Produced by: CGV Research Author: Shigeru , Satou Introduction PayFi, short for Payment Finance, refers to an innovative technology and application model in the blockchain and cryptocurrency sector that integrates payment functions with financial services.  The essence of PayFi lies in its focus on the processes of sending, receiving, and settling cryptocurrencies, rather than mere transactional activities. This model encompasses not only cryptocurrency payments and trades but also extends to lending, wealth management, and cross-border payments among various financial activities. Utilizing decentralized technology, PayFi enables quicker, more secure financial activities while reducing the frictions and costs associated with traditional financial systems, thus promoting seamless value transfer and financial inclusivity on a global scale. The concept of PayFi was first introduced by Lily Liu, Chair of the Solana Foundation, at the EthCC conference in July 2024. She views PayFi as a novel way of constructing financial markets, centered around the Time Value of Money (TVM) to create financial primitives and product experiences that are challenging, if not impossible, to achieve in traditional and even Web2 finance. The vision of PayFi is to revolutionize payment systems using blockchain technology, enabling more efficient, low-cost transactions and offering a novel financial experience. This, in turn, facilitates the creation of more complex financial products and applications, constructing an integrated value chain that forms a new financial cluster.  The CGV Research team believes that with the advancement of high-performance blockchain technologies, the true value of PayFi will rapidly expand and scale within this ecosystem. This expansion will accelerate the integration of payment and financial services, enhancing the practicality and efficiency of cryptocurrencies in everyday transactions and more complex financial operations. In the future financial ecosystem, PayFi is poised to be a key driving force. PayFi: Inheriting and Expanding Bitcoin’s Payment Vision The inception of Bitcoin was marked by Satoshi Nakamoto's revolutionary white paper "Bitcoin: A Peer-to-Peer Electronic Cash System," which introduced the concept of decentralized payment. This idea not only introduced a new form of currency—Bitcoin—but more importantly, it envisioned a global payment system without intermediaries that could circumvent traditional financial institution constraints, facilitating more efficient and transparent value transfer. Nakamoto’s vision aimed to fundamentally reform the existing payment system by eliminating high transaction fees, lengthy settlement times, and financial exclusivity. However, despite Bitcoin's success in leading the cryptocurrency revolution, its initial purpose as a daily payment medium was not fully realized.  Bitcoin is often regarded more as a store of value rather than a currency for daily transactions. Over time, the emergence of stablecoins filled this gap. By mapping the value of fiat currencies onto the blockchain, stablecoins bridged the gap between the cryptocurrency and the real-world financial systems, promoting the first practical application scenario for blockchain payments. Since 2014, the exponential growth of stablecoins has demonstrated a strong market demand for blockchain payments. Stablecoins allow users to enjoy the transparency and decentralization benefits of blockchain technology while avoiding the risks associated with cryptocurrency price volatility. To date, stablecoins support approximately $2 trillion in payments annually, nearing the annual payment processing volume of Visa. However, while stablecoins have advanced blockchain payment capabilities, several challenges remain, such as poor user experience, transaction delays, high costs, and compliance issues. These challenges restrict the widespread adoption of blockchain payments as a mainstream payment medium. The further expansion of the payment ecosystem, particularly relies on the promotion of financial instruments and financing mechanisms.  In the traditional financial system, tools like credit cards, trade financing, and cross-border payments significantly facilitate global payment applications by providing liquidity and financing options. As an emerging industry, blockchain does not necessarily need to completely rebuild a market but can offer more valuable products and solutions based on existing markets through blockchain technology. It is in this context that PayFi has emerged. By leveraging the high performance and low-cost transaction characteristics of advanced public blockchains, PayFi not only promises to surpass traditional financial mechanisms but also aims to create a more liquid and adaptive global financial market. This evolution represents both a return to Bitcoin’s original intentions and a significant innovation built on Bitcoin’s foundation.  Through PayFi, the blockchain payment system will truly unleash its potential, pushing the global financial system towards a more efficient and inclusive future. Core Concept of PayFi: Time Value of Money (TVM) "Time is more precious than money; you can get more money, but you cannot get more time." The Time Value of Money (TVM) is a fundamental concept in finance, emphasizing the value difference of money at various points in time. The basic principle of TVM is that the value of money in the present is generally higher than that of an equal amount in the future. This is because money held now can be immediately invested to generate returns or used for consumption, providing instant utility. Simply put, the important concept behind the time value of money is "opportunity cost." If the holder of money does not use it immediately, they lose the potential investment opportunity and the possible returns. Therefore, the present value of money must reflect these foregone opportunities. For example: - Loans and Mortgages: In bank loans, interest rates are calculated based on TVM, where the interest paid by borrowers essentially compensates for the use of funds provided by the bank. - Investment Assessment: When evaluating investments such as stocks, bonds, or real estate, investors consider the present value of future earnings to determine the attractiveness of the investment. - Capital Budgeting: When conducting capital budgeting, companies evaluate the future cash flows of different projects and calculate their present value through discounting, aiding management in making the most advantageous investment decisions, among other things. PayFi, through blockchain technology, allows users to realize the time value of money on the chain in an extremely cost-effective and efficient manner. By leveraging smart contracts and decentralized platforms, PayFi enables users to manage and invest funds without intermediaries, thus maximizing the efficiency of fund utilization. This new model not only significantly reduces transaction costs but also shortens transaction times, allowing funds to quickly re-enter the market for reinvestment or other purposes. Furthermore, PayFi's infrastructure enables the development of more complex on-chain financial products, such as on-chain credit markets, installment payment systems, and automated investment strategies based on smart contracts. These innovations are expected to expand into more complex financial products and application scenarios, creating an integrated value chain and forming a new "financial cluster." Gluing RWA + DeFi: Building a New Financial Cluster Centered on PayFi In the financial system, Real-World Assets (RWA) and Decentralized Finance (DeFi) each possess unique advantages and face their own challenges: RWA has a vast market size and stable value but relatively low liquidity, and lacks transparency and transaction efficiency; DeFi boasts efficient transaction mechanisms and global liquidity, but primarily relies on cryptographic assets, lacking a direct connection to the real economy. Contrary to some industry perspectives that suggest "PayFi is a sub-category within the RWA track," CGV Research believes that RWA is a part of the PayFi ecosystem. Beyond RWA, PayFi also encompasses a broader range of cryptographic assets, smart contract-driven financial services, and decentralized payment and settlement systems. The introduction and application of RWA through DeFi are crucial components of realizing PayFi's core functionalities. RWA requires DeFi to enhance liquidity and transaction efficiency, through digitalization and smart contracts on the blockchain for rapid, low-cost global financing, and to increase transparency and security of transactions. Simultaneously, DeFi enriches its asset categories by incorporating RWA, reducing volatility risks, providing stable sources of income, and connecting to the real economy, promoting its practical application and development globally. Through PayFi, RWA and DeFi are no longer independently developing financial systems but are interdependent and complementary wholes, achieving the integration and innovation of real assets with on-chain financial services. - Digitalization and On-Chain Integration: Bringing RWA onto the blockchain. The PayFi platform first digitizes RWA through smart contracts, enabling representation and trading on the blockchain. This process ensures the transparency and security of RWA's value and ownership on-chain. In this way, traditional RWA can be fragmented into smaller units, facilitating global trading and investment. - Smart Contracts and Payment Systems: Enabling efficient transactions and settlements. Once RWA is digitized, the PayFi platform uses smart contracts to automate the trading and settlement processes. This not only speeds up transactions and reduces costs but also ensures the transparency and security of transactions. Moreover, PayFi's on-chain payment system simplifies the transfer and payment of these assets, addressing common issues of settlement delays and high fees in traditional finance. - Liquidity Pools and Financing Channels: Providing financial support for RWA. PayFi's liquidity pools offer ample funding for RWA, enabling these assets to receive financing from global investors. By using RWA as collateral, PayFi allows investors to participate in financing activities on DeFi platforms, providing a stable source of funds for RWA. This model not only increases the liquidity of RWA but also brings diversified investment opportunities to DeFi investors. - Risk Management and Transparency: Enhancing market trust. Through blockchain technology, PayFi ensures the transparency and verifiability of all RWA transactions, reducing information asymmetry and operational risks. The automatic execution of smart contracts reduces the risk of human intervention, while the immutability of the blockchain ensures the security of transaction records. All these enhance market trust, promoting further integration of RWA and DeFi. In the future, PayFi will play an increasingly important role in enhancing global asset liquidity, reducing transaction costs, and enhancing market transparency. In Lily Liu's view, PayFi’s integration of RWA and institutional finance into on-chain liquidity pools, creating an integrated value chain, constitutes a "new financial cluster" and may be the biggest theme in the cryptocurrency market this cycle. Why Is PayFi Flourishing on Solana? Why does PayFi happen on Solana rather than on other Layer 1 (L1) blockchains or Layer 2 (L2) solutions? Lily Liu's answer highlights Solana’s three key advantages: high-performance blockchain capabilities, capital liquidity, and talent mobility, which together form a competitive edge that is difficult for rivals to surpass at this stage. Firstly, high-performance blockchain. Solana’s core technological advantage is its unique Proof of History (PoH) consensus mechanism, which enables it to process over 65,000 transactions per second (TPS) with an average confirmation time of around 400 milliseconds. This performance far exceeds Ethereum’s 10-15 TPS and longer confirmation times, and even L2 solutions on Ethereum, like Optimistic Rollups, struggle to match Solana in terms of latency and throughput. Although Visa claims its servers can handle up to 56,000 TPS, in practice, Visa averages only 1,700 transactions per second. By comparison, Solana is fully capable of meeting the actual payment demands. Secondly, capital liquidity. As of August 30, 2024, the total value locked (TVL) in the Solana ecosystem has surpassed $10 billion, attracting significant investments from top venture capital funds including Andreessen Horowitz (a16z), Polychain Capital, and Alameda Research. This capital liquidity provides strong financial support for the expansion of PayFi. Lastly, talent mobility. The Solana Foundation actively promotes the development of its developer community, organizing over 500 hackathons and global developer education programs. By 2024, there are more than 5,000 active developers within the Solana ecosystem, making it one of the fastest-growing blockchain developer communities in the world. This robust talent pool supports the development of various innovative projects and continues to attract new technology and financial talent to the ecosystem, laying a solid foundation for the development of PayFi. PayFi leverages programmable payments to bridge the traditional and blockchain worlds, making it possible to scale credit finance on-chain through smart contracts. Solana's advantages not only support the development of PayFi but also position it strongly for future competition in the global payment and financial markets. For instance, PayPal chose Solana as the new public blockchain for PYUSD payments, primarily valuing Solana's rapid settlement capabilities, low transaction fees, and robust developer ecosystem. Solana's token extension features, including confidential transfers, transfer hooks, and memo fields, provide the necessary flexibility and commercial utility for PYUSD. As PayPal states, "These features are not just nice to have. If we want PYUSD to play a role in a broader range of commercial domains, they must be provided to merchants." Today, Solana has become the main platform for PYUSD, holding a 64% market share, while Ethereum holds only 36%. Moreover, as early as September 2023, Visa had already expanded USDC settlement functions from Ethereum to Solana. Application Scenarios and Typical Projects of PayFi The essence of PayFi is to reshape and upgrade the traditional financial system using advanced cryptographic technology, making it necessary to reimagine all financial scenarios with PayFi. Cross-border Payments and Trade Traditional cross-border payments face challenges due to the segregated nature of centralized sovereign currency systems, affected by foreign exchange controls and national monetary policies, leading to cumbersome processes, long transaction times, and high costs. Initially, cryptocurrency payments were seen as an excellent solution for traditional cross-border payments, but enterprise-focused solutions still have many shortcomings. Today, the cross-border payment industry still heavily relies on prefunded accounts to achieve same-day settlements. Currently, over $4 trillion is locked in prefunded accounts, representing a significant hidden cost for financial institutions and the global payment industry. PayFi can optimize this by leveraging traditional credit finance to enable cryptographic services. Arf（@arf_one）: The world's first regulated, transparent short-term liquidity solution for supporting cross-border payments, based in Switzerland. By providing operational capital and settlement services based on digital assets, along with local entry and exit capabilities for licensed money service businesses and financial institutions, Arf eliminates the capital-intensive business model institutions in the cross-border payment industry. Arf provides a unified liquidity network for cross-border payments and trade, eliminating the need for prefunding and offering 24x7 transparent and compliant services. As of now, Arf's on-chain transaction volume has recently exceeded $1.6 billion with no defaults, becoming one of the fastest-growing stablecoin use cases. Supply Chain Finance  Supply chain finance combines financial services with supply chain management, based on trade relationships and transactions within the supply chain. It involves managing and controlling the flow of information, logistics, and funds to provide systemic financial products and services to upstream and downstream enterprises. Traditional supply chain finance is hindered by complex contracts and legal work, and the financing process is slow and automated evaluation is difficult, significantly affecting the financing turnover of small and medium-sized enterprises. PayFi greatly simplifies the process of purchasing accounts receivable and other services, easing the financing difficulties of businesses. Isle Finance(@isle_finance)： the first project to offer an RWA PayFi network for supply chain payments, introduces real-time Web3 liquidity into supply chain finance, providing liquidity providers with competitive, high-grade returns. By combining supply chain payments with blockchain technology for real-time settlement and liquidity management, Isle enables supply chain participants to process payments and settlements more swiftly, improving capital efficiency. Meanwhile, on-chain liquidity providers can anchor to the payment stability of high-credit buyers and share in early payment discounts offered by suppliers. Isle's main clients include high-net-worth individuals (HNWIs), crypto-native users, DAO treasuries, asset managers, and family offices. The platform also allows regular users to stake ISLE tokens to earn liquidity mining rewards. Consumer Finance PayFi for end-consumers, which may be of more interest to users, primarily occurs in the consumer finance sector. This was a focus emphasized by Lily Liu in her PayFi discussions, "Buy Now, Pay Never." Users can cover current expenses by pledging future earnings, with enforcement facilitated by on-chain smart contracts. In consumer finance, the key to PayFi is connecting the merchant network's service providers who act as acceptors, enabling consumers to access a sufficiently diverse range of consumption scenarios. Huma Finance (@humafinance): A pioneer in proposing the PayFi Stack, an open stack designed to build compliant payment financing solutions and advocating industry leaders to optimize solutions to meet the unique needs of PayFi. The initial stack includes the following layers: transactions, currency, custody, financing, compliance, and applications. For example, the financing layer includes credit rating, underwriting, and RWA oracles. As a representative project in the financing layer, Huma focuses on common short-term financing in the payment field. As of August 26, 2024, Huma has financed a total of over $280 million, with a default rate of 0%. CrediPay (@Credix_finance): Helps businesses increase sales volumes and improve cash flow efficiency through seamless and risk-free credit services. Sellers offer flexible payment terms to buyers at attractive prices and charge prepayments. We manage and protect customers from any credit and fraud risks, allowing them to focus on what matters most: increasing sales volume and profitability. Currently, CrediPay's services are mainly focused in Latin America, such as accounts receivable factoring. Opportunities and Challenges of PayFi Market Growth Potential The primary aim of PayFi is to bring the time value of money onto the blockchain and restructure the financial system in a more programmable, sub-custodial, and decentralized manner. With the rapid increase in the number of global stablecoins and continuous improvements in cryptocurrency infrastructure, PayFi is poised to be a significant force in transforming traditional finance. According to data from Statista, The total volume of global digital payment transactions in 2023 is expected to reach approximately $9.46 trillion, with projections to continue growing to about $14 trillion by 2027. Additionally, data from Mordor Intelligence estimates that the DeFi market size will be $46.61 billion in 2024, expected to reach $78.47 billion by 2029, with a forecasted compound annual growth rate of 10.98%. Calculations by the CGV Research team suggest that if PayFi can capture 10% of the global digital payment transaction volume (a conservative estimate) by 2030, the PayFi market size (projected at $1.8 trillion) could be 20 times that of the DeFi market size ($87 billion). This indicates that PayFi has tremendous market potential and is likely to play a significant role in the global digital payment sector. Regulatory and Compliance Challenges As the issuance of global stablecoins continues to increase, central banks are gradually easing their stance on stablecoins. Broadly speaking, fiat-pegged stablecoins can be seen as a digital extension of fiat currency. PayFi, mainly involving payment services mediated by stablecoins, is still subject to the regulatory framework of the sovereign currency system. On one hand, current PayFi projects emphasize compliance, typically allowing only licensed institutions to participate, while individual users must undergo strict KYC procedures and scrutiny. On the other hand, many PayFi projects tend to expand business in third-world countries, where local regulations are often less robust and regulatory barriers lower, thereby posing relatively smaller compliance risks. Technological and Security Risks Despite years of DeFi development and many security vulnerabilities being identified and audited, security issues have not been completely eradicated. However, the security of on-chain PayFi has essentially reached parity with traditional DeFi's security after stringent audits. The main technical challenges lie in the off-chain segment. Since PayFi requires extensive integration with real-world assets, ensuring the enforcement of off-chain logic remains an unresolved issue. The current solution often involves an intermediary entity to manage the alignment between on-chain and off-chain operations, but this solution still requires further refinement. Conclusion PayFi, as a new wave in payment finance, is reshaping the global financial ecosystem with its unique charm. It not only inherits Bitcoin's payment vision but also elevates the efficiency and inclusiveness of financial services to new heights through blockchain technology innovations. Supported by high-performance blockchains like Solana, the market size of PayFi is expected to grow exponentially, becoming a major driving force in the future financial market. As Lily Liu envisioned, PayFi tightly integrates RWA and DeFi, constructing an integrated value chain and forming a new financial cluster. This revolutionary innovation is poised to drive the global financial system towards greater efficiency and inclusiveness. ---------------------- About Cryptogram Venture (CGV): CGV (Cryptogram Venture) is a crypto investment institution headquartered in Tokyo, Japan. Since 2017, its fund and predecessor funds have participated in investing in over 200 projects, including the incubation of the licensed Japanese yen stablecoin JPYW. CGV is also a limited partner in several globally renowned crypto funds. Since 2022, CGV has successfully hosted two editions of the Japan Web3 Hackathon (TWSH), supported by Japan's Ministry of Education, Culture, Sports, Science and Technology, Keio University, NTT Docomo, and other institutions and experts. CGV has branches in Hong Kong, Singapore, New York, Toronto, and other locations. Additionally, CGV is a founding member of the Bitcoin Tokyo Club. Disclaimer: The information and materials introduced in this article are sourced from public channels, and our company does not guarantee their accuracy or completeness. Descriptions or predictions involving future situations are forward-looking statements, and any advice and opinions provided are for reference only and do not constitute investment advice or implications for anyone. The strategies our company may adopt could be the same, opposite, or unrelated to the strategies readers might speculate based on th

