Web3入门终极指南：一文搞懂所有加密核心概念
Original author:GSR Digital
Original compilation: Deep Chao TechFlow
Cryptocurrencies are heating up with the recent approval of a U.S. Bitcoin spot ETF, the rise of Solana, new experiments around blockchain architecture, and innovation in the Bitcoin ecosystem. Therefore, GSR Digital provides an overview of various digital asset topics and sub-sectors, serving as a reference for experienced people and a starting guide for those new to the industry.
Blockchain related concepts
bridge
Different blockchains have different rules, consensus mechanisms, and token standards, so tokens cannot simply be sent from one blockchain to another. The bridge can transfer tokens and data from the source chain to the destination chain and must perform three main tasks in the process: data transmission, verification, and interpretation. Bridges can be built in a variety of ways, with differences in trustlessness (does the bridge inherit the security of the connected chains), scalability (is it easy to connect multiple chains or does each path require a custom implementation), and generality (can the bridge There are different trade-offs between sending arbitrary data/messages, or only cross-chain exchanges). Bridges also represent a huge attack vector, and their security is typically assessed by the number of supported chains, daily active users, and total value locked.
The three main ways bridges perform cross-chain transactions are:
Locking and minting: These bridges lock native tokens in smart contracts on the original chain and then issue an equal amount of wrapped tokens to users on the destination chain. Wrapped tokens act as IOUs and can be burned later to retrieve the original tokens on the original chain. Such bridges have advantages in staking efficiency because they require no additional staking or liquidity, but they spread liquidity across the destination chain, produce multiple wrapped versions of the asset, and cause damage to the destination chain if attacked Systemic risk.
Cross-chain liquidity: These bridges facilitate low-slippage exchanges by letting liquidity providers (LPs) provide liquidity, acting as cross-chain automated market makers. They are liquidity inefficient but only handle native tokens, so the risk is limited to LPs.
Burning and minting: These bridges burn native tokens on the origin chain and mint an equal amount of tokens on the destination chain. Since they do not wrap tokens or use AMMs, they do not disperse liquidity or introduce slippage. However, the bridge must have the authority to mint native tokens on multiple chains, which typically only applies to real-world assets (Circle’s CCTP is one example).
Before minting on the destination chain, the bridge must reach consensus that the assets on the original chain have been locked or destroyed. This is done in three ways:
Local verification: The bridge runs a light client of the original chain on the destination chain as a smart contract to verify. This inherits the security of the connected chain, but the light client must be custom built for each one-way bridge.
External Validation: The bridge uses its own set of validators to reach consensus, which may be a centralized entity, multisig, or a decentralized group of stakers (usually using PoA or PoS mechanisms). These bridges are less secure and are essentially blockchains themselves, but without social consensus.
Local Verification: The locally verified bridge acts as a P2P matching platform based on a central limit order book, involving both parties interacting to cryptographically verify the counterparty. They are secure and easy to set up across multiple chains, but only enable asset exchange.
Optimistic verification: A hybrid of the above methods, similar to optimistic rollup, which assumes that block headers submitted on the destination chain are valid unless proven otherwise during a challenge.
Cryptography
Cryptography is the study of techniques for securing communications and data in the presence of adversaries. Along with cryptanalysis, it is part of the larger discipline of cryptography.
Cryptography uses various encryption algorithms (called ciphers) to secure communications, where passwords and keys convert input data (called plaintext) into encrypted output (called ciphertext). Cryptography can be divided into symmetric cryptography, asymmetric cryptography and cryptographic hash functions.
Symmetric cryptography uses the same key to encrypt plaintext and decrypt ciphertext. It is generally simpler and less computationally intensive than asymmetric cryptography, but requires a way to securely share keys, and a separate key for each pair of users in the network. Examples include various ciphers (e.g., Caesar Cipher) and the Data Encryption Standard (DES).
Asymmetric cryptography (aka public key cryptography): Using mathematically related public and private keys eliminates the need for shared keys and is therefore more suitable for large/extended/active networks. Public keys are freely shared and created from private keys, they act as a single-factor authentication mechanism and should be kept strictly confidential. Public and private keys are mathematically related, and while its easy to calculate the public key from the private key, the reverse is nearly impossible. This provides a way to prove knowledge of the private key without revealing it, and allows a message to be encrypted to the recipients public key, which can then only be decrypted by the recipients private key (providing encryption), and the senders public key can be used To verify that the sender is the holder of the private key without revealing the private key (providing authentication). Examples include DH, RSA, and elliptic curve cryptography, the latter used by Bitcoin, Ethereum, and others.
Cryptographic hash functions create a digital fingerprint for any amount of data by splitting the data into pieces and subjecting them to multiple rounds of local operations, losing information, and ultimately converting the data into a fixed-length string of numbers. Hash functions are one-way (the input cannot be deduced from the output) and deterministic (return the same output for a given input). Bitcoin uses the SHA-256 hash function in the protocol.
hosting
Digital asset custodians store and protect owners’ encrypted private keys, enabling holders to sign digital asset transactions. Keys are stored in cryptographic wallets, either hot wallets (connected to the internet; sacrificing security for speed, liquidity, automation) or cold wallets (not connected to the internet; more secure but slower and manual).
Custodians hold keys on behalf of users, while escrow technology providers provide technology solutions that enable end users to self-host securely and efficiently. Custodians take more risk, are more regulated, and provide higher customer service, but offer fewer assets/features, introduce counterparty risk, and are slower to respond.
Core hosting technology solutions include:
Hardware Security Module (HSM): is a tamper-proof, government-certified physical device that protects the encryption process and is not connected to the Internet. HSMs are difficult to hack but create a single point of failure.
Multi-Signature: Multiple keys are required to authorize a digital asset transaction, typically requiring a majority of the keys associated with the asset to sign the transaction (e.g., 3 out of 5). Multi-signature alleviates the single point of failure problem of HSM, but may not be supported by all blockchains, may result in higher transaction fees or reduced privacy, and introduce smart contract risks.
Multi-Party Computation (MPC): is the process of splitting a private key into key shares and distributing them to multiple devices. MPC is flexible and can enable complex signing rules, signature shares can be changed or revoked later, allows a mix of hot and cold wallets, and generates standard signatures, but it is newer, less tested technology and cannot be compared with HSM use together.
Custody solutions are managed by a variety of providers (e.g. dedicated crypto-native providers, traditional financial institutions, cryptocurrency exchanges, prime brokers), may focus on retail investors or institutional investors, and often offer additional services such as Trading, lending, staking, governance participation and/or secure customer network.
Decentralized Autonomous Organization
Decentralized Autonomous Organizations (DAOs) are blockchain-based organizations governed by a set of automatically enforceable rules that allow for bottom-up decision-making and organizing communities around common goals. The DAO is collectively managed and owned by its members, without a hierarchical structure, and its governance is encoded into smart contracts. DAOs are essentially coordination mechanisms that provide trustless management and organizational transparency, participatory decision-making and borderless cooperation, as well as novel financing methods and ownership mechanisms. They are used to manage protocols, fund grants, distribute creative works, guide investments, unite community members, and serve other DAOs.
