Shifting Tides and a New Age of Exploration

The best part of ETHDenver 2024 was watching two opposing groups collide in a classic left-curve / right-curve debate.

One arrived with a risk-on, full send mentality in anticipation of a coming mega cycle.

The other came in struggling to find the fundamentals to make sense of today’s market euphoria.

In the short term, I think both are probably right. The setup for a massive, prolonged run up in crypto looks pretty good, even if the current momentum in public and private markets has almost certainly lost sight of fundamentals.

But a closer look suggests something different might be going on this time.

Where previous bull markets drove users, those cycles tended to look less like true adoption and more like a levered macro beta.

Today, those fluctuating waves of liquidity are set to give way to a permanent shift in the tides thanks to three major tailwinds:

Macro x Crypto’s Mainnet

The explosion in public and private markets—thanks to a mix of AI hype and economic optimism—masks several secular changes playing out.

In fact, rather than reverting to pre-pandemic norms, a very different geopolitical paradigm is emerging: one centered on fragmentation and cross-border competition.

While these new dynamics will materially challenge incumbents, they present a generational opportunity for crypto to make the jump to global adoption.

Crypto’s first decade was an extraordinary testnet marked by grassroots development, exuberant highs and difficult lows. Now in its second decade, crypto is ready for mainnet as the world’s interoperability layer: a neutral home for economic exchange and technological innovation in an age that desperately needs it.

Why?

For crypto, secular changes are positive tailwinds arriving at the perfect time.

Real structural shifts in the pipes that have underpinned global trade for the last two decades are being accelerated by very serious fractures in international relations. A restructuring of global supply chains and trade rails accelerated in 2023 and has become a core focus for companies and governments alike.

Meanwhile, over 54% of the world’s population and close to 60% of global GDP are undergoing an election cycle where protectionism is already a major focus as several major military conflicts play out in real time.

Equally relevant to crypto is an evolution in the art of international competition. Countries no longer rely solely on rockets and bullets.

America weaponized international finance in response to Russia’s invasion of Ukraine, while OPEC and Russia have shown they are happy to respond in kind by manipulating energy supplies.

In parallel, techno-nationalism around semi-conductors and other critical inputs has seen rhetoric replaced with action in the form of sanctions and subsidies.

This fragmentation of global commerce is damaging to margins in the developed world, while for the 40% of the world living in Lower-Middle Income (LMI) countries, the impacts are even more existential.

For individuals in LMI countries in particular, crypto provides vital solutions to everyday problems, and its importance only grows alongside systemic challenges. The data confirms this story: grassroots crypto adoption is not only reinforced but accelerated when geopolitical strains rise.

Likewise, for private enterprises this confluence of factors introduces significantly greater costs and restricts access to new consumer markets, all of this in a world where the cost of capital is no longer zero.

The trade wars & tariffs of the last few years have already proven damaging to businesses and domestic economies, and those negative impacts risk compounding as companies adapt to a new reality.

As a result, enterprises and individuals increasingly need to make a choice:

This crossroads reminds me of an intriguing historical parallel:

When Constantinople fell to the Ottomans in the 1400s, its new conquerors inherited control over a geographic nexus connecting global commerce across the ‘Silk Road’.

Famously, the Ottomans would soon move to restrict the overland trade routes that had thrived for centuries. The result pushed European powers to take to the seas in search of new trade routes, thereby igniting the ‘Age of Exploration’ that shaped the modern world.

This time around, it will be blockchains where the riches and perils of the New World will be found by those brave enough to set sail.

Reaching Enterprise Scale

There’s another important point worth hitting on: crypto has historically been a staging ground for large companies looking to experiment with a new technology.

Because of the factors covered here, the traditional enterprise’s exploration of crypto is now transitioning from R&D to production grade.

• Companies will accelerate efforts to explore digital assets and onchain ecosystems as a key source of greenfield markets. What was once a vanity project will increasingly become an existential mission.

• Capital allocators will scale up crypto-native deployment and participation to insulate against ‘beta’ exposure to global risk and uncertainty. There won’t be many places to hide in the old world.

• Systemic challenges in different regions (inflation, capital controls, cold / hot conflicts) will drive even greater relevance and need for digital assets. Permissionless blockchain infrastructure will start grassroots before going global.

To be sure, economic and geopolitical challenges have always driven users to crypto, particularly in developing markets.

But the scale and scope of challenges the world must navigate in the coming years presents a unique window for crypto to become the de facto system for free commerce and culture.

Institutional Flows

Of course, all of this is contingent on the final piece of the puzzle: bringing institutional capital onchain.

The approval of spot BTC ETFs marked a major turning point on this front, and it would seem a similar outcome is on the horizon for ETH.

Already, BTC ETFs have seen more than $7.5B in net inflows, and those launched by BlackRock and Fidelity marked the largest debut months of any ETF in the last 30 years.

This incredible momentum is what will finally allow the biggest institutions to join over 52M Americans and another 500M around the world in the onchain economy.

If the tectonic shifts in macro are providing the spark, the flow of institutional capital represents the gas that will light the fire underpinning crypto’s prime-time moment.

Middleware & Infrastructure Upgrades Drive Growth

The exogenous setup is outstanding. Are we ready to seize the moment?

I believe the answer is yes.

Following the crashes of 2022 that sent tourists scattering, crypto natives worked through self-reflection of the excesses and shortcomings that enabled the bubble in the first place.

As capital and talent consolidated around what felt like a full systems upgrade, colossal progress was made across all layers of the stack, setting the stage for a major coming cycle of adoption at scale.

The flow of private funding throughout the year reflected that story. The year started with financial infrastructure commanding the largest share of funding, followed by wallets, and ended with the former dominant once again and L2/interoperability projects in second place.

Amidst all of this, what is particularly fascinating is the infrastructure-application flywheel is starting to catch fire with more concentrated purpose than ever before.

The needs of a growing class of crypto-native consumers are driving directional and focused improvements in the tech stack, which in turn is yielding new use cases and applications.

Superior UI/UX is Fueling Adoption

Q1 2023 saw the release of the ERC-4337 standard, designed to transform externally owned accounts (EOAs) into smart contract wallets to enable customizability, better private key recovery mechanisms, and a materially more streamlined user experience.

Even more impactfully, teams like Privy* made massive progress by simplifying onboarding with embedded wallets to minimize user friction while letting developers design more contextual experiences.

Privy’s efforts helped streamline Friend.Tech’s explosive early capture of 100K addresses in a matter of weeks, and they’ve gone on to power onboarding for OpenSea, Zora, Blackbird and others to the tune of 2M+ users across 150+ countries in the last 13 months.

Meanwhile, Farcaster’s* launch of Frames—a new primitive allowing people to embed interactive experiences directly within Casts—is a transformative move that is already supercharging activity on the platform.

Farcaster has over 8M+ reactions across 4M+ casts and may well represent early signs of a crypto-native consumer app hitting escape velocity.

New Design Spaces Are Getting Bigger and Better

Just as Ethereum sought to go beyond Bitcoin’s functional limitations, a new generation of projects are now targeting Ethereum’s own structural shortcomings in a wave of modularity.

Alternative L1s & side chains have been a feature of previous cycles, but none have succeeded in disrupting Ethereum’s (mainnet) dominance of users, TVL, developers and activity.

This changed with the launch of rollups like Arbitrum and Optimism—projects designed to enable better throughput and lower fees by offloading computation from Ethereum.

While these new layers have reached scale that rivals, or in some cases surpasses, Ethereum itself, builders are dreaming bigger as they seek to further optimize the L1 stack.

That’s because even though the number of daily active users on L2s has risen 8x in the last year, much of what users are actually doing looks largely similar to historical L1 activity. As a result, the emerging consensus is that offloading transactions to cheaper execution environments isn’t enough to enable truly novel onchain experiences.

We need to actually rearchitect the components underpinning blockchains, from Data Availability (DA) to state access bottlenecks and parallel execution.

Standalone data availability (DA) layers built to scale to web2 performance parity (i.e., EigenDA, Celestia, Avail) are coming to market alongside upgraded virtual machines, some based on the EVM and others using alternate engines like Move’s (Movement Labs*) or the Solana VM (Eclipse). Some of these are building L2s to optimize execution only (MegaETH), while others are launching net new L1s from the ground up (Monad).

Meanwhile, EigenLayer’s mission of providing a shared security layer via restaking is making it possible for a new generation of projects to launch in a way that minimizes the need to bootstrap native liquidity and therefore deviate from the core security model of Ethereum itself.

All of this means the underlying infrastructure, tooling, and design optionality on offer to web3 builders is approaching unprecedented levels of maturity and performance.

As crypto’s ethos increasingly resonates alongside upgrades in infrastructure, tooling, and middleware, we’re seeing a promising story in the data underpinning crypto’s paramount leading indicator: developer flows.

Building on blockchains should not just be a more meaningful exercise, but a more technically performant one that effectively empowers developers to design the future of the open internet.

Significantly better retention of existing developers and onboarding of new ones amidst difficult market conditions speaks volumes to the work that’s been done on this front.

Open-Source AI & Crypto Rails

And finally, our belief is that the intersection of crypto and AI—two paradigm shifts in their own right—represents one of the most transformative moments in modern history.

Blockchain rails have successfully undergone a multi-year pressure test in the design of a permissionless system fit for a digital age, and especially an age shaped by generative AI.

Crypto’s toolkit of solutions tackles pertinent problems ranging from resource and liquidity coordination, asset ownership, data provenance, attestations, and much more. Crucially, the maturity of the ecosystem and technology stack are arriving just in time to meet the demands of the AI revolution.

While there is ample room for blockchains to streamline existing machine learning (ML) flows, the most exciting opportunities will emerge where crypto and AI converge to enable completely novel outcomes.

The most exciting new design spaces will span areas like:

• Decentralized storage underpinning shared, permissionless repositories for data to enable better training or more performant models via Retrieval-Augmented Generation (RAG)

• Zero Knowledge Proofs for model or content verification, training or user data privacy, or enabling edge and local (client side) inference

• Novel information markets and better mechanisms for collecting higher quality data as foundation models require more specialized data inputs to continue evolving

• Autonomous agents transacting on smart contracts that uniquely enable them to accumulate resources, knowledge and assets using machine-operated private keys

As crypto rails impact everything from the supply of compute to markets for data to the collective creation and monetization of powerful foundation models, open-source AI/ML will be supercharged by crypto, fueling a renaissance in human productivity and open collaboration in the coming years.

Crypto will be the best way to get exposure to the rise of AI, as a proxy via blue chip assets like ETH or directly through ownership or speculation across agents, models, networks, and datasets.

What’s Next?

We’re at an inflection point for this industry. After years of grinding in spite of market, incumbent, and regulatory resistance, the tides are finally shifting.

Crypto’s moment has arrived thanks to the convergence of a few significant tailwinds that are finally ushering in the decentralized future. Amidst this renaissance of infrastructure and middleware, which is already enabling a step function evolution in the onchain experience, there’s an important point we should keep in mind.

In a perfect world, modularity enables not just specialization but also a dissemination of control and points of failure across multiple contributors. However, each of these new puzzle pieces involve different technical and security assumptions, incentive mechanisms, token dissemination roadmaps, VCs, foundation setups, and internal politics.

I don’t want to detract from the inspiring efforts of builders across the space last year, especially in the face of a brutal economic downturn. But as activity and excitement pick back up, it’s imperative we escape the echo chambers and false signals of token grants masquerading as logical integration partnerships, effective PR as community approval, or incentivized behavior as a proxy for organic adoption.

In the coming years, we have a shared responsibility to keep this growing number of projects accountable across technical design choices, token concentration, value dissemination, ideology, and governance.

That’s how crypto wins the endgame.

*denotes an Archetype portfolio company

Thank you to my Archetype colleagues Katie Chiou, Benjamin Funk, Aadharsh Pannirselvam, Ash Egan, Tyler Gehringer, and Dmitriy Berenzon for thoughtful review and feedback.

Announcing Our Investment in Ritual

Archetype is thrilled to lead Ritual’s $25M round and unlock the emerging synergies between AI/ML and crypto.

Earlier this year, ChatGPT became the fastest growing platform ever when it reached 100M active users just a few months after launching. It has since catalyzed a frenzy of adoption and investment around the world.

Our belief is that Ritual is positioned to accelerate a similar phenomenon in web3 by bringing AI onchain and into the hands of crypto’s developers and users.

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THE FOUNDATION FOR OPEN AI INFRASTRUCTURE

Ritual is building the foundation for open AI infrastructure in the form of an incentivized network, connecting distributed computing devices. Ritual will be starting with GPUs, serving compute, inference, and model fine-tuning needs, alongside a proof layer with both deterministic and probabilistic proofs to ensure computational integrity.

The incentivized network will permit users to run inference and fine-tuning against a suite of models, ranging from classical to foundation models. These can be built by anyone and will all be hosted on Ritual.

Ritual’s network opens up the supply side for models, compute, and onchain ML services, and entrenches them deep within a critical flow of discourse and shared innovation while also rewarding model creators for bringing innovative and new models across different architectures to the Ritual ecosystem.

Ritual’s overarching mission is to advance collective collaboration and the integration of AI onchain, empowering developers to bring to life more compelling and expressive user experiences all while staying true to crypto’s ethos of being open, permissionless, and gatekeeper free.

AI can enable efficient workflows, transparent governance for existing use cases, as well as a new wave of scenarios where agents, models, and AI-powered smart contracts can operate onchain.

We have high conviction the result will materially advance the overall web3 ecosystem and invite a new – and much larger – audience to find value onchain.

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AN INDUSTRY-LEADING TEAM

Ritual is constructing a team to streamline the emerging design space of AI and blockchains, with a deep bench that brings world class experience across both crypto and AI.

Led by Niraj Pant (ex-GP / Head of Investments at Polychain) and Akilesh Potti (ex-Partner at Polychain, ML @ Palantir) alongside a 20-strong team, Ritual is composed of some of the most widely respected professionals in the fields of crypto and AI/ML respectively.

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MARKET OPPORTUNITY & LOOKING AHEAD

Ritual’s emerging platform is built for crypto-natives looking for AI models and services comparable to OpenAI and HuggingFace. Its SDK allows for both web2 and web3 developers and teams to enter the fray in a seamless yet powerful way.

Because Ritual is purpose-built to sit at the intersection of web2 and web3 infrastructure and users, its market opportunity is a function of growth across both worlds.

Traditional enterprises are increasingly incorporating web3 into their business strategies, and our belief is that they will look to build or partner with ML-powered systems using inputs from existing markets as well as the nascent domain of blockchains in order to streamline the end user experience.

Ritual is planning to launch its alpha platform in early 2024 with an initial SDK in the coming weeks, and intends to use its fresh funding to develop critical network infrastructure, hire world-class talent, and expand its ecosystem of model creators, compute providers, and end users.

