Produced by: CGV Research Author: Cynic ，Shigeru TL;DR — — The concept of DePIN ： Exploring the concept of Decentralized Physical Infrastructure Network (DePIN), emphasizing the intersection of digitization and decentralization. DePIN combines physical hardware and blockchain technology, representing a new era of fusion between digital technology and the physical world. The article underscores the importance of DePIN in terms of data, power, and control redistribution, envisioning a more democratic, fair, and transparent future. — — DePIN’s “chicken and egg” problem： Discussing one of the main challenges DePIN faces in its development, the “chicken and egg” problem. This problem describes a dilemma: to establish a robust decentralized network, a significant amount of hardware devices is needed to participate. However, to attract these devices, there must already be an established and well-functioning network. The article highlights the need to provide some form of incentive to attract early participants to the network. — — How DePIN works ： Introducing the working principles of DePIN, including its decentralized nature relying on individual hardware devices and the use of blockchain technology to manage and secure the network. Blockchain, as a public, transparent, and tamper-proof digital ledger, records all transactions and interactions on the network, ensuring all nodes adhere to the network’s rules. Additionally, DePIN employs an incentive mechanism, typically based on cryptocurrency, to encourage nodes to participate and contribute their resources. — — Applicable industry of DePIN： Exploring the potential applications of DePIN in industries such as telecommunications, energy, data storage, the Internet of Things, and supply chain. For example, in the telecommunications industry, DePIN offers a decentralized solution, allowing devices to communicate directly without intermediaries. In the energy sector, DePIN provides a decentralized energy grid solution, enabling direct power exchange between nodes. — — Market explosion singularity of DePIN： Discussing the impact of increased technological maturity on the DePIN market, primarily due to advancements in blockchain and IoT technologies. High-throughput blockchain solutions, enhanced security and privacy protection, the development of cross-chain technologies, and the growth and maturation of IoT devices all provide DePIN with more nodes and data, strengthening its network effects. 1.The connotation of DePIN As technology advances, we are at a crossroads of digitization and decentralization. Decentralization is not just a technological trend; it represents a redistribution of power, control, and data ownership. In this context, the Decentralized Physical Infrastructure Network (DePIN) has emerged, offering us a fresh perspective on the interaction between the physical and digital worlds. This interaction goes beyond data and is primarily about power and control. Through DePIN, we can envision a more democratic, fair, and transparent future where everyone can participate and benefit. DePIN, also known as a Decentralized Physical Infrastructure Network, is an emerging technological concept that combines physical hardware and blockchain technology. These networks, also referred to as Proof of Physical Work (PoPW), Token Incentivized Physical Infrastructure Networks (TIPIN), and Edgefi Networks, represent a new era of fusion between digital technology and the physical world. In this era, data is no longer passive digits; it’s closely intertwined with the physical world. Through DePIN, we can see a decentralized future where data, power, and control are all redistributed, and everyone can participate and benefit. For example, in wireless networks, there are WiFi hotspots, or in energy networks, there are solar-powered home batteries. These networks are built in a decentralized manner by contributors from around the world. In return, these individuals and entities receive financial compensation and network ownership through token incentives. 2. Analyzing the Inherent Value of DePIN from the “Chicken and Egg” Problem In the course of technological evolution, we often encounter a series of challenges, with the “chicken and egg” problem being one of the most classic. This problem describes a dilemma: to achieve a certain goal, you need to have A first, but to have A, you also need to achieve that goal first. In the context of DePIN, this problem becomes particularly prominent. To establish a strong decentralized network, we need a substantial number of hardware devices to participate. However, to attract these devices, we need an already established and well-functioning network. 2.1 Why is the “Chicken and Egg” Problem Crucial in DePIN? The value of a decentralized network lies in its participants. The strength and stability of a decentralized network are directly related to the number and quality of its nodes. More nodes mean higher redundancy, better data distribution, and greater system resilience. However, for most hardware device owners, joining a new, unproven network carries risks. They may need to invest time and resources without a clear guarantee of returns. Therefore, to attract these early participants, the network needs to provide some form of incentive. 2.2 How Does DePIN Address This Challenge? DePIN’s solution is to provide incentives to early participants. These incentives can take various forms, from cryptocurrency rewards to special privileges within the network. For example, a DePIN might offer additional cryptocurrency rewards to its early nodes or grant them greater influence in network decision-making. This incentive system encourages more hardware devices to join the network, accelerating its growth and stability. In DePIN, incentives are not only about solving the “chicken and egg” problem; they are also essential for ensuring the health and stability of the network. A healthy DePIN requires its participants to continuously provide and maintain their resources. To ensure this, the network needs to offer sufficient incentives to encourage such behavior. This may include providing cryptocurrency rewards, granting special privileges within the network, or other forms of rewards. 2.3 Design Challenges and Opportunities Although DePIN provides a solution to the “chicken and egg” problem, it doesn’t mean it lacks other challenges. For instance, how to ensure the fairness of the incentive system? How to prevent malicious participants from exploiting the incentive system? How to ensure the long-term stability and health of the network? These questions require deep consideration and solutions from DePIN’s designers and operators. However, at the same time, DePIN offers us a unique opportunity to rethink how to build and operate networks. Through innovative incentive systems and decentralized design principles, DePIN presents a more equitable, transparent, and democratic future. 3. How DePIN works DePIN’s Operating Principles DePIN’s operation is based on decentralization and blockchain technology. Firstly, DePIN relies on individual hardware devices, which are also referred to as nodes. These nodes can be personal computers, dedicated servers, or IoT devices. Together, these devices form a decentralized network without any central nodes or authoritative entities. This decentralized characteristic makes DePIN more secure and transparent. Secondly, DePIN utilizes blockchain technology to manage and protect the network. Blockchain is a public, transparent, and tamper-proof digital ledger that records all transactions and interactions on the network, ensuring that all nodes adhere to the network’s rules. Furthermore, to encourage node participation and resource contribution, DePIN employs an incentive mechanism. This mechanism is typically based on cryptocurrency, allowing nodes to earn rewards by participating in the network and contributing their resources. DePIN flywheel effect diagram (Source: IoTeX) Advantages of DePIN Compared to Traditional Physical Infrastructure Networks Shared Ownership: DePIN encourages participants to collectively invest in the deployment and maintenance of infrastructure through a token reward mechanism. This bottom-up approach results in network ownership being shared among all participants rather than controlled by a few shareholders. Cost Distribution: Decentralized physical infrastructure networks effectively reduce operational costs and expenses by mobilizing the shared resources of network participants. Decentralized Features: Compared to traditional centralized infrastructure networks, decentralized networks offer higher security and resilience. The decentralized construction makes the network less susceptible to the negative impacts of corruption, tampering, hacking, and other potential issues associated with centralized control. Open Competition and Innovation: DePIN brings opportunities for innovation to various industries. By eliminating the entry barriers set by traditional infrastructure networks, it incentivizes new participants to compete in markets traditionally dominated by a few large enterprises. 4. Which industries is DePIN best suited for? With the rapid advancement of technology, the concept of Decentralized Physical Infrastructure Network (DePIN) is gradually becoming a reality. This network model, combining physical hardware and blockchain technology, offers countless opportunities across various industries. 4.1 Telecommunications Industry The telecommunications industry is a prime area for DePIN. Traditional telecom networks rely on centralized base stations and switches for data transmission. However, with the increasing number of IoT devices and the widespread adoption of 5G technology, this centralized model becomes increasingly inadequate. DePIN provides a decentralized solution that allows devices to communicate directly without the need for central nodes. This not only improves network efficiency and resilience but also reduces maintenance and upgrade costs. 4.2 Energy Industry The energy industry is also an ideal field for DePIN. With the development of renewable energy technologies, more households and businesses are generating their own power. However, traditional electrical grids are centralized and not suitable for this decentralized energy production model. DePIN offers a decentralized energy grid solution that allows various nodes (such as households, businesses, or small power plants) to directly exchange power. This not only enhances the efficiency of the grid but also provides new economic opportunities for participants. 4.3 Data Storage Industry With the explosive growth of data, data storage has become a significant challenge. Traditional cloud storage solutions rely on centralized data centers, which not only increase costs but also pose security risks. DePIN provides a decentralized storage solution that allows various nodes to offer storage space and receive corresponding rewards. This model not only reduces storage costs but also enhances data security and reliability. 4.4 Internet of Things (IoT) Industry IoT is another ideal field for DePIN. With the increasing number of devices, traditional centralized networks are becoming increasingly unstable and unreliable. DePIN offers a decentralized network solution that allows devices to communicate directly without the need for central nodes. This not only improves network efficiency and resilience but also provides devices with new functionalities and services. 4.5 Supply Chain Industry Supply chain management is a complex process involving multiple participants and extensive data exchange. Traditional supply chain solutions rely on centralized databases and applications, which increase costs and complexity. DePIN provides a decentralized supply chain solution that allows various participants to exchange data directly without the need for central nodes. This not only improves supply chain efficiency and transparency but also provides new economic opportunities for participants. 4.6 Transportation Industry With the development of autonomous driving technology, the transportation industry is undergoing significant changes. Traditional traffic management systems rely on centralized control centers and sensor networks. However, this model may no longer be suitable in the future of autonomous driving. DePIN offers a decentralized traffic management solution that allows vehicles to communicate directly without the need for central nodes. This not only improves traffic efficiency and safety but also provides vehicles with new services and functionalities. DePIN provides countless opportunities across various industries. Through decentralized means, DePIN not only enhances efficiency and resilience but also offers new economic opportunities for participants. With technological advancement and market development, we can anticipate that DePIN will play an increasingly important role in the future. 5. Market explosion singularity of DePIN： In the ever-evolving landscape of technology, innovation stands as the pivotal force propelling progress. Particularly in the domain of DePIN, the advancement of technological maturity is not only a milestone but also a turning point. It signifies the transition of DePIN from theory to practice, from concept to reality. The critical technological advancements behind this turning point will collectively shape the future of DePIN and pave the way for its market explosion. 