Membership in a DAO is typically determined by ownership of the DAO token, which is typically available for free and allows any holder to propose and vote on governance proposals (such as how treasury funds are spent). In addition, many DAO frameworks have emerged to automate DAO creation, including Aragon, DAOstack, Moloch and Colony.
The most famous DAO is The DAO, a community-guided venture capital fund founded in 2016 that invests its funds based on member votes. The DAO, which at the time amassed 14% of all circulating ETH, had $60 million stolen from its treasury, and disagreements over whether to restore funds led to the network splitting into Ethereum and Ethereum Classic (ETC).
DAO is widely relied on in DeFi protocol governance, such as Uniswap, Compound and Aave. Recently, DAOs have been established as art collectives (PleasrDAO), social communities (Friends With Benefits), and purchase items (ConstitutionDAO). The largest DAOs include Optimism, Arbitrum, Mantle and Uniswap.
DAOs have the potential to improve citizen engagement, simplify business creation and funding, pave the way for shared financial and social capital, make work untethered and customizable, better match products/services to demand, and improve meritocracy, Contribution-driven ownership and rewards. However, so far, DAOs have not lived up to initial expectations and goals, and have often been criticized for low voter participation, potential for coercion, lack of privacy, and undue influence from large token holders.
Decentralized Finance
Decentralized Finance (DeFi) is a form of finance that uses blockchain technology, smart contracts, and decentralized applications to provide traditional financial services, such as lending, lending, and borrowing, in an open and transparent manner without the need for intermediaries. Trading and investing.
Protocol developers typically release their DApps as smart contract code deployed on blockchains such as Ethereum. DApps often start out as centralized, but often progress towards decentralization and ultimate control by a Decentralized Autonomous Organization (DAO). DApps usually issue tokens to coordinate and incentivize user behavior and reward value contributions.
By leveraging smart contract code deployed to a decentralized public blockchain and creating a peer-to-peer network, DeFi requires neither trust (because programs execute automatically) nor the need to pay rent (because there is no centralized intermediary). DeFi also inherits the properties of blockchain, such as transparency, openness, and immutability, and introduces new paradigms around ownership, governance, and incentives.
DeFi activity can be measured by the number of active users, the number of DApps, or Total Value Locked (TVL), which is the total amount of assets locked in a DeFi smart contract during a specific period of time. Most DeFi activity occurs on Ethereum or its second-layer network due to the large network effect. However, other blockchains such as Solana and Avalanche also have active DeFi ecosystems and provide aspects such as speed/scalability that exceed Ethereum. The advantages of the workshop. Popular DApps include Uniswap (spot DEX), dYdX (perpetual DEX), Aave/Compound (lending), Lido (liquidity staking), and Maker (collateralized debt position/DAI stablecoin).
DeFi started booming in the summer of 2020, known as DeFi Summer, when lending platform Compound began incentivizing activity on its DApp through its COMP governance token, a process called liquidity mining.
Derivatives
A derivative is a financial contract whose value depends on an underlying asset or portfolio of assets and is used for hedging risk or speculative purposes. The price of derivatives fluctuates based on changes in the underlying asset, and derivatives can be traded on exchanges with standardized terms or bilaterally on more customized terms in the over-the-counter market.
While derivatives in traditional finance also include forward contracts and swaps, the most common derivatives in the crypto space include calendar futures, perpetual futures, and options.
Futures Contract: (Delivery) Futures are a financial contract that requires the buyer to purchase an underlying asset at an agreed price on an agreed date in the future, and the seller to sell the underlying asset. Futures contracts are standardized, traded on exchanges, and can be settled physically or in cash. Standard cryptocurrency futures mainly consist of CMEs futures products. If perpetual contracts are included (that is, most futures trading is completed through perpetual contracts), they account for less than 5% of all futures trading volume.
Perpetual Contracts: Perpetual contracts are similar to futures contracts, except that they have no expiry date. As a futures contract approaches expiration, its price converges to the spot price, whereas a perpetual contract uses a funding mechanism to connect the contract to its underlying spot price. Specifically, when the perpetual contract price is higher than the spot price, the funding rate is positive, and longs pay funds to shorts, and vice versa (the funding rate is also based on the gap between the perpetual contract and the underlying price to incentivize Traders balance demand and connect perpetual contract prices to spot prices). Perpetual contracts increase market efficiency by pooling liquidity from various expirations into a single exchange-traded instrument. Binance dominates the perpetual contracts market share, with OKX and Bybit being the major perpetual contracts exchanges. Only 2% of perpetual contract trading volume occurs on-chain, and dYdX stands out in this regard.
Options: Options give the holder the right, but not the obligation, to buy (a call option) or sell (a put option) an asset at a specific price (called the strike price) with exercise before or on a predetermined future date. Option prices are determined by the underlying asset price, strike price, expiration time, volatility of the underlying asset, and interest rates. Options traders often focus on risk measures called Greek letters, which measure the response of an option price to changes in an underlying variable, such as the price of the underlying asset (called delta), the change in delta due to changes in the underlying asset (gamma), volatility change (Vega) and remaining time change (Theta). Adoption of crypto options is more limited compared to perpetual contracts and liquid options markets. Deribit controls 80-90% of crypto options trading volume, while Paradigm is an OTC communication/inquiry network that accounts for about one-third of Deribits trading volume. Decentralized exchanges (DEX) account for only 1% of the total options trading volume, and Ribbon/Aevo, Lyra and Dopex are the main DEX options trading platforms.
market maker
A market maker is the act of providing two-way buying and selling quotes and quote sizes for an asset on an exchange. It increases liquidity for buyers and sellers who might otherwise see worse pricing and lower market depth.
Market makers use proprietary software, called engines or bots, to display two-way quotes on the market. These engines continuously adjust buy and sell quotes based on price changes and changing volume dynamics.
Traditionally, market makers make profits by charging the bid-ask spread (e.g., buy for $100, sell for $101), and they take on the risk that global price movements will go against them when holding an asset, known as price risk. Given the high popularity of trending markets and one-way order flow, market making efforts in the cryptocurrency market are typically conducted via loan+options or margin models.
Differences between market makers include liquidity provided, technology and software, history and experience, transparency and reporting, reputation, exchange integrations, the ability to provide liquidity on centralized and decentralized exchanges, and value-added services.
Market maker-specific key performance indicators include bid-ask spread, percentage of volume traded, percentage of best bid/ask price (i.e. percentage with best bid/ask price), and uptime.
Market makers offer many benefits to projects and trading, such as better liquidity and market depth, reduced price volatility, improved price discovery, and significantly reduced slippage. Perhaps most importantly, tokens play an important role in decentralized applications, so liquidity is a key factor in making the technology work.
market structure
Market structure: The crypto market structure has many unique features compared with traditional finance, including all-weather trading (24/7), the ability to self-custody, centralized exchanges playing multiple roles such as brokers/exchanges/custodians, instant settlement, Hybrid regulatory oversight, stablecoins as underlying assets, growing derivatives markets, the ability to trade on-chain and off-chain, and increased transparency (for on-chain activity).