Learn more about Ritual at ritual.global and follow them on X/Twitter at @ritualnet.

Seeding Stackr

Archetype is delighted to lead Stackr’s $5.5M Seed Round alongside Lemniscap, Superscrypt, and several other outstanding VCs and angels.

Stackr’s mission is to empower a new class of onchain builders by providing a customizable micro-rollup SDK and verification layer that resemble the conventional developer experience. By prioritizing technical flexibility in the form of micro-rollups, Stackr offers developers a way to build crypto-native applications with familiar tooling while maximizing design choice.

STACKR

Stackr’s value proposition is targeted at two major issues prevalent across blockchains today:

First, web3 development is still very difficult. Building apps onchain is an intimidating experience with a steep learning curve – a major reason why there are less than ~10K full-time developers active today.

Second, builders need more flexibility. Web2 enterprises face unique product, regulatory, and user dynamics. How and why they integrate with blockchain varies significantly, so teams need the design freedom to tailor their onchain strategies accordingly.

Stackr’s micro-rollup framework solves these issues by allowing teams to easily launch new web3 applications, or otherwise migrate existing applications onchain by progressively decentralizing their stack at their own pace.

We’ve written before about the evolution of the interoperability stack and its implications for building scalable, performant applications. Our belief is that micro-rollups represent one of the most exciting developments in this frontier, with the potential to supercharge developer and application efficiency.

ENTER MICRO-ROLLUPS

Conceptually, micro-rollups build on the legacy of microservices in web2. These microservices dramatically simplified and enhanced technical production by breaking down monolithic systems into specialized services, and connecting them to an application’s front end via an API layer.

Micro-rollups go a step further than microservices - and even app-rollups - by transitioning a decentralized application’s architecture to a setup where individual functions can be developed and optimized as independent state machines.

The result is an evolution from app-specificity to logic-specificity which materially improves flexibility, efficiency, and overall performance for onchain applications.

Stackr’s approach to decoupling individual features as micro-rollups that serve smaller, isolated purposes ultimately accelerates production cycles. Each micro-rollup can be upgraded independently or optimized for a specific performance outcome or business need.

Further, Stackr’s SDK allows developers to use the programming language of their choice. This greatly, and immediately, increases the number of developers who are able to build on blockchain today.

Ultimately, Stackr’s micro-rollup framework and SDK expand the strategic and architectural choices offered to application builders. These range from fully onchain dapps to hybrid products for traditional web2 companies looking for finer control over deployment and integration over time.

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Source: Stackr's Micro-Rollups Article

STACKR’S STACK

The core products underpinning Stackr’s micro-rollup framework are its SDK and accompanying decentralized verification layer.

The SDK provides developers with the tools needed to build app-specific micro-rollups with maximum flexibility around programming language, proof integration (fraud or validity), ordering (centralized or decentralized), and more.

Meanwhile, the verification layer will consist of a decentralized network of nodes that processes and bundles transactions, generates proofs and performs verification, and submits data/proofs onchain. Stackr also plans to incorporate a proof marketplace that application developers can leverage to better emphasize flexibility and performance.

To further empower developers, Stackr is building a Module Marketplace that will offer a number of modules off the shelf for things like accounting, identity, and more across different development environments and optimized applications.

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Source: Stackr's Micro-Rollups Article

STACKR’S ROADMAP

In the coming months, Stackr is focused on releasing an initial version of their SDK built atop Ethereum, which will be compatible with Python and JavaScript.

The team, led by Kautuk Kundan, is making it a point to build in public. They are optimizing for transparency and positioning Stackr to learn from – and grow alongside – the open developer community.

If you’re as excited about Stackr as we are and looking to build with them, you can join their waitlist or apply to join their team!

Blockchains and the Future of AI

PLATFORM SHIFT, MEET PLATFORM SHIFT…

The world is shaped by periods in which extraordinary upheavals in technology or infrastructure coincide, unleashing a generational step function in innovation. Think telegraphs and railroads, fiber-optic cables and the internet, or mobile phones and 3G. 

Our belief is that the intersection of two groundbreaking frontiers – Artificial Intelligence (AI) and blockchains – represents a similarly transformative moment. 

Three important pillars underpin this thesis:

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BLOCKCHAINS CAN OFFER A SUPERIOR DESIGN SPACE

AI’s high-impact areas are numerous but can broadly be summarized into three main categories:

In particular, Generative AI introduces unique challenges and opportunities that we believe play to the strengths of blockchain technology.

To understand why, it’s important to consider the core inputs that drive the evolution of intelligent systems. Machine Learning (ML) is fundamentally powered by data (quantity but increasingly quality), feedback mechanisms, and compute power.

Dominant players in AI/ML like OpenAI (backed by Microsoft) and Anthropic (with Google and Amazon) are already consolidating resources and building walls around their models and data. But despite early advantages in compute, data, and distribution, this approach risks stifling momentum by fragmenting the collaborative development cycles that birthed the industry in the first place.

Offering a viable counter to this are blockchains like Ethereum, which have emerged as credibly neutral systems of data and compute fueling open-source innovation.

Blockchains already underpin a range of digitally native primitives that are well positioned to serve critical roles in a world increasingly shaped by generative AI.

Our belief is that there is a major opportunity for blockchains to become the primary domain upon which open-source research & development in AI compounds.

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THE STATE OF TODAY’S MARKET

A tremendous amount has already been invested in this year’s generative AI frenzy across core infrastructure, the model layer, and even user-facing applications like chatbots, customer support, and coding assistants. Despite that, where (and to whom) value accrues across the traditional stack in the long run isn’t obvious.

In the current paradigm, AI risks being a centralizing force that extends the dominance of web2 market leaders. At the infrastructure and model layers in particular, the name of the game is scale – in hardware and capital resources, access to data, distribution channels, and unique partnerships.

Many of these players – from cloud service providers like AWS to hardware manufacturers like Nvidia to longstanding heavyweights like Microsoft – are going full-stack, whether vertically via M&A or through proprietary partnerships.

The titans at the top are competing for scale and accuracy at the margin, but the market for ultra-expensive, high-accuracy enterprise API models may well be constrained by economics, emerging performance parity of open-source, or even a trend towards lower-latency workload needs.

Meanwhile, a large portion of the middle market is already seeing a commoditization in offerings resembling a collection of ‘OpenAI API wrappers’ with indistinguishable albeit sufficient functionality.

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BUILDING ON OPEN-SOURCE MOMENTUM

Open-source datasets for pretraining, training and finetuning, as well as freely accessible foundational models and tools, are already encouraging enterprises of all sizes to get creative with open systems & tooling directly.

A leaked paper from Google outlined just how quickly the gap is closing between the closed and open- source worlds. Notably, 96% of today’s code bases already use open-source software, with the trend particularly evident across Big Data, AI, and machine learning.

Meanwhile, the cloud services oligopoly may be ripe for disruption anyway.

Historically, the big three of AWS, Google Cloud, and Azure have come to own the market by layering on tools and services to entrench themselves deep within the enterprise stack. This dominance has led to a number of challenges for companies, ranging from restrictive operational dependence to excessive costs associated with cloud infrastructure, especially given the premium charged by the major providers.

The pressure on incumbent companies to restructure operating expenses, coupled with a desire to experiment with and integrate the growing range of open-source AI, will create a window to reimagine the stack with decentralized alternatives.

The emerging intersection of open-source AI and blockchain technology therefore presents an extraordinary domain for experimentation and investment.

CRYPTO X AI: A MUTUALLY VALUABLE RELATIONSHIP

We’re profoundly excited by the potential symbiosis between AI and blockchains.

Crypto middleware can drastically improve inputs across the supply side of AI by establishing efficient markets for compute and data (provision, labeling, or finetuning), as well as tools for attestation or privacy.

In turn, decentralized applications and protocols will reach new heights by ingesting the fruits of that labor. 

Undeniably, crypto has come a long way, but protocols and applications still suffer from tooling and user interfaces that remain unintuitive for mainstream users. Likewise, smart contracts themselves can be constricting, both in terms of manual workload demands for developers, but also in overall functional fluidity.

Web3 developers are a remarkably productive bunch. A peak of just ~7.5K full-time developers have built a multi-trillion-dollar industry. Coding assistants and DevOps augmented by ML promise to supercharge existing efforts, while no-code tooling is rapidly empowering a new class of builders.

As ML capabilities get integrated into smart contracts and brought onchain, developers will be able to design more seamless and expressive user experiences and, eventually, net-new killer apps. That step function improvement in the onchain experience will attract a new – and likely much larger – audience, catalyzing an important adoption-feedback flywheel.

Generative AI may prove to be crypto’s missing link, transforming UI/UX and catalyzing a major wave of renewed technical development. In turn, blockchain technology will harness, contextualize, and accelerate AI’s potential.

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USING BLOCKCHAINS TO BUILD A BETTER MARKET FOR DATA

DATA IS ML’S FOUNDATIONAL INPUT

Yes, huge improvements in compute infrastructure have been instrumental, but enormous repositories of data like Common Crawl and The Pile are what made the foundation models captivating the world today possible.

Moreover, it’ll be data with which companies refine the models underpinning their product offerings or build competitive moats going forward. And ultimately, data will be the bridge between users and personal models that run locally and continuously adapt to individual needs.

The competition for data is therefore an essential frontier, and one where blockchains can carve an edge – especially as quality becomes the prized attribute shaping the market for data.

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QUALITY OVER QUANTITY

Early research suggests that up to 90% of online content may be synthetically generated in the coming years. While synthetic training data offers advantages, it also introduces material risks around deteriorating model quality as well as the reinforcement of biases.

There’s a real risk that Machine Learning models may deplete non-synthetic data sources in the next few years. Crypto’s coordination mechanisms and attestation primitives are inherently optimized to support decentralized marketplaces where users can share, own, or monetize their data for training or fine-tuning domain-specific models.

As a result, web3 may prove to be a better and more efficient source of human-generated training and fine-tuning data overall.

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COMPOUNDING PROGRESS

Decentralized training, finetuning, and inference processes enabled by blockchains can also better preserve and compound open-source intelligence.

Smaller open-source models refined using efficient fine-tuning processes are already rivaling their larger peers in output accuracy. The tide is therefore starting to shift from quantity to quality in terms of source & fine-tuning data.

The ability to track and verify the lifecycle of both original and derivative data enables reproducibility and transparency that will fuel higher quality models & inputs.

Source: Will Henshall / Epoch (TIME)

Blockchains can build a durable moat as the primary domain with diverse, verifiable, and tailored datasets. This can be particularly valuable as traditional solutions over-index on algorithmic progress to counter data shortfalls.

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THE CONTENT TSUNAMI

The coming tidal wave of AI-generated content is another place where crypto’s early-mover advantage will excel.

This new technological paradigm will empower digital content creators at unprecedented scale, and Web3 offers plug and play foundations to make sense of it all. Crypto has homecourt advantage thanks to years of development around primitives that establish ownership and immutable provenance of digital assets AND content in the form of NFTs.

NFTs can capture the entire content creation lifecycle, but can also represent digitally-native identity, virtual assets, or even streams of cashflows.

As a result, NFTs make possible new user experiences like digital asset marketplaces (OpenSea, Blur), while also rethinking business models around written content (Mirror), social media (Farcaster, Lens), gaming (Dapper Labs, Immutable), and even financial infrastructure (Upshot, NFTFi).

The technology may even combat deep fakes and computational manipulation more reliably than the alternative - using algorithms to do the work. In one glaring example, OpenAI’s detection tool was shut down because of accuracy failures.

A final point: advancements in succinct and verifiable compute will also upgrade the dynamism of NFTs as they incorporate ML outputs to drive more intelligent, evolving metadata. Our belief is that AI-powered tooling and interfaces atop blockchain technology will unleash full-stack value and reshape the digital content landscape.

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HARNESSING ML’S INFINITE KNOWLEDGE WITH ZERO KNOWLEDGE

The blockchain industry’s search for technical solutions enabling resource-efficient compute while preserving trustless dynamics has led to substantial progress in zero-knowledge (ZK) cryptography.

Though initially designed to tackle resource bottlenecks inherent to systems like the Ethereum Virtual Machine (EVM), ZK proofs offer a range of valuable use cases related to AI.

An obvious one is simply an extension of an existing unlock: efficiently and succinctly verifying compute-intensive processes, like running an ML model offchain, so that the end product, like a model’s inference, can be ingested onchain by smart contracts in the form of a ZK proof.

Storage proofs paired with coprocessing can take this a step further, materially enhancing the capabilities of onchain applications by making them more reflective without introducing new trust assumptions.

The implications allow for net-new functions as well.

ZK cryptography can be used to verify that a specific model or pool of data was in fact used in generating inferences when called via an API. It can also conceal the specific weights or data consumed by a model in client-sensitive industries like healthcare or insurance.

Companies can even collaborate more effectively by exchanging data or IP, benefiting from shared learnings while still keeping their resources proprietary.

And finally, ZKPs have real applicability in the increasingly relevant (and challenging) realm of differentiating between human and synthetically generated data discussed earlier.

Some of these use cases are contingent on the need for further development around technical implementation and the search for sustainable economics at scale, but zkML has the potential to be uniquely impactful on the trajectory of AI.

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LONG TAIL ASSETS & LATENT VALUE

Crypto has already demonstrated its role as a superior architect of value flow across legacy markets like music and art. Over the last couple of years, onchain liquid markets representing offchain, tangible assets like wine and sneakers have also emerged.

The natural successor will involve advanced ML capabilities as AI is brought onchain and made accessible to smart contracts. 

ML models, in combination with blockchain rails, will rework the underwriting process behind illiquid assets previously inaccessible due to a lack of data or buyer depth.

One method will see ML algorithms query a massive range of variables to assess hidden relationships and minimize the attack surface of manipulative actors. Web3 is already experimenting with creating markets around novel concepts like social media connections and wallet usernames.

Similar to the impact AMMs had on unlocking liquidity for long-tail tokens, ML will revolutionize price discovery by ingesting massive amounts of quantitative and qualitative data to derive nonobvious patterns. These new insights can then form the basis for smart-contract based markets.

AI’s analytical capabilities will plug into decentralized financial infrastructure to uncover dormant value in long tail assets.

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DECENTRALIZING THE INFRASTRUCTURE LAYER

Crypto’s advantages around attracting and monetizing higher quality data address one side of the equation. The other side – the supporting infrastructure behind AI – holds similar promise.

Decentralized Physical Infrastructure Networks (DePINs) like Filecoin or Arweave have already built systems for storage that natively incorporate blockchain technology.

Others like Gensyn and Together are tackling the challenge of model training across a distributed network, while Akash has launched an impressive P2P marketplace connecting supply and demand around excess computing resources.

Beyond that, Ritual is building the foundation for open AI infrastructure in the form of an incentivized network and suite of models, connecting distributed computing devices for users to run inference and fine-tuning against.

