Market Commentary

Bitcoin hit a new all-time high of $111,800 on Thursday, an ironic milestone on Bitcoin Pizza Day. The rally came despite rising macro pressures and reinforces BTC’s growing role as a non-correlated asset amid fiscal and policy uncertainty.

This week’s most notable macro event was Moody’s downgrade of the U.S. sovereign credit rating on May 16, citing mounting concerns over the $36 trillion federal debt load. Yet, risk markets barely blinked. Bitcoin and major altcoins all posted gains, suggesting that markets have largely priced in fiscal deterioration, or are choosing to look past it for now.

Bond markets, however, reacted sharply. The 10-year Treasury yield rose to 4.59%, and the 30-year spiked to 5.09%. This move reflects growing discomfort over the U.S.’s fiscal trajectory, inflation risks linked to tariffs, and weak auction demand. Treasury volatility continues to signal underlying stress even as equities and crypto rally.

The absence of progress in U.S.-China trade talks remains a wildcard, but it was not a market mover this week.

What’s noteworthy is the strength of Bitcoin in the face of surging long-end yields, an environment that historically pressured risk assets. The market’s resilience suggests a shifting macro narrative, where BTC may be increasingly viewed as a hedge against both sovereign risk and policy dysfunction.

We continue to monitor Treasury market behavior and geopolitical developments closely. But for now, the bid for Bitcoin remains strong, and the market is sending a clear signal.

Key News and Events 

Anza Proposes Alpenglow: A Major Upgrade to Solana’s Consensus Layer

Anza, a core development team spun out from Solana Labs, has introduced Alpenglow, a new consensus protocol designed to significantly improve finality latency and network efficiency on Solana. This marks the most substantial overhaul to Solana’s core protocol since inception, replacing TowerBFT and Proof-of-History with a new architecture centered on two components: Votor for consensus logic and Rotor for data propagation.

Alpenglow aims to achieve block finality in as little as 100–150 milliseconds by eliminating redundant message passing and leveraging a more direct communication model. Votor introduces a dual-path voting mechanism—finalizing blocks in a single round when 80% of stake is responsive, or in two rounds when only 60% is available. These voting processes run concurrently, allowing the protocol to finalize as soon as either threshold is met.

Rotor, the new data dissemination protocol, refines Solana’s existing Turbine approach. It distributes block data using erasure coding and stake-weighted single-layer relay nodes, ensuring efficient bandwidth utilization and minimizing propagation latency. Rotor also introduces an adaptive routing strategy, dynamically optimizing data paths and improving network fault tolerance.

Simulation results suggest that under the current mainnet stake distribution, Alpenglow can consistently achieve sub-second finality with minimal computational overhead. The system is also designed with enhanced fault tolerance, capable of sustaining operations even when 20% of stake is adversarial and another 20% is offline, under specific network assumptions.

The proposal is currently undergoing review via the Solana Improvement Document (SIMD) process. Testnet deployment is expected by mid-2025, with a potential mainnet rollout following successful validation. If adopted, Alpenglow could position Solana to support real-time, high-throughput applications such as decentralized trading, instant settlement, and event-driven dApps that demand Web2-level responsiveness

USD1 Stablecoin: An Emerging Force Connecting Traditional Finance and Blockchain

Launched in March 2025 by World Liberty Financial (WLFI), USD1 has quickly gained traction, reaching a market cap of $2.2 billion—now the seventh-largest stablecoin globally. Backed by U.S. Treasury bonds, dollar deposits, and cash equivalents, USD1 is primarily issued on BNB Chain and utilizes Chainlink’s CCIP for multi-chain operability.

Its rise has been supported by key institutional backing, including a $2 billion investment in Binance by Abu Dhabi’s MGX Investment Fund via USD1. Huobi was the first exchange to launch USD1 trading in early May, followed by listings on Binance and KuCoin this week, significantly expanding its reach.

WLFI’s influence in the ecosystem is growing. On May 21, Binance Alpha listed B-token (@BUILDonBsc_AI), which surged 651% after WLFI publicly supported the asset. USD1 is also now accepted as collateral on Falcon Finance, a synthetic yield platform with over $125 million in TVL, underscoring its early utility in DeFi.

USD1 is closely tied to the GENIUS Act, a proposed U.S. Senate bill advancing regulatory clarity for stablecoins. The bill, which passed a key vote on May 20, mandates full backing by short-term Treasuries and U.S. dollars and aims to support the global role of the digital dollar. If passed by June, the act could cement USD1’s regulatory standing and further position it as a key player in the stablecoin market.

With institutional backing, exchange integrations, and potential regulatory tailwinds, USD1 is emerging as a credible alternative to established stablecoins, aiming to connect traditional capital markets with blockchain-based infrastructure.

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Bitcoin began the year with renewed strength, rising over 3% early Thursday to trade firmly around $97,000. This comes after weeks of subdued performance as long-term holders took profits and markets consolidated near key support levels. The cautious optimism reflected in the market aligns with a neutral funding rate of 0.01%, signaling measured enthusiasm among traders as they navigate a macro environment marked by uncertainty.

Solana had an outstanding start to the year, surging over 10% on Thursday and reclaiming the $200 mark, now trading at approximately $210. This rally coincides with rising interest in AI agents and AI-themed tokens, a sector driving increased activity across Solana’s ecosystem. The network’s ability to capitalize on these trends reinforces its position as a frontrunner.

In macroeconomic news, the U.S. labor market ended 2024 on a strong note. Initial jobless claims fell to 211,000, the lowest in eight months, reflecting resilience in employment even as the Federal Reserve continues its gradual policy easing. The Fed’s projections for 2025 now include only two rate cuts, down from four previously forecast, acknowledging the persistent strength of the labor market and inflationary pressures. This macro environment remains favorable for risk assets, but the trajectory of inflation and upcoming policy decisions will remain critical to monitor.

Globally, China’s economy closed 2024 with a GDP growth rate near 5%, meeting government targets despite challenges such as weak domestic demand and slumping exports. President Xi Jinping signaled continued proactive macroeconomic policies in 2025, aiming to stabilize growth further amid potential global trade headwinds.

As we enter 2025, the resilience demonstrated by Bitcoin and Solana highlights the strength of the digital asset ecosystem in adapting to macro conditions. With institutional interest growing and innovation thriving across key networks, the foundation for continued growth remains robust.

Accelerating Innovation in AI Agents

"Agentic Infra" Gains Momentum

Over the past 10 days, the AI agent sector has seen a surge in focus on "Agentic Infra," laying the groundwork for what could become the leading layer 1 platforms of the future. This movement is comparable to the foundational developments that fueled the DeFi boom of 2020-2021, and this is just the beginning.

AI agent metrics have experienced unprecedented growth, reflecting the sector's rapid adoption and engagement:

• $Agent: Over the past two weeks, the project has garnered 3,500 members on Telegram and 3,055 followers on X, handling a remarkable 62,000 individual queries. This highlights the increasing reliance on sophisticated AI interactions.

• GemXBT: Marking its two-week milestone, the project has achieved organic growth to 14,500 followers on Twitter and nearly 3,000 Telegram members. It processed over 20,000 technical analysis requests on X and 40,000 on Telegram, demonstrating strong demand for its analytical capabilities.

• Kwantxbt: In just 15 days, Kwantxbt has become a prominent technical analysis agent, attracting 11,000 organic followers on X and 5,000 Telegram members. It facilitated 153,000 messages exchanged on Telegram—averaging 10,000 daily—and analyzed over 50,000 charts, underlining its effectiveness and value to users.

Ai16z’s ElizaOS Tops Uniswap in Developer Activity

The Ai16z’s ElizaOS framework has surpassed the Uniswap repository, becoming the top trending repository globally for December, even outpacing Google Gemini. This milestone reflects the burgeoning interest in ElizaOS’s capabilities and its growing appeal among developers.

ElizaOS has flipped the Uniswap repository, attracting more developers and increasing activity within its framework. This is remarkable, as it is currently the number one trending repository in the world for December, surpassing Google Gemini.

Zerobro Expands Ecosystem Connectivity

Zerobro is broadening its integration capabilities, enhancing its reach and functionality:

• Ai16Z Integration: Leveraging TypeScript, Zerobro will connect with ai16z and expand its operations to Base, where a Zerobro pool is now active.

• Virtual Ecosystem Presence: Zerobro plans to deploy additional validators and embed itself across multiple virtual ecosystems, enhancing its multi-platform availability.

Advancements in ZerePy Framework

The ZerePy framework continues to push the boundaries of AI agent development:

• EternalAI API Integration: ZerePy now supports integration with

  EternalAI’s decentralized inference API, offering an alternative to OpenAI's API. The update provides greater flexibility and autonomy for AI agents.

• Zentients Launchpad: Zerebro has announced Zentients, a user-friendly launchpad designed to streamline AI agent deployment and management. The tool integrates seamlessly with the ZerePy framework, enabling consumers to create and evolve AI agents effortlessly.

• Deployment of ZeropAI:

  ZeropAI was launched. It leverages trustless blockchain protocols to facilitate decentralized knowledge exchange between AI agents, showcasing the potential for autonomous and interactive AI systems.

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Market Commentary

The bullish momentum from last week persisted as bitcoin reached new all-time highs. On Monday, prices surged from $82,000 to $90,000, peaking at $93,500 on Wednesday. In a milestone moment, bitcoin surpassed Silver’s market capitalization, becoming the world’s eighth-largest asset.

Funding rates spiked significantly on Tuesday, reflecting a return of aggressive leverage, with many altcoin longs paying over 50 percent APY in funding. Retail interest was heavily concentrated on memecoins, driven by Robinhood and Coinbase announcing listings for PEPE and WIF.

Dogecoin also saw a significant rally, adding nearly $20 billion to its market cap and rising over 50 percent as Donald Trump officially announced the Department of Government Efficiency (DOGE), led by Elon Musk and Vivek Ramaswamy.

On the political front, Republicans have secured a majority in both the Senate and House of Representatives, granting Trump broad authority to advance his legislative priorities. This development is poised to benefit the crypto industry by enabling pro-crypto policies and providing much-needed regulatory clarity to further legitimize the asset class.

However, there are early indicators of market overheating. Speculative fervor is evident, with crypto Twitter broadly predicting new all-time highs for memecoins and pushing the narrative to "stay long until inauguration day." While we maintain a long-term bullish outlook heading into a Trump administration—anticipating policies that will favor domestic corporates and boost U.S. equities—we expect near-term profit-taking as enthusiasm around the “Trump trade” stabilizes.

Key News & Events:

Layer 1 & Layer 2 Insights

This week demonstrated significant growth in onchain activity across most major ecosystems.

Total Value Locked (TVL) increased by an average of 10%, with the notable exceptions of Polygon and TON, which experienced declines of 7 percent and 25 percent, respectively.

Despite the drop in TVL, TON performed strongly in other areas, with a weekly average increase of 140,000 daily active addresses and a doubling of trading volume. In contrast, Polygon experienced a 20 percent decline in trading volume and an 18 percent reduction in stablecoin activity.

Decentralized exchange (DEX) volume surged across the board, with an average increase of 85 percent. For Tron, this translated to an additional $250 million in trading volume, while Solana recorded a remarkable $16 billion increase.

However, Solana struggled to attract new users, as the number of active wallets declined, suggesting existing participants traded with greater capital.

Ethereum followed a different trajectory, adding 40,000 active wallets over the week and generating $65.8 million in weekly fees, including a daily record of $18.2 million.

Aptos is steadily capturing more active wallets, while Sui is seeing a decline in active users but continues to grow in trading volume and TVL.

Coinbase Launches COIN50 Index

Coinbase has unveiled the Coinbase 50 Index (COIN50), a benchmark tracking the performance of the top 50 cryptocurrencies by market capitalization. Developed with Market Vector Indexes, a regulated index administrator, COIN50 aims to provide a comprehensive view of the crypto market, akin to the S&P 500 in traditional equities. As institutional interest grows, Coinbase positions COIN50 as a standard for diversified exposure across digital assets and sectors.

The index weights assets by circulating market cap, capping Bitcoin at 50% to prevent overconcentration. It currently includes Bitcoin, Ethereum, Solana, XRP, Dogecoin, and other prominent assets, offering representation across decentralized finance (DeFi), infrastructure, and media. Stablecoins and privacy coins are excluded, and all assets undergo strict eligibility screening for token economics, infrastructure, and security. COIN50 is rebalanced quarterly to adapt to market shifts and remain relevant in a rapidly evolving space.

Available on Coinbase’s website and app, COIN50 will also be offered as a tradable derivative for eligible non-U.S. investors via perpetual futures contracts on Coinbase’s advanced trading platform. This dual functionality provides both a market benchmark and a tradable product.

Through COIN50, Coinbase seeks to establish a reliable standard for tracking the crypto market's performance, helping investors navigate its growth and diversity beyond Bitcoin and Ethereum.

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In the Solana ecosystem, 67% of the total SOL supply is currently staked, with a significant 93% of it being natively staked. This is in contrast to Ethereum, where only 28.3% of the total ETH supply is staked, and over 40% of that is liquid staked. The primary reason behind this disparity lies in Solana’s delegated proof-of-stake consensus, which allows SOL holders to delegate their tokens directly to validators. However, the main limitations of native staking on Solana are the unstaking “cooldown period” of one epoch or around two days, and the lack of fungibility of staked positions.

Liquid staking overcomes these limitations by allowing users to maintain liquidity of their staked assets while also earning staking rewards. As of now, liquid staking on Solana accounts for 7% of the total staked SOL, a figure that has been steadily rising since late 2022. Initially, Marinade and Lido dominated the liquid staking landscape. However, the rise of Jito Lab’s MEV client has shifted the balance, with JitoSOL capturing a market-leading 44.7% share, while Marinade’s mSOL has gradually declined from a peak of 64% in October 2022 to approximately 20% today.

The Complexities and Risks of Liquid Staking

Despite the benefits of liquid staking, several risks have hindered its growth on Solana:

1. Smart Contract Risk: The underlying liquid staking token (LST) protocols expose users to potential smart contract vulnerabilities.

2. Diminished Yields: Multiple layers of commission, including those for validators and the staking protocol, can reduce the overall returns.

3. APY Dependency: The returns are highly contingent on the delegation strategy employed by the LST protocol.

These factors have driven the market dynamics in which over 90% of staked SOL remains natively staked. Yet, native staking is not without its own challenges, such as the counterparty risk associated with the delegated validator. In most cases, users tend to delegate to validators with the largest existing stakes, inadvertently contributing to centralization. Currently, Solana’s top 19 validators control over 33% of the total staked SOL, a threshold known as the “superminority.”

Marinade V2 and Marinade Native

To address these challenges and capture a massive untapped market, Marinade has introduced Marinade Native, a non-custodial native staking solution. Through Marinade Native, users maintain full control over their assets by retaining their "withdraw authority," while Marinade only controls the "stake authority," which is used to delegate to validators. This model significantly enhances security and mitigates the risks traditionally associated with liquid staking.

Key features of Marinade Native include:

1. Stake Auction Marketplace (SAM):

Marinade has introduced a competitive marketplace where validators bid for delegated stakes, sharing a portion of their revenue with stakers. This competitive environment ensures that stake flows to the most performant validators, with stakers potentially earning yields 100-200 basis points higher than the average native staking yield. SAM currently has participation from over 150 validators, most of which operate outside the top 19 validators, promoting both performance and decentralization across the network.

1. Protected Staking Rewards (PSR):

Marinade’s PSR program provides an additional layer of security for stakers. Validators are required to set aside 1 SOL for every 10,000 SOL of Marinade stake as a bond. This bond is used to compensate users for any lost yield due to validator downtime or commission changes. To date, Marinade has successfully executed over 4,600 protection events, disbursing more than 10,600 SOL to ensure stakers receive the highest possible APY.

Driving Growth and Institutional Adoption

Since the launch of Marinade Native and other protocol enhancements in October 2023, Marinade has increased its total value locked (TVL) by approximately 2.5 million SOL.

Several strategic initiatives have contributed to this growth:

• Deepening mSOL Liquidity: Marinade’s MNDE Earn Season 3 initiative has bolstered mSOL liquidity by approximately $10 million across Raydium and Meteora pools.

• Fee Reduction: By reducing the mSOL management fee to 0%, Marinade increased its APY by 0.4%, making mSOL even more competitive for stakers.

Moreover, Marinade has made significant strides in positioning itself as the go-to staking solution for institutional players. Its staking marketplace has been designed to meet the needs of institutional investors, offering a custody-agnostic platform. Partnerships with prominent custodians like Zodia and Copper ensure that institutions can easily stake SOL with Marinade, laying the foundation for future growth in institutional demand for staked assets.

This could be significant in a world where solana spot ETFs with staking are approved. Even though that might not seem like a near-term possibility, the crypto regulatory landscape has been changing with haste, and the upcoming U.S. elections could prove a pivotal regulatory shift in favor of our industry.

Conclusion

Marinade is uniquely positioned to drive further decentralization and performance improvements in staking. By addressing key risks associated with both liquid and native staking and expanding its reach through institutional adoption, Marinade is set to capture a growing share of the staked SOL market. The introduction of Marinade Native and innovative programs like SAM and PSR not only improve yields for users but also contribute to the long-term decentralization and resilience of the Solana network.

We believe Marinade’s approach aligns with the broader trend of creating a more efficient and decentralized ecosystem, and that they will be a key player in the future of Solana’s institutional staking landscape.

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On September 24, Pan Gongsheng, Governor of the People's Bank of China, announced during a press conference at the State Council Information Office that the reserve requirement ratio (RRR) would be reduced by 0.5 percentage points, and the policy interest rate would be lowered by 20 basis points. This move is expected to release approximately ¥1 trillion($145 billion) in long-term liquidity, which accounts for 0.8% of the 2023 GDP, aiming to further reduce corporate financing costs and ease the credit burden on households.

Exploring the Necessity of Reserve Requirement Ratio (RRR) Cuts

First, the domestic environment reveals that China's macroeconomic and financial indicators are quite weak, creating an urgent need for monetary policy to step up support. For example, the manufacturing PMI has remained below 50% for four months, the M1 money supply is experiencing negative growth, and both short-term and medium-to-long-term loans for individuals and businesses are sharply declining. Key indicators for prices, real estate, and consumption are also in a downturn.

Second, with a total of ￥3.69 trillion ($527 billion) in Medium-term Lending Facility (MLF) maturing in the fourth quarter, a 50 basis point cut in the RRR could help mitigate the impact of these maturing funds by replenishing liquidity and reducing banks' funding costs. Furthermore, lowering reverse repo rates and deposit rates would directly and efficiently decrease costs for banks on their liabilities.

Lastly, the recent 50 basis point rate cut by the Federal Reserve presents a timely opportunity for adjustments in China's monetary policy.

Positive Outcomes

Earlier in February, the central bank had already lowered the RRR by 0.5 percentage points, making this the second cut this year. The combined 1 percentage point reduction is projected to release around ¥2 trillion of long-term liquidity into the market, providing additional support for economic recovery.

This round of RRR and interest rate cuts has resulted in several positive outcomes:

• Increasing banks’ available funds: Lowering the RRR means commercial banks will have fewer funds locked by the central bank, allowing them more flexibility with their capital, helping ease liquidity pressures.

• Ensuring sufficient liquidity: The RRR and rate cuts will ensure ample liquidity in the market and reduce overall financing costs, thereby stimulating domestic demand and promoting consumption and investment growth.

• Easing quarter-end pressures: With September marking the end of the quarter, financial institutions often face increased liquidity needs and rising funding costs. The central bank’s action at this time helps alleviate financial pressures on institutions, businesses, and households, creating a supportive monetary environment for economic recovery.

TradFi Market Response

Following the policy announcement, the market showed a strong positive response. On September 24, key A-share indexes saw a sharp rise, with more than 5,100 stocks gaining and fewer than 200 stocks declining. The total trading volume for the day surged to ¥971.3 billion($138.8 billion), up ¥420.3 billion($60.0 billion) from the previous session, reflecting investors' confidence in the new policy. By September 26, the Shanghai Composite Index had climbed back to 3,000 points. On September 27, the A-share market remained robust despite an opening session glitch on the Shanghai Stock Exchange, where order congestion and delayed transaction confirmations occurred. The market, however, swiftly returned to normal, with trading volumes in both the Shanghai and Shenzhen markets reaching ¥946.6 billion($135.2 billion) by midday.

Bitcoin Price Trends

Between 2020 and 2024, the percentage change in Bitcoin prices within 30 days following China's multiple cuts to the RRR indicates that Bitcoin prices typically rise after such reductions, although the degree and pattern of this rise can vary over time. Most periods show an upward trend, with increases peaking at 30-35%. However, there are notable fluctuations and exceptions, including some periods of price declines, especially during one cut that was nearly 25%. After the recent adjustment on January 24, 2024, Bitcoin prices surged, rising about 30% in 30 days, though this period coincides with the launch of spot bitcoin ETFs in the United States. While the long-term effects of this RRR cut and interest rate reduction are still under observation, it has already provided a strong boost to economic recovery in the short term, as reflected in the positive responses from the A-share market. We will be keenly watching the future trajectory of Bitcoin.

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This week, China took unprecedented policy actions to support its onshore financial markets. On Tuesday, Chinese Central Bank Governor announced a 50 basis point cut in the reserve requirement ratio (RRR), injecting ~1 trillion yuan ($141.81 billion) worth of long-term liquidity into their financial market. The PBOC also reduced their 7-day repo rate and mortgage rates to lower borrowing costs. 

On Thursday, they announced a massive fiscal stimulus of 2 trillion yuan in special bonds, with the first 1 trillion yuan package aimed at stimulating domestic consumption and production, and the second 1 trillion package to address local government debt issues later this year. Risk assets have reacted positively to these liquidity inflows, with Chinese and Hong Kong equity indices rallying and BTC testing $65,000.

In the US, Presidential Candidate Harris announced her commitment to prioritizing AI and digital assets as key pillars of her presidential campaign. This shift towards a pro-crypto stance removes a significant headwind for the industry, with both Presidential candidates potentially acting beneficially towards the crypto ecosystem.

Bitcoin futures open interest has been steadily increasing since the lows of $28 billion in early September, currently standing at $35 billion, just shy of this year’s all-time high figure of $39 billion in late March 2024.

We look forward to today’s Personal Consumption Expenditures (PCE) print as guidance for upcoming FOMC rate cuts. Muted inflation numbers will pave the way for Powell to continue supporting the US economy with further rate cuts.

Key News and Events

Stablecoins: The Hottest Web3 Vertical With High Growth and Competition

For the first time ever, the total stablecoin supply surpassed $170 billion (excluding algorithmic stablecoins). USDT and USDC continue to lead the market, but Ondo's USDY stablecoin has shown an impressive 21% monthly growth, highlighting the increasing competition in the space.

USDe, a synthetic dollar stablecoin, launched in February and has since climbed to become the fifth-largest stablecoin by market cap, with a circulating supply of $2.6 billion.

At Token2049, Circle announced the launch of its native USDC on Sui, which has already attracted over $50 million in inflows over the last 10 days.

The market cap of USDT on TON has grown by 41% over the last month and surpassed one billion dollars in circulating supply. Tether and TON collaborated last April 2024, issuing 60 million USDT to introduce USDT natively on The Open Network for the 900 million Telegram users. In just five months, USDT supply on TON has increased to over one billion dollars, potentially challenging Tron's dominance in terms of volume transferred.

Ethena Expands Stablecoin Offerings with BlackRock-Backed UStb

Ethena Labs has announced its latest offering, UStb, a new stablecoin backed by BlackRock's USD Institutional Digital Liquidity Fund (BUIDL) and tokenized by Securitize. UStb is designed to function like traditional stablecoins but with a key distinction: its reserves will be invested in BlackRock's BUIDL, a tokenized investment on the Ethereum blockchain primarily investing in U.S. dollars, short-term U.S. Treasury bills, and repurchase agreements.

BlackRock's BUIDL fund, launched in March 2023, has quickly grown to manage over $522 million in assets under management, becoming the largest tokenized U.S. Treasury fund, demonstrating the growing demand for tokenized government securities.

UStb stands out from Ethena's existing stablecoin, USDe, which is backed by derivative strategies rather than direct fiat reserves. USDe has performed well in recent months, maintaining its peg during market volatility. Ethena has designed its governance structure to allow flexibility between the two products. In the event of negative funding rate environments, the platform can reallocate backing assets from USDe to UStb, providing additional risk management measures.

Ethena plans to offer UStb as an additional form of collateral on centralized exchanges, expanding beyond current integrations with platforms like Bybit and Bitget. This approach gives exchange partners a choice between two stablecoin products for margin collateral, offering distinct risk profiles tailored to different market conditions.

The stablecoin market continues to be highly lucrative, driven by increasing demand for secure, liquid assets. Tether’s Q2 2024 report, which posted a record $5.2 billion in profit, underscores the financial potential of these assets. However, this sector is ripe for disruption, as new entrants like Ethena Labs introduce alternative stablecoin models like UStb, offering distinct features and risk profiles. As the market evolves, there is growing room for innovation and competition, positioning stablecoins as a key area where emerging players can challenge the dominance of established leaders.

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On Wednesday, Fed Chairman Jerome Powell made a decisive move by cutting rates by 50bps, lowering the target range for the federal funds rate to 4.75%-5.00%. This marks a shift from the more gradual approach seen during the 2020 rate-hike cycle, when the Fed began with a modest 25bps increase during the COVID-19 crisis. We view this as a front-loaded rate cut, signaling the Fed’s determination to tackle inflation aggressively and stay “ahead of the curve.” This suggests we are likely at peak dovishness, barring any major economic downturns.

Interestingly, the market had largely anticipated this move, with Fed Funds Futures pricing in a probability of over 60% for a 50 bps cut. However, only 9 out of 114 economists polled by Bloomberg had predicted this outcome. The Fed's Summary of Economic Projections indicates an additional 50bps rate cut in 2024, followed by a further 100bps reduction in 2025. During the press conference, Powell emphasized the Fed’s commitment to a data-dependent approach, noting that further 50bps cuts are unlikely in the near future.

We remain optimistic about risk markets, as global liquidity is expected to gradually increase, with easing monetary policy contributing to expanding liquidity conditions.

Key News and Events

Solana Seeker Launch

Solana Mobile has officially launched its second Web3-focused smartphone, the Solana Seeker, building on the success of the earlier Solana Saga. Initially introduced as "Chapter Two" earlier this year, the Seeker has already attracted significant attention with over 140,000 preorders across 57 countries. This reflects the growing interest in Solana's mobile-first approach to crypto integration.

The Seeker comes with notable upgrades in both hardware and software. It features a lighter build, a brighter display, an improved camera, and extended battery life—all at a more competitive price point. Pre-orders are available at a special Founder price of $450 until September 21, 2024, after which it will retail at $500.

One of the device’s standout features is the integrated Seed Vault Wallet, developed in collaboration with Solflare. The wallet integrates seamlessly with the device’s built-in self-custodial seed vault, enabling users to perform transactions with a simple double-tap and manage their accounts more efficiently. The collaboration enhances both the security and ease-of-use for crypto users, making the web3 experience smoother.

The Solana Mobile dApp Store has also received significant updates, with zero fees and crypto-friendly policies. The store now offers improved navigation and discoverability, hosting a wide range of decentralized applications across verticals such as payments, DeFi (Decentralized Finance), DePIN (Decentralized Physical Infrastructure Networks), NFTs, AI, and gaming. A new rewards tracker helps users manage all their incentives in one place, while exclusive content for Seeker users is already in development.

Each Seeker device includes a unique Seeker Genesis Token, a non-transferable NFT providing exclusive access to rewards, offers, and content within the Solana ecosystem. This allows developers to engage directly with committed members of the Solana community, positioning the Seeker as a hub for cutting-edge dApps, DeFi platforms, games, and more.

The Seeker's launch has spurred collaborations that expand its capabilities:

• Helium Mobile is offering Seeker users four months of free coverage, plus opportunities for exclusive network mapping. Through DePIN integration, users can earn rewards simply by using their device.

• Moonshot by Dexscreener introduces Seeker-specific optimizations, enabling users to launch projects and automatically allocate them to other users with a single click. Projects launched on Seeker benefit from increased visibility within the community.

• Leveraging Solana's integration of AI, Seeker users can utilize Alethea AI to generate tokenized AI agents. These agents interact on-chain with programs and the Solana community, opening new avenues for engagement and earning opportunities.

• Parallel Colony, a Web3 gaming platform, will offer Seeker-exclusive assets and rewards when its game launches on the dApp Store alongside the Seeker.

• Airship by Helius Labs provides a zero-knowledge compression tool, dramatically lowering the cost of airdrops. What previously cost $40,000 for distribution to the Solana Mobile pre-order community now costs as little as $100, with automatic allocation to Chapter 2 Preorder Token holders.

With the Seeker, Solana Mobile delivers the full Solana ecosystem right into users' pockets. The device's intuitive design and integrated tools make it easy to interact with decentralized applications, DeFi platforms, NFTs, and more—just as easily as using any mainstream app. By reducing barriers to entry and improving usability, the Seeker is poised to onboard the next wave of crypto enthusiasts, empowering both seasoned users and newcomers to explore the potential of web3 technology on the go.

Neiro and NEIRO: The Battle Between the Real and Fake “WU KONG”

Following the passing of Kabosu, the beloved mascot of Dogecoin (DOGE), its owner adopted a new dog named Neiro, sparking the rise of multiple meme projects under the same name in the crypto market. This section focuses on two Ethereum-based Neiro projects.

To differentiate between them, we'll use capitalization:

• Neiro (lowercase) has the token address 0x812ba41e071c7b7fa4ebcfb62df5f45f6fa853ee.

• NEIRO (uppercase) has the token address 0xee2a03aa6dacf51c18679c516ad5283d8e7c2637.

On September 6, NEIRO was listed on both OKX and Binance, sparking backlash from the community. Prior analysis revealed that NEIRO had engaged in insider trading, with approximately 78% of its tokens pre-allocated—a clear violation of the community’s expectations for fairness in meme project launches. The community also criticized OKX and Binance for listing NEIRO, accusing them of compromising their neutrality.

In response, Binance issued an official announcement 10 days later, on September 16, stating that they would list "First Neiro on Ethereum" (Neiro) for spot trading. From its listing price of $0.0000377, the token has since surged by over 2,500%.

On September 17, Binance co-founder He Yi addressed community concerns in a post on Binance Square, offering insight into their listing decisions. Key points included:

• Meeting user demand: A project must demonstrate strong community interest and engagement.

• Long-term vision: It should show potential for sustainable growth and long-term viability.

• Reliable business model: The project must deliver real value to users and the ecosystem through responsible management and revenue generation.’

In today's market, community support is critical to a project's success. While we may see more debates on trivial issues like uppercase and lowercase in the near future, the ultimate deciding factor will still be the strength of the community. Let's wait and see.

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Key Benefits of Tokenization

Faster Transaction Settlement 

In traditional finance, settling transactions can take several days, especially in markets like securities and real estate, where asset ownership takes time to verify, and payments flow through intermediaries who additional time to verify funds. Tokenization changes this by enabling near-instantaneous settlements that operate 24/7. This is particularly advantageous in environments where “time is money”, such as high-interest-rate markets. Faster settlements reduce counterparty risk and can significantly lower transaction costs.

Operational Cost Savings 

Tokenization reduces operational costs by automating processes through smart contracts, which are always available and error-free compared to manual handling. For example, in asset classes like corporate bonds, where servicing and issuance are often manual and prone to errors, embedding procedures such as interest calculation and coupon payments within the token’s smart contract can reduce the need for human intervention and minimize errors.

Democratization of Access 

Traditionally, investing in assets like real estate or bonds required significant capital, making them accessible only to wealthy investors. Tokenization democratizes access by breaking these assets into smaller, more affordable pieces, allowing a broader range of investors to participate. This fractional ownership model also makes it easier for financial service providers to serve smaller investors, as the process becomes more efficient and less resource-intensive.

Enhanced Transparency

Smart contracts increase transparency by automating processes and ensuring that transactions are recorded immutably on the blockchain. For instance, in the case of carbon credits, a smart contract could automatically record and transfer credits in a transparent, immutable way, ensuring a clear audit trail.

Use Cases for Tokenization

Tangible Assets

Stablecoins

Stablecoins, including the two largest by market cap, USDT and USDC, are tokenized representations of fiat currencies. They have achieved a strong product-market fit by offering fast settlement and a stable store of value on the blockchain.

The total stablecoin market capitalization has reached $170 billion with $1.5 trillion in volume in the last month. Stablecoins have seen widespread adoption in emerging markets, especially those whose fiat currencies have experienced significant hyperinflation. For example, the Turkish Lira depreciated by more than 27% earlier this year, while Argentina’s inflation rate is expected to exceed 95% by year end. Both Turkey and Argentina are economies where many locals prefer to transact in US dollars. However, this demand often results in a shortage of physical cash (USD bills). Combined with government-imposed restrictions aimed at preserving the local currency, this creates challenges for locals seeking to use USD or other fiat currencies for price stability. Stablecoins are an ideal choice for locals to denominate their cash reserves and/or salaries to protect themselves against hyperinflation. 

The European Union's recent Markets in Crypto-Assets (MiCA) framework, passed in June 2024, has brought regulatory clarity to stablecoins, helping establish their legitimacy within traditional finance.

Financial Assets

Tokenized treasuries have attracted over $2 billion in assets under management, reflecting demand from investors seeking on-chain investment opportunities in a high-interest-rate environment. TradFi giants such as BlackRock and Franklin Templeton are at the forefront of this sector, with their BUIDL and FOBXX products. Tokenization streamlines the trading and settlement of these assets, making them more accessible and efficient. Currently, only $72 million worth of global bond assets are tokenized, a mere fraction of the $130 trillion global bond market. This stark contrast underscores the vast potential for growth in bringing more bond assets on-chain. 

Similarly, the opportunity to tokenize stocks is immense. While achieving regulatory clarity is crucial, the potential to bring stocks on-chain marks a pivotal moment for the industry. We believe that Solana, with its robust technology and strong leadership, is well-positioned to be the blockchain where this transformation occurs, thanks to its speed, scalability and its positioning in the market as a leader in stablecoin payments - recently attracting Paypal to the network with the launch of its new PyUSD stablecoin on the network, in addition to getting the nod from Visa for stablecoin settlement.

Real Estate & Infrastructure 

Real estate has long been considered an illiquid asset, with high barriers to entry. Tokenization changes this by allowing properties to be divided into smaller shares, or tokens, that can be bought and sold like stocks. This not only increases liquidity but also opens up real estate investment to a wider investor base. Fractional ownership makes it possible for investors to diversify their portfolios with real estate holdings without the need for large amounts of capital.