On August 27, from 2 PM to 5 PM Tokyo time, the WebX side event titled ‘Bridging Real & Virtual: Global Meets Local in WebX,’ co-hosted by CGV, XStar, and Starbase and co-sponsored by mizu, Aylab, and LayerPixel, successfully concluded. The event brought together top Japanese enterprises, projects, and communities, along with leading industry institutions and projects, to explore the Japanese Web3 market and share insights on how to achieve growth in the Japanese market. Here is a review of the event. Host Speech | CGV、XStar、Starbase CGV (Cryptogram Venture) is a cryptocurrency investment firm headquartered in Tokyo, Japan. Partner YZ provided an overview of CGV’s overall development background and investment activities: since 2017, its funds and predecessor funds have invested in over 200 projects, including the investment and incubation of the licensed yen stablecoin JPYW. Additionally, CGV FoF is a limited partner in several globally renowned cryptocurrency funds. CGV is also actively focused on the development of Japanese Web3 startup projects, and since 2022, it has successfully hosted two editions of the Japan Web3 Hackathon (TWSH), which have received joint support from institutions and experts such as the Japanese Ministry of Education, Culture, Sports, Science and Technology, Keio University, and NTT Docomo. Recently, CGV invested in and incubated the ML KOL Club and RONA. ML KOL Club is a service organization that brings together outstanding global opinion leaders and boasts a large community. The team members come from regions such as Japan, Hong Kong, Singapore, and Vietnam, and have extensive project experience and a wide network of KOL resources in areas such as cryptocurrency investment and research, community management, brand development, and marketing. RONA is a high-performance Web3 gaming ecosystem dedicated to combining advanced hardware with blockchain technology to offer players an immersive gaming experience and opportunities to earn income through gameplay. By integrating gameplay, cryptocurrency mining, and AI computing power sharing, RONA creates a new ecosystem where players can enjoy the fun of gaming while also achieving economic gains. Currently, CGV has branches in Hong Kong, Singapore, New York, and Toronto, and is also a founding member of the Tokyo-based Bitcoin Tokyo Club. XStar is an omnichain identity protocol for proof of humanity. Founder and CEO Ervin introduced how XStar’s decentralized identity system (DID) combines with proof of humanity to counter sybil attacks. Starbase is a Web 3.0 accelerator focused on GameFi and AI. Founder Vivian introduced Starbase’s core operational model, including project investment, incubation, and acceleration. Starbase has invested in over 100 projects across various trending sectors and provides funding support for startups. Keynote | Aylab: Web3 User Acquisition At Scale Aylab CEO Robert Zhang mentioned that Aylab is building the Aylab Traffic Loop (ATL), an innovative Web3 advertising engine designed to help Web3 projects acquire a large number of mobile users from both Web2 and Web3. Panel Panel 1: Navigating Japan’s Web3 Market Japan’s proactive Web3 policies, unique market atmosphere, and the influence of KOLs and vibrant community culture are gradually making it an important market. An increasing number of emerging companies are actively expanding, seeking opportunities in this market. Panel 1 was a Japanese-language session hosted by Anome’s Japan Ambassador, Kaori, and featured guests from well-known Japanese companies, projects, and communities: Hara, CEO of JANCTION and CFO of JASMY; Kab, Director of ACG Worlds; Mack Suzuki, CEO and Founder of LEGENDARY HUMANITY; and Keisuke Horiguchi, Founder of GuildQB. The panelists shared their perspectives on the development of Web3 in Japan and insights on how overseas projects can enter the Japanese market. Panel 2: AI Meets Crypto: Beyond the Hype, Into Real-World Application AIxCrypto has quickly become a significant narrative in the current market. As this trend develops, related applications, protocols, and infrastructure are continuously emerging. Panel 2 was moderated by XStar’s Strategy Lead, Alex, and featured guests from renowned VC firms and projects: Kobby Chen, Investment Director at Fenbushi Capital; Kevin Qi, Investment Director at Mask Network; Jane, Director at CGV; and Sam, Co-founder of mizu. The panelists engaged in an in-depth discussion on the current landscape of the AIxCrypto sector, its broad application areas, and the potential and prospects for future development. Special thanks to all the following partners for their support of this event. About Cryptogram Venture (CGV): CGV (Cryptogram Venture) is a crypto investment firm headquartered in Tokyo, Japan. CGV and it’s predecessors invested more than 200 crypto projects since 2017. CGV also incubated a licensed Japanese yen stablecoin JPYW. Additionally, CGV FoF is a limited partner in several globally renowned cryptocurrency funds. Since 2022, CGV has successfully held two Japan Web3 Hackathon (TWSH) and gained joint support from institutions and experts such as Keio University, Sony and NTT Docomo. Currently CGV has branches in Hong Kong, Singapore, New York, and Toronto.Furthermore, CGV is one of the founding members of the Bitcoin Tokyo Club, based in Tokyo, Japan.

Produced by: CGV Research Author: Satou In the blockchain space, The Open Network (TON) has been making significant strides in the payment sector due to its unique advantages and substantial user base. In 2024, the TON ecosystem has demonstrated robust growth across multiple areas. According to recent data, as of July 21, 2024, over 730M USDT has been issued on the TON network, serving as a crucial driver for the development of the TON payment ecosystem. Additionally, TON gaming platforms like Notcoin, Hamster Kombat, and Catizen have achieved remarkable success, attracting 35 million, 230 million, and 25 million users, respectively. As the TON ecosystem continues to mature and expand, its application prospects in DeFi, GameFi, and SocialFi are becoming increasingly clear. The CGV research team delves into TON’s “ambitions” in the payment sector, exploring how it leverages its strengths, overcomes challenges, and strives for long-term development in crypto asset management and DeFi. Unique Advantages of TON: Backed by Telegram’s Massive User Base According to Statista, as of April 2024, Telegram boasts 900 million monthly active users, ranking eighth among global social networks. In comparison, the blockchain with the highest number of monthly active addresses, Solana, has an estimated 14 million monthly active addresses, which is just 2% of Telegram’s user base From a regional distribution perspective, aside from its origins in Russia and Ukraine and the diverse population of the United States, Telegram users are primarily located in developing countries such as Southeast Asia, Africa, and Latin America. Based on user demographics, Telegram has a massive user base, but the average income per user is relatively low, making Telegram more suitable for traffic-related businesses rather than serving high-net-worth individuals. Unlike other social network projects, Telegram introduced its own encrypted public chain very early on and tightly integrated it with its social network. In 2017, Telegram founders Pavel Durov and Nikolai Durov began developing the blockchain project named Telegram Open Network (TON) and planned to launch its native cryptocurrency, Gram. In 2018, they raised approximately $1.7 billion through an ICO, which also attracted the attention of the U.S. Securities and Exchange Commission (SEC). In 2020, due to regulatory issues, Telegram announced its withdrawal from the TON project, returning development work to the community. The project was taken over by the TON Foundation, renamed “The Open Network,” and the token was renamed Toncoin, with ICO funds refunded. After several twists and turns, in 2023, Telegram officially announced TON blockchain as its preferred Web3 infrastructure and plans to integrate it into the Telegram app interface. In contrast, Facebook’s Libra (Diem) cryptocurrency network, after two and a half years of various setbacks and regulatory pressures, announced it would no longer launch. Additionally, Telegram’s emphasis on privacy and lack of regulation makes it more crypto-friendly, to some extent supporting gray industries that cannot pass regulatory scrutiny, which were early widespread applications of cryptocurrencies. As a result, Telegram hosts a large number of crypto users. Overall, TON’s ecosystem has leveraged Telegram’s advantages from the start, giving it a head start in developing cryptocurrencies. Monetizing Traffic: Overview of TON Mini-Games Compared to fully on-chain games that were once popular on Ethereum, the recent hit on TON might be fully off-chain games. These casual (and sometimes slightly juvenile) mini-games attract users through economic incentives. Fully on-chain games adopt a grand narrative of autonomous worlds, attracting users through potential cultural identity, but often fail to gain widespread adoption. TON’s mini-games are more straightforward: open your phone, tap a few times, and you can earn a point, which can be exchanged for tokens with real value in the future. Recently, the explosion of TON game projects seems to reveal the infinite potential of the industry. Notcoin : With extremely simple gameplay, users earn coins by tapping the phone screen, which can be exchanged for Notcoin tokens. It has attracted over 35 million game users, launched on Binance and OKX, with its token price soaring post-listing, reaching a market cap of nearly $3 billion. Hamster Kombat : Also using the Tap to Earn model, it offers additional ways to earn rewards through card purchases/synthesis, daily check-ins, social media tasks, and referrals. It has gained over 230 million registered users in less than four months. Catizen : A casual cat-raising game that combines game monetization with airdrops to directly establish cash flow. It has over $10 million in revenue, more than 25 million players, and has converted 1.4 million on-chain users. Notcoin has opened up the imagination space for the track, Hamster Kombat is leading the way in traffic, and Catizen represents a more refined and sustainable approach, hinting at the future direction: it’s not just about tapping but establishing a cash flywheel from day one. On one hand, simple game design allows more users to participate, leading to better user data. On the other hand, due to the simplicity, the cost of brushing data is low, so the data might be significantly inflated. In the future, TON mini-game projects will inevitably shift from competing for simple user traffic to competing for user traffic conversion rates. This requires not only better game design but also a sophisticated monetization system to generate sustainable cash flow and maintain the capability for sustainable development. Insights from Official Channels According to the TON official website, Mini Apps, GameFi, and DeFi are the key product types they wish to onboard. The TON Foundation’s Grants program explicitly mentions supporting these categories and provides examples for each. Here are some key statements: Telegram Mini Apps: Social Web3 Use Cases SocialFi: Creator economy E-commerce: Trade market for electronic or physical goods Utility: Daily tools with embedded Web3 elements Community & Brand management: Tools for managing Telegram communities Onboarding platforms: Bringing new users to @wallet or custodial TON wallets through simple scenarios DeFi Lending protocols Derivatives DEXs DEXs with weighted pools (like Balancer.fi ) Yield aggregators Liquidity layers Restaking GameFi We are always happy to support web3 games with easy onboarding, viral social mechanics, referral programs, elements of competition (squads, leaderboards, group challenges), and exciting gameplay. From the above content, it’s clear that Mini App support for Social Web3 use cases will be a development focus. For DeFi, the TON ecosystem aims to enrich the types of DeFi applications. For GameFi, the TON ecosystem can assist games with user onboarding, viral social mechanics, referral systems, competitive elements, and engaging gameplay. Predicting the Near-Term Future of TON: The Reds and Blacks Why [Temporarily] Not DeFi The explosion of the DeFi sector depends on a key metric: TVL (Total Value Locked). Currently, Ethereum leads with a DeFi TVL of $60 billion, surpassing the combined TVL of all other blockchains. This is due to Ethereum’s high native asset value (ETH), a complete DeFi ecosystem where nearly all DeFi innovations occur, the introduction of wBTC to supplement DeFi liquidity, and the release of large amounts of LST/LRT through staking & restaking mechanisms, significantly boosting TVL. For TON, the largest asset on-chain is Toncoin, with a market cap of about $17.5 billion. The second-largest asset is USDT authorized by Tether, surpassing 730M as of July 21, ranking fifth among all blockchains. According to DefiLlama, TON’s current TVL is $757 million, indicating a clear shortfall. From the CGV Research team’s perspective, TON’s DeFi ecosystem lacks the following conditions for an explosion: Onboarding of BTC and ETH: The most traded assets on CEXs are usually BTC and ETH. Therefore, a high-security, low-slippage, low-fee cross-chain bridge for BTC and ETH is needed to bring a large amount of BTC and ETH into the TON ecosystem. Currently, TON’s cross-chain bridge infrastructure is still under construction. More diverse liquid staking products: TON transitioned from PoW to PoS, with initial supply distributed to miners and the team. After transitioning to PoS, it can only choose to reward PoS miners through an annual inflation rate of 0.6%. Compared to other PoS blockchains, TON’s staking rate is less than 10%, which is not high. Therefore, more liquid staking products are needed to increase staking levels, enhance chain security, and boost TVL. More secure wallet infrastructure: The @wallet wallet built into Telegram is a custodial wallet, and given Telegram’s unregulated nature, high-net-worth individuals often do not trust TON’s security. TON needs to introduce more secure wallet infrastructure, such as MPC wallets, and undergo thorough audits to gain the trust of high-net-worth users. These conditions are unrelated to Telegram’s biggest advantage — user traffic — meaning that it might be an uphill battle. Why Payments Native USDT is being issued on the TON network at a very high growth rate. As of July 21, over 730M USDT has been issued. The blockchain with the most USDT issued is Tron, with over 60B TRC20-USDT issued. Tron’s data reveals the vast potential of the stablecoin payment track. The TRON network has over 235 million users, with over 7.8 billion transactions and $450 million in annual fees (network revenue). On average, 2–3 million user accounts transfer over $10 billion daily. Most USDT holders on Tron are “retail” or small holders. Holders with balances below $1,000 number 52.6 million, even growing during the 2022 bear market. In contrast, the $1K-$10K group has 359,000 holders. From on-chain activity, Tron’s transactions are primarily USDT transfers, with minimal DeFi adoption, almost no NFTs, and none of the hot LST/LRT or Memecoins from other blockchains. Yet, it sustains 7.8 billion transactions. Tron can be described as a blockchain designed for stablecoin payments. The reasons for Tron’s large-scale stablecoin payment adoption are: Lower transaction fees, faster speeds, and higher TPS than Ethereum Early adoption triggering a positive feedback loop of users and merchants Long-term stable service earning user trust TON’s payment business has the following advantages over Tron: Higher TPS: With sharding, it can support up to millions of TPS, with cheaper fees than Tron Closer to users: TON wallets are directly integrated into Telegram, making them more convenient and versatile, comparable to WeChat Pay More diverse on-chain activities: TON has more applications that can retain funds on-chain, not just simple fund transfers. The TON Foundation is also actively promoting USDT usage on TON: 5 million TON allocated to reward USDT Farming Pool, with up to 50% APY in Toncoin for USDT deposits On July 1, Tether partnered with Web3 shopping and infrastructure company Uquid, allowing Filipino citizens to pay social security funds with USDT on TON Fee-free, instant USDT transfers using the built-in Telegram wallet, with the ability to transfer USDT to friends without needing addresses Products like subscriptions, VPNs, gaming platforms, and eSIMs on Telegram can be paid directly with USDT on TON Payments will also serve as a key primitive, empowering Telegram Mini Apps and various types of Social Web3 Use Cases. For instance, the creator economy (SocialFi) requires payments for subscriptions and tipping; e-commerce needs payments for goods purchases. More importantly, Telegram Mini Apps could become a Web3 version of the AppStore, requiring payment functionality for managing paid apps. Telegram may follow Apple’s example by charging fees for paid services of apps listed on its AppStore, further diversifying its revenue model. Currently, TON has integrated multiple third-party payment service platforms, enabling merchants to accept payments in various ways. However, compared to WeChat Pay, TON’s payment business still has risks. The most critical is that Telegram’s privacy protection and unregulated characteristics may prevent many legitimate businesses from integrating TON payments due to compliance issues. The TON Foundation is actively seeking solutions, such as requiring KYC for rewards in the USDT Farming Pool, indicating a proactive attitude towards compliance. Conclusion In summary, the CGV Research team believes that TON’s rise in the payment sector is not accidental but the result of its strong user base, technical advantages, and ecosystem strategy. Although there are still many challenges, such as regulatory issues and user trust, TON showcases strong growth potential with its innovative payment solutions and close integration with Telegram. In the future, with more high-quality applications and user traffic conversion, TON is poised to secure a significant position in the global payment market, becoming a vital force in the blockchain payment field. — — — — — — — — — — — About Cryptogram Venture (CGV): CGV (Cryptogram Venture) is a crypto investment institution headquartered in Tokyo, Japan. Since 2017, its fund and predecessor funds have participated in investing in over 200 projects, including the incubation of the licensed Japanese yen stablecoin JPYW. CGV is also a limited partner in several globally renowned crypto funds. Since 2022, CGV has successfully hosted two editions of the Japan Web3 Hackathon (TWSH), supported by Japan’s Ministry of Education, Culture, Sports, Science and Technology, Keio University, NTT Docomo, and other institutions and experts. CGV has branches in Hong Kong, Singapore, New York, Toronto, and other locations. Additionally, CGV is a founding member of the Bitcoin Tokyo Club in Tokyo, Japan. Disclaimer: The information and materials introduced in this article are sourced from public channels, and our company does not guarantee their accuracy or completeness. Descriptions or predictions involving future situations are forward-looking statements, and any advice and opinions provided are for reference only and do not constitute investment advice or implications for anyone. The strategies our company may adopt could be the same, opposite, or unrelated to the strategies readers might speculate based on this article.