Crypto markets offer a number of key advantages over traditional finance, including fewer intermediaries, instant settlement, lower costs, greater efficiency and greater access opportunities.
Cryptocurrency market structure poses some key challenges and risks. First, legal and regulatory oversight are mixed, and many regulatory regimes are still developing. Second, there are heightened risks related to security (smart contract risks, hacks, scams), custody (lost keys, poor access controls), and counterparties (misappropriation, anonymous teams). Finally, there is widespread capital inefficiency due to fragmentation of liquidity across different trading venues and on/off-chain, lack of full-service cryptocurrency prime brokers, limited cross-margin, and required pre-financing of trades.
Trading can take place on centralized or decentralized exchanges, or through over-the-counter markets. While some spot trading occurs through decentralized exchanges (~15% of total trading volume), derivatives trading rarely occurs on-chain (~2-3%). Perpetual contracts are the most popular trading instrument, followed by spot trading, with options or futures trading being relatively less traded.
Although cryptoassets have low correlations with traditional assets, their prices exhibit higher volatility due to their nascent nature and structural reasons. Bitcoin is highly correlated with increases and decreases in global liquidity, often moving in response to macro as well as cryptocurrency-specific catalysts and risks in the short term. Over the long term, we expect Bitcoins price to change as fundamentals include adoption, usage, development, talent, and capital.
Maximum extractable value
Maximum Extractable Value (MEV) is a measure of the profit a miner or validator can extract from block production, in addition to block rewards and transaction fees, by including, excluding, and changing the order of transactions in a block.
Transaction information, including the transactions base fee and priority fee (Gas), is typically broadcast to the blockchain network and placed in a pending transaction queue called a txpool or mempool. Miners/validators can choose which transactions are included in their proposed blocks and in which order, and historically they have selected the transactions with the highest gas price from the mempool and ordered them by gas spend. However, pending transaction information can be used maliciously, as bots attempt to snap up transactions ahead of pending transactions, quickly realizing that ordering transactions based on priority fees is not a profit-maximizing strategy relative to more complex ranking strategies. For example, miners or independent third parties known as searchers may use complex, bot-based trading strategies to arbitrage price differences between DEXs, wrap pending DEX transactions with their own buy and sell orders (known as sandwich attacks), or Perform liquidation for decentralized lending protocols.
While validators are in the best position to take advantage of such transactions because they control which transactions are included in blocks and the order of transactions, the vast majority of MEV is extracted by highly sophisticated independent parties (although the majority goes to validators). The Ethereum validator role is designed to be as simple as possible without specialization, but maximizing transaction fees in this MEV paradigm is complex and computationally challenging compared to the early years when miners simply ordered transactions based on the fees paid. . As a result, validators now typically no longer construct their own blocks (although they can still do so), but instead typically receive blocks from mutually trusted relays, which are supported by block producers and block proposers ( validators). Flashbots MEV-Boost software facilitates this handover. In this setup, block production is outsourced to a market of professional block generators who aim to maximize MEV, and these generators bid block proposers (validators) to propose their blocks into the network. The role of the validator becomes very simple, just select the block with the highest bid. Due to the competitive nature of this bidding process, the majority of MEV revenue is paid by builders/searchers, which is returned to validators who actually have the power to propose blocks that harvest it.
While some types of MEV, such as CEX/DEX arbitrage to ensure users pay the same global market price and exchange clearing to ensure loan repayments, are beneficial, MEV creates many negative externalities. These include worse execution and higher prices from pinched traders, as well as broader network centralization concerns due to the specialization required to compete.
Two very important vectors of MEV competition include private order flow and latency. All else being equal, more trades are always better from a searchers perspective, so any searcher/generator that receives private order flow, rather than trading through a mempool, will be at an advantage . Additionally, CEX/DEX arbitrage is currently the largest form of MEV, and since the price of most DEXs only adjusts between blocks (12 seconds), the price of CEX is constantly fluctuating and therefore has minimal latency to submit the most before the auction ends. Competitive bids are advantageous. This is particularly noteworthy when an assets true market price moves dramatically within a 12-second time period, allowing the participant with the lowest latency to submit the most competitive bid before the auction ends.
There are various companies and strategies to reduce the negative externalities of MEVs, the most famous of which is Flashbots, a research organization that aims to reveal and democratize access to MEVs. After successfully launching products like Flashbots Auction and MEV-Boost, Flashbots is now developing its SUAVE solution to decentralize the block generation itself.
Mining
The Bitcoin blockchain is a network of unrelated computer nodes that use cryptography and consensus mechanisms to agree and record valid transactions. Special nodes called miners organize pending transactions into blocks and compete to be the first to solve the mining puzzle, add their block to the blockchain, and receive block rewards (and related transaction fees). By requiring miners to spend something of value (here, computing and energy resources) to solve a mining puzzle, Bitcoin encourages miners to participate honestly, despite the potential risk of bad actors.
Miners organize pending transactions into a proposal block and include a random number called a nonce, hashing their proposal block so that the hash output is lower than the target value (the hash function is a deterministic A linear one-way algorithm that converts any amount of input data into a fixed-length numeric output). If the hash value is lower than the target value, the miner broadcasts the winning block to the network, where it is verified by other miners and added to the blockchain. The winning miner receives the block reward and block transaction fees. If the miner does not solve the mining puzzle, it changes the nonce (and/or the transaction) and hashes it again, repeating the process until it or another miner solves the puzzle, and then the process starts over. Miners typically use mining equipment with dedicated circuitry, and each mining equipment model has its own hash rate (hash rate refers to how many hash operations the device can do per second. For example, the Bitmain S 19 J The Pro can do about 100 TH/s, which is 10^14 hashes/second) and efficiency (power consumption per hash).
Bitcoins maximum supply is 21 million BTC, which is achieved by halving the block reward every four years (the current block reward is 6.25 BTC and will be halved in April 2024). Additionally, the network adjusts the mining puzzle target approximately every two weeks so that the network (and its hashrate at the time) takes approximately ten minutes to solve the mining puzzle. Therefore, the Bitcoin network produces a new block every approximately ten minutes, which combined with the block reward of 6.25 BTC means that the network is distributing 900 new BTC per day (block reward of 6.25 BTC * 6 blocks per hour *24 hours a day).
The chances of any one miner solving a mining puzzle are directly proportional to their hash rate market share (the miner’s hash rate relative to the network’s hash rate). For example, if a miner produces 4 EH/s (4 * 10^18 hashes/second) and the total network hash rate is 400 EH/s, then this miner will have 1% of the hash rate market share, Expect to receive 1% of all Bitcoin block rewards, which is 9 BTC per day. This setup encourages hashrate competition among miners. Also, note that in order to smoothen income and reduce the impact of luck, miners join mining pools, have the hashrate bundled together, and have block rewards distributed in proportion to the hashrate contributed in exchange for a small portion of the fees).
Mining occurs all over the world, but miners flock to locations with strong rule of law and low electricity costs. China was once the leading geographical location due to its cheap hydropower, until it was banned from mining in May 2021, and now the United States is the leading geographical location for mining. It is important to note that Bitcoin mining is often criticized for its high electricity consumption, although opponents often conflate usage with emissions (mining is often overly reliant on renewable energy as it is often the cheapest source of power), while Mining can actually boost the development of renewable energy by providing flexible baseload for renewable energy projects that would otherwise be uneconomical.
