be on the same L2 solution, same chain or the same place. So I do believe in that effect, the first one to get the network effect will be the winner that takes all. They probably will be maybe 40% of the market shared by several smaller ones. But there definitely will be one winner overall. That’s my take.

Kain Warwick (Synthetix)

Yeah, I totally agree. I tend to agree with that. We saw a DeFi Summer. Even though it lasts two years, liquidity is very fickle. It’ll go wherever the incentives are very, very quickly. Even though liquidity fragmentation is this kind of thing that everyone’s concerned about, it’s very easy to defragment liquidity as well, with the right incentives and the right mechanisms. So I think that it’ll happen. There’ll be some tipping point, and we’re not there yet. It’s not clear whether it’s going to be Arbitrum or Optimism or StarkNet, or one of the otherL2 solutions that’s out there. It’s probably not going to be xDai. It’s cool, but I think that we’re at a point now where it could be Hermez on Polygon. We just don’t know. At the moment, there’s a lot of uncertainty. There will be a tipping point, though, I think where it becomes winner-take-most and then probably trends towards winner-take-all.

Rune Christensen(MakerDAO)

I think specifically it’s going to be. I would guess this is not in the hands too much with Optimistic Rollups, just because they already. I’m not enough of an expert to know exactly what their technology is going to look like, several years out, but we already have those fee issues almost with them now. I think there’s even an upgrade coming that’s going to make them cheaper than Solana or something. Read about them on Twitter. We were all excited about that, but ultimately what I’ve heard about, the zero-knowledge Rollups. This is what we’re talking about is a new paradigm of throughput, where they’re doing things on. Don’t you have seen these demos they’ve done on StarkNet of reinforcement learning agents, that kind of stuff, where they showcase that because this is essentially just a single server that is kept secure, with the cryptography, then you can just do a completely different set of stuff that you just cannot do on a traditional blockchain. I would guess that’s also where we would get into this conversation about. Once you’re in that paradigm, once you get used to, having these new possibilities, that’s where we might see this new behavior, these new types of products, new behaviors emerge. That’s when I would guess that you really have that possibility of problems unlocking, like a new Ethereum that becomes a hub for whatever happens , when you have this new magnitude of throughput.

At the same time, I really think that if you look at Optimistic Rollups, it seems kind of logical in a sense that they will actually load balance more. I’ve seen this argument about what is it like, Manhattan, the suburbs the countryside, depending on where some apps they need more cheap transactions, they don’t need so much composability, while others they’re happy to take more expensive transactions if they get better composability. You might see a spectrum of different Rollups that specialize in being higher cost and higher composability, or lower cost and lower composability, then even as a kind of specialization, so maybe some will be more about swapping random tokens, some will be more about let’s just trade Ethereum here, others will be NFTs or something. Then you get these specializations of ecosystems, in some ways, I think that would be the nicest outcome in a sense, because it just feels more decentralized, but I could also totally imagine, you have StarkNet or zkSync, who sort of raced to build the first Ultra Rollup of Dune, then once that comes out, that’s a new thing, it changes the whole game. It’ll be exciting to see how it plays out released.

🎤 Moderator — Deniz Omer (Ethereum Central)

Just to follow up on that. Assuming we do get there, the technology keeps advancing, we have 100x scalability. What kind of new DeFi applications are likely to emerge from that kind of new capacity, new capability that we have?

Robert Lauko （Liquity）

Maybe I can see two examples. I’m sure there are many more, but currently we have a number of DeFi applications that need a lot of care from the user, for example, borrowing systems and CDPs where you can get liquidated if your collateral falls below a certain threshold. Now there are already automation tools out there like the DeFi Saver, but the gas costs can be prohibitive for some of those tools that constantly manage and update your position. Let’s say every minute or even every second , because that’s what in the end allows the system to take on more risk , because the users can react to it quicker. I guess those kinds of automation systems may emerge with higher scalability. Also another thing that I think will re-emerge will be on-chain order book trading, because currently Uniswap is kind of an answer to Ethereum’s slow scalability. It tries to mitigate that with v3, but it’s still not the real deal when it comes to order book trading.

Kain Warwick (Synthetix)

You really are dating yourself there calling them CDPs. We call them vaults now. They haven’t been CDPs for two years.

Robert Lauko （Liquity）

Just wanted to use a generic term.

Rune Christensen(MakerDAO)

You use a generic term now?

Robert Lauko （Liquity）

-Hahah yeah.

🎤 Moderator — Deniz Omer (Ethereum Central)

Maybe I can ask for your own products. Do you guys see extra features or extra capabilities coming through on specific products once we do have 100x the capacity there?