5.1 The Advancement of Technological Maturity 5.1.1 Progress from Blockchain Technology High-Throughput Blockchain Solutions: With the emergence of next-generation blockchain protocols, such as sharding technology and sidechains, blockchain networks have significantly increased their processing speed and throughput. This enables DePIN to handle more transactions and data, enhancing its practicality and efficiency. Enhanced Security and Privacy Protection: By introducing advanced technologies like zero-knowledge proofs and homomorphic encryption, blockchain networks have bolstered their security and privacy protection capabilities. This provides DePIN with a more secure and reliable environment for data exchange and storage. Development of Cross-Chain Technology: The development of cross-chain technology allows different blockchain networks to communicate and exchange data with each other. This provides DePIN with broader interoperability, allowing it to integrate more resources and services. (Source: ：Messari ） 5.1.2 Progress from IoT Technology IoT Technology: The growth and maturation of IoT devices will provide DePIN with more nodes and data, enhancing its network effects. According to Gartner’s predictions, the global number of IoT devices is expected to reach 25 billion by 2025. This growth will offer DePIN more nodes and data, further strengthening its network effects. Proliferation of Smart Sensors and Devices: As the cost of IoT sensors and devices decreases, their applications in various fields become increasingly common. This provides DePIN with a wealth of data sources and nodes, enhancing its network effects. Development of Edge Computing: The development of edge computing technology allows data processing to occur near IoT devices, reducing data transfer latency and costs. This enables DePIN to more efficiently handle and analyze data from IoT devices. Enhanced IoT Security: With advancements in IoT security technology, such as stronger encryption methods and security protocols, the security of IoT devices and networks has improved. This provides DePIN with a more secure infrastructure and data source. 5.2 Support from Policies and Regulations If governments and regulatory bodies can create favorable policies and regulations that encourage the development of DePIN, it will create conducive conditions for its widespread application, including but not limited to: Innovative Tax Incentive Policies: Governments can implement tax incentives for DePIN projects. For example, they can offer tax reductions or tax credits to businesses and individuals deploying eco-friendly technologies or renewable energy facilities within the DePIN network. Streamlined Permit and Approval Processes: Governments can simplify the permit and approval processes for DePIN projects, particularly for those involving cross-border or multiple administrative regions. This will reduce barriers to project initiation and operation, accelerating innovation. Establishment of DePIN Innovation Funds: Governments can establish dedicated funds to support research and innovation projects related to DePIN. These funds can be used to finance startups, research institutions, or public-private collaboration projects. 5.3 Support from Enterprises and Industries If major companies and industry leaders can support and adopt DePIN, it will provide significant momentum. Strategic Investments by Industry Giants: Imagine if tech giants like Google and Amazon started investing in DePIN projects or established partnerships with DePIN startups. Such actions would not only provide financial support to DePIN but also enhance its visibility and reputation within the industry. Supply Chain Integration: Large manufacturing and retail companies can improve efficiency and transparency by integrating DePIN technology into their supply chain management. For example, using DePIN-based solutions to track the entire process from production to delivery. Energy Management Innovation: Energy giants can optimize energy distribution and trading by adopting DePIN technology. For example, establishing a decentralized energy trading platform that allows users to directly trade renewable energy. 5.4 Expansion of Technological Collaboration and Partnerships Collaboration and integration with other technologies and platforms, such as 5G and edge computing, will provide more possibilities for DePIN applications. For example: Integration of 5G with DePIN: Combining the high-speed and low-latency features of 5G networks, DePIN can achieve faster data transmission and real-time communication. For example, establishing an intelligent traffic system based on DePIN that utilizes 5G networks for instant communication and data sharing between vehicles, enhancing road safety and traffic efficiency. Combining Edge Computing with DePIN: By integrating edge computing technology into DePIN, data processing can occur where it’s generated, reducing reliance on centralized data centers. This is especially useful for applications that require rapid response, such as security monitoring and emergency response systems in smart cities. Collaboration of IoT Devices with DePIN: IoT devices can serve as nodes within the DePIN network, collecting and transmitting data. By combining IoT with DePIN, more secure and efficient data management can be achieved. For example, in agriculture, data collected by IoT devices can be analyzed through DePIN to optimize crop planting and resource allocation. Fusion of AI with DePIN: Combining AI technology with DePIN can enable more intelligent data analysis and decision support. For example, in healthcare, patient data collected through DePIN can be deeply analyzed with AI to provide personalized treatment plans. 5.5 Strengthening Globalization and Cross-Border Cooperation The concept and application of DePIN are not limited by geographical boundaries. A global perspective and cross-border cooperation will bring more significant markets and opportunities. For example: Global Disaster Response Network: Imagine a global DePIN system for disaster response. In the event of earthquakes, floods, or other natural disasters, this decentralized network can rapidly mobilize global resources, including drones, sensors, and communication devices, to provide real-time data and support for rescue operations. International Clean Energy Grid: DePIN can be used to build a cross-border clean energy sharing network. For example, utilizing solar energy from the Sahara Desert and wind energy from Northern Europe, decentralized energy grids can distribute energy worldwide, optimizing energy usage and reducing waste. Global Healthcare Monitoring System: Deploying a DePIN-based healthcare monitoring system on a global scale can track the spread of infectious diseases, monitor public health conditions in real-time, and share critical medical data worldwide, effectively addressing global health crises. In conclusion, the market explosion of DePIN requires various factors to work together. Technology, policies, economics, communities, and markets will all play crucial roles in this process. 6. Some representative projects of DePIN As the DePIN concept gained popularity, many projects began to explore this area. Here are some examples of projects that have successfully applied the DePIN concept and how they are leveraging this new technology to innovate and deliver value. 6.1 Helium Helium is a decentralized wireless network designed to provide Internet connectivity for low-power devices. Helium’s network is made up of hotspots deployed by individuals and enterprises. These hotspots not only provide wireless coverage, but also validate other hotspots in the network. In this way, Helium creates a decentralized, self-validating network. Participants can earn Helium tokens as a reward by deploying hotspots and verifying network activity. 6.2 HiveMapper HiveMapper is a decentralized mapping network that uses video data to create 3D maps. HiveMapper allows anyone to upload video data and use that data to create and update 3D maps. In this way, HiveMapper has created a decentralized, community-driven mapping platform. Participants can be rewarded by providing video data. 6.3 Render Render is a decentralized cloud computing platform designed for 3D rendering, machine learning, and other computationally intensive tasks. Render allows users to provide unused GPU power as part of a network. These GPU resources are pooled to support tasks that require a lot of computing power. Participants can earn Render tokens as a reward by providing GPU resources. 6.4 Filecoin Filecoin is a decentralized storage network designed to provide users with secure and reliable data storage services. Filecoin allows anyone to provide unused storage space as part of a network. These storage resources are pooled together to provide services to users who need storage space. Participants can earn Filecoin tokens as a reward by providing storage space. These projects are successful applications of the DePIN concept. Not only do they demonstrate the potential of decentralized technologies, they also provide new economic opportunities for participants. As technology advances and the market evolves, we can expect more DePIN projects to emerge in the future, providing us with even more innovation and value. Conclusion As we delved deeper into DePIN, we realized that this was not only a technological breakthrough, but also a challenge to existing social and economic structures. DePIN presents a vision of the future based on decentralized power, data transparency, and broad participation. In this scenario, each participant has the opportunity to have an impact on the development of the network, and this decentralized nature not only drives technological innovation, but also promotes social equity and justice. DePIN therefore marks not only a major advance in the field of technology, but also a shift in the way human society is governed. It represents the evolution from centralized control to decentralized governance, from closed systems to open networks. Driven by DePIN, we can expect a future of a more connected, intelligent and human digital 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

Produced by: CGV Research Author: Shigeru TL;DR This examines the potential of Web2 apps like X and Telegram in the Web3 world, not only as insights into the future development of these social platforms but also as a forecast of the new landscape and order of the Web3 world. X and Telegram have distinct differences in user market distribution, key features, innovation capability, business models, openness, community culture, and Web3 exploration. Their competition and cooperation may coexist in the long term. Key factors for victory in the Web3 super app competition between X and Telegram include reshaping user experience, setting new standards for privacy and security, technological innovation and ecosystem integration, and innovative business models. Despite the escalating competition between X and Telegram in the Web3 super app arena, there are still uncertainties in the evolution, and the final competitive landscape may present unexpected outcomes. The Cryptographic Evolution of Web2 Social Giants and the Potential New Order of the Web3 World Web3, representing the next generation of the internet, marks a significant shift from centralization to decentralization. Compared to Web2, Web3 emphasizes user data ownership, decentralized network structures, and transparency based on blockchain technology. This signifies not only a technological leap but also foreshadows innovations in network interaction methods and business models. For example, the rise of Decentralized Finance (DeFi) and Non-Fungible Tokens (NFTs) is a practical manifestation of the Web3 concept. According to DappRadar data, the TVL peak in the DeFi sector reached $267 billion in 2022, while the NFT market’s trading volume was approximately $25 billion. These figures highlight the immense potential of the Web3 world. In the Web2 era, WeChat undoubtedly stood as the titan of social applications. As of 2023, WeChat’s monthly active users have exceeded 1.2 billion, making it one of the most popular social apps globally. WeChat is not only a communication tool but also a super app that integrates functions like payments, shopping, gaming, mini-programs, and more. WeChat’s success lies in its all-encompassing ecosystem, enabling users to accomplish nearly all daily tasks on one platform. Its influence is not only evident in user numbers but also in how it has transformed people’s lifestyles and business models. Against this backdrop, exploring the potential of Web2 apps like X and Telegram in the Web3 world is not only an exploration into the future development of these social platforms but also a forecast of the new landscape and order of the Web3 world. Of course, other social platforms like Facebook and Kakao also have significant room to thrive in the Web3 world. However, currently, X and Telegram appear to be the Web2 social platforms most likely to make early gains in the Web3 world.” “X and Telegram, as globally renowned social media platforms, each possess unique strengths and expansive user bases. X is known for its wide-reaching influence and diverse user demographics, while Telegram is favored for its high regard for privacy protection and security. In the wave of Web3, these two platforms face challenges of adapting to decentralization trends and leveraging blockchain technology for innovative services and business models. These factors will be crucial in determining whether they can become Web3 super app giants akin to WeChat in this new era. Elon Musk has repeatedly praised China’s WeChat, stating that ‘you can do everything in WeChat in China’. His vision is to create an equally comprehensive super app, with X being his namesake for this application. To cater to the unique needs of a dating service, X may need to develop new algorithms and user interfaces. Additionally, becoming a ‘digital bank’ implies that X might introduce financial services such as payment processing, fund transfers, or even cryptocurrency transactions. This would require X to establish a robust security and compliance framework to ensure the safety and legality of financial transactions. Meanwhile, Telegram’s co-founder Pavel Durov initially envisioned TON as a means to integrate cryptocurrency transactions