The largest miners include Marathon (26 EH/s), Core Scientific (16 EH/s), CleanSpark (10 EH/s), RIOT (9 EH/s), Bitdeer (8 EH/s), and Cipher (7 EH/s) s).
Modular
Blockchain has four basic functions: execution, consensus, settlement and data availability. Traditionally, all four functions are performed by the first layer of the blockchain, which is known as the monolithic structure. However, this leads to the blockchain trilemma trade-off, which states that it is impossible for a blockchain to simultaneously balance decentralization, security, and scalability (e.g., a blockchain can increase block size to Increase speed, but this will result in the blockchain becoming larger, preventing some nodes from retaining full copies, ultimately reducing decentralization). However, a new class of protocols is separating and optimizing each function, allowing each component of the modular stack to be optimized for a more decentralized, secure and faster blockchain. This concept is called modular blockchain or modular architecture.
In more detail, the four functions of blockchain are:
Execute: Execute the calculation. This involves starting from an initial state, running transactions and transitioning to an end state.
Consensus: The process of reaching agreement on transactions and their ordering.
Settlement: Validates transactions and provides finality guarantees. For modular chains, this includes verification/proof of arbitration and coordinating cross-chain messaging.
Data availability: Ensure transaction data is published so anyone can recreate the state.
Examples include: Ethereum chose to improve scalability by outsourcing execution to a second layer network. While Ethereum still operates as a monolith, it is moving towards enforcing consensus, settlement, and data availability while leveraging second-layer scaling solutions for off-chain execution. Celestia is another example that uses data availability sampling and erasure coding to provide transaction ordering and data availability to prove that enough data is available to replicate the blockchains state and allow other modular components to connect to Celestias network, quickly Create interoperable, customizable, high-performance blockchains. Other examples include Fuel (modular execution layer), Tezos (first layer with rollup capabilities), Avail, and EigenDA (data availability layer).
Different construction methods can be used to design modular chains, and different solutions can be used for different functions. For example, Solana performs all four blockchain functions and is a monolithic blockchain. In contrast, smart contract rollups use Ethereum for consensus, settlement, and data availability, and smart contract rollups for execution. validium (a scaling solution) can use Ethereum for consensus and settlement, off-chain data availability through the Data Availability Committee (DAC), and execute on validium. Sovereign rollups can use Ethereum for data availability and consensus, and execution and settlement occur on sovereign rollups.
There are many challenges with modular chains, such as their development is still ongoing, the rollups sequencer is still centralized (i.e. each rollup currently determines its transaction/transaction ordering and may be reviewed), and is fragmented across different execution layers of liquidity.
Non-fungible tokens
Homogeneity means that two items are identical and interchangeable, such as dollars or airline points, while non-homogeneity means that the item is unique and therefore not freely interchangeable, such as an original painting or land. NFTs are non-fungible (completely unique) digital assets stored on the blockchain and can be considered a blockchain-based digital representation of ownership. Note that for cost reasons instead the ID number is stored on-chain, which points to the URL of the JSON metadata file (Autoglyphs are one of the few counterexamples). Also note that blockchains have standards that define fungible tokens, like Ethereum’s ERC-20, and non-fungible, like Ethereum’s ERC-721.
NFTs offer typical cryptocurrency advantages such as immutability, provable scarcity and provenance, standardization and interoperability, and programmability, making digital assets as real and permanent as items in the physical world. NFTs can represent ownership of unique items of value such as digital art, domain names, intellectual property, and event tickets, and can be used in a variety of use cases including collectibles, gaming, media, music, and finance.
Notable examples of NFTs include: Colored coins on Bitcoin in 2012; CryptoPunks (the first NFT on Ethereum) in 2017; CryptoKitties (a digital cat NFT collecting and breeding game) in 2017; Beeple’s Everydays NFT Auction (sold for a record $69 million); and NBA Top Shot (digital NBA cards) in 2021.
NFTs have historically been traded on various NFT markets, some focused on specific areas, and during the boom market in late 2021, OpenSea accounted for 95% of the market share. Recently, however, Blur has replaced OpenSea as the main marketplace by using tokens to incentivize and enhance trading capabilities. Overall, NFT trading volume, many of which are transactions of PFP (avatar NFT), is down by about 95%, and prices are down more than 80% from their peak.
Despite serious declines in transaction volume and prices, many believe that the importance of NFTs cannot be underestimated and continue to evolve with new features (such as improvements in programmability and composability), new use cases (such as tokenization, and gaming). ), new ownership and business model paradigms emerge, and the world becomes increasingly digital, they will eventually become ubiquitous.
pledge
Blockchain consists of blocks of transactions that are created and verified according to pre-specified, coded rules. However, since participants may be malicious, blockchain requires block producers to invest a certain amount of value to prevent bad behavior. Proof-of-Stake (PoS)-based blockchains like Ethereum work by requiring block producers (called validators in PoS systems) to lock cryptocurrency in smart contracts, a process known as staking.
In addition to an additional balancing mechanism, validators are randomly selected to produce a block based on their stake ratio and receive staking rewards from transaction fees and protocol issuance to compensate them for the work they perform, such as proposing and validating blocks. However, if a validator performs their duties poorly, intentionally or unintentionally, a portion of their stake may be slashed. Therefore, staking is crucial to the proof-of-stake process and is a means of protecting the network.
To stake, individuals can run a validator node or delegate tokens to a validator in exchange for a small portion of the staking rewards. Staking rewards vary based on protocol design, staking participation rate, network activity, lock period, and selected validators (for token delegators). Risks include the unwinding of the staking period, as staked tokens generally do not allow immediate withdrawal, may be slashed in the event of poor performance, and opportunity costs, since staked tokens cannot be used for other activities.
To circumvent high opportunity costs, many staking service providers distribute derivative assets called Liquidity Staking Tokens (LST), which not only represent the staked tokens, but also generate interest and can be used in DeFi protocols, e.g. Serve as collateral for loans or provide liquidity on decentralized exchanges. Lido-staking Ethereum (stETH) is the biggest example.
Many decentralized applications and centralized digital asset service providers provide staking services, where users deposit tokens into smart contracts or centralized modules to earn rewards/increase rewards, obtain governance rights, etc. Although this is also known as staking, it is very different from staking in a blockchain’s consensus protocol, and is more commonly used to reduce token supply, increase token demand, and reward users.
Real World Assets (RWA)
Overview: Tokenization is the process of bringing off-chain assets (often called real-world assets or RWA) on-chain to enable on-chain tracking, trading, programming, and management. Many different types of assets can be tokenized, such as commodities, collectibles, financial instruments, intellectual property, and real estate. Due to the benefits and improvements it brings, businesses, crypto OGs, and regulators have expressed strong interest in it, with The Block reporting that the global tokenization market is expected to reach $16 trillion by 2030.
