1. ETH Q3 Report
I personally love Bankless's Q3 update on Ethereum, it's really cool that we can generate earnings reports for any crypto community and update them in real time for any period of time without any central corporate investor relations team . We are talking here about a 1000x improvement in investor information symmetry.
It is also very interesting to write about the financial performance of Ethereum now. EIP-1559 was launched in the London hard fork in early August. This proposal restructured the fee market of the Ethereum network and burned part of the gas fee. Half a quarter after this update In 2019, the value of ETH burned exceeded $1.3 billion, and Ethereum has become more like a high-growth tech stock to more traditional investors, so how do you value a company with such growth characteristics? ?
This of course works both ways.
Even against the backdrop of new Layer 2 network launches (Optimistic Ethereum launched its alpha version in July and Arbitrum One’s mainnet in August), this summer’s NFT mania has pushed the Ethereum network to its limits.
At the time of writing, Optimism (Uniswap and Synthetix) has $330M locked, Arbitrum (UNI, SUSHI, Reddit) has $2.7B locked, and Polygon (Aave, Polymarket, Decentraland) has $5.1B locked. DeFi Llama helps us track all this locked value in real time.
As Bankless sums it up: the value locked in Defi is already more than the market capitalization of most banks, EIP-1559 has burned billions of dollars, interoperable Layer 2 has been adopted, and merged into the Ethereum PoS block The chain is in its final stages, which could further reward ETH holders and attract new institutional investors.
Overall, it’s been a good year for ETH and we haven’t encountered significant headwinds, but if Ethereum 2.0 is delayed or stalled in rollup adoption, that will continue to push the market towards competitors.
2. 1559: Miners and MEVs
EIP-1559 stabilizes the Ethereum transaction fee market by implementing a 12.5% "base fee shift" per block, reducing transaction fee volatility, and redirecting certain miner-extractable value attack vectors.
Between the London hard fork and massive DEX volume migration to L2, MEV’s percentage of network usage dropped by more than 80% compared to the beginning of the year.
(Source: Flashbots)
EIP1559 burns money out of miners' pockets (block rewards are still there) and also raises some concerns about mergers, we've never seen such a massive shift from PoW to PoS networks, and in After China’s mining ban, two large Chinese mining pools have shut down, and the remaining western miners (many related to early Ethereum investors) seem more likely to switch to staking cleanly rather than fight at the last minute .
3. Consolidation and Liquid Staking
The merger of Ethereum (migration to PoS) will completely change the situation of the staking market. JPMorgan Chase even predicts that by 2025, Staking will become an industry with an annual output value of 40 billion U.S. dollars. Although the migration brings many benefits, Staking will also Bringing up the opportunity cost issue, locking up assets to participate in validating the network (especially during the initial one-year staking period) prevents those assets from being used in other parts of the ecosystem.
But soon, developers solved this hassle by creating liquid synthetic tokens for staked assets. Currently, there are only $10 billion in liquid pledged assets, a figure that will have to grow over 50x if we are to reach JPMorgan’s estimated $40 billion annual pledge revenue threshold by 2025. It's too early to pick a winner among these projects, but I'm following all related projects and I'm also an investor in Lido and Anchor.
Being able to earn staking rewards while maintaining liquid collateral opens up a lot of possibilities (earning yield via yield tokens!), and while I'm long-term bullish, I'm a bit concerned about liquidation risk in the short term. 1) The bull market won’t last forever, and the delay in consolidation combined with market sentiment turning “safe-off” or transferring ETH out to other L1 public chains may create bank runs in other DeFi protocols that rely on Lido’s stETH as collateral Scenario; 2) Cross-chain bridges have been hacked several times since this time, and the cross-chain availability of some of these tokens opens up many compounding technical risks; 3) Early validator downtime in the merged environment may Lead to frequent slashing, which will also affect the value of pledged tokens.
I'm not smart enough to prevent these risks, but as amazing as DeFi is, I still know about system leverage, collateral layers, cross-chain usability, and migrating a $500 billion network (in unprecedented ways) to brand new blocks risks posed by the chain.