into chats and monetize through in-app currency. In mid-September 2023, the TON Foundation announced an official partnership with Telegram, aiming to integrate and promote the TON network ecosystem to Telegram’s 800 million active users. Their goal is to attract and convert 30% of Telegram’s active users, or 240 million users, into active TON network users by 2028. The wallet TON Space, which provides self-hosted storage, has seamlessly integrated into Telegram, enhancing user convenience and potentially attracting new users interested in cryptocurrencies. In this rapidly evolving digital age, it is much easier to encroach upon low-frequency scenarios within high-frequency settings than vice versa. Social media, as an ultra-high-frequency scenario, faces lower difficulty in penetrating financial scenarios compared to adding social elements in financial scenarios. Convenience is the key to success. Enabling users to download one less application is a clear indicator of success. Both X and Telegram are striving towards this goal, but their paths and strategies differ. Over time, we will see which platform can better adapt to the trends of Web3 and ultimately emerge as the leader of this new era. Functionalities we’ve seen on WeChat will be realized on X and Telegram. These rich ecosystems will form a powerful force, significantly increasing user stickiness and usage duration on X and Telegram. This logic is similar to the transition from the internet to mobile internet, and then from applications to mini-programs. Nonetheless, at the initial stage, this is sufficient to make a substantial impact on the Web3 world. By analyzing their current status, strengths, challenges, and future possibilities, we can gain a better understanding of the development trends and business opportunities in social media for the Web3 era. This includes but is not limited to: Expansive User Bases: Both X and Telegram boast massive global user bases. This means that as they transition to Web3, there is potential to bring hundreds of millions of users into the Web3 ecosystem. This scale of user migration is crucial for driving the popularity and adoption of Web3. Influence and Brand Awareness: As globally recognized social media platforms, X and Telegram wield significant brand influence. Their adoption and promotion of Web3 could have a substantial impact on public perception and attitude towards Web3. Potential for Innovation and Technological Integration: Both X and Telegram have a history of implementing technological innovations and integrating new technologies. Their activities in the Web3 domain could bring about new technological breakthroughs, particularly in decentralization, data security, and user experience. Shifts in Business Models: Web3 offers a completely new business model, especially in terms of data ownership and user incentives. X and Telegram’s exploration in these areas could pioneer a new chapter in social media business models. Reshaping of Privacy and Security: As users become increasingly concerned about privacy and data security, Telegram has already established a reputation in this regard. X and Telegram’s developments in Web3 may further strengthen their ability to protect user privacy and data. Community and Decentralized Governance: Web3 emphasizes the power and involvement of communities. X and Telegram’s experience in building and maintaining active communities could play a crucial role in establishing decentralized governance structures and promoting user participation. Therefore, the development potential of X and Telegram in the Web3 world deserves close attention. Their moves may have profound implications for the entire Web3 ecosystem and even the future of the internet. X and Telegram: Basic Information and Competitive Analysis X and Telegram are globally renowned social media platforms, each with a vast user base and extensive market reach. They differ in key functionalities, with X focusing more on public topic discussions and information dissemination, while Telegram places greater emphasis on privacy protection and security. The main distinctions between the two include:” Comprehensive comparison between X and Telegram 1. X: User Base: As of 2023, X has approximately 528 million monthly active users. Its user base is global, with a significant presence in countries like the United States, Japan, and India. Market Distribution: X holds notable influence worldwide, particularly prominent in Western countries. It plays a crucial role in politics, entertainment, and news dissemination. Key Features: X is renowned for real-time information dissemination, public topic discussions, and high user interactivity. It also supports features like multimedia content sharing, live streaming, and topic hashtags. Web3 Milestones: X has previously introduced blockchain-based NFT avatar verification and explored functionalities for tipping with cryptocurrency. On October 29, 2023, Elon Musk announced X’s vision, anticipating it to become a “mature” dating site and a “digital bank” by 2024. 2. Telegram: User Base: Telegram boasts over 70 million monthly active users. It is particularly popular in countries like Russia, India, Iran, and Brazil. Market Distribution: Telegram has users across various countries and regions globally, especially favored in areas with a high demand for online privacy and security. Key Features: Telegram is known for its high emphasis on privacy protection and security. It supports end-to-end encrypted private chats, large groups and channels, and file sharing functionalities. Web3 Milestones: From May to July 2023, the success of Unibot (token price increased by over 100 times within three months) triggered FOMO sentiment in the market. Based on the integration of artificial intelligence and social, Telegram Bot covers areas like trading, airdrops, communities, and cross-chain, enriching the application scenarios of the crypto industry and bringing innovative development paths to the industry. In July 2023, Telegram introduced the “Stories” feature. Users can edit content by clicking on the “+” icon at the bottom right corner of the main interface and selecting “Create Story”. It supports uploading various media types such as images, videos, audio, and allows the addition of text and location information. Similar to WeChat Moments, users can set filters to control which friends can see the posted content. This complements the product features and paves the way for Telegram to create a Web3 version of WeChat in the future. In September 2023, the TON Foundation announced a formal partnership with Telegram. Telegram will integrate TON Space, a self-hosted encrypted wallet introduced by TON, and from that day forward, all Telegram wallet users will be able to use TON Space. The next step is to roll out this service to Telegram users worldwide in November this year. In October 2023, the TON Foundation applied for a Guinness World Record for “fastest blockchain” and will conduct performance tests on October 31st to demonstrate the reliability, scalability, and speed of the TON blockchain. Four Key Elements for Decisive Victory in the Web3 Super App Competition 1. Reshaping User Experience: In the Web3 era, reshaping user experience means going beyond traditional convenience and interface appeal, towards deeper engagement and ownership. X: With its extensive user base and rich content, X can incentivize users to create and share high-quality content by introducing a cryptocurrency reward mechanism. For instance, providing token rewards for popular tweets or influential content creators can enhance user engagement and sense of belonging. Telegram: Leveraging its high emphasis on privacy protection and security, Telegram can create a more secure and private social environment. For example, by introducing blockchain-based identity verification and data storage, Telegram can provide advanced levels of privacy protection and data security. TON meets the goal of millions of TPS in the future by realizing the “infinite sharding paradigm” and brings a better user experience (Source: Beosin) 2. Setting New Standards for Privacy and Security: In the Web3 era, privacy and security will be crucial factors for users in choosing social platforms. X: Needs to put more effort into protecting user privacy and data security. For instance, X can introduce decentralized data storage solutions to ensure the safety and immutability of user data. Telegram: Already possessing inherent advantages in privacy and security, Telegram can further strengthen this advantage, for instance, by introducing a blockchain-based decentralized authentication system to provide higher levels of user privacy protection. Compared with Ethereum and the Bitcoin network, TON has obvious advantages in fault tolerance and redundant storage 3. Technological Innovation and Ecosystem Integration: Technological innovation and integration with a broader ecosystem are key aspects of the Web3 world. X: By collaborating with other Web3 projects and services, X can enrich its platform functionality and user experience. For example, X can integrate DeFi services or NFT markets, allowing users to engage in financial activities or digital art trading while interacting socially. Telegram: With its openness and flexibility, Telegram has the potential for deep integration with a wider Web3 ecosystem. 4. Innovation in Business Models: For social media platforms, it’s important to explore new sources of revenue and growth while maintaining user stickiness. X: As of 2023, X’s financial data shows that its primary source of revenue is still advertising, accounting for the vast majority of total revenue. According to 2022 financial report data, X’s advertising revenue reached about $4 billion. Additionally, X generates revenue through data licensing and other services, which, although a smaller portion, still brings in hundreds of millions of dollars in revenue for the company. X is also actively exploring new revenue channels, including launching subscription services, enhancing e-commerce functionality, and integrating cryptocurrency payments. Telegram: Since its founding in 2013, Telegram has grown into a product with over 800 million monthly active users worldwide. However, its revenue scale is not proportionate to its user base. Currently, aside from standard subscription services, Telegram’s main revenue comes from limited advertising. According to reports, Telegram’s advertising revenue in 2022 was only 10 billion rubles, equivalent to about $104 million. In comparison, Bilibili, with only a quarter of Telegram’s monthly actives, generated nearly $700 million in advertising revenue in 2022. 5. Impact of Business DNA: In exploring the competition for super apps in the Web3 era, the business DNA of X and Telegram will significantly influence their development trajectory. X: The business DNA of X is very similar to platforms like Weibo, a social sharing platform. For example, as a public platform centered around information dissemination and social interaction, this aligns closely with X’s original intent and development direction. Weibo’s success lies in its ability to rapidly spread information and aggregate public attention, which has always been one of X’s strengths. In the Web3 era, X can leverage this characteristic from Weibo to strengthen information dissemination and social interaction functionalities, while integrating blockchain technology to provide a more transparent and decentralized platform for information sharing. Additionally, X can explore Weibo’s successful experience in content creation and user interaction, such as encouraging users to create and share high-quality content through token incentive mechanisms. Telegram: The business DNA of Telegram is based on instant messaging tools, which has a close association with WeChat. WeChat, as a multifunctional social application, not only provides communication services but also integrates functions like payment, shopping, gaming, forming a comprehensive ecosystem. Telegram can adopt this model from WeChat while maintaining its core communication and privacy protection functionalities, by exploring more diversified services and applications. For instance, Telegram can integrate decentralized financial services (DeFi), non-fungible tokens (NFTs), and other Web3 elements on its platform to provide users with a richer and more convenient service experience. Additionally, Telegram can utilize its strong privacy protection features to provide users with a more secure and trustworthy Web3 social environment. In conclusion, predicting the competition results between X and Telegram is not easy. ChatGPT has provided its answer, but this is just a reference. Bold Speculation on the Future Competition between X and Telegram The competition between X and Telegram for Web3 dominance, might witness some unexpected “black swan” events that could significantly alter the competitive landscape. Let’s imagine some events that might happen one day: Web2 Giant Acquires Telegram: If WeChat announces the acquisition of Telegram, it would greatly change the landscape of the global social media and instant messaging market. This merger could lead to the integration of technical and market resources, posing even greater competitive pressure on X. It’s worth noting that just this September, Tencent Cloud announced its cooperation with the TON Foundation to support web applications and bots built within Telegram, and this collaboration is quietly underway. X Announces Major Collaboration with Web3 Project: If X announces a partnership with a high-performance blockchain network like Solana or a Layer 2 solution, it could significantly enhance its competitiveness in the Web3 arena. This collaboration could involve cryptocurrency payments, integration of decentralized applications (DApps), and more. Tip: Nowadays, when you type “Web3” in X, the logo suffix