Crucially, DePINs like Ritual, Filecoin or Akash can also create a much larger and more efficient market. They do this by opening up the supply side to a much broader domain that includes passive providers able to unlock latent economic value, or by consolidating less-performant hardware into pools that rival their sophisticated peers.

Each part of the stack involves different constraints and value preferences, and significant work remains to be done in battle-testing these layers at scale (in particular, the emerging fields of decentralized model training and compute).

However, the foundations exist for blockchain-based solutions for compute, storage, and even model training that can eventually compete with conventional markets.

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WHAT IT ALL MEANS

Crypto x AI is quickly becoming one of the most inspiring design spaces. The respective fields are already impacting everything from content creation and cultural expression to enterprise workflows and financial infrastructure.

Together, we believe these technologies will reshape the world in the coming decades. The best teams are natively incorporating permissionless infrastructure and cryptoeconomics alongside AI to upgrade performance, enable net-new behaviors, or achieve competitive cost structures.

Crypto introduces unprecedented scale, depth, and granularity of standardized data into coordination networks, often without an obvious means for deriving utility from that data.

Meanwhile, AI converts pools of information into vectors of relevant context or relationships.

When paired together, these two frontiers can form a uniquely reciprocal relationship that sets the stage for builders of the decentralized future.

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*A huge thank you to Niraj Pant, Akilesh Potti, Jason Morton, Dante Camuto, David Wong, Ismael Hishon- Rezaizadeh, Illia Polosukhin, and others for their work at the forefront of this space, invaluable insights, and inspiration – all of which make possible not only this article but crypto’s bright future.

Backing Satsuma

We’re thrilled to co-lead Satsuma’s $5M seed round with our friends at Initialized Capital to help accelerate Satsuma’s goal to make decentralized applications more performant for both developers and end users.

Open blockchains are revolutionizing the way teams build protocols and decentralized applications by providing access to a vast assortment of on-chain data, but the process of querying and indexing blockchain data remains deeply inefficient.

To enable the next billion users to come on-chain, developers need tools that rapidly accelerate the querying and indexing of blockchain data to boost productivity and underpin robust consumer applications.

Where Satsuma sits in the stack:

Satsuma:‍

Satsuma’s beachhead offering is a drop-in subgraph service that powers a significantly more streamlined and reliable way for developers to explore and utilize on-chain data.

Optimizing for seamless integration is critical. Satsuma makes it easy for teams to switch over to its hosted subgraphs in just a few minutes – unlocking near-instant access to a highly reliable query API and low latency indexing with 99.9% uptime.

Satsuma’s suite of products eliminates the resource-intensive obstacles associated with building on top of on-chain data so that teams can get back to efficient product innovation cycles.

The solutions developed by Satsuma will play a key role in making blockchain data accessible, especially as the application layer evolves beyond its nascency and into the proliferation of mainstream usage and distribution amongst millions of users.‍

State of Play Today:‍

Since launching in September 2022, Satsuma has already partnered with outstanding teams like Decentraland, QuickNode, Aragon, and Syndicate, and has cultivated a deep pipeline of additional customers throughout Web3.

Satsuma is led by founders Jonathan Kau and Dan Li, who are leveraging the team’s engineering experience at global technology platforms like Meta, AWS, Heap, and Twitter to develop a proprietary indexing system that can run up to 100x faster than subgraphs.

Investing in DVT and the Future of Ethereum

Archetype is excited to co-lead Obol Labs’ $12.5M Series A alongside Pantera. At Archetype, we’re strong believers in a future where commerce is powered by smart contracts, with Ethereum as the world’s open settlement layer. 

Our mission as investors is to find and accelerate projects that reinforce Ethereum’s resilience, ensuring that the network lives up to its promise of a decentralized future. 

As early supporters of Obol, we’re committed to supporting them on their journey to bring DVT to Ethereum Mainnet, as well as their broader vision to introduce the technology to other Layer 1 PoS blockchains like Cosmos and Layer 2 scaling solutions (to improve sequencer resiliency).‍

DVT:

Distributed Validator Technology (DVT) is a new primitive that allows Ethereum Proof of Stake (PoS) Validators to be run across multiple nodes operated by a diverse community or group acting as a single validator.

Distributed Validator nodes operate as a unified cluster by incorporating Charon – Obol’s middleware client – that coordinates individual partial validator signatures in order to create an aggregate signature on behalf of the Distributed Validator.

In a Distributed Validator cluster, each node holds a key share of an aggregate validator key, without the entire key existing in any single location at once. As long as more than two thirds of operators are online, the distributed validator performance is unaffected – even as some nodes in the cluster go offline.

Obol Labs is leading the effort to develop and bring to market DVT – which is critical for decentralization and PoS network security. Obol’s Charon is an additive middleware piece to be incorporated into the broader technology stack by liquid staking protocols and other core ecosystem participants.

As the largest liquid staking provider on Ethereum, Lido has already conducted a successful pilot integration of DVT with Obol on the Goerli testnet, having previously approved a LDO research grant to Obol.

‍What DVT Unlocks:

DVT minimizes correlation risk by diversifying across geographies and client configurations. With DVT, participating nodes in a cluster can run on machines using different validator, consensus, and execution clients from anywhere in the world.‍

Diverse node clusters also reduce downtime and potential slashing risk, allowing for significantly improved operator efficacy. Notably, operators seeking to improve uptime no longer need to risk slashing by running active-passive setups in which backup “passive” environments activate in the event the active node fails. In such situations, a variety of errors can lead to both nodes actively attesting with the same validator key and getting slashed as a result. ‍

DVT is also critical for single-node validators who are unable to run active-passive setups and are vulnerable to machine failures which lead to missed rewards, downtime, and ultimately weaker overall network infrastructure for Ethereum.‍

DVT allows Liquid Staking Providers to democratize staking. Teams like Lido have prioritized the democratization of staking to enable a broader community of members to participate in running validators, as well as protocol decentralization. Obol is therefore working closely with LSPs like Lido, Stakewise, and others to implement DVT.

‍Obol Today: 

Obol’s Athena testnet resulted in a remarkable 5,000+ signups, 200+ successful Distributed Key Generation (DKG) ceremonies, and 100+ Distributed Validator Clusters signing attestations across 40+ countries.

Obol’s active community of 9,000 members is indicative of the excitement and potential surrounding DVT. Where validators are currently seen today as individual actors, a future underpinned by Obol’s DVT will see validators run by distributed communities.

The net result will significantly improve efforts to decentralize Ethereum, reinforce its architectural resiliency, and open the door for people around the world to play a role in validating the network underpinning a global commercial and financial settlement layer.

The Obol team, led by Collin Myers and Oisín Kyne, has long been involved in building core infrastructure throughout crypto, and is responsible for multiple tools including the ETH2 LaunchPad, the ETH2 Calculator, the Internet Bonds thesis, as well as core DVT research at the Ethereum Foundation.

Looking Ahead to Crypto’s 2023

2022 may be remembered as the year of the Black Swans and the fraudulent architects responsible (from Terra/Luna to 3ac, Celsius and FTX’s grand finale) – and rightly so – but it was also a year of remarkable innovation and world class talent inflows.

The tremendous correction in both liquid and private valuations – as well as the wash out of excess leverage and god-like ponzi actors – will ultimately prove beneficial to crypto in the long run.

That said, it was 2020/2021’s macro set up that fueled last year’s events, and it’ll predominantly be macro forces that dictate the speed of crypto’s recovery in 2023 by driving capital and talent inflows.

MACRO & A CHANGING WORLD:

Covid-19 lockdowns, followed by monetary tightening, a collapse in energy supplies as Russia invaded Ukraine, and China’s unwavering commitment to Zero Covid, exposed an uncomfortable reality concerning the prevailing economic order.

• Intricate global supply chains built on decades of stable diplomacy have resulted in an extreme overreliance on cross-border human capital, logistics, and raw inputs.

• As international relations deteriorated and supply chains fractured (made worse by a post-lockdown shift in consumer spending from services to goods), immense stress has been exerted on the global economy, demonstrating a vulnerability to a changing macro landscape.

• While some of these drivers are transitory, others will prove permanent – namely, tighter flows of talent and goods, as well as weaker international collaboration on technological development.

• Another major headwind facing many countries: aging populations. In the U.S., the fertility rate sits well below the replacement rate, and at record lows. Given international tensions, skilled immigration isn’t likely to be a solution here anytime soon.

• An aging population means a falling labor supply, a decline in productive output, and upward inflationary pressure as governments spend more on care while the elderly become net spenders on healthcare.

2023 will therefore force major countries – in particular, the U.S. – to confront an existential crisis on their ability to power the future of economic and technological progress.

As the domain of permissionless innovation and borderless collaboration, crypto’s relevance in the coming years will be extraordinary – playing the role of digital successor to Silicon Valley and the primary enabler of collective invention.

INFLATION OUTLOOK:

Aggressive fiscal stimulus in response to Covid-19 meaningfully increased disposable incomes, which in turn caused demand to skyrocket in the post-pandemic consumer rebound.

On the supply side, disruptions in manufacturing and transportation networks (driven by prolonged lockdowns in China as well as geopolitical instability in East Europe) pushed up prices of everything from commodities and inputs to shipping and end products.

The combined result saw inflation spike to levels not seen in a generation, and eventually pushed Central Banks (led by the Fed) to raise rates at a near-record pace.

Unsurprisingly, markets plummeted as the cost of inputs and capital skyrocketed, while soaring discount rates reworked the calculus that has underpinned risk assets for a decade.

With China’s reopening this year in particular, prices tied to commodities, manufacturing, and transportation will begin to recede. Meanwhile, the war in Ukraine has seriously accelerated political efforts to adopt alternative and sustainable sources of energy.

That said, inflation is likely to persist above the Fed’s target in the near future as the energy transition takes time and countries and companies reconfigure supply chains to prioritize self-reliance, keeping prices high and permanently denting margins for multinational corporations.

So, while the Fed is likely to soon call an end to its aggressive rate hike strategy, it is unlikely to cut them in 2023, leaving risk assets in an enduringly difficult position.

An important point as we think about a potential recession and prolonged bear market is that thanks to post-2008 regulatory changes, commercial banks remain well capitalized, meaning that while the cost of capital has risen dramatically, the major institutions underpinning global capital markets are well positioned to avoid a credit crunch.

Regardless, crypto is going to have to build its way out of the bear – and it will.

Active developer counts in crypto have staying power in down markets, so the rich talent that came into the space in 2021 and 2022 is largely here to stay, with the opportunity to now go heads down with plenty of cash to deploy.

The bigger question is how traditional high-growth companies find a way forward now that their most reliable levers of profitability – cheap debt, free flowing capital markets, and margin expansion by building in and sourcing from emerging countries – have been seriously curtailed.

Another crucial point: US equity markets benefited from $7.5 trillion in stock buybacks following the 2008 Financial Crisis.

In other words, perhaps the biggest driver of the decade’s explosive equity markets (other than a highly favorable macro environment) has been the companies themselves.

With corporates now facing pressing alternative uses for excess capital – as well as new taxes on stock buybacks – a major tailwind behind rising equity valuations is now firmly in the rearview mirror.

CAPITAL ALLOCATION:

Throughout crypto and traditional markets alike, conventional fundamental metrics have gained renewed importance for investors.

2022’s astounding levels of fundraising means there is plenty of dry powder sitting on the sidelines, but fund managers – especially larger institutions who were publicly burnt by investing heavily in the most speculative of opportunities in recent years – will be far more selective going forward.

We’re likely to see a downstream shift in capital deployment as investors concentrate capital in companies with entrenched product-market fit, meaningful revenues, and strong competitive advantages.

Further, we’ll see a major divergence play out between a small group of obvious winners, in which investors congregate en masse, and the remaining players which are deemed too risky for serious investment.

This is a classic overcorrection in response to a substantial market pullback – and one that will open up rewarding opportunities for bold investors willing to embrace risk and continue funding net-new innovation at the earliest stages.

For late-stage private investors, higher borrowing costs and tighter IPO windows will significantly hinder performance in the coming years. As leverage and multiple expansion respectively become less reliable sources of value creation, firms will need to rely even more on earnings growth. A secondary strategy for mature portfolio companies might involve buy-and-build or bolt-on investments to achieve scale and synergies.

Either way, operational value-add will replace financial engineering and an easy macro environment as the principal driver of returns – a shift which should eventually boost company fundamentals and slowly help normalize private (and ultimately public) markets in Q3 and Q4.

Notably, valuations have yet to meaningfully correct in the private markets. A large part of this is because so many companies raised significant amounts of capital last year and have sufficient runway to avoid repricing their equity by going back to market.

We will likely see the lagging effects of the cyclical downturn play out in the private world in the second half of 2023 as cash reserves get depleted and fundraising activity picks back up.

DIGITAL NOMADS:

The Pandemic was highly effective in accelerating worldwide integration of digitally native behavior across use cases like payments, work, social, and healthcare.

• Global 5G usage will triple by 2025, representing over ¼ of all mobile connections. By 2030, more than 80% of the world will have 5G access.

• Conversely, estimates suggest that by 2030, there will be a human talent deficit of over 85 million people, representing $8.5 trillion in lost value.

The result is that billions of new users will come online in a world increasingly constrained by geopolitical tensions and unequal access to resources and opportunities.

These opposing forces will drive millions of new internet participants to engage with social, commercial, and work environments underpinned by open blockchains as their gateway to the world.

Crypto rails will liberate and connect talent with resources and opportunities, transcending the obstacles innate to legacy infrastructure.

2023 will be a year defined not by excess and speculation but by organic adoption of blockchain technology by users with real world needs around the world.

This will be particularly evident in rising flows of global technical talent to Web3’s leading teams.

We’ll also see significantly more net-new innovation and startups originating in historically underserved regions like Southeast Asia, North Africa, and South America.

Given Emerging Markets already dominate the Global Crypto Adoption Index, this’ll be a natural transition in which existing users evolve from participants to builders of the future.

THEMES TO WATCH IN 2023:

Ethereum Becomes the Predominant Blue Chip Digital Asset

While headlines centered on crypto’s more distressing moments, Ethereum had another exceptional year, solidifying its role as the predominant innovation platform and settlement layer.

The Merge was a monumental achievement during which Ethereum seamlessly upgraded its consensus mechanism from Proof of Work to Proof of Stake while maintaining 100% uptime for the tens of thousands in transactions and billions in value operating across the network.

Ethereum’s extraordinary economic capacity and underlying architectureis now complemented by its shift to an eco-friendlier profile (a reduction in energy consumption of some ~99%), sustainable economics (100% direct and indirect revenue pass through to long-term holders) and predictable supply (slashing supply issuance by some ~95%).

The net result is that Ethereum now has an asset with corresponding cashflows that can be valued, an energy profile that will satisfy the mandates of major institutions, and an ownership instrument tied to the settlement layer of the future of commerce.