(Recommended reading: Should I Stake or Should I Leave)
4. EVM or non-EVM?
I believe we will live in a multi-chain world, and Ethereum's EVM will almost certainly become one of the important standards for decades to come. In the next few sections, I'll introduce other early leaders in the race for a share of Layer 1 (or "Layer 0"), with sections dedicated to Solana, Cosmos IBC, Polkadot, and Terra.
There will be a time window (many criteria!) for this mind-sharing battle, we may have hundreds or thousands of rollups, parachains (Polkadot) or zones (Cosmos) for specific scenarios, but we won’t have counts Hundreds of L0/L1/L2 standards. As Ramshreyas wrote in a recent professional article, the major technology platforms tend to be duopolies. 
Maybe this time will be different, but I've found that even developers (especially those working in small teams) are less likely to choose to integrate with multiple VMs outside of the top 2–3 in the short term, unless Those protocols have extremely superior technical capabilities that are better suited to their application (for example, Serum's decentralized exchange can only run on Solana, because its central limit order book is completely infeasible on Ethereum). Even so, many upstarts will still face a choice in the medium term, either take the safe route and build on Ethereum's EVM, or choose to build new land on other technology stacks, which may not survive the bear market.
Recommended reading: choose EVM or non-EVM (requires messari pro paid membership)
5. Relative valuation of Layer 1
Broadly speaking, Ethereum's competitors are all trying to solve the blockchain impossible triangle from different angles, that is, the blockchain can only prioritize the three priorities of scalability, decentralization, and security. of two. Vitalik and other Ethereum core development members have united around a rollup-centric future. This route prioritizes security and decentralization, while scalability is handed over to rollup's L2. This model is similar to Polkadot and Cosmos' preferred path. Solana, on the other hand, takes the faster route, sacrificing some degree of decentralization for speed.
When it comes to the relative value of these projects, we will think about their overall market cap size, developer ecology, guarded value, interoperability and incentives provided, value capture mechanism and how those blue-chip Dapps will choose.
At the beginning of the year, I thought ETH's lead was unassailable, but now I'm not so sure, even after it has had a tailwind year.
In a year where decentralization (particularly political decentralization) and architectural soundness are secondary attributes at best and willfully ignored at worst, not every new chain throws decentralization aside, But it is true that many agreements have been abandoned.
Even if Ethereum holds its largest non-EVM competitor, it will channel some of the value to its Rollup chain, which relies on scalability. At present, ETH's market value in the Layer 1 track has reached 60%, and this will be reduced to below 50% in 2022, or its Layer 2 Rollup tokens will eat up part of the growth space, or both .
This goes back to my earlier point about cryptocurrencies vs encrypted computing platforms. Watkins also pointed out: An encrypted economy with multiple winners will be similar to the world we live in today, with 5 technology companies with a market value of more than $1 trillion. (full article)
(Further reading: Layer 1 report by The Block commissioned by Algorand)
6. Solana Summer never ends
In 2021 (or in the history of crypto), no project is hotter and more exciting than Solana. A VC with its own 100-fold rise has aroused strong interest, the explosive growth of the infrastructure stack (syndica!), application ecology, and the horribly fast blockchain, making it the Ethereum Layer 1 dominance The first serious challenger.
Instead of trying to surpass Ethereum in terms of EVM and modularity, Solana tries to put all aspects into its main chain, which is something Solana is good at and Ethereum doesn't even try.
The team is moving projects forward at breakneck speed, evident at this month's Breakpoint conference: Investing $100M in Decentralized Social Media with Reddit Co-Founders and $100M in Blockchain with FTX For games, Brave migrated to Solana as the browser’s default blockchain. Phantom, as Solana’s browser wallet, also recently reached 1 million users. Solana already has a potential dominant platform advantage in encrypted games and NFT.
But it needs to be explained that Solana is not a panacea. The network was down for 17 hours at one point (if you interview Solana founder Anatoly, he will tell you that this is a "17-hour block"), which may lead to its fledgling There are systemic problems with DeFi applications. But to be fair, this is no different than the technical challenges of the early fabric of Bitcoin and Ethereum. We often forget that a network with a market capitalization of over $65 billion was launched less than two years ago, that growing pains are inevitable, and that it is normal for a network to discover catastrophic bugs early in its life cycle.