Intangible Assets

Beyond physical assets, tokenization is also advancing into intangible assets such as identity, intellectual property (IP), and data. For example, tokenizing identity can streamline processes such as Know Your Customer (KYC) by enabling individuals to securely control and share their digital identity on the blockchain. This allows for a single, verified source of trust while keeping the identity encrypted and inaccessible to unauthorized parties. When combined with new cryptographic techniques like zero-knowledge proofs (ZK-proofs), individuals gain greater control over their privacy and can selectively share specific information on a need-to-know basis. This can further advance on-chain under-collateralized lending, a much-needed feature that allows for more capital-efficient borrowing and lending on-chain.

Intellectual property rights can be tokenized to enable creators to manage and monetize their work more effectively. A recent example of innovation of this primitive is Story, which raised $80 million at a $2.25 billion valuation to build a blockchain for the business of content IP.

Data tokenization enables individuals and companies to securely control and monetize their data by sharing it with third parties in a transparent manner. This is increasingly vital in the attention economy, where the ownership and source of data are paramount. Similarly, content tokenization allows creators to transform their work into digital assets on the blockchain, ensuring they retain ownership and receive compensation whenever their content is used. In an AI-driven landscape, where models like ChatGPT often rely on vast amounts of online content without direct attribution, tokenization could allow these systems to automatically recognize and compensate original creators, ensuring fair revenue distribution whenever their work is accessed.

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TL;DR 

Fractal Bitcoin, launched on September 9, 2024, could be another blind spot  between Eastern and Western crypto markets. Despite quickly capturing a significant portion of Bitcoin’s hashrate, Fractal remains relatively unknown in the global crypto community. This report aims to bring clarity to this innovative project that has rapidly gained momentum within the Bitcoin ecosystem.

Key points:

1. Innovative Mining Approach: Fractal has introduced a hybrid mining model that combines merged mining with permissionless mining. This model presents a fresh perspective on Proof of Work (PoW), demonstrating that PoW remains a robust method for network security, even as the industry leans towards Proof of Stake (PoS).

2. Precursor Network for Bitcoin: Due to its compatibility with the Bitcoin mainnet, Fractal acts as a real-world test environment for developers, providing valuable user data and activity insights. The activation of OP_CAT on Fractal marks the beginning of numerous anticipated experiments, solidifying Fractal’s role as a proving ground for potential Bitcoin upgrades and innovations.

3. Strong User Base from Day One:  By partnering with OKX and UniSat, Fractal has successfully engaged Bitcoin's most active users from the outset. This early adoption helps Fractal avoid the "cold start" issue that often challenges new platforms.

4. Grassroots and Community-Focused: Fractal maintains a down-to-earth, community-driven approach, steering clear of excessive hype and institutional influence. This focus on organic growth and engagement is central to its strategy.

5. Ecosystem Integration: Fractal has successfully brought together key players in the Bitcoin ecosystem, including communities around BRC-20, Ordinals, and Runes. This integration positions Fractal as a leader in current Bitcoin trends.

1. Introduction

Fractal Bitcoin is the only Bitcoin scaling solution that uses the Bitcoin Core code itself to enable recursive scaling across unlimited layers, building on the security and broad adoption of the world’s most trusted blockchain.

To fully appreciate Fractal's innovation, it's important to consider the historical context of Bitcoin scaling debates. In 2017, the SegWit soft fork was introduced to enhance Bitcoin’s block capacity, followed by the contentious Bitcoin Cash hard fork, which presented an alternative approach to scaling. Since 2018, attention has increasingly turned to Layer 2 solutions like the Lightning Network. Fractal emerges as a novel contender in this ongoing quest for better scalability and functionality in Bitcoin, offering a fresh approach to addressing these long-standing challenges.

In a significant milestone, Fractal's mainnet went live on Monday, September 9 at 00:00 UTC.

The project’s early success has been notable, with Fractal’s merge mining quickly accounting for over 40% of Bitcoin’s total hashrate, and its permissionless mining contributing an additional 2%. To put this in perspective, Fractal’s permissionless mining hashrate surpassed three times that of Bitcoin Cash (BCH) within just 24 hours of its launch. This rapid adoption indicates strong confidence in Fractal's technological capabilities and potential within the mining community.

Major players in the mining industry have already joined Fractal's ecosystem, including leading pools like F2Pool, Antpool, and Spiderpool. Additionally, several other prominent mining pools are poised to participate, reflecting the growing interest and potential for further expansion of Fractal's mining network.

2. Core Concept and Technology

2.1 Native Bitcoin Extension

Fractal distinguishes itself from other scaling solutions by being a native extension of Bitcoin. It leverages Bitcoin's existing codebase, making only necessary modifications to block production parameters. This ensures full compatibility with the Bitcoin mainnet, allowing for seamless integration with existing Bitcoin infrastructure. Fractal enhances Bitcoin’s functionality without compromising its core security principles, effectively balancing innovation with the preservation of Bitcoin’s foundational values.

2.2 Technical Specifications

Fractal introduces several key technical innovations:

1. Block Time: Fractal reduces the block time to 30 seconds, a significant improvement over Bitcoin’s 10-minute block interval. This faster block time allows for quicker transaction confirmations, greatly improving user experience and increasing the network's overall throughput. This enhancement makes Fractal suitable for a broader range of applications that require high transaction volumes.

2. Mining Mechanism: Fractal employs a unique hybrid mining approach. For every three blocks, two are mined through permissionless mining, and one is merged-mined with Bitcoin. This method promotes decentralization by allowing individual miners to freely participate in two-thirds of the block production while leveraging Bitcoin’s robust hash power for added security in the merge-mined blocks. This balanced approach maintains network security and decentralization while incentivizing existing Bitcoin miners to support the Fractal network.

3. Scalability: Fractal’s architecture is designed for recursive scaling, allowing for potentially unlimited layers of improvement. Each Fractal layer increases capacity by 20 times compared to the Bitcoin mainnet. This exponential scalability model addresses Bitcoin’s throughput limitations while preserving the security properties of the base layer.

4. Smart Contract Functionality: By implementing the OP_CAT opcode, Fractal enables Turing-complete smart contracts on a Bitcoin-based platform. OP_CAT, a simple concatenation operation, when combined with other opcodes, allows for the creation of complex smart contract logic. This functionality opens up possibilities for advanced DeFi protocols, complex NFT mechanics, and other decentralized applications that were previously limited to platforms like Ethereum.

5. Parallel Execution: Fractal's architecture allows different applications to run their own instances, enabling specialized optimizations without affecting the entire network. For example, gaming platforms could operate on dedicated Fractal layers optimized for high-frequency, low-value transactions, while DeFi protocols could utilize separate layers with parameters tuned for financial operations.

6. Compatibility: Fractal maintains 100% compatibility with Bitcoin standards such as BRC-20 and Ordinals. This ensures that existing Bitcoin-based tokens and NFTs can seamlessly operate on Fractal. Furthermore, users can use the same address across Bitcoin mainnet and Fractal, simplifying the user experience and reducing the risk of errors in address management.

Lorenzo, the founder of UniSat and core contributor to Fractal has summarized his vision in this reply to a question from the community。

2.3 Unique User Experience

Unlike other Bitcoin Layer 2 solutions, the wallet address on Fractal is exactly the same as the Mainnet address.  This design mirrors the convenience found in Ethereum, where users simply toggle between networks within their wallets, such as UniSat or OKX Wallet, to access different layers. Unlike other Bitcoin Layer 2 solutions that require a separate EVM-based wallet address, Fractal allows users to retain their Bitcoin mainnet address for Layer 2 activities. As of today, major wallets like OKX Wallet and UniSat Wallet, which serve the majority of active Bitcoin DeFi and collectibles users, fully support Fractal Bitcoin.

3. Fractal in the Bitcoin Ecosystem

3.1 Comparison with Other Bitcoin Solutions

Fractal enters a competitive landscape of Bitcoin scaling solutions. Here's how it compares to some of the prominent alternatives:

• EVM-compatible L2s: Several projects have attempted to create EVM based Layer 2 solutions for Bitcoin. While these solutions are relatively easy to implement and launch, they face a significant challenge in terms of acceptance within the Bitcoin community. The Bitcoin ecosystem, particularly its core users and developers, often view these EVM-compatible solutions as Frankenstein's monster. Fractal, by contrast, takes a Bitcoin-native approach, aiming to extend Bitcoin's capabilities without importing external architectures. This approach may resonate more strongly with Bitcoin purists and could lead to better integration and adoption within the existing Bitcoin ecosystem.

• Bitcoin Cash (BCH): Bitcoin Cash emerged as a hard fork of Bitcoin, aiming to increase scalability through larger block sizes. This approach led to a contentious split in the Bitcoin community, effectively forcing users to choose between two competing visions of Bitcoin. The BCH fork introduced political debates that often overshadowed technical discussions. In contrast, Fractal takes a fundamentally different approach. Rather than creating a separate chain or forcing a choice, Fractal embraces Bitcoin as the main network and seeks to scale it natively. Fractal's architecture allows for the creation of multiple instances that can scale together, potentially offering unlimited scalability without compromising the base layer's security or decentralization. 

• Lightning Network: While Lightning excels at fast, low-cost payments and offers high privacy, it has limited smart contract functionality and faces channel liquidity challenges. Fractal, in contrast, offers full smart contract support and doesn't require channel management, potentially providing a simpler user experience.

3.2 Market Approach and Built-in User Base

Fractal stands out in the competitive Layer 2 landscape not just through its technical innovations, but also by leveraging a strategic market approach and a robust built-in user base. Supported by UniSat, a leading Bitcoin wallet with approximately 1,000,000 weekly active users (WAU), Fractal has a significant advantage in reaching a ready and engaged audience.

Many of these UniSat users already hold assets such as BRC20 tokens and Runes in their wallets. These users naturally desire a cheaper, faster, and more feature-rich environment for transactions. Fractal is positioned to meet this demand directly, providing an improved transaction experience while maintaining familiarity and compatibility with the Bitcoin ecosystem these users are accustomed to.

This built-in user base gives Fractal a significant edge over other Layer 2 solutions and new blockchain platforms that often struggle with the "cold start" problem – the challenge of attracting an initial user base and building network effects from scratch. Fractal, by leveraging UniSat's existing user base, can potentially bypass this early adoption hurdle.

Furthermore, Fractal's approach to growth metrics sets it apart from many other blockchain projects. While many Layer 2 solutions and new blockchains focus on Total Value Locked (TVL) as a key metric, Fractal is positioned to prioritize the number of transactions as its north star metric. This approach aligns well with its built-in user base, who are likely to generate transaction volume organically as they interact with their existing assets on a more efficient platform.

By focusing on transaction volume rather than TVL, Fractal can demonstrate real-world usage and adoption, which may be more attractive to both users and investors in the long run. This strategy also allows Fractal to differentiate itself in a crowded market where many projects compete primarily on TVL figures.

4. Ecosystem Building

Fractal's approach to ecosystem development is characterized by a strong commitment to decentralization and community-driven growth. This section outlines Fractal's strategy for fostering a robust and diverse ecosystem.

4.1 Decentralization Ethos

At the core of Fractal's ecosystem-building strategy is an unwavering commitment to decentralization. This ethos is reflected in several key aspects:

1. Diverse Bridging Solutions: Unlike some Layer 2 solutions that rely on a single, official bridge, Fractal encourages multiple bridging methods between mainnet and its network. This approach reduces single points of failure and fosters innovation in cross-chain interactions.

2. Open Development Environment: Fractal doesn't mandate specific development frameworks or methodologies, allowing developers to innovate freely within the ecosystem.

3. Community-Driven Governance: The ecosystem's direction is significantly influenced by community input and initiatives, rather than being dictated solely by a central authority.

4. Distributed Infrastructure: Fractal promotes a distributed approach to core infrastructure development, encouraging multiple parties to contribute to critical components of the ecosystem.

4.2 Bootstrapping Users and Builders

Fractal has implemented strategic programs to bootstrap both user adoption and developer engagement:

1. User Rewards Program: Upon mainnet launch, Fractal distributed 1M FB tokens to over 100,000 eligible addresses from OKX Wallet and Unisat Wallet users. This initiative created a wide holder base of FB tokens, setting the stage for increased participation in Fractal activities.

2. OKX Wallet Partnership: The successful collaboration with OKX Wallet demonstrates Fractal's ability to partner with major players in the cryptocurrency space, significantly expanding its potential user base.

3. Builder Incentives: Through various grant programs and developer resources, Fractal incentivizes builders to contribute to the ecosystem's growth.

4.3 Grant Program and Project Evaluation

Fractal's grant program is designed to support and incentivize projects that contribute to the ecosystem's growth and align with its decentralization ethos:

1. Retroactive Funding Model: Fractal employs a retroactive funding approach, rewarding projects based on demonstrated impact rather than speculative promises. This model encourages high-quality work and tangible outcomes.

2. Evaluation Criteria: Projects are assessed based on their contribution to the ecosystem, technical innovation, alignment with Fractal's decentralization principles, and potential for long-term impact.

3. Diverse Project Types: The grant program supports a wide range of projects, from core infrastructure development to application-layer innovations, ensuring a well-rounded ecosystem.

4.4 Highlighted Grant Recipients

Several key projects have already received support through Fractal's grant program:

1. sCrypt: Enhancing Fractal's scripting capabilities, enabling complex smart contracts on the Bitcoin network.

2. F2Pool: A major mining pool contributing to Fractal's security and providing critical feedback on mining functions.

3. Nubit: Developing a data availability (DA) layer to support scalable applications, including Ordinals and Layer 2 solutions.

4. DeTrading: Enabling cross-chain atomic swaps without central authorities or collateral, simplifying trustless trading on Fractal.

5. UniWorlds: Pioneering immersive environments on Fractal, developing community and game toolkits for building inter-communicable virtual worlds.

6. FractalEcosystem.io: A community-driven directory showcasing Fractal projects, enhancing transparency and discovery within the ecosystem.

4.5 Future Outlook

Looking ahead, Fractal is poised for continued ecosystem growth and innovation:

1. Expanding Grant Programs: The upcoming Season 1 Retroactive Grants Program (September 9 to October 9, 2024) will further accelerate ecosystem development.

2. Community Engagement: Planned community bounties and the establishment of a Community Council in Q4 2024 will deepen community involvement in ecosystem direction.

3. Potential Use Cases: Fractal's architecture supports a wide range of future applications, including advanced DeFi protocols, enhanced NFT functionality, enterprise solutions, and decentralized identity systems.

4. Scaling Infrastructure: As the ecosystem grows, Fractal will continue to support the development of scalable infrastructure to accommodate increasing network activity.

5. Cross-Chain Interoperability: Future developments may focus on enhancing interoperability with other blockchain ecosystems, expanding Fractal's reach and utility.

5. Tokenomics and Economic Model

Fractal has designed a comprehensive tokenomics model aimed at ensuring long-term sustainability while maximizing value for the community and investors. The model is structured to incentivize all participants in the ecosystem, from miners to developers, fostering a shared interest in the network's growth and success.

5.1 Token Details

• Name: FB (Fractal Bitcoin)

• Max Supply: 210 million coins

• Total Supply: 105153225.00000000

• Circulating Supply: 1213225.00061300

• Primary Use Case: Transaction fees within the Fractal ecosystem

  • Secondary Use Case: Voting, Applications

5.2 Token Allocation

Fractal's token distribution strategy is carefully designed to promote network security, incentivize growth, and reward key contributors across the ecosystem. The allocation is as follows:

• Proof of Work Mining (50%): Half of the total token supply is allocated to Proof of Work (PoW) mining. This significant allocation aligns Fractal closely with Bitcoin's security model, ensuring network security and reliable block production.

• Ecosystem Treasury (15%): This portion is reserved for investing in the Fractal ecosystem. It will support and fund initiatives that improve the ecosystem and provide for ongoing core improvements to Fractal. A maximum of 10% of this pool may be used each year, over a period of 10 years.

• Community Grants (10%): Allocated to establish partnerships and liquidity programs. These community-directed initiatives aim to boost network engagement over time. Similar to the Ecosystem Treasury, a maximum of 10% of this pool may be used each year, over a period of 10 years.

• Pre-sale (5%): This allocation targets early investors and is crucial for covering initial development and operational costs, as well as conducting security audits. These tokens are subject to a lock-up period of seven months, followed by a linear release until the twelve-month mark.

• Advisor (5%): Reserved for present and future advisors who will provide strategic advice and support for Fractal's ongoing development. A maximum of 20% of this pool may be used each year, over a period of 5 years.

• Core Contributors (15%): Allocated to those who build and maintain Fractal's core software. These tokens are subject to the same lock-up and vesting schedule as the presale tokens.

5.3 Vesting and Lock-up Periods

To ensure long-term commitment and align interests:

• Pre-sale and Core Contributor tokens are locked for seven months, followed by a linear release until the twelve-month mark.

• Ecosystem Treasury and Community Grants have a controlled release of a maximum of 10% per year over 10 years.

• Advisor tokens have a controlled release of a maximum of 20% per year over 5 years.

5.4 Transparency and OP_CAT based Governance Voting Mechanism

Fractal is committed to transparency and has published the official addresses for each token allocation category, which will be trackable upon mainnet launch. This allows the community to monitor how tokens are distributed and utilized, ensuring accountability throughout the process.

Fractal also actively encourages community participation in governance. Users are invited to contribute ideas and feedback as the project evolves, with proposals ranging from protocol upgrades and parameter adjustments to decisions on fund allocation from the Ecosystem Treasury or Community Grants pool. This inclusive approach ensures that Fractal remains adaptable and responsive to the community's needs and market dynamics.

To further enhance community governance, Fractal plans to implement an OP_CAT-based voting mechanism, a first in the Bitcoin space. This innovative system will enable Fractal token holders to vote on proposals directly within the ecosystem, utilizing the capabilities of OP_CAT to create a secure and efficient governance process.

6. Team and Partnerships

6.1 Core Contributors

Fractal Bitcoin is built by a consortium of experienced teams in the Bitcoin ecosystem:

1. UniSat: As a leading Bitcoin wallet with over 900,000 weekly active users, UniSat brings significant experience in user interface design for cryptocurrency applications, implementing and supporting Bitcoin standards like BRC-20 and Ordinals, and managing high-value digital assets securely. Their involvement lends credibility to the project and provides a potential large user base for early adoption.

2. Block Space Force: The co-founders have a track record of building and scaling world-class ventures like Coinbase, CoinMarketCap, and Cobo. They have invested in 100x projects and navigated 9-figure exits. This suggests expertise in scaling blockchain projects from concept to mass adoption, and navigating regulatory challenges in the space.

6.2 Developer Platform Partnerships

Fractal has strong support from Scrypt, a team building a smart contract metaprotocol on Bitcoin using OP_CAT. This partnership could lead to significant synergies, including collaborative development of advanced smart contract standards, shared security audits and best practices, and cross-promotion and ecosystem-building efforts.

7. Challenges and Risks

While Fractal presents an innovative approach to scaling Bitcoin and expanding its functionality, it also faces challenges that potential investors and users should consider:

Programmability emerges as a primary challenge for Fractal. Due to its 100% compatibility with Bitcoin mainnet, Fractal is programmed using Bitcoin Script, which could present hurdles for ecosystem growth. To put things in perspective, there are 1071 Monthly Active Developers in Bitcoin according to the Electric Capital developer report compared to 7864 Monthly Active Developers in Ethereum. 

Bitcoin Script is less widely known and potentially more challenging to use than popular smart contract languages like Rust or Solidity, likely resulting in a smaller pool of capable developers. The higher barrier to entry for coding on Fractal, combined with potentially limited functionality compared to other blockchains, may slow down ecosystem expansion. Furthermore, the relative immaturity of development tools, libraries, and frameworks for Bitcoin Script compared to other blockchain environments could further impede rapid application development and deployment on Fractal.

Technical risks also present significant challenges. Modifying core Bitcoin parameters and implementing new features like OP_CAT carry inherent risks of introducing vulnerabilities or unintended consequences. The complexity of managing recursive scaling and multiple layers adds another dimension of technical challenge.

Adoption risks pose another significant challenge. Fractal may face resistance from Bitcoin maximalists who view any modification or extension of Bitcoin as unnecessary or potentially harmful. Convincing users and developers to switch from established Layer 2 solutions or other blockchain platforms could prove difficult, especially given the network effects these existing solutions have built. Additionally, the Runes, Ordinals, and BRC-20 communities may be reluctant to adopt the same standards on Fractal, despite its compatibility. These communities have already established ecosystems and may see limited incentive to migrate or expand to a new platform, even if it offers improved performance. Fractal will need to clearly articulate its value proposition and potentially offer significant incentives to drive initial adoption across all these user segments. The challenge lies not only in providing technical superiority but also in overcoming the inertia of established communities and their existing investments in current platforms.

To address these challenges, particularly the programmability issue, Fractal may need to invest heavily in developer education, create robust development tools, and potentially explore ways to make the development process more accessible without compromising its core integration with Bitcoin.

8. Conclusion

Fractal Bitcoin represents a groundbreaking approach to scaling Bitcoin and expanding its functionality. As the only Bitcoin scaling solution that uses Bitcoin Core code itself to recursively scale unlimited layers, Fractal offers a unique value proposition in the competitive landscape of Layer 2 solutions.

Key strengths of Fractal include:

1. Native Bitcoin Integration: Fractal maintains full compatibility with Bitcoin mainnet, ensuring seamless integration with existing infrastructure while enhancing functionality.

2. Technical Innovations: With its 30-second block time, hybrid mining approach, and support for OP_CAT, Fractal significantly improves transaction speed and enables complex smart contracts on a Bitcoin-based platform.

3. Built-in User Base: Fractal has a significant advantage in overcoming the "cold start" problem that plagues many new blockchain platforms. Backed by UniSat wallet with a million weekly active users, Fractal starts with a strong foundation. This is further bolstered by the Fractal Mainnet Bootstrap Program, which has resulted in 100,000 active addresses holding FB tokens, representing some of the most engaged Bitcoin users. Additionally, OKX Wallet's full integration with Fractal opens up access to millions of potential users from the OKX ecosystem. 

4. Strong Mining and Network Security: 30-40% of Bitcoin Hashrates via Merge Mining and 1-2% of Bitcoin Hashrates via Solo Permissionless Mining.

5. Ecosystem Development: Through strategic grant programs and community initiatives, Fractal is actively fostering a diverse ecosystem spanning DeFi, gaming, and core infrastructure development.

6. Unique User Experience: Fractal's approach allows users to use the same address across Bitcoin mainnet and Fractal, providing an Ethereum-like experience for network switching.

7. Strong Team with Long-Term View on the Space: The core contributors to Fractal have been building in Bitcoin and the crypto industry since 2013. This helps the team to adopt a significant long-term view of the industry to move Fractal to a wider audience.

However, Fractal also faces significant challenges:

1. Programmability: The use of Bitcoin Script may present a barrier for developers more familiar with languages like Solidity or Rust.

2. Technical Risks: Modifying core Bitcoin parameters and implementing new features like OP_CAT carry inherent risks.

3. Adoption Hurdles: Convincing users and developers to switch from established solutions may prove challenging.

Despite these challenges, Fractal's innovative approach, strong backing, and early traction in mining adoption suggest significant potential. The project's success in attracting major mining pools and its rapid hashrate growth post-launch are particularly encouraging signs.

As the ecosystem continues to evolve, Fractal is positioning itself as a platform for innovative Bitcoin-based applications across various sectors, potentially reshaping the landscape of Bitcoin utility and adoption. The planned implementation of an OP_CAT based governance voting mechanism further underscores Fractal's commitment to innovation within the Bitcoin ecosystem.

While the road ahead contains both opportunities and obstacles, Fractal Bitcoin represents a bold step forward in Bitcoin's scaling journey. Its success could have far-reaching implications for the future of Bitcoin and the broader blockchain ecosystem. As with any emerging technology, potential investors and users should carefully weigh the project's potential against its risks, keeping a close eye on its technological development, ecosystem growth, and market adoption in the coming years.

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The Open Network (TON) combines a layer 1 blockchain with a suite of network protocols, forming a decentralized platform akin to a version of the internet. Developed initially by Nikolai Durov and advanced by a community of open-source developers, TON supports a diverse range of applications, including digital finance and decentralized storage. Its architecture, featuring a masterchain and multiple workchains, enhances scalability and supports high-volume transactions and complex operations across the network.

TON's development includes the Fragment platform, a decentralized marketplace that has processed over $350 million in transactions, demonstrating the network's functional and economic capabilities. Integration with Telegram has facilitated new methods for content monetization and audience engagement, leveraging the platform's widespread use. Recognition in the UAE and partnerships with major tech entities have broadened TON's global reach and influence.

As TON continues to evolve, its role in transitioning users to decentralized networks becomes increasingly vital. The network’s ability to handle substantial transaction volumes and support diverse applications positions it to potentially lead in blockchain innovation. With strategic initiatives underway and a growing adoption rate, TON aims to enhance the efficiency and security of digital transactions globally, contributing to the broader adoption of blockchain technology.

Introduction

The Open Network (TON) is a decentralized computer network consisting of a layer 1 blockchain (the TON blockchain) and a suite of network protocols (the TON network) that support the blockchain as well as being a stand alone decentralized network. It was originally developed by Nikolai Durov, who co-founded Telegram messenger with his brother Pavel in 2013.

History of Telegram & TON

The Durov brothers founded Telegram in 2013 with the mission “to provide a secure means of communication that works everywhere on the planet.” Before Telegram, the tech entrepreneurs were already well known for founding VKontakte (VK), a popular Russian social media platform similar to Facebook. Pavel Durov, the CEO of VK, was ousted from the company by investors in 2014 amid claims of pressure from the Russian government to hand over user data and censor political content on the platform. Following this, the brothers left Russia to focus on developing Telegram, emphasizing user privacy and security.

Telegram quickly gained popularity due to its focus on speed and security, amassing over 200 million monthly active users by March 2018. Up to then, Telegram was largely funded by Pavel via his Digital Fortress fund. Needing external capital to fund growth, while determined to keep the platform independent and free from external influence after lessons learned at VK, the Durov brothers explored various funding methods. In 2018, they launched the Telegram Open Network, intending to create a decentralized blockchain platform with its cryptocurrency, Gram. The initial coin offering (ICO) for TON raised $1.7 billion from private investors. However, the SEC intervened in October 2019, suing Telegram for conducting an unregistered securities offering. The SEC's action led to a protracted legal battle, resulting in Telegram abandoning the TON project in May 2020 and agreeing to return $1.2 billion to investors and pay an $18.5 million civil penalty.

This was not the end for TON, however. The code was separated from Telegram and open-sourced and the remaining testnet tokens were sent to smart contracts that allowed anyone to participate in future mining. Subsequently, a small team of open-source developers, led by Anatoliy Makosov and Kirill Emelyanenko, resumed active development. It was renamed to Toncoin and eventually TON, receiving full endorsement from Pavel Durov.

TON Components

The Open Network consists of network and storage components that amount to an impressive decentralized networking and web stack in its own right. The Open Network consists of the following core components:

1. TON Blockchain: A blockchain of blockchains - A masterchain, its workchains, their shardchains and finally their vertical blockchains.

2. TON Network: A P2P network used for communicating with / accessing the network.

3. TON Proxy: A network proxy/anonymization layer akin to TOR / I2P, used to hide the identity and IP address of nodes.

4. TON DNS: A predefined service, which uses a collection of smart contracts to keep a map from human-readable domain names to accounts, smart contracts, services and network nodes. Used to register and manage .ton domain names.

5. TON Sites: Allows users to build a decentralized website that can be reached via example.ton, compatible with TON DNS domain lookup. Like hosting an NGINX web server on an AWS instance.

6. TON WWW: A protocol that allows users to access TON Sites, using .ton domains, in a browser.

7. TON Storage: Decentralized file storage and sharing using torrent-like technology over TON Network.

8. TON DHT: A distributed hash table - decentralized data structure that stores key-value pairs, where each node in the network manages a portion of the overall data, enabling efficient and resilient data lookup and retrieval. Used as a 'torrent tracker' for TON Storage, an 'input tunnel locator' for TON proxy, and a service locator for TON services.

9. TON Services: A platform for services available via Network and Proxy enabling browser-like or smartphone application interaction. Think apps - can be on-chain, off-chain, or mixed, and used by human users (traditional apps, e.g. games) or other applications/robots (oracles, file storage). This includes a registry of services and which nodes run them.

10. TON Payments: A micropayment channel network for fast off-chain value transfers, similar to the Bitcoin lightning network.

Below is a simplified summary of how they fit together from a user perspective. 

In summary, in addition to its blockchain core, The Open Network features a comprehensive suite of technologies, including a TOR-like networking stack, decentralized and censorship-resistant DNS, decentralized storage, a proxy for anonymous communication, integrated payments, and more. As TON evolves, it may pioneer a fully decentralized web ecosystem, with websites that are censorship-proof from their HTML code through to their hosting and delivery infrastructure, including servers and proxies. What’s more, with TON Services, TON Payments and Telegram Mini Apps, we expect to see exciting and novel consumer apps and business models, only possible on TON.

Technical Architecture of The Open Network

The technical architecture of The Open Network utilizes a multi-blockchain framework designed to enhance scalability, ensure robust security, and facilitate seamless interoperability. This multi-layered structure allows TON to manage a high volume of transactions and interactions efficiently.

Multi-Blockchain Design

TON's architecture is built around a central Masterchain and multiple Workchains, each of which can be further subdivided into Shardchains. This hierarchical structure is what makes TON able to scale and manage diverse transaction types and volumes across its network.

1. Masterchain: At the top of the hierarchy is the Masterchain, which plays a critical role in maintaining the overall integrity and continuity of the TON network. It acts as the main ledger that records and validates major network changes, coordinates the various Workchains, and ensures global consensus is maintained. The Masterchain is responsible for critical functions such as finality and checkpointing of transactions across Workchains and Shardchains, serving as the ultimate arbitrator in the network’s multi-chain architecture.

2. Workchains: These are independent blockchains that run in parallel under the oversight of the Masterchain. Each Workchain is designed to cater to specific needs or sectors—such as different token economies, decentralized applications (dApps), or compliance requirements—allowing for customization and flexibility within the network. Workchains can have their own rules for transaction formats, consensus protocols, and even the virtual machines they operate, which allows developers to tailor functionalities to specific use cases.

3. Shardchains: To further enhance scalability, each Workchain can be divided into multiple Shardchains. This division is designed to distribute the transaction load more effectively by assigning a fraction of the overall transactions to each Shardchain. By processing transactions in parallel across multiple Shardchains, TON dramatically increases its transaction handling capacity. Shardchains operate under the rules set by their respective Workchain but are primarily focused on scaling transaction throughput. They synchronize and validate transactions with the help of the Masterchain, which aggregates and finalizes transactions across the entire network.

This multi-blockchain approach allows TON to handle diverse and high-volume transactions efficiently by delegating tasks across its different chains according to their specialization. This division not only optimizes processing speeds and network response times but also enhances the network's ability to scale dynamically based on load and demand.

Scalability Through Shardchains

Scalability is a critical aspect of TON's architecture, primarily achieved through its Shardchains. Each Shardchain processes only a subset of transactions, which effectively spreads the computational and storage workload across the network. This method reduces latency and increases throughput, as multiple Shardchains operate simultaneously without overloading any single chain.

The dynamic configuration of Shardchains also allows TON to adjust its scalability based on real-time usage and transaction volume. If a particular Workchain becomes heavily loaded, it can be further subdivided into more Shardchains, thereby distributing the load more evenly and maintaining high performance across the network.

Cross-Chain Interoperability: Facilitating Communication Between Chains

Interoperability within TON is crucial for maintaining fluid communication between its various blockchain components. The Masterchain facilitates this by managing cross-chain transactions and data transfers, ensuring that operations across Workchains and Shardchains remain consistent and secure. This system allows for seamless interaction between different parts of the network, enabling complex operations that involve multiple chains to execute smoothly without user intervention.

Security: Proof of Stake and Nominator Pools

Security in TON is upheld by a Proof of Stake (PoS) mechanism, where validators stake tokens to secure the network. This PoS system is enhanced by the introduction of nominator pools, which allow smaller stakeholders to collectively participate in the validation process, thus democratizing the security process and enhancing the robustness of the network. Validators are incentivized to act honestly due to the economic stakes involved, and the nominator pools ensure that the opportunity to participate in network security is accessible to a wider range of stakeholders.

The multi-blockchain architecture of TON, with its division into Masterchain, Workchains, and Shardchains, is a powerful model for achieving the scalability, flexibility, and security required by modern blockchain networks. This design enables TON to efficiently handle a growing ecosystem of decentralized applications and services while maintaining high throughput and robust security.

Economic and Governance Model

TON has experienced significant changes since a $1.7 billion ICO in 2019 faced regulatory hurdles. Revived in 2022 by the TON Foundation, it has grown into a decentralized network with a supply of 5 billion coins, expanding by 0.6% annually (30 million tokens). Currently, 2.5 billion coins circulate, supporting transactions, staking, and governance within its ecosystem.

The initial distribution saw 98.55% of tokens mined through proof of work (PoW), with the remaining 1.45% held by the development team.

To address centralization risks, a significant proposal was passed in February 2023 to freeze inactive wallets for four years, impacting 21% of total tokens. This decision targeted 171 wallets holding over 1.081 billion TON coins, equating to approximately 21% of the total circulating supply. The move aimed to enhance liquidity and sparked discussions around centralization and governance autonomy within the TON ecosystem, underscoring the delicate balance between regulatory actions and decentralized principles.

Validators in the TON network play a crucial role in maintaining its integrity, earning up to 10% of their stake annually if they diligently perform their duties, such as signing all blocks, remaining online, and avoiding invalid block signatures. This reward system compensates validators sufficiently, allowing them to invest in better hardware to manage the growing volume of transactions. On average, no more than 10% of the total TON coin supply is expected to be locked in validator stakes at any time, producing an inflation rate of about 2% per year. This inflation acts as a payment from the community to validators for their service in maintaining the network's operation.

Conversely, if a validator acts maliciously, a portion or all of their stake can be confiscated as a penalty. A significant part of this confiscated stake may be burned, creating a deflationary effect on the total supply of TON coins. A smaller portion of the fine could also be awarded to the validator or "fisherman" who provides proof of the guilty validator's misbehavior, further enhancing network integrity by incentivizing the monitoring of validator activities.