Benefits: Benefits of tokenization include:
Asset Management and Management: Streamlined operations, reduced administrative burden, automated and transparent recordkeeping
Market Efficiency and Liquidity: Improving standardization through reduced administrative costs and decentralization, shortening settlement times, reducing reliance on middlemen, and increasing asset efficiency through composability
Inclusive finance: Lower minimum investment restrictions and gain access to more sources of capital
Economic growth: improved access to capital and financing through a wider and more diverse set of actors
Process: Real-world assets are put on the chain through a tokenization process, which according to The Block includes:
Identification: Select real-world assets to be put on the chain
Verification: Confirming the ownership and value of an asset through legal documents or appraisals. A trusted third party, such as a lawyer or auditor, can verify authenticity, ownership and valuation
Tokenization: Creating a digital token or set of tokens to represent an asset on the blockchain. Each token typically represents fractional ownership or a specific claim to an asset, and smart contracts can be used to define the tokens properties and functionality.
Issuance: Verified asset information and created tokens are recorded on the blockchain, and token issuance is completed through ICO, STO or direct listing
Custody/Management: Asset management and custody ensure the safe custody of physical assets and the management of their on-chain representation, typically involving traditional asset custodians and blockchain-based custody solutions.
Example: Stablecoins are the most well-known example of tokenization, with stablecoins typically tokenizing the U.S. dollar but also including other assets such as gold (e.g. KAU, PAXG, XAUT). The U.S. Treasury tokenization market is growing rapidly, with leaders including Franklin Templeton ($300 million), Ondo’s OUSG ($130 million) and Matrixdock’s STBT ($85 million). In addition to Treasury bonds, other debt instruments are also being tokenized, such as private credit (by Defyca), structured debt (Intain), and debt securities (Obligate). Additionally, some protocols are also tokenizing or acting as marketplaces for less liquid tokenized products, such as Centrifuge, Goldfinch, Maple, RealT, BSOS, and Re, while others are tokenizing stocks and indices, such as Backed and Swarm. Finally, tokenization also extends to carbon credits (Ecowatt, Flowcarbon), physical collectibles (Collector, Tangible) and even data indexing (The Graph), KYC (Shyft Network) and job marketplaces (Human Protocol), although the latter is usually not Within the current tokenization/RWA narrative.
Challenges: Despite these benefits, tokenization/RWA must first overcome various challenges before it can reach its full potential. First, a sound and clear legal and regulatory framework must be established. Second, there is a need for standardization in asset representation, ownership determination, and user identity. Third, improved interoperability is needed to consolidate users and liquidity between chains and applications. Finally, data, hosting and auditing processes need improvement.
Tokenomics
Tokenomics is the economics of protocol tokens, covering various supply and demand characteristics.
Tokens play an important role in decentralized entities by coordinating and incentivizing behavior, rewarding value contributions, and facilitating exchange. Therefore, strong token economics may support protocol goals, create/enhance sustainable economic models, and accelerate long-term protocol growth and value creation.
Tokenomics design starts with the goals of the protocol and then examines how the tokens can help achieve those goals. Tokenomics is less about increasing prices by reducing supply and more about matching supply and demand. There are many token economics frameworks, but studying supply and demand is probably the most popular.
Supply: Token supply is typically encoded in smart contracts and is more formulaic than demand. Some important things to know about the token supply include:
Supply Definition: There are various definitions of token supply, including Circulating supply is the number of tokens currently in circulation and immediately available for sale; Total supply is the number of tokens created minus the number of tokens destroyed (including those locked in smart contracts token); the maximum supply is a hard-coded limit on the total number of tokens that will exist in the future, indicating remaining inflation.
Supply Metrics: A coin’s current and future supply is affected by many different components. These include issuance schedules (many protocols have built-in mechanisms to increase circulating supply to incentivize and reward activity), distribution (tokens may be created and distributed through fair launch or pre-mining), lock-ups (pre-mined coins may be subject to lock-ups) Planned restrictions to prevent large-scale supply from entering the market all at once), distribution (who currently holds the tokens and the amount, there are a few large holders at risk).
Generally speaking, if a majority of a tokens maximum supply has been used up, or there is stable, predictable inflation to encourage its use, a fair launch or pre-mining, and a gradual, long-term vesting schedule, there is With a high community token distribution rate, reasonable distribution, and no excessively large holders, such tokens will generally be able to absorb demand stably over time.
Demand: Token demand is based on fundamental and speculative characteristics, driven by the benefits the token provides.
Demand creation mechanism: Token demand may come from various sources, such as use within the protocol (e.g. value exchange, governance, access discounts, etc.), sharing of protocol revenue or potential revenue with token holders, monetary properties, and speculative demand.
Demand drivers are not all created equal. Governance rights are generally less valuable because voter participation is lower. Speculative demand has two sides, it can either help increase the price of a token or it can hurt it. Sharing revenue with token holders is a strong potential benefit and demand driver, but difficult to achieve in the current regulatory environment. In summary, protocols should focus on providing and growing real use cases/utilities for their tokens to drive demand for their tokens, and then meeting that demand to match supply.
Zero knowledge proof
Zero-knowledge proof (ZKP) is a method that allows one party (called the prover) to prove to another party (the verifier) that a statement is true without revealing any other information. To illustrate, imagine your friend is wearing a blindfold and holding a green ball and a red ball. You want to prove to your friend that the two balls are different colors without revealing any information about the two balls or anything else. You ask your friend to put the ball behind his back and either change hands or not, and then show it to you again, at which point you can tell him whether he changed the ball or not. With one round and one correct answer, your friend may start to believe you, but not completely because you have a 50% chance of guessing correctly. But with each round and correct answer, the probability that youre just guessing moves toward zero and your friend will eventually believe that the two balls are different colors without you revealing anything about the two balls or anything else. information.
Zero-knowledge proofs are mainly used in blockchain for privacy and scaling purposes. Examples of the former include hiding transaction information and minimizing information sharing, while examples of the latter include zero-knowledge rollup, by processing transactions outside of the Ethereum main chain and then batching, compressing and publishing state data to a layer while providing zero-knowledge A proof (called a validity proof) that the computation was performed correctly. Future use cases include verifiable outsourced computation at cloud scale, open third-party analysis of anonymized data, and enhanced trust, privacy and remuneration with decentralized identities.
Zero-knowledge proofs utilize arithmetic circuits to prove the validity of a statement, are probabilistic (cannot be said with certainty, can only be said with a high degree of confidence), and can be interactive (like the example above) or non-interactive (this is The method used by blockchain), usually in the form of zk-SNARK in the encryption field. Zero-knowledge proofs have only recently moved from theory to practice and are rapidly improving in key areas such as proof time, proof size, verification time, and trusted setup.
The disadvantages of zero-knowledge proofs are that they are in early stages of development, are probabilistic rather than deterministic, require multiple interactions or large amounts of computation, and generally have some minimal trust assumptions in a trusted setting, which is how the proof system is generated. Procedure with standard parameters (although some ZKP implementations do not require trusted settings).
Zero-knowledge proofs are similar to other technologies such as multi-party computation (enabling multiple parties to share data for computational tasks without leaking each others data) and fully homomorphic encryption (enabling computations on encrypted data without first decrypting it).