Yenwen Feng (Perpetual Protocol）

Perpetual Protocol we build on a xDai, v1 the end of last year, so I do feel that the cheaper costs, because on xDai, Gas fee is 100x lower than mainnet, so we do see that, we don’t really incentivize anything, but we do get much higher transaction volume than other similar projects. I do feel that just because of a cheaper fee, so it’s like Robert said that people can do things every block. They can actually submit transaction, adjust the position at every block that enhances lots of things, so I do believe that if we can scale 100x on the L2 all day in like the Uniswap, they will get 10x trading volume. If everyone moved to that solution, so that’s something I am I’m pretty much certain about that, but I do have a concern about order book. I still don’t think that order book will happen soon on-chain, even on Solana. They can process thousands of transactions per second, but there is still a cost to update order book. Compared to a centralized exchange, they don’t have that cost, so they gave me the ability to operate that order book for the market maker or quant-traders and others, so I feel that if we can have more than 20 transactions per second or even more, that can suit that situation, but I don’t think that will happen. I do believe AMMs will come back, dominate the decentralized DEX market. That’s just how I feel.

🎤 Moderator — Deniz Omer (Ethereum Central)

I think we all agree that scalability is incredibly important for mainstream adoption in the future, but I’m trying to get as of now, for example, if instantly tomorrow we had 100x capacity, would that be filled immediately? Where is the demand and supply now? We know the supply needs to keep increasing. We have to increase the transaction per second. Where do we stand on the demand side?

Rune Christensen(MakerDAO)

I want to make a bit of it. You would call a little bit of a spicy point to this.

So first, from the perspective of Maker, what are we going to get when we probably expand to L2s? So I just earlier made the point that maybe there’ll be this new paradigm of completely new things we’ve never seen before, they’ll be possible on ZK Rollups or something, but concretely now it basically looks like. It allows Maker to serve smaller users when users with less capital basically. That’s pretty much about it. The reality is actually that Maker has already established itself. It’s just primarily focused on serving really really large users, and then themselves provide decentralized services to end users. So I think it’s about half of all Ethereum collateral in Maker, is actually already in a sense scaled up this way where you have these centralized providers that they basically arbitrage rates they provide to end users with marketing regulated products, this kind of stuff that a regular person would be scared to jump onto the blockchain. They can just go to this kind of services directly so that what an L2 or very massive scalability would allow us to do, would be that now we can serve a kind of user that they don’t want to use some centralized intermediary. They want to directly use a blockchain, have cheap fees and get the best service possible. I don’t think it’s even guaranteed that there is necessarily that big of a user base, because I think it makes sense that the people who are confident and comfortable, doing highly risky, potentially risky technical operations manually right on a blockchain. It just tends to be those that are well capitalized and sort of know what they’re doing.

Some random person that has a bit of money in Eth. They might not necessarily be so into it. They might actually prefer going on Binance or something like that where they have a brand they can trust but there is a type of product that absolutely needs to be able to offer a fully centralized service directly to the end user. It’s actually the thing that’s pretty much. It’s one of the most popular things to use blockchain for. That’s basically Ponzi schemes.

If you look at what’s happening today. People like to joke about it right now but the reality is that so much of the stuff that’s happening out there so much of the recent innovation in crypto, it’s basically financial gamification primarily. So it’s making all these crazy new ways to kind of gamble in-between financing and gambling. You put them together all these different forms. You get this explosion of what may look an explosion of innovation. I think as it is in the field specifically of financial gamification, my point is that these will just completely explode with L2 scalability they already are we’re seeing that already then the question is whether that is actually sustainable. I don’t think that we can be sure that this will actually always be the case but at least in the short run I would imagine that we might not necessarily be there we see L2 and then all this new innovation that helps society or something or fixes the financial system is going to pop up but it’s more likely that a bunch of people will lose their money actually because the reason why a Ponzi scheme is so heavy to attract these small holders with not a lot of capital they’re not exactly sharks right. They’re actually the people. They’re hoping for these people to be their exit liquidity essentially. That’s also a lot of the criticism that’s been thrown at Ethereum. Look we need these small fish so they can be our exit liquidity. So overall that’s a perspective that also matters. I think that there’s a side to all of this what’s happening now in the bull market that’s I think we’re going to look a bit difference once the froth and the irrational behavior disappears.

Kain Warwick (Synthetix)

You sound so cynical than in your old days, Rune!

🎤 Moderator — Deniz Omer (Ethereum Central)

Kain Synthetix has been one of the beneficiaries of these scaling solutions. We know that quite a bit of volume comes from L2 because with Ethereum we know how expensive that is. So how has that helped growth from maybe, how do you see growth from where you’re standing at Synthetix?