We will continue to observe whether this momentum is long-term, but the short-term arguments given by Multicoin are as follows:
"The only blockchain protocol that can scale to tens of millions of users in the next 24 months is Solana...I'm not saying that sharding and rollup won't work, I'm actually pretty optimistic about those two solutions Both will succeed. However, neither scaling strategy works today and creates a lot of secondary and tertiary problems that must be addressed. In the next 24 months, it is difficult to see a strategy that requires scalability certainty Just organizations will get the certainty they need because scaling Ethereum has many intertwined components.”
7. Polkadot advances slowly and steadily
As I discussed with Polkadot founder Gavin Wood at this year's Mainnet conference, ETH 2.0 does look a lot like Polkadot.
Polkadot bills itself as an interoperable Layer 0 or master protocol, which aims to connect as many as 100 parachains (the current plan) that will compete to share security with its relay chain. We don’t need to go into the technical details here, but you should pay special attention to the first top 5 parachain protocols that achieved this month’s parachain slot auction, which will join the Polkadot network on December 15th.
Polkadot is interesting for several reasons, not the least of which is its slow but steady progress (as opposed to Solana's pace), and the fact that the development team seems to be inverting the ETH 2.0 model rather than allowing applications to escape Layer 1 in order to move forward in a more efficient way. Friendly application-specific on-chain work (ETH's rollup model). Polkadot starts with a bottom layer (i.e., the relay chain) with limited enforcement capabilities but general security. The protocol outsources most of the functionality to a customizable execution layer (parachains) at fixed intervals (slot auctions), which requires participants to continuously purchase and lock DOTs, plus staking and parachain bond derivatives (e.g. derivatives on Acala), and you have a fine Ponzi masterpiece.
Polkadot's progress may be slower and more steady than the other projects in this chapter, but I wouldn't bet against someone who co-founded Ethereum and later built a second $50 billion network.
8. Cosmos and IBC
If you haven't gotten the point, I'll tell you that the interchain theory has already won. Cosmos is the first project to work on a modular network of blockchains, with Ethereum’s rollup-centric expansion plans leading to the deal. The theory that "one chain rules the world" does not work, Cosmos' inter-blockchain communication protocol (IBC) does what Polkadot and Ethereum did not do, that is, keeps the protocol completely open and independent of the Cosmos Hub and its native token ATOM.
The Cosmos Hub does not have a special place in the Cosmos ecosystem, and it competes equally with other blockchains that may seek to act as a central router for data and assets throughout the Cosmos ecosystem in the future.
The Cosmos Hub's initial shared security model provides the option for new Cosmos blockchains (zones) to be anchored to the Hub on an opt-in basis, similar to Polkadot's relay chain, or Ethereum's beacon chain, but The Cosmos Hub is 100% optional. Cosmos views interoperability as a spectrum, and then zones and their users choose which security risks to take when connecting to other zones. Fully uncoupled zones may not connect at all, while fully coupled zones may share a consensus process.
Erik Voorhees articulates the multi-chain narrative evolution of the top platforms well:
Ethereum Q1: Defi, decent enough, a bit slow and very expensive; BSC Q2: Defi, not decentralized enough, fast and cheap; Solana Q3: defi , possible decentralization, very fast and cheap; Cosmos/IBC Q4: defi, decentralization, fast and cheap.
Charlie Noyes of Paradigm put it even simpler:
if Ethereum is a mainframe computer, then Cosmos is a protocol for connecting independent servers.
Chain specialization may be the only way to effectively scale on-chain activity, but Cosmos is not looking for premature answers to the question of how blockchains will modularize and which markets will be winner-take-all.
This is why the top 10 blockchain projects (BSC and Terra) are powered by Cosmos, and may include other public blockchain projects in the future, not excluding Ethereum.
As Do Kwon said at the Mainnet conference:
Putting all applications on one global computer is probably not a good idea. Maybe having a multi-chain future makes sense.
9. Terra and Luna
After reading the above chapters, many people may say: "Oh, my God, this is too esoteric for me."
I know it may disappoint most people, but we will continue to talk about the final Layer 1 topic.