Investors dramatically deepened their understanding of blockchain technology in 2022.

This year will see those same investors shift their focus from BTC to ETH as Web3’s principal productive blue-chip asset.

Distributed Validator Technology

One major evolution introduced by the Merge is in the shift away from a PoW consensus mechanism – in which economies of scale favor centralization of control across a small number of miners – to PoS, which opens the door for a much wider base of potential participants in network validation.

That said, if Ethereum is to realize its potential as the world’s settlement layer and a true global supercomputer, much work remains to be done in effectively decentralizing its network of validators.

Just 4 entities dominate Ethereum staking, with Lido alone controlling roughly ~30% of validators.

Distributed Validator Technology (DVT) is a new primitive that allows Ethereum Proof of Stake (PoS) Validators to be run across multiple nodes operated by a diverse community or group acting as a single validator. Obol Labs is a leading developer of DVT and is building Charon, a middleware client that coordinates individual partial validator signatures in order to create an aggregate signature on behalf of the Distributed Validator.

DVT’s initial deployment will be on Mainnet but will eventually expand to Layer 2s and other ecosystems like Cosmos. SSV is another team building to enable the decentralized future.

DVT can minimize correlation risk by diversifying across geographies and client configurations, reduce downtime and potential slashing risk, but most importantly, it’ll play a significant role in the democratization of staking in the coming years.

Institutional Momentum Picks Up Where It Left Off – Quietly

One important difference between this winter and those of past cycles is that we’ve cleared a point of critical mass in terms of institutional adoption.

As FTX’s collapse ripped through crypto markets, leaders everywhere ­– from Congress to major institutional investors to technology executives – recognized that it was CeFi that was to blame.

DeFi worked exactly as designed.

Fraudulent centralized entities were using client funds to engage in risky on-chain behavior across DeFi. In one remarkable example, as Celsius’ house of cards collapsed the company was forced to pay back $95 million of its debt with Aave and Compound thanks to the immutable code governing its agreements.

DeFi is leading a revolution that is using smart contracts to reimagine the global financial system, and in a major early test – it performed phenomenally well.

Perhaps institutional adoption of open blockchain technology should be considered inevitable.

In 2022, Stripe unlocked crypto payments for its sellers, with Twitter integrating Stripe’s technology for U.S. based creators to accept crypto payments including USDC. Starbucks reimagined its loyalty program using NFTs, while Reddit launched its Avatar Initiative, with users minting over 5 million NFTs to date – surpassing OpenSea for the total number of users owning NFTs.

Fidelity surveyed 1,052 institutional investors and found that 58% owned digital assets, while 35% believed digital assets to be an independent investment class. Fidelity has also enabled its institutional clients to trade ETH.

BNY Mellon, the world’s largest custodian bank and America’s oldest bank, launched a Digital Asset Custody platform for ETH and BTC, while the Financial Accounting Standards Board revised its treatment of digital assets to make it significantly easier for companies to hold crypto on their balance sheets.

Real World Assets are another exciting frontier. Stablecoins have proven prolific as an early use case. Volumes are up 600% over the last two years, with stablecoins executing an astonishing $7.4T in transactions during 2022 – beating the combined volumes of Mastercard, American Express, and Discover.

RWAs are now expanding beyond the initial use case thanks to teams like Centrifuge, GoldFinch, and Maple Finance, who are paving the way for global institutions to eventually bring trillions in financial transaction value on-chain.

Ondo Finance is bringing US Treasuries and institutional-grade bonds on-chain, allowing stablecoin holders to invest in US Treasuries through a tokenized fund with regulated service providers.

Parcl is another fascinating project committed to bringing liquidity, efficiency, and transparency to the world’s largest asset class with a focus on retail investors.

Their synthetic real estate asset protocol, powered by the Parcl Price Feed, promises to rebalance a global market worth $300T in favor of everyday investors to counter the overwhelming dominance of institutions in the asset class.

The Layer 2 Battle Heats Up

The value of ETH denominated TVL bridged to L2s rose 120% in 2022, with Arbitrum and Optimism in particular attracting talent, capital, and users in large numbers respectively.

Optimism is undergoing a huge enhancement in its scalability infrastructure with Bedrock – an upgrade that will allow for consensus/execution client separation, significantly reduced transaction fees, and sets the stage for the decentralization of sequencers (a major criticism of existing L2 architecture).

Optimism experienced an 847% increase in transaction activity throughout the year, with incentive and education programs including OP Quest playing a major role. Meanwhile, the development of OP Stack – designed to empower builders to create custom Layer 2s – will likely drive further expansion of Optimism’s impressive user base.

Arbitrum also saw its transaction count grow markedly, with an increase of 590% from Q1 to Q4 last year. GMX was the most popular dApp deployed, but the launch of its Nitro upgrade – which introduced increased throughput and better calldata compression – was another boost. Though Optimism initially beat Arbitrum to market, Arbitrum’s open approach has allowed it to rapidly gain market share.

GMX drove an astounding $81 billion in trading volumes last year and kicked off a wave of complementary dApps building around the exchange. The resumption of Arbitrum Odyssey should also help position Arbitrum to continue its strong momentum into 2023.

Meanwhile, Polygon had an incredible year on the business development side, emerging as the partner of choice for many of the largest companies in the world looking to enter Web3. The Polygon team has already made serious inroads on the ZK front by developing a suite of products leveraging the nascent technology, including Hermez, Zero and Miden.

Relatedly, 2022 saw an incredible amount of excitement around Zero Knowledge technology. Emerging consensus suggests rollups built with ZK Proofs will win out over the long term.

The bigger question concerns the ability of teams like Optimism and Arbitrum to pivot their tech stacks should that future play out. Optimism’s development of Bedrock – set to go live sometime in Q1 – would seem to imply the core builders are adjusting their positioning already.

Zero Knowledge Technology

Zero Knowledge Technology benefited from an explosion in interest and capital committed during 2022, and was a headline topic at most conferences, while billions in investments flowed into ZK startups.

2023 is poised to be a major year where the promising technology is finally tested in the wild, with the battle between zkEVM and non-EVM compatible L2s set to dominate. A few teams are working to bring the Ethereum experience to a ZK-enabled environment, while a different group are working on completely separate Virtual Machines to enable a range of new possibilities.

StarkWare (building StarkEx and StarkNet) has emerged as one of the early dominant players amongst the latter, with StarkEx (their initial product) having facilitated $797 billion in cumulating trading volume across 313 million total transactions. The team’s decision to build using the programming language Cairo, rather than around the Ethereum Virtual Machine, means their technology breaks free from a number of limitations tied to EVM architecture and is directly compatible with Account Abstraction.

Matter Labs’ zkSync aims to build the first EVM compatible ZK rollup with native integration of Account Abstraction, though it remains unclear how close the team is to achieving true EVM-compatibility, and whether it can deliver a better user and developer experience by pursuing EVM compatibility.

Meanwhile, Polygon is designing multiple ZK-based solutions – Hermez, Miden, and Zero – and is allocating an audacious $1 billion of its treasury to the space. Polygon is another player building towards zkEVM compatibility.

Others, including Scroll, Aleo, Aztec, Espresso, and even ConsenSys are building their own solutions with different end goals and design choices around security, privacy, and scalability.

Ultimately, the ZK field is crowded but well-funded. 2023 will be the year where the few winners put distance between themselves and the rest of the pack, with differentiators centering on architectural design choices (ie: EVM vs non EVM), as well as business development initiatives (Polygon has done exceptionally well thus far).

The latter may well play a more decisive role this year as dApps and users pay less attention to incremental technological advantages between competing solutions.

App Specific Rollups Expand and Optimize Ethereum’s Horizons

App Specific Rollups are another field that will pick up strong momentum in 2023. As scalability infrastructure matures, many protocols and dApps will find that general purpose rollups are redundant and inefficient in their use of data given their need to mirror the underlying chain and optimize for a wide variety of applications and use cases.

Rollups specifically designed for a single application or purpose are able to leverage the base settlement layer’s security and liquidity while still optimizing for an explicit use case. The outcome is an environment that is secure, efficient, and benefits from the broader ecosystem within which it exists – without relying on risky cross-chain bridging for liquidity transfer.

There are arguments in favor of standalone App Chains – namely, the ability to optimize the entire stack by using different layers (ie: settlement vs execution vs data availability) designed for specific functions.

That said, benefits to building atop a unified settlement layer include the aforementioned security advantages and avoidance of liquidity fragmentation (without taking on unnecessary risk), so App Specific Rollups remain a highly exciting solution in the near term.

Visionary early projects include Stackr and AltLayer, among others. Further development around trustless bridging, including the incorporation of ZK technology, will almost certainly play a determinative role but we’re still some distance from this reality.

NFT Technology / Use Case Expansion

NFTs had a blowout year in 2021, with momentum continuing well into 2022 despite the market downturn. The number of unique NFT traders reached 10.6 million in 2022, increasing 877%, while total sales grew 10% to reach 68 million.

OpenSea remained the dominant marketplace in 2022, but upstarts including X2Y2 and Magic Eden had big years (even when accounting for a ton of wash trading), while SudoSwap was able to capitalize on the bear market’s rejection of NFT royalties.

2023 will see further erosion of OpenSea’s dominance as creators and specialized platforms continue to innovate around concepts like royalties, utility, and other concentrated applications of NFT technology, while teams like Reservoir are enabling a future of curated market experiences by aggregating and making liquidity & orderbooks accessible.

NFTFi will drive new innovation around NFTs as a financial and productive asset. Emerging frontiers including Lending/Borrowing, Renting, Fractionalization, and Derivatives will gain additional traction as blockchain rails transform digital art from the speculative to the productive.

Last year, total loan volume using NFTs as collateral reached $500M in one indicator of the momentum behind this emerging paradigm.

Account Abstraction

Wallets in Web3 have historically taken the form of Externally Owned Accounts like MetaMask, with an address identifier and a pair of private and public keys. This solution offers guaranteed ownership and deep cryptographic protection to users, but also means that if a user loses its key (without a backup seed phrase), they lose access to their account, as well the assets contained within it.

The other issue is that there is a restrictive link between the account controlling the assets and the signer with the power to move the assets.

Account Abstraction is a new solution that breaks that link, enabling transaction authorization to become programable by transforming accounts into smart contracts.

A core unlock here centers on social recovery: in the event a user loses their private key, Account Abstraction can build in additional functionality around replacing the key with authorization, including multi factor authentication. AA also enables multiple signers to hold transaction authorization power to better reinforce security and protect against fraud, while multiple transactions can also be bundled to enable single approval.

In one interesting application, Visa is exploring AA for use in enabling auto payments.

EOAs were an incredible early innovation, but to unlock mainstream entry into Web3, AA is a potentially critical advancement that provides better user comfort and improves the overall experience around ownership and self-custody of digital assets.

EigenLayer & Re-Staking

A hurdle in the development of new decentralized infrastructure and applications is the need to scale capital rapidly in order to secure the underlying architecture in a way that prevents a single actor from attacking or manipulating it.

Beyond initial VC investments and mercenary capital attracted through token incentive programs, many projects struggle to attract and develop a high-quality underlying network of cryptoeconomic trust.

A proposed solution comes from EigenLayer in the form of re-staking – a new primitive that unlocks the rehypothecation of staked ETH from Ethereum’s consensus layer to be used by new infrastructure seeking to build a robust security layer. Stakers can choose to re-stake their ETH in a way that extends cryptoeconomic security from the base layer to other protocols in the ecosystem.

As previously fragmented pockets of capital consolidate, the overall network becomes more resilient, while stakers get exposure to additional yield (albeit at the expense of opening themselves up to greater potential slashing risk).

EigenLayer’s solution therefore promises to bootstrap development of new infrastructure and applications throughout the network, while freeing up staked ETH to become even more productive.

Web3 Social & Decentralized Identity Gets Even Bigger

Decentralized Identity kicks off 2023 with a ton of momentum. ENS – which enables users to create and own Ethereum-based domain names ­– had a defining year.

Over 2.8 million ENS names have been created by more than 630,000 unique users. ENS also announced a partnership with Coinbase, making ENS usernames available to Coinbase IOS and android users.

ENS operates much like a DNS does, translating and linking wallet addresses to human-readable identifiers, and will be a critical piece of infrastructure as more of the world moves on-chain.

POAP is another core primitive that has connected on-chain identities to off-chain activities, allowing communities and their members to build identity and shared experiences using NFT technology. To date, 4.5 million POAPs have been issued by 800,000 unique wallets around shared interactive experiences.

Its partnerships with companies like American Express and Adidas are also indicative of its real-world potential.

Farcaster is building the social network of the future using a permissionless protocol open to developers who can freely build applications using Farcaster’s open data layer. Over 30 such apps have been built on top of Farcaster already, offering fascinating insight into social network effects in a decentralized world.

Farcaster’s approach is already expanding the design space around on-chain social networks in a number of fascinating ways.

Lens is another decentralized social media protocol in which users create a profile by minting an NFT. In order to engage the network (follow someone, create content, etc) Lens users mint additional NFTs on-chain, thereby creating an ever-expanding social graph in which users have full ownership of their social identity. Follower NFTs are programmable and can also be encoded with additional value.

This core unlock removes the power and censorship traditional Web2 media companies retain over their users and represents a major step towards true permissionless social discovery.

Web3 Social and Decentralized Identity primitives are positioned to have an explosive 2023 and will be one of the most exciting arenas for innovation within Web3.

In Summary:

2023 will be an incredible year of collective innovation, free from the noise and speculation that muddied recent years.

Gaming: Crypto’s Native Frontier

For billions of people around the globe, Web3 represents an opportunity to realize a vibrant new digital world — one that isn’t designed and controlled by a handful of executives in the glass towers of primarily Western megacities.

It isn’t just about economic empowerment, either.

Web3 offers transformative potential that stretches deep into the realms of cultural identity, entertainment, and communication… and ultimately into the place where these concepts have converged for thousands of years: gaming.

The Crypto Revolution is going to reshape our world not because engineers in Silicon Valley are creating a new generation of user technology, but because Web3’s diverse participants are creating open infrastructure that people everywhere will use to build new worlds themselves.

Today, gaming is a $200B market composed of 3 billion gamers and the fastest evolving form of media in the world.

In order to understand why gaming will be a core frontier in the context of the social-technological revolution playing out today, we first need to explore gaming’s history and trajectory.

The Very Beginning:

Gaming is as native to human culture as language is (and in fact may even predate it).

Serving as an invaluable social mechanism throughout history, we’ve used games to bond, teach, develop our values, and make sense of the world.

The cradle of civilization that was the Middle East naturally saw the emergence of the first examples. In the 3000s BC, Mesopotamians played The Royal Game of Ur on beautifully painted boards, while the Egyptians played Senet.

Chaturanga would formally appear in India around 600 AD, though examples of its predecessors date back to 3000 BC. The Persians adopted it as Shatranj before European traders brought it over and turned it into Chess.

