“You cannot eat your cake and have it!” so they said — but then it happens sometimes that even the most valid rules have exceptions. Particularly in crypto, where innovation is supercharged, and the limits of what is possible are being pushed continually. There's always that one-in-a-million possibility of a breakthrough, against all odds, even in the most technologically impossible situations. One of such intriguing cases is EigenLayer — a claim that has grown into a ~$11.5b stake.

Bootstrapping a new innovation in the crypto space is incredibly challenging; pioneering a whole new frontier is even more so. Yet, EigenLayer burst onto the scene and quickly grew into a behemoth, becoming the second largest protocol by TVL on Ethereum. This uncommon feat speaks volumes about the compelling vision and narrative EigenLayer has championed.

By introducing a novel mechanism in crypto-economic security that was deemed impossible before, EigenLayer has cracked open a discovery that feels like opening up a Pandora's box. Similar to the discovery of MEV, EigenLayer prompts several questions about its profound implications and risks. This article is a venture deep down into the EigenLayer rabbit hole, analyzing its operation logic, the opportunities, and the risks involved.

To appreciate the full breadth of EigenLayer, we need to zoom in on the current state of crypto-economic security to see how EigenLayer's idea fits in the big picture.

At the inception, it all started with Bitcoin. Being the first iteration of decentralized trust and security, pioneering peer-to-peer payments rails without third-party coordination. Bitcoin’s security model however, had its own flaws — it was app-specific in its design. As such, any new decentralized application that builds on top of the network also needs a new blockchain and its own trust network — This impeded innovation and growth on the network.

Ethereum’s genius was pivoting away from Bitcoin’s application-specific approach, by enabling flexible smart contracts that allow developers to explore a new frontier of permissionless applications. This makes it possible for developers to build complex systems that leverage the underlying blockchain’s security and computational resources, establishing trust and security at the base layer. This model had huge implications for the design space — opening the floodgates for innovation upon which most of the things we know and use today are built on.

While Ethereum’s programmability signaled a breakthrough for a new set of applications, its security model is also not without its own caveat — applications that require their own actively validated system (AVS), cannot utilize the Ethereum settlement layer. Akin to the original Bitcoin security model, this creates a hostile for environment for a new AVS. Furthermore, it encourages an ecosystem of smaller, fragmented pools of security and an inherent value leak within Ethereum's security model.

In a perfect world, developers should have the flexibility of creating decentralized applications without the hassle of creating their own blockchain from scratch. EigenLayer makes this possible — Being a network for programmable trust, EigenLayer lowers the entry-barrier for creating decentralized applications by orders of magnitude. Allowing developers to bypass the difficulties associated with bootstrapping and operating their own trust network.

EigenLayer is a set of smart contracts on Ethereum that creates a marketplace for decentralized trust, enabling Ethereum validators to rehypothecate their trust and allows new chains to benefit from the same trust. Think of it this way — EigenLayer takes the security of Ethereum, and allows other emergent applications (decentralized oracles, bridges, rollups) to use it.

At its core, EigenLayer leverages two fundamental ideas. On one hand is the concept of pooled security via restaking — this involves multiple parties combining their staked ETH together to provide greater security. And on the other hand, it employs free-market governance. These mechanisms enable the extension of Ethereum's base layer security to protocols built on the network. This is elegantly explained in the project's Whitepaper.

What Problem Does EigenLayer Solve?

On a basic level, EigenLayer aims to solve the age-long crypto-economic security challenge that has plagued blockchain networks. Particularly, the Ethereum network is plagued by fragmented security — because non-EVM applications built on top of the Ethereum network are responsible for bootstrapping their own trust network. This has proven inefficient, because as more applications are built, crypto-economic security becomes more fragmented across the network.

“One of the central bottlenecks to innovation in today’s crypto ecosystem is the requirement for projects to bootstrap trust, or cryptoeconomic security. We started working on EigenLayer in the hopes of creating a new model in which developers can easily consume trust, instead of needing to build trust, and design powerful systems of assurances that make the crypto ecosystem safer and more useful." — Sreeram Kannan, Founder, EigenLayer

EigenLayer tackles the challenge of fragmented security in the Ethereum ecosystem by introducing a novel concept: restaking. This mechanism, implemented through a network of smart contracts, unlocks the potential of staked ETH. Users can contribute their already-locked ETH to bolster the security of other applications built on Ethereum. In essence, EigenLayer facilitates a system where staked ETH can be "redeployed" for additional purposes.