L1 public chains like Terra are very interesting, and their application ecosystem has exploded this year. Its partnership with South Korean payment app Chai has brought Terra to 2.3 million users, and Terra's algorithmic stablecoin UST has grown from $0 in its first year to more than $7.2 billion today, and may soon surpass Maker's in market capitalization. Dai, whose synthetic stock app Mirror has a locked value of $1.5 billion, is just shy of Synthetix's $2.1 billion. The value of LUNA locked in Terra's Anchor protocol reached $4 billion, almost as much as Lido's locked ETH ($6 billion). 
Terra's biggest headwinds are known unknowns, but it's unclear whether they're manageable or catastrophic for the entire Terra ecosystem.
In addition to Do Kwon/Terraform Labs' fight with the SEC over Mirror and its synthetic equity token, there are concerns over the reflexive nature of UST and its use of LUNA as a primary source of collateral. In a fully risk-off environment, it's unclear how resilient Terra and UST are - during LUNA's spring crash, UST was nearly insolvent as LUNA was worth less than the total value of UST in circulation. Likewise, it received a $70 million infusion of funds from Terraform Labs to support Anchor’s Stability Reserve, a systemically important Terra lending protocol. The lender of last resort model worked until it failed.
On the other hand, the protocol's Columbus-5 upgrade (which includes connecting Terra to all other Cosmos blockchains) and Wormhole v2 integration (bringing LUNA and UST to Ethereum, Solana, and BSC) As well as removing some of the reflexivity by extending UST's relevance to other parts of the cryptoeconomy. That's why I'm still bullish on Terra's long-term potential, and Terra's stablecoin potential alone will bring a huge TAM (Total Addressable Market) to the project.
10. The rest of the best L1s
There are too many L1 projects, sorry.
Cardano is currently in the top 10 by market cap, so this report may feel a bit snubbed by not mentioning it, but no one in my network is suggesting I replace ADA with anything about SOL, DOT, LUNA, or ATOM Partially, if ever, Avalanche (Avalanche) was the first bubble team to be overlooked for Big dance, although we will have a major report on the project soon. Algorand has also made some moves recently, they brought Mooch on board. Fantom was endorsed by Andre Cronje and reported by Nansen. Near has been aggressive with incentives and expanding its ecosystem with an EVM-compatible Aurora sidechain. There are many other projects that will not be listed one by one.
This part is recommended to go to the Messari website for more reading.
Even so, I know I'm missing some items. You can search using the Messari search bar.
Below is the L2 part.
11. Polygon flips ETH
Before we discuss the main players in L2 scaling, it is helpful to review the seven paths we know so far to scale blockchains: 1.
Layer 1 optimization: As we saw in the direction above, there is a lot of innovation methods can be used to extend the core blockchain itself. They all make different trade-offs in the same decentralization, security, and performance “trilemma”.
2. Layer0 interoperability: Ethereum 2.0, Polkadot, and Cosmos IBC all make similar assumptions that their networks will essentially be networks of interoperable chains with a shared settlement layer.
3. Payment channel: This is the method used by the Bitcoin Lightning Network. Users lock funds in a channel and can operate with other channels using the same script. These are usually application-specific: good for payments, but not ideal for most other situations.
4. Side chain: xDai is a good example. BSC can also be said to be a side chain of Ethereum (or at least it may be in the future). The side chain is inserted into some Layer 0/Layer 1 networks and adopts its own consensus security model.
5. Plasma: Often referred to as "child chains" because they are essentially copies of Ethereum, they are independent blockchains anchored to Ethereum through a trust-minimized bridge system. Each Plasma subchain can use its own mechanism to verify transactions, but still uses the Ethereum blockchain as the final arbiter of truth. Various Plasma designs face many user experience and security issues, and cannot support smart contract development. For example, OMG and Polygon have abandoned the Plasma proposal, leading some to believe that Plasma is effectively dead.