Kain Warwick (Synthetix)

It’s only just starting now. We’ve had probably the last six months where trading on L1 has been so prohibitive as to basically be pointless. There’s been cross-asset swaps, some other weird edge-case kind of users for the protocol but other than that the average users left and went to L2 a while ago but there was no trading activity. It’s only been in the last couple of months that we’ve been enabled trading there’s only three assets on L2. There’s still quite a bit of work to rebuild that infrastructure on L2 that existed on L1 even 18 months ago but one of the things that we’ve been able to do is to remove this frontrunning protection that has been there for several years which broke atomic transaction so it stopped the protocol from being composable that meant that already we’re seeing other protocols start to integrate Synthetix like Lyra for example the options protocol which in and out itself is actually an innovation because they’ve taken this kind of internal hedging model that was previously not viable on L1 because the computational requirements for Black Scholes are just not possible they’ve been able to replicate. Those calculations on L2 to have this dynamic hedging function that the protocol itself does so not every innovation is a Ponzi as most of them are probably these kind of crazy primitives that we’re seeing that people are building are cool weird little zero-sum games that people are playing but there’s genuine innovation. I think we’ve barely scratched the surface on L2s in the same way that there’s genuine innovation on L1. People said Uniswap was not a real thing for such a long time. It can’t work it’s dumb it’s nonsense. Most of those people then have been proven wrong. So I do think L2 can scale up transaction throughput but also computational bandwidth as well. It will enable a range of new things that people haven’t yet thought of.

🎤 Moderator — Deniz Omer (Ethereum Central)

Yeah, we all know that there’s so much happening, scaling is happening. It’s actually scary to think about what would have happened to Ethereum gas price if we had none of the scaling solutions come to market just yet. I can’t even imagine because even today so much of the load is off onto L2s and side chains yet Ethereum gas prices still are considerably high. Now we don’t live in a bubble. We could talk about Ethereum its ecosystem and their tools all day. We’re super bullish on this but outside of that we know that there are natively fast L1s out there if you go on crypto Twitter you’re seeing all these different arguments about people abandoning this and that. So I wanted to take your view on how you see the whole ecosystem growing with those other L1s in the picture again we touched on L2s maybe being a winner-takes-all situation? Is it no different for L1s as well? Are those L1s competing with Ethereum? Do you guys still think it will be Ethereum and its ecosystem wins and takes it all or can they co-exist? It’s a controversial subject.

Robert Lauko （Liquity）

I think L1s have maybe an advantage when they apply those sharding techniques when they want to offer an out-of-the-box neat and easy solution to the end user because they can try to at least make the impression from the outside that it’s just one monolithic system while under the hood it’s maybe composed of different sub networks charts and whatnot. So they have this advantage which I think could make them real competitor in the long run whereas on Ethereum now you have multiple projects competing with their L2 solutions. They’re all trying to plug into the mainnet at least be rooted there the question is the fragmentation of liquidity of course but also the whole atomicity that we already touched upon. I think that makes it harder. If you have multiple parties working on the same thing but in a different way. It’s just maybe more chaotic than one L2 sorry than one L1 network could achieve also from an end user perspective.

🎤 Moderator — Deniz Omer (Ethereum Central)

This is the case or maybe the network effect has become so big for Ethereum. The gravity is so big that organically there’s more developers coming into it every day than any VC might be able to pay for on any other chain. Just on a side note, do you guys see any organic growth happening on other chains? Because at some point it has to happen, it should happen if you want product market fit. How do you see this?

Kain Warwick (Synthetix)

I think there’s organic growth happening. I had this debate maybe nine months ago or seven months ago with Kyle from Multicoin back then. I’m not going to mention my other friends that i’ve had debates with but back then it was very early maybe there is some organic activity. I think now it’s pretty undeniable that there’s organic engineering activity happening on Solana for all kinds of reasons. Same thing with Avalanche, same thing with a number of other L1s that are starting to get some genuine adoption. Is it yet through a critical mass or it’s self-sustaining? I doubt it. I don’t think so. It’s being sustained by some incentives and tokenization of those L1s and all kinds of things that we don’t have for L2s yet. L2 don’t have tokens yet. I mean there’s one that has a token but that’s a very powerful incentive that doesn’t exist yet in the L2 ecosystem that does for every L1 by definition. You have some organic activity. It is growing. It’s the Ethereum community’s game to lose here.

If we are able to get to a point where we can scale up and stay ahead of them enough. I think that Ethereum likely wins but if we have a situation like we’ve had with v2. As Rune was talking before I had this horrifying image of Jim and Steven standing up at DEVCON8 or something like that and being like we’re about to have this transition to zero-knowledge proofs, it takes two years or five years or something like that to happen. So I do think we could easily be in a situation where Rollups get some traction but then we’re trying to transition to some other technology it takes way longer than we think. This chasing scalability problem opens up opportunities for a new blockchain to turn up. That’s a blank slate. It’s just going to be fostered by definition. There’s less activity, you could just fork geth, run your own version of Ethereum with 50 people. It would be much faster until there’s any activity on there. This is a problem that I think is very hard to win but I do think that it’s something that the Ethereum community broadly needs to keep pushing. We need to stay ahead of other L1s competitors.