As far back as 2000 BC, Mesoamericans were playing a ballgame on courts. The activity was of immense societal importance, incorporated in rituals and used to resolve conflicts or even war.

This era also saw Ancient China develop Wei Qi — known today as Go — originally used to practice and refine strategic thinking. Later Chinese dynasties would also invent playing cards and dominoes.

Games have always held enormous societal significance across a variety of contexts — military, social, educational, and entertainment

We now think of it as an industry, but throughout the majority of our history gaming was an intrinsic activity that underpinned most of culture

We congratulate ourselves for our use of games to teach, train, and connect, when in reality humans have very effectively used games to do all of this for thousands of years

Today’s progressive gamification of society — investing, learning, working, collaborating — is really just a revival of an ancient behavior codified in our brains

Back to the Future:

German-American engineer Ralph Baer, inspired by the mass production and ownership of televisions as a key primitive, first envisioned a game that could be played on a home television in 1966. The following year, he and his colleagues at Sanders Associates invented a prototype system known as “The Black Box” — the first multiplayer console video game system, initially licensed under the name of “Magnavox Odyssey.”

This is an important point in the nature of technology:

The creation of a new primitive (in this case, televisions) combines with an existing human behavior (gaming) to unlock a universe of new possibilities

The Odyssey would soon inspire its competitor Atari to launch its own video game in 1972/3, initially an arcade video game called Pong that would later be turned into a version playable at home.

Both the history and future of gaming are underpinned by social connections: yesterday’s arcades will be tomorrow’s metaverse

Leveling Up with Composability:

Atari broke new ground in 1977 by launching the Atari 2600 VCS that allowed users to switch out game cartridges via an external ROM slot. Though Atari built dozens of games themselves, their creation of generalizable gaming hardware allowed third-party programmers across the globe to design their own games for the console.

Other novel features included levels with increasing difficulty, scoring systems, and leaderboards, setting the stage for the communities that would soon form around games themselves.

New Entrants:

An intense wave of consumer demand, fueled by the launch of massively popular games like Space Invaders, was followed by a crash in the industry as excessive hype led to an oversupply of cheap games.

The crash wouldn’t last long, however, as a new (yet very old) powerhouse would rise from the East. Nintendo, founded in 1889 as a manufacturer of playing cards, launched a number of titles in the early 1980s that would shape the industry forever, including Donkey Kong, Mario Bros., Zelda, and other major titles.

Nintendo also launched its own console: the Nintendo Entertainment System (NES), featuring significant technological improvements relative to its existing peers.

In 1989, Nintendo made history once more by releasing the first handheld Game Boy – forever transforming the world of gaming and setting the stage for the mobile revolution that would come many years later.

As we’ll explore later, gaming’s biggest domain has shifted to mobile, paying homage to one of its earliest and most important innovations.

Consoles were never the endgame — they were the intermediate medium while the hardware and software caught up during a long period of intense development

Upgrading the Stack:

The console wars of the 1990s saw companies like Sega, Nintendo, and Sony battle for dominance as they leveraged a rapidly evolving technological ecosystem to develop increasingly sophisticated consoles and game franchises.

The technological explosion that engulfed the world in the ’80s and ’90s saw computers enter millions of homes

The tremendous increase in computing power allowed developers to supercharge their efforts, leading to the dawn of three-dimensional gaming experiences and online play.

As more homes came online, LAN parties became extremely popular, with players meeting up in person to compete by connecting to the local network.

The 2000’s saw a new era of console wars, this time between Microsoft (Xbox), Sony (Playstation), and Nintendo (Wii), with competition centering on graphics, quality of storyline, and, eventually, the online gaming experience. Marketplaces sprung up, allowing users to purchase titles or downloadable content, upgrade software, and communicate with other players.

Advanced open world games with simulated autonomous characters also became extremely popular as a predecessor to the digital metaverse boom we’re seeing today.

PC-based MMORPGs became a global phenomenon in their own right, competing less on graphics or story and more on community, digital identity, and portability.

The explosion in PC gaming offered a glimpse of what billions of users would ultimately prioritize in their gaming experiences

Going Mobile:

Decreasing computing and hardware costs allowed the global gaming audience to grow exponentially over the late 1990s and early 2000s.

Just as the prevalence of personal computers provided a new medium for the industry to expand into, so too did the billions of mobile phones produced in the late 2000s and early 2010s offer a new route for adoption.

Mobile gaming continued where PC-based gaming left off, prioritizing experiences that offered portability, simplicity, and community interaction.

The rise of mobile phones as the primary computing hardware used by billions of people saw the gaming demographic expand into casual players of all ages, with low-cost games spinning up to meet every user profile.

The market for mobile games was worth ~$120B in 2021 and is expected to triple over the next decade as the computing stack gets even better.

As with TVs before, the mobile transformation offers further proof of a recurring historical pattern: technological infrastructure introduced for one purpose tends to unlock astonishing value across myriad others

Blockchains will likely end up underpinning trillions in value across cultural and social use cases we have yet to imagine, extending well beyond the initial applications in decentralized finance

Beyond Gaming:

Just as the demographic has expanded tremendously over gaming’s first few decades, so too has its very meaning.

Two critical developments took place in the late 2010s:

1) The ability to integrate real world culture into the game itself

2) The creation of in-game economies for digital assets

Franchises like Fortnite were early pioneers in recognizing that online gaming was as much about the competition as it was about expressing social identity and connecting over cultural movements in an open, digital environment.

The industry’s life cycle has seen a steady convergence of social interactions and traditional gaming, with the former seemingly on track to eventually eclipse the latter in importance

Ultimately, Fortnite and others have become enablers of a new world in which the peripheral gaming experience often matters most: video streaming, chat, digital cosmetics, microtransactions, etc

Decentralizing Web2:

The rise of Roblox — a platform facilitating and hosting user-created games — represents another major industry development. Roblox boasts an incredible ~200M monthly active users, with over 70% of user sessions taking place on mobile devices.

Just as YouTube broke ground by making video content creation open to everyone, Roblox has turned players into builders (though most users are still only players).

Roblox includes its own in-game currency (Robux) that players can use to purchase items in its digital economy.

The Steam Deck is another fascinating development.

Built on an open-source operating system (Linux), the Steam Deck offers cross-platform capabilities for players to access games from a range of developers, as well as older games using emulation software.

The rise of Cloud Gaming is another emerging trend making gaming accessible to a broader audience.

Now, players don’t need to invest in expensive hardware to access incredible games anywhere in the world.

These colossal themes playing out are a major reason why Web3 makes sense as the logical successor domain for gaming: the ideological alignment is extraordinary

The shift away from expensive hardware and closed ecosystems, the proliferation of a rich social layer, and the quest for creative ownership are inevitably driving the industry towards a blockchain-enabled future

Play to Earn:

The blockchain revolution naturally started with financial applications, given the original purpose of Bitcoin itself was to create a peer-to-peer decentralized transaction system. So it shouldn’t be surprising that the tactics that worked early on in DeFi were soon applied to the world of Web3 gaming.

In particular, two areas saw the most significant amount of early adoption:

• Blockchain-enabled marketplaces for in-game digital assets

• Native gaming tokens that had in-game utility but more importantly served to reward early players

However, most of crypto’s early games have largely been built off-chain, with only the digital economies themselves (exchange and settlement) taking place on-chain.

Ultimately, these games crashed back to earth due to a few key problems:

• Terrible gaming experiences centered on yield generation, inevitably attracting short term mercenaries

• Poorly thought-out economies with native governance and utility tokens effectively programmed to go to zero

• Closed-wall infrastructure that is neither composable nor interoperable

Where We’ve Fallen Short:

The approach to date has essentially been to take DeFi and build narratives with prehistoric graphics and storylines on top of it. Predictably, this approach fell into a dangerous purgatory, having failed to attract serious players or even durable traders.

The next phase of Web3 gaming is gravitating towards improved graphics and storylines, as well as better economic design

This new route won’t be a walk in the park either.

By competing on the DeFi front, games were effectively fighting for attention using yield. This strategy was nearsighted but admittedly worked in a market that could only go up.

By making graphics and storylines the new industry battleground, Web3 developers are taking on the traditional AAA studios who have an extraordinary head start.

More importantly, truly crypto-native solutions are less likely to get built this way. This approach feels a lot more like the late ’90s equivalent of taking every business and throwing “.com” in front of it.

Builders need to be wary of forcing crypto rails into unnatural use cases.

The other issue lies in making gaming an asset-based experience at its core, rather than a social one. By doing so, we create barriers to entry that can be exploited by developers, guilds, speculators, and other potentially malicious actors, thereby derailing crypto’s mission to empower the world.

If crypto-native developers want to win, they need to battle on home ground and on their own terms. Trying to beat the incumbents at their own game is a very challenging (and resource intensive) strategy

Building On Crypto’s Unfair Advantage:

The true renaissance will occur as we start leveraging crypto rails to redefine what gaming looks like.

Part of that centers on the gaming experience:

• Interoperability across games so that players can transport their assets and inventories across different platforms without having to start over. This holds true for identity & in-game achievements as well

• Trustless relationships between players that conceal strategy and/or protect identity. Zero knowledge technology will be incredibly powerful in enabling these use cases

• Complete storage of game logic and state on-chain, removing persistent reliance on developers and creating total transparency around the equality of rules and accomplishments

• Users can shape (and profit from) the direction of games through governance or direct economic ownership

• Player inventories and identities become durable yet dynamic assets as they experience upgrades or depreciation

• Games that exist in perpetuity, free from the constant threat that developers might shut off access

Another component concerns the construction of games:

• By building games entirely on-chain, the creativity of users becomes an asset in itself as players can use open-source game logic and state to build extensions that capture aspects unique to their culture or real-world experiences

• Rather than AAA game developers trying to interpret and incorporate local themes, players are empowered to organically design personalized environments that are infinitely more meaningful by leveraging on-chain primitives

• The Atari 2600 encouraged third-party developers around the world to build new games by making the technological (and capital) hurdle minimal

• Importantly, blockchains also provide a mechanism by which creators of user generated content can own their work

• Using open-source, interoperable software to tear down the walls that AAA studios have built up will set the stage for incredible creativity to flourish around the world.

This version of reality makes winners out of us all

Expanding the Definition:

Another reason for infinite optimism concerns who gamers will be and what gaming will mean.

The rise of the mobile phone marked a critical turning point in bringing gaming to an exponentially larger audience: grandparents and children; teachers and athletes; artists and mathematicians.

The “what” changed as well.

Sophisticated storylines gave way to simple contests like puzzles, spelling bees, chopping fruit, and launching birds.

We’re likely to see that trend continue, with blockchains expanding deep into the domain of classrooms, board meetings, corporate training, sporting events, identity cultivation, and more.

The interoperable and composable nature of truly crypto-native games will see a wide range of opportunities for diverse individuals to contribute

Clothing designers who can build skins and outfits for open world environments; graphic designers who can craft remarkable new digital realities; musicians who can incorporate their songs into games, etc.

In an ideal world, the sustainable economies of Web3 games will center on organic user generated value, rather than utility tokens designed to inflate to infinity

Blockchain enabled gaming may well prove to be the reserve currency that connects our world through shared, immersive cultural experiences

Ultimately…

We’re likely to see hybrid experiments play out in the immediate term. Building compelling games entirely on-chain remains a significant technical challenge, so we can expect continued innovation around games that primarily live off-chain.

Further, expect to see sustained creativity around the question of efficiently recording state changes on-chain while preserving true decentralization and efficient performance.

Supporting infrastructure will be a particularly exciting field in the coming years:

• Cross-game NFT marketplaces

• Interoperability stacks

• Identity primitives derived from in-game activity

• Franchise discovery platforms

• Low-code tooling / SDKs

• On/off ramps and specialized wallets

While a number of very talented developer teams are trying to design rich gaming experiences in Web3 native fashion, it may ultimately be that we see a continuation of the trend of social and peripheral experiences outweighing the importance of deep storylines and stunning graphics.

If this proves to the case, however, the on-chain social layer will need to improve drastically. Yields simply aren’t enough to build a sustainable ecosystem of participants.

The decentralized future is incredibly exciting, but we’ll only realize its full potential by building a world for everyone, by everyone.

History teaches us that the creation of a new technological primitive, when combined with innate human behavior, leads to incredible value creation, with gaming perhaps the most fundamental example of them all

Gaming is a universal experience codified into our brains across millennia of social interactions

We’ve previously explored how the crypto revolution represents a reversion to the earliest principles underpinning human commerce. It’s therefore only natural that one its biggest unlocks sees us return to the roots of our very nature

Valuing a Social Supercomputer

A SYMBIOTIC DIGITAL AGE

Crypto is an age in which technology, culture, and finance converge in open digital worlds powered by blockchains.

While the last few decades have seen our commercial domains evolve from the industrial to the digital, the initial mass market prototype (Web2) was built using tools, governance models, and infrastructure imagined by – and ultimately designed for – an increasingly outdated era.

The crypto revolution is therefore a collective response that seeks to revitalize our world using digitally native tools and assets.

At the forefront sits Ethereum – a blockchain enabling a shared economic system in which users and value flow seamlessly across financial infrastructure, immersive worlds, and consumer applications.

ETHEREUM’S MOAT

Ethereum is the dominant blockchain because it enables unparalleled symbiotic relationships across its vast ecosystem thanks to several fundamental components.

1. Ethereum continues to capitalize on the momentum from its early mover advantage.
   
   Unquestionably, Satoshi Nakamoto made history with the launch of Bitcoin. The consolidation of work by pioneer cryptographers to introduce a peer-to-peer digital currency tied to a distributed ledger laid the initial foundation for decentralized, alternative economies.

Ethereum went a step further in its design as a universal computing machine able to support a wide range of diverse applications. As a result, Ethereum has been the primary domain where much of Crypto’s innovation has taken place.

1. Its early dominance has yielded a vibrant ecosystem of tools and applications that sustain a flywheel effect for technical talent, along with widespread Solidity fluency.

Blockchains enable true, positive-sum network effects, with Ethereum the standout leader. This means that even in a down market, the number of active developers on Ethereum is 7x larger than the average across any other major ecosystem.

1. Ethereum’s architecture is purpose built to prioritize security and decentralization. This has encouraged a wave of rival L1s to fight for market share by optimizing for high throughput or more flexible systems design. But Ethereum’s approach has positioned it to be the most reliable blockchain, capable of hosting thousands of applications and settling trillions in economic value.

As Crypto further penetrates the mainstream, the highest value transactors will settle on Mainnet. Meanwhile the most compelling scaling infrastructure is also being built on Ethereum in order to serve higher frequency, lower value actors.