Users essentially grant EigenLayer temporary control over their staked ETH, allowing it to be effectively "restaked" on other applications. This opt-in feature is crucial because it establishes additional slashing conditions for staked ETH, even beyond the base Ethereum consensus layer. This flexibility in slashing conditions is key for extensible security. New conditions can be implemented to address the specific needs of various projects built on top of Ethereum, such as bridges and data availability layers.

By strategically deploying restaked ETH and leveraging customizable slashing conditions, EigenLayer effectively incentivizes honest behavior and discourages malicious activity. This ultimately allows staked ETH to provide validation services beyond the confines of the Ethereum network itself.

Across podcasts and articles, EigenLayer's core messaging is consistent — enabling restaking. Much of what makes restaking interesting is that it taps into something fundamental to every human — the pursuit of profit. Let's unpack this.

Ethereum staking involves committing your Ether to participate in securing the Ethereum network and earn rewards in the ETH. Basically, it is like putting your ETH to work for the network's benefit. Classically, the motive behind validators’ participation in Ethereum consensus is profit-driven — Ethereum validators stake their Ether (ETH) either natively or with a liquid staking token (LST) to earn yield. However, this comes with an opportunity cost of not being able to re-use their staked Ether elsewhere (the ETH is locked).

Of course, validators can take their assets elsewhere if there's a promise of better yield. For instance, if the interest rate on providing ETH as liquidity on Uniswap is “significantly” higher than the validator rewards, validators would rather opt for being a LP on Uniswap.

Currently, over 31.5 million ether, currently valued at $115 billion, is staked on Ethereum. But, what if all of that ETH could do more? This is where EigenLayer enters the picture. In this context, the opportunity cost is taken away. Instead of just chasing limited yield (Ethereum has a low staking rate of ~4.56%), validators are offered alternative revenue sources to increase yield, which is crucial for maintaining Ethereum’s security.

In its most simplified form, restaking is the idea that the same stake that is used for securing the Ethereum proof-of-stake network (PoS), can be used to earn rewards from multiple sources simultaneously.

EigenLayer has profound implications for the EVM, with the potential to unlock a new paradigm of innovation on top of Ethereum. However, amid the excitement and optimism, there are potential systemic risks that should not be sidelined. Critics have collectively lent their voices, and rightfully so. Ethereum’s founder, Vitalik Buterin, recently brought to light critical concerns about systemic vulnerabilities resulting from spreading ETH stakes across EigenLayer’s services.

Two primary areas of potential vulnerability exist within EigenLayer. The first concerns collusion among validators. A group of malicious validators could potentially coordinate an attack on multiple middleware services simultaneously. The second vulnerability stems from integrated protocols. Protocols built on top of EigenLayer might introduce unintended weaknesses, potentially leading to the slashing of innocent nodes.

Additionally, EigenLayer's success hinges on its rebalancing algorithm. This algorithm considers factors like validator stake, security capacity, and usage patterns to ensure balanced distribution. However, if the rebalancing mechanism malfunctions (latency issues, or incorrect parameter settings), EigenLayer's crypto-economic security could be compromised. This could lead to vulnerabilities similar to those addressed by the merge-mining feature it aimed to solve. Therefore, it's crucial to ensure the system accurately tracks and updates restaked ETH, maintaining full collateralization at all times.

Being one of the most anticipated launch of 2024, EigenLayer has already attracted over $1.8B $ETH capital via its points-based incentive program. You ask, what's the big deal about points? Actually, it's a big deal. You’ve probably heard that points are the new meta in crypto.

While the concept of points systems might seem fresh in the crypto world, a closer look reveals a familiar pattern. Traditional loyalty programs for airlines, hotels, and credit cards have been using points for decades. The key difference lies not in the points themselves, but in how they're implemented. What sets the crypto points system apart from traditional finance is the likely potential for tokenization.