Rune Christensen(MakerDAO)

I just really want to add that about concerns that winning L1s and the competition between them because this is something I see quite a lot. There are two sides to this. It tends to be that in Ethereum we like to talk about winning and losing and winner-takes-all. That’s because we’re the incumbent. I’m an Eth Maxi myself because I basically have to because the Maker is built on Ethereum. What i’ve come to realize is that there’s no realistic way for Maker to be this multi-chain utopia where there’s multiple L1s then something like Maker actually being competitive on other L1s that’s because L1s by definition are meant to not give up composability with Ethereum in order to be able to re-engineer whatever they want from scratch and sometimes it literally just copy geth just pump their alternatives. There’s real competition because the bridges between L1s are just not good. You can’t really make them good basically. I’ve talked about it and I can really get talking about this, the multisig thing. The best way to bridge between L1s that have been discovered so far is with the multisig then there’s all these more innovative solutions which in my opinion basically they’re worse than multisigs. You’re better off using a multisig. Because now you’re really going down this path of just having no freaking way to determine what kind of security assumptions that you’re taking when you are playing around across whatever this many different L1s that by itself just means that once you get enough traction people are not going to pick using or doing something across (chains).

Developers want to build something secure for the users where they’re not going to get into huge trouble because some random thing blows up and then suddenly people lose their money. They’re going to much prefer building across a coherent network with coherence security of an L1 or l2s. They’re not going to build across three different L1s in that it inherently means that if something like Solana for instance or Avalanche which are sort of the big ones right now they really managed to surpass Ethereum. It likely means that you will actually have, they will actually take activity from Ethereum onto their own chains because you’d rather do that than mess around with multisigs in the long run especially. When it becomes more than just Ponzi schemes. But it really is about this fundamental innovation that is happening but of course it’s just moving slower. It depends fundamentally on security.

Robert Lauko （Liquity）

I also want to add on it. Maybe projects like yours the Maker but also Liquity. They are not maybe as easy to scale in a multi-chain world because I think the only way you could do that in a really scalable manner would be to make it so that you can basically mint your currency on every single chain. So you have this weakest link issue that if one of the chains fails then the other chains would be affected by it or the whole system could break down. I think there are just also some limitations stemming from the application itself where it’s not as easy as maybe just deploying Uniswap on many different chains because they can have their own living there. They don’t need to rely mutually on each other.

🎤 Moderator — Deniz Omer (Ethereum Central)

I think it’s still early enough that we will have breakthroughs in bridging technology that there is some kind of solution that is better than what we have today. I think overall we do have to root for other blockchains that do bring true innovation to the table it’s all about having these thousands and thousands of experiments play out. Evolution tells us the best solutions will be used will rise to the top. I think that’s what’s going to end up happening. I don’t think it will be a completely Ethereum monotone. All bubble where no one else is using it. There will be many multiple chains connected to it. They will have their strengths and weaknesses. Either way I think it’s a very exciting future for everyone involved, not just Ethereum but in blockchain space as a whole.

On that note, thank you all for joining us. We wrap up this panel. It’s being great talking and hearing these different kinds of thoughts and ideas about scalability. Until we see you next time. Thank you！

❄️ About Us

IOSG Ventures, founded in 2017, is a community-friendly and research-driven early-stage venture firm. We focus on open finance, Web 3.0 and infrastructure for a decentralized economy. As a developer-friendly fund with long-term values, we launch the Kickstarter Program, which offers innovative and courageous developers capital and resources. Since we consistently cooperate with our partners and connect with communities, we work closely with our portfolio projects throughout their journey of entrepreneurship.

Welcome to our bi-weekly newsletter date from 14th October to 12th November.

🐱‍🐉Industry Hotspot

(1/8) Crypto Wallet ZenGo announced to join Visa Fast Track Program to get Non-Custodial Crypto Card off the ground. Read More

(2/8) Ardrive，a “permanent Dropbox” launches in beta on Arweave on 5th Nov. Read More

(3/8) MetaMask users can now swap tokens directly from their wallets. Swaps combine multiple decentralized exchange aggregators, professional market makers, and individual DEXs — like AirSwap — to ensure MetaMask users always get the best price with the lowest network fees. Read More

(4/8) Arbitrum Rollup, announced the launch of ArbiSwap, a Uniswap V2 port developed on ArbChain. Officials say this will reduce transaction fee costs by 55 times. Read More