6. Optimistic Rollups: Optimism and Arbitrum use these schemes (see the next section), and Rollups are mini-blockchains that move computation away from Ethereum. They separate state storage (full transaction data is stored in the rollup chain) and the fingerprint of that state (pushed to L1), and optimistically assume that the fingerprint represents the correct transaction history on the rollup. Since Ethereum stores the fingerprint, it acts as the final arbiter of truth, enabling rollups to assume the security guarantees of Ethereum itself. This is a "innocent until proven guilty" model where users can flag fraudulent rollup transactions during a "challenge period". Although fully compatible with EVM (Uniswap, Sushiswap have been migrated), the 7-day challenge period of Optimistic Rollups means that cross-chain transactions (migrated from Arbitrum to the Ethereum mainnet) will not flow immediately.
7. ZK-rollup: zkSync and StarkWare use this solution, while dydx is using the services provided by StarkWare technology. ZK-rollups are extremely fast because they use something called a proof of validity, which makes it instantly verifiable and eliminates the need for a liquidity challenge period. ZK-rollup has also made great strides in being compatible with the EVM, with StarkWare's StarkNet and ZKSync 2.0 with built-in compilers to support the execution of smart contracts written in Solidity and Vyper. But these EVM-compatible solutions are not yet available. So far, ZK-rollup only supports a few independent tasks such as direct transfers and transactions (e.g. Loopring).
If you haven't followed the previous ones, here's a picture:
(Source: EatTheBlocks)
If you're still lost, Finematics does an excellent job breaking down Layer 2 and Polygon. Coin98 has a nice chart showing the Ethereum 2.0 ecosystem, especially scaling solutions. Ben Simon (Mechanism Capital) is a master at understanding a series of rollup projects. If none of the above makes sense to you, you may need to do more 101 cognitive homework.
Back to the topic of L2.
The rise of Polygon this year has been remarkable, and I'm not talking about the near 100x increase in its currency price to now, I'm talking about how far the team has made so far in building a universally scalable protocol, the The protocol allows users and application developers to choose between building an Ethereum sidechain, a Plasma chain, or (soon) a rollup chain.
In fact, in terms of active user addresses, Polygon has flipped Ethereum, which is a fact (also proves that scalability is the top priority of the Ethereum ecosystem), if not for Polygon's role in processing NFT / game transactions, this year The migration of users to alternative L1s such as Solana may be faster in the summer.
Old leeks who are familiar with the history of modern encryption will notice that Polygon is now much larger than its Matic sidechain and Plasma solutions when it was first launched. Its core products are still EVM-compatible Polygon PoS chains and PoS bridges
. Security gained from a set of MATIC stakers on Ethereum, this chain is not a rollup chain as it has a separate set of validators, but it is not a sidechain either as Polygon validators regularly commit the state of the chain to Ethereum, which led the Polygon team to describe it as a chain of commits.
Since then, Polygon has entered new territories with a range of extended solutions and complementary tools.
Between May and July, the team launched Polygon SDK (a framework for launching new blockchains, which can be used for rollup chains or standalone chains) and Avail (a data availability solution for Polygon SDK chains), which also centralizes Efforts to use ZK technology as a long-term expansion solution for the Polygon ecosystem. In August, Polygon merged with Hermez (an open source ZK Rollup expansion solution) as a step to integrate ZK into the Polygon core ecosystem. The team also announced the establishment of a $1 billion strategic fund to invest in ZK technology, and revealed the upcoming STARK-based rollup project Miden, which will be compatible with EVM.
In the long run, all encryption projects will come to the field of zero-knowledge proofs.
12. They are optimistic
Vitalik and the ethereum core developers have begun scaling ethereum with a rollup-centric design, which appears to be most similar to that of Polkadot and Cosmos. Establishing a series of independent, EVM-compatible, execution-layer blockchains that aggregate to the same Ethereum beacon chain, and has made progress in two different types of rollups: optimistic and zero-knowledge ( ZK).
Optimistic rollup, on the other hand, optimistically assumes that all transactions on the rollup blockchain are valid by default. They use a model of presumption of innocence, that is, the transaction confirmation on the L1 chain goes through a challenge period to prevent fraud. As a fraud prevention mechanism, transaction confirmation on the L1 chain goes through a challenge period. This results in some delay in transactions back to L1 at L2 to allow for challenges. But the good thing is that they are EVM compatible out of the box, which allows developers to port existing Solidity contracts from Ethereum’s L1 to Optimistic L2 with minimal changes.