The anticipation of these points eventually converting into tradable tokens adds a layer of excitement and opens doors to greater utility. Given the massive reputation EigenLayer has built, users have huge expectations of an EigenLayer token. Currently, over 2.82b restaking Points have been accrued by users. Of course, there is no guarantee that points will be converted to tokens. However, given the recent trend in the crypto space, users are expecting the TGE to happen in Q2, 2024. As a matter of fact, it is one of the most anticipated airdrops of the year. The image below shows the point tiers of each user cohort (according to count) and theor share of points.

Without doubt, restaking presents a significant improvement in value accrual for end users. Traditional staking is not capital efficient. Token holders essentially lock their capital into a given contract to earn a reward for contributing to network security. The result? A more robust blockchain landscape, fueled by advancements in security and innovation, is on the horizon. This bodes well for attracting new users to the ecosystem, as it fosters a more trustworthy and dynamic environment.

Lately, I’ve been doing a lot of research around blockchain gaming, following the burgeoning narrative of “fully on-chain games.” Today, I decided to put out a piece I've been working on. I bet you'll find it insightful! Don't forget to share!

Editor's note: In this piece, I'll use the terms “crypto-native games” and “on-chain games” interchangeably.

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The flywheels of progress in the gaming industry are propelled by evolution in computing standards. Historically, we can draw parallels between new computing paradigms and the emergence of new frontiers in gaming. This pattern, however, is not unique to the gaming industry, it is also true across a wider set of applications. Here are some historical precedents in crypto gaming before we continue, lets take short trip down memory lane.

Over the past couple of years, we have seen multiple iterations of crypto-native games. From land-based virtual worlds (like Decentraland and The Sandbox), to play-to-earn games. It all began with CryptoKitties in late-2017, which set the pace for how crypto permeated gaming. Then the launch of Axie Infinity in early 2021, which led to the exponential growth of the P2E model. Driven by the financial incentives involved, many players, especially in emerging markets such as Africa and Southeast Asia, treated the game as a job (coinciding with the COVID-19 pandemic). By the end of 2021, AXS, the game’s governance token was worth over $40B (fully diluted).

The domino effect of Axie Infinity’s success was enormous. It became all the rage and speculation exploded, leading to the proliferation of dozens of play-to-earn games. Everyone, including institutions, guilds, and retail investors, wanted to get their own share of the pie, chasing the next big hit. Of course, it wasn’t all negative, it escalated developer interest, though it wasn’t economically sustainable. Unsurprisingly, the euphoria did not last forever, and the play-to-earn bubble has largely burst.

While the economic fallout of the Play-to-Earn (P2E) era has cast a social taboo over crypto-native games, the events of 2022, when the industry was plagued with major hacks, frauds, and speculation-driven bubbles, didn't help either. However, as with emergent technologies, chaos, Ponzi schemes, hype cycles and speculative bubbles is a way of life. Past technological revolutions have seen similar patterns. As such, it would be unfair to write-off crypto-native games.

Many skeptics might argue that crypto-native games are back to square one. Google search trends, and user counts are good indicators to see how attention and capital flow through games. From the search trends, interest has gone back to 2018, bear market levels. It appears nobody cares about the sector anymore. Not really. Far from the deafening noise of X (formerly Twitter) and the plummeting price signals of gaming-related tokens, progress is being made quietly behind the scenes. From the ashes of the play-to-earn era, a resurgence of some sort, is happening.

Here’s what I’ve noticed.

1. There's been innovations around blockchain infrastructure that can now handle the UX and throughput.

2. The appetite for investment in crypto-native games is alive and kicking.

3. The number of well-funded blockchain games that are opening their doors to the public with playable builds is swelling.

The first generation of crypto-native games all belong to existing gaming genres and have integrated blockchain elements to varying degrees. Presently, the most prevalent forms of crypto-native games are scattered on a spectrum with different levels of blockchain involvement. Prominent games like Axie Infinity, Illuvium, and Gods Unchained, belong to this category. However, recent evolution in blockchain infrastructure and scalability has unlocked a new set of possibilities; allowing new gaming genres to be built fully on-chain.