Recently, CGV officially announced its participation in the seed round financing of the innovative CeDeFi platform BitFi. BitFi completed this round of financing with a valuation of $50 million. Other confirmed investors include Fundamental Labs, IBC Group Ventures, TyreGate Capital Group, and Citizen Journalism Network Accelerator (CJNA). BitFi was founded by Liu Han, the former co-founder and CTO of Ascendex Exchange. Since the early access launch on June 25, the platform has reached a peak Total Value Locked (TVL) of $400 million within just one month. BitFi combines the strengths of centralized and decentralized financial solutions. By leveraging multi-chain adaptability and complex off-chain trading strategies, it provides users with secure staking yields and multi-level yield generation, maximizing returns on various assets including BTC. Led by a team with Wall Street backgrounds and deep expertise in quantitative trading, BitFi offers consistent, low-risk returns through neutral quantitative strategies, passive income across multiple chains, and BitFi-specific platform rewards. This comprehensive approach makes BitFi the preferred choice for BTC holders seeking to optimize returns and secure asset management solutions. CGV believes that CeDeFi represents a deep integration of centralized and decentralized finance, poised to become a key force in driving traditional financial institutions to join the crypto ecosystem. As a pioneer in the CeDeFi space, BitFi provides BTC holders with a one-stop asset management solution through secure staking mechanisms and innovative synthetic assets. While ensuring asset security, BitFi significantly enhances asset yields through a combination of on-chain and off-chain innovative strategies, demonstrating vast growth potential. This investment in BitFi represents CGV's continued commitment to the CeDeFi and crypto asset management sectors. In the future, CGV will fully leverage its industry resources to support BitFi's growth in various aspects such as investment, incubation, and business expansion, jointly promoting the prosperity and development of the CeDeFi ecosystem. — — — — — — — — — — — About Cryptogram Venture (CGV): CGV (Cryptogram Venture) is a crypto investment institution headquartered in Tokyo, Japan. Since 2017, its fund and predecessor funds have participated in investing in over 200 projects, including the incubation of the licensed Japanese yen stablecoin JPYW. CGV is also a limited partner in several globally renowned crypto funds. Since 2022, CGV has successfully hosted two editions of the Japan Web3 Hackathon (TWSH), supported by Japan’s Ministry of Education, Culture, Sports, Science and Technology, Keio University, NTT Docomo, and other institutions and experts. CGV has branches in Hong Kong, Singapore, New York, Toronto, and other locations. Additionally, CGV is a founding member of the Bitcoin Tokyo Club in Tokyo, Japan.

Produced by: CGV Research Author: Shigeru Introduction： With the arrival of the summer of 2024, the TON network has shown unprecedented growth momentum, with daily active addresses, transaction volume, and total value locked (TVL) reaching new highs. These achievements indicate that the golden decade of the TON ecosystem has set sail. The CGV Research team deeply explores “the explosion of the TON ecosystem,” analyzing the key drivers from both internal innovations and external market factors that have propelled it to become a leading blockchain platform. As we enter June 2024, every day sets new records for the TON in terms of users, transaction volume, and TVL: — The number of daily active addresses on TON has surpassed Ethereum for several consecutive days; — TON’s total value locked (TVL) has broken through $600 million, increasing a thousandfold since 2024; — In 47 days, $450 million in $USDT was issued on TON; — Steve, the chairman of the TON Foundation, suggested that a hallmark of crypto’s mass adoption is the creation of the first TON mini-app with 100 million Telegram users; Hamster Kombat achieved this the very next day. The CGV Research team believes that the arrival of TON summer 2024 benefits from both “internal” and “external” positives of TON. Internal Drivers from TON Eco — Wallet Innovation: In July 2023, TON launched a new wallet payment feature, allowing users to conduct various transactions and payments through the TON wallet, enhancing the user experience. In September, TON launched TONSpace, a self-hosted wallet allowing users to manage their own private keys and assets. By December, a secondary wallet entry was added to the Telegram app, making it more convenient for users to use the TON wallet within Telegram. — Token Lock-Up Strategy: Early in 2023, the TON community and validators decided through on-chain voting to freeze the wallets of inactive miners, which accounted for about 21% of the total supply, locked until February 2027. In October, the community launched the TON Believers Fund, a five-year lock-up plan where users could choose to donate their tokens or deposit them into a smart contract. This action locked up 26% of the supply, totaling about 47% of TON tokens locked for three to five years, effectively reducing the market’s circulating supply and stabilizing the token price. — Native USDT Deployment on TON: In April 2024, Tether announced the introduction of USDT to the TON network, adding USDT-related transactions and financial activities to TON, providing strong support for DeFi applications. The issuance of USDT on TON quickly surpassed that on Cosmos and Near, becoming the network second only to Tron, Ethereum, Solana, and Avalanche. — Blockchain Performance Breakthrough: On October 31, 2023, TON reached a peak of 104,715 transactions per second in a public performance live test, processing a total of 107,652,545 transactions. This performance, verified by CertiK, marked TON as one of the fastest and most scalable blockchains globally. — Market Promotion: In the spring of 2024, by launching the #OpenLeague Super League with a total prize pool of $150 million, TON attracted a large number of users and market attention. Additionally, the revenue-sharing strategy implemented by the TON Foundation and Telegram, along with the listing of Notcoin on several major exchanges, greatly enhanced its market performance and brand influence. External Factors for TON Eco — Significant Investment from Pantera: In May 2024, Pantera made the largest single investment in history in the TON network, not only demonstrating recognition of TON’s technology and market potential but also likely attracting more capital attention and strengthening market confidence in the TON ecosystem. — Global Competitive Environment and Market Demand: With Musk’s X app planning to introduce crypto payment features in mid-2024, TON faces pressure from global competitors. Moreover, the entire crypto market urgently needs new narratives and directions, and the TON ecosystem, relying on its innovative technology and applications, injects new vitality into the market. — Demand for New Narratives: The crypto industry needs new narratives and directions. The social fission and flywheel effect brought by TON, leading to user and transaction volume growth, provides new vitality to the market. In conclusion, the CGV Research team believes that the TON ecosystem may exhibit four major development trends in the future. These trends will shape the unique position of the TON ecosystem and may have a profound impact on the entire crypto industry. TON Eco Next Step Trends 1. Telegram’s Full Ecosystem Expansion Bringing a Black Hole Effect: Originally an instant messaging tool, Telegram has now evolved into a multi-functional platform integrating social, payment, service subscription, and mini-app functions. With TON joining, Telegram is rapidly advancing along a similar development trajectory. - Upstream (Infrastructure and Development Platform): TON provides robust infrastructure and software development kits (SDKs), attracting developers to build and deploy decentralized applications (DApps), which may weaken other blockchain platforms’ development resources. - Midstream (Application Layer and Services): Custom stablecoin solutions and micropayment systems within the TON ecosystem, along with the ability to seamlessly integrate mainstream crypto assets through official cross-chain bridges, provide users with a one-stop asset management and trading platform. - Downstream (User Adoption and Market Expansion): Telegram’s large user base provides a market access point for TON. By establishing relationships with financial institutions, media companies, and retailers, Telegram can integrate crypto technology into broader economic activities. 2. Unregulated Barriers + Fastest Public Chain + Flywheel Effect, Making the TON Ecosystem Limitless: TON’s global service capability, unrestricted by specific national or regional financial regulations, combined with its high performance and user growth flywheel effect, indicates that the potential of the TON ecosystem may have no upper limit. - Traffic Monetization: Telegram’s traffic advantage will bring significant monetization potential to TON, especially in decentralized markets like Fragment, which has already facilitated significant transaction volumes. - NFT Market: Telegram’s stickers turned into NFTs and traded via the TON blockchain indicate a massive emerging market. - Web3 Project Revenue Realization: TON’s mini-apps are expected to become high-revenue Web3 projects, leveraging their large daily active user base. 3. Joining of Global Financial Giants: Mainstream Recognition of the TON Ecosystem: As the TON platform matures and achieves cross-chain functionality, it may attract the attention of traditional financial institutions, encouraging them to explore blockchain technology and collaborate with TON. - Financial Service Innovation: Financial institutions may migrate their services to TON or collaborate with TON, taking advantage of its low costs and high efficiency. - Stablecoins and Financial Products: Financial institutions may develop new loan, insurance, and investment products on TON, or even create stablecoins linked to specific assets. 4. Shift in Investment Logic: Non-Essentiality of Token Economy: The maturation of the TON ecosystem may change the investment logic of the primary market, making tokens no longer a mandatory element for crypto projects. - Technology and Business Models: Projects may rely on more mature technology and business models to attract users and investors, rather than solely depending on the token economy. - Regulatory Adaptability: Projects that do not issue tokens may more easily adapt to regulatory environments, avoiding potential legal risks. - Investment Analysis: Future evaluations of TON ecosystem projects may focus more on actual user data and business performance, such as daily active users (DAU), user retention, and average revenue per user (ARPU), rather than just focusing on token unlocks and distributions. These trends indicate that the TON ecosystem will not only consolidate its position in the crypto field but may also attract a wider user base and participation from traditional financial institutions, marking a new stage of development. Conclusion The rise of the TON ecosystem signals the future direction of cryptocurrency and blockchain technology. With Telegram’s deep integration and TON’s innovation-driven approach, we foresee a new ecosystem forming, which will not only change our understanding of financial services, social interaction, and digital assets but will also bring unprecedented convenience and opportunities to global users. — — — — — — — — — — — About Cryptogram Venture (CGV): CGV (Cryptogram Venture) is a crypto investment institution headquartered in Tokyo, Japan. Since 2017, its fund and predecessor funds have participated in investing in over 200 projects, including the incubation of the licensed Japanese yen stablecoin JPYW. CGV is also a limited partner in several globally renowned crypto funds. Since 2022, CGV has successfully hosted two editions of the Japan Web3 Hackathon (TWSH), supported by Japan’s Ministry of Education, Culture, Sports, Science and Technology, Keio University, NTT Docomo, and other institutions and experts. CGV has branches in Hong Kong, Singapore, New York, Toronto, and other locations. Additionally, CGV is a founding member of the Bitcoin Tokyo Club in Tokyo, Japan. Disclaimer: The information and materials introduced in this article are sourced from public channels, and our company does not guarantee their accuracy or completeness. Descriptions or predictions involving future situations are forward-looking statements, and any advice and opinions provided are for reference only and do not constitute investment advice or implications for anyone. The strategies our company may adopt could be the same, opposite, or unrelated to the strategies readers might speculate based on this article.

Token2049 in Singapore has concluded. Steve Chiu, the founder of CGV, shared his thoughts and observations from participating in this summit: The overall landscape is undergoing changes, the mysterious Eastern forces are fading, India is rising, AI is gaining prominence, NFTs are no longer as prominent, exchanges are becoming more robust, and Japan plays a role that is half present, half absent…… The route from Tokyo to Singapore is incredibly busy, with over a dozen flights shuttling back and forth each day, most returning at full capacity. In September, amid the bustling and vibrant atmosphere of the Singapore Grand Prix, from Ginza to MBS — the locations change, but the busy crowds and unwavering faith remain constant. This was my third participation in the Token2049 conference over the six years since entering the crypto space. Each time, I come with questions and leave with even more. Industry conferences are never meant for providing answers; instead, they offer a constant stream of evolving narratives, forward-thinking concepts, waves of unforeseen black swan events, and a multitude of ever-changing policies and regulations. The previously established is overturned without explanation, and hot topics emerge — seemingly out of nowhere. The key is to keep moving forward, never looking back. In short, change is substantial. Firstly, there’s a stark division between old and new circles, with a generation gap emerging. Perhaps marking the last bull market or using the pre and post-pandemic periods as a dividing line, seasoned players who have weathered several cycles are now in a period of dormancy, while most of the attendees are fresh faces. It’s heartening to see that trading platforms which stood the test of time appear even more robust, while the older generation projects have almost disappeared from sight. The NFT track was nowhere to be found. From large-scale posters, offline activities, souvenirs to talk topics within smaller circles, NFTs were conspicuously absent. When it comes to NFTs, project teams were actively explaining, trying to avoid the subject. In its place, there were a variety of AI-related protocols, games, platforms, and computing power. Of course, there was a new path outlined through discussions of Bitcoin Layer 2 and engravings. The Ethereum ecosystem and ZK series didn’t seem as popular, likely due to the saturated market — something we’ve grown accustomed to. Furthermore, the influence of Asian funds has waned, dispelling the notion of a mysterious Eastern force. Vitalik’s statement contradicts Hong Kong, where policy instability persists. In reality, Singapore has only harnessed its power as a hub for transit. What the Singaporean government desires is regulatory compliance in the crypto market, which is gradually moving further away from compliance. China’s nominal absence has left Asian projects in a state of limbo. Aside from becoming limited partners (like us…), Asian funds will find it difficult to achieve significant accomplishments. However, what’s remarkable is that Indian projects seem to be rising. With their powerful linguistic advantages and technological innovation capabilities, Indian teams and projects are gradually gaining prominence at conferences — from mobile internet to the Web3 encryption industry. Coupled with a vast population base and a weak sovereign currency, India’s teams and projects are beginning to make a name for themselves. Japan has always played a semi-attending, semi-absent role in the crypto industry. The Japanese government’s conservative approach to the crypto industry has successfully helped the Japanese people avoid many pitfalls from 2022 to 2023. Whether it’s Layer 2 networks, NFTs, or even STOs, Japan still leads in advanced technology and cutting-edge trends. Compared to the rest of the world, Japan boasts exceptional design capabilities, but fewer technical developers than China and the United States. Compared to Singapore, Hong Kong and Southeast Asia, Japan has a broader market and strong purchasing power. Since 2022, Japan has gradually eased its control over the listing of licensed trading platforms, and recently, it also opened up channels for crypto financing for startups. Regardless of bull or bear markets, Japan is independently accelerating towards the global crypto market. It will face a tremendous challenge ahead. CGV is an active Japanese crypto fund committed to promoting the construction and development of Japan’s crypto regulatory framework. We lead Japanese projects in going global and also assist global projects in entering Japan. Faced with such a significant challenge, after engaging in discussions at Token2049, I believe many share our thoughts. The crypto industry is still in a period of uncertainty, and revolutionary innovative applications have yet to emerge. Japanese players should approach the market rationally, gradually enter the scene, and patiently seize opportunities and ultimately, they will eventually see results. CGV FOF: Cryptogram Venture (CGV) is a Japan-based research and investment institution engaged in crypto. With the business philosophy of “research-driven investment,” it has participated in early investments in FTX, Republic, CasperLabs, AlchemyPay, Graph, Bitkeep, Pocket, and Powerpool, as well as the Japanese government-regulated yen stablecoin JPYW, etc. Meanwhile, CGV FoF is the limited partner of Huobi Venture, Rocktree Capital, Cryptomeria Capital, etc.