Popular protocols that employ zero-knowledge proofs include Aleo, Anoma, Mina, Tornado Cash, Iron Fish, Manta Network, Aztec, Argent, Starknet, zkSync, and Penumbra, among others.
Blockchain subfield
Blockchain games
Games are increasingly leveraging blockchain technology to incorporate cryptocurrency-based payments, rewards, and ownership into their games. This includes everything from facilitating in-game transactions, to creating in-game digital assets like NFTs, to validating and recording all blockchain transactions that occur in the game.
Blockchain-based gaming offers many benefits, including:
Decentralized/Trustless: The game is more secure, transparent, trustless and traceable.
Ownership: Users truly own their assets, in the form of self-hosted NFTs, turning in-game purchases from expenses into assets.
Enhanced functionality: Users can resell their assets to others. Composability might allow users to transfer assets between different games or allow developers to build on top of existing games.
Greater influence: Blockchain-based games can adopt user-generated content or DAO-based community governance, and users can create world/in-game assets, develop storylines, or improve the game’s economic model.
Incentives: Token incentives can reward users for their contributions to the game, such as completing tasks, producing popular content, or guiding new users to join.
New revenue streams: Developers can now oversee dynamic virtual economies where they take a cut of all commerce transactions.
Blockchain-based gaming first appeared in late 2017 with the launch of CryptoKitties. CryptoKitties enables users to collect and breed digital cats based on a smart contract-based breeding algorithm that determines cat properties, and is so popular that it clogged Ethereum. The next hot blockchain-based game is launching in 2021, Axie Infinity, a digital pet universe game that allows players to collect, breed, and battle NFT-based Axie characters through the game, earning tokens from the game. At its peak, Axie had nearly 3 million daily active users, many of whom had quit their day jobs and relied on gaming to generate income. Other popular games include Ember Sword, Star Atlas, Splinterlands, The Sandbox, Sorare, and more.
Gamers are generally skeptical of blockchain-based games, viewing them as money traps for developers, and GameFi has been criticized for relying on a growing player base and potentially collapsing as quickly as it grows. Additionally, blockchain-based games face many other challenges such as regulatory, security, scalability, user interface/user experience, and general gameplay/graphics issues. However, developers are now primarily focused on the games themselves and the unique benefits that blockchain technology brings, while avoiding volatility incentives. Furthermore, given the long development cycles, we are finally on the verge of the first truly AAA blockchain-based games, with games like Illuvium, Shrapnel, and Otherside being examples.
In addition to the game itself, there are other players in the blockchain game ecosystem, including development studios (such as Sky Mavis, Blockade, Mythical, Dapper, Wax), marketplaces (Immutable, Rarible, OpenSea), blockchain/scaling solutions (Immutable, Ronin, Polygon, Flow, Wax, Hive, Safa, Oasys), infrastructure/tools (Enjin, Ronin, Forte) and game guilds (Yield Guild Games, Avocado DAO, Merit Circle).
loan agreement
Lending markets, such as Aave and Compound, are the backbone of DeFi, allowing users to borrow or lend crypto assets permissionlessly via smart contracts to gain leverage, short the market, or earn additional income. Smart contracts enable these services to conduct non-custodial transactions without the need for an intermediary.
Often referred to as peer-to-pool lending, borrowers lend their crypto assets to a liquidity pool from which they can borrow. Interest rates are typically variable and determined based on a supply and demand (i.e. pool utilization) algorithm. Increased demand for borrowing pushes interest rates higher, providing lenders with higher returns, and vice versa.
Lenders typically receive receipt tokens corresponding to the margin they lend, similar to the design of liquid staking tokens. Lending proceeds are either added to the balance of receipt tokens (aTokens) or the price of receipt tokens (cTokens). Given the peer-to-peer lending model, borrowers can only call back their loans when they have spare capacity, and borrowers may not be able to call back their loans when the loan pool is fully utilized (i.e. all deposits have been borrowed). However, since interest rates are typically floating and rise as utilization rises, one would expect some borrowers to repay their loans in this scenario, allowing the lender to withdraw collateral from the pool. Additionally, because receipt tokens are provided in conjunction with loans, borrowers can sell their loan positions on the secondary market via decentralized exchanges if liquidity is urgently needed.
Borrowing often requires over-collateralization to help reduce the risk of the protocol accumulating bad debt. Borrowers are exposed to liquidation risk, and most protocols charge additional fees when liquidating positions if the value of borrowed assets rises sharply or the value of assets that have been pledged declines, so borrowers loan health factors should be closely monitored. Borrowing/loaning assets are typically only backed on a permissioned basis as the risk is typically shared, so backing smaller/riskier assets increases the risk of the protocol accumulating non-performing debt. As such, typically only large tokens are supported, but protocols like Euler have taken the approach of isolating the lending market and allowing it to form without permission.
The lending/lending market also introduces new financial native ecosystems that do not exist in traditional markets, the most prominent example of which may be flash loans. Flash loans allow borrowers to borrow any available amount of an asset without posting any collateral, as long as liquidity is returned to the protocol within the same block (i.e. imagine if ETH on Uniswap was more expensive than Sushiswap, you could borrow USDT Buy ETH on Sushi and sell to Uni within the same block, thus cutting the spread before repaying the loan). If the loan is not paid back within the same block, the entire flash loan transaction will fail (i.e. the capital will not leave the lending pool).
central bank digital currency
A central bank digital currency (CBDC) is a widely available digital form of a country’s legal tender issued by a central bank. Since CBDCs are liabilities of the central bank itself, they have no credit or liquidity risk. The central bank’s goal is to ensure that CBDC does not undermine monetary and financial stability, coexists and complements other payment mechanisms and forms of money, and supports efficiency and innovation.
There are two main types of CBDC: retail CBDC is used by the public for daily payments, while wholesale CBDC is used as a settlement tool between financial institutions.
CBDC can improve payments and payments infrastructure, support policy and enhance economic growth, facilitate global commerce and improve remittances, support financial inclusion and combat inequality. Risks to CBDC include potential impacts on financial system stability, monetary policy, credit costs/availability, and privacy.
For CBDC, there are many design choices regarding interest rates, household restrictions, structure, payment verification, functionality, access, and governance. For example, the architecture can be centralized or decentralized, transfers can be through a central intermediary or peer-to-peer, system and payment access/verification can be identity/account based or token based, and the ledger can contain simple accountability data or more complex Payment information, ledger access can be relatively open or more restricted. In addition, the central bank must determine what responsibilities it will provide beyond issuance, such as distribution, system management, and equipment management. Currently, 11 types of CBDC have been launched, 21 are being tested, 33 are under development, and 46 are in the research stage.
Centralized exchange
A centralized cryptocurrency exchange (CEX) is an intermediary platform that connects token buyers and sellers and enables digital asset transactions. Unlike traditional finance, most CEXs have a broader role, acting as brokers, exchanges and custodians.
CEX will create a user virtual balance after receiving fiat currency/token deposits, and only conduct on-chain transactions when withdrawing funds. This increases speed and reduces costs, but introduces a large assumption of trust in the exchange hosting user deposits.