The fee mechanism in TON differs significantly from Ethereum’s user-pay model. Instead, TON adopts a developers-pay model. Unlike the synchronous smart contracts on Ethereum, both Dfinity and TON utilize an asynchronous actor architecture to enable parallel computation.

Transaction fees in TON comprise several components: storage fees, message ingress and egress fees, routing fees, and computation fees. On average, the transaction fee is around 0.005 TON, but this value can be adjusted by validators as needed. The purpose of the transaction fee is to deter malicious actors from overloading the network. Additionally, half of the collected fees are used to reward validators and nominators, incentivizing them to maintain the network’s security and efficiency.

Half of the transaction fees in TON are burned, meaning they are sent to a black hole address and permanently removed from the circulating supply. Additionally, the majority of the slashed funds from misbehaving validators are also burned. This burning mechanism helps to reduce the circulating supply, contributing to the overall economic stability and deflationary aspects of the TON network. TON can also be purchased directly through the Telegram Wallet for services like anonymous accounts, advertising and purchasing stars on the Fragment marketplace

Governance Within the TON Community

TON employs a decentralized voting platform, TON.VOTE, where token holders influence the project's development and major policy decisions. This participatory approach ensures that the community remains at the heart of the ecosystem's evolution.

Major Investors and Partnerships

Institutional adoption of TON has been significantly bolstered by major investments from prominent firms such as Pantera Capital and Animoca Brands. Pantera Capital has shown substantial confidence in TON by launching a dedicated investment fund to raise capital to buy TON tokens. This move reflects their bullish outlook on TON's potential within the crypto market. Animoca Brands, known for advancing digital property rights in gaming and the open metaverse, has become the largest validator on the TON blockchain, supporting various GameFi projects and integrating TON-based applications within Telegram. These strategic investments and partnerships underscore a robust institutional endorsement of TON's capabilities and its future potential in the blockchain space.

Staking and Its Impact on Decentralization

TON operates on a Proof of Stake (PoS) consensus model, where validators play a crucial role in maintaining network security by ensuring block validity and earning Toncoin as rewards. To participate, validators need advanced hardware and substantial Toncoin staked for a fixed term. The demanding hardware requirements, such as a 16-core CPU and high-speed internet, often limit this role to those with significant resources, potentially centralizing control among wealthier participants. Validators not only earn rewards from transaction fees and new coins generated during validation, with an average daily income of approximately 120 Toncoin, but they also face stringent penalties for non-participation or malicious activities, ranging from fines to complete stake forfeiture. This structured incentive and penalty system aims to ensure robust network health and integrity. Validator positions are competitive, requiring a minimum of 300,000 Toncoin to enter elections, with successful candidates validating blocks for entire validation cycles.

TON’s tokenomics is designed to balance incentives for validators, ensure network security, and maintain economic stability. The combination of a PoS consensus mechanism, a robust staking system, and a transaction fee structure aligned with network usage ensures the sustainability and scalability of the TON blockchain.

Current Status of The Open Network (TON)

The Open Network has shown measurable growth and activity, as indicated by several financial metrics and user engagement statistics. This section of the report provides an overview of TON's current statistics, highlighting key aspects of its ecosystem.

Total Value Locked (TVL): TON reports a TVL of approximately $919 million. Below, we’ll discuss which applications have the most TVL.

Stablecoins: The market capitalization of stablecoins on TON is $619 million, with USDT being the only stablecoin available. TON accounts for about 0.38% of the total stablecoin market capitalization. 

USDT's integration is notable, particularly its utility for transactions via Telegram.

Users can bridge USDT to the TON network using platforms like Symbiosis and Layerswap, facilitating the use of stablecoins within the TON ecosystem.

TON Token Metrics:

• Current Price: $6.48

• Market Cap: $16.3 billion

• Fully Diluted Valuation (FDV): $33 billion

User Adoption

The network's user engagement is indicated by:

• Onchain Activated Wallets: More than 12 million wallets have been activated onchain, a significant increase from ~1 million in January.

• Active Monthly Wallets: There are 4.2 million active monthly wallets, up from ~300,000 in January.

TON DEX Landscape: DeDust & STON.fi Spotlight

The decentralized exchange (DEX) landscape on the TON blockchain is defined by its innovation and user engagement, with seven operational DEXes contributing significantly to the ecosystem. In 2024, on-chain data indicates a notable upward trend in transactions and daily active users, driven by the Open League initiative and the native integration of USDT. Among these platforms, DeDust and STON.fi stand out due to their substantial trading volume and TVL.

Both DeDust and STON.fi are instrumental in the recent surge in TVL on TON, which has been amplified by The Open League's boosted liquidity pools initiative. This program provides TON incentives for users engaging in DeFi activities, which has propelled significant increases in TVL, particularly noticeable during the program’s initial four seasons. For Season Five, participants can explore enhanced pool options on both DeDust and STON.fi.

STON.fi: 

STON.fi is the dapp with the highest TVL in TON. It is renowned for its integration with TON wallets, simplifying the process for users to swap tokens directly within the ecosystem, and it also allows users to become liquidity providers, with additional benefits for engaging in staking and farming. Key statistics include:

• TVL: Holds a TVL of $277 million.

• Strategic Developments: Plans are underway for STON.fi to evolve into a cross-chain DEX, which would introduce features such as order books and margin trading, significantly broadening its market appeal and functionality.

DeDust

DeDust operates as an Automated Market Maker (AMM) on TON and boasts the second-highest TVL across the network. It integrates various asset types seamlessly, including native coins and tokens from other blockchains. As of the latest data:

• TVL: $258 million in TVL.

• Staking and SCALE Token: It offers a staking program that converts swap fees into SCALE tokens, used to reward users. This not only fosters liquidity but also stabilizes the ecosystem.

• Transaction Efficiency: DeDust is optimized for low gas usage, facilitating cost-effective transactions. It supports stablecoin swaps and complex trade types like multi-hop transactions.

• Interoperability Features: Features an early-stage bridge to Ethereum, enhancing its capability to manage wrapped assets like WBTC and stablecoins, facilitating asset movement across blockchain networks.

Comparison: DeDust vs. STON.fi

Swap.coffee: A New DEX Aggregator on TON

TON blockchain has recently welcomed a new player in its DeFi ecosystem, Swap.coffee, a DEX aggregator designed to enhance user experience in trading by offering optimal exchange routes. The platform stands out with its user-friendly interface that simplifies the trading process for users of all levels by automating the selection of DEXs and managing liquidity concerns.

For seasoned traders, Swap.coffee offers advanced settings that allow for the customization of trading strategies, providing opportunities to achieve significant savings on larger transactions, albeit with higher risk. This feature caters specifically to experienced users looking for more control and better profit margins in their trading activities.

Liquid Staking on TON with Tonstakers

Tonstakers is the third largest project by TVL, managing $212 million.

Tonstakers introduces a dynamic approach to liquid staking within the TON blockchain, offering users the ability to earn yields securely, equally, and transparently. This service is tailored for users who wish to contribute to blockchain security while gaining rewards, without having to sacrifice access to their staked assets.

Secure and Open Liquid Staking

Tonstakers operates in collaboration with TON Core Developers, ensuring the platform is robust and well-integrated within the TON ecosystem. It champions transparency and security with its open-source protocol, available for review and contribution on GitHub. Furthermore, the platform's security measures are verified through an audit by Certik, a leading blockchain security firm, ensuring that it is secure to the core.

Non-Custodial Staking

What sets Tonstakers apart is its non-custodial approach to staking. Users maintain complete control over their assets without any intermediaries, meaning that while their TON coins are staked, they're not held or controlled by Tonstakers but remain under the users’ control.

Telegram Ads: Leveraging TON for Effective Marketing

One of the distinct advantages of TON, in collaboration with Telegram, is its ability to attract Web2 talent pools. This attraction is largely due to the availability of familiar marketing and channel acquisition tools that are integrated into the Telegram platform.

Telegram Ads enable projects to purchase advertisements displayed at the bottom of Telegram channels. This feature has proven to be a highly effective component of the go-to-market strategies for numerous Web3 startups operating within Telegram. These ads not only help in broadening the reach and visibility of projects but also facilitate direct engagement with a targeted user base.

A key aspect of Telegram Ads is their payment structure. Ads are purchased using TON, and remarkably, 50% of the revenue generated from hosting these ads is distributed back to the channel owners in TON. This revenue-sharing model incentivizes channel owners to actively participate in the ad network, enhancing the ecosystem's overall growth and engagement.

Ads can be bought via https://ads.telegram.org/ or https://fragment.com/ads. 

TON Growing Adoption in Asia

Leveraging Telegram Mini Apps for Engagement and Transactions

Hamster Kombat is a Tap-to-Earn game where players assume the role of a cryptocurrency exchange CEO. By tapping on hamsters on the screen, players accumulate game points and can earn rewards through various methods. The game combines simple tap mechanics with a passive income mining feature and a card system, enhancing its depth and entertainment value. According to the official Twitter account, as of June 24, there are already 200 million Hamsters!

In Tehran, the capital of Iran, taxi drivers, cyclists, and pedestrians alike are seen fervently tapping on their phone screens during red lights in the hot June weather. Their target is an app named "Hamster Kombat," which they believe has the potential to make them wealthy.

The craze for Hamster Kombat in Iran is comparable to the past success of Axie Infinity in Southeast Asia. During a period of high unemployment in the Philippines, Axie Infinity players were earning an average monthly income of over $300 by playing the game.

Hamster Kombat is more than just a game; it is evident that it is driving the mass adoption of Web3 and fostering community building.

Integration with Bitget for Enhanced Trading Convenience

Bitget has been quick to integrate with the Telegram mini apps, offering functionalities such as spot trading directly within Telegram. The integration allows users to trade cryptocurrencies effortlessly without the need to switch between different applications. The convenience of sharing and trading cryptocurrencies within a social context could significantly enhance user adoption and market penetration in regions where mobile-first strategies dominate.

Game Development and GameFi on TON

Asian game studios dominate mobile games and will be a huge force in gaming on TON.

What's more, Hong Kong-based Animoca Brands, a key player in the GameFi sector, has become the largest validator on the TON blockchain. This status highlights the growing importance of TON in supporting third-party games and GameFi projects. The TON Play platform provides developers with tools to port existing online games directly to Telegram, tapping into its vast user base and facilitating new forms of engagement through decentralized gaming.

Web3 Development Initiatives

In collaboration with Tencent Cloud and Chainbase, the TON Foundation aims to streamline the development process and enhance the deployment capabilities of developers, further fostering the adoption of Web3 technologies. By providing essential tools and resources, this initiative targets to make it easier for developers to create and launch applications on the TON blockchain.

Recognition and Adoption in the UAE

The United Arab Emirates (UAE), and specifically the Dubai International Finance Centre (DIFC), has officially recognized the TON blockchain alongside major cryptocurrencies like Bitcoin and Ethereum. This recognition permits financial institutions in Dubai to utilize Toncoin for transactions, showcasing the growing acceptance and institutional trust in TON within significant financial markets. The official recognition not only enhances TON’s credibility but also opens up numerous possibilities for its use in financial transactions and regulatory frameworks within the region.

India

India, with the second highest number of smartphone users globally, offers significant potential for deeper smartphone penetration. The launch of Reliance Jio in 2016 revolutionized the telecom industry, leading to a substantial increase in data consumption by pricing data significantly lower than the market rate. This caused data consumption in India to jump from an average of 400 MB per user per month to 11 GB. Currently, while the global average price for 1GB of data is $5.09, in India, it is just $0.09.

This creates an ideal environment for Telegram and its ecosystem. With over 100 million downloads, Telegram is one of the most popular messaging apps in India. Integrating these users into the TON ecosystem presents a unique opportunity to monetize this large audience.

As Web3 becomes increasingly mainstream, more apps will prioritize mobile-first UI/UX designs to cater to the vast market of smartphone users similar to the Mini app model adopted by Telegram. India will be a key region for the development and user growth of consumer apps in the future.

Future Outlook

TON is strategically positioned to unlock numerous opportunities for the Telegram community to monetize, share, and grow their businesses. A standout example is Fragment, a decentralized marketplace on the TON network, where users can trade collectibles such as virtual phone numbers and custom Telegram usernames. To date, Fragment has facilitated over $350 million in sales, demonstrating the platform's potential. A promising development on the horizon is the transformation of Telegram stickers into NFTs, a move that could significantly enhance engagement and revenue. With 730 billion stickers sent, making these available as NFTs on the TON blockchain presents a substantial opportunity.

Telegram is evolving its revenue model by integrating revenue sharing with content creators and channel owners through its Fragment platform, which leverages the TON blockchain. This shift from traditional social media models allows creators to earn directly from ad revenues on their channels, promoting a fairer distribution of financial benefits within the digital ecosystem. This approach not only rewards creators for their content but also strengthens the relationship between the platform and its users. Additionally, the implementation of gasless transfers with built-in on-ramps and off-ramps, including bank transfers and exchanges, enhances accessibility and usability, especially benefiting individuals in developing countries who often lack access to banking services.

Telegram has become the first chat-only app to delve seriously into gaming. Since integrating HTML5 compatibility for Telegram bots in 2016, the development of the TON blockchain has aimed to further reduce friction for both users and developers. Through TON, developers gain access to payment rails, decentralized storage for in-game assets, and smart contracts for secure and automated game mechanics, allowing them to efficiently distribute their content to a community with 900 million monthly active users.

TON sets itself apart from platforms like WeChat and other Western social apps by establishing Telegram as a major gateway for Web2 users transitioning into Web3. With approximately 900 million MAU, Telegram represents one of the largest pools of "Web2.5 users" and serves as a primary distribution channel for major crypto markets. Unlike central exchanges like Coinbase and Binance, Telegram’s social nature makes it more compatible with applications that blend social features with financial incentives, providing a better product-market fit for games and other interactive experiences.

Distribution is key to TON’s recent success and underscores the challenges Web3 game developers face in acquiring players. Growth initiatives, including grants, technical support, and marketing assistance, have expedited the onboarding of teams into the ecosystem. In the short term, many teams are likely to leverage TON’s current mindshare to attract users to their games or protocols. Over time, as developer tools and support become more robust, games that adapt learnings from platforms like WeChat in a Telegram-native approach will be crucial case studies.

Looking ahead, TON's future is bright, with its potential for monetization, stablecoin integration, and a thriving ecosystem of mini apps and games. By leveraging its vast user base, scalable infrastructure, and innovative revenue models, TON is well-positioned to become a leading force in the blockchain space, driving significant advancements in decentralized finance and digital content creation.

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I. Introduction: The Development of AI+Web3

In recent years, the development of Artificial Intelligence (AI) and Web3 technologies has drawn global attention. AI, which simulates human intelligence, has achieved breakthroughs in facial recognition, natural language processing, and machine learning. These advancements have transformed various industries.

The AI industry's market size reached $200 billion in 2023, with key players like OpenAI, Character.AI, and Midjourney leading the way.

Simultaneously, Web3, an emerging network paradigm based on decentralized blockchain technology, is changing how we use the Internet. Web3 facilitates data sharing and control, user autonomy, and trust mechanisms through features like smart contracts, distributed storage, and decentralized identity verification. Its core concept is to free data from centralized authorities, giving users control over their data and the ability to share its value.

Currently, the Web3 industry's market value stands at $25 trillion, with significant contributions from Bitcoin, Ethereum, Solana, and applications like Uniswap and Stepn. These developments are drawing more people to the Web3 sector.

The combination of AI and Web3 is of great interest to builders and venture capitalists worldwide. Exploring how to integrate these technologies effectively is a valuable endeavor.

This article examines the current state of AI+Web3 development, exploring the potential value and impact of this fusion. We will introduce the basic concepts and characteristics of AI and Web3, examine their interrelationships, analyze the current status of AI+Web3 projects, and delve into their limitations and challenges. Through this research, we aim to provide insights and references for investors and professionals in related industries.

II. Interactions between AI and Web3

AI and Web3 development are like two sides of a balance scale. AI enhances productivity, while Web3 transforms production relationships. What kind of sparks can AI and Web3 create together? We will analyze the challenges and improvement opportunities in the AI and Web3 industries, and explore how they can help each other solve these challenges.

2.1 Challenges in the AI industry

To understand the challenges faced by the AI industry, we need to examine its core elements: computing power, algorithms, and data.

1. Computing Power: 

Computing power refers to the ability to perform large-scale computations and processing. AI tasks often involve handling large amounts of data and conducting complex calculations, such as training deep neural network models. High-intensity computing power can accelerate model training and inference processes, improving AI system performance and efficiency. The development of hardware technologies like Graphics Processing Units (GPUs) and specialized AI chips like TPUs has played a crucial role. Nvidia, whose stock has surged in recent years, has gained a significant market share as a GPU provider, earning substantial profits.

2. Algorithms:

Algorithms are the core components of AI systems, using mathematical and statistical methods to solve problems and accomplish tasks. AI algorithms can be categorized into traditional machine learning and deep learning algorithms, with significant breakthroughs in deep learning in recent years. The selection and design of algorithms are crucial for AI system performance and effectiveness. Continuous improvement and innovation in algorithms enhance accuracy, robustness, and generalization capabilities. Different algorithms yield different results, so ongoing improvements are crucial for achieving desired outcomes.

3. Data:

The core task of AI systems is to extract patterns and regularities from data through learning and training. Data serves as the foundation for training and optimizing models. Large-scale data samples allow AI systems to learn more accurate and intelligent models. Rich datasets provide comprehensive and diverse information, enabling models to better generalize to unseen data and assist in solving real-world problems.

Having understood the core elements of AI, let's examine the challenges and issues AI faces in these areas:

Computing Power:

AI tasks often require substantial computational resources for model training and inference, especially for deep learning models. However, acquiring and managing large-scale computing power is expensive and complex. The cost, energy consumption, and maintenance of high-performance computing devices are significant issues. Startups and individual developers may find it difficult to obtain sufficient computing power.

Algorithms:

Despite significant successes in deep learning algorithms, there are still challenges and limitations. Training deep neural networks requires vast amounts of data and computational resources. For certain tasks, the interpretability and explainability of models may be insufficient. Additionally, robustness and generalization capabilities are important issues, as model performance on unseen data can be unstable. Finding the best algorithm to provide optimal services is an ongoing process.

Data:

Acquiring high-quality and diverse data remains a challenge. Some domains, such as healthcare, may have difficulty obtaining data. The quality, accuracy, and labeling of data pose challenges. Incomplete or biased data can lead to erroneous behavior or biases in models. Protecting data privacy and security is also a significant consideration.

There are also issues of interpretability and transparency. The black-box nature of AI models is a concern for the public. For applications such as finance, healthcare, and judiciary, the decision-making process of models requires interpretability and traceability, which current deep learning models often lack. Explaining the decision-making process of models and providing trustworthy explanations remains a challenge.

Additionally, many AI projects lack a clear business model, leaving many AI entrepreneurs puzzled.

2.2 Challenges faced by the Web3 industry

The Web3 industry faces several challenges that need to be addressed, such as data analysis, poor user experiences, and vulnerabilities in smart contract code. AI, as a productivity-enhancing tool, has significant potential to contribute in these areas.

Data Analysis and Predictive Capabilities:

There is room for improvement in data analysis and predictive capabilities within Web3. AI technology can profoundly impact the Web3 industry through intelligent analysis and mining using AI algorithms. Web3 platforms can extract valuable information from vast amounts of data, making more accurate predictions and decisions. This is crucial for risk assessment, market forecasting, and asset management in the decentralized finance (DeFi) space.

User Experience (UX):

User experience is another area where the Web3 industry can benefit from AI. Many decentralized applications (dApps) and blockchain platforms currently suffer from poor user experiences, hindering mainstream adoption. AI can improve UX by providing personalized recommendations, intelligent interfaces, and streamlined processes. Natural language processing (NLP) and computer vision techniques can enhance user interactions and simplify complex operations.

Security and Vulnerability of Smart Contracts:

The security and vulnerability of smart contracts are significant challenges in the Web3 industry. Smart contracts are self-executing contracts with terms written directly into code. However, vulnerabilities in the code can lead to financial losses or exploitation. AI can analyze and audit smart contracts, identifying potential vulnerabilities and suggesting improvements to enhance security. AI-powered security systems can also detect and respond to suspicious activities and attacks in real-time, protecting Web3 platforms and users from cyber threats.

Decentralized Governance:

Decentralized governance in Web3 platforms often involves complex decision-making processes. AI can assist in governance mechanisms by providing data-driven insights, sentiment analysis, and predictive analytics. AI algorithms can identify patterns and trends in community discussions and propose informed decisions based on data analysis. This can enhance the efficiency and effectiveness of decentralized governance systems.

III.  Analysis of AI+Web3 Projects

The integration of AI and Web3 projects primarily focuses on two major aspects: leveraging blockchain technology to enhance AI performance and utilizing AI technology to improve Web3 projects.

Numerous projects have emerged around these aspects, including Io.net, Gensyn, Ritual, and others. In the following sections, we will analyze the current status and development of different sub-tracks related to AI empowering Web3 and Web3 empowering AI.

3.1 Web3 Empowering AI

3.1.1 Decentralized Computing Power

Since the launch of ChatGPT by OpenAI at the end of 2022, the AI field has experienced rapid growth. Within five days, ChatGPT reached 1 million users, a milestone that took Instagram over two months. By November 2023, it had 100 million weekly active users, solidifying AI as a major industry.

According to a Trendforce report, ChatGPT requires 30,000 NVIDIA A100 GPUs, and future models like GPT-5 will need even more. This has led to a competitive scramble among AI companies to secure sufficient computing power, resulting in a GPU shortage.

Before AI's rise, NVIDIA primarily served cloud services like AWS, Azure, and GCP. However, the AI boom has attracted new buyers, including major tech firms like Meta and Oracle, data platforms, and AI startups. Companies such as Meta and Tesla have ramped up purchases of custom AI models and internal research. Basic model companies like Anthropic and platforms like Snowflake and Databricks have also increased GPU acquisitions to support AI services.

According to Semi Analysis's "GPU Haves and Have-Nots" report, a few companies have over 20,000 A100/H100 GPUs, allowing extensive project utilization. These include cloud providers or firms with large-scale machine learning infrastructure, such as OpenAI, Google, Meta, Anthropic, Inflection, Tesla, Oracle, and Mistral.

Most companies, however, are GPU "have-nots," struggling with fewer GPUs and significant operational constraints. This includes prominent AI companies like Hugging Face, Databricks (MosaicML), Together, and even Snowflake, which are limited by GPU supply, hindering their competitiveness.

The GPU shortage has affected even leading AI companies. By the end of 2023, OpenAI had to temporarily close paid registrations due to insufficient GPU availability while seeking more supplies.

The imbalance between GPU demand and supply is critical. To address this, some Web3 projects are exploring the use of decentralized computing power services, such as Akash, Render, and Gensyn. These projects aim to incentivize users to provide idle GPU computing power through tokens, supporting AI clients.

The supply side can be divided into three main categories: cloud service providers, cryptocurrency miners, and enterprises. Cloud providers include major names like AWS, Azure, and GCP, as well as GPU cloud service providers like Coreweave, Lambda, and Crusoe. Users can resell idle computing power from these providers to generate income. With Ethereum's transition from Proof of Work (PoW) to Proof of Stake (PoS), idle GPU power from cryptocurrency miners is also a significant potential supply. Additionally, large enterprises like Tesla and Meta, which have purchased substantial GPUs for strategic purposes, can contribute their idle computing power.

Currently, players in this field can be broadly divided into two categories: those focusing on decentralized computing power for AI inference and those for AI training. The former includes projects like Render (primarily for rendering but also usable for AI computing), Akash, and Aethir. The latter includes projects like io.net (supporting both inference and training) and Gensyn, differing mainly in their specific computing power requirements.

Let's first discuss projects focusing on AI inference. These projects incentivize users to contribute computing power through tokens and provide network services to meet demand, thus matching idle computing power supply with demand. Detailed information and analysis about these projects can be found in the research report published by Ryze Labs on DePIN. 

The key aspect is the token incentive mechanism, which first attracts suppliers and then users, allowing the project to bootstrap and operate effectively. In this cycle, the supply side receives valuable token rewards, while the demand side benefits from more affordable and higher-quality services. As the token price rises, more participants and speculators are attracted, creating value capture.

The second category focuses on decentralized computing power for AI training, such as Gensyn and io.net (supporting both training and inference). These projects operate on a similar logic to those focusing on AI inference, attracting the supply side to contribute computing power through token incentives and providing it to the demand side.

io.net, a decentralized computing power network, currently has over 500,000 GPUs and has shown strong performance in the field of decentralized computing power projects. It has integrated the computing power of Render and Filecoin and continues to develop its ecosystem.

Additionally, Gensyn facilitates machine learning task allocation and rewards through smart contracts to drive AI training. The hourly cost of machine learning training on Gensyn is approximately $0.4, significantly lower than the cost of over $2 on AWS and GCP.

The Gensyn ecosystem involves four key participants: submitters, executors, validators, and reporters.

• Submitters: Consumers who provide tasks to be computed and pay for AI training.

• Executors: Perform the model training tasks and generate proofs of completion for validation.

• Validators: Compare the executor's proofs with expected thresholds, linking the non-deterministic training process with deterministic linear computation.

• Reporters: Verify the work of validators and raise objections to earn rewards when issues are discovered.

Gensyn aims to become a large-scale, cost-effective computing protocol for global deep learning models. However, why do most projects choose decentralized computing power for AI inference rather than training?

For those unfamiliar with AI training and inference, here are the differences:

• AI Training: If we compare AI to a student, training is like providing the student with a large amount of knowledge and examples, understood as data. The AI learns from these examples. Since learning requires understanding and memorizing a vast amount of information, this process needs significant computational power and time.

• AI Inference: Inference can be understood as using acquired knowledge to solve problems or take exams. During the inference stage, AI uses the acquired knowledge to provide answers rather than actively learning new information. Therefore, the computational requirements for inference are relatively lower.

It is evident that the computing power requirements for training and inference are significantly different. The availability of decentralized computing power for AI inference and training will be further analyzed in the subsequent challenge section.

In addition to decentralized computing power networks, other approaches are being explored to address the GPU supply shortage. One such approach is the development of more efficient and specialized hardware for AI workloads.

Companies like NVIDIA, AMD, and Intel are continuously working on developing GPUs and specialized accelerators optimized for AI tasks. These hardware solutions aim to provide higher performance and better energy efficiency for AI training and inference. By improving hardware capabilities, the demand for GPUs can be met more effectively, reducing the supply shortage.

Another approach is advancing AI algorithms and models to make them more efficient and require fewer computational resources. Researchers are developing algorithms and techniques that can achieve comparable or better performance with reduced computational requirements. This helps alleviate the strain on GPU resources and allows for more efficient use of the available supply.

Efforts are also being made to optimize the utilization of existing GPU resources. Techniques like virtualization and containerization enable the sharing and efficient allocation of GPUs among multiple users or applications. This can help maximize GPU utilization and mitigate the impact of supply shortages.

Lastly, governments and industry associations are taking steps to address the GPU supply shortage. They are working on initiatives to increase GPU production capacity and improve the supply chain. These efforts aim to stabilize the GPU supply and ensure a more balanced market.

Overall, addressing the GPU supply shortage requires a multi-faceted approach that includes developing specialized hardware, optimizing AI algorithms, efficient resource utilization, and collaborative efforts between industry stakeholders. These measures aim to alleviate the supply-demand imbalance and ensure a more sustainable availability of GPUs for AI workloads.

3.1.2 Decentralized Algorithmic Models

As mentioned in Chapter 2, the three core elements of AI are computational power, algorithms, and data. Since computational power can form a supply network through decentralization, can algorithms also follow a similar approach and form a supply network for algorithmic models?

Before analyzing projects in this field, let's first understand the significance of decentralized algorithmic models. Many might wonder why we need decentralized algorithm networks when we already have OpenAI.

Essentially, a decentralized algorithm network is a marketplace for AI algorithm services that connects various AI models, each with its own expertise and skills. When users pose questions, the marketplace selects the most suitable AI model to provide answers. ChatGPT, developed by OpenAI, is an AI model that can understand and generate human-like text.

In simple terms, ChatGPT is like a highly capable student solving different types of problems, while the decentralized algorithm network is like a school with many students solving problems together. Although the current student (ChatGPT) is highly capable, there is significant potential for recruiting students globally in the long run.

Currently, some projects are exploring and experimenting in the field of decentralized algorithmic models. We will use the representative project Bittensor as a case study to understand development in this subfield.

In Bittensor, the supply side of algorithmic models (or miners) contribute their machine learning models to the network. These models analyze data and provide insights. Model suppliers are rewarded with the cryptocurrency token TAO for their contributions.

To ensure the quality of answers, Bittensor uses a unique consensus mechanism to determine the best answer within the network. When a question is posed, multiple model miners provide answers. Validators in the network then determine the best answer, which is sent back to the user.

The token TAO in Bittensor plays two main roles throughout the process. On one hand, it incentivizes miners to contribute algorithmic models to the network. On the other hand, users spend tokens to ask questions or have tasks completed by the network.

Since Bittensor is decentralized, anyone with internet access can join the network, either as a user posing questions or as a miner providing answers. This enables more people to leverage powerful artificial intelligence.

In summary, taking networks like Bittensor as an example, the field of decentralized algorithmic models has the potential to create a more open and transparent landscape. In this ecosystem, AI models can be trained, shared, and utilized in a secure and decentralized manner. Additionally, decentralized algorithmic model networks like BasedAI are also exploring similar concepts, using zero-knowledge proofs (ZK) to protect user and model interactive data privacy. This will be further discussed in the fourth section.

With the development of decentralized algorithmic model platforms, small companies can compete with large organizations in using cutting-edge AI tools, potentially having a significant impact on various industries.

3.1.3 Decentralized Data Collection

Training AI models requires a large supply of data. However, most Web2 companies currently retain user data for themselves. Platforms like X, Reddit, TikTok, Snapchat, Instagram, and YouTube prohibit data collection for AI training, creating a major obstacle for the AI industry.

On the other hand, some Web2 platforms sell user data to AI companies without sharing profits with the users. For example, Reddit reached a $60 million agreement with Google to allow AI model training on its posts. This situation, where collection rights are dominated by big capital and big data, has led to an overly capital-intensive industry direction.

In response, some projects are combining Web3 with token incentives to achieve decentralized data collection. For example, PublicAI allows users to participate in two roles on the platform:

• AI Data Providers: Users find valuable content on platforms like X, tag it with #AI or #Web3, and send it to the PublicAI data center for collection.

• Data Validators: Users log into the PublicAI data center and vote for the most valuable data for AI training.

In return, users receive token incentives, fostering a mutually beneficial relationship between data contributors and the AI industry.

In addition to PublicAI, many other projects are utilizing token incentives for decentralized data collection. For example:

• Ocean Protocol: Tokenizes user data to serve AI.

• Hivemapper: Collects map data through users' vehicle cameras.

• Dimo: Collects users' car data.

• WiHi: Collects weather data.

These projects, which collect data in a decentralized manner, are potential suppliers for AI training and exemplify Web3 empowering AI.

3.1.4 Utilize ZK to Protect Privacy in AI

Beyond the decentralization benefits brought by blockchain technology, zero-knowledge proofs (ZK) offer another crucial advantage. ZK technology protects privacy while enabling information verification.

In traditional machine learning, data is typically stored and processed centrally, posing risks of privacy breaches. Meanwhile, methods like data encryption or de-identification can limit the accuracy and performance of machine learning models.

ZK technology helps address this dilemma by balancing privacy protection and data sharing. Zero-Knowledge Machine Learning (ZKML) enables training and inference of machine learning models without revealing the original data, using zero-knowledge proofs. With ZKML, the data features and model results can be proven correct without disclosing the actual data content.

The primary goal of ZKML is to balance privacy protection and data sharing. It can be applied in scenarios such as medical health data analysis, financial data analysis, and cross-organizational collaboration. By using ZKML, individuals can protect their sensitive data while sharing it with others, gaining broader insights and collaboration opportunities without risking data privacy breaches.

Currently, this field is in its early stages, with most projects still exploring possibilities. For example, BasedAI proposes a decentralized approach that integrates Fully Homomorphic Encryption (FHE) with Large Language Models (LLM) to maintain data confidentiality. By embedding privacy into their distributed network infrastructure and utilizing Zero-Knowledge Large Language Models (ZK-LLM), user data is kept private throughout network operations.

Fully Homomorphic Encryption (FHE) is an encryption technique that allows computations on encrypted data without decryption. This means various mathematical operations performed on data encrypted with FHE produce the same results as if performed on unencrypted data, thus preserving user data privacy.

In addition to these categories, blockchain projects like Cortex support executing AI programs on-chain. Running machine learning programs on traditional blockchains is challenging due to inefficiencies in virtual machines when handling complex models. However, the Cortex Virtual Machine (CVM) uses GPUs to execute AI programs on-chain and is compatible with the Ethereum Virtual Machine (EVM). This means the Cortex chain can execute all Ethereum DApps and incorporate AI machine learning into these DApps, enabling decentralized, immutable, and transparent execution of machine learning models, with network consensus verifying every step of AI inference.

3.2 AI Empowering Web3

In the collision between AI and Web3, the assistance of AI to the Web3 industry is noteworthy. The core contribution of artificial intelligence lies in enhancing productivity. Consequently, there have been many attempts in areas such as AI auditing of smart contracts, data analysis and prediction, personalized services, and security and privacy protection.

3.2.1 Data Analysis and Prediction
Many Web3 projects are integrating existing AI services (such as ChatGPT) or developing their own to provide data analysis and prediction services for Web3 users. This includes providing investment strategies, on-chain analysis tools, and price and market forecasting through AI algorithms.

For example, Pond uses AI graph algorithms to predict valuable alpha tokens, offering investment advice for users and institutions. BullBear AI trains on users' historical data, price history, and market trends to provide accurate price trend predictions, helping users gain profits.

Investment competition platforms like Numerai use AI and large language models to predict the stock market. The platform provides high-quality data for training models, and participants submit daily predictions. Numerai calculates the performance of these predictions over the next month, and participants can stake NMR on their models to earn profits based on their performance.

Blockchain data analysis platforms like Arkham combine AI services. Arkham connects blockchain addresses with entities such as exchanges, funds, and whales, and displays key data and analysis to provide decision-making advantages for users. Arkham Ultra integrates AI to match addresses with real-world entities using algorithms, developed over three years with support from core contributors from Palantir and the founder of OpenAI.

3.2.2 Personalized Services
In Web2 projects, AI has been widely applied in search and recommendation to meet users' personalized needs. This trend is also seen in Web3 projects, where many teams optimize user experience by integrating AI.