Produced by: CGV Research Author: Cynic  , LeoDeng TL;DR MEV, short for Miner Extractable Value (also referred to as Maximal Extractable Value), refers to the additional profits miners can obtain by manipulating transactions (adding, removing, reordering transactions). Ways to acquire MEV include DEX arbitrage, liquidation, front-running, back-running, and sandwich attacks. The Impact of MEV: Front-running and sandwich trades lead to poor user experience and more significant losses, but DEX arbitrage and lending liquidation can help the DeFi market reach equilibrium faster and maintain market stability. Continued Growth of the MEV Market: After Ethereum’s The Merge, only Ethereum using Flashbots’ block proposer received over 206,450 ETH in MEV profits (as of early July 2023). Flashbots as a major force in the MEV space introduced MEV-Geth, enabling miners and searchers to share MEV profits. MEV-Boost distributes MEV among proposers, builders, and searchers while safeguarding transactions from front running. MEV-share aims to allow users, wallets, and DApps to capture generated MEV. MEV-SGX employs SGX trusted hardware to replace the trusted MEV-Relay role, achieving permissionlessness. SUAVE attempts to address centralization risks posed by MEV, providing transaction sequencing and block construction services to all existing chains as a dedicated chain. New Variables in the MEV Market: Chainlink, the largest oracle platform, aims to mitigate MEV issues at the oracle network level through transaction sequencing. The emergence of UniswapX effectively resolves the “sandwich attack” problem but introduces new concerns like MEV scrutiny. MEV Explanation MEV, short for Miner Extractable Value (also referred to as Maximal Extractable Value), refers to the additional profits that miners can obtain by manipulating transactions (adding, removing, reordering transactions). In a typical public blockchain, all transactions are initially submitted to the mempool, where they wait to be included in a block. Miners/validators, as the entities responsible for block creation in the blockchain ecosystem, have significant power to decide which transactions are included in a block. Initially, miners simply sorted transactions by transaction fees from highest to lowest to determine the order of inclusion. However, it was later discovered that by monitoring transactions in the mempool, miners could add, remove, or reorder transactions in a block to gain extra profits beyond block rewards, giving rise to MEV. In practical terms, there are often specialized searchers who use complex algorithms to identify profit opportunities. Since these searchers compete openly within the mempool, when they identify MEV opportunities, they increase transaction fees to ensure their transactions are included. Miners and searchers then share the MEV profits. According to the widely held view within CGV, MEV acquisition strategies vary and include: DEX arbitrage, liquidation, front-running, back-running, and sandwich attacks. For blockchains using probabilistic finality consensus algorithms (such as Bitcoin and Ethereum 1.0 which use PoW consensus algorithms), fee sniping attacks can also occur. DEX arbitrage involves exploiting price differences between different DEXes. By utilizing the atomic transaction feature of blockchains, one can buy on a low-price DEX and sell on a high-price DEX, achieving risk-free arbitrage. Liquidation in lending protocols occurs when the collateralization ratio falls below a predetermined threshold. The protocol allows anyone to liquidate the collateral, immediately repaying the lender. During liquidation, borrowers often pay substantial liquidation fees, part of which becomes MEV opportunity. Front running involves monitoring profitable transactions and submitting the same transaction with a higher fee to ensure the submission precedes the original transaction, thus gaining profit. Broadly, front running involves inserting a transaction before another to profit. Back running pertains to AMM-based DEXes with significant slippage in large trades. After a large trade, the market is imbalanced. Back running involves adding a transaction after the large trade to buy assets at a price lower than the market equilibrium. Sandwich trading combines front running and back running. It involves buying at a low price before a large trade, and then selling at a high price after the trade raises prices, yielding substantial profit. Fee Sniping Attack: The recent surge in the BRC-20 market led to Bitcoin network congestion and rising transaction fees, prompting concerns about Fee Sniping attacks. On PoW consensus blockchains, if potential profits are significant, miners can roll back or reorganize recent blocks, reordering or including specific transactions to gain more profit. Note: Ethereum prior to The Merge also used PoW consensus but referred to it as “Time Bandit”. Impact of MEV MEV brings both negative and positive effects, damaging users and even the entire blockchain network, yet simultaneously fostering greater market equilibrium and efficiency. 1. Positive Aspects DEX arbitrage and lending liquidation can assist the DeFi market in reaching equilibrium faster and maintaining market stability. Similar to traditional finance, MEV searchers are essentially prerequisites for an efficient financial market. For this category of MEV, the gains of MEV searchers come from the market itself. 2. Negative Aspects Front-Running and sandwich trades lead to poor user experiences and more significant losses. Competitive MEV searchers bidding on gas can congest the network and elevate gas fees. For probabilistic finality PoW chains, a more severe concern is the potential for fee sniping attacks. Time-bandit attacks violate the blockchain’s principle of “immutability,” seriously compromising network security and stability. This has raised concerns within the BTC community about the current state resulting from the Ordinals protocol. For PoS chains, particularly concerning the current ETH2.0, MEV could lead to centralization of validators. Larger staking pools gain higher MEV profits, resulting in more resources to enhance MEV extraction capability, leading to the Matthew effect and eventual validator centralization, thereby decreasing security. Development History of MEV Early Beginnings (2010–2017): In 2015, Bitcoin core developer Peter Todd introduced the concept of “Replace By Fee (RBF)” on Twitter, which was the precursor to the front running mentioned earlier. RBF suggested that users could replace an existing transaction by submitting a new transaction with higher transaction fees and at least one identical input. Building upon RBF, the Bitcoin community gradually explored the concept of fee sniping. Fee sniping involves miners intentionally re-mining one or more previous blocks to gain the fees originally earned by the miner who initially created those blocks. While the likelihood of successfully re-mining previous blocks is small compared to extending the chain with new blocks, this method could be profitable if the fees from previous blocks are more valuable than the transactions in the miner’s current mempool. Fee sniping was later extended to the EVM model and described as the “Time Bandit” attack in the “Flash Boys 2.0” paper. Formal Emergence (2018–2019): MEV arises only when there’s contention in state or when submitted state transitions are unconfirmed. Bitcoin lacks shared state and has strictly defined state transitions, limiting MEV on Bitcoin to fee sniping and double-spending attack attempts. In contrast, Ethereum, with Turing-complete smart contracts, offers significantly more MEV opportunities. In 2016, EtherDelta, Ethereum’s first DEX, introduced a sub-matching order book design, providing wide-ranging MEV opportunities, although they weren’t fully exploited at the time. In 2017, the first algorithmic stablecoin on Ethereum, DAI, emerged, introducing the concept of liquidations to DeFi and creating occasional but significant MEV opportunities (Spike MEV). In 2018, Hayden Adams founded Uniswap, Ethereum’s first AMM-based DEX. The AMM mechanism relies on MEV extractors to maintain market efficiency, leading to a substantial increase in MEV opportunities. The Rise of Flashbots (2019–2021): In April 2019, “Flash Boys 2.0” was published, bringing MEV research into the mainstream. Towards the end of 2019, a group of like-minded digital nomads formed Pirate Ship, later renamed Flashbots, using a robot emoticon as their logo. In January 2021, Flashbots Auction (mev-geth and flashbots relay) was officially released. Riding the wave of the DeFi Summer, extracted MEV saw significant growth. Current State: Diverse MEV Landscape, Flashbots Leading As the MEV market expands, numerous projects have joined the fray. Flashbots currently supports the Ethereum mainnet, prompting popular Layer1 and Layer2 solutions to study Flashbots and experiment with implementing MEV auctions. Some projects are taking alternative approaches, such as encrypting transaction pools to comprehensively address the MEV problem. Flashbots itself continues to innovate, following the early 2021 release of Flashbots Alpha, subsequently introducing Flashbots Protect, MEV-Boost, MEV-Share, and the upcoming SUAVE phase. The Size of the MEV Market In theory, the potential MEV profits from user-submitted transactions could be unlimited. However, determining the exact magnitude of MEV profits is not possible through finite calculations, as the MEV profits that people discover form the lower bound of potential MEV. Typically, the realized MEV (REV) is used to estimate the potential MEV market situation. This represents the MEV that has been successfully extracted and realized through various strategies. tatistics of the MEV Market After Ethereum’s “The Merge” Source: https://explore.flashbots.net/ According to data provided by Flashbots, as of early July 2023, after Ethereum’s “The Merge,” a total of 206,450 ETH in realized MEV (REV) extraction has been achieved. However, this figure only accounts for the MEV profits received by block proposers, and the earnings of searchers have not been factored in. Wouldn’t it be better without market competition? Based on the historical experience accumulated throughout human society, the concept of the “invisible hand” is often a better choice in most cases. However, few would deny that market economies aren’t universally applicable and can lead to serious consequences when misused in certain specific domains. The issue of elevated gas prices caused by front running is rooted in Ethereum’s pricing mechanism. Can gas prices be kept at a fixed level to avoid searcher’s priority gas auction? Nevertheless, a clear consequence of doing so would be collusion off-chain, where searchers with MEV opportunities could bribe miners to include their transactions earlier, leading to the emergence of small-scale off-chain markets. This contradicts Ethereum’s open, permissionless ideology. Of course, we could ensure miners/validators in the network are certified with some form of authority to guarantee they won’t act maliciously, but this introduces a strong assumption of trust and would transform the system into a permissioned chain. In summary, CGV believes that, under the premise of maintaining Ethereum’s existing characteristics, it might be difficult to completely eliminate the MEV problem. How to Mitigate the Adverse Effects of MEV Protocol-Level Priority-Based Scheduling (PBS) — Ethereum Community Solution In PoS, validators take turns proposing blocks, and consensus among validators determines whether the block is written to the chain. In PoW, miners perform the block proposal and consensus tasks, though the essence is the same. PBS aims to address the centralization of validators caused by current MEV. In the default MEV process, block generators have two tasks: 1) building the optimal block from available transactions (block building), and 2) proposing the block with proof of work or stake to the network (block proposing). In cases where MEV has not been thoroughly exploited, step 1) often involves sorting transactions by fee size, simply incorporating them into the block. As MEV profits grow, larger pools of miners/validators capture more MEV profits, leading to a Matthew effect and increased centralization. Additionally, the actual block-producing entity in decentralized pools gains the MEV opportunity, excluding other members from profit sharing. This inequality undermines the adoption of decentralized mining pools, further increasing centralization within the consensus network. Roles involved in MEV may include: 1.Producer: Block generators (Miners, validators) 2.Proposer: Block proposer (Selects blocks constructed by builders with the highest MEV) 3.Builder: Block builder (Determines block content) 4.Searcher: Searches for MEV in transactions 5.User: Submits transactions potentially containing MEV Currently, many roles are often held by the same entity, such as in the standard Ethereum consensus process, where producer, proposer, and builder are the same role. Vitalik’s Early Solutions As early as early 2021, Vitalik proposed two solutions, each with a distinct focus. It’s important to note that the solutions discussed in this section are Ethereum protocol-level solutions, enforced by the protocol, rather than private negotiations like in Flashbots’ solutions. PBS seeks to achieve these five goals: 1.Proposer non-trustworthiness: Builders don’t need to trust Proposers. 2.Builder non-trustworthiness: Proposers don’t need to trust Builders. 3.Weak proposer non-trustworthiness: Proposers don’t require high computational resources or technical difficulty. 4.Unstealability of bundles: Proposers can’t steal profits from the submitted block contents. 5.Simple and secure consensus: Consensus remains secure, ideally without modifying the current block proposal mechanism. Solution 1 Builders create bundles, send bundle headers to proposers, including the bundle body hash, payment to proposers, and builder’s signature. Proposers select the highest-paying bundle header, sign, and publish a proposal containing that bundle header. Upon seeing the signed proposal, builders publish the complete bundle. Analyzing against the five goals: Proposers can receive payments from builders but prevent builders from obtaining MEV profits, for instance by delaying proposal release until late slots, giving builders insufficient time to publish complete bundles, not meeting goal 1. Submitting bundle headers ensures proposers receive payments from builders, satisfying goal 2. Involving basic network communication and signatures, goal 3 is met. Proposers can’t exclusively access bundle contents, only headers, meeting goal 4. Introducing the new role of builder necessitates modifying forking rules, potentially increasing the complexity of forking selection from 2 to 3, introducing new uncertainty, not meeting goal 5. Solution 2 Builders create bundles, send bundle headers to proposers, including the bundle body hash, payment to proposers, and builder’s signature. Proposers select bundle headers from those seen and create a signed declaration for the selected headers. Builders, upon seeing the declaration, publish the corresponding bundle bodies. Proposers select a bundle header from their signed list and publish a proposal containing it. Analyzing against the five goals: Only including full bundles in proposals ensures completion of builder payments to proposers, satisfying goal 1. Builders could publish multiple high-paying bundle headers without submitting actual bundle bodies, rendering proposers unable to publish valid bundles, not meeting goal 2. Without limiting the number of bundles accepted, excessive bundle bodies received by proposers could lead to high network bandwidth usage, not meeting goal 3. Proposers pre-sign declarations, limiting them to proposing a finite list of bundles for the slot, preventing profit theft, satisfying goal 4. Builders don’t directly engage in consensus, proposers’ behavior remains similar to before, without an increase in forking situations, satisfying goal 5. Evolving Paths — Two Slot PBS vs. Single Slot PBS The two paths correspond to improvements and refinements of Vitalik’s early proposals, namely Two Slot PBS and Single Slot PBS, which correspond to Solution 1 and Solution 2. In the Two Slot PBS approach, a new type of block called the “Intermediate Block” is introduced to store the contents of the winning builder’s block. In Slot n, the proposer will propose a regular Beacon Block containing a commitment to the winning builder’s block contents. Then, in Slot n+1, the winning builder will propose the Intermediate Block, which includes the content of the awarded block. These two blocks can be seen as two parts of a larger block, split into two stages (slots) for completion. The first stage is akin to the block header, while the second stage constitutes the actual block body. If there is no Beacon Block, it means no builder won the bid, and there will be no subsequent Intermediate Block. Both of these blocks require attestation voting from the Committee. The Beacon Block is voted on by a single committee, whereas the Intermediate Block is voted on by all remaining committees within the slot. Votes for each block (whether Beacon or Intermediate) will appear in the next Slot’s block. If a builder doesn’t see the Beacon Block, it could indicate a delayed release, and the builder won’t publish the Intermediate Block. Furthermore, to prevent potential losses caused by delayed Beacon Block appearances, the proposal employs well-defined Fork Choice Rules to reject such Beacon Blocks that arise after a certain period of time. Two Slot PBS Scheme Design source: https://ethresear.ch/t/two-slot-proposer-builder-separation/10980 Single Slot PBS utilizes a decentralized committee as an intermediary to store the content of blocks. The builder sends the bundle header to the Auction subnet and simultaneously sends the chunk-encrypted bundle body to the committee. Once the committee’s voting surpasses the threshold, the proposer sends a proposal. Upon receiving the proposal, the committee decrypts and broadcasts the bundle body, enabling the completion of Proof of Block State (PBS) within a single slot. Single Slot PBS design source: https://ethresear.ch/t/single-slot-pbs-using-attesters-as-distributed-availability-oracle/11877 n Ethereum’s need for protocol-level Proof of Block State (PBS) goes beyond addressing MEV concerns. Implementing PBS at the protocol level in Ethereum could potentially shake the foundation of consensus and introduce various new issues. Why is there an insistence on modifying the protocol layer rather than seeking solutions above the protocol? It can be perceived that the Ethereum community’s intentions are not solely focused on immediate gains, as PBS holds significance for Ethereum’s long-term development, beyond just alleviating MEV issues. In the context of PBS, proposers are relieved of transaction ordering, enabling a stateless approach that doesn’t require storing Ethereum’s complete state. They only need to validate the transactions within the blocks packaged by the builder through merkel proofs. With the emergence of initiatives like Danksharding, the future burden of storage is expected to grow. The statelessness attribute is pivotal, reducing storage demands for proposers and enabling greater decentralization by allowing more individuals to participate. Ethereum’s proposal of PBS aligns with the spirit of EIP-1559 from earlier years. Miners/validators, acting as arbiters of transaction content within blocks, wield significant privilege. If miners/validators accumulate excessive profits, centralization could intensify, leading to an imbalance of power that affects the security of the entire consensus network. PBS’s objective is to diminish the position of miners/validators, curbing their income and dispersing power among the people. Furthermore, in the PBS solution facilitated by Flashbots’ MEV-Boost, trust assumptions related to the Relay could result in transaction censorship issues. This severely undermines Ethereum’s vision of censorship resistance and permissionlessness. Transaction review can account for up to 80% source: https://www.mevwatch.info/ Protocol-level Proof of Block State (PBS) in Ethereum eliminates the need for a trusted relay and can enforce builder compliance through proposer constraints. This compels the builder to include censored transactions, either through Proposers’ enforcement or direct inclusion, thereby enhancing Ethereum’s resistance to censorship. In summary, protocol-level PBS in Ethereum achieves the allocation of interests between builders and proposers, lowering the barrier for proposers to participate. This has the potential to elevate Ethereum’s decentralization level while also enhancing its resistance to censorship. However, it does not necessarily improve the overall user experience. Flashbots — Dominant in the MEV Field Flashbots aims to alleviate MEV issues through a market auction, providing profits to MEV participants. In Flashbots’ official documentation, it is categorized into 1) Flashbots Auction 2) Flashbots Data 3) Flashbots Protect 4) Flashbots MEV-Boost 5) Flashbots MEV-Share. However, in reality, MEV-Boost is a phase within the Flashbots Auction. We will describe the development of Flashbots chronologically. The Flashbots Auction is actually comprised of two phases: MEV-Geth for ETH1.0 (Before The Merge) and MEV-Boost for ETH2.0 (After The Merge). MEV-Geth In early 2021, Flashbots introduced MEV-Geth and MEV-Relay. MEV-Geth is a patch on the Go-Ethereum client, comprising just over a hundred lines of code. MEV-Relay serves as a bundle forwarder, responsible for relaying transaction bundles between searchers and miners. Together, MEV-Geth and MEV-Relay established a private transaction pool and a sealed-bid block space auction, transforming MEV from the dark forest into a market-driven economy. Bundles, as a novel transaction type, represent preferences for transaction order. The Flashbots Auction introduced a new RPC called “eth_sendBundle” to standardize bundle communication. Bundles encompass a series of signed transactions and the conditions under which these transactions are included. Furthermore, Flashbots provided the Flashbots Protect RPC node, allowing users to avoid Front Running attacks on their transactions in the public transaction pool by simply modifying their wallet’s RPC node. Additionally, since Flashbots Protect submits user transactions through an alternate block inclusion process, reverts do not occur, relieving users of paying for failed transactions (though it introduced an Exclusive Order Flow). MEV-Geth rapidly gained adoption among over 90% of Ethereum miners and significantly boosted miners’ earnings. However, the simple auction design had several notable shortcomings, including 1) the need to trust miners, 2) compatibility only with Geth, lacking diversity, and 3) the centralized server operation of the auction service, posing a risk of single point of failure. Additionally, due to the prevalent competitive relationships among searchers, the vast majority of earnings flowed into the pockets of miners, introducing centralization risks for Ethereum. source: https://twitter.com/lvanseters/status/1481988717367767042/photo/4 MEV-Boost Following The Merge, Ethereum transitioned to a PoS consensus mechanism, making the centralization issues brought about by MEV more pronounced. To address this, Flashbots devised MEV-Boost. MEV-Boost can be seen as a variant of Single Slot PBS. Unlike protocol-level PBS in Ethereum, this approach serves as an optional middleware service rather than enforcing behavior through the protocol, and it doesn’t modify the consensus process. The relay no longer acts as an intermediary between users/searchers and miners; instead, it functions as an intermediary node between builders and validators. Based on the transaction flow submitted by users/searchers, each role — builder, relay, and validator — selects blocks to be passed downstream according to maximum gains. source: https://docs.flashbots.net/flashbots-auction/overview# MEV-Boost employs the commit-reveal mechanism proposed in Single Slot PBS. Only when a validator commits to a block header does the builder reveal the full content of that block. The specific process is illustrated in the diagram below: Prior to the proposal, validators need to register with MEV-Boost and relays, ensuring that block builders can construct blocks for a designated validator’s proposal. 