(5/8) KPMG LLP and Coin Metrics, Inc. have entered a strategic alliance to deliver trusted data & insights, proprietary analytics and cryptoasset services to support growth in institutional adoption of cryptoassets and public blockchains. This alliance pairs Coin Metrics’ full-suite of institutional data products and infrastructure with KPMG Chain Fusion. Read More

(6/8) Global peer-to-peer bitcoin marketplace Paxful partners with BlockCard, a crypto fintech platform by Ternio, announced to offer a crypto debit card on 2nd Nov. Initially available in the USA, with global expansion in development, the debit card will give users the ability to convert cryptocurrencies to USD, make purchases, get a checking account, and withdraw funds from any ATM worldwide. Read More

(7/8) Crypto derivatives exchange FTX has launched a novel way to trade the world’s most popular stocks like Tesla, Apple and Amazon. Read More

(8/8) Bitcoin surges past $15,000, hitting its highest level since January 2018. Read More

🐱‍🚀 Our portfolio companies

(1/5) Mask Network completed a new round of financing jointly led by HashKey and Hash Global

(2/5) Razor Network has raised $3.7 million in a seed funding round from NGC Ventures, Alameda Research, Spark Digital Capital and private investors including Mariano Conti, former head of oracles at MakerDAO.

(3/5)UMA Protocol Announced Developer Mining. Starting on November 10th, the Risk Labs foundation will pay out 50,000 $UMA weekly to developers that deploy synthetic assets using UMA.

(4/5) 1inch Exchange has unveiled their version2 on 6th Nov on Twitter. The main highlights are Pathfinder, an API that contains a new discovery and routing algorithm, and an intuitive, user-friendly UI.

(5/5) Phala Network, a Polkadot-based project focused on data privacy preserving protocol, has announced a partnership with Bluzelle. They have chosen Bluzelle’s decentralized database as one of their off-chain data storage solutions for their main product, Web3 Analytics (winner of Web3 Foundation Grant).

🐱‍👤 Community & Marketing

7th Old Friends Reunion IOSG DeFi Summit has been successfully held in Shanghai on 26th Oct. The great show has been put up by IOSG, together with imToken、DeBank and Aave. Despite the pandemic, we had more than 1000 crypto enthusiasts, developers, investors and friends who joined us, not to mention big names like Vitalik Buterin co-founder of Etherium，Illia Polosukhin, Co-Founder of NEAR Protocol，Stani Kulechov Founder and CEO of Aave, Matt, Co-founder of tBTC/Keep, Emin Gün Sirer, Founder of Avalanche and Dawn Song, Founder of Oasis Labs.

It was our great honour to have Xinshu Dong, partner of IOSG Ventures, Santiago Roel Santos, partner of ParaFi Capital, Michael Anderson, co-founder of Framework Ventures, and Ben Perszyk of Polychain Capital, four top institutional investors to share their opinions on the topic “Like never before: A new era of DeFi investment and beyond”, and talk about new gameplay, new challenges and new investment concepts in the DeFi field.

Disclaimer: And as always, for all our reports, it is important to remember that we are not registered financial advisers with the SEC or any other organization or governmental body, and what we provide is not personalized investment advice. These are merely the best opinions of our research team based upon our various research and diligence. But this is no substitute for personalized advice from an investment professional. Investments in tokens and crypto currencies are highly speculative, and prices of tokens can be quite volatile, so doing so may not be suitable for you.

🦄 About IOSG

Founded in 2017, IOSG Ventures is research and community-driven with offices across China, US, Singapore and Germany. We focus on Open Finance, Web3.0 and cross-chain ecosystems, investing in teams with top potential worldwide. Our portfolio covers more than 60 projects, including Layer-1 blockchains (Near, Polkadot, Cosmos), middleware (Celer, Raiden, Reach) and applications including Defi (MakerDAO, Synthetix, UMA). We have been actively involved in various developer & DAO communities. We believe in long-term partnership and we work closely with our portfolios to advise and support them along their journey of entrepreneurship.

If you would like IOSG Ventures to consider your project, please send a summary of your project along with a pitch deck and/or white paper to hello@iosg.vc

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Welcome to our bi-weekly newsletter date from 23th September to 14th October.

Announcement:

IOSG 7th Old Friends Reunion — DeFi Summit 2020

Leading the future trends in DeFi. We are only 2 weeks away from the most anticipated blockchain event in 2020, featuring IOSG Ventures, Vitalik Buterin and many more! Click the link below to register ASAP.

https://eventbrite.hk/e/iosg-7th-old-friends-reunion-defi-summit-2020-tickets-122011376311

Crypto Art Gallery — The Time of Variation

Announcing our Crypto Art Gallery in partnership with SuperRare, ArtGee, ChainNews and Digital Renaissance, featuring Pak, Esteban Diacono, FEWOCiOUS and many more!

