Source: cryptotvplus
Original article by Micah Bamigboye
The Messari report provides an overview of Ethereum in 2022 and predicts its turnaround in 2023, providing a reference for blockchain natives to make decisions in the new year. The report mainly discusses Ethereum and L1 trends, as follows:
Ethereum Roadmap Update
The merger was a major technical update that took six years to complete, and the ambitions of the Ethereum core team may not be fully understood by outsiders.
The Messari report examines these development stages in the roadmap.
The Merge: The Merge moves from Proof-of-Work to Proof-of-Stake consensus. Now that investors can exit the staking contract, developers are working to ensure an even distribution of transaction validation. Other more complex tasks are also in progress.
The Surge: By introducing a new type of Ethereum transaction called "blobs" which will have a designated block space allocation to publish their data, the goal is to reach 100,000 transactions per second. Blobs will be introduced in the first form in EIP-4844, also known as "Proto-Danksharding". Fees on L1 and L2 should be reduced while attacking Ethereum's implementation of data availability sampling, the full form is called "Danksharding".
The Scourge: This is a new step that was just added (per Vitalik's tweet) primarily in response to community concerns that the Maximum Extractable Value ("MEV") will lead to transaction censorship (more on this later). Additionally, all blob transactions are fully sharded.
The Verge: “Fully SNARKed Ethereum” facilitates extremely efficient and trustless block validation for Ethereum, and introduces Merkle trees, which are smaller than their cryptographic proof counterparts. This opens the door to mobile clients on Ethereum.
The Purge: This included many small code cleanups, reduced network costs, simplified the Ethereum protocol, and got rid of technical debt. It improved performance while cutting costs.
What Vitalik calls “fixing everything else” is The Splurge. These include “quantum-safe” Ethereum development, account abstraction, and enhancements to the EVM.
Merger Economics
The merger marks a significant change in Ethereum's business strategy. By switching to a PoS consensus mechanism, which reduces environmental impact by more than 99%, Ethereum becomes a more attractive investment target for organizations interested in environmental, social and corporate governance (ESG). In addition, it reduces the selling pressure of miners by nearly $500 million per month and reduces the issuance of new tokens by 90%. Finally, due to the fee burning mechanism implemented by Ethereum in EIP-1559 in August 2021, it has become a net deflationary asset with real returns.
Since EIP-1559 went live last summer, the Ethereum system has "burned" about 85% of all transaction fees, with the remaining 15% distributed to miners as "tips." If the transaction fees burned are greater than the network's issuance rate, Ethereum's supply will become net deflationary. Depending on the demand for block space, we believe the network could experience steady-state deflation of 1% to 2% per year. No other crypto asset project can accomplish these supply dynamics.
Yields in 2023 could be between 5-7%, establishing a “risk-free rate” for Ethereum’s financial system, depending on the number of active participants on the network and the level of network activity.
Such yield curves have already begun to be constructed for investors in some DeFi protocols to track.
While overall yields are slightly higher right now, we expect them to eventually decline and return to normal as staking becomes more accessible and derivatives like Lido’s Staked ETH (stETH) become more common.
Maximum Extractable Value and Censorship Resistance
Maximum Extractable Value, or "MEV" for short, is one of the most intriguing technical puzzles in all of crypto assets, attracting some of the greatest technical and financial minds in the industry to solve its puzzle.
In short, MEV is the result of the power dynamics between network users and the blockchain’s security providers (Miners and Validators). Users may be charged fees by security providers, who decide the order of transactions and which transactions are included in each block.
In some ways, MEV might be seen as a feature rather than a problem because it exists on every blockchain.
MEV may improve the anti-fragility, efficiency, and liquidity of the protocol. Most of the MEV incentives will be distributed to token holders who hold MEV, and a strong MEV sub-economy will ensure that the "supply chain" of transaction processing separates block proposers (everyone) and block builders (experts) in a worldwide, decentralized manner.