1.Users/searchers submit transactions to block builders through public/private mempools. 2.Block builders construct an execution payload based on received transactions. In terms of incentive distribution, the builder sets their address as the payload’s coinbase address, and the last transaction transfers to the proposer’s address. The block is then sent to the relay. 3.The relay verifies the block’s validity and sends the ExecutionPayloadHeader to MEV-Boost. MEV-Boost selects the highest-profit forwarding from ExecutionPayloadHeaders submitted by different relays and sends it to the Validator. 4.The validator signs the header, calls submitBlindedBlock to send it back to MEV-Boost, and then forwards it to the relay. After verifying the signature, the relay sends the complete payload body to MEV-Boost and forwards it to the consensus. This allows the Validator to use it when proposing a SignedBeaconBlock to the network. source: https://twitter.com/keccak254/status/1656984680003153924 Compared to MEV-Geth, MEV-Boost offers greater versatility. It serves as a plugin for Consensus Client, supporting multiple client types, while also addressing the centralization issues inherent in miners. However, post PBS, builders gain higher authority. Dominant builders in the market can attain the ability to censor and monopolize transaction order flows. Currently, centralization risks are mitigated mainly through encouraging competition among builders. The trust level in relays is further diminished, though there’s still a potential risk posed by virtual bidding submitted by builders and proposers. Presently, monitoring the honesty of relays allows validators and builders to choose relays freely as a means to alleviate this concern. MEV-Share MEV-Geth enabled miners and earchers to share MEV earnings, while MEV-Boost distributed MEV among proposers, builders, and searchers, safeguarding user transactions from front running. However, neither of them accounted for user profits. Within the ethos of Web3, where users generate value from their data, it’s important to give back to users themselves. MEV-Share embodies this principle in practice. MEV-Share is dedicated to allowing users, wallets, and DApps to capture the MEV generated from their transactions. MEV-Share introduces the role of Matchmaker, acting as an intermediary between users, searchers, and builders. It maintains user privacy by restricting the user transaction information exposed to searchers. Simultaneously, it limits searchers to only insert their transactions after user transactions, known as back running, to prevent user losses. Back running doesn’t result in user loss; the profits gained through back running are essentially derived from market imbalances. Users can easily connect their wallets to the Flashbots Protect RPC to send transactions to the Matchmaker. Alternatively, they can use the Matchmaker API to send private transactions, specifying the builders they want to submit to. For searchers, they need to listen to the selective portion of transaction information sent by the Matchmaker through an SSE (Server-Sent Events) Event Stream. SSE is a technology that enables servers to push information to clients without requiring the clients to initiate requests, allowing clients to receive real-time updates on the blockchain state. Searchers select transactions from this stream and insert their own signed transaction afterward to create a bundle. Searchers can share partial transaction information from the bundle with other Searchers to receive MEV rewards and improve the chances of their bundle being included in a block. Searchers can also specify builders in the “privacy” field of the bundle. Ultimately, the bundle will be sent to builders accepted by both users and searchers. MEV-SGX: Eliminating Trust Assumptions with SGX Encryption The exploration and discussion in the market regarding using SGX to mitigate MEV issues were initially initiated by Flashbots. The MEV-SGX scheme was introduced in June 2021 on the Ethereum forum. It aimed to address the trust issue within the MEV-Relay component of the Flashbots Alpha (the initial version of Flashbots MEV-Auction) proposal from early 2021. The goal was to build a fully private and permissionless MEV auction using MEV-SGX. Various solutions were discussed, such as sending only block headers to hide the transaction trie, introducing collateralized block headers, employing time-lock encryption, and creating secure enclaves. The decision was eventually made to use secure enclaves, with Intel’s SGX being the most widely used, to provide complete privacy and permissionlessness. In the MEV-SGX scheme, SGX serves as a Trusted Execution Environment (TEE), replacing the single-trusted intermediary in MEV-Relay. Both searchers and miners use separate SGXs. The tamper-resistant features of SGX ensure that each party runs specific code within an environment that cannot be tampered with or breached. Searchers’ SGX ensures block validity and profitability for miners (Proposers don’t need to trust builders), while Miners’ SGX handles block decryption and broadcasting (Builders don’t need to trust proposers, and proposers cannot illegitimately capture profits from submitted blocks). It’s worth noting that the term “miner” is used in the context of this proposal since Ethereum was still in its PoW consensus at the time of this proposal. However, both “miners” and “validators” serve the same function in the consensus, which is to package transactions and propose blocks. With Ethereum’s transition to the PoS consensus through The Merge, MEV-SGX’s role gradually diminished in favor of MEV-Boost and MEV-Share. However, SGX hasn’t been entirely abandoned. Due to the complexity of implementing MEV-SGX, the community opted for the more practical MEV-Boost and MEV-Share, with plans to use SGX to patch and improve the existing solutions in the future. On December 20, 2022, the Flashbots community announced the successful execution of Geth (Ethereum client’s Go implementation) within SGX, validating the technical feasibility of applying SGX to MEV. On March 3, 2023, the Flashbots community announced the implementation of block builder execution within SGX, taking another step towards transaction privacy and decentralized builders. Executing block building algorithms within secure enclaves ensures that participants, apart from the users, cannot access the content of user transactions, thus preserving privacy. Additionally, running verifiable block execution algorithms allows for proving the economic efficiency of blocks without compromising privacy. In the long run, running builders within SGX could offer proposers verifiably valid blocks and genuine bidding, potentially replacing the trusted MEV-Relay role entirely, achieving permissionlessness. SUAVE — The Future of MEV While MEV-Share addresses the distribution of MEV-related benefits, it still fails to eliminate the centralization risk posed by block-building authority. In Flashbots’ current stage, due to 1) Exclusive order flow and 2) Cross-chain MEV, the builder market experiences a positive feedback loop, making it susceptible to centralization risk. SUAVE (Single Unified Auction for Value Expression) aims to tackle the centralization risk posed by MEV. SUAVE is another attempt at modular blockchains, striving to provide an off-the-shelf memory pool and decentralized block builders for all blockchains. Operating as a dedicated blockchain, SUAVE aims to offer transaction sorting and block-building services to all existing chains. source: https://writings.flashbots.net/the-future-of-mev-is-suave/ The feature of supporting multiple chains effectively enhances the efficiency of cross-chain MEV extraction. As a blockchain itself, its decentralized nature will address the centralization risk associated with block builders in previous solutions. SUAVE consists of the following three main components: 1.Universal Preference Environment: “Preferences” can be understood as an improved type of transaction on the bundle, reflecting the user/searcher’s requirements for transaction execution (e.g., transaction parameters, timing, order). It maintains pre-confirmation privacy and irreversibility of the bundle. The “universal” aspect embodies SUAVE’s multi-chain nature, aggregating transactions submitted by users/searchers on all chains onto SUAVE. It provides a universal sorting layer that can gather user preferences to enhance MEV extraction efficiency. Moreover, it enables collaboration among block builders from different domains to boost efficiency. 2.Optimal Execution Market: Executors participate in bidding based on user-submitted preferences, offering users the most optimal execution. This market facilitates cross-domain preference expression, aiming to return as much MEV revenue as possible to users. 3.Decentralized Block Building: Within the decentralized blockchain network, block builders construct blocks for various domains based on user preferences and the optimal execution path. While maintaining decentralization, this component provides validator from each chain with maximized MEV blocks. The premise for this component’s implementation is the sharing of order flows and bundles among block builders without revealing content. source: https://writings.flashbots.net/the-future-of-mev-is-suave/ Of course, it must be noted that SUAVE is still in its early stages, with an unclear technical roadmap and somewhat ambiguous solution design. The details are still being developed. This may be a challenging endeavor, as Flashbots refers to MEV as the Millennium Prize Problem of the crypto world, and calls for collective collaboration to create a decentralized future. New Variables in the MEV Market n Chainlink: Fair Sequencing Services (FSS) — Arbitrum’s Chosen MEV Mitigation Solution As the largest oracle platform in the market, Chainlink seeks to alleviate the MEV problem at the level of the oracle network by introducing transaction sequencing. Personally, I believe its inspiration is to prevent front running of oracle reports, as manipulating the order of oracle reports in a block can result in significant MEV due to the substantial impact of these reports on prices. Fair Sequencing Services (FSS) can be described as follows: Decentralized Oracle Nodes (DONs) provide tools to distribute transaction sequencing and implement strategies specified by dependent contract creators. Ideally, these strategies should be fair (typically First-Come-First-Served based on arrival time) to prevent participants seeking to manipulate transaction sequencing from gaining an advantage. These tools collectively form FSS. FSS comprises three main components. The first is transaction monitoring. 1.Transaction Monitoring: In FSS, oracle nodes in DONs monitor the memory pool of the MAINCHAIN and allow off-chain transaction submissions through dedicated channels. 2.Transaction Sequencing: Nodes in DONs sequence transactions for dependent contract SCON based on policies defined for the contract. 3.Transaction Publication: After sequencing, nodes in DONs collectively send transactions to the main chain. 4.FSS Diagram source: Chainlinkv2 Whitepaper The potential benefits of FSS include: Fair Sequencing: FSS includes tools that help developers ensure transactions entering a specific contract are sequenced fairly, ensuring users with ample resources or technical advantage cannot gain an upper hand. The usual strategy for fair sequencing is FCFS (First-Come-First-Served). Specific Contract’s Transaction Sequencing source: https://blog.chain.link/chainlink-fair-sequencing-services-enabling-a-provably-fair-defi-ecosystem/ Reduced or Eliminated Information Leakage: By preventing network participants from exploiting knowledge about upcoming transactions, FSS can mitigate or eliminate front-running attacks based on available information in the network before transaction submission. Preventing attacks leveraging such leaks ensures adversarial transactions dependent on the original pending transactions cannot enter the ledger before the original transactions are submitted. Lower Transaction Costs: By removing the need for participants to prioritize speed when submitting transactions to smart contracts, FSS can significantly reduce transaction processing costs. Priority Sequencing: FSS can automatically provide special priority sequencing for critical transactions. For instance, to prevent front-running attacks on oracle reports, FSS can retroactively insert oracle reports into a sequence of transactions. In comparison to other solutions that mitigate MEV within smart contracts, FSS implemented using DONs achieves lower latency due to its off-chain MEV defense mechanism. The latency would be in the millisecond range as opposed to the multiple of 12s that corresponds to block delay. UniswapX: Addressing Sandwich Attacks but Introducing MEV Scrutiny On July 17, leading decentralized exchange (DEX) Uniswap announced the launch of an open-source protocol called UniswapX. This protocol aggregates liquidity from decentralized trading pools and introduces features to counter MEV attacks. UniswapX introduces new features during its off-chain order matching process. These features include non-price-sequenced sorting, executing limit orders, and using a local ledger to handle price differences. Due to these changes, transactions stored in the mempool become increasingly unpredictable, further reducing the arbitrage space for MEV. MEV largely arises from miners prioritizing transactions based on gas, but with adjustments made by the off-chain ledger, we can significantly improve MEV. Uniswap traders are adversely affected by sandwich attacks, resulting in harmful MEV and potential losses of up to $3 million daily. UniswapX aims to address this issue by converting original transactions into “intents” submitted to Uniswap’s central server. While this effectively resolves sandwich attacks, it introduces the new problem of MEV scrutiny. During quoting and trading, fair prices may lean towards the quoters. In such cases, the sole quoter often prefers to submit transactions on-chain during an exclusive window. However, this presents an opportunity for validators who might collude to scrutinize transactions. Although this type of attack may not be common at this stage, if some validators become powerful enough, consistently win multiple blocks, or the infrastructure for validator collusion becomes widespread, we might witness a malignant growth of MEV scrutiny issues. In conclusion, while the Ethereum Foundation might hold a generally negative view towards MEV, the current state of the blockchain ecosystem, dominated by centralized miners/validators, makes it difficult to tackle the problem with direct solutions like transaction encryption without causing intense market volatility. Thus, the progressive improvement-oriented solutions like those offered by Flashbots and other teams aim to involve multiple parties in MEV extraction, gradually diminishing centralized control. This approach minimizes MEV’s impact on users and ultimately transitions to privacy-focused transaction solutions (as emphasized by Vitalik in “The Three Transitions”). From this perspective, MEV has evolved from its initial state of a dark forest zero-sum game to a stage of checks and balances. It may gradually move towards comprehensive privacy. Nevertheless, MEV remains a market with sustainable development potential, attracting more participants and novel developments. ---------------------- About Cryptogram Venture (CGV): CGV (Cryptogram Venture) is a crypto investment institution headquartered in Tokyo, Japan. Since 2017, its fund and predecessor funds have participated in investing in over 200 projects, including the incubation of the licensed Japanese yen stablecoin JPYW. CGV is also a limited partner in several globally renowned crypto funds. Since 2022, CGV has successfully hosted two editions of the Japan Web3 Hackathon (TWSH), supported by Japan's Ministry of Education, Culture, Sports, Science and Technology, Keio University, NTT Docomo, and other institutions and experts. CGV has branches in Hong Kong, Singapore, New York, Toronto, and other locations. Additionally, CGV is a founding member of the Bitcoin Tokyo Club. Disclaimer: The information and materials introduced in this article are sourced from public channels, and our company does not guarantee their accuracy or completeness. Descriptions or predictions involving future situations are forward-looking statements, and any advice and opinions provided are for reference only and do not constitute investment advice or implications for anyone. The strategies our company may adopt could be the same, opposite, or unrelated to the strategies readers might speculate based on th References and data materials: https://ethereum.org/en/developers/docs/mev/ https://bitcoinops.org/en/topics/replace-by-fee/ https://bitcoinops.org/en/topics/fee-sniping/ https://medium.com/@Prestwich/mev-c417d9a5eb3d https://medium.com/@VitalikButerin/i-feel-like-this-post-is-addressing-an-argument-that-isnt-the-actual-argument-that-mev-auction-b3c5e8fc1021 https://www.paradigm.xyz/2021/02/mev-and-me#mev-is-hard-to-fix https://ethresear.ch/t/proposer-block-builder-separation-friendly-fee-market-designs/9725 https://thedailyape.notion.site/MEV-8713cb4c2df24f8483a02135d657a221 The Future of MEV is SUAVE | Flashbots https://collective.flashbots.net/t/frp-18-cryptographic-approaches-to-complete-mempool-privacy/1210 https://explore.flashbots.net/

Produced by: CGV Research Author: Cynic TL;DR 1. From Layer1 to Layer2 How is scalability achieved technically? Ethereum considers Rollup as the only Layer2 solution because it expands Ethereum without compromising decentralization and security. From a modular perspective, Layer2 is responsible for execution, while settlement, consensus, and data availability are handled by Layer1. 2. From Layer2 to Layer3 What is the difference between Layer2-Layer3 and Layer1-Layer2? While Rollup technology addresses Ethereum’s computational bottleneck, it doesn’t solve the issue of data availability. The upper layer needs to compress transaction data to pass it down to the lower layer, but compression cannot be repeated, and the performance from Layer2 to Layer3 does not bring significant improvement. Why do we still need Layer3 with Layer2 in place? Layer2 maintains decentralization as a general-purpose computation layer, providing composability, while Layer3 should serve as an application-specific chain that meets unique application requirements such as compatibility, efficiency, and privacy. Regarding the application chain ecosystem, what is the difference between Layer3 and Cosmos? Layer3 relies on the Ethereum ecosystem, making it easier to access users and funds. However, due to its strong binding with Ethereum, it also loses some sovereignty, such as capturing the value of tokens. 