for Immutable automatically appears (though this is most likely a technical bug). Government Intervention Strengthened: Governments might enact new regulatory policies that have a significant impact on social media and cryptocurrency markets. For instance, let’s assume the U.S. government introduces new social media regulations, requiring all social platforms to rigorously review and remove content deemed as “fake news”. This might compel X to invest substantial resources in compliance, while also potentially sparking controversies about freedom of speech, affecting user activity and brand image. Geopolitical Risks: With the influence of international situations such as the Israel-Palestine conflict and the Russia-Ukraine conflict, it might potentially affect the international image and brand reputation of Telegram and X. If they are perceived as tools of a particular country’s politics or part of information warfare, it could damage their credibility among global users. Currently, the countries with the highest market shares for Telegram are Russia, Indonesia, Malaysia, Brazil, Saudi Arabia, India, Nigeria, Egypt, and Turkey; while X is primarily dominant in countries like the United States and Europe. Breakthrough in Technological Innovation: If X or Telegram achieves a significant technological breakthrough, it could bring about a major shift in competition. For example, if Telegram develops a new type of decentralized identity verification system based on ZK technology that can protect user privacy while providing efficient authentication services. This technological innovation might attract a user base highly sensitive to privacy, thus enhancing Telegram’s competitiveness in the social media market. Major Security Incidents: If X or Telegram experiences a major security vulnerability or data breach, it could severely damage user trust, impacting their market position. This might also lead to significant penalties from governments and strong public criticism. Major Partnerships: Imagine if X announces a partnership with Amazon, allowing users to directly purchase Amazon products on the X platform and make cryptocurrency payments. This would greatly enhance X’s competitiveness in the e-commerce and payment fields. Conclusion In the exploration of the super app competition between Telegram and X (formerly Twitter) in the Web3 era, reshaping user experience, setting new standards for privacy and security, technological innovation, and ecosystem integration may be the decisive three key elements. Telegram, with its advantages in privacy protection and security, as well as its close collaboration with the TON network, is actively exploring the possibilities of Web3. Meanwhile, under Elon Musk’s leadership, X is demonstrating ambition for diversified services and the concept of a digital bank. These initiatives challenge not only existing business models but also explore the future direction of social media. However, despite both platforms striving to shape their Web3 visions, the future competitive landscape remains uncertain. In the future, we may see more partners joining this competition, or entirely new competitors emerging, which could change the current competitive landscape. In summary, the super app competition between Telegram and X in the Web3 era is not only a clash of technology and business models but also a profound exploration of the future internet world. Regardless of the ultimate outcome, this competition will drive the development of the Web3 world, leading us into a more open, decentralized, secure, and user-friendly digital age. ---------------------- 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

Produced by: CGV Research Author: Shigeru TL;DR Rise of Inflation-resistant Stablecoins: Digital stablecoins pegged to fiat currencies are impacted by declining purchasing power, leading the financial markets to show strong interest in “Flatcoin,” a stablecoin designed to maintain purchasing power in inflationary environments. This new type of stablecoin hedges against inflation by pegging its value to a specific basket of goods, and is considered a significant direction for the future of finance by industry leaders such as Vitalik Buterin and Coinbase’s CEO Brian Armstrong. Definition of Inflation-resistant Stablecoins: Unlike stablecoins pegged to specific assets or fiat currencies, inflation-resistant stablecoins are designed to combat inflation and aim to preserve purchasing power. In countries with soaring inflation rates, it provides an effective tool to counter inflation and is used as a hedge in high inflation regions like Latin America and Africa. Design Challenges of Inflation-resistant Stablecoins: Accurately measuring inflation rates poses a challenge due to differences in countries, regions, and measurement methods like CPI and PPI. It requires reliance on reliable, accurate data sources and ensuring data validation and auditing. High system stability and security are needed to combat manipulation, attacks, and market volatility. Legal and regulatory differences across countries may impose additional restrictions and risks on stablecoin design and issuance. Effective economic models are needed to ensure the stablecoin accurately reflects inflation. Technically, real-time processing of inflation data, designing stable smart contracts, and ensuring system efficiency are essential. Market acceptance and user education are also key to success. Significance of Inflation-resistant Stablecoins in the Cryptocurrency Market: They protect purchasing power for users in high inflation environments, providing more reliability compared to traditional stablecoins. They drive technological innovation, increase the practicality of digital currencies, attract more traditional financial participants, and contribute to the formation of a clear regulatory environment. Additionally, they bring diverse options to the market and offer new risk management tools for the global economy. Analysis of Typical Projects: This includes the Frax Price Index (FPI) and the stablecoin linked to CPI-U from Frax Finance, which is fully collateralized by crypto assets. The Reserve project aims to create a decentralized stablecoin, Reserve Token (RSV), by diversifying risk. SPOT, based on Ampleforth and Buttonwood, aims to bridge the gap between speculative cryptocurrencies and dollar alternatives, providing stability through zero-clearing layering and can operate on multiple chains. Why Do We Need Inflation-resistant Stablecoins (Flatcoin)? As a reflection of economic and national power, currencies have undergone many changes throughout history. Whenever a dominant power gradually declines and is replaced by emerging powers, the status of its dominant currency also changes accordingly. The Dutch guilder dominated during its economic peak, and the British pound of the British Empire became the globally trusted currency. However, none of these currencies were able to permanently maintain their leading position. Recently, Ray Dalio, the founder of Bridgewater Associates, suggested that the status of the US dollar as the world’s reserve currency may be challenged. In an interview in 2023, he emphasized that as the influence of the US dollar diminishes globally, the international economic and monetary landscape is becoming multipolar, and the reserve currency status of the dollar faces future uncertainty. Since January 2020, the average purchasing power of Americans has decreased by 23.90%.(Data source: https://truflation.com/) Over the three-year period from October 10, 2020, to October 10, 2023, Truflation data reveals that the average purchasing power of Americans has decreased by 20.39%. This effectively means that for someone holding entirely USD-denominated assets, their ability to buy goods in the market has shrunk by one-fifth during these three years. However, this inflation phenomenon is not unique to the United States. Data from the International Monetary Fund (IMF) projects a global inflation rate of 6.6% in 2023, compared to 8.8% in 2022. The World Economic Forum further points out that due to complex factors such as deglobalization, climate change, the wage-price spiral, and highly liquid global markets, the global economy is facing a sustained period of high inflation. Certain countries, like Argentina, Turkey, and Iran, have shown extremely high inflation rates of 76.1%, 51.2%, and 40.0% respectively in 2023 due to political instability, international sanctions, monetary policy missteps, and economic management issues. In the field of digital currencies, while traditional stablecoins are designed to be pegged to specific fiat currencies or assets to maintain their stability, they are also affected by fiat currency inflation. From the first batch of stablecoins born in 2014, to the widespread attention gained in 2017 with the rise of decentralized finance (DeFi), Tether (USDT) and USD Coin (USDC) have become the third and fourth largest cryptocurrencies in global market capitalization respectively. Currently, there are approximately 200 stablecoins in the market with a total market capitalization of 190 billion USD. However, stablecoins like USDT and USDC primarily operate in a centralized manner, carrying the risk of being subject to control by central entities and potential exposure to counterparty and regulatory risks. Even more crucially, as global inflation continues to rise, the real value of these stablecoins pegged to fiat currencies like the US dollar is being eroded. Comparison of the Relative Purchasing Power of the US Dollar (Compared to Initial Issuance) (Data source: howmuch.net) In light of this, stablecoins aren’t necessarily truly “stable.” This may seem counterintuitive, but it’s a real dilemma. With the rise in inflation rates and global economic uncertainty, the financial markets, especially in the realm of crypto finance, are beginning to seek a new type of stablecoin that can maintain purchasing power even in an inflationary environment. Enter the “inflation-resistant stablecoin” (also known as Flatcoin), which has become a new focal point in the market. Flatcoin, as a decentralized stablecoin, emerged with the aim of safeguarding assets from the impact of inflation. Unlike traditional stablecoins, Flatcoin combats inflation by maintaining its peg to the prices of specific baskets of goods, thereby preserving purchasing power. Since the conception of Flatcoin, it has garnered significant attention from the crypto industry. The explicit goal of Flatcoin is to “maintain stable purchasing power while also possessing some flexibility to withstand economic uncertainties caused by the traditional financial system.” At the end of 2022, Ethereum co-founder Vitalik Buterin, in an interview with Bankless, shared his outlook on the cryptocurrency industry in 2023, mentioning three “massive” opportunities yet to be realized in the crypto space: mass wallet adoption, inflation-resistant stablecoins, and Ethereum-powered website logins. Vitalik believes that creating a stablecoin capable of withstanding various conditions, including hyperinflation of the US dollar, would provide a tremendous opportunity for the entire cryptocurrency industry. He emphasizes that providing a reliable, inflation-resistant stablecoin for billions of users would be a significant supplement to the traditional financial system. Coinbase CEO Brian Armstrong has also mentioned Flatcoin multiple times in public interviews and discussed this new technology on Twitter, ranking it as the top among ten crypto technologies. Brian believes that Flatcoin represents the future direction of stablecoins. Unlike traditional stablecoins pegged to fiat currencies, Flatcoin offers a new and more stable value storage by tracking inflation. He also emphasizes that while Coinbase has not yet developed in this area, they have a strong interest in the potential of this new type of stablecoin. What is an Inflation-Resistant Stablecoin? Inflation-resistant stablecoins, often referred to as “Flatcoins” (or alternatively as “value-stablecoins” or “purchasing-power-stablecoins”), are a type of stablecoin designed to track inflation rates rather than a specific currency. The concept of “Flatcoin” was initially introduced by former Coinbase CTO Balaji Srinivasan in 2021. The purpose of Flatcoin is to maintain stable purchasing power, even in an inflationary environment, by pegging to the Consumer Price Index (CPI) or other inflation indicators. These stablecoins are able to maintain their real value, providing users with a more stable and reliable means of storing value. Subsequently, blockchain technology development company Laguna Labs introduced a new cryptocurrency called Nuon. They claim it to be the world’s first over-collateralized and decentralized “Flatcoin.” Just as decentralized protocols are the answer to the risks posed by centralized currencies, over-collateralization is the answer to maintaining value in times of market collapse, and inflation-resistant stablecoins offer a solution for preserving value over time. With rising inflation rates, such as the United States’ inflation rate reaching 8.5% in 2022, far above the Federal Reserve’s 2% inflation target, inflation-resistant stablecoins have become an attractive option. They are typically not subject to the limitations of bank deposits and often offer higher interest rates, making them an enticing choice in the face of inflation. In Latin America, where the inflation rate reached 14.6% in 2022, and is projected to reach 9.5% in 2023, these high inflation countries are using inflation-resistant stablecoins as a hedge against high inflation and as a means to facilitate cross-border remittances across different regions. Distinguishing Inflation-Resistant Stablecoins from Other Stablecoins Different types of stablecoins can primarily be classified based on their backing assets or operational mechanisms. Here are the main types of stablecoins, along with their characteristics and examples: 1. Commodity-backed Stablecoins: - Typically backed by hard assets like gold or real estate to maintain the stablecoin’s value. For example, PAX Gold (PAXG) is a stablecoin pegged to gold, with each PAXG representing one ounce of gold. 2. Crypto-backed Stablecoins: - Typically maintain the stablecoin’s value by over-collateralizing with crypto assets. For example, DAI is a crypto-backed stablecoin issued by MakerDAO, with its value pegged to the US dollar but maintained by collateralizing with assets like Ethereum. 