For example, Dune, a well-known data analysis platform, recently introduced the Wand tool, which uses large language models to write SQL queries. With the Wand Create feature, users can generate SQL queries based on natural language questions, making it convenient for those unfamiliar with SQL to perform searches.

Additionally, some Web3 content platforms have begun integrating ChatGPT for content summarization. For instance, the Web3 media platform Followin uses ChatGPT to summarize viewpoints and provide the latest updates in specific fields. IQ.wiki, a Web3 encyclopedia platform, aims to be a primary source of objective and high-quality knowledge related to blockchain technology and cryptocurrencies. It makes blockchain more accessible and provides users with trustworthy information by integrating GPT-4 to summarize wiki articles. Kaito, a search engine based on large language models (LLM), is dedicated to becoming a Web3 search platform, transforming how Web3 information is accessed.

In content creation, projects like NFPrompt reduce user creation costs. NFPrompt allows users to generate NFTs more easily with AI, thereby lowering creative costs and providing various personalized services during the creative process.

3.2.3 AI Auditing of Smart Contracts
In the Web3 space, auditing smart contracts is a crucial task. Using AI to audit smart contract code can efficiently and accurately identify vulnerabilities.

As Vitalik Buterin mentioned, one of the biggest challenges in the cryptocurrency space is code errors. AI offers the exciting possibility of significantly simplifying the use of formal verification tools to prove code properties. Achieving this could lead to an error-free Ethereum Virtual Machine (EVM), enhancing security across the space.

For example, the 0x0.ai project provides an AI-powered smart contract auditor. This tool uses advanced algorithms to analyze smart contracts, identifying potential vulnerabilities or issues that could lead to fraud or security risks. Machine learning techniques are used to identify patterns and anomalies in the code, flagging potential issues for further review.

Beyond auditing, there are other native AI use cases in the Web3 space. For instance, PAAL helps users create personalized AI bots that can be deployed on Telegram and Discord to serve Web3 users. Hera, an AI-driven multi-chain DEX aggregator, uses AI to find the best trading paths for the widest range of tokens and token pairs. Overall, AI empowers Web3 primarily as a tool-level assistance.

IV. Limitations and Challenges of AI+Web3 Projects

4.1 Real-world barriers to decentralized computing power

Many current AI+Web3 projects focus on decentralized computing power, using token incentives to encourage global users to supply computational resources. While this is an innovative approach, it faces several practical challenges:

Compared to centralized computing power service providers, decentralized computing power products typically rely on nodes and participants distributed globally. This distribution can lead to potential network latency and instability between nodes, causing performance and stability issues that may be inferior to centralized alternatives.

Additionally, the availability of decentralized computing power products is influenced by the balance of supply and demand. Insufficient suppliers or excessive demand can lead to resource shortages or an inability to meet user needs.

Furthermore, decentralized computing power products generally involve more technical complexity compared to centralized alternatives. Users may need to understand and manage aspects such as distributed networks, smart contracts, and cryptocurrency payments, increasing the complexity and cost of usage.

After in-depth discussions with numerous decentralized computing power projects, it has been found that current decentralized computing power is primarily limited to AI inference rather than AI training.

Next, I will address four specific questions to help understand the underlying reasons:

1. Why do most decentralized computing power projects focus on AI inference rather than AI training?

2. What makes NVIDIA stand out? What are the challenges in achieving decentralized computing power training?

3. What will be the endgame for decentralized computing power projects like Render, Akash, and io.net?

4. What will be the endgame for decentralized algorithm projects like Bittensor?

Let's explore these questions step by step:

1）Focus on AI Inference Over Training:

Most decentralized computing power projects focus on AI inference rather than training due to the different requirements for computing power and bandwidth. To understand this better, consider AI as a student:

• AI Training: Training is like providing the AI with a large amount of knowledge and examples (data). The AI learns from these examples, requiring significant computational power and time to understand and memorize vast amounts of information.

• AI Inference: Inference is like using the acquired knowledge to solve problems or take exams. During the inference phase, the AI uses learned knowledge to provide answers without acquiring new knowledge. Therefore, the computational requirements for inference are relatively low.

The fundamental difference between the two lies in the large-scale data and high bandwidth needed for AI training, making decentralized training challenging. Inference, on the other hand, requires much less data and bandwidth, making it more feasible for decentralized computing power.

For large-scale models, stability is crucial. Interruptions in training require restarting the process, incurring substantial costs. However, tasks with lower computational requirements, such as AI inference or training medium-sized models in niche scenarios, can be achieved within the decentralized computing power network. Relatively large node service providers can cater to these higher computational demands.

2）So, where are the bottlenecks related to data and bandwidth? Why is decentralized training challenging to achieve?

Decentralized training of large-scale models involves two key elements: single-card computing power and multi-card parallelization.

Single-Card Computing Power:

All centers requiring large-scale model training can be compared to supercomputing centers, akin to organs in a human body, with GPU units as cells. If the computing power of an individual cell (GPU) is high, the overall computing power (number of cells × individual cell power) is also significant.

Multi-Card Parallelization:

Training a large-scale model often involves processing hundreds of billions of gigabytes of data. Supercomputing centers dedicated to large-scale model training require at least tens of thousands of A100 GPUs as a foundation. Training a large-scale model is not a simple sequential process done on one GPU after another. Different parts of the model are trained on different GPUs, and the training of one part may require results from another, introducing the need for multi-card parallelization.

Why is NVIDIA So Dominant?

NVIDIA's dominance and skyrocketing market value are due to two main aspects: the CUDA software ecosystem and NVLink for multi-card communication.

• CUDA Software Ecosystem: Having a compatible software ecosystem is crucial. NVIDIA's CUDA system is a prime example, and building a new system is challenging, similar to creating a new language with high replacement costs.

• NVLink for Multi-Card Communication: Training large models requires high-speed communication and synchronization between GPUs. NVIDIA's NVLink technology provides efficient communication between GPUs, enabling effective parallelization and scaling of training processes, giving NVIDIA an edge over competitors like AMD, Huawei, and Horizon Robotics.

Challenges in Decentralized Training:

Achieving decentralized training in the computing power space faces significant challenges in replicating the capabilities of supercomputing centers, such as high-performance single-card computing power and efficient multi-card parallelization. Overcoming these challenges requires significant advancements in hardware, software, and communication technologies.

The first point explains why it is difficult for AMD, Huawei, and Horizon Robotics to catch up, and the second point explains why decentralized training is challenging to achieve.

3）What will be the ultimate form of decentralized computing power?
Decentralized computing power currently faces challenges in training large-scale models, mainly due to the need for stability in such training. If the training process is interrupted, it must be restarted, incurring high sunk costs. The requirements for multi-card parallelization are demanding, and bandwidth is limited by physical distance. NVIDIA's NVLink facilitates multi-card communication, but within a supercomputing center, NVLink restricts the physical distance between GPUs. As a result, decentralized computing power cannot form a unified cluster for large-scale model training.

However, it is feasible to achieve lower-demand computing requirements, such as AI inference or training smaller models for specific niche scenarios. When there are relatively large node service providers in a decentralized computing power network, there is potential to meet these significant computing demands. Additionally, scenarios like edge computing for rendering are easier to implement.

4）What will be the ultimate form of decentralized algorithm models?
The ultimate form of decentralized algorithm models depends on the future of AI. The AI landscape may consist of 1-2 closed-source model giants (such as ChatGPT) alongside a diverse range of models. In this context, application-layer products need not be tied to a single large-scale model but can collaborate with multiple large-scale models. From this perspective, the approach taken by Bittensor holds significant potential.

4.2 The combination of AI and Web3 is still rudimentary

Currently, in projects combining Web3 and AI, especially those involving AI in Web3 applications, most only superficially use AI without demonstrating deep integration between AI and cryptocurrencies. This superficial application can be seen in two aspects:

Firstly, whether using AI for data analysis and prediction, AI-powered recommendations and search, or code auditing, the integration is not significantly different from Web2 projects. These projects simply use AI to enhance efficiency and perform analysis without showcasing native integration and innovative solutions between AI and cryptocurrencies.

Secondly, many Web3 teams integrate AI primarily at the marketing level, using the concept of AI purely for promotion. They apply AI technology in very limited areas, creating an illusion of a close connection between the project and AI. However, in terms of true innovation, these projects still have a long way to go.

Although current Web3 and AI projects have these limitations, it’s important to recognize that we are in the early stages of development. In the future, we can expect more in-depth research and innovation to achieve closer integration between AI and cryptocurrencies and create more native and meaningful solutions in finance, decentralized autonomous organizations (DAOs), prediction markets, NFTs, and more.

4.3 Tokenomics serves as a buffer for the narrative of AI projects.

As mentioned earlier, regarding the business model challenge for AI projects, with more large models gradually becoming open source, many AI+Web3 projects struggle to find development and financing opportunities in the Web2 space. As a result, they overlay the narrative of Web3 and tokenomics to encourage user participation.

However, the crucial question is whether the integration of tokenomics truly addresses the practical needs of AI projects or if it is purely a narrative or short-term value pursuit.

Currently, most AI+Web3 projects are still far from practical stages. It is hoped that more diligent and thoughtful teams can go beyond tokenization as a mere spectacle for AI projects and instead genuinely fulfill practical use cases.

V. Conclusion
Numerous cases and applications are emerging in AI+Web3 projects. Firstly, AI technology can provide more efficient and intelligent application scenarios for Web3. Through AI's data analysis and prediction capabilities, users in Web3 can access better tools for investment decision-making and other scenarios. Additionally, AI can audit smart contract code, optimize the execution process of smart contracts, and improve blockchain performance and efficiency. Furthermore, AI technology can offer more accurate and intelligent recommendations and personalized services for decentralized applications, enhancing user experience.

At the same time, the decentralized and programmable nature of Web3 offers new opportunities for AI development. Projects that leverage decentralized computing power provide new solutions to the scarcity of AI computing power through token incentives. Web3's smart contracts and distributed storage mechanisms also offer broader space and resources for sharing and training AI algorithms. The user autonomy and trust mechanisms in Web3 bring new possibilities for AI development. Users can choose to participate in data sharing and training, thereby improving data diversity and quality, further enhancing AI model performance and accuracy.

Although current cross-over projects between AI and Web3 are still in the early stages and face many challenges, they also bring many advantages. For example, while decentralized computing power products have their drawbacks, they reduce reliance on centralized institutions, provide greater transparency and auditability, and enable wider participation and innovation. For specific use cases and user needs, decentralized computing power products may be a valuable choice. Similarly, decentralized data collection projects offer benefits such as reducing reliance on a single data source, providing wider data coverage, and promoting data diversity and inclusivity. It is necessary to weigh these pros and cons and implement appropriate management and technical measures to overcome challenges and ensure that decentralized data collection projects positively impact AI development.

Overall, the integration of AI and Web3 provides endless possibilities for future technological innovation and economic development. By combining AI's intelligent analysis and decision-making capabilities with the decentralization and user autonomy of Web3, a more intelligent, open, and fair economic and social system can be built in the future.

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Executive Summary

The global stablecoin market is witnessing a remarkable expansion, with a current market capitalization of approximately $160 billion. This report delves into the dynamics of the top five stablecoins by market cap, including Tether (USDT), which dominates the market with a 69% share.

The report highlights the significant adoption of stablecoins in emerging markets, where they are increasingly viewed as viable solutions to economic volatility, offering stability, lower transaction costs, and financial inclusion. The potential impact of stablecoins in these regions is profound, providing a reliable alternative to unstable local currencies and facilitating greater participation in the global digital economy. The report also addresses the regulatory landscape, which is evolving as various nations and global organizations seek to establish frameworks that balance innovation with financial safety.

Introduction: Current State of the Stablecoin Market

The total market capitalization of stablecoins currently stands at approximately $160 billion, up from $130 billion a year ago. Tether (USDT) remains the most significant one, with a market dominance of 69.29%. 

Here is a detailed look at the top five stablecoins by market capitalization:

• Tether (USDT): With a market cap of $111 billion, USDT is the stablecoin with the highest usage across exchanges. 50% of the USDT in circulation is on the Tron blockchain, 40% is on Ethereum, and the remaining 10% sits across several other networks. 

• USD Coin (USDC): As the second-largest stablecoin, USDC holds a market cap of $32.7 billion. It has experienced a growth of 50% over the past 5 months, being one of the largest beneficiaries of this current bull market. 

• Dai (DAI): Dai has a market cap of $5.25 billion. It observed an increase of 2.97% in the last month, following some controversial decisions such as including Ethena’s USDe as collateral. 

• First Digital USD (FDUSD): FDUSD has shown remarkable growth since its launch, reaching a market cap of $3 billion. 

• Ethena’s USDe (USDe): USDe, the hottest new ‘digital dollar’ launched only in February this year, has quickly reached a market cap of $2.5 billion. After an incredible initial adoption, USDe has more recently slowed down its growth. 

Notably, over 85% of the stablecoins live on Ethereum and Tron. 

Besides Tron, Solana is the only blockchain in the top 10 networks by stablecoins market capitalization that’s not an EVM-blockchain. It amasses $3.6 billion in stablecoins, with USDC being the clear dominant with 74.79% of the share. 

Usage of Stablecoins:

• Adoption: There are now 93.5 million crypto addresses that hold stablecoins, showcasing rapid adoption, especially for remittances and daily transactions. Tether, as the largest stablecoin by user base, represents a significant portion of this market with over 76 million holders.

• Transactional Volume and Active Addresses: Stablecoins like USDC and BUSD are also widely used, with TRON and BSC hosting most transactions despite a lower dollar volume compared to platforms like Ethereum, indicating a strong retail presence.

Why stablecoins are needed in emerging markets

Emerging markets are characterized by volatility and economic transitions, presenting unique challenges that stablecoins could potentially mitigate.

Given the growing adoption, with nearly 100 million holding addresses, stablecoins offer a promising alternative to traditional financial systems.

Stablecoins used for remittances can significantly benefit developing countries by addressing the high transaction costs and inefficiencies associated with traditional money transfer methods.

Remittances are a crucial source of income for many developing nations, helping to reduce poverty, finance education, healthcare, and support small businesses. Traditional remittance channels often incur high fees, averaging around 6.25%, which can be a burden for low-income families.

By leveraging digital platforms and financial technologies, stablecoins can reduce these costs, enhance the speed and security of transactions, and increase accessibility for unbanked populations. This shift towards digital remittances can also promote financial inclusion, stimulate local economic development, and ensure that a larger portion of the remitted funds is available for the recipients, thus maximizing the positive impact on their livelihoods and economic stability.

Adoption

According to Chainalysis, which measures the adoption of crypto all over the world, countries like India, Nigeria, Vietnam, and the Philippines are among the top performers, showcasing a widespread acceptance and utilization of cryptocurrencies among everyday citizens. It’s no surprise that emerging countries are the ones that are most entrenched in the blockchain ecosystem, since they are the ones that need it the most: a permissionless system that allows them to make payments, take on loans, earn yield, and much more, with only their phones. Even though there have been numerous attempts to “unbank the unbanked” with Web2-type fintechs, crypto is still gaining ground.  

In Latin America, for example, Argentina stands out as a great example of how stablecoins are penetrating deep into the society’s manner of escaping from rampant inflation. From October 2022 through October 2023, almost 80% of people who bought any cryptocurrencies via exchanges in Argentina bought USDT, not BTC or ETH. Similarly, over the same period, Braze’s share of USDT was closer to 50%, still quite high. 

Looking at a different region, in Africa the predominant transaction tokens are stablecoins. Between 2022 and 2023, 40% of the crypto exchanged in Sub-Sahara Africa came from stablecoins.

Regulatory Environment

The state of stablecoin regulation in emerging markets is in a phase of ongoing development and adaptation, as regulatory bodies and governments seek to balance the benefits of financial inclusion and innovation with the potential risks associated with digital currencies. 

In the past year, there has been significant movement towards establishing regulatory frameworks for stablecoins in various regions. For instance, the Monetary Authority of Singapore (MAS) announced a new framework that will regulate stablecoin-related activities, focusing on reserve assets, redemption, disclosures, and prudential and solvency requirements for issuers of MAS-regulated stablecoins. Similarly, the Republic of Kazakhstan's Financial Services Authority (AFSA) announced the implementation of a regulatory base for stablecoins effective from January 1, 2024, demonstrating a proactive approach to addressing this emerging area of digital finance.

On a global scale, there is a push for consistent and effective regulation, supervision, and oversight of stablecoin arrangements to address potential financial stability risks, with a focus on promoting responsible innovation and providing sufficient flexibility for jurisdictions to implement domestic approaches. However, disagreements between the G7 and G20 on the specifics of stablecoin regulation suggest that the process of establishing universal norms and standards may face challenges.

The International Monetary Fund (IMF) and the Financial Stability Board (FSB) have been identified as key players in shaping global standards for stablecoins, with a focus on the potential impact of stablecoin use on wider financial stability and the macro-financial implications.

In the U.S., the Lummis-Gillibrand Payment Stablecoin Act was introduced on April 17. It aims to create a regulatory framework for payment stablecoins. Key aspects of the bill include:

1. One-to-One Reserves: It mandates that stablecoin issuers maintain one-to-one reserves, ensuring all stablecoins are fully backed by cash or cash equivalents. 

2. Prohibition of Unbacked Stablecoins: The bill bans unbacked, algorithmic stablecoins, further tightening the regulatory environment for these digital assets. This measure aims to prevent scenarios like the collapse of TerraUSD, which had significant repercussions on the crypto market.

3. Protection of the U.S. Dollar's Dominance: The legislation seeks to maintain the U.S. dollar's dominance in the global digital economy by setting standards for U.S.-issued stablecoins.

4. Dual Banking System Preservation: It preserves the existing authority of state regulators over non-depository trust companies and allows state trust companies and federal or state depository institutions to issue stablecoins.

However, critics say that the bill could stifle innovation in the digital asset space and breach First Amendment rights by imposing strict regulations on stablecoin issuers. They argue that the bill's approach could hamper the growth and development of the digital asset industry in the United States. Moreover, the bill has been criticized for preempting state authorities over trust companies and money transmitters, and for handing the Federal Reserve unprecedented authority over firms that don't create new money. 

Conclusion

Stablecoins stand at the forefront of financial innovation in emerging markets, offering a transformative potential that is both expansive and inclusive. As detailed in this report, stablecoins like USDT, USDC, and newer entrants like USDe are becoming integral to economic activities in these regions, driven by their ability to mitigate traditional financial system flaws such as high inflation and inefficient banking services.

However, the rapid growth of stablecoins comes with challenges, including regulatory adjustments and the need for enhanced financial literacy. To maximize their positive impact, policymakers, industry leaders, and financial institutions must collaborate on developing robust regulatory frameworks that ensure stability and build trust while fostering innovation and growth. By addressing these challenges, stablecoins could significantly contribute to economic resilience and financial inclusivity, empowering businesses and individuals alike to thrive in an increasingly interconnected and digital global economy.

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Our team member, Fred, has provided a detailed overview of the activities and interactions that marked this gathering:

1. A standout theme at Token2049 was the AI/DePIN+BTC ecosystem, which attracted considerable attention and participation. The AI/DePIN activities were especially popular, with several events reaching full capacity. There is a growing array of DePIN projects attracting interest from venture capitalists who are keen to explore diverse opportunities within this space. Prominent projects from companies like io.net, Aethir, and Ritual were in attendance, drawing interest from both Eastern and Western VCs and builders.

2. The BTC ecosystem also showcased significant activities, particularly around BTC Layer 2 solutions and various ecosystem projects. The Chinese community was notably active, representing a significant portion of the attendees, ranging from Mainland China to other regions including Singapore, Taiwan, Hong Kong, and Malaysia.

3. The SOL ecosystem was represented with a dedicated booth, where Western builders expressed a bullish outlook. 

4. Exchanges maintained a high profile throughout the event, with Binance hosting continuous Clubhouse events and other platforms like Bitget, HTX, Gate, and more demonstrating their capabilities.

Project representatives primarily from Asia and Europe were encountered frequently, with a notable presence of teams from Italy, Russia, and Southeast Asia. The focus was particularly strong on teams from China, Southeast Asia, and the host region, Dubai.

Highlighting the event, our founder, Matthew Graham, participated in a panel discussion titled "Emerging Markets: Crypto's Next Frontier?" His insights into the future of emerging markets, with a particular focus on the Indian and Chinese sectors, sparked lively discussions and showcased our commitment to understanding and investing in these regions.

Check out our live coverage of the conference here.

Also, here are a couple of clips from the panel, featuring Matty:

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In the U.S., 11 Bitcoin ETFs were launched and they quickly attracted almost $60 billion in assets. However, the estimates for Hong Kong's new ETFs are not as high. Some are optimistic, like Matrixport, which thinks these new ETFs could bring in as much as $25 billion, but only if mainland China investors, who are currently not allowed to invest, get access. Most of the time, ETFs in Hong Kong draw around $50 billion in total, mainly from local buyers and sellers.

Eric Balchunas from Bloomberg believes that Hong Kong might only see about $500 million coming into its Bitcoin ETFs. He points out several reasons for this, such as the fact that Chinese investors can't buy these ETFs, the smaller size of the issuing companies, the fees which are likely to be between 1% and 2%, and the wide price spreads.

Ryan Rasmussen from Bitwise Asset Management thinks that the demand for Bitcoin and Ethereum ETFs in Hong Kong could reach $1 billion, with most of that demand likely going towards Bitcoin. He also mentioned that these ETFs will probably help increase Bitcoin's price, but not as dramatically as in the U.S. where Bitcoin's price went up by over 40% this year due to ETF-related demand.

Michael Dunn, president of Bitnomial, pointed out that these ETFs could make it harder to find Bitcoin available for trading outside of ETFs. He said that there's already a shortage of available Bitcoin, and these new ETFs will keep that demand high.

In short, Hong Kong's launch of Bitcoin and Ethereum ETFs is an important development, but the actual impact and the amount of money it will attract could be quite different from the U.S. experience due to different rules and market conditions.

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Recently, the popularity of Bitcoin's inscriptions has ignited a frenzy among crypto users. Originally considered "digital gold," Bitcoin, which was primarily seen as a store of value, has once again garnered attention due to the emergence of the Ordinals protocol and BRC-20. This has prompted people to focus on the development and possibilities of the Bitcoin ecosystem.

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As the earliest blockchain, Bitcoin was created in 2008 by an anonymous entity named Satoshi Nakamoto, marking the birth of a decentralized digital currency that challenges traditional financial systems.

Bitcoin, born as an innovative solution in response to the inherent flaws of centralized financial systems, introduced the concept of a peer-to-peer electronic cash system, eliminating the need for intermediaries and enabling trustless and decentralized transactions. The fundamental technology of Bitcoin, the blockchain, revolutionized the way transaction records are stored, verified, and secured. The Bitcoin whitepaper, released in 2008, laid the foundation for a decentralized, transparent, and tamper-resistant financial system.

After its inception, Bitcoin went through a gradual and stable growth phase. Early adopters primarily consisted of technology enthusiasts and cryptography supporters who engaged in mining and trading Bitcoin. The first recorded real-world transaction occurred in 2010 when programmer Laszlo purchased two pizzas in Florida for 10,000 Bitcoins, marking a historic moment for the adoption of cryptocurrencies.

As Bitcoin gained increasing attention, its related ecosystem infrastructure began to take shape. Exchanges, wallets, and mining pools emerged in large numbers to meet the demands of this new type of digital asset. With the development of blockchain technology and the market, the ecosystem expanded to involve more stakeholders, including developers, entrepreneurial teams, financial institutions, and regulatory bodies, leading to the diversification of the Bitcoin ecosystem.

The market, which had been dormant for a long time in 2023, experienced a renaissance due to the popularity of the Ordinals protocol and BRC-20 tokens, bringing about a summer of inscriptions. This also refocused people's attention on Bitcoin, the oldest and most established public blockchain. What will be the future development of the Bitcoin ecosystem? Will the Bitcoin ecosystem become the engine for the next bull market? This research report will delve into the historical development of the Bitcoin ecosystem, focusing on the three core aspects within the ecosystem: asset issuance protocols, scalability solutions, and infrastructure. It will analyze their current status, advantages, and challenges to explore the future of the Bitcoin ecosystem in depth.

II. Why the Bitcoin Ecosystem is Needed

1. Characteristics and Development History of Bitcoin

To understand the necessity of the Bitcoin ecosystem, we must first delve into Bitcoin's fundamental characteristics and evolutionary journey.

Bitcoin stands apart from traditional financial models, exhibiting three key features:

1. Decentralized Distributed Ledger: At the heart of Bitcoin's network is blockchain technology, a decentralized ledger that records every transaction. This blockchain comprises blocks linked in a chain, each block referencing the previous one, ensuring transaction transparency and immutability.

2. Proof-of-Work (PoW) System: Bitcoin's network relies on a Proof-of-Work mechanism to validate transactions. Network nodes solve complex mathematical problems to confirm transactions and add them to the blockchain, thus bolstering network security and decentralization.

3. Mining and Bitcoin Issuance: Bitcoin is generated through mining, where miners solve mathematical puzzles to validate transactions and create new blocks, earning Bitcoin as a reward.

In stark contrast to familiar account models like PayPal, Alipay, and WeChat Pay, Bitcoin uses the Unspent Transaction Output (UTXO) model rather than adjusting account balances directly.

The UTXO model is pivotal in understanding the technical underpinnings of the Bitcoin ecosystem. In this model, each Unspent Transaction Output represents a transaction output in the network yet to be utilized. These outputs are the building blocks for future transactions. The UTXO model is characterized by:

1. Generation of New UTXOs with Each Transaction: Bitcoin transactions consume existing UTXOs and create new ones, setting the stage for future transactions.

2. Transaction Verification via UTXOs: The network verifies transactions by confirming the existence and non-use of referenced UTXOs.

3. UTXOs as Inputs and Outputs: Each UTXO has a specific value and owner's address. In transactions, some UTXOs serve as inputs, while others are created as outputs for future use.

The UTXO model enhances security and privacy, as each UTXO is distinct in ownership and value, allowing for precise transaction tracking. Additionally, its design enables parallel processing of transactions, as each UTXO operates independently, avoiding resource conflicts.

Despite these strengths, Bitcoin's block size limitations and the non-Turing complete nature of its scripting language have confined it to being mainly "digital gold," restricting a wider array of applications.

Bitcoin's journey has seen significant developments. Colored coins appeared in 2012, enabling the representation of other assets on the Bitcoin blockchain through metadata. The 2017 block size debate led to forks such as BCH and BSV. Post-forks, BTC focused on scalability improvements, like the 2017 SegWit upgrade which introduced extended blocks and block weight, increasing block capacity. The 2021 Taproot upgrade enhanced transaction privacy and efficiency. These upgrades paved the way for scaling protocols and asset issuance protocols, including the notable Ordinals protocol and BRC-20 tokens.

It's clear that while Bitcoin was initially envisioned as a peer-to-peer electronic cash system, many developers are striving to transcend its "digital gold" status. Their efforts are focused on amplifying Bitcoin's scalability and fostering a diverse array of applications within its ecosystem.

2. Comparison between the Bitcoin Ecosystem and Ethereum Smart Contracts

In Bitcoin's developmental journey, Vitalik Buterin proposed a distinct blockchain, Ethereum, in 2013. Co-founded by Buterin, Gavin Wood, Joseph Lubin, and others, Ethereum introduced a programmable blockchain, enabling developers to create diverse applications beyond mere currency transactions. This functionality positioned Ethereum as a smart contract platform, facilitating automated contract execution on the blockchain without third-party trust.

Ethereum's standout feature is smart contracts, allowing developers to craft various applications. Consequently, Ethereum has emerged as a crypto space leader, fostering an expansive ecosystem with Layer 2 solutions, applications, and assets like ERC20 and ERC721 tokens.

Despite Ethereum's capabilities in smart contract and DApp development, there's a persistent pull towards Bitcoin for scaling and application development. The key reasons are:

1. Market Consensus: As the first blockchain and cryptocurrency, Bitcoin holds significant public and investor recognition and trust. Its market capitalization, about $800 billion, accounts for nearly half of the entire crypto market.

2. Bitcoin's High Decentralization: Bitcoin is highly decentralized, with its anonymous creator, Satoshi Nakamoto, and a community-driven development approach. In contrast, Ethereum has visible leadership in Vitalik Buterin and the Ethereum Foundation.

3. Fair Launch Demand Among Retail Investors: Web3's growth hinges on new asset issuance. Traditional token issuances, whether fungible or non-fungible, usually involve project teams as issuers, making retail investor returns dependent on these teams and venture capitalists. The Bitcoin ecosystem, however, has seen the rise of fair launch platforms like Ordinals, granting retail investors more influence and attracting capital to Bitcoin.

Despite its lower transaction speed and block time compared to Ethereum, Bitcoin continues to attract developers interested in implementing smart contracts and developing applications on it.

In essence, just as Bitcoin's ascent was anchored in a value consensus—its widespread acceptance as a valuable digital asset and medium of exchange—crypto innovations are intrinsically linked to asset properties. The Bitcoin ecosystem's current buzz mainly stems from the Ordinals protocol and assets like BRC-20 tokens, revitalizing overall interest in Bitcoin.

This cycle differs from previous bull markets, with retail investors gaining more clout. Traditionally, VCs and project teams have steered the crypto market, but as retail interest in crypto assets grows, these investors seek a larger role in project development and decision-making. Their involvement has partly fueled the Bitcoin ecosystem's revival in this cycle.

Therefore, despite Ethereum's adaptability with smart contracts and decentralized applications, the Bitcoin ecosystem, with its status as digital gold, a stable value store, market leadership, and consensus, maintains an unmatched significance in the cryptocurrency domain. This enduring relevance continues to draw attention and efforts towards developing the Bitcoin ecosystem, exploring its potential and possibilities further.

III. Analysis of the Current Development Status of Bitcoin Ecosystem Projects

In evolving the Bitcoin ecosystem, two primary challenges are evident:

1. Bitcoin Network's Low Scalability: Enhanced scalability is crucial for building applications on Bitcoin.

2. Limited Bitcoin Ecosystem Applications: Popular applications/projects are needed to attract more developers and spur innovation.

To tackle these challenges, the focus is on three domains:

• Protocols for asset issuance

• Scalability solutions, including on-chain and Layer 2

• Infrastructure projects like wallets and cross-chain bridges

Given the Bitcoin ecosystem's early developmental stage, with applications like DeFi still emerging, this analysis will center on four aspects: asset issuance, on-chain scalability, Layer 2 solutions, and infrastructure.

1. Asset Issuance Protocols

The Bitcoin ecosystem's growth since 2023 owes much to protocols like Ordinals and BRC-20, transforming Bitcoin from a mere value storage medium to an asset issuance platform, thus broadening its utility.

Post-Ordinals, various asset issuance protocols emerged, including Atomicals, Runes, PIPE, etc. These aid users and teams in launching assets on the Bitcoin network.

1）Ordinals & BRC-20

First, let's take a look at the Ordinals protocol. Simply put, Ordinals is a protocol that allows people to mint NFTs similar to those on Ethereum on the Bitcoin network. The initial attention was drawn to Bitcoin Punks and Ordinal punks, which were minted based on this protocol. Later on, the popular BRC-20 standard also emerged based on the Ordinals protocol, ushering in the "Summer of Inscriptions."

The birth of the Ordinals protocol can be traced back to early 2023 and was introduced by Casey Rodarmor. Casey has been working in the tech industry since 2010 and has worked at Google, Chaincode Labs, and Bitcoin Core. He currently serves as the co-host of SF Bitcoin BitDevs, a Bitcoin discussion community.

Casey became interested in NFTs in 2017 and was inspired to develop Ethereum smart contracts using Solidity. However, he disliked building NFTs on Ethereum, considering it to be overly complicated for simple tasks. In early 2022, he came up with the idea of implementing NFTs on Bitcoin. During his research on Ordinals, he mentioned being inspired by something called "atomics" referenced by Bitcoin's creator, Satoshi Nakamoto, in the original Bitcoin codebase. This indicates that Casey's motivation was to make Bitcoin interesting again, leading to the birth of Ordinals.

So how does the Ordinals protocol achieve what people commonly refer to as BTC NFTs or Ordinal Inscriptions? There are two key elements:

• The first element is assigning serial numbers to each Satoshi, the smallest unit of Bitcoin. This allows tracking of Satoshis when they are spent, effectively making Satoshis non-fungible. It's an imaginative approach.

• The second element is the ability to attach arbitrary content to individual Satoshis, including text, images, videos, audio, etc., thereby creating unique Bitcoin-native digital items called inscriptions (also known as NFTs). 

By numbering Satoshis and attaching content, Ordinals enables Bitcoin to have NFT-like functionality similar to Ethereum.

Now let's dive into the technical details to better understand how Ordinals is implemented. In the allocation of serial numbers, new serial numbers can only be generated in the Coinbase Transaction (the first transaction in each block). By tracing UTXO transfers, we can determine the serial number of the Satoshis in the corresponding Coinbase transaction. 

However, it's important to note that this numbering system is not derived from the Bitcoin blockchain itself but is assigned by an off-chain indexer. Essentially, it's the off-chain community that has established a numbering system for Satoshis on the Bitcoin blockchain.

After the introduction of the Ordinals protocol, many interesting NFTs emerged, such as Oridinal punks and TwelveFold, and as of now, Bitcoin inscriptions have exceeded 54 million. Building upon the Ordinals protocol, the BRC-20 standard was developed, paving the way for the subsequent BRC-20 summer.

The BRC-20 protocol is based on the Ordinals protocol and incorporates functionalities similar to ERC-20 tokens into script data, enabling token deployment, minting, and trading processes.

1. Token Deployment: In the script data, indicate "deploy" and specify the token's name, total supply, and quantity limit per token. Once the indexer identifies the token deployment information, it can start recording the corresponding token's minting and transactions.

2. Token Minting: In the script data, indicate "mint" and specify the name and quantity of the minted tokens. After identification by the indexer, the recipient's token balance is increased in the ledger.

3. Token Transfer: In the script data, indicate "transfer" and specify the token's name and quantity. The indexer decreases the sender's balance by the corresponding token quantity and increases the balance of the recipient's address.

From the technical principles of minting, it can be observed that since the balances of BRC-20 tokens are embedded in the script data of segregated witnesses, they cannot be recognized and recorded by the Bitcoin network. Therefore, an indexer is needed to locally record the BRC-20 ledger. Essentially, Ordinals treats the Bitcoin network as storage space, where on-chain metadata and operation instructions are recorded, while the actual computations and state updates of operations are processed off-chain.