Flashbots, one of the top MEV R&D companies, has proposed a system to classify different MEVs based on their potential externalities and value accumulation. If we can develop a system that accounts for specific kinds of “bad” MEVs, future protocols that socialize the benefits of MEVs may be more fair.
What is Buterin excited about this year?
Stablecoins that protect privacy and are pegged to traditional assets
Vitalik likes to predict the DeFi market. But Vitalik also admitted that he does not expect them to make "multi-billion dollar moves", so perhaps this is just purely academic interest.
The core concepts include identity module authentication (used for permission authorization on Ethereum), name (ENS), proof (decentralized social), and proof of humanity.
DAO, which he categorizes as a stable, efficient, or interactive decentralized community.
Applications that combine blockchain technology with non-blockchain technology, such as voting, "auditable centralized services", etc.
Cross-chain bridge
According to the Messari report, one of the three most important areas of development in the future is the interoperability of blockchains and bridging protocols.
A hacker stole $600 million from Axie’s Ronin “sidechain.” Wormhole’s ETH-SOL bridge lost $320 million and Nomad lost $200 million. Current cross-chain bridges have shown their fragility.
Rollups are essentially blockchains that have built-in value cross-chain bridges and settle transactions between EVM chains. As the name suggests, Rollups are the blockchains that process their transactions, but as the name suggests, they are "rolled up" to Ethereum and use Ethereum's strong security for settlement.
Buterin revealed why he thinks the use of cross-chain bridges is unwise, revealing that “there are fundamental limitations to the security of bridges that span multiple ‘sovereignty zones’” and that the argument for modular blockchains is that “you can’t pick and choose separate data layers and security layers. Your data layer must be your security layer.”
According to the Messari report, the L1 "blockchain war" will parallel the browser war and mobile operating system war for this scenario. In other words, the EVM and some other systems may succeed at scale, but we will not witness the emergence of a large number of L1 blockchains.
Rollups and Modularity
Rollups improve the scalability of blockchains by processing transactions on different blockchains. Transaction data is published and compressed onto an underlying L1. With the release of Arbitrum and Optimism Layer-2s in 2021, traditional Rollups that rely on Ethereum L1 for data availability, consensus, and settlement will be listed first.
The popular "modularity" theory in 2022 was proposed by newcomer Celestia. Traditional Rollups process transactions and rely on Ethereum to settle, verify, and store their data, but modularity enables developers to choose how their protocols handle each step.
There are two types of Rollup: smart contract Rollup and sovereign Rollup.
Smart Contract Rollups: Smart contracts on L1 use various types of "proofs" to check batches of compressed transactions, which are packaged to L1 because they rely on the final approval of the smart contract. Smart Contract Rollups are divided into two types: Optimistic Rollups and Zero-Knowledge Proof Rollups (ZK Rollups).
Sovereign Rollups: Just as cloud providers can set up virtual servers with a single click, programmers can create sovereign blockchains with little upfront capital and avoid the hassle of launching a distributed group of validators. Sovereign Rollups process and validate transactions, upload data to consensus and data availability layers such as Celestia, Polygon Avail, or Ethereum, and execute transactions.
Similarities with Solana
According to Messari, a fragmented approach with different layers could be more effective for scaling blockchain ecosystems than wrapping transaction execution, settlement, network consensus and data availability on a single main chain. This is comparable to the microservices architecture used in traditional application development.
Messari goes on to list some of the things an alt-L1 like Solana would need to have in order to compete with other modular blockchains.
Continued development of algorithms will reduce the operating costs of large nodes
Rollup delays or securities issues
User choice and expertise
Product-Market Fit of AppChain
User tolerance for centralization and MEV
The report also delves into Solana’s relationship with the now-bankrupt trading platform FTX and the impact it has on Solana. In elaborating on this point, the report shows that SOL and SRM are a significant part of FTX’s financial table, according to bankruptcy records. FTX, Alameda, and some of the closest investors were active, enthusiastic supporters of the Solana ecosystem in its early days. However, the Solana team and its founding community were keen to adopt a “eat glass” mentality during the previous bear market, and may recover again after this storm passes.
