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.

Display: CGV Research Author: Cynic Nowadays, Ethereum occupies half of the infrastructure of the blockchain industry, but its dominant position in the mainnet is being challenged by many latecomers. One of the industry consensuses is that multiple chains will coexist in the future, and cross-chain or even full-chain will be the most critical link in the multi-chain ecology. However, cross-chain bridges connecting various blockchain networks are plagued with security issues, and the cross-chain ecosystem seems to be in jeopardy. The emergence of ZK Bridge (a cross-chain bridge using zero-knowledge proof) will effectively solve various defects of the current cross-chain solutions and realize the interconnection of all chains. Heimdallr guards Rainbow Bridge Image source: Klugh, Maria Tales from the Far North (Chicago, IL: A. Flanagan Company, 1909) In Nordic mythology, Heimdall is a mysterious and important god who guards Bifröst, the Rainbow Bridge connecting Asgard to Midgard. If we compare the Rainbow Bridge connecting Asgard and Midgard to the cross-chain bridge, can zero-knowledge proof shoulder the responsibility of guarding cross-chain security and serve a role like the invincible Heimdallr on the Rainbow Bridge? This report presents the comprehensive analysis of the ZK Bridge by the Investment & Research Team of CGV Research, and strives to explore the development potential of zero-knowledge proof in solving cross-chain security issues and removing high-performance bottlenecks. TL; DR — What is ZK Bridge? ZK Bridge is a cross-chain bridge using zero-knowledge proof, with zero-trust, license-free, scalable, and efficient features. — Why do we need ZK Bridge? The current centralization and trust assumption of cross-chain bridges lead to poor security, frequent vulnerabilities, and serious losses; while cross-chain bridges that emphasize security are low in efficiency and high in cost. ZK Bridge can simultaneously maintain security, decentralization, and efficiency. — How to implement ZK Bridge? A light node solution based on ZK-SNARK — Related project introduction: Succinct Labs, zkIBC by Electron Labs, zkBridge by BerkleyRDI. What is a cross-chain bridge? Cross-chain bridge is a technological solution that allows for the transmission of value and information between different blockchain networks. By using a series of crypto and protocol techniques, the cross-chain bridge has realized the safe, verifiable, and trust-free transfer of assets and data, thus promoting interoperability between blockchain networks. Generally speaking, we divide cross-chain bridges into direct asset cross-chain bridges and universal message cross-chain bridges. Why has cross-chain bridge become a target of criticism? As a centralized pool of huge funds, the cross-chain bridge is naturally attractive to hackers — the benefits brought by successful attacks are huge. Besides, security assumptions may differ between chains, the code of assets across chains is more complex and code audits cannot identify all vulnerabilities, thus providing opportunities for hackers who are driven by huge incentives. The specific attack schemes are divided into the following types: Centralized attacks: Some cross-chain bridges rely on centralized relays or validators to transmit and validate transactions. This kind of design may lead to a single point of failure, and attackers can destroy the entire cross-chain system by attacking these centralized components. Economic incentive attacks: Cross-chain bridges usually require setting appropriate economic incentives to ensure the honest acts of validators and relays. However, it is not easy to design appropriate incentive mechanisms, and insufficient or imbalanced incentive designs may cause malicious behaviors or collusive attacks. Double-spend attack: In some cases, attackers may attempt to spend the same asset on the source and target chains, resulting in double spending of the asset. It is necessary to design effective preventive measures for cross-chain bridges to prevent double-spend attacks. Replay attack: Attackers may attempt to replay transactions on the target chain that has already taken place on the source chain to obtain improper benefits. It is necessary to implement transaction validation and anti-replay mechanisms for cross-chain bridges to prevent such attacks. Off-chain coordination attacks: Some implementations of cross-chain bridges rely on off-chain coordination, such as state channels or side chains. Attackers may disrupt the normal operation of cross-chain bridges by disrupting or attacking off-chain coordination. Inter-chain consensus attack: As the cross-chain bridges involve multiple blockchain networks, different networks may adopt different consensus algorithms. Attackers may exploit the weaknesses of inter-chain consensus to launch attacks, such as implementing a 51% attack on a single chain to affect the correctness of cross-chain bridges. Overview of current mainstream cross-chain bridge solutions There are no solutions. There are only trade-offs. — — Thomas Sowell Thomas Sowell (a representative of the Chicago School of Economics) The core cross-chain issue is how to verify the reliability of messages from another chain. Different solutions have been proposed to address this issue, including different levels of trust assumptions. Trust graph of cross-chain bridges Comparison of technical parameters of current mainstream cross-chain solutions The combination of light nodes and relays is the earliest cross-chain solution, represented by BTC Relay, which aims to use Ethereum services by paying Bitcoin. However, due to a large amount of on-chain computing and storage, it is expensive to run on-chain light clients. Moreover, due to the heterogeneity of consensus algorithms and signature algorithms between different chains, the cross-chain solution is not scalable. Therefore, it is necessary to implement the light client and relay for each pair of two specific chains. So far, only IBC on the Cosmos application chain has achieved large-scale on-chain light clients. The success lies in the extremely high-level standardization of Cosmos application chain, and each application chain needs to run the Tendermint consensus and comply with IBC standards. In a multi-chain world with various consensus mechanisms, signature schemes, and virtual machines, it is difficult to verify on-chain light clients. Current mainstream cross-chain projects shift the verification process off-chain to avoid the high cost of on-chain light nodes, causing different levels of trust assumptions and potential fraud risks. The Investment & Research Team of CGV Reserach introduces some of the key solutions according to the level of trust, from high to low. Cross-chain solution 1: Multiple signatures without pledges Typical projects include Multichain, Wormhole, and Ronin Bridge. These all require the implementation of multi-signature and MPC, which require entity verification of transactions and verification (i.e., signature) of their validity. After passing the threshold (often 2/3), the transaction is considered to be validated. In this solution, each entity needs to run the entire node for verification. There is no cost for lies without pledges, but reputational damage caused by dishonesty may lead to greater potential costs. Hence, the verification of nodes is often associated with fixed off-chain identities to increase the cost of doing evil. Multichain’s message verification is guaranteed by the SMPC network, which consists of 24 nodes. Messages signed by more than 2/3 of nodes are considered to pass verification, and SMPC nodes do not need to pledge and are relatively fixed. AnyCall’s security is based on the trust assumptions of SMPC nodes. The trust layer of Wormhole is constructed using the PoA mechanism, with a set of trusted Guardians responsible for verifying inter-chain messages. Guardians are specific entities endorsed by capital and reputation. Currently, Wormhole has 19 Guardians, including well-known large companies such as FTX, Everstake, and Chorus One. Cross-chain solution 2: Oracle and relayer A typical project is LayerZero, which ensures cross-chain security by separating the delivery of messages and proof of message from verifying the delivery transaction of relayer. The core design idea of LayerZero is the separation of oracle and relayer. In LayerZero, relayer is responsible for delivering messages and proof of message, while oracle is responsible for obtaining block headers from the source chain as needed according to the block where the messages are located, and then the terminal on the target chain verifies