CEX uses a central limit order book (CLOB), where different currency pairs have a bid (the amount you are willing to pay for an asset) and an ask (the amount you are willing to sell an asset for at a certain price) on the exchange. Exchanges match bids and offers based on the price-time priority principle, and market participants can see order book depth, meaning they can see bids and offers beyond the best bids and offers.
An order can be a market maker order, which provides liquidity and is added to the order book (i.e. a limit order), or a taker order, which is executed immediately at the best bid or ask price (i.e. a market order) and reduces liquidity. Market maker orders often have significantly lower or even negative transaction fees in some cases, while taker orders are usually much more expensive. Additionally, exchanges often offer discounts on trading fees at higher volume tiers.
Different CEXs offer trading in different cryptocurrency assets and products, such as spot, perpetual futures, and options. Exchanges also often offer their own tokens, which may grant holders discounts on trading fees, access to launch pad listings, and can be used as gas on the blockchain associated with the exchange.
The largest exchanges include Binance, Upbit, OKX and Coinbase (for spot trading), Binance, OKX and Bybit (for perpetual futures), Deribit (for options). CEX accounts for 85% of total spot trading volume (compared to DEX) and 97% of derivatives trading volume.
Distributed cloud (compute and storage)
Decentralized cloud protocols utilize blockchain technology to provide storage and computing services:
Cloud storage: Provides space to store data, but stores it offline on a cloud server over the Internet. Cloud storage is used for web hosting, file sharing, virtual desktop hosting, automatic data backup, etc., enabling users to protect data from disasters, secure sensitive data, supplement storage space, and reduce operating costs.
Cloud Computing: is any internet-based service that performs computing processes or runs applications. It is used in cloud-based communication platforms (e.g. email), SaaS, remote data analytics, website content and management systems (e.g. CRM, CMS, ERP), it facilitates easier collaboration, enables remote working, increases business agility and Integrate important files and applications.
Decentralized cloud companies offer these services through P2P networks of service providers who either leverage idle infrastructure (such as renting unused computer hard drive space through Filecoin) or purchase custom hardware and run the network from scratch in exchange for Coin rewards (for example, Flux miners purchase and run Flux nodes in exchange for Flux rewards). Decentralized cloud providers compete with oligopolistic tech giants such as Amazon AWS, Google Cloud Platform and Microsoft Azure, offering lower prices, greater resiliency, better privacy and censorship resistance.
Decentralized Storage: Decentralized storage solutions store data distributed across multiple nodes or computers, eliminating the need for a central server and making data permanent and censorship-resistant. They act as marketplaces that allow anyone, from individuals to large cloud companies, to rent unused hard drive space in exchange for a fee, and attempt to coordinate and secure the process (including encryption, storage, retrieval, contract management, storage auditing, etc.). Typically, users encrypt data and then split it into smaller parts called shards, which are often replicated for redundancy purposes and stored by nodes on the network. Nodes communicate with each other via a P2P protocol, receive token incentives that guarantee storage availability and reliability, and retrieve and share data upon user request, all in a transparent and tamper-proof manner.
Some decentralized storage solutions include Filecoin, Storj, Arweave, and Sia, among others. Filecoin is built on IPFS and uses a content-based addressing rather than a location-based addressing system to store files (this method assigns a unique cryptographic hash to each data file, which acts as a fingerprint of the file, called a CID), which makes sharing files It becomes easier without worrying about its location and ensuring that the files are tamper-proof. Filecoin sits on top of IPFS and provides a P2P marketplace for storage services, incentivizing storage and retrieval providers, and ensuring the process runs smoothly (miners post slashable collateral and submit proof of stored data, called proof of replication, and they continue to store data The proof is called the time-space proof). Other storage solutions offer similar services but may vary. For example, Storj uses error correction encoding and parallel file transfers to improve performance and availability, unlike IPFS which relies on a single host for file transfers. Arweave is another example. Unlike IPFS, it is not permanent and requires a fixed service to implement. You can pay a one-time fee to store files permanently.
Decentralized Computing: Decentralized computing protocols use geographically distributed computing resources to provide computing, data processing, and data interaction services, which are often provided in conjunction with data storage. Most protocols provide CPU, RAM and GPU (newer options) and allow computation on anything that can be put into a Docker container. Additionally, many computing protocols offer enterprise-grade service level agreements and may be compatible with existing centralized providers such as Amazon S 3 for easy integration.
For example: Flux incentivizes miners to purchase specialized node hardware, provide computing resources, and provide distributed storage (Flux Drive) and distributed wallet/identity solutions (Zelcore). Akash is a decentralized cloud market based on Cosmos that connects users and providers of computing and storage services. Personal or corporate servers can work through unused capacity bidding, allowing users to save up to 90% compared to AWS. Internet Computer uses data centers and high-end node hardware to replace traditional technology stacks, directly provide users with Web content, act as a public computing platform, and expand, decentralize, and enhance the Web. It’s important to note that other protocols replicate smaller components of the current internet stack, such as Fleek, a decentralized edge network/CDN (similar to CloudFlare).
Companies are increasingly turning to hybrid cloud models with multiple providers because traditional cloud costs have roughly doubled in the past two years and it doesnt handle new technologies like artificial intelligence well. Additionally, companies are adding local servers to place computing tasks close to data sources (called edge computing) to reduce latency and save on bandwidth costs. This hybrid infrastructure reduces dependence and lock-in on large tech providers, making it easier for companies to adopt decentralized solutions.
Decentralized exchange
A decentralized exchange (DEX) is a decentralized application that serves as a peer-to-peer marketplace that allows cryptocurrency trading to occur directly between users. DEXs inherit the positive characteristics of cryptocurrencies (decentralization, permissionless, trustless, censorship-free, immutable, etc.), two of the more noteworthy features being the elimination of rent-extracting intermediaries and enabling self-custody.
Given the speed and cost constraints of the underlying blockchains they are built on, DEXs typically use a deterministic pricing algorithm called an automated market maker (AMM) rather than a central limit order book. AMM utilizes a pool of tokens locked in a smart contract, allowing anyone (called a liquidity provider or LP) to deposit tokens into the liquidity pool. The price of tokens in the token pool will follow a formula, such as the constant product market maker algorithm (x*y=k, where x and y are the quantities of two tokens in the pool, and k is a constant), resulting in the pool The ratio of tokens in the pool determines the price, slippage is determined by the ratio of trade size to pool size, and liquidity is always available regardless of trade size. The price is then pegged to the global market price by arbitrageurs who buy and sell the token in a liquidity pool, pushing it back when it deviates from the global market price.
Liquidity providers receive transaction fees in proportion to the liquidity provided in the liquidity pool. Additionally, protocols often incentivize the provision of liquidity by providing protocol tokens to liquidity providers, which is known as liquidity mining. Liquidity providers are exposed to the risk of impermanent losses, where one of the two assets provided to the pool differs materially from the movement of the other, causing the liquidity provider to directly hold the two assets instead of providing Liquidity and better returns.
Decentralized exchanges account for approximately 15% of total spot trading volume and approximately 2-3% of total derivatives trading volume.