3. Fiat-backed Stablecoins: - Usually pegged to a specific fiat currency like the US dollar, euro, or Chinese yuan in a 1:1 ratio. For example, USDT (Tether) and USDC (USD Coin) are stablecoins pegged to the US dollar in a 1:1 ratio. 4. Algorithmic Stablecoins: - Typically adjust the supply through algorithms to maintain the stablecoin’s value. For example, Ampleforth (AMPL) is an algorithmic stablecoin whose supply dynamically adjusts based on market demand. The main purpose of inflation-resistant stablecoins (such as Flatcoin) is to protect purchasing power by pegging them to inflation indices like the Consumer Price Index (CPI) and thus, mitigating the impact of inflation. In contrast, other types of stablecoins typically maintain their value through pegging to specific assets or employing algorithms. In the design and implementation of inflation-resistant stablecoins, more complex economic models and algorithms may be required to accurately reflect inflation changes and adjust the stablecoin’s value accordingly. Additionally, these stablecoins may face more intricate regulatory challenges, particularly regarding requirements related to the accuracy and fairness of inflation data. Design Challenges of Inflation-Resistant Stablecoins: 1. Accurate Measurement of Inflation Rates: Accurately measuring inflation rates is a crucial factor influencing the design of inflation-resistant stablecoins. The inflation rate may vary from country to country, necessitating designers to find an accurate and reliable method for measurement. Inflation can be measured through various means, such as the Consumer Price Index (CPI), Producer Price Index (PPI), or other inflation indicators. However, these indicators may be influenced by various factors, including political considerations, differing economic policies, and variations in statistical methods, potentially affecting the accuracy and effectiveness of inflation-resistant stablecoins. For instance, in a use case of the Volt Protocol, its corresponding local stablecoin VOLT maintains stability by anchoring it to the Consumer Price Index (CPI). If the inflation rate remains at 7% for a year, the token will be anchored at $1.07. 2. Reliability of Data Sources: The design of inflation-resistant stablecoins relies on reliable and accurate data sources. If the data sources are inaccurate or unreliable, it may lead to a disconnect between the stablecoin’s value and the actual inflation rate, thus compromising its inflation-resistant properties. Designers need to identify dependable data providers and ensure the accuracy and timeliness of the data. Additionally, robust data validation and auditing mechanisms need to be established to ensure the authenticity and completeness of the data. 3. System Stability and Security: Any cryptocurrency project, especially stablecoin projects, needs to consider the stability and security of the system. The design of inflation-resistant stablecoins requires contemplation on how to prevent manipulation, attacks, and other factors that might affect the stability and security of the system. Furthermore, it is necessary to contemplate how to design robust protocols and mechanisms to respond to market fluctuations and unforeseen events, ensuring the continuous stable operation of the system. For example, on May 10, 2022, the price of TerraUSD, an algorithmic stablecoin running on the Terra blockchain, dropped and lost its peg to the US dollar due to a lack of collateral. This case illustrates how algorithmic stablecoins can be vulnerable to speculative attacks when the system lacks adequate collateral. 4. Legal and Regulatory Challenges: Inflation-resistant stablecoins may be subject to the legal and regulatory environments of different countries and regions. These legal and regulatory aspects may affect the design, issuance, and trading of inflation-resistant stablecoins. Some countries may restrict or prohibit the use of these stablecoins, or require projects to comply with specific regulatory requirements. These legal and regulatory challenges may add complexity and risk to the project. Towards the end of 2019, when stablecoins were just beginning to emerge, the G7 summit strongly declared them as a serious risk for international settlements. This demonstrates the influence of legal and regulatory environments on the design and application of stablecoins. In September 2023, the G20 summit approved the Financial Stability Board’s recommendations on the regulation, supervision, and oversight of crypto asset activities and markets, as well as global stablecoin arrangements. It is expected that more related regulatory requirements will be introduced in due course. 5. Design of Economic Models: The economic model of inflation-resistant stablecoins forms the foundation for ensuring their functionality and effectiveness. Designers need to contemplate how to construct an effective economic model to ensure that the stablecoin’s value accurately reflects the inflation rate. This may encompass determining the issuance, circulation, and burning mechanisms of the stablecoin, as well as adjusting its value through market mechanisms. 6. Complexity of Technical Implementation: The technical implementation of inflation-resistant stablecoins is a complex process, necessitating consideration of various technologies and algorithms. For example, how to accurately and in real-time acquire and process inflation data, how to design the smart contracts of the stablecoin to ensure its inflation-resistant properties, and how to ensure the scalability and efficiency of the system. Additionally, it is necessary to contemplate how to integrate with existing blockchain networks and other cryptocurrency projects to achieve widespread application of inflation-resistant stablecoins. 7. Market Acceptance and User Education: Market acceptance and user education are also critical factors for the success of inflation-resistant stablecoins. Designers and project teams need to consider how to educate users about the advantages and usage of inflation-resistant stablecoins, as well as how to promote their adoption for broader market acceptance. Significance of Inflation-Resistant Stablecoins for the Cryptocurrency Market: Exploring and developing inflation-resistant stablecoins holds multifaceted strategic importance for the cryptocurrency market. They not only provide more options for market participants but also drive innovation and development within the cryptocurrency industry. 1. Protection of Purchasing Power: Inflation-resistant stablecoins protect users’ purchasing power by pegging them to inflation indices. This is highly attractive for investors and users seeking asset preservation in high inflation environments. They provide a unique value storage and trading tool for the cryptocurrency market. 2. Increased Market Stability and Trust: Traditional stablecoins (such as USDT and USDC) are typically pegged to specific fiat currencies. However, in an inflationary environment, their actual value decreases along with the purchasing power of the fiat currency. By providing an inflation-resistant stablecoin, market stability and trust can be increased, reducing inflation risks for investors and users. 3. Driving Innovation in the Cryptocurrency Industry: The design and implementation of inflation-resistant stablecoins require addressing many technical and economic challenges, which contributes to driving innovation and development within the cryptocurrency industry. Addressing the challenges faced by inflation-resistant stablecoins can help the cryptocurrency market find new solutions and technologies, thereby advancing the entire industry. 4. Enhancing Practicality and Widespread Acceptance of Cryptocurrencies: Inflation-resistant stablecoins can serve as a more reliable value storage and medium of exchange, enhancing the practicality and widespread acceptance of cryptocurrencies. They may attract more participants from traditional financial markets into the cryptocurrency market and potentially encourage more merchants and service providers to accept cryptocurrency payments. 5. Promote Diversification of the Cryptocurrency Market. Inflation-resistant stablecoins provide the cryptocurrency market with more choices and diversity, allowing market participants to select different stablecoins based on their needs and risk preferences. This diversity can increase the complexity and maturity of the market, encouraging more people to participate in the cryptocurrency market. 6. Provide New Risk Management Tools for the Global Economy. Against the backdrop of increased global economic uncertainty, inflation-resistant stablecoins can serve as a new risk management tool, helping individuals and businesses more effectively manage their assets and financial risks. In summary, the exploration and development of inflation-resistant stablecoins hold significant strategic importance for the cryptocurrency market. They can bring more opportunities to the market, but also present a range of challenges and issues that need to be collectively explored and addressed by market participants, developers, and regulatory authorities. Analysis of Typical Projects: 1. Frax Price Index (FPI): The Frax Price Index (FPI) is one of the stablecoins in the Frax Finance ecosystem. It is the first stablecoin pegged to a basket of tangible consumer goods defined by the US Consumer Price Index (CPI-U). Unlike traditional stablecoins priced in national currencies, the FPI creates an independent unit of account fully backed by cryptocurrency collateral, providing consumers with a unit unrelated to any national currency. Regarding mechanisms for addressing inflation, the FPI introduces the following innovations: - Pegged to Consumer Goods: The design of FPI aims to anchor its value to a basket of tangible consumer goods defined by the average of the US CPI-U. This peg is unique as it ties the value of digital assets to tangible consumer goods, with the goal of preserving purchasing power and offering a level of price stability unprecedented in the volatile cryptocurrency market. - Inflation Tracking: The FPI mechanism uses the unadjusted 12-month inflation rate reported by the US federal government’s CPI-U. This data is then promptly submitted to the chain by a dedicated Chainlink oracle upon public release. The reported inflation rate is applied to the redemption price of the FPI stablecoin in the protocol’s contracts. This peg calculation rate is updated every 30 days in sync with the monthly CPI price data published by the US government. - Algorithmic Market Operations (AMOs): The FPI adopts similar Algorithmic Market Operations (AMOs) as the primary stablecoin FRAX in the Frax Finance ecosystem. However, the FPI’s model maintains a constant 100% collateral ratio (CR), ensuring that the growth of the protocol’s balance sheet aligns at least with the CPI inflation rate. If AMO earnings fall below the CPI rate, the protocol triggers specific operations to restore a 100% CR, such as selling FPIS tokens in exchange for FRAX stablecoins. - Stablecoin as the Unit of Account: The goal of FPI is to become the first on-chain stablecoin with a derived unit of account from a basket of goods. This aspiration is not only about becoming an inflation-resistant asset; it seeks to create a new stablecoin to represent transactions, value, and debt. In doing so, it provides a framework to better measure if real appreciation is indeed counteracting inflation and links the on-chain economy with a basket of tangible assets. - Governance and Revenue Distribution: The FPIS token is introduced as the governance token of the system. It has the right to minting fees from the protocol, and excess revenue is transferred from the treasury to FPIS holders. In cases where FPI financial revenue is insufficient to support the increased FPI backing due to inflation, new FPIS tokens may be minted and sold to bolster the treasury. The management of FPI is achieved through the Frax Price Index Share (FPIS) token, which was introduced by Frax Finance in April 2022. FPIS is intricately linked with the Frax Share (FXS) token, jointly providing economic support and governance structure for FPI. Through its unique governance mechanism and revenue distribution structure, FPIS offers support to the Frax ecosystem and provides unique governance and revenue opportunities for users of the FPI stablecoin. FPI adjusts the system monthly based on the on-chain Consumer Price Index to ensure that holders of FPI see an increase in its USD-denominated value every month based on the reported CPI growth. For example, if the inflation rate was 9.1% in June 2022, FPIS would increase at a rate of 9.1% over the following 30 days. 2. Reserve Protocol The Reserve Protocol aims to create a decentralized stablecoin called Reserve Token (RSV). It allows holders to engage in various transactions similar to fiat currencies. The goal is to mitigate risks through diversification and decentralization, while establishing a stablecoin that maintains its value, unlike traditional fiat currencies (such as the US dollar) that experience inflation, but without the high volatility seen in cryptocurrencies like Bitcoin. Diagram of RToken’s Issuance and Redemption Mechanism (Data source: https://reserve.org/protocol/rtokens/) In terms of addressing