the transactions delivered by relayer according to the block headers obtained by oracle. As long as the two do not collude, cross-chain security can be guaranteed. It is worth noting that although Layerzero calls its technical solution as Ultra Light Node, the solution is fundamentally different from light client. LayerZero verifies the proof of transaction provided by relayer through the block header provided by oracle. The verification occurs at the end of the target chain and is the native validation. However, the verification of the block header is completed by a third-party oracle network as an external validator, and the verification process occurs off the chain. Cross-chain solution 3: Multiple signatures with pledges On the basis of MPC, a layer of proof of equity has been added. Typical projects include Celer, Axellar, deBridge, Hyperlane, and Thorchain. If evil is committed, the validator’s pledge will be significantly reduced, effectively increasing the validator’s cost of deception in economic terms. A problem that PoS Bridge faces is the imbalance of validators. To alleviate this problem, Axellar adopts the quadratic voting scheme, where the signature weight will be proportional to the square root of the $AXS pledged by the validator; while Hyperlane adopts the “verifiable fraud proof” scheme, where the validators’ joint wrongdoing will be immediately detected and Slash will be executed; pNetwork and Bool Network directly require all nodes to pledge the same number of tokens. Cross-chain solution 4: Optimistic validation The knowledge of game theory is used to increase the risk of users’ evil through the game scenarios between users. Typical projects include Nomad and Synapse. The basic logic of optimistic verification is to set up a group of challengers and a challenge window period based on external verification to challenge incorrect verifications. The validator needs to pledge, and when the behavior is inappropriate, the challenger will challenge and provide proof of fraud. If the challenge is successful, the validator’s pledge will become the challenger’s reward. Nomad has a challenge window period of 30 minutes. In terms of optimistic verification, it requires that at least one challenger is honest and there are economic incentives to challenge. Compared to external verification, this is a smaller trust assumption, under which attackers cannot guarantee the success of attacks, no matter how much economic cost they pay. All traditional cross-chain solutions are mentioned above, but the development of ZKP has brought new solutions to address the dilemma of the safety and efficiency of cross-chain bridges. What is ZK Bridge? ZK Bridge is a cross-chain bridge that employs the zero-knowledge proof, without introducing trust assumptions. It adapts to multiple isomorphic/heterogeneous chains, generates zero-knowledge proof off the chain, and is only responsible for verification on the chain, thus greatly reducing the cost of computing and storage on the chain. It has zero-trust, license-free, scalable, and efficient features. Let’s first provide a basic overview of the principles of light clients. Light clients, also known as light nodes, are often presented in the form of light smart contracts on the chain. The basic principle of the light client is to deploy the light node contract of the source chain on the target chain to verify messages from the source chain. If we want to achieve bidirectional cross-chain, we need to deploy the light node contract of the other chain on both chains. Compared to full nodes, light nodes do not store sequences of complete blocks and only store sequences of block heads. Despite its small size, the block header contains a cryptographic summary of the complete data in the block. When a light node needs to know whether a transaction is included in the chain, it can perform simplified payment verification (SPV) on the transaction through the block header of the block where the transaction is located and the Merkle path of the transaction. In the following figure, the collection of green squares is the Merkle path of blue squares. To maintain the light nodes of the source chain deployed on the target chain, it is necessary for the off-chain agent to continuously synchronize block heads of the source chain with the target chain. The light node contract has no trust assumption for the off-chain agent, which is responsible for synchronizing block heads. Given that the light node performs validation on its synchronized block headers, the off-chain agent cannot deceive the light node. The logic of the light node’s validation of block head is no different from that of the full node and mining node. It is divided into two parts, namely effectiveness validation and finality validation. The Investment & Research Team of CGV Research argues that for the PoW chain, verification of effectiveness mainly refers to verifying the proof-of-work of the block, and the verification of finality is to check whether effective blocks are appended behind the block header (in BTC chains, an append of 6 blocks is generally considered to confirm the finality of a block, while in Ether, an append of 25 blocks is generally considered to confirm the finality of a block). For PoS chains, verification of effectiveness refers to verifying whether a block has been generated by randomly selected blockers, while verification of finality refers to whether the block has been signed by validators with voting weights of more than 2/3. There is no need to perform the verification of the effectiveness of the light nodes of PoS, but it is necessary to verify their finality. Because in the PoS chain, the final block must be valid, while in the PoW chain, it may not be valid. The implementation of ZK Bridge follows almost the same process as the light node and relay solution, with slight changes. In ZK Bridge, the relay off the chain is still required to monitor the source chain and forward the block information of the source chain to the target chain. It not only forwards the block header, but also the proof of validity generated using the ZK-SNARK algorithm. On the target chain, light nodes do not directly verify the effectiveness of transactions based on block headers, but rather verify them on the chain based on proof of validity, thus lowering the computational burden. The implementation roadmap of ZK Bridge Why is ZK Bridge expected to end the cross-chain war? Among the cross-chain bridges that have been deployed and put into use, many of them have suffered serious security attacks, with a huge amount of money stolen, causing large-scale panic at the time. Today, people still hold a skeptical attitude toward the safety of major cross-chain bridges. There is an increasing need for a secure, zero-trust, decentralized cross-chain bridge to lay a solid foundation for a full-chain ecology. Statistics of funds lost and funds returned of some cross-chain protocols in 2022-Image source: DeField（https://defiyield.info/ ) The Investment & Research Team of CGV Research deems that ZK Bridge has brought new solutions to address the dilemma of safety and efficiency of cross-chain bridges. Specifically, by generating a zero-knowledge proof for the block header off the chain, the correctness of the source chain’s block header is verified by the proof generated by the ZK-SNARK algorithm. In this way, no external trust assumptions are added, and the only thing we trust is mathematics. Moreover, the verification process of zero-knowledge proof on the chain significantly lowers the computing and storage costs compared with the original light node verification. Introduction to some projects of ZK Bridge Succinct by Succinct Labs Gnosis Chain Omnibridge is a cross-chain bridge between Ethereum and Gnosis, using the mainstream solution of MPC. Team members of Gnosis want to explore cross-chain designs that do not rely on centralized entities, and Succinct Labs and Gnosis collaborate on this, with Gnosis DAO providing R&D grants. The verification process of Ethereum mainly includes the verification of Merkle proof of block headers; Merkle proof of validators in the sync committee; and the correct rotation of the BLS signatures of the sync committee. The core idea is to use zk-SNARK (Groth16) to generate a proof of validity with constant size, which can be efficiently verified on Gnosis on the chain. Illustration of Succinct cross-chain solution- Image source: Succinct’s official website（ https://www.succinct.xyz/ ) Succinct Labs’ cross-chain solution is capable of transmitting any message between any two Ethereum-compatible PoS chains. Currently, a cross-chain demo has been implemented between Ethereum and