Fully on-chain games refer to the core end of the crypto-native spectrum: games whose state and logic live entirely on open smart contract platforms. These games maximally embrace the architectural patterns of blockchains to fundamentally invent net-new experiences. In essence, on-chain games bring the entire experience onto the blockchain.

Fully on-chain games are not entirely new. If you are a keen industry observer, you may have come across Dark Forest, the first on-chain game created with zero-knowledge in conjunction with on-chain game logic. Although the niche is still somewhat obscure and in its nascent stages of development, fully on-chain games have been quietly gathering momentum, which I believe will soon culminate into an increase in developers and investor interest.

The question is, why put games on a blockchain? And why should we pay attention to fully on-chain games?

I'll start with a quote from Gubsheep's post, “The strongest Crypto Gaming Thesis;”

If we accept that games are a leading indicator of new technologies, and that the most interesting applications of new technologies will lean into truly new affordances rather than incremental improvements, then it follows that the bleeding edge of crypto application design in the next few years will be found in crypto-native games.

While the first generation of crypto-native games were focused on verifiable “ownership” of digital assets. Fully on-chain games, or as it's being increasingly referred to as “autonomous worlds,” are at the absolute end of the crypto-native spectrum, where every change to the game state is recorded to the blockchain.

It is worthy to note that different game-specific infrastructure to streamline the development of fully on-chain games are beginning to emerge. The MUD engine from the Lattice team, the Starknet gaming ecosystem, and the Dojo suite, to name a few. It is also vital to point out that potential that decentralization, open-sourcing, and self-custody can have on gaming is enormous. This could prove to be a game-changer for crypto-native games.

While fully on-chain games are not without their own challenges, the common knowledge is that the technical infrastructure isn’t ready yet. To set the records straight, I’m not claiming that fully on-chain games are going to meaningfully impact the industry on a short or even medium-term time frame. However, the possibilities are immense and exciting for the industry.

Signing Out,

Taiwo

If you are building or interested in on-chain games please reach out to me on Twitter! Would love to chat.

This week, I decided to revisit the custodial debates again. I hope you find it insightful.

NB: This newsletter is still in Beta stage, if you have any feedbacks and suggestions about areas that need to be improved, do not hesitate to reach me. I’ll be waiting to hear from you!

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The age-long expression “not your keys, not your crypto” carries the idealist's philosophy of cryptographic key management. This framing implies a standard where only an individual (or a group via “multisig”) has direct and sole control over their own private keys— and subsequently, ownership and control of crypto assets. Crypto wallets that adhere to this approach are referred to as “non-custodial,” meaning no third party has access to users’ private keys.

In reality, the narrative is wider than a mere mantra can fully capture. The norm has always been to follow a binary approach when considering the security of crypto wallets, projecting non-custodial wallets as one in which users are in control of their keys, hence, a higher level of security. However, It turns out that this thinking is flawed in everyday practice.

Before I thread any further, I want to provide some historical context to the infamous FTX unraveling. Whenever a major negative development or event happens in the financial markets, or in the world of crypto, it is always accompanied by a flurry of debates and unusual market movements. Similar to traditional bank runs, custodial exchanges witnessed a substantial spike in withdrawals.

The image above report highlights the parallels between significant market events and withdrawals from custodial exchanges to self-custodial wallets. Each highlighted major negative market event correlated with a significant spike in liquidity transfers from custodial exchanges to self-custodial wallets.

The FTX collapse rekindled the debates over custodial practices across the industry. Many started advocating for users to boycott custodial exchanges, and embrace self-custodial wallets. The effect? Hardware wallets generated a boom in sales. While the calls for the boycott of custodial wallets for non-custodial wallets are well-earned, we need to take a few steps back and examine crypto wallets from a more nuanced perspective.

Before we proceed, it is important to point out that there has also been a number of high-profile non-custodial wallet hacks, from the Slope wallet hack in 2022, to the most recent being the Atomic wallet hack, a massive $100 million exploit that compromised an estimated 5,500 crypto wallets in June, alongside the vulnerabilities of hardware wallets, and other incidences. These occurrences blur the line between custodial and non-custodial wallets, as in many instances, the victims of most hacks and thefts admitted that attackers found a way to hijack their coveted keys. A paradox, is it?