inflation, Reserve incorporates the following innovations: Dual Token Mechanism: Reserve employs a dual token mechanism consisting of Reserve Token (RSV) and Reserve Rights Token (RSR). RSV, as the stablecoin, is maintained in stability using a combination of other assets and RSR. This mechanism collectively supports the overall stability of the Reserve network. Governance Collateral Mechanism: RSV is collateralized by a basket of assets. This collateralization is crucial in maintaining the peg of RSV and ensuring its stability against inflationary pressures. When the market value of collateral tokens is insufficient to support the value of RSV, the protocol utilizes RSR to restore the peg. Reserve’s design innovations revolve around creating a mechanism capable of withstanding the impacts of inflationary market conditions, providing a stable value store, and facilitating exchanges. Through a dual-token system, collateral support, and a decentralized structure, RSV strives to offer a stablecoin solution that preserves purchasing power over the long term. 3. SPOT SPOT is a stablecoin designed to hedge against inflation, aiming to bridge the gap between speculative cryptocurrencies and dollar alternatives. Built on the Ampleforth and Buttonwood protocols, it is governed by the FORTH token. SPOT is defined as a perpetuity note backed by fully collateralized AMPL derivatives. While it shares many attributes of modern stablecoins, it is not pegged to any specific value. It employs a zero-liquidation tranching mechanism to provide stability, with prices potentially fluctuating within a range similar to AMPL. SPOT can be seen as a derivative that mitigates AMPL supply volatility. By introducing SPOT, the Ampleforth team hopes to offer the crypto-economic system its first truly decentralized unit of account. As a decentralized stablecoin immune to rebase and inflation, SPOT aims to enhance the overall distribution of the evolving digital financial system. In terms of mechanisms to address inflation, SPOT introduces the following innovations: ERC-20 Token and Perpetual Wrapper: SPOT functions as an ERC-20 token and a perpetual wrapper, abstracting away supply volatility of AMPL from holders. Its price will behave similarly to AMPL (which targets adjustment to the 2019 USD CPI), serving as a safe haven against volatility and inflation. SPOT will be fully collateralized by derivatives supported by AMPL. SPOT Rotator: By pledging AMPL through the SPOT Rotator, users can support the SPOT Flatcoin while maintaining AMPL rebase and earning AMPL rewards. SPOT is a decentralized Flatcoin utilizing a layering market instead of liquidation, enabling scalable stability. Diagram of SPOT Collateral Rotation Mechanism (Data source: docs.spot.cash/spot-documentation) Multi-Chain Availability: Due to the full-chain capabilities of the SPOT protocol, SPOT is not confined to a single blockchain. It can be used and traded on any compatible chain, such as Ethereum, Polygon (PoS), Arbitrum, Optimism, BNB Chain, and Polygon zkEVM. This allows for the maximization of unique opportunities on each chain, providing users with more reliable assets. Conclusion If there were an anti-inflation stablecoin capable of preserving its value across centuries, impervious to the erosion of inflation, it would be an exceptionally ideal asset. Imagine if you could earn some funds today and pass them on to your descendants, and a hundred years from now, they could use those funds to purchase goods equivalent to what you can buy today. What a scenario that would be! However, this is not something traditional currencies, even strong ones like the US Dollar, can achieve. In the long-term perspective of the cryptocurrency space, especially in the realm of stablecoins, industry innovation should not only expand existing asset categories, portfolios, and mechanisms, but it should also create new types of assets that remain stable in the short term, are more robust in the long term, and can withstand inflation. In this regard, anti-inflation stablecoins are bound to play a more crucial role. ---------------------- 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

Produced by: CGV Research Author: Cynic ， Shigeru TL;DR TON’s History: Telegram, founded by the Durov brothers, embarked on the development of its own blockchain — Telegram Open Network (TON) in 2018, aiming to meet the demands of its billion-user base. Through the Initial Coin Offering (ICO) of its token $Grams, TON raised over $1.7 billion. However, in 2019, due to a lawsuit from the U.S. Securities and Exchange Commission (SEC), Telegram abandoned further development of TON. Nevertheless, between 2020 and 2021, the NewTON team (now TON’s core team) resurrected TON development based on open-source materials, successfully rebranding it as The Open Network. Technical Features of TON: TON is tailored for massive user communities. It distinguishes itself by employing sharding technology, enabling multiple chains to process transactions in parallel, referred to as the “blockchain of blockchains”. TON’s architecture comprises three layers: masterchain, workchain, and shardchain. The masterchain serves as the coordinating hub, while actual transaction processing is handled by various workchains and shardchains. Additionally, TON’s sharding is dynamic, allowing for the aggregation of Shardchains into larger ones based on interaction patterns between accounts. Network Structure of TON: TON nodes communicate using the Abstract Datagram Network Layer (ADNL), providing the foundation for interactions between different Shardchains. By leveraging the Kademlia Distributed Hash Table (DHT) to locate other nodes in the network, TON has also established Overlay sub-networks specific to each Shardchain, ensuring effective communication. Applications and Prospects of TON: TON’s purpose extends beyond fundraising, aiming to establish a decentralized, secure, and reliable internet. Features like TON eSIM, TON domains, and TON storage are designed to enhance user privacy and data security. While current demand for decentralization might not be high, TON has allocated substantial funds for its ecosystem and, with its massive user base, is poised to attract attention and grow in the future. Despite facing challenges upon its initial launch, TON continues to garner attention in the blockchain field due to its innovative technology and vision for a decentralized future network. Its robust financial backing and extensive user community lay a solid foundation for its future development. TON’s Past In 2018, the founders of Telegram, the Durov brothers, began exploring blockchain solutions suitable for Telegram. At that time, no existing blockchain could support Telegram’s billion-user community, so they decided to design their own Layer 1 chain, naming it Telegram Open Network, or TON for short. A few months later, through an Initial Coin Offering (ICO) of TON’s native token $Grams, TON raised over $1.7 billion. In 2019, the Telegram team released relevant documents and successively launched two testnets. In October 2019, the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Telegram, accusing it of conducting an unregistered securities offering. The Telegram team halted the mainnet launch of TON and eventually chose to give up the project in their battle with the SEC, returning the ICO funds to investors. Between 2020 and 2021, the NewTON team (now TON’s core team) resurrected TON’s development based on open-source materials. In May 2021, the community decided to rename the long-running Testnet 2 to Mainnet. The NewTON team was also renamed the TON Foundation, serving as a non-profit community to support and develop TON. This is the TON we are familiar with today, officially known as The Open Network. Of the Network From the very beginning of the story, TON was designed for social networks with a massive user base, and the TON Blockchain is Telegram’s blockchain. Going back to that time, within the outdated technological framework, mainstream blockchain’s TPS (transactions per second) couldn’t achieve significant improvement. How could it possibly handle Telegram’s billion-user count and the potential for millions of transactions per second? The TON team’s idea was that a single blockchain’s TPS could only reach a few tens of transactions per second, so why not create multiple chains? TON employs sharding technology, distributing the workload of processing transactions across multiple chains, forming a blockchain network composed of multiple blockchains, referred to as a “blockchain of blockchains”. To be specific, TON Blockchain adopts a pyramid-shaped three-layer architecture, with each layer accommodating a type of blockchain: masterchain, workchain, and shardchain. Masterchain serves as the central coordinator for TON Blockchain, and there is only one of its kind. This chain encompasses protocol parameters, a collection of Validators, corresponding shares, the current operational Workchains, and their respective Shardchains. Lower-level chains submit their latest block hashes to the Masterchain, enabling the determination of the most recent state when cross-chain message retrieval is required. Masterchain acts as a coordinator and anchor, while the actual work is carried out by individual Workchains. The system can accommodate up to 2³² Workchains. Each Workchain, meeting interoperability standards, can flexibly customize rules such as address format, transaction types, native tokens, and smart contract virtual machines. It’s important to note that Workchain is a virtual concept; it exists as a collection of Shardchains and has no physical entity. To enhance processing efficiency, each Workchain is further divided into Shardchains, with a maximum of 2⁶⁰. Shardchains adhere to the rules set by their parent Workchain, distributing the workload among all Shardchains. Each Shardchain serves only a portion of the collective accounts. In typical sharding, the division is top-down, often based on account address prefixes. For instance, if a Workchain is evenly divided into 256 shards, accounts with address prefixes like 0x00, 0x01, …… 0xFE, 0xFF would be distributed across different Shardchains. In TON’s sharding mechanism, it’s a dynamic bottom-up process. Initially, each account is considered as a separate Shardchain, and then they are combined based on their interactions to form larger Shardchains, ensuring each Shardchain has a sufficient number of transactions. Now, looking back at the architectural diagram of TON Blockchain, do you see some similarities with network architecture? We have reason to believe that the Durov brothers, with their background in networking, were inspired by network architecture in the design of TON. In the initial scenario, each network device operates independently as a single point (each account as a separate Shardchain). Due to frequent communication between some network devices, they are grouped into a local area network (combining individual Shardchains into larger ones). Different local area networks communicate with each other through higher-level nodes (interoperating between Shardchains through the Masterchain). TON Blockchain is, in essence, another form of network, embodying the essence of “TON of the network”. By the Network As a distributed system, blockchain requires nodes to communicate through a P2P network rather than relying on centralized servers and client-server architecture. For monolithic blockchains like Bitcoin and Ethereum, spreading blocks and transactions through gossip protocols suffices. However, for TON, the multi-chain architecture places higher demands on network protocols. TON nodes utilize the Abstract Datagram Network Layer (ADNL) for data transmission, abstracting the network layer in the traditional TCP/IP layered architecture. To facilitate identity recognition, nodes communicate using Abstract Network Addresses instead of considering IP addresses. These addresses are 256-bit integers, derived from ECC public keys and other parameters’ hashes, facilitating communication encryption and decryption between nodes, providing the foundation for segmentation between different Shardchains. TON employs the Kademlia Distributed Hash Table (DHT) to locate other nodes in the network. When a client needs to submit a transaction to a Validator on a specific Shardchain, it can use a key to look up and retrieve the Validator’s location in the DHT. The crucial part lies in the Overlay network. Since different Shardchains operate independently and have no interest or capability to handle transactions on other Shardchains, it’s necessary to construct an Overlay sub-network for each Shardchain within the TON Network, open to nodes wishing to engage in communication. The Overlay network communicates internally using a gossip protocol based on ADNL. With its distinctive network protocol design, addressing, transmission, and application finalized, TON achieves an infinitely sharded scheme, attaining exceptionally high Transactions Per Second (TPS). This embodies TON’s essence as “TON by the network”. For the Network In today’s era of “myriads of chains,” for a public blockchain to stand out, it must play to its strengths and distinguish itself. Ethereum’s strength lies in TVL and its application ecosystem, Solana boasts a vast developer community, and Arbitrum excels in technical reliability and operational capabilities. TON Blockchain currently occupies a relatively new but rapidly rising position in the blockchain market, and it needs to set itself apart with its unique multi-chain architecture and high scalability. Firstly, its technical foundation positions it as a highly flexible and scalable platform. Thanks to its innovative multi-chain architecture, it can effortlessly handle a large volume of transactions, addressing scalability issues faced by many other blockchains. Secondly, TON’s close integration with Telegram