Gnosis, and a bridge deposit contract has been deployed on Ethereum to allow users to deposit. The bridge deposit passes a message to the ambient message bridge (AMB), which stores the message in the contract. The operator is responsible for obtaining proof from the sync committee, generating SNARK proof for valid BLS signature verification, and submitting updates to the light clients of Gnosis Chain. On Gnosis Chain, the Ethereum block where the deposit transaction is located is confirmed (usually 2 epochs, about 12 minutes). After the light client is updated to a height higher than or equal to that block, the relayer will automatically submit an executeMessage transaction to Gnosis AMB. The executeMessage transaction contains Merkle storage proof for the updated slot of the light client. During executeMessage, AMB uses the light client to obtain the Ethereum state root of the requested_slot and verify the Merkle storage proof to show that the message has been sent on the other side of AMB. Then, AMB uses the calldata specified in the message to receive the smart contract. Given the maturity of the tech stack and the overhead of on-chain verification, the team chose to use the most mature Circom and the cheapest Groth16 proof system for on-chain verification to generate ZK-SNARKs instead of using the newer and faster PLONK, KZG, or FRI. It is worth noting that although the project has been tested on the testnet, its usability is poor. According to the test by the author, the number of Successs tokens on the Goerli testnet has been reduced after passing through bridges, but the Gnosis network has not received tokens, and the dashboard on the website has no bridge records. It is also important to note that the cross-chain becomes unidirectional. In other words, it can only go from Goerli to Gnosis, not the other way around. zkBridge by BerkleyRDI zkBridge proves the correctness of the block headers of remote blockchains through ZK-SNARKs, therefore it does not introduce any external trust assumptions. In fact, zkBridge is secure as long as the connected blockchains and basic light client protocols are safe, and there is at least one honest node in the block header relay network. Of course, it is worth noting that although one honest node can guarantee security, too many dishonest nodes will significantly reduce the availability of the cross-chain bridge, and the light client will frequently reject the proof and fail to obtain real information. Illustration of zkBridge cross-chain solution-Image source: https://rdi.berkeley.edu/zkp/zkBridge/zkBridge.html Specifically, zkBridge mainly consists of the block header relay network and updater contract. In the block head relay network, the relay retrieves the block head from the sender blockchain C1, generates a block head validity proof, and sends the block head and proof to the updater contract set on the receiver blockchain C2. For the updater contract, once the relevant proof is verified, the corresponding block header of C1 will be stored. Additionally, the updater contract maintains a light client state. Once a new block header is added, the contract updates the light client state just like other light clients on C1, and updates C1’s current main chain. The updater contract also exposes a feature to the application, through which the application on C2 can obtain block headers of a given height on C1. After obtaining the information regarding block header, the application can perform more validations (such as specific transactions) and build its applications. To make the underlying zk-SNARK system compatible with on-chain usage, it is necessary to quickly generate proof and reduce the cost of on-chain proof verification. The main innovations of zkBridge include: DeVirgo: It adopts the distributed method to generate ZK-SNARK without trust assumptions. Besides, it significantly increases the time for generating ZK-SNARK off the chain by splitting the computational work and allocating it to more devices. Recursive proof: To reduce on-chain costs, zkBridge uses recursive proof to compress the volume of ZK-SNARK to around 131 bytes through two iterations. The first step is to generate the deVirgo proof, and the second step is to use the Groth16 proof generator for compression. The Groth16 validator generates and executes a proof of integrity for the deVirgo circuit. Batch processing: zkBridge implements an update contract for block headers, which takes block height as input and returns the corresponding block header. But zkBridge does not call the update contract when the new block is generated. The prover can first collect N block headers to generate a single proof. The N value can be set. The larger the N value is, the longer the user waits, but the lower the system operating cost. At present, zkBridge has implemented an instance of Cosmos Client on Ethereum using Solidity. According to testing, it can generate a ZK-SNARK of Cosmos Zone block header within 2 minutes. Then, on the Ethereum side, the verification cost is a constant of 230k gas per hour. By comparison, if ZK-SNARK is not used, the cost will be 64 million gas. It should be noted that relay network computing will suffer from the same communication complexity as MPC, which will seriously affect the time for proof. The communication complexity of the GKR multi-layer sum-check protocol is O (N log2 (number of signatures), where N machines are in the relay network. Even if there are 32 machines in the relay network with 32 signatures, it may cause numerous communicating sequential processes in the network, which damages the performance of distributed computing. zkIBC by Electron Labs Specifically, zkIBC hopes to simulate the trustless communication protocol — Inter Blockchain Communication Protocol (IBC) used in Cosmos, and expand its use to Ethereum. ZkIBC uses ZK-SNARKs to verify the light client state, quickly prove transactions on Ethereum, and keep up with the block generation time of the Tendermint. The main difficulty is that the Tendermint light client used in the Cosmos SDK runs on the Ed25519 curve, which is not supported by Ethereum. Besides, it is expensive and inefficient to verify Ed25519 signatures on Ethereum’s BN254 curve. The project roadmap is divided into five stages: research — implementation of ed25519 signature scheme — testnet — implementation of recursive Snark to reduce redundancy — mainnet. On February 2, 2023, the Positron testnet was officially launched to the public, supporting the cross-chain communication between Near and Ethereum. The current testnet requires approximately 20–30 minutes to achieve finality, including Goerli network finality (15–20 minutes), ZK Proof generation (5–8 minutes), and Near chain casting (10–20 seconds). The project claims to be completely open source, tested, smooth to use across chains, well-designed UI/UX, and supports bidirectional cross-chain. Reflections At a certain stage of development, blockchain technology usually evolves into a philosophy of trade-offs. The public chain suffers from the trilemma in terms of security, scalability, and decentralization; the cross-chain communication faces the dilemma of security and efficiency: the pursuit of efficiency leads to the introduction of third-party trust assumptions, resulting in security damage; while the pursuit of security by using the completely light node and relay causes high on-chain overhead. But, from the point of view of system design, even the unpledged MPC with the highest degree of trust can ensure the security of cross-chain bridges in most cases. The reason why many cross-chain bridges were stolen is due to the pursuit of transparency and open source code. The hidden vulnerabilities in complex code provide hackers with opportunities to exploit them. CGV Research holds that with the continuous progress of technology, the usability of ZK solution gradually increases, ZK Rollup is expected to be put into large-scale use in the second half of 2023, and ZK Bridge is also in the ascendant. We hope that the maturity of ZK Bridge can break the dilemma of security and efficiency faced by cross-chains, to realize the interconnection of all chains. References: 1. zkBridge: Trustless Cross-chain Bridges Made Practical（https://rdi.berkeley.edu/zkp/zkBridge/zkBridge.html） 2. Bridging the Multichain Universe with Zero Knowledge Proofs（https://medium.com/@ingonyama/bridging-the-multichain-universe-with-zero-knowledge-proofs-6157464fbc86） 3. Exploring ZK Bridges（https://zkvalidator.com/exploring-zk-bridges/） 4. Overall Comparison Between Multiple Blockchains（https://dune.com/springzhang/cross-blockchain-comparison-overview） 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.