1. Ethereum offers unmatched economic capacity as both a blockchain and an asset.

Its unrivaled economic capacity (as well as its shift to an eco-friendlier profile) will reinforce Ethereum’s position as the preferred Web3 asset & settlement layer for institutions and companies representing trillions in potential transaction value.

The EVM ecosystem’s L2s and Sidechains will also drive demand for ETH as a core unit of account and medium of exchange, while furthering demand for Ethereum’s blockspace.

RETHINKING FINANCE

Ethereum is leading a revolution that is using smart contracts to reimagine the global financial system.

DeFi enables an efficient, unified economic layer built on interoperable, transparent, user-owned networks that empowers users and builders to take control of their finances.

DEXs are averaging roughly $2B in daily transaction volume amidst the depths of the bear market, while Lending Protocols have supported over $7.5T in borrowing volume throughout the last year.

The last two years have also seen the rise of Stablecoins: total supplies now hover around $150B, while YTD adjusted on-chain Stablecoin volume has already crossed $6.3T.

Today, global consumers contend with significant currency debasement and rising inflation, as well as fragmented and politicized monetary networks. A world that is increasingly nomadic requires capital solutions that aren’t constrained by aging infrastructure or geopolitical instability.

Open blockchains amplified by high-speed wireless networks will level the playing field, providing unprecedented financial resources and opportunities for those who seek them.

DeFi’s incredible early traction is proving that this vision is already far more than a hypothetical.

OPEN VIRTUAL WORLDS

The exploration of ownership, value, and identity will play out across a variety of interconnected digital ecosystems.

Crucially, blockchains like Ethereum enable a symbiotic environment of immersive worlds that interweave identity, entertainment, and capital around an expanded understanding of value.

Virtual worlds will ultimately connect users across a communal layer of commerce and culture that transcends languages, politics, and firewalls (both economic and technological).

More than that, Ethereum’s universal standards facilitate native communication between creators, investors, builders, and developers in a way previously impossible.

Collectibles (including Avatars and PFPs) are an early proving ground, having generated over $14B in sales volume in the first three quarters of 2022, with Ethereum continuing to capture over 90% of total trading volume.

In another emerging frontier, Virtual Land purchases in Web3 are approaching $2B. With Real Estate the world’s largest asset class, urbanization in developing countries will accelerate adoption as people look to Web3 as a solution to unreliable domestic property markets.

Major brands are also shifting to crypto-native identity cultivation. First movers like Nike, D&G, and Tiffany & Co. have already generated over $250M in NFT revenues.

Multi-purpose NFTs that can address authentication, reward loyal customers, and introduce dynamic utility are areas of massive opportunity that will shake up existing global markets like Social Commerce ($492B), Resale Fashion ($27B), and Counterfeit Goods ($500B).

In 2021, over $60B was spent on cosmetic virtual goods. The impact of virtual worlds on e-commerce is estimated to be roughly $2T by 2030, with an additional ~$150B in value created in advertising and another $225M within academic virtual learning.

‍BLOCKCHAIN GAMING

Gaming is a multi-decade experiment into digital experiences that has culminated in a $200B market with 3B gamers around the world.

Source: Nansen

As the world’s fastest evolving form of media, gaming has rapidly become one of crypto’s most exciting proving grounds.

Crypto and gaming make for a uniquely optimal fit. The role of blockchains as base communication layers underpinning economic activity, culture, and entertainment is perfectly suited for an industry whose value increasingly centers on in-game economies and peripheral content.

The Web2 market is growing 10% a year and is on pace to hit $218B by 2023, with an estimated $168B spent on in-game digital assets. Much of this commercial activity will eventually take place across the Ethereum ecosystem, where the vast majority of blockchain gaming activity already takes place.

Web3 Gaming is an $8.6B market projected to grow at a CAGR of 100% through 2025 to reach nearly $50B in size as early lessons offer competitive advantages for first movers.

‍$7B has been invested in the space throughout 2022, with gaming activity making up over 50% of all Unique Active Wallets and gaming NFT sales volume crossing $1B this year.

Games built on blockchains will create robust markets for in-game assets, support the provenance and monetization of player identity, and offer astonishing economic alignment.

‍WEB3 MUSIC

Music is an $87B market dominated by three players that sees artists take home less than 16% of royalties and stands to be one of the largest disintermediated by Web3.

The largest incumbent record labels are already experimenting with Web3, while crypto-native projects are using NFTs and on-chain tooling to reimagine the artist-fan relationship.

Over $182M in primary music NFTs have been sold to date. Over the course of 2021, that figure reached $86M, with Ethereum home to 90% of all sales.

Music is another domain where much of crypto’s most exciting experimentation is playing out, from on-chain labels, royalties, splits protocols, and IP, to off-chain utility and community formation.

Crypto is providing creators with the means to engage their audiences directly, freeing them to take control of the economics of both production and distribution.

DIGITAL ART

Web3’s rise helped global art sales overtake pre-pandemic volumes with 74% of high net worth (HNW) collectors purchasing art NFTs.

NFTs are revolutionizing the art world by introducing liquidity, accessibility, and renewed relevance to one of the world’s oldest asset classes.

Art’s largest incumbents are also embracing the new technological frontier. Christie’s and Sotheby’s have sold a combined $250M in NFTs to date. Sotheby’s launched an NFT trading platform called Sotheby’s Metaverse, while Christie’s has gone live with Christie’s 3.0, their rival NFT platform. Meanwhile, New York’s MOMA is preparing to buy art NFTs using proceeds from the sale of its many masterpieces.

The mean resale duration in traditional art ranges between 25 to 30 years. With art NFTs, that figure has fallen to just 33 days.

2021 saw over $2.7B in Crypto Art NFT sales, with $2.5B taking place across Ethereum’s NFT marketplaces. Sales have crossed $1.3B throughout 2022 already despite the market downturn.

The on-chain art market will be driven by continued innovation around NFTs in areas like derivatives, lending/borrowing, fractionalization, and renting across various use cases.

QUANTIFYING THE VALUE OF ETHEREUM

Ethereum is introducing powerful new tools fit for a digital age built on the most secure settlement layer.

Ethereum’s cash flows and durable moat ultimately allow us to examine its value using conventional frameworks.

MODEL ASSUMPTIONS

Growth Rate and Value Capture

• To forecast each sector’s growth, we leveraged widely-respected research while using on-chain data to quantify existing Web3 penetration. In projecting future value capture, we used conservative forward metrics that don’t reflect crypto’s remarkable growth to date, nor its implied trajectory

• We’ve also taken a conservative approach by using large discounts in 2022, 2023, and 2024 to capture prolonged macro, regulatory, or crypto-specific uncertainty

• Crypto remains in its infancy, with countless use cases & sub-sectors likely to emerge in the coming years. Our approach is therefore designed to capture overall expansion without getting caught up in which current use cases will endure, or trying to predict what each core market will look like at maturity

• We delineate between stakers capturing value from ETH’s burn, tips, and MEV (net of searcher income) and non-stakers whose direct value capture is limited to burnt ETH (share buyback), while present value is sensitized across a range of ETH supplies. Estimates vary for steady state burn, but our research suggests 100M by 2030 is a reasonable forecast

Monetary Premium

• Digital assets are unique from traditional equities. With ETH, a vibrant ecosystem of protocols, dApps, and users is being built on top of it. Though many will launch their own tokens, ETH will serve as the primary unit of account and medium of exchange, as well as a core balance sheet asset, commercial intermediary, and hedge

• Additionally, people in Emerging Markets will increasingly look to borderless assets like ETH and BTC to counter currency debasement and institutional corruption. Ethereum’s dynamism and utility will position it as the logical choice for millions, though consumers will diversify into other crypto assets too

Terminology

• Web3 and Crypto aren’t perfectly synonymous, but we’ll leave the delineation for a different exercise

• The Metaverse is an obscure ”catch-all” phrase often used in place of any substantive definition. We avoid the term, preferring to use our own definitions:

Web2’s virtual worlds will primarily be composed of isolated segments including:

• Virtual Hardware (VR/AR)

• Gaming Worlds (Mobile and Cloud)

• Virtual E-Commerce (Cosmetic Digital Assets)

• Traditional Gaming Hardware (Consoles and PCs)

Web3’s frontiers will largely be interoperable, compounding value across areas like:

• Virtual Land

• Web3 Gaming

• The Creator Economy (Incl. Music, Art, & Social)

• Fashion/Cosmetic NFTs

• NFT Collectibles/Avatars/Identity

ETHEREUM VALUATION MODEL

With all of this in mind, we can now begin to build out a detailed model that accounts for Ethereum’s cash flows when factoring in the Total Addressable Market (TAM) across different verticals. From there, we can take these inputs and starting building out our model based on the compounded annual growth rate (CAGR) derived from our bottoms up analysis.

It’s worth noting that in this model, the percentage of total ETH staked stays constant overtime, providing a more conservative baseline for our forecasts. In practice, the rate should steadily increase over time, creating a stronger case for a monetary premium (we’ll touch on that later).

Reminder that this base case price projection is strictly based off cash flows from Ethereum’s core business of selling secure blockspace for the range of applications built on top of it.

When we factor in a monetary premium, which accrues when ETH has an increasing amount of demand for it across different mechanisms (think ETH locked in DeFi, ETH burn rate, ETH staking, ETH used for NFT purchases, etc.), the numbers start to scale to substantially higher numbers.

RISKS & CONSIDERATIONS

Competition

• While the future may ultimately be multi-chain, we believe Ethereum will remain the standout leader. As trillions in value migrate to Web3, a substantial portion of the highest value will continue to transact on Ethereum’s mainnet as they optimize for reliability and security.

• Further, blockchains naturally experience network effects as entrenched traction (users, developer mindshare, regulatory recognition, institutional acceptance) invites additional inflows of activity and investment.

• That said, we are excited about Ethereum’s L2 scaling solutions as they relate to everyday users, while we also recognize the value in select competing blockchains.

As a result, we’ve been highly conservative in modeling a decline in Ethereum’s dominance, from over 80% today to 60% by decade’s end, even as we continue to believe Ethereum is likely to retain a materially larger portion of the market.

Risks

• Regulatory threats, ranging from reasonably minimal to extreme censorship. That said, regulatory clarity (if and when it ever arrives) should ultimately be beneficial to adoption.

• Increasing headwinds (both macro and crypto-specific) tend to drive liquidity towards staked ETH, which is perceived as offering better risk-adjusted returns. As a result, liquidity across DeFi may continue to move towards the safer yields offered by staked ETH, which could challenge Ethereum’s ecosystem in the near term. Innovation around liquid staking may alleviate much of this pressure.

• Competing blockchains may capture significantly larger portions of the overall market as high value users optimize for speed/cost over decentralization/security. Our belief remains that scaling solutions built on top of Ethereum will ultimately offer a much more compelling value proposition to users and projects.

• Over 60% of current ETH staked is done through 5 platforms and service providers, with Lido capturing 30% of the total. Ownership of Lido’s governance token is concentrated across <10 holders who could be vulnerable to censorship. Post-merge, Ethereum has significant work to do in continuing to decentralize its validator base.

Supporting Exhibit

Contextualizing the Crypto Revolution

Introduction

At its core, crypto represents an unprecedented systemic overhaul — an attempt to restore credibility to the global financial system, to correct the broken economic models underpinning human commerce and ultimately, to reverse the trend of centralization that has played out over the last 10 millennia.

The technologies underpinning the crypto revolution are very much 21st century, but its ideological building blocks can be traced back thousands of years. Crypto is more than yields and PFPs: it is a movement built on the belief that you can empower people and unlock limitless creativity using composable, open networks and censor-resistant code.

For those who don’t fully appreciate the gravity of what is playing out, it is imperative we demonstrate why crypto is neither a temporary fad nor the latest form of counterculture — rather, it is the natural point of evolution in a long and linear journey of human connectivity.

The point here is not only to demonstrate the continuity of human innovation, but also to show how crypto is very intentionally a multi-cultural, cross-discipline movement that aims to address the shortfalls of the existing global economic and technological orders.

The biggest misconception concerning the space is that it is simply a collection of cryptocurrencies. The use of cryptography and blockchains to create peer-to-peer digital currencies was just one early application of a groundbreaking technology.

The real potential lies in an endgame where entire industries leverage the power of blockchains to create new user behavior and models that unlock infinitely more efficient value creation and capture.

But first, let’s rewind…

Early Numbers — 3000 B.C. to 1500 B.C.

Five thousand years ago, early Sumerians laid the groundwork for the first written language by developing a ledger-based system to record transactions, contracts, and inventories. These early thinkers pioneered concepts like compound interest, deposits, and interest rates using a clay tokens to communicate and store economic information. Early forms of writing would also later emerge independently in Egypt, China, and Mexico.

The Babylonians inherited and expanded on the Sumerian’s base-60 numerical system, building the first positional numeral structure. To promote transparency and impartiality, they eventually codified their principles through texts like the Code of Hammurabi which standardized the laws governing money in society.

These early efforts saw the first attempts in human history to create an impartial, ledger-based monetary system similar to what is being built using today’s blockchains. It’s relatively well known that Web3 is an attempt to revive the internet’s original tenets: unrestricted, borderless collaboration and user-first business models.

But beyond that, crypto represents a reversion to the earliest principles underpinning human commerce.

Democratic Governance — 700 B.C.

Centuries later, the ancient Greeks expanded on these ideas by pioneering an early version of democratic institutions that governed cross-border commerce. The Athenians developed a network of merchant courts that could oversee and arbitrate agreements between third parties using voluntary juries, fixed speaking times, and a legal code inscribed on large blocks in public areas.

Rather than having lawyers or judges represent each side, individuals were allowed to represent themselves in arguing their cases in what was one of the first examples of self-sovereignty and control over one’s public identity.

The use of public forums to display laws, intended to foster trust in the regulatory system, was highly successful in encouraging citizens to voluntarily partake in juries and deliberations.

Universal Currency — 600 B.C.

It was not long after this that the first coins began to circulate, having been developed independently in Ancient Greece, China, and India. Importantly, although early mediums of exchange were previously created using a variety of commodities, the first true coins were formed using metal as the preferred base, demonstrating the importance of durability, divisibility, fungibility, and portability in currency.

It was around this time that Aristotle first contemplated the problem of commensurability, or how to create standard methods of measurement across very different things. Aristotle concluded that Money can be used as a standard medium of measurement across non-equal things, while he also theorized the core principles and functions of money: a unit of account, a medium of exchange, and a store of value.

In the centuries that followed, the Roman Empire would introduce a standard coinage system (the silver Denarius) that spread throughout much of the world, inspiring the creation of many similar currencies as well as the adoption of the word to represent money across a range of cultures, even today.

For those focused on the value of crypto assets as currencies, much of that value is derived from cryptocurrencies’ ability to satisfy these early traits: durability through decentralization, fungibility through open standards, and portability powered by P2P software and the internet.