gives it a competitive edge. Telegram’s massive user base provides TON with a substantial potential user pool, which is a distinct advantage that many emerging blockchains don’t have. However, it also faces some challenges. Other blockchain projects have established large communities and ecosystems, so TON needs to continuously work on attracting developers and users. Additionally, it needs to compete with other blockchains that offer powerful features and innovative solutions, which means it must keep innovating to maintain its competitive edge. In the competition with other mainstream blockchains, TON must prove its technical superiority and practicality, which will be crucial for its future development. By demonstrating the security, speed, and efficiency of its system, it may attract more enterprise and individual users. Overall, TON Blockchain is in a highly competitive and dynamic market environment. While it has some notable advantages, it still needs to prove its worth, especially in a market where many mature and successful projects already exist. So, what are TON’s strengths? As various scaling solutions mature and become operational, “high performance” is no longer the sole determining factor for a chain’s success. How does TON maintain the vitality of its ecosystem? CGV Research believes there are two directions: social networks and network services. Looking at the social network aspect, one only needs to consider the demands users have while using Telegram. There is a significant amount of transaction settlements on Telegram, leading to TON payment. Its operation is similar to the Bitcoin Lightning Network, and the integrated wallet in Telegram reduces the entry barrier. Users also have a demand to showcase their artistic aesthetic, which TON NFT serves as an excellent social tool. Engaging in games with friends is one of the most enjoyable activities, so GameFi can undergo rapid expansion through social networks. Network services are TON’s core expertise, as it has reengineered everything from traditional networks, shaping what is referred to as the future of the internet. The anonymous eSIM realizes Telegram’s initial vision: a privacy-protecting social network. TON domains enhance readability, making it easier for users to find each other in the TON network. TON addresses, TON proxies, TON WWW aim to provide a decentralized, secure, and reliable internet for everyone. TON storage is an upgraded version of Torrent, ensuring the safety of user data through decentralized storage. TON employs blockchain technology not only to raise funds but also to build a more decentralized, secure, and reliable internet. This embodies TON’s essence as “TON for the network.” Conclusion Unfortunately, judging by the current level of activity in the TON ecosystem, it seems that there aren’t too many users in need of a more decentralized, secure, and reliable internet. This is a challenge faced by all blockchain projects at present. Most people enter the blockchain ecosystem in pursuit of financial gains rather than a genuine need for decentralized services. Without the wealth-creating effect, projects find it challenging to sustain ongoing attention. Fortunately, the TON ecosystem isn’t lacking in funds. TON has established an ecosystem fund of several hundred million dollars, dedicated to investing in and incubating projects within the TON ecosystem. With the largest monthly active user count in the entire Web3 world, we have reason to believe that the future of the TON ecosystem will experience a surge, making it worthy of sustained attention. ---------------------- 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

Produced by: CGV Research Author: Cynic ，Leo Introduction Recently, the Ethereum Rollup, which is garnering the highest market attention, has seen frequent developments in Rollup-as-a-Service (RaaS). Could we be on the verge of a Rollup-dominated summer? This article provides an overview, ecosystem analysis, and future prospects of RaaS, aiming to offer insights from a comprehensive perspective. TL;DR In the blockchain space, a “trilemma” exists, where achieving security, decentralization, and scalability simultaneously is a challenging task. Bitcoin and Ethereum have prioritized the first two, but have faced challenges in supporting scalability. This means a surge in transactions over a short period leads to network congestion and high transaction fees. While Bitcoin’s ecosystem initially proposed scalability, aiming to build a virtual second layer for transactions on top of Bitcoin, with the main chain being used for settlement. Ethereum has attempted to achieve enhanced scalability through various approaches like State Channels, Sidechains, and Plasma. On September 5, 2018, Barry Hat introduced the concept of Rollup on Github. Eventually, Rollup technology gained community recognition, and the Ethereum Foundation labeled it as the sole Layer 2 technology. In a span of five years, Ethereum Rollup, with the highest market attention, has recently witnessed the emergence of RaaS. Are we approaching a Rollup-dominated era soon? This article delves into the overview, ecosystem, and future development of RaaS, aiming to provide comprehensive insights. RaaS Overview From the technology perspective, Rollup’s implementation is complex, demanding high levels of specialized skills and development capabilities. This high entry barrier contradicts the permissionless ethos of blockchain. RaaS packages Rollup as a service, offering a more user-friendly and simplified Rollup deployment experience for enterprises, organizations, and individuals. It is similar to Cosmos SDK and Polkadot Substrate. Similar to what Layer 1 does for blockchain deployment, RaaS provides a universal SDK for Rollup, enabling autonomous Rollup development and deployment through simple configurations, ensuring project sovereignty through customization. Some RaaS projects even offer one-click deployment without the need for programming skills. Rollup is highly modular, allowing independent iterative upgrades for the Sequencer and Prover. In RaaS, there are projects specializing in the design and development of Sequencers and Provers, providing services for all Rollup implementations. RaaS brings about the following changes: 1. More cost-effective, efficient, and equally secure application chains: Rollup moves the expensive computation off-chain, making transactions cheaper and more efficient. By using the underlying public chain as the DA layer and validating proofs through smart contracts, it achieves the same level of security as the base layer. 2. Experimental ground for innovative ideas: Rollup uses the same virtual machine environment as the underlying public chain but at a lower cost. It serves as a battle-tested environment for proposals from the community before migrating them to the underlying public chain. 3. Enhanced interoperability: Rollup services from the same RaaS enable easy definition of message rules thanks to the use of a similar technical architecture. This eliminates the need for cross-chain bridging, allowing direct message transmission between Rollups and enhancing interoperability. RaaS Ecosystem Broadly speaking, all projects contributing to Rollup deployment are part of the RaaS ecosystem. Following the modular principle, this article categorizes the RaaS ecosystem from bottom to top into four levels: DA (Data Availability), SDK (Software Development Kit), Sequencer, and No-Code deployment. 2.1 DA (Data Availability) In theory, any public blockchain can serve as the DA layer to store Rollup transaction data. However, without a stable and correctly functioning DA layer, Rollup cannot reliably verify state transitions. For Rollup, there are two options. One is Smart Contract Rollup, which is the mode chosen by most Rollups. It relies on the underlying public chain for settlement and data availability. The other is Sovereignty Rollup, which separates data availability from settlement, relying solely on the data availability of the underlying public chain while handling settlement independently. Representatives of the former typically select fully-featured public chains that are EVM compatible, Cosmos compatible chains, or platforms like Solana. The demand for the latter has led to projects specializing in data availability, including Celestia, EigenLayer, Avail, and others. Celestia Celestia is a PoS chain built using the Cosmos SDK, employing a modified Tendermint consensus algorithm and encoding block data using Reed-Solomon (RS) codes. By utilizing data availability sampling techniques, Celestia further reduces the verification cost for light nodes, which only need to download partial block data to verify data availability. Moreover, Celestia employs an Optimism mechanism to determine if a block has been correctly encoded. It initially chooses to optimistically assume correct encoding and, if no fraudulent proof is received within a period, confirms the block’s correctness. While this improves runtime efficiency, it introduces some latency. Avail Supported by Polygon Labs, Avail utilizes the BABE+GRANDPA consensus algorithm and also employs data availability sampling techniques. Unlike Celestia, Avail uses validity proofs to verify that blocks have been correctly encoded, employing the more efficient KZG proof rather than Merkel Proof. EigenLayer EigenLayer serves as a solution for heavy staking, leveraging liquidity from Ethereum staking to provide economic security for projects. With EigenLayer, new protocols don’t need to build their own distributed validation network. They can utilize the security of ETH staking through EigenLayer. EigenLayer excels in lightweight, permissionless, and decentralized scenarios. In the narrative of Ethereum scalability, the best use case lies within RaaS. Since DA only encodes and commits to transaction data without performing transaction computation, it imposes lower requirements on nodes. With the use of the PoS algorithm, staked liquidity directly reflects blockchain security and availability, providing a prime opportunity for EigenLayer to shine. EigenLayer exists as a smart contract on Ethereum, using KZG validity proofs to verify correct block encoding. However, the current EigenLayer has not yet adopted data availability sampling techniques, which may be related to Ethereum’s upcoming upgrade plans. 2.2 Sequencer The role of the sequencer is to order received user transactions. Subsequent execution and block production will follow this order. In Ethereum’s architecture, due to the same entity handling both ordering and execution, validators have excessive power, leading to phenomena like MEV and censorship, which greatly impacts user experience. Separating ordering from execution is an embodiment of the PBS (Propose Builder Separation) concept. However, the current Rollup architecture still heavily relies on centralized sequencers to determine transaction order, posing risks of single points of failure and censorship. A decentralized solution set still needs to be sought after. Astria Astra provides a solution with a shared sequencer. User transactions from different Rollups are collected into the Astria sequencer. As for Rollup nodes, they can directly obtain data from Astria for lower latency soft confirmations. Alternatively, they can wait for Astria to submit data to the DA layer and obtain the strongest finality confirmation. Since the data submitted by Astria contains transactions from multiple Rollups, each Rollup needs to eliminate invalid transactions (including those from other Rollups) based on the consensus mechanism before processing the remaining data. Astria only provides data, leaving the choice of consensus to the Rollup nodes, hence safeguarding the sovereignty of Rollup. OP Stack The default configuration of OP Stack uses a dedicated sequencer to process transaction ordering. A simple modification involves using a licensed collection of sequencers, which can reduce the possibility of sequencer node misconduct through the PoS mechanism. Following the introduction of the concept of Superchain, shared sequencers became an inevitable choice for OP Stack. Shared sequencers bring atomic cross-chain functionality, enhancing interoperability between Superchains. Espresso Espresso aims to leverage the liquidity of Ethereum stakers to achieve shared security through over-staking. Espresso integrates sequencers and DA, providing sorting results to Rollups via a REST API, thereby masking the details of DA. Consensus security is verified by smart contracts on L1, which leads to stronger reliability. Saga Initially serving a role similar to the Cosmos Hub, Saga provides shared security for application chains using Cosmos SDK on Saga with its own set of validators. Amidst the fervor of Rollup, Saga collaborates with Celestia, utilizing Celestia as the DA. Saga then transforms its validators into sequencers, and exchanges information with upper-layer Rollups through Optimistic Rollup IBC, providing shared security. SUAVE Unlike other sequencers, SUAVE consistently targets the MEV market. Flashbots leads the MEV race, and SUAVE is a product proposed by them for cross-chain MEV capture, claiming that “The Future of MEV is SUAVE.” Through the shared sequencer provided by SUAVE, atomic cross-chain transactions become possible, which contributes to the efficiency of capital markets on different chains. EigenLayer As mentioned earlier, EigenLayer has use cases in the DA layer. Decentralization of the sequencer is also a strong suit of EigenLayer. Since the sequencer is responsible only for ordering and not execution, it imposes low requirements on nodes. The key to decentralization lies in reducing the possibility of node misconduct through a penalty mechanism. EigenLayer provides a deep staking pool, utilizing Ethereum’s decentralization to nurture the decentralization of Rollup sequencers. 