From last week’s investment and financing data (13 projects in total), the main investment directions include Web3 infrastructure (6), Game (4), DeFi (2), NFT (1), and Metaverse (1). Among them, Web3 infrastructure projects are favored by crypto-investors, with investments from well-known companies such as PayPal Ventures, Galaxy Digital, Coinbase, Uniswap, etc.; game projects are also in the spotlight, such as Azra Games and Kratos, both of which have received investments from well-known VCs. Finance, which addresses impairment losses in liquidity provision and offers diversification and yield; the NFT project NeoSwap AI and the Metaverse project Worldwide Webb, which have also received investments, respectively. CGV summarizes a week of significant investment and funding information in the crypto market, from February 20, 2023, to February 26, 2023, in the global crypto market. [Infrastructure] 1. Chaos Labs | Seed round financing of $20 million | Led by Galaxy Digital On February 21, Chaos Labs, a blockchain security agency, announced the closing of a $20 million seed round led by PayPal Ventures and Galaxy Digital, with participation from Coinbase, Uniswap, Lightspeed, Bessemer, and angel investors including Balaji Srinivasan and Naval Ravikant, among other angel investors. 2. Intu | Pre-Seed round financing of $2 million | Participated by Fantom Foundation, etc. On February 21, Intu, the Web3 decentralized account management protocol, announced the closing of a $2 million Pre-Seed round with participation from CoinFund, Metaweb Ventures, Fantom Foundation and others. 3. iBLOXX | Financing of $5 million | Led by PrimeXM On February 23rd, iBLOXX, a Web3 incubator and market maker, announced the closing of a $5 million funding round led by PrimeXM, which will be used to expand the company’s game development division, iBLOXX Studios, bringing the post-investment valuation of its game division to $30 million. 4. Chain Reaction | Financing of $70 million | Led by Morgan Creek Digital On February 23rd, Chain Reaction, an Israeli blockchain chip startup, closed a $70 million funding round led by Morgan Creek Digital. 5. OneKey | A+ round financing of $85 million | Led by IOSG Ventures On February 23, OneKey, a hardware wallet company, announced the closing of its Series A+ funding round at a valuation of $85 million, led by IOSG Ventures. [Game] 6. Azra Games | Seed round financing of $10 million | Led by a16z On February 21, Azra Games, a gaming company, announced closing an additional $10 million seed round led by a16z through its $600 million gaming fund, GAMES FUND ONE, with participation from NFX, Coinbase Ventures, Play Ventures, and Franklin Templeton. 7. Kratos | Seed round financing of $20 million | Led by Accel On February 23rd, Kratos, an Indian Web3 game company, closed a $20 million seed round led by Accel, with participation from Prosus Ventures, Courtside Ventures, Nexus Venture Partners, and Nazara Technologies, at a valuation of $150 million. And Nazara Technologies. [DeFi] 8. Affine | Financing of $5.1 million | Led by Jump Crypto On February 23rd, Affine Protocol, a DeFi yield protocol, closed $5.1 million in funding led by Jump Crypto and Hack VC, with participation from Circle Ventures and Coinbase Ventures. 9. Tsunami.Finance | Pre-seed round financing of $1.3 million | Led by Big Brain Holdings On Feb. 24, Aptos ecosystem derivative protocol Tsunami. Finance completed a $1.3 million Pre-seed round of financing, led by Big Brain Holdings and Mirana, with participation from Zeta Markets, Hedge Labs, Pontem, Brilliance Ventures, BuilderVC, Marin Digital Ventures, Soju, Switchboardxyz, Coral DeFi, RNR Capital, Aptos Monkeys, and Time Research. 10. Huma Finance | Seed round financing of $8.3 million | Participated by Race Capital, etc. On February 24, Huma Finance, a DeFi project, announced the closing of an $8.3 million seed round with participation from Race Capital, Distributed Global, ParaFi, Circle Ventures and Folius Ventures, and launch partners including Circle, Request Network and Superfluid. [NFT] 11. NeoSwap AI | Financing of $2 million | Led by DACM and AngelHub On February 25, NeoSwap AI, an NFT trading platform, closed a $2 million Pre-Seed round of funding at a valuation of $15 million, led by DACM and AngelHub, with participation from Gossamer Capital, Cavalry Asset Management, Stacks Ventures, Dhuna Ventures, and several angel investors. [Metaverse] 12. Worldwide Webb | A round financing of $10 million | Invested by Pantera Capital On Feb. 23, pixelated metaverse Worldwide Webb completed a $10 million A round of financing, with Pantera Capital as its only investor. The funds will be used to enhance Worldwide Webb’s influence, expand its team, and integrate other chains besides Ethereum. [Web3 Applications] 13. Towns | A round financing of $25.5 million | Led by a16z On February 23, Towns, a Web3 social app, closed a $25.5 million funding round led by a16z with participation from Benchmark, Framework Ventures and others. towns takes the town square idea and combines community, NFT, and gaming. About Cryptogram Venture (CGV): CGVCGV FoFCryptogram 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, Kirin fund, etc. From July to October 2022, it launched the first TWSH in Japan, which was jointly supported by the Ministry of Education, Culture, Sports, Science and Technology (MEXT), Keio University, SONY, SoftBank, and other institutions and experts. Currently, CGV has branches in Singapore, Canada, and Hongkong.