After the birth of the BRC-20 protocol, it ignited the entire inscription market, with BRC-20 occupying the majority of Ordinals asset types. As of January 2024, BRC-20 assets accounted for over 70% of all Ordinals asset types. Furthermore, in terms of market capitalization, BRC-20 tokens currently have a market value of $2.6 billion, with the leading token Ordi valued at $1.1 billion, and Sats at around $1 billion. The emergence of BRC-20 tokens has brought new vitality to the Bitcoin ecosystem.

The popularity of BRC-20 is driven by several factors, which can be summarized into two main aspects:

• Wealth Effect: The success of Web3 protocols and projects is often attributed to the wealth effect, and BRC-20, as a new asset class on the Bitcoin network, naturally possesses an attractive quality that captures the attention and interest of a significant number of users.

• Fair Launch: BRC-20 inscriptions are characterized by fair launches, where no one has a natural advantage. Unlike traditional Web3 projects, fair launches enable individual investors to participate on an equal footing with venture capitalists in token investments. This encourages retail investors to engage with projects that implement a fair launch approach. Even in cases where malicious actors attempt to accumulate large quantities of BRC-20 tokens, there are associated costs involved in the minting process.

Overall, although the Ordinals protocol has faced some controversy within the Bitcoin community since its inception, with concerns about the potential increase in block size due to Bitcoin NFTs and BRC-20, resulting in higher requirements and fewer nodes, thereby reducing decentralization, there are positive perspectives as well. The Ordinals protocol and BRC-20 have showcased a new use case for Bitcoin beyond being digital gold. They have injected new vitality into the ecosystem, attracting developers to refocus on and contribute to the Bitcoin ecosystem by exploring scalability, asset issuance, and infrastructure development.

2）Atomicals & ARC-20

Launched in September 2023 by an anonymous Bitcoin community developer, the Atomicals protocol aims for a more intrinsic asset issuance process. It facilitates asset issuance, minting, and trading without external indexing, offering a native alternative to the Ordinals protocol.

Key differences between Atomicals and Ordinals protocols include:

• Indexing: Atomicals does not assign numbers to Satoshis off-chain, unlike Ordinals. It uses Unspent Transaction Outputs (UXTOs) for indexing.

• Content Attachments or 'Inscriptions': Atomicals inscribes content directly into the UXTOs, differing from Ordinals, which attaches content to the script data of individual Satoshis' segregated witnesses.

A unique feature of Atomicals is its Proof-of-Work (PoW) mechanism, which adjusts the length of prefix characters to regulate mining difficulty. This approach requires CPU-based calculations for matching hash values, promoting a fairer distribution method.

Atomicals generate three asset types: NFTs, ARC-20 Tokens, and Realm Names. Realm Names represent a novel domain name system, using domain names as prefixes instead of suffixes, unlike traditional domain naming.

Focusing on ARC-20, the official token standard of Atomicals differs significantly from BRC-20. ARC-20, unlike BRC-20 (which is based on Ordinals), employs a colored coins mechanism. Token registration information is recorded on UXTOs, and transactions are processed entirely by the Bitcoin network, marking a distinct approach from BRC-20.

In summary, Atomicals relies on Bitcoin for transactions, reducing unnecessary transactions and their impact on network costs. It also forgoes off-chain ledgers for transaction recording, enhancing decentralization. Furthermore, ARC-20 transfers require only a single transaction, boosting transfer performance compared to BRC-20.

However, ARC-20's mining mechanism might indirectly lead to market costs covering miner efforts, differing from the fair inscription model that favors retail investor participation. Additionally, ARC-20 tokens face the challenge of preventing accidental spending by users.

3）Runes & Pipe

The BRC-20 protocol's creation of numerous redundant UTXOs drew criticism from Casey Rodarmor, the Ordinals developer. In response, he proposed the Runes token protocol in September 2023, utilizing the UTXO model. Runes mirrors the ARC-20 standard in using UTXO scripts for token data and BTC network for transactions. Its distinctive feature is the customizable quantity of Runes tokens, in contrast to ARC-20's fixed minimum precision.

Yet, Runes remains conceptual. A month later, Benny, Trac's founder, introduced the Pipe protocol, akin to Runes. As per Benny's statements, Pipe aims to support various asset types, paralleling Ethereum's ERC-721 and ERC1155.

4）BTC Stamps & SRC-20

BTC Stamps, distinct from Ordinals, emerged to address the risk of Ordinals data being pruned or lost during network hard forks, as it's stored in segregated witness script data. Twitter user @mikeinspace developed this protocol, embedding data in BTC's UTXOs for permanent, tamper-proof blockchain storage. This method suits applications requiring immutable records, like legal documents or digital art authentication.

Technically, Stamps embeds base64-encoded image data in transaction outputs, encoding images as base64 strings with the "STAMP:" prefix, broadcasted using the Counterparty protocol. This ensures permanent storage, as full nodes cannot delete data split across multiple transaction outputs.

SRC-20, alongside BTC Stamps, emerged as a counterpart to BRC-20. Unlike BRC-20's segregated witness data storage, SRC-20 embeds data in UTXOs, ensuring permanent blockchain presence.

BTC Stamps supports NFTs and FTs, with SRC-20 being an FT standard. SRC-20's minting cost, initially high at around 80U, decreased to 30U after the SRC-21 upgrade, yet remains costlier than BRC-20's 4-5U mint fee. SRC-20's minting process requires just one transaction, advantageous during network congestion compared to BRC-20's two transactions. SRC-20 supports four BTC address types, while BRC-20 only supports Taproot addresses.

SRC-20's advantages include enhanced security and transaction ease, fitting Bitcoin's security-focused ethos. However, challenges include high transfer costs and file size and type restrictions.

5）ORC-20

ORC-20 evolved to optimize BRC-20's limitations, including its secondary market dependence and fixed token supply. BRC-20's reliance on external indexers also raises double-spending concerns, highlighted by the Unisat incident in April 2023.

ORC-20, compatible with BRC-20, enhances adaptability, scalability, security, and addresses double-spending. It differs in naming, coin supply flexibility, UTXO-based transactions, and ID identification, offering a richer economic model than BRC-20. ORC-20's compatibility with BRC-20 facilitates wrapping BRC-20 tokens as ORC-20.

6）Taproot assets

Launched by Lightning Labs, Taproot assets integrate with the Lightning Network, built on the UTXO model. They allow customizable token quantities and seamless Lightning Network integration, reducing transaction costs.

Drawbacks include metadata storage off-chain, requiring trust in indexers or Universes for token state maintenance, and not facilitating fair launches. All tokens are project-issued and transferred to the Lightning Network, controlled by the project.

Elizabeth Stark, Lightning Labs' co-founder, envisions leading a Bitcoin renaissance through Taproot assets, leveraging the Lightning Network as a multi-asset platform, enabling users to deposit Taproot assets into Lightning channels for simplified transactions.

7）Summary of the Current Situation Analysis

The rise of the Ordinals protocol and the BRC-20 token standard has significantly stirred the Bitcoin community, inciting a surge in tokenization and asset issuance activities. This enthusiasm has led to the creation of various asset issuance protocols like Atomicals, Runes, BTC Stamps, and Taproot assets, along with standards such as ARC-20, SRC-20, and ORC-20.

Beyond these mainstream protocols, there is an array of emerging asset protocols in development. BRC-100, inspired by Ordinals, is a decentralized computing protocol designed to broaden asset use cases and support applications in DeFi and GameFi. BRC-420, akin to ERC-1155, allows for the amalgamation of multiple inscriptions into complex assets, finding utility in gaming and metaverse scenarios. Even meme coin communities are venturing into this space, with the Dogecoin community introducing DRC-20, contributing to a diverse array of possibilities.

The current project landscape reveals a bifurcation in asset issuance protocols: the BRC-20 camp and the UTXO camp. BRC-20 and its evolved counterpart, ORC-20, inscribe data in segregated witness script data and rely on off-chain indexers. The UTXO camp, encompassing ARC-20, SRC-20, Runes, Pipe's targeted assets, and Taproot assets, represents a different approach.

The BRC-20 and ARC-20 camps epitomize two distinct methodologies in Bitcoin ecosystem asset protocols:

• BRC-20: This approach is characterized by its simplicity and minimalism, serving as an effective minimum viable product. It elegantly fulfills basic requirements with innovative, concise code.

• ARC-20: ARC-20 adopts a more reactive, bottom-up development strategy. It evolved through addressing bugs and optimizing solutions as challenges emerged.

BRC-20, benefiting from its first-mover advantage, currently holds a leading position among asset protocols. The future may see standards like SRC-20, ARC-20, or others challenging and potentially surpassing BRC-20's dominance.

In essence, the "inscription" trend has not only introduced a new fair launch model for retail investors but also captivated attention within the Bitcoin ecosystem. Furthermore, as per OKLink's data, the share of mining revenue from transaction fees surpassed 10% since last December, yielding substantial benefits to miners. Driven by the collective interests of the Bitcoin ecosystem, the inscription ecosystem and asset issuance protocols on Bitcoin are set to enter a new phase of exploration and development.

2. On-chain scalability

The rise of asset protocols has brought renewed focus to the Bitcoin ecosystem. Addressing Bitcoin's scalability and transaction time challenges is crucial for long-term development. Currently, two main paths are being explored: on-chain scalability (optimizing Bitcoin Layer 1) and off-chain scalability (Layer 2). This section and the next will discuss developments in both areas.

For on-chain scalability, the goal is to enhance TPS (transactions per second) by optimizing block size and data structure. Examples include BSV and BCH, which, despite their scalability solutions, haven't garnered mainstream BTC community consensus. Among the widely accepted on-chain scalability upgrades are the SegWit and Taproot upgrades.

1) Segwit Upgrade

mplemented in July 2017, the Segregated Witness (SegWit) upgrade was a significant scalability improvement. It aimed to address transaction capacity limitations and high fees.

Before SegWit, Bitcoin's 1MB block limit led to congestion and high fees. SegWit restructured transaction data by separating witness data (signatures and scripts) from transaction data, storing it in a new "witness area." This separation effectively expanded block capacity.

SegWit introduced "weight units" (wu) as a new block size measure. Non-SegWit blocks have 1 million wu, while SegWit blocks can have up to 4 million wu, allowing block sizes to surpass the 1MB limit. Consequently, Bitcoin's throughput increased, accommodating more transactions per block, reducing congestion and fees.

SegWit's significance extends beyond scalability. It laid the groundwork for subsequent developments, including the Taproot upgrade. For instance, operations of the Ordinals protocol in 2023 and BRC-20 tokens occur within the segregated data, making SegWit a foundation for the "Summer of Inscriptions."

2) Taproot Upgrade

Implemented in November 2021, the Taproot upgrade (combining BIP 340, BIP 341, and BIP 342) aimed to improve scalability, privacy, security, and functionality. It introduced new smart contract rules and cryptographic signature schemes.

Taproot's key advantages include:

1. Schnorr Multisignature Aggregation (BIP 340): Schnorr signatures aggregate multiple public keys and signatures into a single key and signature, reducing transaction data size. This aggregation maximizes block space savings, making transactions faster and cheaper.

2. Enhanced Privacy (BIP 341): Introduces P2TR, a new script type combining P2PK and P2SH functionalities, enhancing transaction privacy and authorization mechanisms. P2TR standardizes output appearance, making it harder to identify participants' transaction inputs.

3. Complex Smart Contracts (BIP 342): Tapscript, a new script type, allows for more sophisticated smart contracts, including conditional payments and multi-party consensus, expanding Bitcoin's smart contract capabilities.

In conclusion, SegWit and Taproot have significantly enhanced Bitcoin's scalability, efficiency, privacy, and functionality, forming a solid foundation for future innovation.

3. Off-Chain Scaling Solutions: Layer 2 

Off-chain scaling solutions, known as Layer 2, have become a focus in the Bitcoin community due to the inherent limitations of Bitcoin's blockchain structure and decentralized consensus. Layer 2 protocols or networks built atop the Bitcoin network offer promising alternatives to on-chain scaling.

Layer 2 solutions within Bitcoin are generally categorized based on data availability and consensus mechanisms, encompassing state channels, sidechains, and rollups. State channels facilitate high-frequency transactions off-chain with final outcomes recorded on the blockchain. Rollups and sidechains differ in their security reliance: rollups depend on the main network's consensus, while sidechains operate independently.

Furthermore, protocols like RGB contribute to off-chain scalability enhancement.

1）State Channels

State channels are off-chain communication channels enabling efficient transactions, recorded on the blockchain only upon completion. They offer increased speed, throughput, and reduced costs.

The Lightning Network, launched by Lightning Labs in 2018, is a prime example of state channel implementation on Bitcoin. Proposed in 2015, it's a network of state channels facilitating fast, off-chain transactions. This marked the first state channel project on Bitcoin, laying the groundwork for further developments.

Focusing on the Lightning Network's technical aspects, it's designed for quick transactions between nodes, addressing Bitcoin's scalability issues. It conducts numerous transactions off-chain, recording final transactions on the blockchain only upon channel closure.

Participants open payment channels on the Lightning Network, transferring Bitcoin as collateral. They can perform unlimited off-chain transactions, updating the channel's fund allocation without on-chain recording. Final fund distribution occurs upon channel closure, based on transaction records.

The Lightning Network's closure involves broadcasting the current transaction status to the Bitcoin network, settling funds on-chain. In exceptional closures, such as incorrect status broadcasts, a dispute period allows for contesting and correcting settlements, with dishonest nodes penalized.

Key advantages of the Lightning Network include:

1. Real-time Payments: Transactions occur off-chain, enabling millisecond to second payment speeds.

2. High Scalability: Capable of handling millions to billions of transactions per second, surpassing traditional systems.

3. Low Cost: Minimal fees due to off-chain transactions and settlements.

4. Cross-chain Capabilities: Supports off-chain atomic swaps between blockchains with compatible cryptographic hash functions.

Despite challenges in user education and transaction procedures, the Lightning Network significantly reduces Bitcoin mainnet's transaction load. Its Total Value Locked (TVL) approaches 200 million USD.

State channels' limited scope, mainly transaction-focused, restricts their support for diverse applications, unlike Ethereum's Layer 2 solutions. This has led to efforts in expanding Layer 2 use cases on Bitcoin.

Post-Lightning Network, Elizabeth Stark's initiatives have aimed to evolve it into a multi-asset network, introducing protocols like Taproot Assets. Subsequent scaling solutions have integrated with the Lightning Network, enhancing its adoption and functionality. Thus, the Lightning Network not only serves as a state channel network but also as a base for other Layer 2 solutions on Bitcoin.

2）Sidechains

The concept of sidechains, a pivotal addition to blockchain technology, was first introduced in the 2014 paper "Enabling Blockchain Innovations with Pegged Sidechains" by Adam Back and others. The paper underscored the necessity for Bitcoin's evolution to offer enhanced services, proposing sidechains as a solution for asset transfer across various blockchains.

A sidechain is an autonomous blockchain network running parallel to the primary chain, enabling customization of rules and functionalities. This setup facilitates greater scalability and flexibility. However, the security of a sidechain relies on its unique mechanisms and consensus protocols, rendering its security distinct from the main chain. Sidechains are designed to offer higher autonomy and customization, though they might exhibit lower interoperability with the main chain. A crucial feature of sidechains is the capacity to transfer assets from the main chain for utilization, generally involving cross-chain transfers and asset locking mechanisms.

Rootstock (RSK) and Stacks are prime examples of Bitcoin sidechain solutions, each illustrating the current state of these technologies.

Rootstock (RSK): Rootstock is a sidechain solution that enriches the Bitcoin ecosystem with increased functionality and scalability. It aspires to integrate smart contract capabilities into Bitcoin, crafting a potent platform for decentralized application (DApp) development and advanced smart contract functionalities. RSK presently boasts a Total Value Locked (TVL) of 130 million USD. It connects Bitcoin with the RSK network through sidechain technology, enabling smart contract creation and execution on the RSK network while benefiting from Bitcoin's security and decentralization features.

RSK's primary advantages are its compatibility with Ethereum's language and merged mining:

• Ethereum Language Compatibility: RSK's Virtual Machine, an enhanced version of the Ethereum Virtual Machine (EVM), allows developers to utilize Ethereum's smart contract development tools and languages, fostering a familiar development environment and leveraging Bitcoin's robust security.

• Merged Mining for Miner Participation: RSK introduces a consensus mechanism known as "merged mining," harmonizing with the Bitcoin mining process. This dual mining approach enables Bitcoin miners to secure both Bitcoin and RSK networks simultaneously, enhancing RSK's security and incentivizing miner participation. This system allows miners to contribute hash power to RSK without needing additional resources, potentially boosting profitability.

RSK addresses Bitcoin's Layer 1 challenges like prolonged transaction confirmation times and network congestion by hosting smart contracts on the sidechain. It offers a dynamic platform for developers, fostering innovation and broader adoption in the Bitcoin ecosystem. RSK produces blocks approximately every 30 seconds and achieves a TPS of 10-20, surpassing Bitcoin but still lagging behind Ethereum's Layer 2 solutions in terms of high-concurrency application support.

Stacks: Stacks, initially known as Blockstack, is a Bitcoin-based sidechain equipped with its own consensus mechanism and smart contract functionality. It interacts with the Bitcoin blockchain to achieve enhanced security and decentralization, utilizing the Stacks token (STX) as an incentive. Launched in 2013, Stacks' mainnet went live in October 2018, with a significant update, Stacks 2.0, released in January 2020. This update established a native connection with Bitcoin, enabling developers to create decentralized applications.

Stacks utilizes the Proof-of-Transfer (PoX) consensus mechanism, an adaptation of Proof-of-Burn (PoB). In PoX, miners send Bitcoin transactions to predetermined addresses to participate in consensus and generate blocks on the Stacks blockchain. The PoX mechanism mirrors Bitcoin's Proof-of-Work but utilizes Bitcoin transfers instead of energy-intensive mining. Despite the innovative consensus approach and the introduction of its development language, Clarity, Stacks' ecosystem development has been relatively slow, with a current TVL of around $50 million. It is primarily a sidechain, though the upcoming Nakamoto upgrade, planned for the second quarter, is expected to transition it into a true Layer 2 solution. This upgrade promises increased transaction throughput, faster block confirmation times, and alignment of Stacks' security with Bitcoin's network.

Furthermore, Stacks plans to introduce sBTC, a decentralized, programmable Bitcoin-backed asset facilitating smart contract interactions on the Bitcoin blockchain. This development is geared towards ensuring transaction security backed by Bitcoin's hash power.

In addition to RSK and Stacks, other sidechain solutions like the Liquid Network aim to improve Bitcoin's scalability through diverse consensus mechanisms. These sidechains represent significant strides in the evolution of the Bitcoin ecosystem, offering innovative approaches to scalability and functionality while maintaining a degree of separation from the main Bitcoin blockchain. As these solutions continue to develop, they are poised to play a crucial role in broadening the scope of applications and use cases within the Bitcoin landscape.

3）Rollup

Rollup is a key Layer 2 solution designed to augment throughput by relocating much of the computation and data storage off the main chain to the Rollup layer. Its security is anchored in the main chain's security, with transaction data typically batched and submitted to the main chain for verification. Rollups are often viewed as a more traditional Layer 2 solution, offering a wider application scope than state channels and inheriting Bitcoin's security more effectively than sidechains. However, Rollup development for Bitcoin is still in its nascent stages.

Key examples of Bitcoin Rollup solutions include Merlin Chain, B² Network, and BitVM.

Merlin Chain, developed by Bitmap Tech (creators of Bitmap and BRC-420), employs ZK-Rollup to enhance Bitcoin's scalability. With its testnet recently launched, Merlin Chain facilitates free cross-chain asset transfers between Layer 1 and Layer 2 and supports the Unisat Bitcoin wallet. Future plans include support for Bitcoin-native assets like BRC-20, Bitmap, BRC-420, Atomicals, SRC20, and Pipe.

In its implementation, Merlin Chain uses a sequencer in the Rollup layer to process transactions, creating compressed transaction data, ZK state roots, and proofs. This data and proofs are uploaded to a decentralized Oracle, Taproot, on the Bitcoin network, ensuring security. Nodes in this decentralized Oracle system must stake BTC as a security measure, with challenges allowed based on the compressed data, ZK state roots, and proofs. Successful challenges lead to the confiscation of the penalized node's staked BTC. Currently in its testnet phase, Merlin Chain is expected to launch its mainnet soon, with its performance to be evaluated post-launch.

B² Network represents another Rollup solution, focusing on improving transaction speed and diversifying applications without compromising security. It combines zero-knowledge proofs (ZKP) and fraud proofs with Bitcoin's Taproot, offering enhanced transaction privacy and security. B² Network consists of a Rollup Layer for executing transactions and a Data Availability Layer (DA Layer) for storing Rollup data, verifying proofs, and finalizing confirmations on the Bitcoin network.

BitVM, proposed by Robin Linus, aims to alleviate congestion on the Bitcoin blockchain by offloading complex computations, like Turing-complete smart contracts, off-chain. Utilizing Bitcoin's scripting language, BitVM enables Turing-complete smart contracts through NAND logic gates. It involves two roles: Prover and Verifier. The Prover initiates computations, while the Verifier checks their accuracy. Disputes are resolved using a fraud-proof-based challenge-response protocol, with successful challenges recorded on Bitcoin's blockchain.

Currently, BitVM remains in the whitepaper and development stages, indicating that it might take some time before it becomes operational. Overall, the Bitcoin Rollup space, including Merlin Chain, B² Network, and BitVM, is still evolving. The future performance of these networks, particularly their support for Dapps and transaction speed (TPS), will be crucial to observe once they officially launch.

4）Others

Beyond the state channels, sidechains, and Rollups, other off-chain scaling solutions like client-side validation are making significant strides, with the RGB protocol being a prominent example.

Developed by the LNP/BP Standards Association, RGB is a client-side validation smart contract system built on Bitcoin and the Lightning Network. Proposed by Giacomo Zucco and Peter Todd in 2016, RGB was conceptualized as an advanced iteration of colored coins.

RGB tackles Bitcoin's scalability and transparency challenges by utilizing smart contracts. These contracts enable two users to establish an agreement that automatically executes upon meeting predefined conditions. Integrated with the Lightning Network, RGB maintains anonymity and privacy without needing KYC, as it operates independently of the Bitcoin main chain.

The protocol is designed to revolutionize Bitcoin's capabilities, introducing NFTs, tokens, fungible assets, decentralized exchange (DEX) functionalities, and smart contracts. While Bitcoin Layer 1 remains the settlement layer, Layer 2 solutions like Lightning Network and RGB facilitate rapid, anonymous transactions.

RGB's two principal features are client-side validation and one-time sealing:

• Client-Side Validation: In RGB, data is stored off-chain, with smart contracts overseeing data integrity and executing logic. Bitcoin transactions or Lightning channels act as anchors for validating data, while clients verify the actual data and logic. This approach enables RGB to build a smart contract system atop Bitcoin and Lightning without altering their underlying protocols.

• One-Time Sealing: RGB tokens are linked to specific UTXOs. Spending a UTXO involves a Bitcoin transaction with a message commitment that indicates RGB inputs, destination UTXO, asset ID, and amount. Although RGB token transfers require a Bitcoin transaction, the output UTXO for RGB transfer can differ from the Bitcoin output UTXO. This process allows tokens to be sent to unrelated UTXOs, obscuring their trail on the Bitcoin network and enhancing user privacy.

Each contract state in RGB is associated with a unique UTXO and governed by Bitcoin scripts for access and usage. This design guarantees the distinctiveness of contract states, with each UTXO corresponding to only one contract state, and they remain separate in transaction history. The validity and singularity of contract states can be verified through Bitcoin transactions and related scripts.

RGB utilizes Bitcoin's script functionality to create a secure model where ownership and access rights are defined and executed by scripts. This allows RGB to construct a smart contract system founded on Bitcoin's security while ensuring the distinctiveness and safety of contract states.

RGB smart contracts thus offer a layered, scalable, private, and secure solution, representing an innovative venture within the Bitcoin ecosystem. RGB aspires to support the development of more varied and complex applications and functionalities, upholding Bitcoin's core attributes of security and decentralization.

5）Summary of the Current Situation

Since Bitcoin's inception, the pursuit of scaling and the development of Layer 2 solutions have been a focus for many developers, particularly with the recent surge in NFT popularity drawing renewed attention to Bitcoin's Layer 2 space.

State Channels: Among these, the Lightning Network stands as one of the earliest and most prominent Layer 2 solutions. It alleviates the load and latency on the Bitcoin network by creating bidirectional payment channels. The Lightning Network has seen widespread adoption and development, marked by an increasing number of nodes and channel capacity. It offers rapid transaction speeds and the capability for low-cost micropayments. In terms of Total Value Locked (TVL), the Lightning Network leads with nearly $200 million, significantly outperforming other Layer 2 solutions.

Sidechains: In this domain, projects like Rootstock (RSK) and Stacks are innovating to enhance Bitcoin's scalability. RSK encourages Bitcoin miners' participation in its network through merged mining, offering a platform for decentralized application development. Stacks introduces additional functionality and scalability via proof-of-transfer consensus and smart contracts. Despite its potential, Stacks faces challenges in ecosystem development and developer engagement. The anticipated Nakamoto upgrade could transform Stacks into a more integral Bitcoin Layer 2 solution.

Layer 2 Rollup: Progress in Rollup technology has been slower. The concept revolves around offloading computation off-chain and proving the correctness of smart contract execution on-chain. Projects like Merlin Chain and B² Network have entered the testnet phase, but their performance remains to be fully assessed. BitVM, still in the whitepaper stage, suggests a longer developmental journey ahead.

Scaling Protocols: RGB represents a client-side validation model for enabling smart contracts. Storing data off-chain, RGB utilizes smart contracts to validate data integrity and execute logic, with Bitcoin transactions or Lightning channels as anchors for validation, and clients verifying the data and logic.

In summary, the Bitcoin community is actively exploring various avenues such as state channels, sidechains, scaling protocols, and Layer 2 Rollup. These developments are expanding Bitcoin's functionality and scalability, injecting new possibilities into the Bitcoin ecosystem and the broader cryptocurrency industry. Each approach offers unique benefits and faces distinct challenges, collectively pushing the boundaries of what's achievable within the Bitcoin framework.

4. Infrastructure

The expansion of the Bitcoin ecosystem isn't just limited to asset issuance protocols and scaling solutions. There's a growing emphasis on infrastructure within the Web3 space. This includes the development of wallets supporting inscriptions, decentralized indexers, cross-chain bridges, and launchpads, many of which are still in early development stages. Here, we'll highlight some noteworthy projects across different infrastructure categories.

1）Wallets

Wallets have been instrumental in the rise of the BRC-20 protocol. The market has seen an increase in wallets that support inscriptions, such as Unisat, Xverse, and those recently introduced by OKX and Binance. We'll focus on Unisat to provide a deeper understanding of inscriptions wallets.

Unisat Wallet is an open-source wallet and indexer pivotal for storing and trading Ordinals NFTs and BRC-20 tokens. When Ordinals NFTs first emerged, they were met with skepticism and questions about the necessity of an ecosystem beyond Bitcoin's primary function as digital gold. Initially, Ordinals NFTs transactions were largely off-chain, raising decentralization and trust concerns.

The introduction of the BRC-20 token standard by Domo in March 2023 marked a turning point. Despite initial market skepticism, Unisat chose to concentrate on the Ordinals and BRC-20 tracks, becoming one of the first wallets to support both. It stands as the official wallet for the Ordinal protocol, facilitating relatively seamless trading of Ordinals NFTs and BRC-20 tokens.

Unisat gained significant traction with the popularity of the first inscribed Ordi, drawing a large user base into the BTC ecosystem. As a prominent supporter of the BRC-20 ecosystem, Unisat's main features include:

1. Storing and trading Ordinal NFTs; storing, minting, and transferring BRC-20 tokens.

2. Providing open-source indexing code, enabling more exchanges and projects to participate in the BRC-20 indexing track.

3. Offering instant registration without the necessity of running a full node.

Moreover, Unisat is rapidly broadening its asset support within the Bitcoin asset protocol. Beyond BRC-20 tokens, it swiftly began supporting ARC-20 tokens from the Atomicals protocol, indicating its ambition to be a comprehensive trading platform for BTC ecosystem asset protocols.

(Source: Unisat's official website supporting asset types from the Ordinals and Atomocials protocols)

As one of the early wallets and indexers to back BRC-20, Unisat has played a crucial role in lowering the barrier to entry for users interested in inscriptions, thereby attracting more participants to the BTC ecosystem. The synergy between Unisat's development and the growth of BRC-20 has been mutually reinforcing, contributing significantly to their joint success.

2）Decentralized Indexers

The reliance on centralized off-chain indexers for BRC-20 tokens presents risks, as an attack on an indexer could lead to account loss, posing a challenge to asset security. To address this, projects like Trac Core are focusing on decentralized indexing solutions. Developed by Benny, the founder of the asset issuance protocol Pipe, Trac Core aims to solve indexing and oracle issues, providing services like filtering and organizing Bitcoin data.

Trac Core is designed to decentralize indexing, reducing the centralization risks associated with current BRC-20 token indexers. It also plans to function as a Bitcoin oracle, fetching external off-chain data to provide comprehensive services to the Bitcoin ecosystem.

Additionally, Benny has developed the Tap Protocol, intending to enrich the Ordinals ecosystem with DeFi functionalities like lending, staking, and leasing, potentially creating "OrdFi" for Ordinals assets. All these projects in the Trac ecosystem, including Trac Core, Tap Protocol, and Pipe, are in their nascent stages and require ongoing observation.

Projects like Unisat and Atomic.finance are also exploring decentralized indexing, aiming to provide more secure and robust services for BRC-20 tokens in the future.

3）Cross-Chain Bridge

Cross-chain asset interoperability is a critical aspect of Bitcoin's infrastructure. Projects like Mubi and Polyhedra are focusing on this area. Polyhedra Network, in particular, provides a cross-chain interoperability infrastructure for secure, efficient, and verifiable data access and sharing between multiple blockchain networks.

In December 2023, Polyhedra Network introduced its zkBridge, supporting Bitcoin's message transmission protocol. This allows Bitcoin to interact with other Layer 1/Layer 2 blockchains, boosting interoperability. zkBridge enables the verification of Bitcoin consensus and transactions on the receiving chain, safeguarding the security of consensus proofs and transaction Merkle proofs.

When Bitcoin functions as the message-receiving chain, zkBridge uses a PoS-like mechanism, where validators from the sending chain stake tokens to write data on the Bitcoin network. Validators use the MPC protocol, with a punishment contract on Ethereum to penalize malicious activity and compensate user losses.

4）Staking Protocol

The exploration of utilizing idle Bitcoin for additional returns and empowerment is a growing interest among Bitcoin developers. Projects like Babylon and Stroom are attempting to create Bitcoin staking protocols. Babylon, initiated by researchers and engineers from Stanford University, aims to extend Bitcoin's security to protect the decentralized world.

Babylon's approach differs from other projects; it doesn't build new layers or ecosystems on Bitcoin. Instead, it extends Bitcoin's security to other blockchains, including Cosmos, BSC, Polkadot, and Polygon, enabling them to share security. Its Bitcoin staking protocol allows holders to stake BTC on PoS chains and earn rewards, enhancing the security of PoS chains and applications without the need for bridging, wrapping, or custodying Bitcoin.

Moreover, Babylon uses a Bitcoin timestamping protocol, placing timestamps of events from other blockchains onto Bitcoin, facilitating fast staking and unbonding, reducing security costs, and improving cross-chain security.

In summary, the ongoing development in infrastructure, including decentralized indexers, cross-chain bridges, and staking protocols, is diversifying Bitcoin's use cases. These advancements are transforming Bitcoin from a static asset to an active contributor to network security, potentially leading to broader adoption and a more robust interconnected blockchain network.

IV. Challenges and Limitations in the Development of the Bitcoin Ecosystem

1）The issue of decentralized indexing needs to be addressed in BRC-20 Sphere
The rise of BRC-20 has significantly increased traffic and attention in the Bitcoin ecosystem. This surge has led to the development of various asset protocols like ARC-20, Trac, SRC-20, ORC-20, and Taproot Assets, each addressing BRC-20's issues from different angles. Despite the emergence of these new standards, BRC-20 maintains a notable lead. According to CoinGecko, the market capitalization of BRC-20 tokens has surpassed $2.3 billion, close to RWA's and higher than Perpetuals'.
A primary challenge for BRC-20 is decentralized indexing. Since the Bitcoin network itself cannot recognize and record BRC-20 tokens, reliance on third-party indexers for the ledger is necessary. However, these indexers, like Unisat or OKX, currently operate on centralized indexing methods, posing risks of discrepancies and potential irreversible damage from attacks.
Efforts towards decentralized indexing are underway, with projects like Trac Core and Best In Slots experimenting in this direction. However, a mature, feasible, and widely accepted solution is yet to be developed, marking an ongoing area of exploration.

2）Current scalability is still in the very early stages and cannot support large-scale applications
Originally designed for peer-to-peer payments, Bitcoin faces technological limitations impacting transaction throughput, block confirmation times, and energy consumption. To build more complex applications, improving TPS and supporting smart contracts within the Bitcoin ecosystem are essential.
Current scalability solutions like the Lightning Network, RGB, Rootstock, Stacks, and BitVM are addressing these issues, but their scale and adoption are limited. For instance, the Lightning Network, with the highest TVL among scalability solutions, mainly supports transactional activities and cannot cater to a broad range of use cases. Other protocols and sidechains, while in their infancy, lag behind Ethereum's Layer 2 solutions in scalability and smart contract capabilities, hindering their ability to support large-scale applications.

3）The Bitcoin ecosystem needs to find its own native use cases, as directly copying existing applications is challenging to make huge progress
Post-Ethereum's success, there's been anticipation for breakthrough applications on the Bitcoin network. However, replicating Ethereum's applications on Bitcoin is challenging due to its lack of Turing completeness. Instead, opportunities may lie in leveraging Bitcoin's unique characteristics.
Focusing on Bitcoin's core attributes—asset security, asset issuance, and asset returns—offers potential exploration avenues:
Asset Security: Emphasizing user ownership is crucial. For example, unlike Ethereum's staking model, Bitcoin users often prioritize retaining ownership. Solutions that allow income generation without ownership transfer could be a new direction. Additionally, ensuring secure cross-chain asset transfers and scalability protocols is vital for BTC holders.
Asset Issuance: The emergence of NFTs in the Bitcoin ecosystem underscores a preference for fair launches, contrasting traditional venture capital methods. Breakthroughs in asset issuance may require incentives beyond fairness to attract broader public participation.
Asset Returns: Exploring ways for users to generate income from BTC and BRC-20 tokens through lending, collateralization, derivatives, and liquidity mining is worth pursuing.
The Bitcoin ecosystem faces the challenge of carving out its path, leveraging its strong asset properties, rather than merely emulating existing models. This approach could lead to innovative applications that align with Bitcoin's inherent strengths and market position.