The value proposition of non-custodial wallets has always been about eliminating trust in third parties, in alignment with the cryptocurrency canon of autonomy and self-sovereignty. However, in reality, do non-custodial wallets really put users in “full control” of their keys?

Custodianship is, in reality, a spectrum. What appears to be non-custodial at a first glance, actually involves a number of third-party elements. These elements are often overlooked or taken for granted. What is called a wallet is someone else's creation. Wallets are typically created and operated by third-party software or hardware. As such, using a non-custodial wallet means putting a level of trust on other people and products to some extent. I’ll use the Ledger incident to drive my point home.

The Ledger incident in May clearly demonstrates this. The crypto hardware wallet provider came under intense criticism from the crypto community for its newly proposed “Ledger Recover” feature, a new service allowing users of the Ledger hardware wallet to back up their seed phrases with third-party entities. Following the backlash from the crypto community, the firm had to delay the launch, with the intention of accelerating its plans to open-source more of its codebase.

“Some amount of trust must be placed into Ledger to use their product. If you don't trust Ledger, meaning you treat your HW manufacturer as an adversary, that can't work at all.” — Éric Larchevêque, Ledger co-founder an CEO.

The above statement sums up the situation with non-custodial wallets. If you trust the device to sign a transaction only when you press a button, you automatically trust all the various wallet connection integrations in between, including smart contracts and software updates. Oftentimes, we do not consider these fine little details, but when all these interwoven elements are brought together, it flaws the non-custodial aspect.

This post is not a campaign against non-custodial wallets, rather, it is intended to help web3 users better understand the technicalities involved in securing their assets by way of the catchphrase above. It is important to regard wallets with more nuance and to consider the specific risks and trade-offs involved with each type of wallet, which often involves striking an optimal balance between accessibility, convenience, and security. There is no one-size-fits-all answer when it comes to wallet security. Users should choose the wallet type that best meets their needs and risk tolerance.

****

Ps: This article was first published on my Mirror account.

Signing off for now, enjoy your weekend.

I'll see you next week!

Taiwo

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This piece was inspired by Matt Huang's The Casino on Mars, a literary masterpiece in which the author employs the metaphor of a new planet to symbolize the frenzied nature of the crypto market. So far, it tops my list of best reads this year, it creatively captures the speculatory nature of crypto. I strongly recommend that every builder out there should read it.

Speculation in crypto has become a hot topic of debate in the industry. This post will be frequently referenced in future editions of this newsletter. Do me a favor, spread the love by sharing this post.

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As with all financial markets, the crypto market has a long history of speculation. Crypto’s speculatory image and hype cycles have been the biggest criticism against it's existence. Many skeptics argue that the industry needs to move beyond speculative games, or better still, rid its lottery-like image, for it to scale to mainstream adoption. This piece summarizes my thoughts on whether all this speculation is necessary even as the space matures.

Understanding speculation in the historical context of financial markets can help us navigate the current crypto landscape. Every investor should be a good student of history, think of it as a compass that steers you in the right direction.

The history of financial markets is punctuated with speculative bubbles and manias. Since the earliest recorded history of stock markets, speculation has been a thing. Joseph De La Vega’s Confusion De Confusiones in 1688, describes the allure of speculation, and the psychology of the market participants on Amsterdam’s stock exchange in the 17th century1, he said:

“If it is of importance to spread a piece of news which has been invented by the speculators themselves, they have a letter written and [arrange to have] the letter dropped as if by chance at the right spot. The finder believes himself to possess a treasure, whereas he has really received a letter of Uriah which will lead him into ruin.” — Joseph de la Vega (1688)

History shows that speculation has benefited financial markets, providing the early liquidity for them to actually function and evolve into the mainstream asset markets they are today.

Speculation and crypto are deeply intertwined. In the past few years, the levels of speculative culture witnessed in crypto has been reminiscent of previous frenzies like the Dot Com bubble.