2022 is a highly unusual year for the crypto industry. With the collapse of Luna/UST as the starting point, prominent institutional participants such as 3AC and FTX have taken a heavy toll one after another and coupled with the severe macro-financial environment “deleveraging” impact. The crypto industry has suffered a long cold winter. However, many investment institutions are still unswervingly optimistic about the application prospects of crypto and Web3. With a long-term vision, they actively carry out business layouts “countercyclically.” As a research and investment institution in the crypto and Web3 industry with compliance qualifications approved by Japan, Cryptogram Venture (CGV) has always adhered to the research-driven investment” business orientation. Since its inception, CGV has taken advantage of its location and business hub in Japan to explore and help more innovative crypto projects across the world by actively participating in extensive research in the primary crypto market, organizing the first Web3 hackathon in Japan (web3hackathon.io), and delivering high-quality industry research reports (cgv.fund/blog). Since 2020, we have witnessed the rise of DeFi, the emergence of NFTs, the popularity of GameFi, the nationwide pursuit of Metaverse, the implementation of Layer 2, the madness of the new public chain, etc. These narratives in different fields facilitate the national quest for encryption. According to Steve Chiu, founder of CGV, “It is crucial for crypto practitioners to discover and anticipate the new narrative of the future to make response and layout in advance.” It is precisely based on the professional trend research and accurate cycle prediction of the encryption industry that CGV has successfully participated in the early stages of projects such as Republic, CasperLabs, AlchemyPay, The Graph, Bitkeep, Pocket, and Powerpool, as well as the yen stable currency JPYW under the supervision of the Japanese government. Invest and get rich investment returns. In 2022, CGV invested in dozens of crypto projects and made extensive layouts in critical fields such as Metaverse, games, and NFT. Typical projects include: Metaverse field l SkyArk Chronicles: a multi-Metaverse inspired by Japanese anime. It develops the story around the fantasy world created by Satoshi Nakamoto. It has monsters and heroes in fantasy and urban areas to immerse players in the fantasy game world, such as Legends Arise, House of Heroes, and Re: SkyArkVerse. l SecondLive: it builds a center for Metaverse residents, where more than 1 million users gather to express their views, give full play to their creativity, build a parallel universe in their dreams, and establish a Web3 open Metaverse that serves 1 billion people with the content generated by UGC and AI. l HALO: it cooperates with 3D artist communities to realize the value exchange with the natural world through the original economic system and brand effect. In HALO, characters are static images and avatars of ourselves in the virtual world, connecting the virtual world with the real one. Game field l Avalon: an MMORPG Metaverse game involving P2E (play to earn) economic model and content creation tools. l PIAS: an agriculture-based simulation game with the theme of the human renaissance. It integrates digital and physical elements and can exchange the in-game items (NFT) obtained by players through the game for crops in the real world. l Bedlam: an electronic sports game center, a platform for creating and hosting personal game identities (performance statistics and content) for Web3 games. Users can participate in leagues or tournaments and follow their favorite teams. l Orbler: a tower defense game driven by P2E (play-to-earn) model that requires clever thinking and planning to achieve victory. Players become Orblers, defend personal areas, and fight with enemies using orbs. l Mechaverse War: a mecha game from Japan. It is committed to building the world’s first real-time strategic mecha game platform. The cultural background of modern Japanese mecha anime and ancient samurai armor inspires the project. NFT field l UneMeta: a leading NFT incubation platform, trading market, and social space. It is committed to creating a safer, more convenient, and better NFT participant experience for NFT players, with numerous high-quality IP resources, mature NFT operation mode, and solid technology and community infrastructure. l BBC Protocol: a computing power service platform integrating Bitcoin computing power distribution and Bitcoin multiple financial derivatives. It aims to build the next computing power Metaverse with NFTs. It cooperates with many large Bitcoin mining pools, mining machine manufacturers, mining plants, and power suppliers worldwide to provide users with systematic BTC mining and financial derivatives value-added services. l Multiverse Play: a decentralized NFT post-investment management platform that connects users and assets of Web3, including players, NFT holders, guilds, and developers. Additionally, it provides them with intelligent matching, task scheduling, asset management, and high liquidity. Infrastructure field l Celestia: the first modular blockchain network with pluggable consensus and data availability layer. It enables anyone to quickly deploy a decentralized blockchain without the expense of bootstrapping a new consensus network. “After the shakeout in 2022, the future crypto digital asset market will gradually undergo the transition from ‘wild growth’ without the need for permits to ‘rational prosperity’ with regulatory compliance”, said Steve Chiu. In 2023, CGV will constantly explore popular Web3 fields such as Blockchain Infrastructure, Metaverse, NFT, DAO, SocialFi, GameFi, and DeFi. Additionally, CGV will pay constant attention to innovative trends such as wallet infrastructure, innovative stablecoins, Web3 mobile products, zero-knowledge proof, soulbound tokens, and fully on-chain games to help more outstanding projects have a smooth start and achieve sustainable growth and development. Cryptogram Venture (CGV) is a Japan-based research and investment institution engaged in the crypto industry. With the business philosophy of “research-driven investment,” it has participated in early investments in Republic, CasperLabs, AlchemyPay, the 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, Kirin fund, etc. From July to October 2022, it launched the first Tokyo Web3 Summer Hackathon (TWSH) in Japan, jointly supported by the Ministry of Education, Culture, Sports, Science and Technology (MEXT), Keio University, SONY, SoftBank, and other institutions and experts. CGV has branches in Singapore, Canada, and the Chinese mainland. Website: https://www.cgv.fund/ Twitter: https://twitter.com/CGVFOF Project contact: Yurinatyou@cgv.fund

Shigeru, CGV Research Nowadays, Web3 is no longer an armchair theory or an Internet buzzword. It is perceived by many people as the technological revolution that subverts the Internet. However, looking around the world, few Web3 applications have a host of users. Probably the only renowned Web3 application with the most users is Bitcoin. — Jack Dorsey, a former Web3 advocate and Twitter founder who converted the first tweet into NFT, claimed that “You don’t own web3. The VCs and their LPs (limited partners) do. It will never escape their incentives.”; — Moxie Marlinspike, founder of Signal, an encryption communication application, discovered that Web3 may be a false proposition, after developing two DApps; — PandaDAO, which raised 1900ETH, started the dissolution process less than one year after its founding, just because “the core work of the community is to vote, and there is no time to do other things”… Currently, it is fair to say that the world of Web2 is definitely better than that of Web1. Many people wonder if the world of Web3 is better than that of Web2. It makes no sense without users. The natural selection of users determines the prosperity of the Web3 world or not. In the Web2 world, Facebook has more than 3 billion global users, YouTube and WhatsApp have more than 2 billion users, and WeChat and Tik Tok have more than 1 billion users. According to the data of TripleA, a cryptocurrency payment company, there were more than 320 million users of cryptocurrency and Web3 worldwide in 2022, which was about 4.2% of the global population. If we compare the current user volume of Web3 with that of the Internet, we can find that the current development stage of Web3 is roughly equivalent to the Internet in the late 1990s. Andreessen Horowitz (a16z) predicted that Web3 might have 1 billion users in a short time. So, what are the areas in which applications will attract billion of Web3 users? Stay away from “pseudo-Web3 applications” dressed in Web3 Discard the false and retain the true. Not all so-called Web3 applications are authentic. In the field of GameFi, there are many “pseudo-Web3 applications”. Literally speaking, GameFi, consists of two parts, namely game, and finance. In a