Solana still maintains its advantages in node decentralization and speed. Different enterprise-level carpet pulls may have a greater long-term impact, although the liquidation of FTX/Alameda is a setback for some of Solana's major investors. Solana has also made efforts to promote the application of blockchain by developing Saga, a crypto asset mobile phone in 2022.
Cosmos and Application Chain
The Cosmos community is attempting to usher in a new era known as "ATOM 2.0," which seeks to establish the Hub as the main data router and security source for Cosmos. According to a report by Messari, as developers discuss ATOM 2.0, Cosmos may continue to be the leading ecosystem for "sovereign" application chain developers. This bold attempt faces resistance as the request to adopt ATOM 2.0 was rejected by the community.
The ecosystem is attractive to those who have the technical knowledge to vertically integrate their applications, because Cosmos gives developers the freedom to create their chains with the flexibility they need. IBC also gives app chains access to value accumulation mechanisms (MEV, transaction fees, etc.). Take DYDX as an example, it switched from ZK-rollup to app chain last year, which is probably the largest crypto asset application.
Sei and Canto are two new L1s built on the Cosmos SDK that focus on DeFi applications and were both created in 2022. Sei has a parallel order matching engine and an integrated central limit order book (CLOB). Messari claims that Sei aims to become the Nasdaq of the crypto asset world, and its Centralized order mechanism and shared liquidity make it ideal for DeFi use cases. Canto recently launched an EVM-compatible L1 with built-in core protocols such as AMM DEX, lending protocols, and stablecoins. It intends to make these basic protocols available to users and developers for free.
For user acquisition, Canto has chosen a more democratic strategy. There is only the chain, no venture funders, pre-sales or foundations, aiming to provide direct, free infrastructure to users and developers. While admirable, without the opportunity to make a profit, the product will not be competitive, and developers may be reluctant to innovate or improve features.
L1 of other chains
Cardano: Cardano has made significant technological advances in 2018, including the Plutus smart contract functionality and the Vasil hard fork, improvements to Plutus and greater scalability. But so far, Cardano still cannot compare with the larger ecosystem in terms of transaction volume (transactions, TVL and development activity). According to Messari, 2023 will be a crucial year for Cardano.
Polygon: The Roll Up and modularity parts encompass a lot of different parts of what Polygon goes through. In Q3, they hit all-time highs in terms of active addresses and NFT wallets. Additionally, they have one of the top BD teams in the crypto asset industry, a team that has signed deals with Reddit, Meta, and Starbucks this year.
Polkadot: Polkadot’s proposed interoperable “chain within a chain” is similar to a merged Ethereum, which should come as no surprise since Polkadot’s creator, Gavin Wood, is also Ethereum’s co-founder and its technical architect.
Technically, Gavin is often one step ahead, and Polkadot’s developer community has consistently been at the forefront of comparisons with similar groups. In the coming year, we will see whether this leads to more game-changing ecosystem applications. (In 2023, Gavin will no longer serve as director of the project, but will remain as chief architect).
MOVE-Blockchain development language
Facebook's abandoned Diem project gave birth to Aptos and Sui. Aptos and Sui come from first-class engineering teams, inheriting years of R&D and cooperative negotiation skills. Move is their new smart contract development language developed from Rust, designed to give programmers better control over their data management and safer execution. Both projects claim to be high-speed, highly scalable chains (they decouple consensus, parallelize transaction processing, and complete transactions within one second). There are strong teams, supporters, and networks behind these projects.
Aptos' early deployment encountered problems, and Sui is still only accessible on the test network. According to Messari, Sui may encounter kickback issues as FTX enters the bankruptcy liquidation process. FTX Ventures admitted to donating $75 million of the $350 million raised by Aptos this year, but the transaction took longer than the general 90-day bankruptcy recovery period to complete. Sui's $100 million is another matter. It seems that a third of Sui's $300 million in funds in the third quarter was obtained before the 90-day clawback period. 2023 will prove that FTX's liquidation has a significant impact on the crypto world.