2.3 SDK (Software Development Kit) Similar to the Cosmos SDK, the SDK provided by RaaS enables developers to reuse a plethora of software modules, allowing for cost-effective customization of the required Rollup, thereby making software development less complex. Rollkit (Optimism) Originally incubated within the Celestia community, Rollkit has now evolved into an independent project. Utilizing Celestia as the DA layer, Rollkit offers an ABCI-compatible client interface, providing services for all Rollups compatible with ABCI (on the Cosmos chain). Currently, Rollkit employs a single centralized sequencer and supports integration with Cosmos SDK, Ethermint, and CosmWasm. Users have the flexibility to choose their preferred execution environment. In the future, Rollkit will be further developed to support a broader range of configuration services. Dymension (Optimism) Dymension divides its service into front-end and back-end components. The front-end supports customizable RollApps, backed by the Dymension RDK (modified Cosmos SDK). The Dymension Hub in the back-end coordinates the entire system and handles DA and sequencing. Dymension operates on the Optimism mechanism, where the Dymension Hub optimistically receives status updates from the sequencer. If valid fraud proofs are received, it rolls back state changes. RollApps have currently achieved an average latency of 0.2 seconds and a peak TPS of 20,000. Dymension employs an elastic block production scheme. When there are no transactions in a block, block production is halted, significantly reducing sequencer operational costs. Currently, Dymension’s product is still in development, and there is no explicit choice for the DA layer. Sovereign (ZK) The Sovereign SDK provides zk-Rollup as a Service, offering general modules for building blockchains and a zkVM that shields the underlying zero-knowledge proof details. This allows developers to write programs in Rust, and the SDK can compile them into an efficient zk-friendly format. As the project name suggests, the Sovereign SDK emphasizes sovereignty. Rollup determines the legality of state transitions through custom consensus rules, without the need for DA layer verification. Currently, the Sovereign SDK is adapted to Celestia and Avail at the DA layer. It supports Risc0’s zkVM and enables deployment and demonstration of Rollup. Stackr (Unknown) Stackr proposes a more radical innovation by migrating the microservices architecture from the traditional internet to the blockchain. It introduces the concept of micro-rollup. The relationship between conventional Rollup and micro-rollup is akin to that of a virtual machine and container. With the Stackr SDK, developers only need to define the desired data structures and state transition functions, leaving the rest to Stackr. Stackr supports various execution environments, such as EVM, Solana VM, and FuelVM. It allows users to choose the environment they wish to use. AltLayer (Optimism) AltLayer, as a decentralized and flexible RaaS, provides a developer-oriented SDK and a No-Code Dashboard that requires no coding experience, hence enabling one-click chain deployment. AltLayer offers a unique form of elastic Rollup called the Flash Layer. When application demand surges, a Rollup chain can be rapidly deployed. Once demand returns to normal, settlement occurs on L1 and the Rollup can be discarded, achieving horizontal scalability commonly seen in internet systems. AltLayer’s goal is to support multiple chains and execution environments. Currently, it has implemented support for EVM and WASM. OP Stack (Optimism) OP Stack is built to support the Optimism Superchain, a proposed network with shared security, communication layer, and collaborative development stack at the L2 network. Following the Bedrock upgrade, Rollups created using OP Stack are natively compatible with the Superchain. Of course, components of OP Stack can be modified to obtain customized features, and projects like base and opBNB are developed based on OP Stack. The security and availability of OP Stack have been thoroughly tested on networks like OP Mainnet and base. However, challenges persist, including a lack of fraud proofs and centralization of sequencers. OP Stack is exploring new avenues, such as adopting more cost-effective DA layers, utilizing ZK Proofs, and implementing shared sequencers. Arbitrum Orbit (Optimism) On June 22nd, Offchain Labs released tools for launching the Arbitrum Orbit Chain. Orbit Chain operates as Layer3 on top of Arbitrum Layer2, allowing users to settle on one of three Layer2 options: Arbitrum One, Arbitrum Nova, or Arbitrum Goerli. Users have the choice between using Rollup or Anytrust technology. The key distinction is that Anytrust employs a DAC and does not require transaction data to be submitted on-chain, resulting in lower costs but slightly weaker security. Orbit Chain’s advantages lie in its straightforward chain launch process, interoperability with the Arbitrum ecosystem, real-time updates via Nitro, and compatibility with EVM+ through Stylus (supports Rust, C, C++, and runs on the WASM virtual machine). Users can customize and launch their own Orbit Chain without having to acquire permissions, but settlement must occur on Arbitrum Layer2. Otherwise, users need to contact Offchain Labs or the Arbitrum DAO for authorization. ZK Stack (ZK) On June 26th, zkSync announced that it would modify existing open-source code in the coming weeks to introduce ZK Stack. This enables users to build their own customized ZK superchains. Unlike Arbitrum’s Orbit Chain, ZK Stack places emphasis on sovereignty and interoperability. Users have complete customization based on their needs, and chains built with ZK Stack can achieve bridgeless interoperability. ZK Stack can be used for constructing both Layer 2 and Layer 3, and the official team has not imposed any restrictions, nor is it required to settle on zkSync. From this perspective, ZK Stack seems to offer a higher degree of sovereignty. Starknet Stack/Madara (ZK) Originally, Madara was positioned as a sequencer on Starknet. Leveraging technological expertise, the team successfully developed Starknet Stack based on the original product, which facilitates the creation of application-specific Rollups on Starknet. With Ethereum as the DA layer and utilizing Starknet’s shared prover, settlements occur on Starknet. From the perspective of availability, Madara has already assisted a team in achieving the launch of an application-specific Rollup within 24 hours during the PragmaOracle hackathon, complete with a video demonstration. In comparison to zkSync’s ZK Stack, Madara exhibits a higher level of completeness. 2.4 No-Code Deployment No-code deployment is a lower barrier solution that provides non-developers with an option for one-click chain deployment. It has the potential for increased adoption. Caldera (Optimism) Caldera Chain offers a fully customizable one-click chain deployment solution. At the execution layer, it supports OP Stack and Arbitrum Orbit, while the settlement layer can choose from EVM-compatible chains like Polygon, BSC, Evmos, and others. The DA layer is supported by EigenLayer and Celestia. In addition to the Rollup chain itself, Caldera also provides a range of complementary infrastructure, including a blockchain explorer, testnet faucet, oracle, and bridges supported by Hyperlane, further reducing the cost of chain deployment. Eclipse (Optimism+ZK) Eclipse boasts high levels of customizability. It supports EVM and SolanaVM at the execution layer, integrates Celestia, Avail, and EigenLayer at the DA layer, and offers Optimistic settlement at the settlement layer. It is also in the process of developing RISC0 zkVM for ZK settlement support. Users can also customize the chain’s permissions (permissioned/unpermissioned), choose whether to charge Gas Fees, allow MEV, specify certain opcodes, and adjust block size. This grants them a high degree of flexibility. Opside (ZK) Opside’s most notable feature is its establishment of a decentralized ZKP market. Originally, it was intended to describe the Prover as a separate layer, but due to the limited number of projects, this idea was abandoned. Zero-knowledge proof (ZKP) places high demands on computational power. Against the backdrop of a growing market share for zkRollup, the decentralization of ZKP is a major direction for future development. Opside employs a permissionless PoW consensus mechanism to incentivize miners to generate ZKPs, ensuring the security and availability of zkRollup without requiring chain deployers to consider proof generation. At the validator level, a PoS mechanism is used to lower the barrier to entry and promote validator decentralization. Opside offers customized services, allowing users to choose between zkEVM solutions like zkSync, Starknet, and Polygon zkEVM. Users can also modify the economic model and adjust Gas fees. Future Development of RaaS More ZK Compared with Optimistic Rollup, zkRollup upgrades security from economic guarantees to cryptographic guarantees, hence providing a higher level of security. It eliminates the need for long challenger periods, which results in lower confirmation delays, and offers higher data compression, making DA more cost-effective. While Optimism’s solution has gained a significant market share due to its high technical maturity and early-stage advantage in product releases, ZK, as a revolutionary technology, is expected to play an even more crucial role in the future. Vitalik’s speech in Montenegro, placing ZK technology on an equal footing with blockchain technology, indirectly reflects the importance of ZK. As the technology continues to mature, more zk-Rollup as a Service projects will come into the public eye, providing users with more choices. More Non-Ethereum To this day, the Ethereum ecosystem still holds an absolute dominant position in the entire blockchain industry. Despite continuous innovation in other communities, the throne of the Ethereum ecosystem remains unshaken. In the realm of RaaS, things seem to be a little different. Due to Ethereum’s low-capacity and high-cost data storage, people can choose more cost-effective DA layers like Celestia, Avail, or Polygon. Ethereum is non-modular, making modifications complex. People can opt for highly modular solutions like Cosmos SDK. EVM’s execution efficiency is low, and people can choose more efficient options like Solana VM, Move VM, and CairoVM. Diversity in solutions outside the Ethereum ecosystem will bring new vitality to RaaS. More Modularity Modularity serves two purposes: it allows each module to iterate quickly, improving development efficiency, and significantly reduces the complexity of customization. In the current market environment, it’s nearly impossible to independently develop an all-in-one solution. The overall pace of innovation will never catch up with the rapid iteration of small modules. Extreme customization requirements lead to further refinement of module divisions. Without modularity, projects may ultimately be fragmented by other projects, as seen with OP Stack and Arbitrum Orbit being separated by Caldera from execution layers. More Customization As scaling technologies mature, transaction costs decrease, and infrastructure improves, people will realize the importance of application-specific rules and patterns. A one-size-fits-all solution cannot accommodate complex application ecosystems. Therefore, more customization is needed. From block size to data structures, from transaction fees to transaction delays, from admission mechanisms to security assumptions, from contract engines to token empowerment, the level of Rollup customization will gradually increase, providing more flexible solutions for applications. More Interoperability As mentioned earlier, the Ethereum ecosystem dominates the blockchain ecosystem, largely due to the massive liquidity it has locked in. In the crypto market, since each chain exists independently, liquidity cannot exist simultaneously on two chains. An increase in the number of Rollups will further fragment liquidity, posing a serious problem. Stronger interoperability can reduce cross-chain friction, allowing liquidity to flow smoothly between different chains and to be even referred to as shared liquidity. Projects like OP Stack, Arbitrum Orbit, ZK Stack, and Starknet Stack are attempting to build extensive application chain ecosystems using the same technology stack. Due to their similar technical architectures, Rollups built with them can achieve native interoperability without the need for cross-chain bridges. More Heavy Staking Currently, many services in RaaS adopt a PoS model, using economic penalties to increase the cost of malicious behavior and enhance security. However, economic security requires a deep staking pool as a guarantee, leading to low capital utilization and increased startup costs for service providers. Heavy staking could be a great solution. By utilizing the massive staking pool of Ethereum’s consensus, sharing security with other services through heavy staking not only increases income for stakers but also improves capital utilization. Currently, EigenLayer and Espresso are working on related initiatives, and it’s foreseeable that more services will rely on heavy staking to ensure economic security. In summary, the most significant beneficiary of RaaS development is the application chain. Can the concept of application chains proposed by Cosmos and Polkadot in the early days experience a renaissance and achieve an explosion in the RaaS ecosystem? We’ll have to wait and see. Perhaps, only innovation at the application layer can drive a major breakthrough in the RaaS ecosystem. After all, even the best road needs vehicles running on it to be considered good infrastructure. ---------------------- 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

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.