nutshell, it means that game players earn cryptocurrency by playing games. Famous GameFi games such as Axis Infinity, DeFi Kingdoms, etc., fail to impress 3 billion game players around the world, and gradually move towards a death spiral with the recession of the encryption market. Taking Axie Infinity as an example, since 2021, by allowing players to “Play-to-Earn”, it has been advocating that “blockchain games can promote a fairer global economy and provide people around the world with more opportunities”, which has been favored by the market. However, 14 months later, most people stopped playing the game. They generally felt angry, and anxious. Some even lost thousands of dollars. A healthy GameFi project has a well-established ecological mechanism of internal and external circulation, such as obtaining external benefits through commercial cooperation. As for the GameFi projects that rely on the Ponzi model for user growth, the income earned by early users comes from the principal invested by late users. If the income of the project cannot keep up with the growth rate of the debt, the collapse is only a matter of time. Similar problems exist in the field of NFT, which is dominated by avatars and profile pictures (PFP). In the past, PFP was almost synonymous with NFT. When mentioning NFT, you may think of the boring ape head that costs several million dollars a piece. However, without functional support, effective incentives, and healthy circulation of the creator economy, the vast majority of PFP projects have little value, and they only seek the recognition of a group of users to support their value. Compared with the market peak at the beginning of 2022, the overall transaction volume of the NFT market has dropped by more than 90%, the mainstream PFP projects have dropped by 60–70%, and other projects are even more miserable. The same is true of the once-popular Metaverse projects. Compared to Roblox’s 202M monthly active users, Minecraft’s 141M monthly active users, Sandbox and Decentraland only have 200k and 56k monthly active users, respectively. It seems that Decentraland and Sandbox are overvalued. It can be said that in addition to the above fields, there are a large number of “pseudo-Web3 applications” in DeFi, DID, DAO, Sociafi, and other fields. They may be the products of the capital bubble or the historical heritage of the technological growth cycle, which cover up the true value of Web3 applications. It’s time for us to seek the value essence of Web3 From the perspective of the first principles, let’s explore the essence of Web3 to gain insight into its next development direction. Web3 is generally regarded as the industry form closest to “value Internet”. In fact, Web3 is not a simple upgrade based on Web1 and Web2. Its core is to build a new network with decentralization, value co-creation, and distribution according to the contribution, thus giving users real data autonomy. So, how should we define “Web3 application”? Based on the views of the industry, CGV Research team reckons that the Web3 application is based on blockchain technology, takes Token as a tool or medium, and addresses users’ actual needs as the starting point to support users’ interactive operations, thus realizing the creation, distribution, and circulation of value. Obviously, the Web3 application is not a panacea for all issues, nor is it suitable for any scenario. If you develop a Web3 application to cater to the trend of Web3, it will be in vain. What are Web3 applications suitable for and not suitable for? This is a question that should be on the minds of anyone investing in Web3. I quite agree with Alex Xu of Mint Ventures that the underlying value of Web3 lies in its unlicensed and global nature, providing a free market with unprecedented scale and boundaries. The open source of code and the verifiability of data offer a lower cost of trust in this unprecedented and prosperous free market. Therefore, “liberty” and “trust” are the core advantages and essential values of Web3. In terms of Liberty, it includes the free combination and migration of assets, agreements, identities, product matrices, intellectual property, and other fields; with respect to trust, based on the tamper-proof, transparent and open characteristics of blockchain technology, Web3 has established a new trust relationship different from the traditional trust that relies on justice, violent authority, customs, and culture. If a Web3 application suitable for a business scenario is not well designed in terms of “Liberty” and “trust” and has no business planning, it will encounter major challenges in future operations. For example, projects that transfer real assets on the chain (such as synthetic assets, STO, etc.) do not get rid of the original credit system (based on the law, government’s asset identification), so it does work well in Web3 field; as for crypto native Web3 assets, their business flows can all be operated on the chain, which has the dual advantages of Liberty and trust. In addition to giving full play to Web3’s advantages of “Liberty” and “trust”, the ability to have basic business logic ensures the sustainable operation of Web3 projects. Looking back at StepN, a phenomenal Web3 application in 2022, although its attempts to solve various issues related to product growth, IPO fundraising and corporate governance with a set of X-to-earn economic models deserve some credit, it encountered a tremendous recession in the later stage. The biggest issue of StepN is similar to that of GameFi mentioned above, that is, the project’s business model is not sound and does not create much extra-ecological value. It turns forward debt (NFT sales revenue) into cash proceeds, weakening the value creation ability of the project. Therefore, the CGV Research team argues that the success of Web3 applications lies in the digital elements of “Liberty” and “trust”, and the verifiability of business logic, which are indispensable. In this regard, the team proposes the “Unicorn Growth Index” of Web3 applications: Six types of Web3 projects that have the potential to grow into “unicorns” 1.Mobile crypto digital wallet Liberty index: ☆☆☆☆ Trust index: ☆☆☆☆ Business model verifiable index: ☆☆☆☆☆ Web3 Unicorn growth index: ☆☆☆☆☆ The crypto digital wallet has two attributes, namely asset account, and identity symbol. The first step for users to access the Web3 world is to create a crypto digital wallet. Whether it is to create an account in a centralized exchange, register a decentralized wallet or purchase a hardware wallet, users need a wallet to access Web3. In 2009, Bitcoin enabled the existing asymmetric key pair technology to be used to write to the public database, thus creating the first “crypto wallet”; In 2016, MetaMask was officially launched, which opened the door to dApps. It is unlike previous wallets and platforms that focused on interacting with crypto assets such as Bitcoin. Number of global wallet users from November 2011 to July 11, 2022 (Unit: million) Data source: https://www.statista.com With the development of crypto assets, wallets have undergone changes in different stages: from single-asset wallets and single-chain wallets to multi-chain multi-asset wallets, from single transfer and collection to blockchain ecological aggregation service platform, which generates mobile wallets, public-chain ecological wallets, transaction platform wallets, asset custody wallets, hardware wallets, identity wallets, and other sub-tracks. In addition to the traditional business model of attracting users and developing the fund deposit function, crypto wallets provide value-added services (wealth management products, PoS mining, trading, asset aggregation, market information, etc.), as well as advertising and other ways to increase revenues. We are optimistic about the development of mobile crypto wallets and have the opportunity to become the data flow and distribution platform of Web3 applications, which will ultimately promote the paradigm shift of the entire Web3 track from “wealth creation effect” to “daily application”. Mobile crypto digital wallets worth attention include: Metamask: (@MetaMask) 30+ million monthly active users. Lightweight Ethereum open-source wallet is also a kind of APP wallet; It has the function of testing Ethereum smart contract and supporting the most complete Dapp; it can be compatible with hardware wallets such as Ledger and Trezor. TrustWallet: (@TrustWallet) an unmanaged mobile multi-chain crypto wallet that has more than 58 million users and supports more than 8 million tokens and various gateways to thousands of Web3 dApps. BitKeep: (@BitKeepOS) 8 million users worldwide, the largest Web3 multi-chain wallet in the Asian market, adopts various security mechanisms such as hot and cold separation, offline signature, and supports 80+ mainnets, one-click cross-chain transactions, and other functions. 