There's a negative perception of speculating as “degenerate gambling” that has lingered for centuries. As such, speculation and its associated manias are often dismissed and considered ludicrous by financial professionals and society at large. Much of Crypto’s skepticism can be attributed to this viewpoint, which is not entirely fair, given that speculative investments have historically been important catalysts in the diffusion of technological revolutions. From the internet to smartphones, railroads, telegraphs, computers, and more, the path from new innovations to mainstream adoption has often been riddled with speculation.

Bootstrapping a crypto protocol from scratch is hard, as most retail users are hesitant to make risky bets with their money, unless the value proposition is incredible. In John Joel's words: “Crypto’s original sin is in charging users.” Many crypto products have so-called “utility” on one side of the transaction but require speculation to fulfill the other side. Usually, the early-adopter horde are attracted by the allure of high risk-return bets. While it may be the “get rich quick” aspect of speculating on crypto that draws in the initial cohort of users, that experience with the protocol or product may lead to their developing a more serious and longer-term interest.

User retention for crypto products is more difficult compared with conventional tech apps. Since blockchains allows faster rails for the transfer of money, users tend to switch products frequently in search of more lucrative options. As such, to retain the initial cohort of users, protocols require a compelling product that offers better yields that users deem enticing enough. However, speculation serves the purpose of providing the initial liquidity boost for the protocol to effectively function, before network effect kicks in.2

As with all emergent technologies — chaos, is the way of life, and history offers some clues. The parallels between the Wild West or the early days of the internet, and crypto are striking. While crypto presents a frontier for innovation, akin to open or free markets, it also welcomes all kinds of participants, including the bad actors and the misbehaving ones.

Crypto has a dark alley of speculative manias that can be quite distasteful. There are way too many bad actors in crypto today — high-profile bankruptcies, busts, rug pulls, pump & dump schemes, blackhat hacks, Ponzi and pyramid schemes, the list goes on. Short-term speculative activities in a bid to to “time the market” often result in a zero-sum dynamic, where unsuspecting newbies are exploited by sophisticated traders. All of these account for crypto's regulatory fallout with the SEC.

Interestingly, the Cointelegraph incident coincided with when I was writing this piece (I couldn’t resist the temptation to chip it in). Earlier today, during routine coverage, Cointelegraph’s social media team posted a message on X (formerly Twitter) without prior editorial approval stating that the United States Securities and Exchange Commission had approved BlackRock’s iShares spot Bitcoin exchange-traded fund, or ETF. Apparently, this was false, a result of misinformation. The news lead originated from an unconfirmed screenshot posted by an X user who claimed it was from the Bloomberg Terminal. The result? Close to $60 million got liquidated due to the sudden price volatility.

If anything, this incident clearly shows that centuries later, investors are still falling prey to the same old trick. A pointer to the fact that one thing is always constant—human nature. Yes, technological advancements have evolved over the years, but people and their behaviors in each period are pretty much the same as they were centuries ago. Today, false news still sways the crypto market, causing volatile swing in the price of crypto assets. The same scenario that played out in the Amsterdam Stock Exchange in 1688. Different ages, same behavioral pattern.

However, amidst all these mayhem, it is worth remembering that equity markets were no different in the 19th century and early 20th century. The stock market endured long periods of speculation and fraudulent activity, before its transition into being a major pillar of modern finance. While the deafening noise of fleeting price movements may appear louder than signals of innovation, the crypto space is making considerable progress. For what it's worth, I believe crypto's net positives far outweighs the negatives.

To set the record straight — Speculation is not an evil thing. In the context of crypto, It turns out that speculation has been productive. Financial speculation has been critical to the growth of crypto as a decentralized financial system. Some of the most prominent successful protocols strategically took advantage of financial speculation, and that will likely continue to be the case as the industry matures.

Many of the technological innovations that changed the the world today, were once considered impossible, insecure, and dangerous. Crypto is no different, it is an open frontier for innovation.

It is expected that the will crypto markets to follow a similar pattern, evolving far beyond this initial bootstrapping phase. Speculation is simply a historical pattern repeating itself, and a valid starting line for these new protocols to evolve into mainstream financial markets.