3. From Layer3 to LayerX? Current development status of Layer3: Arbitrum released Orbit Chain on June 22nd; zkSync announced the launch of ZK Stack in a few weeks on June 26th; Starknet’s madara has helped a project deploy a Starknet Layer3 application chain within 24 hours during a hackathon. With the advent of Layer3, will Layer4 and Layer5 be far behind? CGV believes that from a technical perspective, Layer3 cannot achieve a performance leap through simple stacking. Although the ecological correlation between Layer1–2–3 is close (Ethereum ecosystem), and interoperability is stronger than traditional heterogeneous chains (cheaper cross-chain), they still cannot achieve complete ecological inheritance between each other. The narrative of Ethereum’s scalability may come to an end with Layer3. From Layer1 to Layer2: Scalability There exists an “impossible triangle” in blockchain, where security, decentralization, and scalability cannot be achieved simultaneously. Ethereum has chosen the first two, but lacks support for the latter. On a typical day, a swap in Ethereum costs $3-$4 in Gas Fees, while during a bull market with high transaction volumes, a single swap can cost nearly $100, resulting in severe congestion. Despite the emergence of many new public chains focusing on scalability since 2018, Ethereum still dominates the market due to its established ecosystem. As a result, attention has turned to scalability solutions built on top of Ethereum. The widely used solutions include Sidechains, Validium, and Rollup, each with different trust assumptions. Sidechains are independent blockchains running separately from Layer1, connected to the Ethereum mainnet via bi-directional bridges. Sidechains can have separate block parameters and consensus algorithms, enabling efficient transaction processing, but they do not inherit Ethereum’s security properties. Validium uses off-chain data availability and computation to improve throughput, processing transactions off-chain, and publishes zero-knowledge proofs on Layer1 to validate off-chain transactions and ensure security. Rollup performs computation off-chain but uses Layer1 as the data availability layer, validating off-chain computations through the submission of fraud proofs or validity proofs in Layer1 smart contracts, inheriting Ethereum’s security properties. Ethereum considers Rollup as the only Layer2 solution because it extends Ethereum without sacrificing decentralization and security. From a modular perspective, Layer2 is responsible for execution, while settlement, consensus, and data availability are handled by Layer1. Rollup can be further categorized into Optimistic Rollup and ZK Rollup based on different proof submission approaches. For Optimistic Rollup, the rollup batch executes transactions and sends the batched transactions, pre-state, and post-state to the Rollup contract deployed on Layer1. Layer1 does not validate the state transition process; as long as the initial state submitted by Rollup matches the one stored in the Layer1 contract, the state transition is optimistically finalized. Prevention of fraudulent behavior is ensured through fraud proofs. During a period of dispute, other validators can challenge the state root by submitting fraud proofs to the Rollup contract on Layer1. This would revert the Rollup state back to a known state before the dispute and recompute the legitimate state, imposing penalties on validators. In practice, fraudulent cases are rare, so optimistic state transitions significantly save validation resources. ZK Rollup differs from Optimistic Rollup in that state transitions require validation, which is performed within the contract using validity proofs. Once the validation is completed, the state transition achieves finality immediately without waiting for a one-week dispute period. Projects using Optimistic Rollup include Arbitrum and Optimism, which have already launched on the mainnet. Arbitrum has implemented fraud proofs but limits submission to a whitelist, while fraud proofs are still under development for Optimism. Both projects are actively decentralizing their systems, including the decentralization of sequencers and validators. According to L2Beat data as of June 26, 2023, the Total Value Locked (TVL) on Arbitrum One and Optimism is $5.81 billion and $2.25 billion, respectively. Other projects utilizing Optimistic Rollup include Boba Network, Zora Network, Layer2.finance, Fuel, BNBOP, and Coinbase, with some projects built using the open-source OP Stack developed by the Optimism team. Projects using ZK Rollup technology include zkSync Era, StarkWare, and Polygon zkEVM, which support virtual machines. They have already launched on the mainnet with TVL of $618 million, $68.11 million, and $42.65 million, respectively. Projects supporting specific types of transactions include dydx, Loopring, and zkSync Lite, with TVL of $350 million, $98.47 million, and $97.69 million, respectively. The development direction for ZK Rollup is better Ethereum compatibility, with projects such as Taiko, Scroll, and Linea currently in development for zkEVM. From Layer2 to Layer3: Customization Layer2: 100x, Layer3: 100x²=10000x? The cost from Layer1 to Layer2 reduces to 1/100. It is natural to consider building Layer3 on top of Layer2 to achieve a cost reduction of 1/10,000. Unfortunately, the answer is negative. While Rollup effectively solves Ethereum’s computational issues by moving execution off-chain, it does not solve the problem of data availability. Layer2 needs to pass the bundled transaction data to Ethereum’s smart contracts in calldata format. Although the packed transaction data is compressed, it cannot be compressed twice in the same way. Layer3’s transaction data must eventually be submitted to Layer1 (to inherit security), but the compression level of the transactions cannot be further reduced. Therefore, data availability cannot be achieved through stacking and cost reduction. Thus, Layer3 cannot be achieved through simple stacking. The solution proposed by the StarkWare team is customization, where Layer3 and Layer2 assume different functionalities. Why do we need Layer3 with Layer2 already in place? Ethereum provides security and decentralization, while Layer2 offers scalability, effectively solving the trilemma of blockchain. So why is Layer3 needed? The concept of Layer3 was initially proposed by the StarkWare team in the article “Fractal Scaling: From L2 to L3”. The team believes that this hierarchical structure and encapsulation are the core principles that maintain vitality in computer science. Additionally, while the Layer2 virtual machine maintains decentralization as a general-purpose computation layer, Layer3 should serve as an application-specific chain that meets unique application requirements. The Turing completeness lays a solid foundation for the hierarchical structure, enabling the creation of any possible application on it. In practice, to maintain its generality, Layer2 inevitably involves trade-offs and cannot meet the needs of all applications. A direct example is StarkWare developing the Cairo language and CairoVM for more efficient proof generation, which is not compatible with Ethereum. In such cases, a Layer3 chain can address the security concerns. Potential use cases for Layer3 include: Compatibility: Implementing an interpreter for other virtual machines on the Layer2 virtual machine to achieve compatibility with other virtual machines. Efficiency: If an application requires extremely high TPS (e.g., gaming, social media), sacrificing some security and settling on Layer2 using the Validium solution can be considered. Applications can also customize transaction formats to achieve higher compression rates. Privacy: Establishing a dedicated privacy chain for settlement on Layer2, which cannot be publicly observed. Furthermore, since application chains are specialized, they are not directly influenced by other applications, and the performance and costs of the chain are relatively predictable. Additionally, bridge transactions do not need to be sent directly on Layer1, resulting in lower costs, making bridging between L2-L3 and L3-L3 cheaper. Layer3 also has a significant advantage in batch transaction submissions, as it requires lower fixed Gas for submitting a batch, eliminating the need to wait for more transactions to reduce average Gas. This significantly mitigates the dilemma between confirmation time and cost in Layer2. In the application chain ecosystem, what are the differences between Layer3 and Cosmos? Cosmos can be considered the earliest project to introduce the concept of application chains. Users can easily customize and issue their own application chains using the Cosmos SDK. Cosmos IBC aims to be the TCP/IP protocol of the Internet, providing native interoperability for application chains built using the Cosmos SDK. In simple terms, Cosmos envisions building a blockchain universe with interconnected chains. Both Layer3 and Cosmos have invested in interoperability. Due to their similar technical architectures and low transaction costs, cross-chain transactions between Layer3 chains are trustless, fast, and inexpensive. From an interoperability perspective, the functionalities provided by Layer3 and Cosmos are almost the same. The main difference between Layer3 and Cosmos, according to CGV’s research team, lies in their binding with the Ethereum ecosystem, which is both an advantage and a disadvantage. In terms of advantages, Ethereum has a vast liquidity pool and a large user base. Although Cosmos has powerful technology and is the preferred choice for many giants to launch their chains, it still cannot escape the fate of low market share. As of June 26, 2023, Ethereum’s TVL was $26.2 billion, while the entire Cosmos ecosystem’s TVL was less than $1 billion. The Ethereum ecosystem is a key factor for the success of Layer3. Regarding disadvantages, the high binding with Ethereum results in the loss of some sovereignty. For projects using Cosmos chains, the token model is entirely designed by the project according to their needs, granting strong token empowerment. However, the native token of a Layer3 chain is subject to Ethereum’s restrictions. Although project tokens can be used as Gas tokens, the submission of final transaction data to Ethereum consumes ETH. Therefore, if Gas tokens are not ETH but native tokens issued by the project, the project needs to constantly convert native tokens to ETH for submission, ultimately transferring the empowerment to ETH. Another characteristic of Layer3 is that anything done on Layer3 can be migrated to Layer2, depending on the choice of the DA (Data Availability) layer. If the Layer2 settlement infrastructure that Layer3 depends on experiences security vulnerabilities or a decrease in activity, Layer3 can migrate to another Layer2 at a lower cost or even rely on Layer1 for DA and settlement, effectively becoming Layer2. Due to its high binding with the Ethereum ecosystem, Layer3 has the potential to foster numerous innovative applications. Looking towards LayerX from Layer3 Current development status of Layer3: On June 22nd, Offchain Labs released tools for issuing the Arbitrum Orbit Chain. Orbit Chain is a Layer3 solution built on top of the Arbitrum Layer2 and can settle on one of the three Layer2 options: Arbitrum One, Arbitrum Nova, or Arbitrum Goerli. Users can choose to use either Rollup or Anytrust technology, with the difference being that Anytrust utilizes DAC without submitting transaction data to the chain, resulting in lower costs but slightly weaker security. The advantages of Orbit Chain include a simple process for launching chains, interoperability with the Arbitrum ecosystem, instant updates with Nitro, and EVM+ compatibility provided by Stylus (supporting Rust, C, C++ writing, running on a WASM virtual machine). Users can issue any Orbit Chain with customized features, but settlement must occur on the Arbitrum Layer2, unless authorized by Offchain Labs or Arbitrum DAO. On June 26th, zkSync published an article announcing modifications to existing open-source code to launch ZK Stack in the coming weeks. ZK Stack enables users to build their customized ZK superchains. Unlike Arbitrum’s Orbit Chain, ZK Stack emphasizes sovereignty and interoperability, allowing complete customization based on user needs. Chains built using ZK Stack can achieve bridgeless interoperability. ZK Stack can be used to construct both Layer2 and Layer3 chains, with no specific requirement for settlement on zkSync. In this regard, ZK Stack seems to provide stronger sovereignty. StarkWare, the team that first proposed the concept of Layer3, is actively promoting the development of Layer3 within its Starknet ecosystem. Madara is being tested for public-facing stacks. During the @PragmaOracle hackathon, a team used Madara to launch an application chain within 24 hours. However, due to Starknet’s unique zk-STARK proof technology, it still requires further development to mature the product before publicly releasing Starknet Stack. The current Layer3 ecosystem is still in its early stages. However, with the introduction of convenient tools for launching Layer2 chains, it is expected that Layer3 chains will be operational soon. As the infrastructure gradually improves, attracting users has become the most important concern for all chains. With the arrival of Layer3, will LayerX be far behind? From a technical perspective, Layer3 cannot achieve a significant performance leap through simple stacking. Although Layer3 can obtain specific advantages through customization, the loss of generality makes further stacking challenging. Of course, hierarchical stacking can be infinitely performed if desired, but CGV’s research team believes that currently, such stacking cannot meet any specific requirements and will exponentially increase system complexity. Most importantly, although the Layer1-Layer2-Layer3 ecosystem is closely related (Ethereum ecosystem) and offers stronger interoperability compared to traditional heterogeneous chains (cheaper cross-chain transactions), they still cannot achieve complete ecological inheritance from each other. Contracts deployed on Arbitrum One cannot be directly called on the Orbit Chain, and liquidity from DEX deployed on zkSync cannot be directly aggregated on ZK Stack. The current situation is that the marketplace has been built, and it is getting taller, but there are not many merchants and customers. Although the lower levels are overcrowded (Ethereum), people are still unwilling to go to the higher levels of the marketplace because there are fewer merchants there. Therefore, CGV’s research team believes that it will be challenging for Layer3 to gain a significant number of users until blockchain technology achieves widespread adoption. As for Layer4, Layer5, and LayerN, even if some specific applications have specific needs, it is unlikely that they will be advertised under the LayerN banner. As the saying goes, “The Dao produces one, one produces two, two produce three, and three produce all things.” The narrative of Ethereum scalability may come to an end with Layer3, but it may take time to validate. ---------------------- About Cryptogram Venture (CGV): CGV (Cryptogram Venture) is a crypto investment institution headquartered in Tokyo, Japan. Since 2017, its fund and predecessor funds have participated in investing in over 200 projects, including the incubation of the licensed Japanese yen stablecoin JPYW. CGV is also a limited partner in several globally renowned crypto funds. Since 2022, CGV has successfully hosted two editions of the Japan Web3 Hackathon (TWSH), supported by Japan's Ministry of Education, Culture, Sports, Science and Technology, Keio University, NTT Docomo, and other institutions and experts. CGV has branches in Hong Kong, Singapore, New York, Toronto, and other locations. Additionally, CGV is a founding member of the Bitcoin Tokyo Club. Disclaimer: The information and materials introduced in this article are sourced from public channels, and our company does not guarantee their accuracy or completeness. Descriptions or predictions involving future situations are forward-looking statements, and any advice and opinions provided are for reference only and do not constitute investment advice or implications for anyone. The strategies our company may adopt could be the same, opposite, or unrelated to the strategies readers might speculate based on th

Cryptogram Venture (CGV), a Japanese crypto and Web3 research institution, recently announced the “Web3 Shining Golden Pavilion” event, hosted by CGV and UneMeta, which will take place in Kyoto, Japan on June 28th. Since 2022, Japan has been actively promoting the development of the Web3 industry. It has established a Web3 Minister and special zones, released policies such as the “NFT White Paper” and “Proposal for Stablecoin Openness in Japanese Society”, and introduced the world’s first stablecoin legislation, the “Fund Settlement Act Amendment.” Japan’s NFT market has great potential due to its rich and high-quality artists, anime and gaming IPs, mature user market, and the new opportunities opened up by NFT applications for digital IP development and innovation. Steve Chiu, the founder of CGV, expressed the hope that through the Web3 Shining Golden Pavilion event, Japan can leverage its resource advantages in anime, IP, gaming, and other fields to actively explore the applications of NFTs, blockchain games, metaverses, and other Web3 businesses. They aim to discover and assist outstanding talents in the Web3 field in Japan and globally, providing them with resource support and exploring the vast development opportunities of Web3. Ann Yu, the founder of UneMeta, mentioned that the NFT industry is still in its early stages. As they delve deeper into the NFT field, they have observed the impact brought about by this technology. Many traditional players and high-quality content are highly interested but also cautious. The UneMeta team insists on collaborating with genuinely long-term and high-quality content and working alongside teams that are truly determined to contribute to the industry. They hope to provide continuous positive guidance for users and the industry. The event will take place from 7:00 PM to 9:00 PM (JST) on June 28th at Brooklyn Night Bazaar (6F, Enpaia Bld., 521 Kamiosaka-cho, Nakagyo-ku, Kyoto-shi, Kyoto, 604–8001, Japan). The agenda includes keynote speeches, offline networking, and other activities, aiming to provide a platform for Web3 startups to showcase and promote their projects, engage with the Japanese market, and attract potential investors. This event will be jointly organized by TWSH, Alibaba Cloud, Teamz, Star, Dracoo World, Farcana, KEKKAI, and others, providing comprehensive support for the event. Strategic partners such as CoinW labs, Flow, Sei, and others will also provide full support for the event. Simultaneously, the second edition of the “Tokyo Web3 Summer Hackathon” initiated by CGV is currently underway. CGV, Flow, and Sei have jointly established a dedicated fund. Since the launch ceremony and the first Demo Day event held in Tokyo on May 17th, the “Tokyo Web3 Summer Hackathon” has gained increasing attention and participation from crypto and Web3 institutions, developers, and projects. The hackathon is expected to continue until September 2023 to better nurture and assess the sustainability and development capabilities of the projects. Project registration link: https://www.web3hackathon.io/ For more event details, please follow CGV’s official Twitter account @CGVFOF and visit their official website (https://www.cgv.fund/) to get the latest updates and important information. — — — — — — — — — — — About Cryptogram Venture (CGV): Cryptogram Venture (CGV) is a Japan-based, fully compliant crypto industry research and investment institution. With a business orientation of “research-driven investment,” it has participated in early investments in FTX, Republic, CasperLabs, AlchemyPay, The Graph, Bitkeep, Pocket, and Powerpool, as well as the Japanese government-regulated yen stablecoin JPYW. At the same time, CGV FoF is an LP for funds such as Huobi Venture, Rocktree Capital, and Cryptomeria Capital. It has established Web3 hackathons and industry summits as brand events under its umbrella. From July to October 2022, it initiated Japan’s first Web3 Hackathon (TWSH), which received joint support from the Japanese Ministry of Education, Culture, Sports, Science and Technology, Keio University, SONY, SoftBank, and other institutions and experts. CGV has branches in Singapore, Canada, and Hong Kong. CGV Official: https://www.cgv.fund/ Twitter: https://twitter.com/CGVFOF TWSH: https://www.web3hackathon.io/ About UneMeta: UneMeta is Japan’s largest high-quality IP NFT incubator, trading and social finance platform, focusing on excellent IP services based on Japanese culture. So far, we have released the NFT “Second Dimension” in cooperation with the popular Japanese voice actress Hanazawa Kana, and the NFT of Mushi Production’s classic art IP “BELLADONNA OF SADNESS”. The UneMeta platform aims to attract many users by developing a unique point system and providing an NFT experience that blends with real life. In addition, we aim to be a bridge connecting Web2 and Web3, and are committed to bringing more high-quality Web2 IPs to Web3 to promote a sustainable NFT ecosystem. Website: https://www.unemeta.com/ Twitter: https://twitter.com/UNE_METAVERSE Discord: https://discord.com/invite/YzztkC6ENe

Produced by: CGV Research Author: Cynic TL; DR What is a full on-chain game? Challenges and solutions for full on-chain games Why do we need full on-chain games? Which blockchain is suitable for full on-chain games? What types of games are suitable for being full on-chain? The past of full on-chain games — Decentralization, trustlessness, and let’s open a casino here The present of full on-chain games — High-performance public blockchains make full on-chain games a viable option The future of full on-chain games — From full on-chain games to on-chain society? What is a full on-chain game? A full on-chain game refers to a game where the game logic and data are stored entirely on a blockchain. The operation and interaction of the game are based on smart contracts, allowing for the full utilization of blockchain technology’s advantages, including decentralization, trustlessness, verifiability, transparency, and traceability. A full on-chain game is contrasted with a partial on-chain game. In a partial on-chain game, only certain game elements such as game assets and transaction records are stored on the blockchain, while the game logic and data processing still rely on traditional centralized servers. Depending on the content stored on the blockchain, partial on-chain games can be categorized into core logic on-chain, asset on-chain, and achievement on-chain. Core logic on-chain typically involves storing key game data and algorithms on the blockchain to ensure fairness and transparency. For example, putting the random number generator (RNG) or combat result calculation logic on the chain can prevent cheating and manipulation. Alternatively, parts of the in-game economic system can be placed on-chain, allowing for more diverse and innovative incentive mechanisms. For instance, players can earn token rewards through mining, staking, or participating in in-game activities. By putting assets on-chain, virtual items, characters, or other resources within the game are usually represented as non-fungible tokens (NFTs) or fungible tokens (FTs). This enables players to own, trade, and manage these assets, providing them with economic benefits and incentivizing their participation in the game ecosystem. Achievement on-chain typically refers to players unlocking certain achievements in the game and choosing to register them on the blockchain as proof of their game level or as credentials for subsequent airdrops. However, these achievements cannot be directly traded. Compared to asset on-chain, achievement on-chain provides much smaller economic incentives to players, but it helps the game focus on its essence — “After all, the most important thing about a game is that it’s fun.” Challenges and solutions for full on-chain games Since the inception of the concept of full on-chain games, it has yet to be widely adopted due to several challenges in the real-world implementation. 1. Performance and scalability: Blockchain networks have limited processing capabilities, especially in terms of transaction throughput and confirmation speed. Full on-chain games may lead to network congestion and latency, which can impact the gaming experience. To address this issue, developers need to explore scalability solutions such as sharding, state channels, and layer-two scaling. 2. Transaction costs: Every operation in a full on-chain game requires a transaction to be submitted to the blockchain, resulting in corresponding fees (e.g., gas fees on Ethereum). If the transaction costs are too high, it may restrict player participation and the overall playability of the game. Reducing transaction costs requires considerations like optimizing transaction structures and utilizing more energy-efficient consensus algorithms. 3. User experience: Compared to traditional games, full on-chain games may face challenges in terms of user experience. For instance, users need to understand and use cryptocurrency wallets, manage private keys, and handle transactions, which may pose certain barriers and learning curves for the average user. 4. Privacy concerns: Due to the public and transparent nature of blockchains, player data and transaction information in full on-chain games may be at risk of privacy breaches. Protecting player privacy requires the adoption of technologies such as zero-knowledge proofs and privacy-preserving computations, but these may further increase system complexity and development costs. 