2. “Play-and-Earn” game Liberty index: ☆☆☆☆ Trust index: ☆☆☆☆☆ Business model verifiable index: ☆☆☆☆☆ Web3 Unicorn growth index: ☆☆☆☆☆ Just like the importance of games to the Internet economy, crypto games have been regarded as the optimum driving force for the growth of users of the Web3 ecosystem. Although crypto games have a huge potential market, it is not interesting for most players. Currently, GameFi or P2E (Play-to-Earn) is the most common crypto game. Their biggest advantage is to offer players the opportunity to earn money. But the simple incentive to make money through play is not necessarily a sustainable model. If the cycle is extended to half a year or longer, you will find no successful practice project. To play Web3 games, we still have to respect the game attributes and pay attention to the fun, which is the real value. As the market fever wanes and user interest shifts, Web3 games have a new trend of Play-and-Earn. On the one hand, Web3 games draw on the Free-to-Earn model of traditional games, so that everyone can participate for free and some players can make money; On the other hand, Web3 games create complete on-chain games and autonomous worlds. The core logic of games is on the chain, and they will adopt the open architecture, autonomous existence, and combination in the future. Unfortunately, the typical representative of the “Play and Earn” game has not yet appeared. Who will be the next Axis Infinity and StepN needs to be tested by history. While games are still exploring how to strike a balance between the entertainment experience and the financial incentives, the capital is betting on the market. In May 2022, a16z launched a $600 million fund dedicated to investing in Web3 gaming startups, mainly in three areas: game studios, consumer applications that support the player community (take Discord for example), and game infrastructure providers. Superficially, the three fields are scattered, they only have one goal, to create real Web3 games. It is worth noting that the next generation of “Play-and-Earn” games, projects related to Web3 game industry, may be created by them: TreatureDAO: (@Treasure_DAO) a decentralized game platform and distribution platform that meets the needs of independent developers through perfect infrastructure and ecology, and forms an economy by accumulating players’ activity content. Currently, it is the №1 game and NFT ecosystem on Arbitrum, with more than 100,000 players. SkyArk Studio: (@SkyarkS) an AAA blockchain game studio, which launched on-chain and asset-only series of games such as SkyArk Chronicles, as well as the exclusively developed NFT game engine. The engine allows NFT to be interoperable, editable, and evolvable, and helps players use NFTs in different games with different gameplays. Bedlam: an electronic sports game center, a platform for creating and hosting personal game identities (performance statistics and content) for Web3 games. Users can participate in leagues or tournaments and follow their favorite teams. 3.Phydigital application Liberty index: ☆☆☆ Trust index: ☆☆☆☆ Business model verifiable index: ☆☆☆☆ Web3 Unicorn growth index: ☆☆☆☆ In terms of crypto native and Web2 brands in fashion and entertainment, Web3 offers opportunities to bring digital and real-world objects and experiences to their audiences. The new popular pairing of the physical world and the digital world has coined a new term “phydigital”. “Phydigital” (“Physical” plus “Digital”) integrates physical environment or physical objects and digital or online technology-driven experience. It was first proposed by Momentum, an Australian marketing agency, in 2013. We reckon that, in a broader sense, physical projects with digital performance and digital projects that affect the physical environment or physical objects can be taken as phydigital applications. They represent a broad category of Web3, enabling blockchain developers to figure out new approaches that combine the physical and digital worlds. In 2022, Tiffany, a luxury jewelry company, launched “NFTiffs” to the holders of CryptoPunks, with a physical version of the diamond pendant. 250 NFTiffs sold out within 20 minutes after their debut and created $12.5 million of revenue for the company. The creation of this “phygital” project is an innovative business attempt by luxury goods to Web3. In December 2021, NIKE announced the acquisition of RTFKT, a virtual fashion brand, and regarded it as the fourth largest independent brand in addition to Nike, Jordan, and Converse. It can be seen that Nike has raised NFT construction to the level of brand strategy. RTFKT is building a physical shoe, which employs Nike’s electronic shoelace Adapt technology. Consumers can exchange corresponding physical shoes after purchasing virtual ones. NBA Top Shot is a blockchain collection game jointly created by NBA, NBPA, and Dapper Labs. It aims to turn the highlight moments of NBA games into tradable digital game cards. In other words, the paper card exchange that fans used to need to do offline can take place anywhere, anytime online. In addition to the above FMCG and luxury goods, the physical card business of the financial category is trying to connect with Web3. Visa and Mastercard jointly develop cryptocurrency debit cards with different Web3 companies. For example, Blockchain.com will cooperate with Visa to launch a debit card, which is associated with the client’s crypto account. There are no fees for the transactions of this debit card and users can get 1% cryptocurrency cashback. By integrating the physical and the digital world, phydigital drops are no longer used to buy items for display, but to produce more things by combining various parts of the real world and the virtual world to create unique experiences. In the initial stage, phygital products integrate physical and virtual products. With the convenience of social sharing and DIY derived from virtual products, we can get a glimpse of the great potential generated by the combination of phygital and Web3. At present, the providers of phydigital application solutions that deserve attention include: RTFKT Studios: (@RTFKT) it adopts the latest game engine, NFT, blockchain certification, and augmented reality, and applies manufacturing expertise to create unique sneakers and digital artifacts. Dapper Labs:（@dapperlabs）it is the company behind the well-known projects CryptoKitties, NBA Top Shot, NFL All Day, UFC Strike, and Flow blockchain. It uses blockchain technology to develop NFT and new forms of digital engagement for fans around the world, paving the way for a more open and inclusive world that starts with games and entertainment. 4.Web3 growth stack application Liberty index: ☆☆☆ Trust index: ☆☆☆☆ Business model verifiable index: ☆☆☆☆☆ Web3 Unicorn growth index: ☆☆☆☆ Web2 embraces Web3, which will facilitate the breakthrough in Web3 and attract huge incremental users. According to statistics, 43 of the top 100 brands in the world, including Starbucks and others, are testing the alternative use cases of Web3 and NFTs. Major Brand Flagship NFT Collection Launches Source: Messari Shayon Sengupta of Multicoin Capital first proposed the concept of “Web3 Growth Stack”, that is, product managers and marketing personnel use Web3 technology to build tools to acquire, attract and retain clients. The great advantage of Web3 Growth Stack is the ability to tightly couple in-application events with on-chain payments. Web2 products cannot deliver value to users in real time, but Web3 products can and may even fundamentally expand the design space for growth tools and advertising models. Previously, Starbucks announced the launch of the Starbucks Odyssey, an NFT membership program. Consumers can participate in Odyssey series of travel activities, mainly including interactive games and fun challenges. After completion, consumers will receive a collectable Digital Journey Medal (NFT) as the reward. The Digital Journey Medal can be traded as NFTs, upgrading participate-to-ear to collect-to-earn and improving user stickiness and repurchase; Starbucks members have NFTs, which means that the data is uploaded on the chain. Other brands (cooperative or competitive brands) can perform various airdrops for these members, which has evolved into airdrop-to-ear. The more active the members are, the more NFTs they have, the more airdrops they will get, and the stickiness and repurchase of users will be improved. The essence behind the Starbucks NFT membership program is to follow the user-centered philosophy, where users take back data ownership and gain more value. Now, more commercial brands are paying close attention to how Starbucks develops and practices in the future; If it works, we will see the great enthusiasm of major brands for the release of the NFT reward points system. Starbucks has 27.4 million members, Nike has more than 300 million members, and Pizza Hut has more than 80 million members… These brands use the “Web3 Growth Stack” to transform Web3, which may be the fastest way to create Web3 applications with one billion users. “Web3 Growth Stack” applications that deserve