Insight:

Source: DevCon5(Osaka), UMA Presentation

UMA is a protocol for building synthetic assets. It provides smart contract templates, allowing anyone to create synthetic assets that track the price of any value subject. UMA also has its decentralized oracle system as a support.

Overall, the UMA project consists of two core concepts: Self enforcing contract design patterns that allow remargining, and an oracle mechanism for honest price reporting with economic guarantees.

🐱‍🐉Industry

The Radix token sale opens on October 8th, 2020 at 18:00 UTC and will run until all tokens are sold out, or until October 22nd, 2020 at 18:00 UTC. Read more

Coinbase supports Balancer (BAL) and Ren (REN) at Coinbase.com and in the Coinbase Android and iOS apps. Coinbase customers can now buy, sell, convert, send, receive, or store BAL and REN. Read more

Plasm Network’s 2nd lockdrop has just ended with a total of 137,253 ETH locked in 4 weeks. Read more

MetaMask adds extended plug-in support for Web3 privacy product Mask Network. Read more

yearn founder Andre Cronje responded to the hack of the EMN: $8m will be returned to users. Read more

DeBank introduces DeFi’s “True Value Locked” data to solve the DeFi double counting problem. Read more

Nexus Mutual announced NXM staking rewards, NXM holders that stake to provide cover for tBTC minters will be rewarded by KEEP. Read more

PieDao announced DeFi+L, the first truly decentralized tokenized index of large-cap DeFi projects, consists of 7 DeFi assets. Read more

IDEX, a decentralized exchange, will launch version 2.0 on October 20. Read more

DeFi protocol Persistence will launch a staking airdrop campaign that will distribute one million XPRT tokens to participants. Read more

Rari Capital launches Rari V2 on Oct 20 which includes liquidity mining, and governance token RGT. Read more

🐱‍🚀 Our portfolio companies

Persistence Raises $3.7M from Industry Heavyweights to Bridge Traditional Finance and DeFi via NFTs. Read more

Privacy infrastructure NuCypher CEO MacLane Wilkison stated in the community that the NuCypher mainnet is scheduled to go live on October 15. Read more

ConsenSys Codefi, a platform launched by ConsenSys that supports the institutional-level Ethereum 2.0 staking pledge service, announced that it will help the decentralized storage project Filecoin launch its mainnet this month through the market application Filecoin Storage and the Ethereum bridge service Filecoin DeFi Bridge. Read more

IoTeX and IoT chip manufacturer WISeKey have reached a cooperation to jointly promote trusted and safe manufacturing. Read more

DODO, a decentralized trading platform, has launched DODO tokens through the first liquidity issuance. Read more

Aave ecological NFT platform Aavegotchi launched GHST pledge plan on Kovan testnet, mainnet will be launched at the end of the fourth quarter. Read more

Synthetix officially released Biotite products, including the new Synth icon. Through the clever combination with the Synthetix protocol, users can more clearly understand the meaning of each Synth asset. Read more

🦄 About IOSG

Founded in 2017, IOSG Ventures is a research and community-driven concept.we are focusing on Open Finance, Web 3.0, and cross-chain industry. We have over 60 investments and been actively involved in various developer & DAO communities. We invest in top teams with innovative ideas, operational excellence, and a robust community, and always supportive to IOSG portfolios to grow local communities in China, the US, and Germany.

If you would like IOSG Ventures to consider your project, please send a summary of your project along with a pitch deck and/or white paper to hello@iosg.vc

Follow us on Twitter.

Welcome to our bi-weekly newsletter date from 11th September to 23rd September.

Announcement:

IOSG Ventures’ investment in UMA

We are excited to announce our recent investment into UMA and we believe IOSG Ventures and UMA’s cooperation will add much value in the open finance community and bring fresh opportunities for new applications and use cases!

🐱‍🐉Industry

The project gave away a minimum of 400 UNI to anyone who had used Uniswap prior to September. Read more

Teller Finance, an algorithmic credit risk protocol for decentralized unsecured lending, is set to launch in October. Read more

Hakka.Finance has delayed the launch of DeFi insurance product 3F Mutual due to the high cost of Ethereum Gas. Read more

Huobi DeFi Labs Launches Global Alliance to Expand the Decentralized Financial Ecosystem with Cross-Border Collaboration. Read more

Japanese social communication giant LINE has launched LINK Rewards Program for its native token. Read more

Polkadot cross-chain DEX Zenlink secured $1.1 million angel round led by Hashkey, Continue Capital, IOSG Ventures, D1 Ventures, and Youbi Capital. Read more

WOOTRADE announced financial backing from prestigious institutional investors, including Three Arrows Capital, IOSG Ventures, QSN, the ventures arm of QCP Capital, and Defi Capital. Read more