5. Game design limitations: Due to the performance limitations of blockchain technology, full on-chain games may struggle to implement complex game mechanics and real-time interactions. This implies that full on-chain games may face restrictions in terms of game genres and gameplay, making it challenging to adapt to high-performance demanding game types such as large-scale multiplayer online games and action games. High-performance Layer 1 solutions and the recent popularity of Layer 2 solutions are expected to reduce transaction costs and improve confirmation speeds, effectively addressing challenges 1 and 2. Account abstraction (AA) can lower user barriers and address challenge 3. ERC-4337 has passed the audit on March 2, 2023, and has been deployed on the mainnet, indicating that widespread use of account abstraction is on the horizon. Zero-knowledge proof technology has proven effective in protecting privacy, addressing challenge 4. As for challenge 5, do we really need to put every game type on-chain? The answer is likely no. Why do we need full on-chain games? With so many issues still existing in full on-chain games, why do we need them? This question is somewhat akin to asking why we need permissionless blockchains. The need for full on-chain games can be understood from the following perspectives: 1. Decentralized gaming world open to everyone: Full on-chain games eliminate the reliance on centralized servers, making game operations more decentralized. This can increase system security and resistance to censorship, while reducing reliance risks on a single organization or individual. 2. Trustless and verifiable game fairness: Since game logic and data are stored on the blockchain, game rules and states are transparent to everyone. This enables players to verify the fairness of the game and the correctness of outcomes, enhancing the credibility of the game. 3. Ownership, not just usage rights: Full on-chain games can utilize non-fungible tokens (NFTs) to represent in-game items and characters, allowing players to truly own and control these assets. This ownership can incentivize player participation in the game while providing real-world value and profits. 4. Once on-chain, running permanently: Due to game states and logic being stored on the blockchain, full on-chain games have high sustainability. Even if the original developers no longer support the game, as long as the blockchain keeps producing blocks, the game can continue running and evolving. 5. Reliance on the community, dedication to the community: Full on-chain games achieve community-driven development and governance through smart contracts and decentralized autonomous organizations (DAOs). This enables games to better adapt to player needs and market changes, increasing the game’s lifecycle and attractiveness. 6. Open collaboration, user-driven innovation for iterative evolution: Open-source code and an open system facilitate collaborative efforts between individuals. With the assistance of AI large models, users’ creative abilities will be fully unleashed, and user-generated content (UGC) or AI-generated content (AIGC) will bring about more diverse, richer, and more sophisticated gaming experiences. Which blockchain is suitable for full on-chain games? A five-dimensional comparison can be made based on TPS (transactions per second), confirmation time, transaction cost, security, and independence, with a maximum score of 5. The primary prerequisite for full on-chain games is excellent transaction performance. A shorter confirmation time can provide a better gaming experience, a robust ecosystem can offer the necessary infrastructure for games, security is crucial for protecting game assets, and independence ensures that games are not affected by congestion caused by other events on the blockchain. There is no one-size-fits-all solution in the real world, as each option has its strengths and weaknesses. Game projects can choose based on their specific design characteristics. What types of games are suitable for being full on-chain? We believe that full on-chain games should leverage the advantages of being entirely on the blockchain, rather than simply migrating their operational logic onto the chain. In other words, the goal should not be to go fully on-chain for the sake of it; going fully on-chain is a means to an end, not the end itself. What types of games can benefit from the advantages of blockchain technology? We believe there are two main types that are particularly suitable. One type is Multi Party Games (MPGs) that utilize the blockchain’s openness, transparency, and verifiability in a multiplayer setting. Interestingly, the term “game” can refer to both the concept of entertainment games and strategic games. “Multi Party” implies that the game is not single-player or based on fixed game logic but involves interactions between players. With permissionless blockchains, anyone can participate in the game. “Game” suggests that the parties are engaged in competitive interactions. By utilizing the blockchain, we ensure fairness in the game, and the public, transparent, and verifiable nature of the blockchain prevents game designers from tampering with the results. The most direct example of an MPG is gambling. Broadening the scope, various types of card games and turn-based strategy games can also be categorized as MPGs. MPGs are characterized by relatively fewer interactions, emphasizing players’ strategic thinking rather than reflexes. Through the blockchain, adversarial parties obtain a fair judgment. Another type is User-Generated Games (UGGs) that leverage the blockchain’s openness, autonomy, and ownership. In this type, the initial game designer sets minimal core rules, and users can unleash their imagination and creativity within the framework of these rules, exploring various gameplay possibilities. With the assistance of AI large models, users can easily put their creative ideas into practice and gain profits from the blockchain’s rights attribution. Without centralized organizations, UGGs rely on collaboration between individuals, and true autonomy is achieved by distributing governance rights to everyone, representing the broadest form of democracy. If users are dissatisfied with the core rule set established by the original designer, they can modify it at any time and deploy a new smart contract to create a new world. Starting from a small seed, with the momentum of positive feedback, the game will eventually grow into a towering tree. The past of full on-chain games: Decentralization, trustlessness, and let’s open a casino here On November 1, 2008, Satoshi Nakamoto published “Bitcoin: A Peer-to-Peer Electronic Cash System.” On January 3, 2009, the genesis block of Bitcoin was created. As Bitcoin transactions became more widely known, people started using it for online gambling. In 2012, the first Bitcoin-based gambling game, SatoshiDice, emerged. SatoshiDice was a simple blockchain-based gambling game where players placed Bitcoin bets, and the game returned the results of wins or losses based on predetermined odds and a random number generator. During this stage, blockchain gambling games were primarily limited to the Bitcoin ecosystem, and the variety of games was limited. In 2013, the Ethereum project was launched, and its smart contract functionality had a significant impact on blockchain gambling games. In 2015, when the Ethereum mainnet went live, blockchain gambling games started to transition from Bitcoin to Ethereum. With Ethereum’s smart contract technology, developers could create more complex and interactive gambling games. This phase saw the emergence of many Ethereum-based gambling games and platforms such as vDice and Etheroll. In May 2014, Kevin McCoy and Anil Dash created the first known non-fungible token (NFT). In 2017, CryptoKitties, the first Ethereum-based NFT game, successfully attracted a large number of users. NFT technology had a profound impact on the development of blockchain gambling games. NFTs could be used to represent unique in-game assets, such as limited edition gambling props or virtual tokens, and an increasing number of gambling games began utilizing NFT technology. In the summer of 2020, the DeFi Summer explosion occurred, and decentralized finance (DeFi) began to rise, leading blockchain gambling games into a new stage of development. Gambling games started integrating with DeFi projects and platforms, providing players with more extensive financial functionalities such as liquidity mining, staking, and lending. During the same period, the public blockchain sector experienced a significant boom. Blockchains like Binance Smart Chain (BSC), Polygon, Solana, and Tron optimized transaction costs compared to Ethereum, offering players faster and cheaper transaction experiences. As the blockchain gambling game market gradually matured, innovative game types and gameplay also emerged. For example, prediction market platforms like Augur and Gnosis allowed players to bet on the outcomes of future events. These platforms used smart contracts and blockchain technology to create fair, transparent, and trustless gambling environments. Gambling games, in fact, were the first games on the blockchain. They are naturally suited for full on-chain implementation since games of chance or guessing numbers are essentially mathematical calculations, easily verifiable through simple hash functions. By learning from history, we can understand the rise and fall. Although gambling may have a negative reputation for many people, we should not forget that full on-chain games had their humble beginnings here. The present of full on-chain games: High-performance public chains make full on-chain games a viable option With the rise of various high-performance Layer 1 and Ethereum Layer 2 scaling solutions, full on-chain games has gradually become a feasible reality. People’s exploration of full on-chain games has also deepened, with the emergence of the game Dark Forest marking a milestone event in the development history of full on-chain games. Source: Twitter@Ner0nzz Dark Forest is the first on-chain game in the category of incomplete information games. It utilizes the blockchain’s transparency and verifiability while hiding information that affects the gaming experience through ZK-SNARKS technology. It achieves incomplete information games and recreates the environment of the “dark forest” from the novel “The Three-Body Problem” on the blockchain. As an open MMO strategy game, Dark Forest encourages players to create their own in-game and out-of-game gameplay, leading to the formation of a large community ecosystem. Some players have formed guild organizations and made significant contributions in plugin development, game exploration, and event planning. As a real-time strategy full on-chain game, each player interaction is presented on-chain through contract calls and updated in real-time among different players. The “war fog” implemented through ZK-SNARKs technology achieves incomplete information games and simulates the dark forest environment. Dark Forest has proven the feasibility and playability of full on-chain games. Since then, the doors to full on-chain games have truly opened. Various major public chains are nurturing the full on-chain games sector, with Starknet being the most active. On Starknet, several full on-chain games have emerged, such as LootRealms, GO L2, Isaac, and Unstoppable Games, gaining significant popularity. However, considering the persistently high Gas Fees on Starknet, the mainnet launch of these games is still a long way off. Looking at the overall trend of various game projects, two game themes stand out: strategy-based battle games like Dark Forest and casual mini-games with a focus on financial attributes. Considering the current high Gas Fees, it may require tangible economic incentives to attract people to participate in the games. From this perspective, the latter is likely to launch on the mainnet faster. The future of full on-chain games: From full on-chain games to on-chain society? Where will the future of full on-chain games lead? In the short term, the role played by Ethereum scaling solutions, primarily Rollups, remains limited. Anchoring on Ethereum can also be negatively affected by other financial activities on the Ethereum network (such as MEV attacks causing sudden gas spikes during significant cryptocurrency market price fluctuations). The cost is still too high for more complex full on-chain games, and relying solely on game experience is insufficient to attract users. Meanwhile, high-performance Layer 1 solutions, due to their lack of compatibility with the Ethereum Virtual Machine (EVM) and a limited number of developers, struggle to build a large user base. In the short term, GameFi, which provides higher economic incentives to players, may dominate. In the medium term, we believe that Ethereum’s dominant position will be challenged, and more high-performance Layer 1 solutions will attract a significant number of users due to lower costs and better experiences. ZK-Rollup technology will mature further, truly reducing gas fees to levels comparable to traditional transactions. More customized dedicated chains will emerge to avoid congestion caused by unrelated activities. On this basis, various complex full on-chain games will be deployed on the mainnet, exploring the full potential of on-chain gaming in practice. With the development of VR and AR technologies, full on-chain games have the potential to be more vividly presented in the physical world, bridging the gap between on-chain and off-chain, recording on-chain and experiencing off-chain. In the long term, games, starting from entertainment, may generate real-world value. The interaction records and game processes of each player can serve as valuable data for training AI systems, benefiting real-life applications. The blockchain’s ownership authentication allows every user to control their own data and profit from on-chain interactions. For example, a player’s reaction in a racing game can better train autonomous driving systems, at least providing many boundary cases that are difficult to encounter in real life. The emergence of decentralized autonomous organizations (DAOs) will gradually bring games closer to social ecosystems. Human society, built upon a core set of natural laws and created through exploration and innovation among individuals, can develop social ecosystems on the blockchain just as it has in the physical world. ---------------------- About Cryptogram Venture (CGV): CGV (Cryptogram Venture) is a crypto investment institution headquartered in Tokyo, Japan. Since 2017, its fund and predecessor funds have participated in investing in over 200 projects, including the incubation of the licensed Japanese yen stablecoin JPYW. CGV is also a limited partner in several globally renowned crypto funds. Since 2022, CGV has successfully hosted two editions of the Japan Web3 Hackathon (TWSH), supported by Japan's Ministry of Education, Culture, Sports, Science and Technology, Keio University, NTT Docomo, and other institutions and experts. CGV has branches in Hong Kong, Singapore, New York, Toronto, and other locations. Additionally, CGV is a founding member of the Bitcoin Tokyo Club. Disclaimer: The information and materials introduced in this article are sourced from public channels, and our company does not guarantee their accuracy or completeness. Descriptions or predictions involving future situations are forward-looking statements, and any advice and opinions provided are for reference only and do not constitute investment advice or implications for anyone. The strategies our company may adopt could be the same, opposite, or unrelated to the strategies readers might speculate based on th

On April 28th, 2023, Cryptogram Venture (CGV) announced that the second Tokyo Web3 Spring Hackathon (TWSH), is initiated by CGV and jointly supported by experts from institutions such as Keio University, NTT DOCOMO, MetaFocus, TEAMZ, CoinW Labs, etc. The registration channel for (pre-)participation projects has now opened at https://www.web3hackathon.io/, and institutional cooperation and recruitment are underway. CGV FoF recently sponsored one of the most influential Web3 offline summits in Japan, the TEAMZ Web3 Summit 2023, and will organize the Tokyo Web3 Spring Hackathon (TWSH) Demo Day event at Toranomon Hills on the first day of the summit (May 17th) in Tokyo. Dozens of guests, including former Japanese Cabinet Secretary and current Ministry of Digital Society Promotion Minister Hiroshi Hirano, Tim Draper, the founder of Draper Associates, Satoshi Watanabe, the founder of Astar Network, Yuzo Kano, the CEO of BitFlyer, Jason Sai, a web3 special examiner for NTT DOCOMO, Amo Kensuke, the COO of Coincheck, David Gan, the founder of OP Crypto, Akio Tanaka, a founding partner of Infinity Ventures Crypto, Mable Jiang, the chief revenue officer of STEPN, Tony Gu, a partner of NGC Ventures, and Qi Liu, the co-founder of SevenX Ventures, will attend the event and give speeches. The choice of Japan as the birthplace of TWSH is in line with the Japanese government’s efforts to develop Web3. Recently, Japanese Prime Minister Fumio Kishida stated that the advent of the Web3 era could lead to economic growth in Japan. In the future, the Japanese government will carry out institutional reforms to create an environment that promotes the creation of new services, including Web3-related infrastructure. Japan has great development potential in the encryption and Web3 fields and may occupy an important position in the global Web3 market. The organizer CGV stated this hackathon activity differs from previous industry hackathon events in that it emphasizes the sustainability and development capabilities of projects in addition to development capabilities. Therefore, the contest is expected to last for up to six months. The construction and development of the Web3 ecosystem is not something that can be done overnight, and it is hoped that, with a more responsible examination and more patient support, outstanding talents and teams in the Web3 field can be discovered and assisted globally to jointly explore the enormous development space of Web3. The first Japan Web3 Hackathon, hosted by CGV, was held from July to October 2022, and was jointly launched by institutions such as the Ministry of Education, Culture, Sports, Science and Technology of Japan, Keio University, Sony, Softbank, and Cointelegraph Japan (CTJ). Dozens of well-known global blockchain industry institutions such as Metis, MetaEstate, Atom Capital, Binance, BAI Capital, Consensus Lab, Gate.io, IOSG Ventures, IPFS infinite Japan, NGC Ventures, OKX, Tokyo Tower, and Tokyo Esports Gate supported the event, with over 100 outstanding projects participating from Japan, the United States, Singapore, Dubai, Hong Kong and other regions. Ultimately, nine projects from different tracks stood out through selection and shared a $150,000 prize pool. Some of the favored projects also received investment from investment institutions and support from Japanese local resources. When it comes to the focus of the second Japan Web3 Hackathon, Steve Chiu, the founder of the organizer CGV, stated that the projects for this event not only cover popular Web3 tracks such as blockchain infrastructure, DeFi, GameFi, Metaverse, NFT and SocialFi, but also place emphasis on innovative trends such as Zero-knowledge Proof (ZK), encrypted AI fusion, innovative stablecoins, DePIN (decentralized physical infrastructure network), Soul Binding Tokens (SBT), completely on-chain games, and new social applications. Participating institutions will have the opportunity to have early contact with front-line projects, and communicate with global Web3 industry institutions and practitioners. As for participating projects, they will have the chance to obtain investments and entrepreneurial guidance from top global VC institutions, win the total prize pool of hundreds of thousands of dollars, and receive support from a multimillion-dollar incubation fund. According to the schedule of the competition, from April to June during the event, project registration, screening and review, Demo Day exhibitions (Tokyo Toramagashi), online preliminaries, and excellent project roadshows will be held sequentially, and the award ceremony will be held in Japan in September. As of now, more than 30 VC institutions from all over the world have registered to participate in the project selection and review, and more institutional cooperation is being confirmed. For institutional cooperation applications (event support, project selection and review, media cooperation, etc.): Yurinatyou@cgv.fund Registration channel for participating projects (pre-registration): https://www.web3hackathon.io/ About Cryptogram Venture (CGV): Cryptogram Venture (CGV) is a compliant crypto industry research and investment institution headquartered in Japan. With “research-driven investment” as its business orientation, it has participated in early investments in projects such as FTX, Republic, CasperLabs, AlchemyPay, The Graph, Bitkeep, Pocket, Powerpool, and JPYW, a yen stablecoin regulated by the Japanese government. At the same time, CGV FoF is an LP of funds such as Huobi Venture, Rocktree Capital, and Kirin Fund. Currently, CGV has branches in Singapore, Canada, and Hong Kong, About Keio University: Keio University, is a world-renowned research-based comprehensive university and the first institution of higher education in Japanese history. Keio’s predecessor was the “Rangaku Juku” founded in 1858, a private school that spread Western natural sciences. Under the guidance and influence of its founder, Yukichi Fukuzawa, it continued to develop and played a pioneering leadership role in Japanese society. About NTT DOCOMO: The largest mobile communication operator in Japan, with over 60 million contracted users. It provides 3G network services throughout Japan and provided LTE commercial network services as early as 2010. In November 2022, NTT DOCOMO announced that it will invest up to 600 billion yen (US$4 billion) in developing next-generation Web3 internet technology. About MetaFocus: MetaFocus is an accelerator that focuses on incubating innovative projects in the fields of cryptocurrency and metaverse. Its headquarters are located in Singapore, and it has branches in Tokyo, Hong Kong, and other locations. Its business currently covers some countries and regions in North America, Asia, the Middle East, and Europe, with over 50 partnering organizations and nearly 100 industry mentors. MetaFocus provides matching support to the founding teams at every growth stage of their startup projects. With a top-notch team of mentors and rich experience in project localization, MetaFocus offers personalized and differentiated coaching and support in areas such as industry, operations, marketing, financing, and going public. About TEAMZ: TEAMZ is a digital creative team that provides business strategies and solutions for Web3-related companies seeking new opportunities. It supports customer needs in the Japanese Web3 market through one-stop services from planning and development to ongoing support for Web3 products and services such as NFT, DAO, GameFi, wallets, and Metaverse integration. About CoinW Labs Established in early 2022, CoinW Labs is committed to building a world-class distributed ecosystem incubation laboratory, providing industry-leading and highly professional global blockchain investment and incubation services to accelerate builders and achieve sustainable growth and success in the blockchain field. The business focuses on Gamefi, NFT, DeFi and other areas. Since its establishment, it has successfully discovered and incubated more than 300 projects, achieving a financial investment return of over 20 times overall, and has been highly recognized in the industry for its high coverage and efficiency of services.