V. Conclusion

• Bitcoin has been in existence for 15 years since its inception in 2008 when Satoshi Nakamoto proposed the whitepaper "Bitcoin: A Peer-to-Peer Electronic Cash System," laying the foundation for Bitcoin's development. In 2009, the Bitcoin network was officially launched, becoming the world's first cryptocurrency and leading the wave of cryptocurrency development as the first decentralized digital currency.
  In terms of impact, Bitcoin has not only changed the landscape of the financial industry but also had extensive and profound effects on the entire world:
  Firstly, it provides a convenient way for cross-border transfers and payments without the need for intervention from third-party institutions. This offers opportunities for financial inclusivity on a global scale and improves the accessibility of financial services.
  Secondly, Bitcoin's decentralized nature allows individuals to have complete control over their funds, enhancing personal financial security and privacy protection.
  Additionally, Bitcoin has sparked the development of blockchain technology, paving the way for decentralized applications and innovative digital assets.
  In terms of financial inclusivity, some countries have started accepting and using cryptocurrencies as legal tender. El Salvador became the first country in the world to adopt Bitcoin as legal tender in 2021, and the Central African Republic followed suit in 2022. Furthermore, other countries are exploring similar initiatives to consider incorporating cryptocurrencies into their legal currency systems. In regions with inadequate financial infrastructure or limited access to financial services, Bitcoin provides a fast and low-cost means of cross-border payments and transfers. It offers financial inclusivity opportunities for those without bank accounts or unable to access traditional financial services. Moreover, the approval of the Bitcoin spot exchange-traded fund (ETF) in the United States on January 10, 2024, represents a significant milestone for Bitcoin in the traditional financial world.
  In terms of the development of blockchain technology, after Bitcoin, there have been more blockchain technologies supporting smart contracts, such as Ethereum, Solana, and Polygon. This expansion has extended the use of blockchain beyond value storage and transactions and into various aspects like DeFi, NFTs, Gamefi, Socialfi, and DePIN. It has also attracted a more diverse range of users and builders.
  With the development of the blockchain industry, more attention has been focused on Ethereum-like chains that support smart contracts, while Bitcoin has mostly been seen as "digital gold." However, the explosion of BRC-20 scripts has brought people's attention back to Bitcoin, prompting them to consider whether the Bitcoin ecosystem can continue to give rise to different application scenarios. This has led to the creation of many new asset protocols, including BRC-20, ARC-20, SRC-20, ORC-20, and some interesting explorations such as BRC420 and Bitmap. The hope is to better facilitate asset issuance from different perspectives. Unfortunately, after BRC-20, other asset protocols and projects have not been able to generate the same level of excitement.
  For builders, the BTC ecosystem is still in its very early stages. The majority of project teams consist of independent developers and small teams. There are many opportunities and spaces for exploration for teams that truly want to make a difference and innovate within the BTC ecosystem.
  Regarding scalability, Bitcoin has undergone multiple technological upgrades and improvements over the past 15 years, including reducing transaction confirmation times, discussing scalability solutions, and enhancing privacy protection. Current explorations in the scalability direction include state channels like the Lightning Network, scalability protocol RGB, sidechains like Rootstock and Stacks, and Layer2 Rollup BitVM. However, the overall journey toward supporting diverse applications is still in the very early stages. There is still much exploration and experimentation to be done in terms of scaling Bitcoin, which is not Turing complete.
  In conclusion, the explosion of BRC-20 scripts has redirected the attention of users and builders back to the Bitcoin ecosystem. Whether it is the desire for fair asset launches or the belief in Bitcoin as the most orthodox and decentralized public chain, more and more developers are starting to build within the Bitcoin ecosystem. For the future ecological development of Bitcoin, it needs to diverge from the path taken by Ethereum and focus on the asset attributes of Bitcoin to discover native application scenarios. This may lead to a revitalization of the Bitcoin ecosystem.
  Lastly, I would like to express sincere thanks to partners such as Constance, Joven, Lorenzo, Rex, KC, Kevin, Justin, Howe, Wingo, and Steven for their assistance, as well as everyone who has been generous in sharing during the exchange process. I genuinely hope that all the builders in this track will continue to thrive!
  
  References
  

• https://cointelegraph.com/learn/what-is-the-src-20-Token-standard

• https://docs.ordinals.com/

• https://github.com/mikeinspace/stamps/blob/main/BitcoinStamps.md

• https://www.investing.com/news/Cryptocurrency-news/unisat-halts-marketplace-following-doublespend-attacks-3062947

• https://medium.com/fourpillars/orc-20-src-20-the-experiment-continues-f9dba00cc6b6

• https://docs.bsquared.network/architecture

• https://docs.lightning.engineering/

• https://docs.rgb.info/

• https://babylonchain.io/learn

• https://twitter.com/hiCaptainZ/status/1743871785987355114?t=R6EUNTtC7V6pLAQLieezAA&s=19

• https://followin.io/zh-Hans/feed/3519779
  https://www.panewslab.com/zh/articledetails/l62qew50.html
  https://twitter.com/weihaoming/status/1737399312940986518

• https://captainz.xlog.app/jian-dan-ming-wen-dai-bi-de-ben-zhi-jiu-shi-SFTmd#btc-%E9%93%BE%E5%A6%82%E4%BD%95%E5%8F%91%E8%A1%8C-nft
  https://medium.com/@miixcapital/btc%E8%B5%9B%E9%81%93%E7%A0%94%E7%A9%B6%E6%8A%A5%E5%91%8A-8953f58aac4c

• https://www.odaily.news/post/5192192

• https://share.foresight-news.com/article/detail/49355

• https://share.foresight-news.com/article/detail/48677

• https://twitter.com/0xshimmer/status/1726907464736755929

• https://twitter.com/blockpunk2077/status/1719321676989771801

• https://twitter.com/blockpunk2077/status/1725513817982136617

• https://mp.weixin.qq.com/s/h7WdMaVHYka_A3nDvB0q1Q

• https://medium.com/trac-systems/trac-ecosystem-ff99787585d4

• https://twitter.com/weihaoming/status/1737399354330386648

• https://m.jinse.cn/blockchain/3665815.html

• https://foresightnews.pro/article/detail/40875

I. Introduction: What Is Web3 Social?

The surge of friend.tech last year has reignited interest in the Web3 social sphere, particularly due to its unique approach to pricing Key Opinion Leader (KOL) influence. This has led to a significant increase in Fear of Missing Out (FOMO) among enthusiasts. Following this, Bodhi's debut also garnered considerable attention by valuing content and facilitating the return of data value. In the domain of social networking, Web3 social represents a phase of novel transformations and explorations. As blockchain technology advances, it is reshaping our understanding of social interactions, introducing a range of groundbreaking solutions. This is evident in both SocialFi (Social Finance) and Decentralized Social (Desoc), where Web3 social actively explores future possibilities for social networks.

Looking back at the evolution of social products, Web2 social platforms like Facebook, X (formerly Twitter), Instagram, WeChat, and others have offered unparalleled ease for users to share, interact, and communicate. Yet, these platforms have inherent challenges. Most Web2 social networks centralize control over user data, often lacking transparency and privacy protection. Additionally, they are typically governed by a handful of centralized entities, leading to controversial debates around creator incentives.

In contrast, Web3 social is redefining social networks in a fundamentally new way. It prioritizes decentralization, user data privacy and control, and leverages the incentive mechanisms inherent in cryptocurrency economics. This has led to the emergence of innovative protocols and products such as Lens, CyberConnect, Farcaster, Phaver, Debox, friend.tech, and more. Concepts like SocialFi blend finance with social networking, transforming the landscape of social interactions. Meanwhile, Desoc strives to build a decentralized social ecosystem, aiming to resolve many of the issues prevalent in Web2 social networks.

Although there has been a longstanding hope that social channels would become the next Mass Adoption, they have yet to achieve widespread application. This raises the question: What does the future hold for Web3 social? Is the growing influx of social products a temporary trend or a step towards mass adoption? This research report delves deep into the fundamental concepts and solutions of Web3 social, examining its current state, benefits, and challenges. It revisits the essence of social interaction, scrutinizes the Web3 social domain, highlights its strengths and challenges, and investigates its potential in redefining social networks.

II. Why Do We Need Web3 Social?

1、The Essence of Social Interaction Remains Unchanged Throughout History

Tom Standage's "A Brief History of Social Media" asserts that the concept of social media, contrary to popular belief, predates the internet era. Human beings have always been involved in various forms of socialization and information sharing. From the days of ancient letters and coffeehouses to the modern digital social networks, the core of social media remains constant; only its mediums and technologies have evolved. Social media is an inherent human characteristic, a manifestation of our perpetual quest for connection and communication.

The progress of technology across different eras has significantly shaped the development of social media, acting as a key catalyst for its transformation.

1. Ancient and Traditional Media Era: Initially, letters and postal services were the primary communication methods. The advent of printing technology introduced books and newspapers, extending the reach of information, albeit within certain geographical and temporal limits.

2. Telegraph and Telephone Era: In the late 19th and early 20th centuries, the telegraph revolutionized the speed of information dissemination. The telephone further changed long-distance communication dynamics, facilitating quicker exchanges of information.

3. Radio and Television Era: These media in the 20th century drastically altered mass communication, expanding the reach of information and influencing cultural, political, and societal perceptions.

4. Internet and Web 1.0 Era: From the 1990s to the early 2000s, the internet ushered in a new age of information distribution, marked by broader and more immediate access. The Web 1.0 era was characterized by static web pages that primarily provided content in a one-way flow from creators to users, offering limited user interaction.

5. Web 2.0 and the Emergence of Social Media: Since the mid-2000s, the advent of Web 2.0 brought forth interactive social media platforms like Facebook, X (formerly Twitter), and YouTube. These platforms emphasized user-generated content and interactive functionalities, becoming essential tools for everyday communication, content sharing, and social engagement.

6. Web 3.0 and Decentralized Social: The latest development, fueled by blockchain and cryptocurrency technologies, has given rise to Web3.0 social platforms. These platforms focus on decentralization, privacy, and user control, aiming to overcome the limitations of Web2.0 social networks, such as concerns over data privacy, algorithmic biases, and content authenticity, to provide a more secure and transparent social experience.

Throughout history, the fundamental human need for social interaction has remained constant, despite the changing mediums of communication, from direct conversations to digital platforms. This need encompasses four primary aspects:

1. Building Connections and Belonging: Social interaction fosters a sense of belonging, meeting emotional and psychological needs, and enabling the formation of close relationships and support networks.

2. Learning and Exchanging Information: It facilitates the sharing of experiences, knowledge, and information, promoting learning, development, and personal growth.

3. Collaboration and Mutual Aid: Social interaction is crucial for collaboration, allowing individuals to work together, solve problems, and achieve shared objectives.

4. Social Identity and Self-Expression: It provides a platform for individuals to express themselves, build their identities, and gain recognition and validation from their peers.

2、How Web2 Social Catered to the Demand for "Fast, Good, and Economical"

The flourishing of Web2 social media began in the mid-2000s, with Facebook leading the way. It offered a platform for users to share information, photos, videos, status updates, and forge social networks. Following its success, other platforms like X, YouTube, LinkedIn, and others emerged, each with its unique features and functions.

For instance, X, known for its real-time messaging and interactive approach, became a crucial tool for information dissemination and discussion, with its 140-character limit facilitating rapid information spread. YouTube revolutionized the realm of video sharing, becoming a prominent platform for content creation and distribution. LinkedIn specialized in professional networking, providing opportunities for users to build professional relationships, share work experiences, and expand connections. Instagram, with its robust image-sharing capabilities, drew a massive user base, becoming a leading platform for photo and video sharing.

During this era, the focus shifted to user engagement, interaction, and content creation. Websites evolved from static information repositories to dynamic, interactive social platforms where users could create and share diverse content, from text and images to videos, blogs, and profiles. The rise of mobile internet and smartphones further enabled constant access to social media, enhancing convenience and encouraging frequent social engagement.

As user numbers grew, social media increasingly became a primary avenue for commercial activities and advertising. Businesses and brands utilized these platforms for user engagement and product promotion, contributing to the growing market value of social projects. Meta (formerly Facebook), for example, experienced a significant increase in market value after its IPO in 2012, surpassing $1 trillion in 2021.

Reflecting on the development of Web2 social, it's clear that while the essence of social needs remained consistent, the platforms provided faster, more convenient, and cost-effective services. Facebook, for instance, enabled quicker connections with friends and information sharing. X offered speedy access to trending news and interactive discussions, a step up from newspapers and TV. LinkedIn transformed workplace socialization, shifting it from offline interactions to quick online networking. In essence, Web2 social products successfully addressed the "fast, good, and economical" aspects of socialization, meeting the evolving demands of users in an increasingly digital world.

3、Challenges in Traditional Social Media: The Predicaments of Web2 Social

Web2 social media, despite its advancements and widespread adoption, has introduced several significant challenges, particularly in the realms of data ownership and centralization:

1）Data Ownership Issues in Web2 Social Platforms:

• Privacy Breaches: A major concern in Web2 social media is the extensive collection and utilization of user data, which poses risks of personal privacy breaches. Platforms might misuse this data or sell it to third parties, leading to privacy violations and potential data abuse.

• Value Exploitation: While user data enables social platforms to conduct targeted marketing and advertisements, the users often do not benefit from the revenue generated. This situation leads to a scenario where users' data contributions are exploited for the platforms' financial gain, without appropriate reciprocation to the users themselves.

• Data Portability Limitations: In the Web2 ecosystem, user data is owned by the platform, not the users. This means that when registering on different social media platforms, users often have to start from scratch, as their social identity and information cannot be transferred across different platforms. This lack of data portability results in isolated "data islands" for each platform.

Creators on these platforms often find themselves in a predicament. They generate significant value through their content but lack ownership and control over their content data. Deleting personal data on platforms like X or YouTube can lead to the loss of all accumulated content, highlighting the lack of control creators have over their intellectual property.

2）Centralization and its Implications:

• Censorship Vulnerability: The centralized storage of information in Web2 social media leads to limitations on freedom of expression. Political, cultural, and other influences can dictate content moderation, often resulting in censorship. This issue is prevalent in platforms like X, Facebook, TikTok, and WeChat, where sudden changes in platform rules, account suspensions, and other restrictions confine users within imposed limitations.

• Challenges in Decentralized Alternatives: Although applications like Mastodon attempt to address these issues through decentralization, there are still unavoidable problems. While they may offer a degree of overall decentralization, specific server instances can subject users to risks such as provider authoritarianism, abandonment, or restrictions on other users, indicating that true decentralization is challenging to achieve.

These challenges highlight the underlying predicaments within the traditional Web2 social industry. Users and creators are often at a disadvantage due to the centralized control of data and the platforms' overarching authority, leading to calls for more decentralized, user-centric solutions in the social media landscape.

III. Web3 Social Industry Product Analysis

In response to the array of challenges presented by Web2 social media, the Web3 social industry has embarked on a journey of innovation and exploration, encompassing everything from foundational protocols to application layers. This burgeoning sector is characterized by its diverse range of projects, each designed to address specific pain points associated with Web2 social interactions.

The Web3 social landscape can be segmented into four distinct layers, each playing a crucial role in the ecosystem:

1. Application Layer: This layer is focused on addressing specific needs in various segmented scenarios. It involves the development of user-facing applications that provide direct social media functionalities. These applications are tailored to meet the unique demands of users in the Web3 space, offering a more decentralized, user-centric experience.

2. Protocol Layer: The protocol layer serves as the backbone for these applications, offering public development components that assist teams in building their products. It acts as the foundational framework upon which Web3 social applications are constructed, providing essential building blocks for decentralized social media platforms.

3. Blockchain Layer: The blockchain layer underpins the entire Web3 social infrastructure. This layer is particularly important for social-specific chains that customize Layer 1 (L1) protocols for social applications. Unlike financial Decentralized Applications (DApps), social applications demand higher throughput (TPS), enhanced storage capabilities, and more sophisticated indexing features to accommodate the greater volume of information exchange inherent in social interactions.

4. Storage Layer: This layer is crucial for housing social-related data. It is where the vast amounts of data generated by social interactions are securely stored. The storage layer ensures that this data remains decentralized, tamper-proof, and accessible, addressing the privacy and ownership issues prevalent in Web2 social platforms.

As the Web3 social track is currently in the phase of value verification, this study aims to conduct a thorough analysis of various Web3 social projects, categorizing them based on their approach to fulfilling different social needs. This comprehensive analysis seeks to understand the development status of these projects and how they collectively contribute to reshaping the landscape of social media in the era of Web3.

1、Data Value Benefiting Users in Web3 Social Products

In traditional Web2 social products, user data is typically treated as an asset of the platform, not of the user. This leads to issues like privacy breaches and value exploitation, where users contribute data but don't receive adequate compensation. Essentially, users' data is freely used and often exploited by platforms for targeted advertising and marketing, without benefiting the users.

Web3 social products are attempting to change this dynamic by implementing token incentives, data NFTs, and other strategies to ensure users benefit from their data contributions.

1）Lens Protocol

The Lens Protocol, developed by the Aave team in February 2022 on the Polygon chain, represents a significant shift in how social graph data is managed and utilized. This decentralized social graph protocol uniquely stores all aspects of users' social interactions — including profiles, content, sharing, comments, and social relationships — as Non-Fungible Tokens (NFTs).

As a standout in the Web3 social space, Lens boasts over 200 applications built on its protocol, with a total ecosystem user count of 370,000. Its peak monthly active users surpassed 60,000 in March, and it currently maintains around 3,000 monthly active users.

Lens Protocol is distinguished by three main features:

1. Tradable Data Value: In traditional social media, user-generated content and social connections hold significant value, but this is rarely passed back to the users. Lens Protocol addresses this imbalance by tokenizing user data. Each user account is transformed into an NFT, which can be traded in the market. However, the real-world attachment of users to their social accounts means that such transactions are not common, leading to questions about the actual demand for trading social accounts.

2. Data Circulation: Lens Protocol facilitates the construction of novel social products by providing modular components for social DApp developers. It allows personal profiles and all content data, represented as NFTs and controlled via DID, to be synchronized across applications within the Lens ecosystem. This ensures seamless data circulation, exemplified by the ability of Lens versions of platforms like Twitter and YouTube to interchange data through NFTs.

3. High Decentralization: In the Lens ecosystem, everything from content and social interactions to user identity is stored on-chain. This high degree of decentralization makes Lens a distinctly crypto-native social protocol.

Several innovative products have emerged based on the Lens Protocol, including Lenster and Phaver. Lenster mirrors functionalities similar to X (formerly Twitter), providing an experience akin to a decentralized version of the platform. 

Phaver, on the other hand, introduces a unique "reward through likes" model. In this system, users stake tokens on high-quality content, with rewards shared between stakers and content creators. This model incentivizes the discovery and support of quality content early on, addressing the creator incentive problem by tying content value to user engagement and approval.

2）friend.tech

friend.tech, a notable SocialFi project, has recently experienced a surge in popularity, evidenced by its impressive trading volume of 12.48 million and a record single-day volume of 530,000 on September 13th.

At its core, friend.tech innovatively tokenizes individual influence to cultivate a fan-driven economy:

• Fan Perspective: Followers of Key Opinion Leaders (KOLs) can purchase a KOL's "key" on friend.tech, granting them exclusive access to the KOL's private chat group and interactions. As the demand for a KOL's token increases, so does the value of the key, enabling fans to potentially profit from its resale.

• KOL Perspective: Each transaction made by followers incurs a 10% fee, with half of this fee going directly to the KOL. This system incentivizes KOLs financially, as their expanding influence and follower base translate into higher transaction fees and increased revenue.

Essentially, friend.tech has developed a model where the influence value of KOLs is monetized. As KOLs gain more reputation and their shares are bought by more users, their value appreciates, leading to higher buying and selling prices.

The rise in popularity of friend.tech, especially during August and September, has sparked widespread discussions in the global crypto community. This interest can be attributed to several key factors:

1. Innovative Model: friend.tech's model of buying KOL keys with tokens to create a fan-driven economy is groundbreaking. Although it bears some resemblance to a Ponzi scheme, the cycle of KOL endorsements and fan purchases creates a positive feedback loop. This synergy between KOLs and fans fosters a mutually beneficial community, propelling the project's growth.

2. Capital Injection: The project received a significant boost when it announced a $50 million seed round funding from Paradigm on August 19th. Following this announcement, the trading volume surged, fueled by the backing of a top-tier venture capital firm.

3. PWA Implementation: Opting for a Progressive Web App (PWA) over a traditional mobile app, friend.tech provides an app-like experience through web browsers on mobile devices. This strategy circumvents the need for app store downloads and associated fees, particularly beneficial in simpler application scenarios.

Additionally, friend.tech's use of invitation code-driven marketing and user-friendly Web2 login methods are strategic moves typically employed in project bootstrapping, contributing to the project's momentum.

Despite experiencing a decline after reaching its peak, the innovative approach of friend.tech in creating a fan-driven economy and sharing value with users has been a source of inspiration for many professionals and project teams within the industry.

3）Bodhi

Bodhi, a recent addition to the SocialFi sphere, has swiftly captured attention, particularly within the Chinese-speaking community. It has demonstrated remarkable growth in trading volume and user engagement. Remarkably, within just two days of its launch, Bodhi's Total Value Locked (TVL) escalated to 165 ETH. Adding to its achievements, the project's foundational article, doubling as its whitepaper, reached a peak trading value of over $4000 USD and continues to maintain a value above $2000 USD.

Bodhi's primary focus is on the assetization of content, which parallels friend.tech's approach of tokenizing the reputations of Key Opinion Leaders (KOLs). However, Bodhi differentiates itself by trading individual content pieces created by a user, facilitating more targeted transactions and potentially higher transaction volumes. Additionally, Bodhi employs decentralized storage solutions by storing its content on Arweave.

Highlighted in Bodhi's whitepaper is the challenge surrounding content incentivization within the Web3 framework, particularly concerning the nature of public goods. When content is stored on centralized servers, it's at risk of being lost or removed. On the other hand, storing content on a blockchain and regulating access through content payments introduces the need for encryption and decryption processes. This presents a dilemma, as most decryption processes are still handled by centralized servers, undermining the decentralized ethos. If decryption were to be managed by blockchain mechanisms, the content effectively becomes publicly accessible.

On closer inspection, content stored on-chain exhibits two fundamental characteristics of a public good: universal accessibility and non-rivalrous consumption, meaning one person's access doesn't diminish another's. These aspects pose a significant challenge for content monetization and exclusivity within the blockchain domain.

Despite its initial success, Bodhi has faced challenges in maintaining momentum, primarily due to issues with its economic model. Nonetheless, its foray into content assetization and the exploration of novel incentivization methods in the Web3 environment mark significant advancements in the social media landscape, contributing new perspectives and possibilities to the domain.

4）Current Analysis Summary:

The current landscape of Web3 social products, encompassing both protocol layers like Lens Protocol and application domains such as friend.tech and Bodhi, is actively addressing the need for fair user data value distribution from various angles.

Lens Protocol: This protocol adopts an NFT-based model for users' social graph data. It allows personal profiles and content to be controlled via Decentralized Identifiers (DIDs) and traded freely in the market. This approach not only facilitates the creation of a market for high-value accounts but also enhances data liquidity. Lens Protocol's modular components aid social DApp developers in synchronizing and circulating user data across different applications, promoting interoperability within the Web3 social ecosystem.

Friend.tech: In contrast, friend.tech focuses on tokenizing the influence of Key Opinion Leaders (KOLs). It enables fans to access private chat groups and conversations by purchasing a KOL's "key." This not only allows fans to engage more closely with the KOLs but also provides them with the opportunity to benefit financially from the increasing value of these keys. Friend.tech's model establishes a unique fan-driven economy, aligning the interests of fans and KOLs.

Bodhi: While tackling the aspect of content assetization, Bodhi trades individual content pieces, offering a more targeted approach to transaction and value realization. Although it faces challenges, especially in the realm of content incentivization on decentralized platforms, Bodhi's model represents an innovative effort in returning value to content creators.

Overall, these emerging Web3 social products are pioneering new ways to redistribute the value of user data and content. By implementing mechanisms that enable data circulation, tradability, and fairer sharing of value, they are setting a precedent for more equitable, user-centric, and innovative social platforms. As technology continues to evolve, alongside growing communities and the development of new incentive structures, Web3 social products are poised to significantly reshape the dynamics of social interactions, offering enhanced opportunities and benefits for users and creators alike.

2、Anti-censorship

The shift towards anti-censorship is a key focus in current Web3 projects, addressing the centralization issues like content censorship and speech restrictions commonly faced by traditional Web2 social platforms. Web3 social platforms lean towards decentralization, reducing reliance on centralized entities, thus minimizing censorship risks and advocating for more open freedom of speech. Two notable projects in this realm are Farcaster and Nostr.

1）Farcaster

Founded by former Coinbase executives Dan and Varun, and supported by notable figures like Vitalik Buterin, Farcaster is a decentralized social protocol for developing user-centric social applications. The official frontend product, Warpcast, maintains around 2,000 daily active users with a total user count exceeding 40,000.

Farcaster’s key features include:

1. Decentralized identity, ensuring user identity information is stored on the blockchain, akin to Lens Protocol. This facilitates easy migration across various applications within the Farcaster ecosystem.

2. On-chain/off-chain hybrid model to improve user experience, using Farcaster Hub for storing high-frequency data. While this approach slightly compromises decentralization, it enhances usability.

Despite lower daily active users and total user counts compared to Lens, Farcaster's engagement metrics, such as daily postings and interactions, are higher, indicating strong user involvement. However, Farcaster's subscription model for Warpcast could be a barrier for Web2 users accustomed to free services.

2）Nostr

Nostr, an open-source decentralized social protocol, was developed by an anonymous team led by Fiatjaf, a notable developer in the Bitcoin and Lightning Network communities. Its primary aim is to provide a robust anti-censorship platform.

The unique architecture of Nostr includes a network of clients and "relayers." Relayers, functioning independently, facilitate direct communication with users. Every user possesses a public and private key, with the private key securing access and verifying the sender's identity through unique signatures.

A flagship application of Nostr, Damus, gained considerable attention, especially following an endorsement from former X CEO Jack Dorsey. This led to heightened global interest upon its release on the App Store.

Damus operates similarly to platform X, but its defining feature is its decentralized nature. Built on the Nostr protocol, each user on Damus serves as a client, connecting through a network of relayers. This decentralized structure allows anyone to run a relayer, significantly reducing the risk of official censorship compared to platforms like X. Users enjoy the freedom to choose any relayer, including their own, for content publication, thus enhancing censorship resistance. While Damus maintains basic functionality, it effectively fulfills a growing demand for freedom of expression.

Despite a recent slowdown in Nostr and Damus, episodes of censorship and controversial actions on platforms like X tend to revive interest in Web3 anti-censorship networks. Damus's initial surge in popularity highlighted the ongoing user demand for platforms resistant to censorship.

3）Current Analysis Summary

Traditional Web2 social platforms often suffer from content censorship and speech restrictions due to centralized control. This has increasingly spotlighted the necessity for anti-censorship measures. Preceding the rise of Web3, platforms like Mastodon sought to circumvent these limitations. Now, with the advancement of blockchain technology, more Web3 projects are aspiring to develop social platforms and protocols that are resistant to censorship, in the vein of platforms like X and Facebook.

Both Farcaster and Nostr represent significant strides in this direction. While neither has yet produced continuously active applications, Farcaster's high engagement levels, despite its smaller user base compared to Web2 platforms, show potential. However, its subscription model might hinder wider adoption. The initial popularity of Damus on the Nostr protocol indicated a strong user interest in anti-censorship solutions, although this did not translate into sustained engagement.

Nevertheless, the buzz generated by Damus and the general interest in anti-censorship solutions underscore a persistent curiosity and demand for Web3 social products that champion freedom of speech. These projects, through their innovative approaches against censorship, are opening new pathways for Web3 social interactions and fostering hope for the emergence of groundbreaking applications in the future.

3、Native Social Scenarios Enabled by Web3

Blockchain technology in the Web3 era has gone beyond the primary concerns of data value feedback and anti-censorship to address a variety of inherent social demands. Numerous projects are strategically focusing on specific social needs that have emerged with this technological evolution. A key player in this realm is DeBox.

DeBox: Enhancing Community Engagement

• Addressing the "Holding Chat" Issue: In traditional social platforms, distinguishing between genuine token holders or NFT enthusiasts and potential scammers in group chats can be challenging. DeBox innovatively addresses this by implementing criteria for group chat access, such as owning specific NFTs or holding certain amounts of tokens. This ensures that only genuine community members participate, fostering a more secure and focused discussion environment.

• Growing Popularity: As of August, DeBox reported over 1.1 million registered users and more than 13 million logins, indicating its rising popularity within the Web3 community. The platform has been particularly noted for its BOX feature, which has been a subject of significant discussion.

• Community Building Through Holding Consensus: DeBox kickstarted its user base by integrating multiple NFT sets, attracting a diverse range of users. By using holding as a consensus mechanism, it gathers community members with common interests, enabling spontaneous community governance and reducing irrelevant information within discussions.

Broader Web3 Social Spectrum

• Cyberconnect Protocol: Focused on building user social graphs, Cyberconnect is tailoring the social experience to the unique landscape of Web3.

• Link3 Project: Link3 aggregates users’ on-chain and off-chain data, offering a more enriched social profile by validating off-chain activities on the blockchain.

• Mask Network and Firefly Aggregator: The introduction of the X plugin by the Mask Network and the subsequent launch of the Firefly aggregator represent significant steps in amalgamating content from various Web3 platforms like Lens, Farcaster, and X. This results in a comprehensive and integrated Web3 social platform.

These emerging projects exemplify the diversification and innovation that are defining the Web3 social domain. Each project, including DeBox, Cyberconnect, Link3, and others, is addressing different social interaction needs unique to the Web3 environment. This is leading to the construction of a more diverse and rich social landscape, meeting various native social demands of the Web3 era. These developments signify a shift towards more nuanced and user-centric social experiences in the blockchain era.

IV. Why is Web3 Social Media Comparatively Less Popular Than Other Tracks?

Despite the innovative efforts in data value feedback, censorship resistance, and catering to specific social scenarios, Web3 social media platforms have not yet achieved widespread popularity. There are several key challenges and limitations contributing to this phenomenon:

1、Balancing Decentralization and User Experience

• Complex User Interfaces: Many Web3 social platforms have interfaces and operations that are more complex compared to traditional Web2 platforms. This complexity, often involving wallet logins, can be daunting and obstructive for Web2 users who are not familiar with wallets, thereby hindering their transition to Web3 social products.

• Educational Barrier: The concepts of blockchain and cryptocurrencies are still relatively unfamiliar to a large segment of potential users. This lack of understanding affects the adoption of Web3 platforms, as users are often hesitant to engage with technologies they do not comprehend fully. To mitigate this, some Web3 projects are incorporating Web2 account logins to lower entry barriers.

• Decentralization vs. Efficiency: There is an inherent conflict between the ideals of decentralization and the practicality of efficient user experience. For instance, if all actions and data require on-chain processing, it can lead to a slower and more cumbersome user experience. Projects like Lens have placed all content, social relationships, and identities on-chain, while Farcaster has chosen to store only identities on-chain. Others, such as Debox and friend.tech, keep most data off-chain, except for crucial elements like NFTs or tokens. This variation in approach highlights the struggle to balance user experience with the level of on-chain activity.

• Cost and Speed Considerations: Implementing full on-chain processes can be costly and slow, which may detract from the user experience. Conversely, only partially utilizing on-chain features might lead to a "Web2.5" experience, which may not fully align with the decentralized ethos of Web3. Web3 social projects are continuously exploring ways to strike a balance between these factors, aiming to effectively address user needs while providing a satisfactory user experience.

2、High Replacement Costs of Social Products

The migration cost for users of established social products like Facebook, X, Instagram, or WeChat is notably high. This cost isn't just financial; it encompasses time, effort, the learning curve involved in adapting to a new platform, data migration, and the challenge of rebuilding social networks. Users who have invested considerable time in establishing their presence on a platform, uploading substantial data, and familiarizing themselves with its functionalities and interface, are generally reluctant to switch to another platform easily.

In evaluating the value of a new social product, one could say it equals the new experience minus the old experience, further subtracted by the replacement cost. Given the strong network effects of social products, where users build dependencies on specific platforms, the high replacement cost poses a significant barrier to switching. This factor makes it challenging for new platforms, particularly those in the Web3 space, to attract users from established Web2 platforms.

Therefore, for Web3 social projects to successfully draw users, mere replication of Web2 features with added decentralization is not enough. Regular users may not fully grasp the benefits of decentralized storage, but they clearly understand user experience and the tangible costs of migration. Hence, to entice users and gain widespread adoption, Web3 social products need to offer innovative experiences and unique features that distinctively meet user demands, differentiating themselves from existing Web2 products. This requires more than just technological innovation; it calls for a deep understanding of user needs and preferences, and the creation of compelling new reasons for users to make the switch.

3、Sustainability of Feedbacking Data Value to Users

The challenge of sustainability in rewarding data value to users is a significant issue for many Web3 social or "socialfi" projects. These projects often incorporate various economic models to leverage user influence or content. However, most of them are currently in a phase that resembles a Ponzi scheme, where the financial sustainability depends on new users funding the returns of earlier users, rather than generating intrinsic value. As a result, these projects struggle to achieve sustainable development and often become speculative ventures.

To navigate this challenge, finding a balanced token economics model and a functional curve is essential. Such a model should harmonize the financial aspects of the platform with sustainable development, ensuring that social products can feasibly reward users for their data contributions over the long term.

4、Low Overlap Between Social Media Target Users and Web3 User Profiles

The disparity in funding and project numbers between social projects and other sectors like DeFi and Gaming in the Web3 space reflects a crucial underlying issue: a low overlap between the target users of social media and the typical profiles of Web3 users. According to Messari's data from Q3 2023, social projects received around $10 million in funding, significantly less than the $200 million for DeFi projects and $150 million for Gaming projects. Moreover, the number of social projects was substantially lower, with only 6 compared to 67 DeFi projects and 25 Gaming projects.