USDC, backed by Coinbase and Circle, has a total market capitalization of $2 billion. In July, USDC’s total market value just topped $1 billion, which means it has doubled in value in two months. Read more

Polimec, the token issuance and transfer framework for Polkadot, is being launched by the team behind blockchain identity protocol KILT. Read more

Andre Cronje announced StableCredit, a new protocol for decentralized lending, stablecoins, and AMMs. Read more

DeFi Swap Goes Live on Ethereum Mainnet. DeFi Swap is the place to swap & farm DeFi coins, powered by CRO. Read more

BarnBridge Closes $1m Seed Round, investors includes Fourth Revolution Capital & ParaFi Capital. Read more

🐱‍🚀 Our portfolio companies

UMA announced the launch of the income-based U.S. dollar token uUSD based on renBTC asset collateral. Read more

Synthetix, a synthetic asset platform, will soon launch the Synthetix Volume Program, which aims to encourage other DeFi platforms and protocols to integrate with the Synthetix protocol. Read more

SynthetixDAO announced the launch of a binary options platform incubator program, looking for a development team to build a binary options trading interface on Synthetix. Read more

Mooniswap, an automated market maker service launched by 1inch, a decentralized transaction aggregation platform, has been integrated with the TRON blockchain. Read more

Avalanche announced mainnet launch on September 21. Read more

The IoT blockchain platform IoTeX (IOTX) will launch the first decentralized exchange mimo DEX on September 22. Read more

Kava will launch a new version Kava-4 on October 15th. This version will expand the assets supported on Kava to BTC, XRP, BUSD, LINK, etc. Read more

The open network platform NEAR Protocol (NEAR) is about to enter Phase 1, the mainnet restricted phase. The entire transition process will be completed on September 24. Read more

Nervos announced the Q4 roadmap: DEX, stablecoins, token agreements, cross-chain assets and oracles will be promoted. Read more

Filecoin announced that it will launch the second round of competition Space Race 2 to continue testing and improving Filecoin before the mainnet launch. The competition will end on October 5th. Read more

🦄 About IOSG

Founded in 2017, IOSG Ventures is a research and community-driven concept.we are focusing on Open Finance, Web 3.0, and cross-chain industry. We have over 60 investments and been actively involved in various developer & DAO communities. We invest in top teams with innovative ideas, operational excellence, and a robust community, and always supportive to IOSG portfolios to grow local communities in China, the US, and Germany.

If you would like IOSG Ventures to consider your project, please send a summary of your project along with a pitch deck and/or white paper to hello@iosg.vc

Follow us on Twitter.

Welcome to our bi-weekly newsletter date from 26th August to 10th September.

🐱‍👤IOSG Insight

Our investments in DeFi

IOSG Ventures investment priorities in DeFi include:

1.Application products that enhanced user experience of UI/UX , middleware third-party tools across different protocols or highly decentralized protocols (MakerDAO, tBTC) that really reduce friction.

2.Derivative projects that create better asset value via creative economic design, and with deep liquidity and moderate risk reward ratio.

3.Lending protocol that optimise capital utilisation, composable new products across different protocols (Kava); project indirectly improve trading efficiency (1inch, Kyber and DDEX).

4.DeFi protocol security Guardian, third party auditor.

We believe the spread of DeFi applications will further develop the underlying infrastructure with increasingly complex and diverse requirements, including low cost and high performance transaction processing, scalability that supports the rapid growth of network effects, and a user-led data economy.

How to resolve impermanent loss

Automated Market Makers emerged as an alternative to order book-based exchanges, providing trading against the smart contracts / liquidity pools rather than searching for a counterparty as in traditional models.

To understand the factors that contributed to the emergence of AMMs on chain, we need to go back to the late 2016. Particularly, in October 2016 Vitalik Buterin proposed building on-chain Constant Product Market Maker to resolve the high spread inherent in trading the coins back in the days. What originally caused the high spread is the inconvenience of market making on-chain due to high gas cost of creating and removing orders.

Namely, running an order book on chain requires gas fee payment anytime any type of order is set, resulting in too costly trading experience. Consequently, on-chain order books struggle to provide enough depth, causing a high spread / illiquidity.

On the other hand, the simple formula proposed by Vitalik guarantees liquidity no matter the price range, enabling users to execute their trades instantaneously. However, the execution quality depends on the depth of liquidity pools, where the more deposited assets imply the better execution quality (i.e. lower slippage).

To ensure the deeper liquidity pools, AMMs have been offering incentives such as “yield farming” that attracted assets worth millions of dollars to AMMs’ pools. Nevertheless, the depositors quickly realized that, often, holding the tokens in their wallets might be more lucrative than providing liquidity to AMMs. This issue has later been coined as Impermanent Loss.