I'll see you next time, keep winning!

Taiwo A

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1

https://investoramnesia.com/2022/07/17/history-matters/

2

https://en.wikipedia.org/wiki/Network_effect

I’m starting this newsletter today for Web3 builders, crypto-curious minds and knowledge seekers. Here's to many more in-depth and thought-provoking research pieces in the coming days. That said, let’s dig in!

The year is 2023. The US market continues to grapple with the prolonged onslaught of the SEC's regulatory crackdown. Development in the industry is overwhelmingly dominated by DeFi and infrastructure projects. Layer 2 networks (L2s) are literally popping up everywhere. A new Web3 protocol is taking the markets by storm (and it's not an L2).

Since its launch, Friend.tech has been on a high-growth trajectory, evolving from a simple social app to spawning its own ecosystem. While token-gated social apps are not a new idea (BitClout and Steemit are iterations of such experiments in the past), neither of these previous iterations, even in their prime, garnered as much traction as Friend.tech. Today's piece explores Friend.tech's phenomenal growth and the key factors driving its adoption.

Since its launch on August 10th, Friend.tech has performed beyond expectations. The platform has grown exponentially and garnered robust user traction. The numbers are a testament to this. Within a short period of time, the platform has carved out its own niche, with applications growing on it, including portfolio management tools, DeFi tools, a range of experiments, and even forks; a positive sign for the continued growth of the platform.

Usually, dApps require a threshold amount in liquidity to become relevant. But in the case of social networks, relevance is defined by the number of people creating content and engaging with it. Friend.tech has been able to capture significant “early-stage liquidity” of human attention. The platform has onboarded over 300k unique users since launch, flipping already-existing Web3 native social networks. As against the fluctuations that occurred after launch, the platform’s user activity has stabilized, averaging between 6k to 9k recurring daily users. In the month of September, the platform saw its TVL reach an all-time-high of $50M.

Frankly, there are a number of things that are novel about Friend.tech team, which has contributed immensely to the platform’s virality. I’ll summarize these into distinct points, and give an elaborate analysis of each.

1. The product was backed by prominent VC fund, Paradigm. The market couldn't ignore a social app with such a strong backer.

2. Friend.tech’s use of a Progressive Web Application (PWA) model and the embedded Privy wallet (to be explained later)

3. The hype around launching the product on Base (Coinbase’ Layer-2) instead of Polygon (where Lens is currently).

4. The Twitter gateway as part of the onboarding process.

5. The use of a novel token incentive mechanism (Airdrop) to bootstrap initial user activity.

The effect of the announcement that Paradigm had backed Friend.tech further attests to the speculative culture of the industry. Borrowing Matt Huang's words in “The Casino on Mars”: this casino-like speculation is part of a bootstrapping process.

Sequel to the news that Paradigm had backed Friend.tech, speculation exploded, the app’s active user count saw a swift increase. The fact that Friend.tech is backed by Paradigm, one of the most prominent “crypto-native” VC firms, signaled value. The market couldn't ignore a social app with such a strong backer.

Friend.tech’s adoption of a mobile-first approach with a progressive web app (PWA) is one of its strongest hooks. PWAs are web applications that look and feel like native mobile apps. They can be added to the home screen of your device (displayed with an icon similar to those of native apps) yet aren’t downloaded through an app store but the web via browsers. This approach also circumvents the App Store, enabling users to avoid the mandatory 30% transaction fee imposed by Apple or Google. This, in turn, allows Friend.tech and content creators to retain the full share of marketplace fees.

Also, it is incredibly genius of Friend.tech’s to use embedded wallet, easing the onboarding process by miles. Embedded wallets are different from the regular self-custodial wallets (MetaMask, Exodus, etc.) that crypto-natives are familiar with. Though embedded wallets provide users with a fully self-custodial experience, the distinction is that users don’t have to explicitly download wallet software separately from the app.

As the name suggests, embedded wallets are installed along with the app by default. This model increased the friend.tech’s appeal to non-crypto natives, by skipping the usual many steps that custodial wallet users typically go through (such as downloading a wallet, saving a seed phrase, switching networks, and connecting the wallet to the app). This, among many factors has contributed to the virality of Friend.tech, as the app has successfully attracted and onboarded big names across other industries.