We are likely to see over 80% of on-chain EVM transaction volume move from L1 to L2 within the next 12 months, the pace of migration must be fast as other Layer 1 blockchains continue to gain market share, Time will be the key to whether the above predictions can be established (at the beginning of the year, the TVL of Ethereum accounted for 98%, and now this ratio has dropped to 66%). 
For some applications (aggregating most liquidity on a single rollup chain), it may be easier to quickly migrate to Layer 2, but for others it will be more challenging. For example, Vitalik emphasized the need to quickly promote the migration of NFTs across L2 this fall. It is foreseeable that we will usher in a rich, multi-chain future.
13. Zero-knowledge proof expansion
Vitalik believes that in the long run, ZK Rollups will handle most Ethereum transactions, and they may also subvert those L1 candidates. As it stands, the most innovative technology in crypto (ZK Rollup) has yet to have a broad impact on the market, but StarkEx and zkSync may change that. ZK may be the only solution that enables encryption to scale to billions of users, and it provides the privacy guarantees that institutions need.
ZK Rollup uses zero-knowledge proof (also known as "magic beans" by industry insiders) to confirm the status of L2 chain to Ethereum L1 almost instantly. Loopring, Immutable X, and dYdX were early adopters of this technology, but don't expect their success to spark a ZK Rollup craze: they are not fully EVM compatible right now, and require some customization on the project side to transfer between L1 and other L2 . The programmability gap between Optimistic and ZK rollup will inevitably close (StarkWare says its StarkNet is coming soon), but the trade-off today is about simplicity, compatibility, and speed of settlement. The claim made by Vitalik about ZK rollup dominance may be true, but it will take time and a lot of education from a technical and regulatory standpoint.
I bet that by the end of next year, the share of Ethereum L1 transactions will be less than 20%, and by 2023, Optimistic Rollup will account for less than 50% of the total L2 usage, which will come sooner than we think.
14. Cross-chain bridge
Obviously, the multi-chain world is not just the future, it has become a reality now.
Today there are 15 chains that store over $10 billion in assets, while Bitcoin and Ethereum themselves store nearly $2 trillion. Growth doesn’t appear to be slowing down anytime soon, and with the launch of Layer 2 rollups, more blockchain projects are likely to emerge in the coming years. In many ways, the blockchain world is beginning to resemble our physical world today, defined by individual countries, each with its own economy governed by its own rules.
But blockchain ecosystems are still isolated, they are like isolated countries with limited transportation systems or international trade throughput. Today, there is still no scalable, decentralized, widely integrated protocol for moving value and data between blockchains without relying on trusted third parties.
Instead, users rely primarily on centralized intermediaries such as exchanges and custodians to transfer value between blockchains, exposing users to custody risk and seizure/censorship risk.
Fortunately, there are many teams that are keenly aware of this opportunity and have been building projects like Cosmos for the world since 2014. Dmitriy Berenzon wrote a great article outlining the various cross-chain bridges. method. 
Just as Ethereum's composability enables developers to package protocols together and build new dynamic applications (e.g., Yearn deposits assets into Compound, Aave, Curve, etc. to automate yield), once the cross-chain bridge infrastructure is ready Ready and able to unlock crypto collateral, we may see similar cross-chain applications emerge.
Cross-chain interoperability may also be standardized around a small number of trusted, widely integrated protocols. The immaturity of today's solutions creates a lot of friction between users and developers, but a reliably decentralized, battle-tested, well-integrated bridge across Layer 1 may become a cross-chain due to its predictability and reliability. The first choice for mobility. With the development of the multi-chain economy, the cross-chain bridge will inevitably facilitate a large amount of assets and data transfer.
Prediction: Within five years, the daily transaction volume of the most popular L1<>L2/L1<>L1/L2<>L2 cross-chain bridge protocols will be higher than that of the most popular centralized exchanges.
15. Pack and summarize
Before we get into the final chapter of participating in the web3 economy (and the future organizational structure of society), it's helpful to review the incredible innovations that are just beginning to emerge in the crypto space. I love this threaded post on 23 crypto innovations that will revolutionize our world. Time will tell if the market overheats in the short term, but we're just getting into the crypto super cycle.
This is Day 1.