In more detail, AMMs rely on arbitrageurs to adjust the ratio of reserves in the pool so that AMM-given price is aligned with the external market price. However, arbitrage profit goes at the expense of liquidity providers, creating loss for LPs. The loss can disappear only if the prices return to the initial ratio, which is why it is defined as impermanent. However, the volatile nature of crypto assets, generally, makes the loss permanent.

The Bancor has simply explained the impermanent loss using the figure below. They compare LP portfolio and HODLer portfolio ( HODL — hold on for dear life). For simplicity the example assumes there are no transaction fees. Whenever the relative price of deposited tokens changes HODLer position is more favorable than LP position due to the arbitrage effect discussed above. This effect is a problem that CPMM and CMMM in the simplest form cannot resolve.

a. Focusing on less volatile assets -> marginal chance of impermanent loss

Since impermanent loss is closely connected with asset volatility, the simplest way to resolve it is by ignoring volatile assets. Curve.fi focuses on stablecoin swaps, which is why impermanent loss is much less of a concern for Curve’s LPs. The concern for LPs remains only if one of the coins loses its peg.

b. Leveraging an oracle to achieve “fairer” prices

Rather than relying on arbitrage to coordinate AMM prices with market prices, Bancor utilizes Chainlink oracles. The weights of each asset in the pool is adjusted based on the oracle price update, simultaneously exterminating arbitrage opportunity and protecting the value for liquidity providers.

Bancor v1

Bancor v2

DODO implements a similar solution, however, both DODO and Bancor v2 are still in an early-stage and are yet to prove that constant dependency on oracle could serve as a robust solution. The concern comes from the risk of oracle failure and the arbitrage being faster than the price feed simultaneously generating a substantial loss for LPs. Nevertheless, if these risks are successfully controlled, LPs would find liquidity provision to this type of protocols extremely attractive, potentially making them another DeFi hot topic.

🐱‍🐉Industry

yearn community proposed to bolt a CFAMM facility to the Y pool, in order to minimise governance risk. Read more

GoodGhosting announced its genesis saving pool which will be launched soon. Read more

Ethereum 2.0 updates: Medalla has chugged along quite smoothly, now with 39k active validators and another 12k in the activation queue. Read more

StarkWare Introduces Cairo for Turing Complete L2 Scaling. Read more

Oasis Protocol will release the native token ROSE when the mainnet is launched, with a total limit of 10 billion. Read more

DeFi explosion: Uniswap surpasses Coinbase Pro in daily volume. Read more

Lien Protocol’s first Solid Bond Token (SBT) auction is underway. Read more

SEC’s Hester Peirce on DeFi: ‘I think it’s going to challenge the way we regulate’. Read more

Redis Labs announced that it raised $100 million in Series F funding at a valuation of more than $1 billion. Read more

SPiCE Venture Capital has listed its tokenized blockchain fund (SPiCE VC) on Fusang Exchange. Read more

🐱‍🚀 Our portfolio companies

IoTeX unveiled groundbreaking infrastructure to fuel #DeFIoT — IoT data oracle, cross-chain bridge, DEX and more! Read more

1inch integrates DODO, a decentralized trading platform based on active market maker algorithm, bringing 1inch more liquidity sources, better prices and lower slippage. Read more

WOOTRADE released the Eco-Partnership Program, which aims to recruit outstanding partners from investment institutions, media, communities, KOLs and other backgrounds to jointly build the WOOTRADE ecosystem. Read more

NEAR Protocol will hold an open online hackathon “Hack The Rainbow” on September 15th. Read more

Filecoin officially released the details of the token economic model design. Read more

Nervos announced the integration of the decentralized oracle Band Protocol to aggregate and connect real-world data and APIs to smart contracts. Read more

Ocean Protocol (OCEAN) announced the launch of a new contract and completed the migration of OCEAN tokens. Read more

The decentralized IoT platform IoTeX announced the launch of the cross-chain bridge ioTube, which has realized the two-way bridging of Ethereum ERC 20 assets and IoTeX public chain. Read more

Decentralized transaction aggregation platform 1inch announced the update of gas fee optimization and upgrade plan, which can greatly reduce gas fee costs. Read more

🦄 About IOSG

Founded in 2017, IOSG Ventures is a research and community-driven concept.we are focusing on Open Finance, Web 3.0, and cross-chain industry. We have over 60 investments and been actively involved in various developer & DAO communities. We invest in top teams with innovative ideas, operational excellence, and a robust community, and always supportive to IOSG portfolios to grow local communities in China, the US, and Germany.

If you would like IOSG Ventures to consider your project, please send a summary of your project along with a pitch deck and/or white paper to hello@iosg.vc

Follow us on Twitter.