This disparity is partly because many individuals are drawn to the crypto space with motivations centered around wealth creation and speculation. Genuine social media, on the other hand, relies on authentic user engagement in social activities. Unlike other sectors that can attract users through financial incentives like airdrops or boosts in Total Value Locked (TVL), social projects aiming to fulfill real social needs must attract and retain users genuinely interested in such interactions, not those driven by short-term speculative gains.

The profile of gaming enthusiasts, often characterized by a propensity for risk-taking and competitiveness, aligns more closely with Web3's typical user base, making them a more natural fit for conversion into gaming users. Similarly, DeFi projects appeal to investment-minded individuals. In contrast, the natural differences in needs and motivations between typical social media users and the Web3 community make it more challenging to align the two. This divergence in user profiles and interests is a key factor in why the social track in Web3 seems less vibrant compared to gaming and DeFi sectors.

In summary, the target audience for social media differs significantly from the money-driven, risk-taking, and competitive tendencies often seen in DeFi and Gaming users. Finding ways to align with and appeal to the target audience for social media remains a critical, ongoing exploration for Web3 social projects.

V. Social Media Business Models

Finally, let's delve into the commercial aspects of the Metaverse's business model.

The evolution of social product business models can be divided into distinct stages, each with its own unique characteristics:

1. Early Web 1.0 Phase (Late 1990s to Early 2000s):

During this period, social products predominantly took the form of forums, chat rooms, and similar platforms. The primary revenue sources were advertising and membership fees. Some forums generated income through displaying ads, while chat rooms charged users membership fees. For example, America Online (AOL) required a membership fee for access, and Yahoo Groups generated revenue through ad displays.

2. Web 2.0 Social Media Phase (Mid to Late 2000s to 2010s):

As internet technology advanced, social media and networking platforms gained prominence. The business model during this phase mainly revolved around ad displays and the collection of user data. Social media platforms generated revenue through ads and targeted advertising. User data became a valuable asset used for personalized advertisements and marketing. Platforms like Facebook, X, and TikTok predominantly operated under this model.

3. Emergence of Web3 (Late 2010s):

The arrival of Web3 brought blockchain technology and decentralized concepts into the picture. Social products began exploring novel business models, such as data value feedback, token economics, and NFT-based data assets. Users gained more control over their data, allowing them to participate in governance and receive rewards for sharing data. For example, Lens tokenizes data assets into NFTs, platforms like friend.tech and Bodhi assign value to influence and content, providing users with a stake in the value, while Farcaster still adheres to the traditional subscription-based model.

Additionally, when introducing Web3 social products, it's crucial to consider regional market variations inherent to social products. One significant aspect of this is addressing the economic challenges faced by content creators.

Currently, the primary income model for creators still largely revolves around Business-to-Business (ToB), with Consumer-to-Consumer (ToC) playing a secondary role. Many platforms, both domestic and international, offer relatively modest incentives for content views and clicks, which forces content creators to rely on amassing substantial traffic to attract advertising revenue from the ToB side. Some creators have started experimenting with ToC approaches like e-commerce, but both income models can have negative impacts on the creators' brand and reputation. Therefore, many Web3 social projects aim to begin with a ToC model, allowing creators to directly receive fair compensation for high-quality content. This approach is also followed by friend.tech and Bodhi, which employ influence and content incentives.

However, there is a difference in approach. In the domestic market, social and creator platforms face significant traffic monopolization. Platforms like WeChat, TikTok, and Kuaishou dominate the majority share, wielding substantial control and offering creators limited bargaining power with minimal revenue shares. Consequently, Chinese creators often find it challenging to sustain themselves solely through platform-based traffic incentives and often turn to ToB models for business income, including advertisements and live-streamed product endorsements. However, due to the platform's dominance, redirecting traffic to private domains is challenging. Therefore, Chinese creators tend to focus on studying platform recommendation strategies, producing content types that generate higher traffic volumes, and then monetizing that traffic.

In contrast, the monopolistic situation for social platforms in overseas markets is slightly better than in domestic markets. There's relatively more fluidity between public and private domain traffic, while in China, the concept of the private domain emerged due to the overwhelming dominance of the public domain. Consequently, creators on overseas social media platforms such as Instagram and YouTube, once they amass followers, can redirect traffic to their independent sites or web pages to sustain themselves. This freedom enables many overseas creators to create niche content they enjoy, which also seamlessly redirects to their private domains.

Facing distinct competition patterns of traditional social products across different regions, Web3 social projects should consider employing diverse strategies when entering the market.

Overall, the business models of current Web3 social projects are still in a phase of diverse exploration and validation. Looking back at the history of social products, the evolution of business models has transitioned from a single advertising revenue model and membership income to precise advertising after data monopolization, and now to the trend of returning data value to users through tokens/NFTs. The future direction may emphasize user data value, participation, community governance, and more diversified business models.

VI. Exploration of the Future of Social: Collision Between Web3 Social and the AI Wave

In the midst of rapid technological advancements, two prominent domains, Web3 and AI, have emerged as significant players in shaping the future of social interactions. This holds true as we explore the evolving social landscape. Alongside the growth of Web3 and Crypto social projects, we've witnessed a surge in AI projects. Even traditional Web2 teams are now integrating social platforms with AI technology, finding diverse applications in matchmaking, translation, and the development of virtual personas.

For example, in the Chinese market, Soul has introduced "AI Guodan," an intelligent conversational AI designed for personalized user interactions. Similarly, Baidu has launched the AI-powered social app "Skyclub" to re-enter the social arena with the added dimension of AI. On the international front, Meta has integrated AI into social feed recommendations, significantly enhancing user engagement. Last year, algorithm refinements increased user engagement on Facebook by 7% and on Instagram by 6%. These developments in both domestic and international products underscore the importance of amalgamating social platforms with AI.

AI, as a tool for boosting productivity, has found fertile ground in the realm of social interactions. A noteworthy area of exploration involves merging social platforms with AI agents to create virtual companions, fulfilling human needs for companionship and emotional support. For instance, Character.AI, backed by A16Z, generates human-like text responses and engages in contextual conversations, creating intelligent chatbots for user interaction.

As mentioned earlier, one of the fundamental human needs in social interaction is the fulfillment of emotional and mood-based requirements, establishing intimate relationships, and receiving support. Currently, AI + social projects primarily focus on addressing these emotional needs, venturing into uncharted territory to explore whether AI-driven virtual entities can fulfill these needs in real-time. The market is still in the process of validating the demand and value of human emotional companionship provided by AI.

In the evolution of social products, we observe that Web3 and AI possess complementary potential in the social domain. Unlike AI's role in enhancing productivity, Web3's characteristics in production relations and financial incentives empower social products in unique ways. For instance, Myshell, incubated by Binance, combines AI with Web3, enabling users to create their AI bots. It has introduced Samantha, a Telegram-based voice chatbot, to address the need for human emotional companionship. The ecosystem's token, shell, incentivizes consumers to pay for features and creators to gain exposure through token usage.

Furthermore, Siya.AI, within the recent Solana ecosystem, aims to construct a social companionship platform coexisting with AI and real individuals. It seeks to make AI agents an entry point for internet and Web3 users, introducing incentive mechanisms for creator economies and AI companions by integrating the SDK provided by Realy. Through the fusion of AI and Web3, Siya.AI aims to fulfill emotional companionship needs in social interaction. Users engaging in conversations with AI companions can also participate in chat mining and NFT incubation.

In summary, AI and Web3, as two transformative waves of the new era, are making distinct contributions to the realm of social interaction. AI focuses on emotional companionship and support, while Web3 emphasizes returning user data value and resisting censorship, both of which are in the early stages of development. Regardless of their specific focus, the overarching goal is to better satisfy humanity's fundamental social needs. As we continue to explore the world of social products, collaboration and complementarity between AI and Web3 emerge. There is great anticipation for the emergence of the next major-scale social application, driven by these new technologies and models. Perhaps, the convergence of AI and Web3 in the social domain will spark innovations that more effectively cater to the diverse social needs of humanity.

VII. Conclusion

Social interaction, a fundamental human need transcending age and circumstance, serves as the gateway to Web2's industry, boasting the highest Daily Active Users (DAU). Since the inception of Web3 social concepts, there has been immense anticipation among Web3 practitioners for widespread adoption.

On a positive note, Web3 social platforms herald revolutionary changes in terms of data value and user feedback. In stark contrast to traditional Web2 social products, Web3 treats user data as a precious asset, employing token incentives and NFTs to return the value of data to its rightful owners. This is underpinned by the principles of user data sharing, creator incentives, and community consensus.

Furthermore, the censorship resistance inherent in Web3 social products bestows upon users greater freedom and enhanced privacy protection. Harnessing blockchain technology and decentralization, these platforms mitigate the risks of censorship and bans, advocating for the unfettered freedom of speech. This creates a safer, more open social environment, fostering authenticity and freedom in social interactions.

However, present-day Web3 social platforms encounter challenges and have yet to achieve widespread adoption. Formidable obstacles include high replacement costs and the formidable network effects established by traditional social products. The entrenched network effects among users make it arduous for them to transition to new Web3 social platforms, owing to habituation, resource investments, and platform dependence. The struggle to replicate the success of Web2 products hampers the expansion and growth of Web3 platforms. Balancing sustainability with user experience is another challenge. Some Web3 social products prioritize decentralization and data control, sometimes at the expense of user convenience and experience. Striking the right balance between innovation and user-friendliness is critical for ensuring user retention and engagement.

Tom Standage's book, "Writing on the Wall: Social Media - The First 2,000 Years," underscores the enduring human need for social interaction. Regardless of technological evolution, humans consistently yearn for information exchange. From ancient Roman politicians using papyrus for communication to pamphlets during the American Independence and French Revolution, and from newspapers, radio, and television to the internet and blockchain technology, the human quest for a balance between speed, quality, economy, freedom of speech, and censorship remains unyielding.

While Web2 social products like Facebook, X, and WeChat offer faster, better, and more affordable communication and dissemination compared to telephones, text messages, and newspapers, Web3's core focus is on resisting censorship and restoring data value to users. Although Web3 has not yet achieved the widespread adoption of Web2 products, the demand for censorship resistance and data value return continues to simmer in the minds of users, awaiting a breakthrough moment.

Looking to the future, the attribute of community looms large. Social interactions are not unidirectional broadcasts but rather oscillate between centralization and decentralization. Community consensus is a pivotal facet of Web3 social, and the characteristics of data sovereignty and openness align seamlessly with the aspirations of decentralized communities. Communities have the potential to facilitate multidirectional interactive social engagement and may well represent a future direction for Web3 social products. Furthermore, the intersection and integration with other domains, such as gaming, have the potential to ignite fresh waves of innovation.

Despite the challenges and limitations faced by Web3 social, particularly in user profiling, it remains a beacon of hope for many. Emerging projects and technologies continually propel progress in this field. As technology continues to advance, we witness ongoing explorations and enhancements in terms of sustainability and user experience. This field matures continually, seeking its unique development path, introducing ever more innovation to users, and exerting a profound influence on the broader social landscape.

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This report provides an in-depth analysis of the development and potential impact of spot Bitcoin Exchange-Traded Funds (ETFs) in the global financial market.

The historical context section outlines the initial challenges faced in introducing Bitcoin ETFs, highlighting regulatory hesitations primarily centered around market manipulation and investor protection. The report reviews the pivotal launch of the ProShares Bitcoin Strategy ETF (BITO) in 2021, underscoring its role as a significant but limited advancement due to its futures-based nature.

In discussing the landscape of spot Bitcoin ETFs in 2024, the report identifies key players in the market, such as Ark, Bitwise, Grayscale, BlackRock, and Fidelity, and analyzes their proposed ETFs, and provides insights into the competitive landscape. The report also examines the evolving regulatory perspectives, with particular attention to the SEC’s cautious but shifting stance towards cryptocurrency investments and the implications of their decisions for future digital asset-based financial products.

The market impact and analysis section explores the expected influence of spot Bitcoin ETFs on Bitcoin's price and market dynamics. The report also contemplates the short and long-term market implications, drawing parallels with the impact of gold ETFs and the general ETF market.

This report serves as a comprehensive resource for understanding the nuances of spot Bitcoin ETFs, their place in the financial ecosystem, and their potential to reshape the cryptocurrency landscape.

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Introduction

15 years after its genesis day, Bitcoin keeps reshaping notions of value, investment, and monetary exchange. 

Emerging from the fringes of technology and finance, Bitcoin has garnered significant attention, not just as a standalone asset but also as a foundation for various financial products. Among these innovations, Exchange-Traded Funds (ETFs) tethered to Bitcoin have become a focal point of interest for investors and regulators alike. 

A spot Bitcoin ETF, in particular, represents a convergence of traditional financial mechanisms with the new age of digital assets. These ETFs would allow investors to gain exposure to Bitcoin without the complexities of direct ownership, such as managing wallets and keys. 

This report delves into the intricacies of spot Bitcoin ETFs, shedding light on their potential role and impact in the broader financial market. 

Historical Context

Initial attempts to introduce Bitcoin ETFs faced a rocky path, primarily due to regulatory hesitations. Concerns over market manipulation, volatility, and investor protection were at the forefront of these challenges. The U.S. Securities and Exchange Commission (SEC), among other regulatory bodies, has been particularly cautious, balancing the demand for innovation with the need for market stability and investor safety. Despite these hurdles, the concept of a Bitcoin ETF persisted, evolving in form and structure.

The launch of the ProShares Bitcoin Strategy ETF (BITO) on October 19, 2021, marked a pivotal moment in the industry, particularly for Bitcoin-based investment products. Garnering over $1 billion in assets within its first two days, BITO's introduction was one of the most successful in ETF history. In terms of performance, BITO closely mirrored the returns of spot Bitcoin, although it saw a -36.5% return compared to -33.5% for spot Bitcoin in its first six months. Despite this decline and broader market volatility, the ETF continued to attract investor interest, adding an additional $476 million in the following period. This persistent demand, reflected in over $210 million in average daily volume, underscored Bitcoin's resiliency and the appeal of BITO's regulated structure. BITO's performance and sustained investor interest highlighted the ETF's role as a convenient and regulated alternative to direct Bitcoin investment.

However, there’s a significant distinction between futures-based and spot-based ETFs. Futures-based Bitcoin ETFs, which trade on contracts speculating on future prices of Bitcoin rather than the cryptocurrency itself, were the first to gain regulatory approval. This marked a crucial step, albeit with limitations, as they didn't provide direct exposure to Bitcoin's spot market prices.

The pursuit of a spot Bitcoin ETF, where the fund directly holds Bitcoin, thus offering a more accurate reflection of the cryptocurrency's current market value, has been fraught with more challenges. The approval of such ETFs has been a long-awaited event in the financial and crypto communities. It represents not just an investment vehicle, but also a significant step in the institutional acceptance of Bitcoin.

As we begin 2024, the landscape appears cautiously optimistic. The increasing maturity of Bitcoin markets, coupled with enhanced regulatory frameworks and growing institutional interest, has renewed the momentum for the approval of spot Bitcoin ETFs. 

Gold ETFs

The launch of Gold ETFs in the United States, particularly the SPDR Gold Shares ETF (GLD) in November 2004, heralded a transformative era in gold investment. Gold ETFs significantly democratized access to gold, enabling a broader range of investors to participate in gold markets without the complexities of physical gold ownership. Following the launch of the first gold ETF, it rapidly attracted more than $1 billion in assets within just three days, setting a record for the fastest growth in the ETF industry. This influx of investment was instrumental in triggering a sustained multi-year bull run in gold prices, with gold prices eventually doubling over the next four years​​.

A comparative chart showing the growth in assets under management (AUM) for the first gold ETF and the ProShares Bitcoin Strategy ETF would provide a clear visual representation of their respective market impacts.

Drawing parallels with the Bitcoin market, the introduction of ProShares Bitcoin futures ETF (BITO) in 2021 marked a similar milestone for Bitcoin as an investable asset. BITO attracted $1 billion in investment within just two days, surpassing the record previously set by the first gold ETF. However, unlike gold ETFs, which had a pronounced impact on gold prices, the launch of BITO had a negligible impact on Bitcoin's price. Bitcoin was trading around $60,000 at the time of BITO's launch and reached a peak just shy of $69,000 shortly thereafter, only to decline by almost 60% subsequently​​​​.

The Landscape of Spot Bitcoin ETFs in 2024

Overview of Current Status in the U.S. and Globally

As of early 2024, the landscape for spot Bitcoin ETFs is poised at a crucial juncture, with the U.S. Securities and Exchange Commission (SEC) set to make a landmark decision by January 10, 2024. This decision will potentially approve the first-ever spot Bitcoin Exchange-Traded Fund (ETF), a development eagerly anticipated across the financial and cryptocurrency communities. The potential approval signifies a shift in the SEC’s historically cautious stance towards cryptocurrency investments, reflecting recent legal challenges to the extent of the SEC’s regulatory authority over digital assets​​.

Key Players and Their Proposed Spot Bitcoin ETFs

In terms of competition and market differentiation, the focus is increasingly turning towards the management fees (expense ratios) charged by these ETFs. With all ETFs holding the same underlying asset (Bitcoin), fees become a crucial differentiating factor for investors. 

• Bitwise: Bitwise has proposed a fee of 0.24%, one of the lowest in the market. Moreover, they plan to waive this fee for the initial six months or until the fund reaches $1 billion in assets.

• Ark/21Shares: In a shift from their earlier proposal of 0.8%, Ark/21Shares has now proposed a zero-fee structure for the first six months or until their fund accumulates $1 billion in assets. After this promotional period, the fee will adjust to 0.25%, positioning them competitively close to the market's lowest fees.

• BlackRock: BlackRock proposed a fee of 0.2% for the initial 12 months or until its fund reaches $5 billion in assets, after which the fee will increase to 0.3%. This proposal undercuts earlier industry predictions and establishes BlackRock as a formidable market player.

• Fidelity: Fidelity has set its fee at 0.39%, offering a stable and competitive rate compared to other ETFs.

• Invesco/Galaxy: This collaboration is offering a fee waiver for the first six months or until the first $5 billion in assets are reached. Post the waiver period, they will charge a fee of 0.59%.

• VanEck: VanEck has chosen a distinct approach, offering a constant fee of 0.25% from the start, which will become one of the market's lowest rates once other ETFs' promotional fees expire. Additionally, VanEck commits to donating 5% of its ETF profits to Bitcoin development.

• Grayscale: Grayscale has set its fee at 1.5%, the highest among the competitors, sparking controversy in the market given its significantly higher rate compared to other issuers.

However, fees are only one part of the equation. Issuers of spot Bitcoin ETFs will compete on other key fronts to attract investors:

• Distribution: The most crucial factor for the success of an ETF. It's vital that the ETF is available on platforms used by Registered Investment Advisors (RIAs), as these are the channels through which a substantial asset base for these products is likely to be built.

• Brand: Recognizable and trusted brands are likely to be favored by financial advisors and investors, offering perceived safety based on historical performance and reputation.

• Liquidity: Initial liquidity, often seeded at launch, is essential for the ETF to be traded effectively in the open market. This liquidity impacts the ease with which investors can buy and sell shares of the ETF.

• Expense Ratio (Fees): While important, the fees charged by the ETF (expense ratio) are ranked lower in priority compared to distribution, brand, and liquidity. However, competitive fee structures remain a significant factor in attracting long-term investors, especially in a market where all products hold the same underlying asset.

Regulatory Perspectives and Anticipated Decisions

A critical aspect of the SEC’s potential approval is the requirement that investments in these ETFs be made using cash, not Bitcoin. This differs from the traditional “in-kind” transactions seen in conventional ETFs and is driven by concerns about market manipulation and arbitrage opportunities. The insistence on a cash redemption model alters the dynamics of ETF purchases, potentially impacting tax implications for investors since converting Bitcoin to cash before purchasing ETF shares could trigger tax liabilities​​.

The anticipated decision by the SEC is not only a watershed moment for Bitcoin as an asset class but also a test of the regulatory framework's adaptability to innovative financial products. The outcome of this decision could set a precedent for future digital asset-based financial products and significantly influence the mainstream acceptance of cryptocurrencies in the U.S. financial market.

Market Impact and Analysis

Expected Impact on Bitcoin Price and Market Dynamics

The approval of a spot Bitcoin ETF is anticipated to influence Bitcoin’s price significantly. Analysts have mixed opinions; some argue that the initial impact might be overestimated, expecting initial inflows to be a few hundred million dollars, mostly recycled money​​. Others foresee a more substantial effect, suggesting the necessity for ETF issuers to purchase tens of billions of dollars of Bitcoin to meet institutional demand, potentially causing a supply shock, especially given the recent decrease in Bitcoin held on exchanges​​.

Furthermore, if the BTC ETF gets approved, there might be significant increases in the infrastructure, meme coins, and application projects related to the BTC ecosystem. Sentiments regarding the approval of BTC are likely to quickly permeate throughout the entire Bitcoin ecosystem. However, if the BTC ETF is not approved, the tokens of related ecosystem projects might experience even more severe declines.

Analysis of Investor Sentiment and Market Expectations

The market has shown a bullish trend in anticipation of the ETF approval, with Bitcoin rallying over 60% since early October, driven by these expectations. However, there is a forecast of a possible sell-the-news-led pullback, a pattern observed in previous significant events like the debut of CME Bitcoin futures and the listing of Coinbase on Nasdaq​​.

Potential Capital Inflow into Bitcoin Market with the Approval of ETFs

The approval of spot Bitcoin ETFs could lead to significant capital inflows into the Bitcoin market. For context, the BITO futures-based ETF, attracted about $1.5 billion in 30 days post-launch. Spot Bitcoin ETFs, involving actual Bitcoin, might attract even larger inflows, given the participation of conservative institutional investors like pension funds, seeking exposure to native Bitcoin rather than derivatives or proxies​​.

Short and Long-term Market Implications

In the short term, market volatility may increase, fueled by speculative trading and adjustments in investor portfolios. Over the long term, the introduction of spot Bitcoin ETFs could lead to broader institutional acceptance and integration of Bitcoin into diversified investment portfolios. This transition is mirrored in the gold market, where the introduction of gold ETFs significantly increased gold’s accessibility and investment. Drawing from the gold ETF experience, a Bitcoin ETF might also bring in substantial additional demand, potentially amounting to nearly $30 billion​​ in the first year. 

The value of assets managed by exchange traded funds globally currently stands at an impressive $9.6 trillion. Should investment advisors decide to allocate a modest 2% of their client's portfolios to Bitcoin, this strategic move would elevate the value of the spot Bitcoin ETF market to an estimated $192 billion in the long term. This projection underscores the significant potential impact that even a small shift in asset allocation toward Bitcoin could have on the market.

Conclusion

As we approach a potential watershed moment in financial history with the anticipated approval of a spot Bitcoin ETF in the U.S., this report has examined the multifaceted narrative of Bitcoin ETFs. From their inception to the possible ramifications of their acceptance, we've navigated through a complex interplay of market dynamics, regulatory stances, and investor sentiments.

The enthusiasm among Bitcoin enthusiasts, traditionally aligned with cypherpunk ideals and a hardcore ethos, may seem paradoxical. Yet, it can be understood through a lens that sees this potential approval not just as a valuation milestone but as a transformative catalyst for the entire cryptocurrency domain. The expected price growth following an ETF launch is not merely a statistical uptick. It embodies a magnet for capital, talent, and innovation, heralding a new era of enriched ecosystem development. This anticipated influx isn't solely about market capitalization; it's about invigorating the space with resources crucial for pioneering projects and technological breakthroughs.

The potential uptick in Bitcoin's price, leading to a virtuous cycle of investment and innovation, aligns with a broader narrative of growth and mainstream acceptance. However, this poses a significant challenge: integrating this growth while upholding our foundational principles. The call by figures like Ethereum's Vitalik Buterin to revisit the core cypherpunk ethos underlines the industry's need to balance expansion with the intrinsic values of decentralization and autonomy. This sentiment echoes Satoshi Nakamoto's original vision for Bitcoin and the broader crypto space.

In embracing this new phase of growth, fueled by mainstream financial instruments like ETFs, we as the crypto community face the task of ensuring that the principles of decentralization and independence, which form the cornerstone of the industry, are not diluted.

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1. Introduction

Hong Kong, an international financial hub, is now a focal point in the cryptocurrency sector. Amid global regulatory shifts, Hong Kong's journey – from the JPEx incident in 2023 to current practices – offers a unique look at evolving crypto dynamics. This study explores Hong Kong's regulatory framework, focusing on authorities like the HKMA and SFC, and their impact on market players.

This study delves into the regulatory landscape of cryptocurrencies in Hong Kong. It examines the approaches of regulatory authorities such as the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC), assessing how these measures impact players in this market.

2. Overview of Hong Kong's Cryptocurrency Market

Before we can paint a clear picture of the crypto market in Hong Kong we must first define some of the key terms used to describe different types of tokens and their utility: 

Security Tokens

Digital tokens, including cryptocurrencies, are classified as "securities" if they meet criteria such as representing company equity, acknowledging issuer's debts, offering returns akin to dividends, or giving holders rights like voting or a share in liquidation assets. For example, Tykhe Capital introduced the PRINCE Token in 2023 as the first security token offering (STO) offered by HK real estate funds for professional investors. It is sanctioned by HK SFC and it’s subject to regulatory greenlight. 

Non-Security Tokens

Cryptocurrencies outside the realm of security tokens fall under "non-security tokens" or "virtual assets," with stablecoins being a subtype.

Other Tokens

Payment Tokens: Mainly used for buying goods and services, like Bitcoin, these tokens don’t represent company stakes or provide inherent rights. Their trade can incur capital gains tax.

Utility Tokens: These digital assets grant access to specific services within their issuing networks. Unlike investment tools, they're meant to add practical value within their ecosystems.

Market Trends

The "Worldwide Crypto Readiness Report 2023" ranks Hong Kong top globally in crypto readiness, scoring 8.36. Crypto traders in Hong Kong benefit from a 0% tax rate, with numerous crypto ATMs and blockchain companies. This suggests a possible shift in China's stance on digital assets, viewing Hong Kong as a pivotal gateway for international crypto trade, akin to Guangzhou's historical "Thirteen Factories."

Hong Kong's market mainly focuses on large-scale transactions for institutional and high-net-worth individuals. Platforms like HashKey and OSL cater to this segment. HashKey's retail platform, launched on August 3, 2023, has already surpassed $600 million in trades, with a record single-day volume of $100 million on October 30. OSL, meanwhile, targets professional investors and businesses, requiring brokerage services for retail trading. 

Key Market Players in Hong Kong's Crypto Sphere

Exchanges

Top Tier: HashKey Exchange and OSL, holding licenses No. 1 and No. 7.

Second Tier: License applicants including OKX, HKVAEX, HKbitEX, Hong Kong BGE, and Victory Fintech (Victory Securities）, etc.

HashKey leads in product development, particularly in mobile platforms, among Hong Kong-based trading platforms. Its trading volume has seen a steady increase to $80 million since November, although it's important to note that there is a potential for volume inflation. License restrictions limit these platforms to Bitcoin and Ethereum spot trading, excluding staking, leverage, wealth management, and contracts, posing significant challenges in customer acquisition and business expansion over time.

Investor Demographics

Between July 2022 and June 2023, Hong Kong based marketplaces saw about $64 billion in crypto transactions, nearing Mainland China's $86.4 billion, despite having just a fraction of Mainland China's population. This is largely due to Hong Kong's robust over-the-counter (OTC) trading market, catering to institutional investors and high-net-worth individuals, resulting in a more substantial number of transactions above $10 million compared to Mainland China. However, Hong Kong lags in retail trading, with only a 3.1% share of local retail users engaged in the crypto market, compared to the global average of 4%.

Additional Market Contributors

This includes cryptocurrency wallet providers, crypto funds, payment service providers, and blockchain development firms, all vital for technological and service support in the crypto market.

3. Hong Kong's Crypto Regulatory Framework: Authorities, Regulations, and Licenses

Key Regulatory Bodies

Hong Kong Monetary Authority (HKMA): Oversees banking and monetary policies, including crypto-related transactions and services.

Securities and Futures Commission (SFC): Regulates securities and futures markets. SFC and HKMA jointly issued guidelines on virtual asset activities, outlining regulatory methods for crypto asset distribution, trading, and advisory services.

Typical Regulatory Requirements

Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT): Proposed amendments by the Financial Services and the Treasury Bureau (FSTB) to include exchanges offering non-security crypto assets under SFC's supervision.

Licensing Requirements

Virtual Asset Service Provider (VASP) License 

Providers of Virtual Asset services in Hong Kong must possess a VASP license from SFC, adhering to high standards akin to those for major banks and asset managers. This system became effective on June 1, 2023.

10 types of Licensing

The SFC also stipulates the 10 types of regulated activities and provides detailed definitions for each of them. These activities are:

Type 1: Dealing in securities

• Offer stock and stock option trading and brokerage services to clients.

• Execute bond transactions on behalf of clients.

• Handle the purchase and sale of mutual funds and unit trust funds for clients, including the distribution and underwriting of these securities.

Type 2: Dealing in futures contracts

Type 3: Leveraged foreign exchange trading

Type 4: Advising on securities

• Advise clients on the sale and purchase of securities.

• Provide clients with research reports and analyses on various securities.

Type 5: Advising on futures contracts

Type 6: Advising on corporate finance

Type 7: Providing automated trading services

• Run an electronic trading platform facilitating the matching of client buy and sell orders.

Type 8: Securities margin financing

Type 9: Asset management

• Manage clients' securities or futures contract investment portfolios and funds under full discretionary authority.

Type 10: Providing credit rating services

Licenses Nos. 1, 4, 7, and 9 are particularly significant for crypto companies, as they cover securities trading, advice on securities, automated trading services, and asset management respectively.

While the Type 9 License is intended for traditional finance companies seeking to legally operate crypto funds need to apply to the SFC in order to get approval for conducting digital currency operations within their funds. Interestingly, the scope of crypto fund operations can expand with improved performance.

Hong Kong Crypto Compliance Fund Example

Sinohope Asset Management (Hong Kong) Limited (“SINOHOPE ASSET”) is a fully regulated virtual asset management institution holding SFC Type 4 (Advising on Securities) and Type 9 (Asset Management) licenses. As the first SFC-licensed Virtual Asset (“VA”) fund manager that manages active VA funds, it accepts both fiat and VA subscriptions and has launched the first VA discretionary managed account services in Hong Kong. Sinohope Asset specializes in Bitcoin and Ethereum funds, a multi-strategy virtual asset fund, and a private equity fund focusing on virtual asset mining.

As crypto regulation evolves, more entities, including fund managers and exchanges, are acquiring licenses from the SFC. By August 7, 2023, 11 Type 9 VA licenses were issued for fund managers managing entirely VA portfolios, along with mixed licenses for those managing fiat and crypto funds.

4. Applying for Licenses in Hong Kong’s Crypto Sector

Essential Licenses for Crypto Funds

• Asset Management License (Type 9): Necessary for managing investment portfolios, particularly crypto asset portfolios, under full discretion.

• License for Providing Advice on Securities (Type 4): Required if offering investment advice or issuing securities-related research.

• Virtual Asset Service Provider (VASP) License: Essential for funds involved in trading or managing virtual assets classified as securities, or operating virtual asset trading platforms.

• Other Licenses: Depending on business activities, licenses like Providing Advice on Futures Contracts (Type 5) or Providing Automated Trading Services (Type 7) might be needed.

It is crucial that the fund adheres to the regulatory requirements in all pertinent sectors as stipulated by the Hong Kong Securities and Futures Commission (SFC). Additionally, the fund must also address tax compliance and adhere to anti-money laundering (AML) and counter-terrorist financing (CFT) norms.

Application Platform: WINGS

The WINGS platform serves as an all-encompassing system that integrates electronic spreadsheet and data submission services for the SFC.

To submit a license application to the Commission, users must first register and log into the WINGS platform. Once logged in, navigate to "Submission Management > New Submission > Application > Licensing applications" in the menu to begin the application process.

The platform features a well-equipped help center, including a textual User Guide and an Online Demo video tutorial, both accessible from the bottom right corner of the website's main page.

Capital Requirements

Note: Capital requirements vary by license type but typically include proof of shareholders' funds' source and legality, capital requirements for business operations, and legal mandates on registered capital. Regular financial reporting is mandated, with monthly or semi-annual submissions to the SFC, depending on the license type.

Management Personnel Requirements 

A hedge fund manager must have at least two responsible officers (ROs) approved by the SFC to supervise the business. At least one of them should be fully competent and ordinarily based in Hong Kong.

The SFC accepts that some ROs may be based offshore, provided they can effectively delegate their supervisory responsibilities.

Application Timeline

Around six months for a new financial license from the SFC, while amending an existing license typically takes 3-4 months.

Application Process

Fill out the application form via the WINGS platform, either through a personal or a consultant company sub-account. Upon submission, track progress and pay required fees through WINGS.

Detailed application fee information can be found in the relevant table：

5. Hong Kong’s Crypto-Friendly Banks

In April 2023, Hong Kong's regulators encouraged banks to support virtual asset companies, aiming to position Hong Kong as a hub for the cryptocurrency sector. Banks were urged to enable crypto-related companies to open accounts for typical business needs like corporate payroll and office rent, but banks aren’t allowed to  engage with these firms directly in crypto trading.

This directive, promoting a more crypto-accommodative approach, was communicated by the HKMA and SFC to key banks such as HSBC, Standard Chartered Bank, and Bank of China.

Banks are advised to use a “risk-based approach” when dealing with accounts linked to crypto companies’ client assets. The HKMA clarified that unlike Mainland China's ban since September 2021, working with crypto companies isn't illegal in Hong Kong.

Despite these regulatory encouragements, many digital asset startups in Hong Kong have faced challenges when trying to open bank accounts, often being turned away upon mentioning virtual assets.

In a positive shift, certain banks, including the Hong Kong branches of China CITIC Bank, Shanghai Pudong Development Bank, China Communications Bank, and the virtual bank ZA Bank backed by ZhongAn Financial Services, are increasingly open to providing services to crypto firms. HashKey Pro, one of Hong Kong's licensed virtual asset exchanges, has established partnerships with ZA Bank and China Communications Bank for fiat currency transactions.

ZhongAn Virtual Finance Limited, a joint venture formed in August 2018 by ZhongAn Online, Sinolink Group, and CITIC Bank International, applied for a virtual banking license in Hong Kong. ZhongAn Online, established in November 2013, is a collaboration between Ant Group, Tencent, and Ping An Insurance. Ant Group's Alipay played a crucial role in the development of China's e-commerce sector and in breaking the banking monopoly in payments. There is anticipation for ZhongAn's significant impact in the cryptocurrency arena.