Uniswap is the most well-known and widely used DEX, with its v2 implementation allowing permissionless creation of pools (anyone can create a pool) and v3 allowing centralized liquidity (liquidity providers can provide liquidity within a specific range to increase capital efficiency), the upcoming v4 provides hooks (for improved pool customization). In addition to Uniswap, various protocols have iterated on the basic AMM model or introduced new models to provide performance improvements such as highly correlated tokens (Curve), multi-asset liquidity pools (Balancer), and also extend When it comes to virtual AMMs, such as DeFi perpetual contract protocols.
Decentralized identity
With more than 1 billion people unable to prove their identity, the average Internet user having 100 passwords, identity fraud costing billions of dollars every year, and current identity verification systems having many problems. Digital identity initially took the form of users creating personal accounts on each website (centralized model), later users logged in through Google or Facebook (federated model, sacrificing privacy for convenience and security), and more recently to a new decentralized model. The centralized paradigm, known as self-sovereign identity (SSI) or decentralized identity, allows users to own and control their personally identifiable information (PII) and data without relying on a centralized entity.
Rather than having PII housed and controlled by a centralized authority that could abuse its power, decentralized identity allows individuals to keep their own data. To do this, users create decentralized identifiers (DIDs), which are then granted verifiable credentials (VCs) by the issuer. Users can use cryptography to prove ownership of the DID and make claims that can be verified by verifiers.
Decentralized identity brings an improved experience (log in with your wallet and bring your data to the website), enables users to monetize their own data (get paid when sharing data or viewing ads), enhances Digital reputation (offering low-security loans), increased privacy protection (selective disclosure of information), and reduced risk (self-custody of data). Use cases range from authentication to compliance, access control, Sybil resistance, governance, employee management, medical records, supply chain, and more.
Decentralized identity systems face several challenges. First, the solution set is highly fragmented across use cases and blockchains, with little interoperability (90+ DID method specifications in 80+ blockchains), with entities like the World Wide Web Consortium (W3C) There is a huge task ahead in setting standards. Additionally, most users still struggle to manage keys and have a good user experience. Additionally, it will take longer for user behavior to change and for decentralized identity to crack the powerful network effects of current digital identity construction. Issuers will have to adapt to new governance and issuance frameworks, and businesses and validators will need to adopt verification technologies to facilitate acceptance of these credentials.
Many decentralized identity and certificate issuance protocols exist, some built on general-purpose blockchains like Ethereum (POAP and ENS, which issue proof-of-attendance NFTs and name-to-address resolution respectively), while others are built specifically for decentralized Blockchains optimized for centralized ID management (such as Sovrin, Veres One, and Ontology). There are also protocols that provide certificates as a service, enabling other Dapps to easily issue certificates, such as Galaxe and Gateway.
Decentralized physical infrastructure network
Due to the billions of dollars of investment required to build and maintain large physical infrastructure and hardware networks, many technology fields have oligopolies that are immune to new competitors. However, blockchain technology challenges this model by allowing projects to bootstrap and coordinate these networks through user-contributed infrastructure and token incentives. This decentralized physical infrastructure network or DePIN (also known as Token-Incentivized Physical Infrastructure Network TIPIN or Proof of Physical Work PoPW) incentivizes users to contribute to and operate devices on the network that could potentially scale Comparable to existing networks.
DePIN has several key differences. First, it bootstraps the network through crowdsourced hardware. Second, it makes the network owned and operated by users rather than by large corporations extracting rents. Third, they democratize access to the network because anyone can run a node or use its services. Finally, they are decentralized and censorship-resistant.
In theory, DePIN could implement a flywheel, incentivizing supply-side actors to deploy infrastructure through token rewards. As the infrastructure network grows, developers create products and end users increase demand. As demand increases, the fees generated from end users attract more hardware providers, and the cycle repeats. In fact, DePIN is great at bootstrapping hardware networks, but they dont always meet the corresponding needs of users.
The DePIN network is created from user-contributed hardware, which can be new or existing but unused. The former involves users purchasing and operating nodes/hotspots in exchange for protocol tokens, while the latter involves users contributing existing but idle resources, also in exchange for token payments. For example, Helium is the first project to create a large-scale network of user-contributed new hardware, and third-party manufacturers sell plug-and-play Helium hotspots to users to power IoT devices (the hotspots are generated by mining HNT Build/secure the network and provide connectivity to nearby devices in exchange for HNT rewards). Although Helium built the worlds largest LoRaWAN network, demand did not materialize as expected, and Helium is now more focused on launching 5G cellular networks. Other protocols such as Filecoin and Arweave allow users to rent or purchase unused hard drive space on other peoples machines in exchange for FIL or AR tokens, utilizing excess storage space while also increasing data as files are stored on multiple machines durability and the ability to resist censorship.
DePIN is being used in a variety of infrastructure sub-sectors, including:
Storage network: Filecoin, Arweave, Sia, Storj
Database: Ceramic, Tableland
CDN network: Fleek, Meson
VPN networks: Boring, Deeper, Orchid
Computing network: Akash, Flux, Render, Livepeer, Gensyn
5G Networks: Helium, Pollen, XNET
LoRAWan Network: Helium, Chirp
WiFi：WiCrypt、Wifi Dabba
Sensor Network: Hivemapper, DIMO, Planetwatch, WeatherXM
Energy Network: React, Arkreen
Liquidity Staking Tokens
Liquid Staking is an innovation in the Proof-of-Stake (PoS) blockchain ecosystem that enables stakers to maintain liquidity while simultaneously earning staking rewards. In exchange for depositing assets into a liquidity staking provider, users receive Liquidity Staking Tokens (LST), which serve as proof of deposit and provide liquidity and fungibility to otherwise illiquid pledged assets. and rewarding claims of power. In addition to maintaining liquidity, LST is also free to be used for other DeFi purposes, such as borrowing as collateral or providing liquidity in DEXs. Overall, LST improves capital efficiency and increases flexibility while earning staking rewards in the form of incentives in exchange for small fees priced as a percentage of the rewards.
Rewards are usually accumulated into LST in the following two ways. First, rewards may accumulate into the price of LST, so that as rewards are earned, LST becomes more valuable than the underlying asset. Alternatively, rewards may accumulate into LSTs token balance, increasing the supply of LST (e.g., new LST tokens are minted proportionally to the value of accrued rewards). While the latter model allows the price of LST to track 1:1 with the underlying token, there may be negative tax implications in some jurisdictions.
Variables to consider include:
Does LST hold up? How long has the provider been running on mainnet.
How much of the pledged assets does the provider control?
Who manages the pledged assets? Is it an entity? Multiple entities? Can anyone become an administrator of staked assets (permissionless node operator), or is a whitelisting feature required?
How liquid is LST? Are there multiple uses besides buying and selling liquidity? Are there widespread DeFi integrations?
What is the fee structure?
Are there any governance issues? Does the underlying PoS blockchain adopt strict pledge-based governance, or is it more similar to Ethereum’s soft governance? Does the LST provider have its own token with governance powers, like Lido’s LDO?
How is LST structured?
Liquid staking is booming on Ethereum, especially since the network does not allow native delegated staking, so it is absolutely