Bitcoin Ordinals is completely written on the chain of Bitcoin, like a tattoo, and becomes part of Bitcoin. Crops can only grow well on fertile land. Bitcoin has been operating successfully for 14 years and is now the 10th largest asset in the world by market capitalization, just behind Nvidia. CGV argues that Bitcoin has changed many people, allowing us to view the world from a new perspective and making us think about “what is value?” Even if there are still people who doubt Bitcoin, it cannot hide the fact that Bitcoin has become a mature and widely recognized asset. Top Assets by Market Cap Data source: Global ranking, https://companiesmarketcap.com/ While Bitcoin is changing us, it is undergoing evolution. The innovative projects based on Bitcoin, such as Bitcoin Layer 2 solution, Ordinals protocol, BRC-20, and Nostr protocol, spring up like mushrooms after rain. These innovations provide faster and more convenient trading solutions for Bitcoin, as well as greater potential and imagination for Bitcoin. Some people may question these innovations, but doesn't Bitcoin thrive on skepticism? Let's put aside our stereotypes for a while and understand the new concepts centered on Bitcoin, which is also the original intention of this article. Let's repeat the first sentence of the opening paragraph, an investment philosophy worth thinking about: Crops can only grow well on fertile land. Note: When it comes to innovations regarding Bitcoin, we are well aware that there is still much to be done. We warmly welcome your comments and suggestions, and sincerely invite you to join us in the discussion. I. Ordinals protocol - The era of sats is approaching As Ethereum is designed to support smart contracts and decentralized applications, it has a natural advantage in the NFT field. Based on Ethereum's ERC-721, developers can easily create, issue, and trade NFTs. You may wonder, why does not Bitcoin, which has the strongest consensus, issue NFTs. The original intention of Bitcoin was to become a peer-to-peer digital currency. Therefore, its network focuses more on security, stability, and simplicity, which constrain its development of smart contracts and Dapps. It doesn't mean the Bitcoin network can't support NFTs, or even issue “tokens”. It brings us to the point of discussion: Ordinals, a protocol created by Casey Rodarmor, a former developer of Bitcoin. 1. Origin of Ordinals: Bitcoin NFT In January 2023, Casey Rodarmor, a core contributor to Bitcoin, released the Ordinals protocol. The emergence of the Ordinals protocol stimulated discussions over Bitcoin NFT. How does the Ordinals protocol make NFT possible on Bitcoin? The total supply of Bitcoin is 21 million, and its smallest denomination is sats. 1 BTC is equal to 100 million sats. The Ordinals protocol proposes an innovative design based on “sats”, which allows for embedding various information such as images, text, and videos (also known as inscriptions) in “sats”. The uploaded inscriptions are connected to specific “sats”, which is similar to the minting of Ethereum NFT. The ultimate product is a sats with inscriptions, also known as Bitcoin NFT. Each sats has a unique tag and code, the corresponding content is also unique, transforming sats from a pricing unit to an NFT unit. The number of Ordinals inscriptions has exceeded 1.6 million, data source: Dune Analytics As of April 23, 2023, the number of Ordinals inscriptions had exceeded 1.6 million. It means that the NFTs in the Bitcoin ecosystem are unlikely to disappear. What value does Ordinals NFT create? Permanent on-chain. Bitcoin Ordinals NFT is completely written on the chain of Bitcoin, like a tattoo, forever becoming a part of Bitcoin. It makes sense to keep your favorite things permanently on the Bitcoin chain; Never return to zero. Ordinals NFT will not return to zero, its base value is a sats; Historical value. The total supply of Bitcoin is limited, and the total number of inscriptions that can be inscribed is also limited. Over time, early inscriptions become precious due to their historical status. In the NFT world, uniqueness and scarcity endow works with high value. The early NFT inscriptions of Bitcoin may become more and more precious. Partial infrastructure of the Ordinals ecosystem, source: CGV The Ordinals protocol was created three months ago. Currently, it has already spawned many ecological projects built around its infrastructure, including wallets, trading markets, and tools. Leading exchanges such as OKX and Binance have joined in supporting Ordinals Ecosystem. Some interesting Ordinals NFTs 1）TwelveFold TwelveFold is a Bitcoin NFT project launched by Yuga Labs. It is a series of 300-piece generative art collections. 2）Bitcoin Punks Bitcoin Punks is the first project to successfully upload the original Ethereum CryptoPunks to the Bitcoin blockchain using Ordinals, and all assets have been minted for free by collectors. 3）Taproot Wizards Why has Taprot Wizards received so much attention? It is said to be the largest block in Bitcoin's history, with a staggering capacity of 4MB, four times higher than the usual 1MB limit. 4）Pixel pepes “Pepe the Frog” is one of the most viral memes on the Internet. Pixel Pepes was airdropped from Ordinals Wallet and is composed of some of the most active KOLs and eco-developers in the ecosystem. 2. Exploration of Ordinals: BRC-20 CGV holds that the composability of the digital world has brought many interesting experiments to the industry. Two months after the release of the Ordinals protocol, Twitter user @ domodata proposed a Token standard - BRC-20 - on the Ordinals protocol. Mint and transfer functions of BRC-20, source: https://domo-2.gitbook.io/brc-20-experiment/ BRC-20 utilizes 𝗢𝗿𝗱𝗶𝗻𝗮𝗹 𝗶𝗻𝘀𝗰𝗿𝗶𝗽𝘁𝗶𝗼𝗻𝘀 of JSON to deploy token contracts, mint and transfer tokens. You can perceive BRC-20 as an NFT for Ordinals, which is similar to a check. BRC-20 does not have a smart contract. “Ordi” is the first BRC-20 token deployed by @domodata, source: https://domo-2.gitbook.io/brc-20-experiment/ More than 30,000 𝗢𝗿𝗱𝗶𝗻𝗮𝗹 𝗶𝗻𝘀𝗰𝗿𝗶𝗽𝘁𝗶𝗼𝗻𝘀 were minted within 24 hours after the release of BRC-20. @domodata also deployed $ordi, the first token of BRC-20, with a total of 21 million. Everyone could mint it for free, and all $ordis were minted in less than 2 days. Some of BRC-20 tokens, source: https://brc-20.io/ Although @ domodata has repeatedly stated that BRC-20 and $ordi are for experiments only and have no value, some people are trading $ordi and minting more BRC-20 tokens. There have been 3,466 BRC-20 tokens, with a total market value of nearly US$20 million. The arrival of the era of pricing based on “sats” Is it necessary to issue cryptocurrency on Bitcoin ordinals? BRC-20 does not have a smart contract, and the inscription can be used as a ledger. However, it is difficult to establish an efficient and stable system with an immutable ledger. Moreover, the 'writing' on the Bitcoin blockchain takes up very valuable resources. It requires paying some sats as gas fees and spending time waiting for transaction confirmation. BRC-20 is created based on Ordinals, making it very fragile. As BRC-20 does not use Bitcoin UTXO, it is prone to problems in trading. Recently, after Unisat launched the BRC-20 trading marketplace, it was suspended due to related trading attacks. BRC-20 is still in the experimental stage, why do some people participate in it? Apart from the speculative nature of FOMO, if you deploy and mint some tokens, you will find that the release of tokens via BRC-20 seems to have achieved the original idea of the encryption industry. That is to say, everyone can easily issue tokens, and the biggest value is that it's on Bitcoin. It occupies a portion of sats, and these BRC-20 tokens are like incarnations of Bitcoin, which gives them value. Unisat's BRC-20 token trading market, source: Unisat More importantly, in CGV's view, the era of pricing based on "sats" has arrived, with all Ordinals NFT trading platforms starting to use Bitcoin for pricing. After Unisat launched BRC-20 related tokens, these tokens are directly priced using sats. It can be seen that the era of pricing based on "sats" has arrived Summary Regardless of the success or failure of the Ordinals protocol and BRC-20, their emergence has opened up new possibilities for Bitcoin, making the Bitcoin ecosystem more diverse and vibrant. Most importantly, they have transformed sats, the smallest denomination of Bitcoin, from a concept to a practical unit. II. Lightning network - Let sats flow Bitcoin has been plagued by issues such as slow transaction speed, high transaction fees, and difficulty in scalability, constraining its performance and application scenarios. How to solve these issues? Many developers are attempting to build so-called Layer 2 networks based on Bitcoin. The Layer 2 network is a technical solution built based on the Bitcoin mainnet (Layer 1). By running protocols or platforms on top of the basic layer, the Layer 2 network can fully utilize the security and decentralization characteristics of the Bitcoin mainnet while providing a more efficient trading experience. There are many Layer 2 solutions, among which the lightning network and side chain (such as the liquid network) are the mainstream, and the former is widely used. Next, let's talk about the lightning network. What is the lightning network? Lightning network is one of the Layer 2 solutions. It is mainly used in Bitcoin payment scenarios, helping users save costs and improve efficiency. Why could the lightning network complete peer-to-peer payments at a lower cost and faster speed? Because the lightning network places the transaction process off the chain, only the final transaction results are confirmed on the Bitcoin mainnet. Advantages of the lightning network -Smaller transactions are more convenient Through the lightning network, users can use sats, the smallest denomination of Bitcoin, to make payments, satisfying the needs of daily sporadic consumption. Bitcoin transaction fees, data source: https://bitinfocharts.com/comparison/bitcoin-transactionfees.html -Reduce transaction costs At present, the transaction fee for Bitcoin is approximately US$2. At the peak of the market in 2021, the fee exceeded US$60. With the lightning network, the fee is around 1 cent for US$100 transaction, which is quite cost-effective for daily small payments. -Accelerate transaction processing speed Currently, the Bitcoin network can process up to 7 transactions per second, and network congestion may cause the delay in transaction confirmation, affecting the user payment experience. Theoretically speaking, the lightning network can reach a processing speed of millions of transactions per second. Development of the lightning network As the technology of the lightning network gradually matures, the payment and social giants are driving its popularization. As of April 25, 2023, the lightning network has a total of 16,000 nodes and nearly 75,000 payment channels, with channel funds of approximately 5,379 Bitcoins (nearly US$152 million). Real-Time Lightning Network Statistics, source: 1ML Let's take a look at the current usage scenarios of the lightning network: Social platform payments and tips Many people use the lightning network because of the Nostr protocol and the Damus built on top of it. They support payments and tips via the lightning network. Cross-border remittance In January 2023, digital payments platform Strike announced a partnership with Send Globally to enable remittances via the lightning network between users in the U.S. and the Philippines. With Send Globally, the US dollar can be converted into Bitcoin, which is sent via the lightning network to a third-party partner in the recipient's country, and then converted into local currency and directly transferred to the recipient's account. Merchant payment Strike collaborated with Shopify, Blackhawk Network, and NCR to establish a Bitcoin payment system that allows merchants to quickly receive US dollars after clients make payments using cryptocurrency. At present, the merchants that support the payment system include McDonald's Corporation, CVS, Walgreens, Whole Foods, and Walmart. The lightning network has been trying to realize the original intention of Bitcoin - to become a point-to-point electronic cash system. In addition to large transactions, sats in small transactions can flow very easily through the lightning network. Although the lightning network faces many challenges on its way to popularity, as the technology matures and usage scenarios continue to enrich, it will definitely become a powerful assistant to Bitcoin. Final thoughts CGV deems that whether you are a developer or a speculator, as long as you involve in Bitcoin, you promote the prosperity and development of Bitcoin and its community. Whether it is the Ordinals protocol, BRC-20 experiment, or Layer 2 solution such as the lightning network, they have expanded the application range of the Bitcoin network, allowing for the use of “sats” and the pricing based on “sats”, thus reducing the psychological pressure and lowering the threshold for entry. There is nothing wrong with the open development and multifaceted attempts of the Bitcoin network. With the accumulation of wealth effect and the increase in the number of users, the competition among ecological products will gradually promote overall improvement. ​At present, many projects centered on Bitcoin are still in a state of chaos, with varying levels of quality. The only thing you need to pay attention to is to protect your Bitcoin. ｜Disclaimer: The information and materials presented herein are from public sources and the Company makes no warranty as to their accuracy or completeness. Any descriptions or projections of future conditions are forward-looking statements, any recommendations and opinions are for reference only and do not constitute investment advice or implication to anyone. The strategies that the Company may adopt may be the same, opposite, or unrelated to those that readers speculate based on this report. About Cryptogram Venture (CGV): Cryptogram Venture (CGV) is a Japan-based, fully compliant crypto industry research and investment institution. With a business orientation of “research-driven investment,” it has participated in early investments in FTX, Republic, CasperLabs, AlchemyPay, The Graph, Bitkeep, Pocket, and Powerpool, as well as the Japanese government-regulated yen stablecoin JPYW. At the same time, CGV FoF is an LP for funds such as Huobi Venture, Rocktree Capital, and Kirin Fund. It has established Web3 hackathons and industry summits as brand events under its umbrella. From July to October 2022, it initiated Japan’s first Web3 Hackathon (TWSH), which received joint support from the Japanese Ministry of Education, Culture, Sports, Science and Technology, Keio University, SONY, SoftBank, and other institutions and experts. CGV has branches in Singapore, Canada, and Hong Kong.