special attention include: Blackbird: (@blackbird_xyz) a Web3 platform specially designed for the tourism and hotel catering industry. It is committed to establishing direct links between restaurants and guests through loyalty and membership services. It integrates loyalty and member-related products to provide rewards for dining frequency, consumption, etc. Layer Infinity: (@RensOriginal) a Web3 platform established by e-commerce brands. It helps traditional consumer brands easily migrate to Web3, and release NFTs compatible with the Metaverse, which can be bound with physical products. In addition to tracking the authenticity of products and exchanging physical objects, each NFT can be linked to various practical NFTs. 5.Web3 social application Liberty index: ☆☆☆ Trust index: ☆☆☆☆ Business model verifiable index: ☆☆☆☆☆ Web3 Unicorn growth index: ☆☆☆☆ The social platform has a large number of users, portraits, and behavior data, which contains the huge business value. The most valuable Internet products in the world of Web2 are best illustrated by the valuations of giants like Facebook, Twitter, TikTok, etc. According to Metcalfe’s law, the value of a social network is proportional to the square of the number of users. The more users, the greater the value of social platforms, and then the user growth curve explodes at a single point. Diagram of Metcalfe’s law Source: MicroFinTech: Expanding Financial Inclusion with Cost-Cutting Innovation Therefore, the pain point of innovation in social projects is that it is “easy to defend but difficult to attack”. Once a user network is established through a certain paradigm, it is impossible for the latecomers to surpass it. For the social platform in the Web3 era, the decentralized technology based on the blockchain makes the user’s creative content, social relationship data, identity, and reputation achieve decentralization and composability. People will have absolute control over their social data, thus forming a user-centered social network. However, the development of Web3 social applications is still at an infant stage. Web 3 products cannot support the billion-level daily user volume of Facebook, WeChat; Web 3.0 products have a higher threshold, but their product experience is poorer than Web2 products. Besides, most Web3 social products only meet the on-chain social and financial needs of crypto native users. Products that meet on-chain and off-chain social and financial needs may stand out in the future. After all, social is more than just online data interaction. It should be linked to video entertainment, games, music, fitness, and other aspects of our lives. CGV Research believes that the key characteristics of the next generation of Web3 social applications should include: 1) the cost acceptable to the user; 2) The product experience close to or better than Web 2, and lower threshold for use; 3) cost acceptable to the user data synchronization (both on-chain and off-chain can be integrated); 4) design continuous incentive mechanism through tokens or NFTs; 5) mature community vitality, high user activity, and stickiness. Overall, social applications are the most promising but the most difficult field for Web3 applications. How to expand infrastructure and implement a sustainable economic model is the current focus and pain point. For the Web3 social applications, we need to take a longer view. Web3 social applications worthy of attention include: Lens Protocol: (@LensProtocol) an open and composable Web3 social media protocol that allows anyone to create unmanaged social media materials and build new social media applications. Users are free to develop and own the content they create by owning the corresponding NFTs. Mask Network: (@realMaskNetwork) a portal that helps users transfer from Web 2.0 to Web 3.0. It integrates privacy and social networking, a cross-border payment network, decentralized file storage and sharing, decentralized finance, and governance (DAO). It allows users to encrypt their messages on social media platforms, such as Twitter and Facebook. Besides, it has the functions of sending and receiving cryptocurrency red packets, ITO, uploading, and saving decentralized files. Galxe: (@Galxe) a collaborative credential infrastructure that is designed to create user profiles based on the user’s blockchain behavior. Brands and projects can use these Web3 digital credentials for better promotion, such as gamifying their loyalty system, launching marketing campaigns, acquiring users, etc. 6. Creator economy application Liberty index: ☆☆☆☆☆ Trust index: ☆☆☆☆☆ Business model verifiable index: ☆☆☆☆ Web3 Unicorn growth index: ☆☆☆☆ For many people, the creator economy is a big concept. Its content includes texts, pictures, music, videos, and other forms, each with a different growth logic. From the perspective of the industry, CGV Research deems that the creator economy refers to the economic form in which independent content creators (such as bloggers, social media KOL, photographers, etc.) publish their original content through digital carriers such as texts, videos, audios, and other channels via platforms or communities, and gain profits. The creator economy has two key characteristics: first, creators can turn data flow into cash by acquiring fans and followers with unique contents; second, creators can build tools and infrastructure to create or manage content. According to the Influencer Marketing Hub, 50 million people worldwide participate in the creator economy. By the end of 2022, the market size of the global creator economy reached US$104.2 billion. However, the current creator economy system has serious income inequality, with a large portion of creators’ earnings being paid to third parties as service fees. On Spotify, each song played once by a paid account only generates a copyright fee of $0.004; only 0.33% of YouTube creators earn full-time income; and only the top 1% of authors on Amazon earn $1,000 in a month. In addition, problems such as the lack of content management rights and vicious competition are commonplace in the current creator economy system. Web3 is a new generation of Internet based on blockchain infrastructure, which has made the biggest difference between the creator economy and the previous ones. In addition to consumption and creation, users own and freely use the data content created by themselves. List of global creator economy startups Source: Speedinvest According to this logic, Web3 will bring three paradigm changes to the “creator economy”: 1) redistribute the value and rights of the platform to creators through independent mechanisms such as tokenization and smart contracts; 2) provide composable and trustable perspectives for people who want to start creating; 3) for the first time, users have the opportunity to gain rewards and own part of the Internet value. The application scenarios of Web3 creator economy projects include content creation, NFT issuance and trading, community building, fan motivation, and asset management. A complete value chain has been formed to help creators use content, NFT, and social tokens to closely connect with fans. Of course, it should be reminded that the starting point of the Web3 creator economy is not about grabbing data flow, but abandoning the competition for users’ attention and highlighting productivity. Only by providing better content, can higher revenue be achieved. Web3 creator economy applications worthy of attention: Mirror: (@viamirror) it combines content publishing with web3 technology, stores content in Arweave, and publishes it to fans by connecting wallets. Besides, all posts on Mirror are mintable, turning fans into collectors; Rally: (@rally_io) YouTube’s Web3 alternative. It is a platform for creators and their communities to build their independent digital economy. It prioritizes creators and allows them to promote interaction with the community around social tokens. Bill Gates once said: “most people overestimate what they can do in one or two years and underestimate what they can do in five or ten years.” Now it seems that the Web3 market with 1 billion users is still far away from us. But nothing is impossible, it is only a matter of time. As a Web3 practitioner, the only thing we can do is to provide better Web3 services to all corners of the world and all aspects of everyone’s life through the constant building, thus making this day come earlier. Note: This article is a CGV research paper and is for reference only. It does not constitute any investment proposal. About Cryptogram Venture (CGV): A Japan-based research and investment institution engaged in crypto. It has participated in early investments in Republic, CasperLabs, AlchemyPay Graph, Pocket, and Powerpool, as well as the Japanese government-regulated yen stablecoin JPYW, etc. CGV FoF is the limited partner of Huobi venture, Rocktree capital, Kirin fund, etc. Currently, CGV has branches in Singapore, Canada, and China. 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