Equally important, it was the Romans who first demonstrated the problems associated with coins minted and controlled by a powerful centralized authority: in particular, inflation-driven debasement as a form of reckless taxation. As a modern example, the real value of the US Dollar has dropped by an incredible 92% since 1933.

Identity — Bronze Age

Across a variety of bronze age civilizations, gold served as both a form of currency and a form of jewelry, adorned to display wealth or status. Not long after coins were first introduced to the world did mints begin incorporating designs reflecting artistic and cultural symbolism as represented by animals, deities, and emperors.

The emergence of this fixation represented an early example of how finance, art, and culture would begin to collide over the coming centuries, leading to much of what we see in crypto today — for example, the marriage of DeFi and NFTs, or the vibrant communities and imagery that make up the ecosystem.

The Silk Road & Global Trade — 500 B.C. Onwards

The Persian Royal Road, built by Persian King Darius the Great and later expanded by the Romans, served as one of history’s first high-speed global networks designed to disseminate trade and messages across long distances. When Alexander the Great conquered the Persians and spread his empire deep into Asia, he leveraged the Persian roads to establish cities across Asia, including Alexandria Eschate, also known as Alexandria Farthest.

Centuries later, when the Han Emperor Wu sent his emissary Zhang Qian to repair relations with the nomads of Central Asia, the envoy came across Alexander’s descendants, who the Chinese termed Da Yuan (Great Ionians), taking note of their particularly powerful horses.

The early exchanges between these two cultures, as well as the resurgence of the Persian Roads, saw the formation of the Silk Road and the export of commodities like paper, gunpowder, and silk. The Silk Road supercharged the exchange of goods and ideas around much of the world until the Ottomans, following their conquest of the Byzantines, closed off the routes. Crucially, the Ottoman closure of the Silk Road routes encouraged merchants to turn to the oceans for trade, leading to the Age of Exploration.

The free exchange of ideas and technology across the Silk Road saw the best pieces of different cultures and technologies adopted by people around the world.

As we see time and again, open collaboration is an infinitely more effective engine for positive evolution than building behind closed doors. Applying this framework to Web3, we begin to understand why the pace of development in crypto’s first decade has been so tremendous.

China & Paper Money — 700 A.D.

Having invented the first true paper as well as an early example of movable type, China’s Song Dynasty later developed an early form of paper money, initially as a form of promissory notes that holders could redeem for coins. A few hundred years later, the Song created the world’s first formal paper money system as we know it today, printing bills known as jiaozi.

Though a revolutionary step, the transition to paper money, as opposed to coins minted from tangible metal with perceived intrinsic value, was not without issue.

Several centuries after the introduction of paper money backed by the full faith and credit of the issuing government, the Ming dynasty ceased printing paper money and reverted to the system of coinage after runaway inflation devalued the monetary system.

Though not immediately successful, the introduction of paper money represented a historically significant step forward: namely, the acceptance of money as an intangible, faith-based representation of value.

Islamic Golden Age — 800 A.D to 1300 A.D.

In the early medieval period, the Islamic world led a golden age in mathematics and science, translating and consolidating early innovations by the Greeks, Romans, Persians, Indians, and others that would likely have been lost as much of the world underwent a period of decline.

The spread of paper from China saw information become democratized, allowing people from all professions to build on one another’s work in another early example of the incredible value that comes from open-source knowledge and composability.

The region saw many important developments across a range of disciplines, but perhaps most important was the Islamic world’s contribution to mathematics. Numeral systems around the world had famously struggled with the calculation of large numbers until the development of the Hindu-Arabic system in the first and fourth centuries by Indian mathematicians. Persian mathematician al-Khwarizmi was principally responsible for the introduction and adoption of the system in the Middle East before Fibonacci’s Liber Abaci helped popularize the system in Europe where it eventually replaced the Roman Numeral system.

Al-Khwarizmi also pioneered trigonometry and algebra, with his name giving us the word for algorithm. Other achievements during this period centered on advancements in geometry, astronomy, and medicine, largely fueled by one of the most significant scholarship movements in history.

Not only is this era responsible for a lot of what our modern world is built on today, it is also perhaps the best example in history of what can happen when walled gardens are torn down and unrestricted creativity is allowed to flourish. The most important developments in crypto’s relatively brief history have almost all been built by groups of cross-discipline individuals leveraging and expanding on existing achievements across technology and finance.

In fact, one could credibly argue that the pace of innovation seen in crypto materially exceeds that seen in almost any other industry precisely because of its open-source nature.

History is full of valuable case studies that allow us to explore this concept by examining the parallel growth and decline of major civilizations — the rise of the Ottomans as Europe (confined by the Church) fell into the dark ages; the decline of the Ottomans as they consolidated while Europe opened up and entered the Renaissance; the fall of the Ming who went from the world’s naval superpower to burning ships and effectively outlawing foreign ideas and commerce.

Medieval Europe — 1300 A.D.

In the late Middle Ages, cross border trade saw the center of financial innovation shift to Northern Italy where sophisticated financial institutions began to emerge. Europe’s first university was founded, and the seeds of the modern financial system were planted. In particular, cities like Venice, Genoa, and Florence began their rise due to their extensive trade with the Middle East and Asia, who exported not only their products but also their ideas.

To service this trade, successful merchants and traders began to engage in structured financial practices, eventually forming the first modern banks known as Merchant Banks. Fibonacci’s Liber Abaci didn’t just popularize a system of numbers; it helped lay the foundation for innovations like double-entry bookkeeping and the bill of exchange, as well as present value, profit distribution, and interest rate calculations.

With their primary activity foreign exchange, the early financiers of Tuscany conducted their business on benches (bancu), lending us the word for bank. Meanwhile, Genoa developed a system for trading currencies using a forum structure that governed rates by vote, in an early example of a consensus-based financial marketplace. The city also launched the first form of European public debt in the form of compere, that was eventually fractionalized into standardized, transferable shares.

The Medici dynasty would soon rise to power in Florence, first as a banking dynasty and then as the most significant patron of the arts during the Renaissance — another example of how art and finance have long represented two sides of the same coin.

Around this time, Nicolas Oresme released his Treatise on the Origin, Nature, Law, and Alterations of Monies, one of the earliest publications on monetary theory, in which he argued that regulation of coinage and minting should belong not to the state but to the people under communal governance.

In particular, the shift away from the Roman Numeral system serves as an invaluable case study in what can be accomplished when people prioritize efficient design and objective value over tradition.

The regulatory battle surrounding crypto is falsely made out to be about protecting people, when in reality it is more a crusade designed to protect existing systems and powers.

Moving North — 1500 A.D.

Italian merchants began to shift their trade north to cities like Bruges and Antwerp, where they could conduct business with counterparts from all over the region. As the blossoming financial industry made its way north, a major milestone in the history of technology took place in Germany: the invention of Gutenberg’s printing press, marking a monumental step forward in the realm of global interconnectivity.

In parallel, Bruges became one of the early homes of commerce in northern Europe, hosting consulates also known as nation houses on behalf of the major trading houses. The most prominent host of such houses was the Van der Buerse family who helped lay the seeds for the first modern stock exchanges as platforms for trade and discourse. It is believed that the Van der Beurse name lent itself to the word “beurs” and its variations used throughout Europe to describe stock exchanges to this day.

As the Age of Exploration began to take off (spurred by the previously noted closure of the Silk Road by the Ottomans), Antwerp emerged as a powerhouse in global commerce, giving birth to new dynasties that would shape much of the next few centuries, including the Hochstetters, Fuggers, and Welsers.

Initially fueled by Portuguese naval commerce, Antwerp’s rise also benefitted massively from Spanish expeditions by conquistadors like Francisco Pizarro, who uncovered the seemingly incalculable wealth stored in the silver mines of Potosi, Peru. The Spanish Dollar (Piece of Eight), modeled after the German Thaler (Dollar), was minted on the backs of slaves working in unimaginably cruel conditions and became the world’s first global currency, circulating from Peru to the Philippines.

Antwerp heavily promoted the bill of exchange as an instrument, and built a commodity exchange as a predecessor to the world’s stock exchanges. In doing so, Antwerp facilitated an explosion in global commodities trading, the creation of the modern derivatives market, and the launch of an international money market for sovereign debt.

Despite having uncovered a well of apparently infinite fortune, the Spanish empire began to decline within just a few centuries as a result of continent-wide runaway inflation caused (in part) by the massive oversupply of precious metals. The Spanish regression and prolonged seaborne wars irreversibly hindered Antwerp but opened the door for a new city: Amsterdam.

The Dutch Golden Age, Tulips, and the First Stable Coin — 1600 A.D.

As the Spanish kingdom fell in power, its former subjects in the Netherlands rose to dominate the seas and the markets. The Dutch Empire established the Dutch East India Company (the VOC) in 1602, generally recognized as the first joint-stock company in history, formed on the world’s oldest stock market, the Dutch Stock Exchange. The VOC introduced concepts like limited liability and permanent capital, and would go on to become the largest company in history with an army of its own.

As the center of trade conducted using a wide range of currencies, Amsterdam had to contest with the challenge of inconsistent coinage quality caused by people hording coins of higher purity — a phenomenon described by Gresham’s Law. To combat this, the city founded the world’s first formal Central Bank ­- the Bank of Amsterdam — designed to standardize the value of currency.

The Dutch Guilder, modeled after the Florin in Florence, was built using a novel system of debits and credits represented by a centralized ledger, and eventually became the world’s reserve currency, in part thanks to the comfort derived from the 100% reserve ratio the Central Bank maintained.

The Bank also introduced tradable receipts for use by merchants in their daily activities — an early predecessor to modern fiat currencies. Sweden would soon launch its own central bank — the first in Europe to print banknotes and still the world’s oldest central bank.

Famously, tulips also began to arrive in Amsterdam via the spice trade and were immediately sought after for their exotic origins, leading to massive speculation and trading. The bubble and subsequent collapse in prices represented one of the most famous asset bubbles in history.

Though prohibited from doing so by charter, the Bank of Amsterdam began to lend heavily to the Dutch East India Company, whose board members held intimate relations with those governing the Bank. As the Dutch Empire began to see its share of global trade decline in favor of the British following the Napoleonic Wars, the Dutch East India Company was no longer able to service its debt obligations to the Bank, whose own irresponsible lending practices left it critically overextended. As a result, the world’s first Central Bank collapsed.

The Dutch played an invaluable role in building the first stock market, joint-stock company, modern global reserve currency, and even central bank, but their reckless lending practices and neglect of their original mandate led to their downfall.

One of the crypto’s most important contributions is the introduction of systems with programmable guarantees built into publicly visible code. This means that we can now build systems where the original mandate is codified and unalterable behind closed doors.

Collective governance isn’t just about building a more equitable system; it also offers a much better business model. For the first time, a direct line of discovery can be built between users’ interests and the way commercial organizations are governed via an infinitely more efficient set of relationships.

London Rises — 1688 A.D.

When tensions with the French reached a critical point in 1688, the Dutch made the decision to forcefully align with the British as a preemptive defensive measure in what would come to be known as the Glorious Revolution. In November of that year, the Dutch sailed a fleet four times the size of Spain’s famed Armada to England, where they overthrew and replaced King James II with William of Orange (William III) as King. John Locke’s Two Treatises of Government, published one year later, contextualizes the widespread sentiment that led up to the Revolution.

William and the Dutch brought with them the innovations of Amsterdam and Antwerp, leading to the formation of the Bank of England, the evolution of the stock market, and the modernization of the British Empire. In fact, the momentous financial implications of the Revolution have led many to brand it the Financial Revolution.

In 1689, Parliament issued a joint monarchy under William III and James’ daughter Mary, who in return agreed to sign the Bill of Rights outlining constitutional principles including the right for regular Parliament, free elections, and free speech in government. The absolute monarchy was effectively extinguished, and a constitutional monarchy rose to take its place.

The preceding case study serves as a useful example of how effective regime change can be in revitalizing our world. The establishment has rarely been a powerful catalyst behind innovation throughout history.

Asset Bubbles — 1696 A.D. to 1773 A.D.

London’s stock market began to expand rapidly in the 1690s when tales of fantastic successes drove the public to buy ownership in any company they could. When the first bubble finally popped in 1696, more than half of all British companies had gone under.

The first mutual funds also emerged at this time, while early examples of the securitization of assets appeared as well, initially as packaged plantation loans sold to investors as securities. These, too, captured the imagination of the public but ultimately made for poor investments.

Meanwhile in France, an exiled Scot named John Law had convinced the near-bankrupt monarchy to support his launch of the Banque Générale. The Regent granted the Banque the authority to print notes partially backed by government bonds as part of Law’s new monetary system. These notes would allow companies credit for use against their business ventures. Law then built a monopoly over trading in Louisiana and French Canada via the Mississippi Company.

While prices of shares in the Company soared for a number of years, the hype eventually collapsed as the company failed to deliver on its early promise and Law began printing huge sums of money via the Banque to support the stock.

The South Sea Bubble was yet another contemporary case study in excitement and failure in which financiers in Britain copied the Mississippi Company’s model to form a company with a monopoly on British trade in South America. As with Law, the hysteria around company shares enveloped all of levels of society before the share price collapsed on itself as outflows began to outpace inflows. Even the great Sir Isaac Newton, at the time Master of the Mint, fell for the South Sea Bubble fraud.

While it may be unsurprising that senseless frenzy tends to accompany periods of rapid innovation and development, what we see time and again is people of all levels of education and power falling prey to these schemes. The presence of fraudulent “get-rich-quick” schemes is not necessarily indicative of a broader falsehood. Rather, they tend to opportunistically accompany periods of genuine progress.

A major challenge in crypto is differentiating between the durable infrastructure and applications being built and the opportunistic scams inevitably arising along the way.

The Early Industrial Revolution — 1760 A.D.

History’s most important technological revolution was really just a frenzied period of development in which entrepreneurs and financiers sought to answer an important question: how can we do things better across our entire economy?

When Adam Smith published “The Wealth of Nations” his fundamental point was that people have a tendency to maximize their own self-interest, which in turn results in a more prosperous society through the “invisible hand” of the market. Smith’s seminal piece marked the rise of free-market capitalism and would set the stage for the industrial explosion that would follow.

The British would soon conquer India, cementing their place as the globe’s superpower with India serving as a major source of the raw materials that would build the modern world.

Steam had been explored as a source of power over several millennia, but the development of the first crude steam engine, initially to remove water out of coal mines, marked the real technological turning point. Throughout the next century, steam would serve as the fuel behind the Industrial Revolution and the primary driver of the transition from human to machine power.

Another key invention was the Spinning Jenny, a machine that would see the textile industry weave together a new global order built on inputs like exploited labor and cotton.

The explosion in textiles would in turn yield the first factories built by entrepreneurs like Richard Arkwright, who helped imagine a new world based on efficient manufacturing at incredible scale.

A cunning businessman named Samuel Slater would later recognize the potential of Arkwright’s water-powered factory system, bringing it under secrecy to the US where he would help kickstart America’s own revolution in industry.