At the moment, PWAs already offer a strong alternative to native mobile apps and conventional web apps. With the integration of PWAs and embedded wallets, Friend.tech might have opened up a new paradigm for mobile-first beginner-friendly crypto apps.

A considerable part of “value” in crypto is narratives. Narratives drive capital and attention within the industry. Given the liquid nature of the crypto market, narratives emerge and fade quickly, so it's always a game of timing bets right. You can be at either end of the spectrum — being early to a theme or caught in the midst of a dying theme. At the moment, the Base ecosystem commands the most attention above other L2 networks, due to its nascency (a result of the market’s love for new shiny toys).

Clearly, the Friend.tech team understood that crypto culture is built on narratives, and timed their bets properly. Launching the product a day after the public launch of Base was a brilliant move, leveraging the initial hype around Base and maximizing activity on both the protocol and blockchain. The product could have been built on Arbitrum, Optimism, Polygon, or any other L2 other than Base, but the team chose to ride the wave of the Base narrative — a choice that is paying off massively.

At its core, Friend.tech cleverly bridges Web3 to Web2. Bringing out the best of two worlds — Friend.tech <> Twitter. Historically, finding friends on a new social network is one of the most difficult part of bootstrapping a social network from the ground up. The status quo is that when you sign up on social networks like FB, TikTok, and Instagram, the product asks permission to sync your phone contacts to their servers. The products then map out the phone numbers to platform users and suggest them as friends to you.

Friend.tech took a different route by enabling users to sync their followers from Twitter. To onboard to Friend.tech, users need to link their Twitter profiles to their Friend.tech accounts. This allows users to effortlessly identify their connections when navigating within the app, reducing the initial cognitive effort for users to sign up on the app and build out their social graphs there again. Users who sync their Twitter accounts will receive notifications whenever a Twitter friend joins the app.

This trend of blurring the lines of social graphs is not new. Historically, there has been previous attempts which include Meta’s attempt at allowing users to link NFTs to their profiles, Twitter’s (now X) integration of NFTs into the product, and Reddit’s NFT odyssey.

Incentives play a pivotal role in the growth strategies of emerging crypto platforms. They serve as an effective onboarding mechanism for new users, while aligning growth and liquidity with the company's strategic objectives. Friend.tech’s incentive scheme is one of the strongest hooks. It allows users to trade your online reputation (social capital), translating it into speculatory gains.

It is noteworthy that Friend.tech is relying on token incentives (airdrops) to bootstrap its initial user activity. The platform announced an airdrop of 100m reward points to users over the upcoming six-month beta period. Given its backing by Paradigm, there are speculations that history may repeat itself, and the Friend.tech airdrop could follow similar patterns to other Paradigm-backed protocols such as dYdX, Blur, and Uniswap. On average, approximately 10% of supply was airdropped to users of these protocols. While this doesn't imply that users are only on the platform to farm airdrops, but it is enough to keep people interested. A notable example is the case of top Blur farmers shifting their focus from farming Blur points to farming Friend.tech points.

Overall, Friend.tech has an optimistic outlook from the numbers recorded so far. While there has been many questions about the sustainability of its growth, its difficult to predict if it will survive or fail — time will be a true test of it’s sustainability. While many are of the opinion that real users cannot be verified as long as incentives are involved. We’ve seen similar scenarios before (such as LooksRare), where user activities and trading volume dwindled rapidly as soon as token incentives (airdrops) were off the table. We can only wait to see if history will repeat itself in this case.

To achieve long-term success, friend.tech will need to find a sustainable revenue model that depends less on speculation and incentives. However, one thing that the Friend.tech exodus has shown, which is a lesson to everyone that’s building a Web3 native product out there is that people only care about what a product can do for them. I mean, people care less about the consensus mechanism and other technical stuffs that happens behind the scenes. What they appreciate is the value that the product brings to them.

That’s all for now! I hope you enjoyed this this piece.

Until next time, keep winning!

Taiwo A

Institutional-Grade Research For Web3 builders.

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