Unsurprisingly, the New York Stock Exchange would be created just a few years later on Wall Street — the site where the Dutch in New Amsterdam (New York) built their defenses to keep out Native American and English threats.

The irony of Wall Street originating where people literally built walls to keep others out provides an incredible metaphorical perspective into the very nature of the existing global financial order.

The Industrial Revolution saw astonishing experiments play out — many failed, others were outright frauds, but this period of insatiable innovation would ultimately yield a remarkable array of world-changing inventions.

Our most important achievements come from relentless trial and error — the more trials are conducted, the greater the resulting success (in both scope and scale). The study of history has a tendency to gloss over the failures in favor of the major successes.

The Gold Standard — 1820 A.D.

England would first experiment with the Gold Standard in the 1700s under Sir Isaac Newton but didn’t formally adopt it until the 1820s, with the United States, Germany, France, and others following soon after. Advocates of the structure felt the system prevented individual countries from driving significant inflation by excessively printing money, while the system would also strengthen free trade by minimizing cross-currency volatility.

In the new system, currencies were fixed to gold and therefore to one another under a new international standard that caused price levels around the globe to correlate. Problems soon arose as the direct relationship between nations’ currencies saw monetary shocks spread rapidly — for example, new discoveries of gold in one country drastically increasing overall supply and affecting prices everywhere.

The desire to build a unified global system backed by a standardized commodity was born from reasonable intentions, but was ultimately predicated on the belief that countries would work together in good faith. When tensions reached a boiling point in the lead up to WWI, the classical Gold Standard fell apart as political alliances changed and countries began to pursue inflationary policies against the spirit of the agreement.

The classical Gold Standard existed for just a few decades and eventually collapsed thanks to the paradox of maintaining a global standard underpinned by numerous centralized entities each pursuing individual actions under differing agendas.

Countries adopting the Gold Standard were expected to follow the “rules of the game” regarding the adjustment of domestic bank rates in response to fluctuations in the value and supply of gold itself.

The failure of the Standard is just one example of how handshake agreements and even formal laws can be ignored by centralized actors when convenient, demonstrating the importance of immutable and objective rules built into publicly visible code.

The Boom in Technological Infrastructure — 1850s A.D.

Over the next few decades, many incredible developments would play out on both sides of the Atlantic. In 1856, Henry Bessemer invented a new process for the mass production of inexpensive steel. The world’s first subway opened in London in 1863, while the Transcontinental Railroad would be built just a few years later in the US.

Following Samuel Morse’s invention of the telegraph a few decades prior, Alexander Graham Bell patented the telephone in 1876, marking a critical inflection point in the world of global communication. Edison’s light bulb would come just a few years later.

The Wright brothers took flight in 1908, only a few decades after Belgian inventor Jean-Joseph-Étienne Lenoir built the first commercial internal combustion engine. That same year, Ford began production of the Model T using production lines inspired by Arkwright’s factory systems.

A crucial theme of this period saw production coincide with scientific research on a scale never before seen, with the resulting pace of innovation dwarfing any historical precedents.

We often forget that technology drives new user behavior — history is full of monumental examples of new developments that precede product-market fit, requiring years of tinkering before society recognizes the potential and begins to adopt it at scale.

The technological advances occurring in crypto in many ways precede the endgame use cases that will ultimately form. The mistake people make over and over again is to discount the present, as well as future, value of a technology because it has yet to find mainstream applications. This is exactly what is happening in Web3 today.

Abolishing Slavery But Not Inequality — Mid 1800s A.D.

The middle years of the nineteenth century saw the abolition of slavery in Britain, the Ottoman Empire, France, and the United States. Though the various abolitions of slavery didn’t end the exploitation of workers around the world, they marked an important turning point in the perception of labor: namely, the right of individuals to profit from their direct contributions to output.

Even though slavery was ultimately abolished, workers in industrialized nations continued to work in subhuman conditions for pennies throughout the Industrial Revolution. Despite the improvement in labor laws over the following years, workers around the world continue to suffer today.

In first world nations, marginalized people struggle from systemic biases and unequal access to resources that starts from birth and is often impossible to reverse. In developing nations, corrupt officials, primitive financial and technological infrastructure, and economies built by profiteers and dictators prevent upward mobility.

Importantly, a large portion of people around the world are locked out of the financial system we take for granted in developed nations. The censor-resistant, open financial ecosystem that crypto seeks to build offers a source of hope and empowerment for these same people. A powerful open letter issued to Congress this year made this point exceptionally well.

The Great Depression — Early 1900s A.D.

As America matured into a global superpower following the horrors of the First World War, Wall Street became the new home for investors and speculators around the world. Ironically, the War saw the formation of an interconnected global order made up of individual nations with little trust in one another. As a result, systemic risks could quickly spread globally while individual nations could do little to protect themselves — an issue that the Gold Standard only amplified.

In the pre and early post-War years, America’s newly launched Federal Reserve helped create a relaxed monetary and low-interest environment that encouraged consumers to borrow heavily and invest on credit. The Roaring Twenties saw a boom in American manufacturing & consumption driven by continuous technological improvements in industry, while retail investors began to use loans to invest in stocks at an extraordinary pace.

The Smoot-Hawley Tariff was enacted in 1930 in an effort to protect American agriculture but resulted in foreign countries raising taxes on American exports in return, leading to a significant decline in global trade.

When the stock market finally began to pull back, investors who had traded on margin were crushed as sentiment (and therefore consumer spending, production, and employment) throughout the economy plummeted. Fear also drove people to liquidate their bank accounts, leading to runs on banks throughout the country.

The rise of a new global network in the early 20th century allowed for incredible cross-border efficiencies in trade and collaboration. However, the downside to this new construct is that systemic risks become hyper contagious if countries stop working together or begin to attack one another economically.

Just as leverage amplifies an investor’s upside or downside, global interconnectivity magnifies the opportunities and risks associated with swift economic changes.

In the lead up to Covid-19, the US and China — the two largest members of the global economic order — faced off via tariffs and protectionism. As we saw during the Great Depression, the fragmented yet interconnected global order ultimately exaggerated early demand shocks via uncorrelated government responses and broken supply chains.

Further, it is the developing world that predictably deals with the most severe ramifications under this construct.

We can therefore see that the global economic system that emerged in the 20th century is largely characterized by one-way flows: of value (to developed nations) and of destruction (to third world economies).

Post WWII and the Modernization of Finance — Mid 1900s A.D.

A decade of stagnation in America soon came to an end as the Second World War effort picked up, leading to an explosion in employment, manufacturing, and economic output. Contrary to the expectations of many, the boom would only accelerate in the aftermath of the War as military factories were repurposed to serve consumer needs and investment skyrocketed under The Marshall Plan.

The invention of the transistor in 1947 by Bell Labs was a monumental achievement that would usher in a new age of computing as well as the perpetual innovation engine described by Moore’s Law. The Univac I, the world’s first commercial electronic computer, would be produced just a few years later.

Back in 1914, Western Union had issued metallic plates allowing holders to defer payment to a later date, known as “Metal Money,” as an early predecessor to credit cards. In 1946, John Biggins launched the Charg-It card before Diners Club and later American Express would create their own general purpose credit cards in the 1950s and 1960s.

IBM’s invention of the magnetic stripe used on credit cards & IDs meant merchants could obtain account information and authorization on the card itself, rather than having to call the credit company each time.

Interestingly, we see that many of the 20th century’s most important technological achievements came as a result of inventors seeking to reinforce and simplify the collective infrastructure underpinning our world.

The Dawn of the Computing Age ­– Late 1900s A.D.

The Department of Defense built the first functioning prototype of the Internet in 1969, known as ARPANET, to allow several computers to communicate and share information across a unified network.

As more computers sought to connect to the network, computer scientists Bob Kahn and Vinton Cerf developed Transmission Control Protocol and Internet Protocol, or TCP/IP, as a standard for transmitting data throughout multiple networks. ARPANET’s adoption of TCP/IP in 1983 saw the emergence of an interconnected network of networks around the world that would ultimately become the Internet.

The early internet generated immense excitement, but usage was generally limited to academics and scientists due to the complexity of the prevailing systems. The Domain Name System (DNS) was created in 1983 to simplify IP addresses by converting them into human-readable form. Tim Berners-Lee would soon propose a new way of organizing and connecting information across computers under a web of information that would come to be known as the World Wide Web.

Berners-Lee developed numerous fundamental technologies underpinning today’s web, including HTML, URL, and HTTP, as well as the first browser and web server. Crucially, Berners-Lee demanded that the technology be made free and open to the public in perpetuity.

The Internet and World Wide Web would forever change our world, but they wouldn’t have done so had they been built in proprietary manner. As we’ve seen repeatedly, the concept of open-source technology isn’t simply a moral one: it drives more effective solutions.

Berners-Lee in particular introduced core ideas like decentralization, publicly visible code and universal compatibility into his designs. Without these themes underpinning his technology, the interconnected computing age we take for granted today might not exist.

This is an incredibly important point: the Internet isn’t just a layer of infrastructure for communication. It’s also the most powerful library of information ever assembled, a canvas for open innovation, and a core source of empowerment for disenfranchised people around the globe. A world of several closed Internets would unquestionably hurt billions of people in the developing world.

The Dot Com Bubble & Finding Adoption ­– Early 2000s A.D.

The excitement around the Internet accelerated into the late 1990s as the potential behind the Internet captivated the world. As investors struggled to reconcile their lack of technical understanding with a desire to compete, endless pools of capital were thrown at thousands of opportunities.

While legitimate technological progress continued, particularly at the infrastructure layer, the commercialization wave led to an incredible windfall of speculation that ultimately crashed at the turn of the millennium.

The years following the Bubble saw improvements in bandwidth speeds, the transition from dial-up systems to cable internet, and PCs becoming mainstream. Early use cases began to resonate — e-mail, search engines, social media, and more ­­– allowing the Internet to go mainstream as users switched from speculation to native utilization.

The parallels between crypto’s current era and the dot com bubble are covered extensively, but the focus tends to converge on the boom and bust nature of both periods. The truth is that both periods saw the introduction of world-changing technologies that saw early hype exceed actual traction and the discovery of product-market fit.

Those writing off crypto because of spikes and declines in asset prices fail to understand the real parallel between the two eras: crypto’s potential today mirrors the Internet’s in the late ’90s. More importantly, the excitement captivating grassroots builders and users feels similar to the sentiment that surrounded the early days of the open-source internet.

As crypto continues to discover and refine its core use cases throughout the emerging “Application Era,” we will start to see blockchain technology become a part of our daily lives.

Just as we do with the Dot Com Bubble, we’ll inevitably look back at this era with 20/20 hindsight bias and recognize the immense potential that crypto offers today and question how anyone ever missed it.

Satoshi & Beyond — 2008 A.D. and Onwards

History is riddled with examples of universal currencies struggling due to the differing agendas of the underlying entities that govern them. As such, it’s unsurprising that various thinkers have attempted to counter this using decentralized technologies.

In 1995, cryptographer David Chaum designed an electronic form of currency called Digicash that used encrypted keys. Bit Gold, designed a few years later by Nick Szabo, introduced a novel concept that required participants to spend computing power to crack cryptographic puzzles as a way to disincentivize malicious behavior.

The Bitcoin white paper, published by Satoshi Nakamoto in 2008 as the Financial Crisis shook the world, outlined a global peer-to-peer electronic cash system that incorporated these existing ideas but also solved the critical issue of preventing double spending — essentially, the ability to copy and paste code — without the use of a governing central authority.

Bitcoin served as a revolutionary (and functional) example of a truly peer-to-peer, decentralized currency and medium of exchange, but its architecture was somewhat limited in the broader applications it could support. So in 2014, a group of developers led by a remarkable young programmer named Vitalik Buterin raised funds for a platform that could support generalized use cases beyond simple payments.

Ethereum went live in 2015 as a Turing-complete blockchain that could understand and implement complex instructions, setting the stage for a new world of decentralized, open-source protocols and applications. Since then, many other blockchain ecosystems have sprung up, some leveraging Ethereum’s infrastructure, others trying to create their own architecture and consensus mechanisms. Some optimize for security while others build with high throughput in mind.

The sector has experienced multiple boom and bust cycles over its short life as a loose macro environment and stories of riches attracted everyone from retail traders to global institutions. Early bubbles formed around NFTs or protocols promising exorbitant yields, while projects both good and bad raised immeasurable capital with ease.

What we’re seeing today mimics the tail end of the dot com bubble. The endless excitement that drove up asset prices in the space over the last couple years has come crashing down, destroying many who traded on leverage and eviscerating poorly thought-out protocols built to take advantage of the hype.

But just as we saw before, during, and after the dot com bubble, incredible infrastructure continues to be built throughout Web3. Scaling solutions, payments infrastructure, privacy layers, digital identity primitives and more are all being designed by some of the smartest and most passionate people in the world.

Today, governments everywhere are experimenting with blockchain technologies, with many seeking to build their own centralized digital currencies. In evaluating the current environment, it is critical we remember history’s recurring lessons on what society on aggregate loses when we build behind giant walls, optimizing for control over utility.

The complexity and obscurity that defines the global financial system today is a deviation from the original principles upon which commerce was built. Some might argue that the complexity is a natural byproduct of an increasingly convoluted and interconnected world, but in reality it is our disjointed institutional and retail systems that have made the world the way it is. And to be clear — this is very much by design, so that power resides with the few institutions (government and private) that understand and can control the monetary system. Except, we see time and again that even these organizations don’t fully understand the world they’ve built.

History is full of examples showing why an obscure and interconnected system sets us up for contagious, systemic shocks that spread rapidly and concentrate their damage on society’s marginalized.

Likewise, the trend of centralization that has played out in technology over the last two decades is an aberration that goes against not only the original tenets of the Internet but also actively ignores what made technology so incredible in the first place: open collaboration.

The most productive periods of innovation tend to materialize when centralized authorities step back and let the natural forces described by Adam Smith play out. The inevitable scams and ponzis that came along in eras past neither defined those periods nor derailed their progress.

The models that govern our world today are designed to benefit the few, not the many, while the crusade against crypto seeks to control, not protect.

Web3 is a revolutionary experiment that seeks to rebalance the system in favor of the many by replacing human bias with immutable code to unlock human creativity with composable infrastructure.

The ongoing search for true mainstream product-market fit is indicative of the magnitude of the project, but as we’ve seen time and again, if the incentives are right, people will find a way to build incredible things.

The last few years have given rise to a trend of empowerment as represented by people demanding more: more freedom, more meaning, more ownership.

Those who make the mistake of evaluating the probability of crypto’s success using immediate economic returns are missing the forest for the trees.

A new era of interoperability and imagination is upon us. Those who disparage it either don’t know their history, or simply seek to retain control, fearful in the face of a changing world.