6. Compliance Challenges and Strategies in Hong Kong's Crypto Sector

Compliance Challenges

License and Professional Investor Restrictions

The process of obtaining a cryptocurrency license is intricate and lengthy, often extending beyond six months. A crucial aspect of this process is securing a qualified Responsible Officer (RO). However, finding ROs with the requisite skills is challenging due to their scarcity and the associated high human resource costs. In the fast-evolving and periodically volatile cryptocurrency market, efficient time management is essential. Furthermore, applicants must ensure robust financial backing throughout the process to deal with the complexity of the procedures and possible delays.

In early November, the Hong Kong SFC issued a "Circular on intermediaries engaging in tokenised securities-related activities," signaling a significant development: tokenised securities offerings are now accessible beyond just professional investors. This indicates that Hong Kong, while adhering to regulatory standards, permits the public offering of tokenised funds and similar products to retail investors.

However, sources familiar with the matter indicate that due to concerns over investor protection and risk management, Hong Kong is unlikely to see tokenized funds for retail investors in the near future. Tokenization's potential to improve market liquidity hinges on adequate market demand, a robust price discovery process, and active trading. Presently, the market's awareness of tokenisation is limited, and challenges persist in terms of token liquidity and potential market manipulation. As a result, many tokenized funds lack a secondary market and face difficulties in gaining approval for trading on virtual asset exchanges.

Tax Compliance

Hong Kong taxes only local business profits, with a 15% rate for non-corporate entities and 16.5% for corporations.

Key features include no sales tax, no capital gains tax, and usually no tax on dividends.

From January 1, 2023, certain offshore passive incomes remain tax-exempt under specific conditions.

Digital asset taxation, as per revised DIPN 39, depends on asset classification and transaction nature. Income from Initial Token Offerings and long-term held digital assets have specific tax implications for example.

Cryptocurrencies that are received by employees as payment are subject to salary tax.

Fiat Currency Access

Traditional banks' caution towards cryptocurrencies limits the number of reliable fiat channels for crypto funds, increasing intermediary exchange costs.

Cryptocurrency Transfer Regulations

No specific law governs private peer to peer crypto transfers. If a conversion to fiat is involved, it falls under Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO)  requiring Customer Due Diligence for transactions over HK$8,000. It’s important to note that records related to these transactions must be kept for at least five years.

AML Requirements

Hong Kong's AMLO is applicable to a diverse range of financial entities. This includes banks under the Hong Kong Monetary Authority, companies authorized by the SFC, licensed insurance companies, stored value facility issuers, and money service operators. 

Additionally, AMLO extends its reach to certain non-financial professions and businesses such as lawyers, certified public accountants, licensed real estate agents, and trust and company service providers. As stipulated by AMLO, all entities authorized by the Securities and Futures Commission to conduct regulated activities, including newly authorized Virtual Asset Service Providers (VASPs), are required to adhere to Anti-Money Laundering/Counter-Terrorist Financing (AML/CTF) obligations. 

Furthermore, these entities must ensure their policies and practices align with the latest recommendations of the Financial Action Task Force (FATF).

Strategies for Navigating Hong Kong's Crypto Compliance Landscape

Legal and Financial Consulting

Engaging experts for real-time regulatory advice and strategic guidance helps funds adapt to legal changes, minimize compliance risks, and maintain operational stability. These advisors play a crucial role in liaising with regulators.

Internal Compliance System

Developing a robust internal system is critical for investment scrutiny, risk assessment, and ongoing compliance monitoring. Regular audits and staff training ensure adherence to current regulatory norms.

Collaborating with Banks

Demonstrating a track record of compliance and professional management is essential to meet banks' AML and KYC standards. Regular interactions with banks help foster transparency and trust while partnering with crypto-friendly banks enhances service stability and financial product quality.

Proactively Engaging with Regulators

Active participation in events like Hong Kong Fintech Week and regular engagement with bodies like the SFC and HKMA is vital for staying informed and connected, ensuring a deep understanding of the regulatory climate.

Monitoring & Transaction Surveillance Tools

Incorporating sophisticated tools like Chainalysis or OKLink for AML monitoring is vital. These solutions provide real-time insights into transactions, aiding in regulatory compliance and highlighting suspicious activities.

7. Conclusion

In the intricate world of Hong Kong's cryptocurrency market, primarily catering to sophisticated investors, navigating the complex regulatory environment is key. Market participants are encouraged to seek expert guidance, implement strong internal compliance frameworks, and employ cutting-edge technology. This approach is essential for meeting the rigorous standards established by the HKMA and SFC, especially under the new VASP licensing framework.

At Ryze Labs, our deep dive into pivotal markets like Hong Kong positions us at the forefront of emerging market growth. Our comprehensive grasp of local dynamics, coupled with a sharp focus on global regulatory trends, makes us an indispensable resource for our partners and portfolio entities. Our expertise is not just in offering timely and practical advice but in steering our partners through these dynamic markets to unearth and capitalize on the most lucrative Web3 opportunities. Together, we're committed to unlocking the immense potential that these thriving markets hold.

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I. Introduction: What Are Full On-Chain Games?

Recently, the gaming industry experienced a surge in interest with the Pass card of the full on-chain game Sky Strife reaching 21,000 ETH, astonishing players of non-full-chain games with its remarkable traction. Since the advent of "Pong" in 1972, the gaming industry has rapidly evolved, transitioning from classic 8-bit games like "Super Mario Bros" and "The Legend of Zelda," to complex social network games such as "Fortnite" and "League of Legends." Games have long transcended their original role as mere forms of entertainment.

However, with the advent of blockchain technology and the development of cryptocurrencies, the gaming industry is undergoing a transformation, reshaping our experiences in unprecedented ways. Innovative creations like Axie Infinity tightly integrate gaming with the crypto economy, while projects like Stepn combine social interaction with innovative gaming. Blockchain games are increasingly viewed as the vanguard of Crypto Mass Adoption. This shift prompts exploration into new integrations of gaming and blockchain, leading to the emergence of full on-chain games.

So, what exactly differentiates full on-chain games from traditional games?

In traditional games, all aspects like game logic, data storage, digital assets, and game statuses are controlled by centralized gaming companies. For instance, when playing games like Honor of Kings, Genshin Impact, or Dungeon Fighter Online (DNF), all game content, including in-game assets, are owned by these centralized entities.

Conversely, asset-on-chain games, often referred to as Web2.5 games, such as Axie and Stepn, have brought assets onto the blockchain. This shift allows players to own assets and enhances asset liquidity. However, these assets still risk losing value if the game shuts down. The relationship between asset-on-chain games and traditional games is complementary rather than a replacement, similar to how food delivery services relate to restaurants. Web2.5 games also face competition from both other Web2.5 and traditional Web2 games.

The emerging full on-chain games bring all game interactions and statuses onto the blockchain, including game logic, data storage, digital assets, and game states. This shift realizes truly decentralized gaming.

To provide a clear understanding, I have summarized the characteristics of full on-chain games into four key points:

1. Authenticity of Data Sources: The blockchain ensures the authenticity of data sources. It serves not just as auxiliary storage but as the primary source of game data. This approach fully leverages the characteristics of programmable blockchains, achieving transparent data storage and permissionless interoperability.

2. Game Logic and Rules through Smart Contracts: Operations within the game are executed on-chain, ensuring the traceability and security of game logic.

3. Open Ecosystem for Game Development: Game contracts and clients are open-sourced, providing a vast creative space for third-party developers. This openness allows for innovative content production and sharing through plugins, third-party clients, interoperable smart contracts, and even the redeployment and customization of game experiences.

4. Independence from the Client: This aspect is closely related to the first three points. The key to truly crypto-native games is that the game can continue even if the core developers' client is no longer available. This independence relies on the permissionless storage of game data and the execution of logic, empowering the community to interact with core smart contracts without relying on interfaces provided by the core team. This structure epitomizes decentralization.

II. Why Do Humans Need Full On-Chain Games?

Before understanding why full on-chain games are needed, let's first briefly look at the current state and operation mode of the traditional gaming industry.

Full on-chain games are essentially games as well, and understanding the operation mode of traditional games is very important and necessary for us to comprehend and analyze the future of full on-chain games.

1. Current State of the Traditional Gaming Industry

With the development of the gaming industry, many excellent Web2 games have emerged throughout our growth. Whether it's FPS games like Counter-Strike and CrossFire, RPGs like Dungeon Fighter Online and Dragon Nest, MOBAs like League of Legends and Honor of Kings, or card games like Onmyoji and Hearthstone, games have accompanied the growth of our generation and occupy a significant part of our entertainment life.

According to data from Fortune Business Insights, the global gaming market size in 2022 is $249.55 billion, expected to exceed $280 billion in 2023, and will surpass $600 billion by 2030. In a horizontal comparison with the film and entertainment industry, which has a global market size of $94 billion in 2022, it is evident that gaming, as an entertainment industry, occupies a very important position in economic development. Its depth of commercialization and breadth of types offer much to explore, making it the crown of the leisure industry.

1) Why Humans Love Playing Games

Data from Statista shows that the current number of gamers worldwide has exceeded 2.5 billion, approaching 3 billion. So, how do games manage to attract over a third of the global population? The core reason can be summarized as fulfilling various aspects of human nature's needs and weaknesses:

• Escape from Reality and Restart Life: Games provide a space to escape the pressures and challenges of daily life. In games, people can break free from real-life troubles, immerse themselves in a virtual world, and have a second life.

• Burden-Free Social Interaction: For multiplayer online games, gaming provides a platform for social interaction, which is friendly even to those with social anxiety. Players don't have to worry about others' eyes in real life, enabling them to do what they want and build relationships with others.

• Immediate Feedback and Rewards: Unlike the daily struggles of students and workers in real life, the enchanting aspect of gaming lies in its rich reward system and immediate reward mechanism. After putting in effort, defeating monsters, and completing challenges, players quickly gain new skills, unlock new levels, or receive new items. This incentive mechanism can inspire people to keep moving forward.

• Low-Cost Freedom to Explore: Many games offer rich virtual worlds for players to explore unknown territories, interact with NPCs and other players, and advance the plot, satisfying the human innate desire for adventure and exploration. In contrast, in the real world, the cost of exploration is significantly higher due to constraints of money, energy, time, and geographical location.

• Pursuit of Achievement and Self-Actualization: By completing a series of tasks and goals, people can fulfill their desire for success and recognition. Whether it's leaderboards or achievement points, in games, people can more easily achieve self-challenges and character growth.

By cleverly addressing one or more human weaknesses, games can meet the diverse needs and preferences of different users, playing a significant role in both covering a broad audience and providing deep immersive experiences.

2) Current Status and Development of Traditional Gaming

Next, let's briefly understand the current state of the traditional gaming industry.

In traditional gaming, there are generally categories like Shooter, Adventure, Role-Playing, Battle Royale, Strategy, Sports, Puzzle, Action, Simulation, and other game types.

According to data from Newzoo, role-playing and adventure games perform well across PC, mobile, and console platforms, ranking in the top five. Additionally, genres like shooters and battle royales are very popular on PC and consoles. On mobile platforms, puzzle and idle games also enjoy considerable popularity among users.

2. Challenges in the Traditional Gaming Industry

However, the traditional gaming industry currently faces two major challenges: first, the game publishing is restricted by licensing, and second, the high costs involved in game development before release lead to a slow return on investment, often resulting in sunk costs.

1) Game Publishing Limited by Licensing

Game licensing refers to the requirement in some countries or regions to obtain a specific permit issued by the government to release a game. This system aims to regulate game content, ensuring that games comply with the laws, culture, and values of the country or region, to protect minors from inappropriate content and maintain social stability.

For example, Germany has strict content censorship for games, focusing on content that may negatively influence teenagers. Korea and Japan have game rating systems evaluated and issued by national agencies.

In China, the impact of game licensing is even more significant. China implements a strict game licensing system managed by the National Radio and Television Administration. Games must obtain a license before they can be released in the Chinese market.

After the release of 87 licenses on July 22, 2021, there was a long period of stagnation until April 2022, when the situation began to turn around. In April 2022, 45 licenses were issued, followed by more in September and December. However, during the license approval hiatus from mid-2021 to April 2022, only a few large companies survived, while many small and medium-sized game companies faced closure. According to data from Tianyancha App, over 14,000 small and medium-sized game companies (with registered capital below 10 million yuan) were deregistered from July to December 2021.

China, as the world's largest gaming market with over 500 million gamers, faces significant pain due to licensing issues. Even with the resumption of license issuance, the tightening or continuous adjustments of licenses remain a Damocles' sword for every game project. During the period without license issuance, numerous unfunded projects faced closure.

2) High Costs Before Publishing and Silent Costs

In the Web2 game development model, during the game development phase, upfront human resource and infrastructure costs are incurred, and there are idle time costs during the waiting period for licensing. Profit sharing only occurs once the license is issued, the game is published, and commercial revenue is generated.

It's evident that a large portion of the costs is incurred upfront. If issues arise during the development phase, licensing phase, or user acquisition stage, all preceding costs become sunk costs. For a medium-sized game, the cost is typically several million dollars. The lengthy initial development and publishing phases mean that the profit cycle is very long, resulting in higher risks of achieving expected returns.

3. The Breakthrough Attempts of Web2.5 Games

Facing these two dilemmas, Web2.5 games took the lead in breaking through. On one hand, Web2.5 games circumvented domestic licensing restrictions by targeting global users, making them accessible to citizens worldwide. On the other hand, by issuing NFTs and tokens, these games could generate revenue through market-making even in the early stages of internal testing and development, significantly lowering the financial entry barrier for game production.

In the breakthrough attempts of Web2.5 games, games like Axie and Stepn emerged, gaining significant popularity. Axie became so popular in Southeast Asia that many people earned a living through it, with incomes exceeding the average wage in the Philippines. Stepn's move-to-earn model attracted many non-Web3 users who began to ask, "How do you play with those running shoes? I want to give it a try too," sparking a trend of blockchain games breaking into the mainstream. However, as the Ponzi economic model of Web2.5 games collapsed, none could ignite the same spark as Axie and Stepn.

Builders began to explore in different directions. Some moved towards AAA titles, attempting to carve a niche among Web2 users, but this led to Web2.5 AAA titles having to compete with both Web2.5 and Web2 games. Another group decided to take a different path, turning towards full on-chain games to explore new possibilities and validate their value. In the emerging industry of Web3, there are always pioneers eager to forge ahead on newer paths.

III. Current State Analysis of the Full On-Chain Gaming Industry

Currently, the entire full on-chain gaming industry is in a very early stage, with both game projects and related infrastructure under development. In the industry landscape of full on-chain gaming, it can be broadly divided into four main categories: full on-chain game projects, full on-chain game engines, full on-chain gaming blockchains, and full on-chain game distribution platforms.

1. Full On-Chain Game Projects

Current full on-chain game projects are in their infancy. Let's analyze a few full on-chain game projects to understand the current state of full on-chain games.

In terms of game projects, there are early well-known ones like Dark Forest, and recent ones like Loot Survivor, Sky Strife, Imminent Solace, Loot Royale, etc. Most of the projects that can be experienced are still in the testing phase, and the number of playable full on-chain games on the market does not exceed double digits. The games are mainly SLG (strategy) types, and many new project teams are experimenting with the direction of simulation and management.

Since most games are still under development and unplayable, let's focus on a few playable and unique full on-chain games.

1.1) Dark Forest

Let's start with Dark Forest, a representative of full on-chain games. Simply put, Dark Forest is a decentralized strategy game created on Ethereum using zkSNARKs.

Developed by MIT graduate Brian Gu under the pseudonym Gubsheep, Dark Forest draws partial inspiration from Liu Cixin's sci-fi novel "The Dark Forest." Other team members include Alan, Ivan, and Moe. The game project didn't raise funds, but Argus Labs, a new project of the team, recently raised $10 million.

Dark Forest is one of the earliest established incomplete information games on a decentralized system. As a space conquest strategy game, players start their journey on their planet to explore the infinite universe, discovering and occupying other planets and resources to develop their empire.

Dark Forest's three main highlights: Two have already been mentioned in the introduction to full on-chain games. First, the game logic, data, and status are all on-chain, and centralized entities cannot single-handedly control their outcomes. Second, a free and highly combinatory game ecosystem: the open-source full on-chain game model gives Dark Forest permissionless interoperability. Essentially an Ethereum smart contract, any address can interact with it, thus fostering a thriving secondary creation ecosystem (plugins), leading to more ecological communities.

For example, Project Sophon wrote a Dark Forest local library allowing users to start a game round on or off-chain; the Ukrainian game organization Orden_GG built a trading market for artifacts and added liquidity pools; the Chinese DAO MarrowDAO|GuildW @marrowdao developed numerous plugins including an artifact trading market, GPU mapping tools, etc. The UGC ecosystem is fascinating.

Another significant highlight of Dark Forest is the use of zk-SNARKS technology for information concealment. In strategy games, if all information is transparent, opponents will know one's location, making it impossible to implement strategic opposition under full transparency. Dark Forest utilizes zk technology, so when a player first enters the game, most of the universe and opponents are hidden. Only when a player explores the hidden areas do they become visible. Each time a player moves, they send a proof to the blockchain, confirming that the move is valid, without revealing their coordinates in the universe.

Since the official v0.6 version Round 5 ended in February 2022, Dark Forest hasn't launched a new game version. Currently, the game is in a state of free operation. If you want to experience the game, you can participate in some community-organized rounds, such as creating a small universe in the Arena system developed by dfDAO to get a feel for it.

In summary, Dark Forest has redefined the possibilities for Web3 games. Many praise "Dark Forest" as a perfect example of the intersection between gaming and cryptography, providing inspiration for many subsequent full on-chain game projects. According to previous reports, the game has accumulated over 10,000 players in its history.

However, the significance of Dark Forest extends beyond the game itself. As the first widely recognized full on-chain game, it serves more like a spiritual totem for the full on-chain gaming industry. It showed builders in the industry that based on full on-chain gaming, there are numerous free, open combinatory play methods and a thriving secondary creative ecosystem that can emerge, bolstering the confidence in the possibility of creating "Autonomous Worlds."

Following the creation of Dark Forest, the Dark Forest team and several others formed 0xPARC. One of the sub-projects of 0xPARC, Lattice, while developing full on-chain games, discovered the high cost of existing development. Therefore, in 2022, they started the MUD project, aiming to develop a user-friendly full on-chain game engine around the ECS framework. This project addresses issues like contract and client state synchronization, continuous content updates, and interoperability with other contracts, thereby lowering development barriers and significantly advancing the development of full on-chain games. In some ways, Dark Forest represents a significant symbol and catalyst for the advancement of the full on-chain gaming industry.

1.2) Loot Survivor

Next, let's take a look at Loot Survivor, a game developed by the BibliothecaDAO team and an important part of the Loot ecosystem.

Loot was launched on August 28, 2021, by @Dom Hofmann. Unlike common PFP-type NFTs such as BAYC and Crypto Punks, each Loot NFT consists of text with white letters on a black background. The interpretation of these texts is very open and free, and its characteristics of being entirely community-driven and autonomously grown attracted many ecosystem contributors and related derivative projects.

Among them, Loot Realms, launched on September 1, 2021, has been dedicated to the development of the Lootverse. Core contributors @lordOfAFew and @TimshelXYZ played significant roles in this project, building the underlying narrative of Loot and presenting the narrative in a gamified way through Eternum, the first project of Realms.

The team proposed the core concept of "Play 2 Die" as early as February 2022, initially planned as an expansion of the Realms series, named "Realms: Adventurers." However, during the iterative development process, the team decided to quickly release a smaller-scale solo full on-chain game, leading to the birth of Loot Survivor.

Loot Survivor is a text-based dungeon or Roguelike game. It made its debut at the full on-chain gaming summit in Lisbon on May 25 this year (which is also the author's birthday) and garnered significant attention.

The overall gameplay is relatively simple, involving text-based interactions to fight monsters until death. The game also features a leaderboard, encouraging users to continually challenge themselves.

Overall, the game has a smaller scale and playability, inheriting more from the creative aspect of the Loot ecosystem and adding a gamified narrative to it. Additionally, as one of the flagship projects of the Dojo engine ecosystem, it has bolstered confidence in both the Dojo engine and Starknet ecosystems.

1.3) Imminent Solace

Imminent Solace is a recently launched battle royale game based on ZK fog of war mechanics, developed using the Mud engine. The project team, developed by PTA DAO, is a Chinese team highly focused on full on-chain games. It combines PvP plundering, autonomous world exploration, and PoW resource mining. The gameplay is similar to Dark Forest, but with simpler operations and a better user experience.

The ultimate goal of the project is to create a war simulation game akin to EVE, where players experience tangible losses in resources and assets during gameplay, posing strategic challenges.

Imminent Solace is one of the more playable full on-chain games released recently, with good game interaction and user experience.

Additionally, there are other games exploring the path of full on-chain gaming, such as Sky Strife and OPCraft developed by Lattice, the text-based game Word3 by SmallBrain, the Web3 version of Werewolf, Framed, and the battle royale game Loot Rayale, as well as the nurturing management game Genki Cats. Most of these games are still in the testing phase, and only a few are currently developed and playable.

The research reveals that almost all current full on-chain games are web-based, with virtually no presence on PC or mobile platforms. 

• On one hand, this aligns with the characteristic of full on-chain games not requiring a dedicated client. Since full on-chain games can have multiple front-ends, it's most important for project teams to quickly develop an MVP version for the community and users to play with. Web platforms, compared to PC and mobile, offer faster development speeds and lower costs, making them the optimal or even the only choice for many developers.

• On the other hand, full on-chain games are still in the proof-of-concept stage. The key lies in how to quickly develop playable games to validate the value of the game.

2. Full On-Chain Game Engines

Before delving into full on-chain game engines, let's first understand the core essence of engines:

Simply put, it's about standing on the shoulders of giants to see the world. Game engines integrate commonly used game-making functionalities into general-purpose code, so subsequent creators don't have to reinvent the wheel.

For example, in traditional game engines like Unity and Unreal Engine, game developers can use existing engines to implement the laws of motion after a cosmic explosion or the trajectories of characters colliding, thus focusing their efforts on developing unique game content.

Similarly, full on-chain game engines aim to achieve similar objectives. Compared to traditional game engines like Unity and Unreal Engine that can handle tasks like graphic rendering, physical simulation, and network communication, full on-chain game engines, due to the characteristics of their games, focus more on contract-client state synchronization, continuous content updates, and interoperability among different contracts.

Currently, in the realm of full on-chain game engines, there are several, including Mud, Dojo, Argus, Curio, Paima, etc., among which Mud and Dojo are the two most mainstream full on-chain game engines. They have created a competitive landscape in the EVM-compatible ecosystem and Starknet ecosystem. Here, we will mainly introduce these two game engines.

Mud

Mud, officially released by Lattice in November 2022, is the first full on-chain game engine. The Mud team, Lattice, and the full on-chain game pioneer Dark Forest both belong to the OxPARC team. As the earliest full on-chain game engine, Mud currently has the most developers in its ecosystem. Besides the earliest Dark Forest, it has also given birth to OPCraft, Sky Strife, Word3, and the recent Imminent Solace, making it the most developer-rich full on-chain game engine.

Dojo

Dojo, born in the Starknet ecosystem, initially revolved around MUD development in Starknet's Cairo language and was officially released in February 2023. From the words of Dojo's core developer, tarrence.eth, it's evident that there is a passion for the Cairo language, which is considered to have greater advantages in proof recursion and step-by-step proof compared to Solidity.

However, from another core developer, Loaf's speech, it appears that the reason for creating another Mud-like engine on Starknet is not that Mud was insufficient, but because Loaf wanted to develop an ECS system on Starknet and thus chose to fork MUD. Similarly, other Layer1/Layer2 networks looking to develop their full on-chain game ecosystems, like Move and Flow, have also started forking their engines. Essentially, it's about enriching the on-chain ecosystem and choosing to build the infrastructure for full on-chain game builders.

Backed by the major IP of the Loot ecosystem, the Dojo ecosystem has also seen many notable projects, with Loot Survivor, just mentioned, being one of them, as well as Loot Realms: Eternum belonging to the Loot ecosystem. In addition, other projects like Dope Wars and Influence have also performed well.

Just as traditional game engines have played an important role in advancing the game industry, the rise of the full on-chain gaming trend is closely related to the emergence of full on-chain game engines. They enable developers to create games at lower costs. The advent of Mud and Dojo has propelled the development of the entire full on-chain gaming track, with events like the ETH AW Hackathon, Pragma Cario 1.0 Hackathon, and Lambda zkWeek Hackathon in May, June, and July of this year continuously nurturing the development of full on-chain gaming.

3. Full On-Chain Gaming Blockchains

In the domain of gaming-specific blockchains, compared to the gaming-specific chains that were popular in the Web2.5 gaming era (which I won't enumerate here), current full on-chain gaming projects prefer to build on general-purpose Layer 2 solutions like Arbitrum Nova, Optimism, Starknet, etc.

The fundamental reason is that these previous gaming-specific chains catered to users who enjoyed Web2.5 blockchain games and AAA-like titles. Such players are generally not very interested in full on-chain games, which tend to have simpler and less polished content. Consequently, these so-called gaming-specific chains don't attract much attention from full on-chain gaming projects.

Additionally, it's worth noting CaptainZ's mention of a contradiction that exists when a game is fully on-chain: the conflict between the push-based nature of blockchains and the loop-based nature of games.

Many blockchains are event-driven and passively trigger updates only when a new transaction or operation occurs. This framework fits well with many existing applications. For example, in the DeFi space, when users want to trade two tokens on Uniswap, the trade is executed after the transaction is submitted, in an event-driven process. Similarly, many social platforms are also event-driven. For instance, when you post a tweet on Twitter, it is published and seen by others, paralleling the event-driven nature of blockchains.

However, many traditional games are structured based on loops (except for some turn-based and card games), where the game system actively processes user inputs, updates the game state, and renders the game world. Each loop is called a Game Loop or Tick, and many games require dozens or even hundreds of Ticks per second to ensure continuous play.

This leads to a natural contradiction between game logic and current blockchain logic. Facing this situation, some teams are building proprietary chains specifically for full on-chain games, also known as Ticking chains.

For example, the Argus team is building a new Layer 2 based on Polaris (an EVM module compatible with the Cosmos SDK), which is a ticking chain with a precompiled ticking function, named World Engine. Curio is also building a new Layer 2 based on OPStack, which also has a precompiled ticking function.

Although still in the development stage, there is much anticipation for the emergence of a new roll-up constructed specifically for full on-chain gaming. It is believed that such chains will further propel the development of full on-chain gaming.

4. Full On-Chain Game Aggregators/Distribution Platforms

Lastly, let’s discuss the still-nascent aggregators/distribution platforms for full on-chain games. Currently, as full on-chain games are in their early stages, the number of playable full on-chain games available on the market is very limited. According to data from Composable Hub, including alpha, beta, and fully launched games, the number of playable games does not exceed 30.

Therefore, for players of full on-chain games, finding these games largely relies on word-of-mouth and circulation within small circles. There aren’t many aggregators like those in mature tracks such as DeFi and GameFi to help users explore and choose games.

Currently, there are two main platforms dedicated to aggregating full on-chain games: Composable Hub and Cartridge.

Composable Hub

Composable Hub is a full on-chain game aggregator platform under Composablelabs, which also owns Klick, a GameFi aggregator for Web2.5 games, and Lino Swap, an NFT DEX.

Currently, Composable Hub aggregates 56 full on-chain games, with 14 of them fully launched, 12 in the testing phase, and the remaining 30 still under development.

Cartridge

Cartridge is a full on-chain game aggregator in the Starkware ecosystem, committed to creating a Web3 version of Steam. Currently, it aggregates five games from the Starknet ecosystem: Dope Wars-Roll Your Own, Influence, Loot Survivor, Briq, and Frens Land. In addition, the Cartridge team has been continuously promoting the development of the Dope Wars-Roll Your Own game and is also a core contributor to the Dojo engine.

IV. Core Advantages of Full On-Chain Games

In summary, full on-chain games, by putting the game's logic, state, data storage, and assets entirely on the blockchain, make gaming more fair. Moreover, because both the game contracts and accessible game clients are open-sourced, they provide a broad autonomous space for third-party developers, allowing for more community and third-party developed rules and gameplay.

This openness transforms the traditional model where the game company is the provider and players are consumers, into a new model where every player can be a builder and creator of the game.

1. From PGR to UGR, Empowering Everyone to Play God

In traditional games, all our content is provided by the company, whether playing Honor of Kings, Genshin Impact, Fortnite, or Overwatch. We are participants in a PGC (Professional Generated Content) model. Of course, we have the right to create, engaging in secondary creations like character designs and writing fanfiction, thus achieving a degree of UGC (User Generated Content).

However, this kind of creation does not involve the core of rules and gameplay. We can only be consumers, not makers, of game rules; we are powerless to enhance or weaken game characters or to change game values and environments, still bound by PGR (Professional Generated Rules). For players yearning to create, this is somewhat restrictive. Humans, disillusioned in the real world, always yearn for the power to play God, aspiring to UGR (User Generated Rules), whether through novels, films, or games.

Most traditional games, due to considerations of business models, security, and stability, are reluctant to experiment with openness. However, we can see in many games that some projects are starting to transition towards openness and PGR, allowing other developers to create game content beyond the official scope using mods. The most notable example is Minecraft, which allows players to create and run their own game servers. Third-party developers can implement custom game modes, rules, and content, creating gameplay different from the original game, including Minecraft versions of battle royale or even online graduation ceremonies during the pandemic.

Although Minecraft allows the creation of new game modes through the establishment of multiple servers, these servers are separate and not interconnected, competing for players' attention and time. The data accumulated by players in one gameplay cannot be circulated in a new gameplay server. This kind of UGR is truncated, forming their small universes, not a shared universe for everyone.

The creation of new gameplay in Minecraft requires setting up new servers, but the difference in full on-chain games is that they share the same backend. Different mods and smart contract interactions only affect the frontend, allowing data to be shared and circulated across different clients.

Due to their on-chain nature for game logic and rules, and support for permissionless interoperability, full on-chain games enable players to freely build and create various game functions and experiences. These creations are not isolated from each other, greatly enriching the game's content and features, such as trading markets, embedded games, custom clients, etc., making the gaming experience more diversified and realizing the transition from PGR to UGR.

This reminds me of the virtual world of Jiuzhou, collectively created more than a decade ago by Chinese online writers Jiangnan, Jin Hezai, and Da Jiao, among others. They formed a Jiuzhou universe through collective storytelling, extending from literary works to the film, television, and gaming industries, creating a vast world.

In fact, if we compare it to our lives, full on-chain games are somewhat similar to playing cards. Playing cards themselves only have fixed suits and numbers, but people have developed various ways to play, like Dou Dizhu, Texas Hold'em, Tractor, Upgrade, Panic, and Zhajinhua, showing the diversity and flexibility of game rules. Full on-chain games do the same; by supporting open creation and interoperability, players can build various different game experiences on basic rules. In traditional games, everyone is just a consumer, but in full on-chain games, people can become the creators of game rules.

In summary, the advantage of full on-chain games lies in their openness and permissiveness. They grant players greater creativity and freedom, allowing them to participate in the creation of game rules and content, thus forming a diverse, personalized, and vibrant gaming ecosystem.

2. Fairness and Transparency, Experiencing an Unmanipulated Gaming Environment

Another major advantage of full on-chain games is the transparency that comes with having all game logic and rules on the blockchain.

This transparency is particularly crucial for betting and gambling games.

As shown in the popular movie "Rounders," the outcomes of gambling apps used by players are often manipulated by centralized companies. The results might not be random but pre-determined. For card games like poker and Zhajinhua, which involve gambling, the opacity of the game process and status can lead to countless players being unfairly treated. This is one of the reasons why many Web2 gambling games involving money are often criticized.

The transparency of game logic and rules in full on-chain games ensures open and transparent rules. Combined with cryptographic technologies (for example, ZK-SNARK used in war fog-type games like Dark Forest and Imminent Solace), it allows game genres with a strong need for fairness to achieve an experience that is difficult to realize in Web2 and Web2.5 games.

V. Challenges and Limitations of Full On-Chain Games

As the infrastructure continues to improve, full on-chain games are gaining traction. However, despite their unique advantages, they face several limitations and challenges:

1. Poor User Experience

In general, players agree that the playability of current full on-chain games is much lower compared to Web2 and Web2.5 games. On one hand, most full on-chain games have rudimentary or rough graphics. On the other hand, they face four main challenges in terms of interactive experience:

1.1) Difficulty in Finding Players: 

For multiplayer PvP games that often require at least four players, it’s hard to find enough participants due to the small number of players in full on-chain games. The absence of a matchmaking mechanism means many multiplayer games only have the option of inviting friends to play, which can quickly diminish interest.

1.2) High Entry Barrier: 

Apart from the gaming experience, many full on-chain games set numerous artificial barriers, such as certain games only being playable at fixed times or requiring an entry fee, like purchasing specific tokens or NFTs to play. This restricts and increases the gaming cost for players.

Some game developers maintain the spirit of independent game development, believing that paying for games is the most authentic approach. However, independent games in the Web2 era at least offer some innovative gameplay or high-quality content to attract players.

Facing the current situation where the majority of full on-chain games have such low playability, why would users be willing to spend money on games that they wouldn't give a second glance in the Web2 world? This to some extent reinforces the stereotype that full on-chain games are often self-indulgent. Apart from a few project teams and true believers, how many people are really willing to play these games? Many players who are willing to try out beta versions of games do so out of passion, and the actions of some of these project teams can be off-putting to players.

1.3) Frequent Bugs: 

Full on-chain gaming requires a lot of patience from players. 

From PC to mobile, the overall trend in gaming has been towards greater convenience. In contrast, in full on-chain games, it's common to encounter bugs, whether in page refreshes or various unexpected errors, testing the patience of anyone trying to complete a full gaming session.

1.4) Overpromising and Underdelivering: 

Most current games are big on narrative but offer very low playability, even less enjoyable than web games from a decade ago. Hopefully, as the infrastructure and more builders join, the gap in playability between full on-chain games and Web2 games will narrow.

2. Limitations in Game Genres

Due to the current performance of blockchains and the imperfect infrastructure, not all game genres are suitable for full on-chain implementation.

From the existing types of full on-chain games, it’s evident that strategy games (SLG) dominate. These games do not require high real-time responsiveness. In contrast, genres like RPG, AVG, ACT, and MOBA demand continuous, real-time updates, which current blockchain performance struggles to support.

Current full on-chain games are developing in two directions: one is to create small but refined games with playable MVP versions to accumulate users, such as simulation management, pet nurturing, tower defense, and other lightweight, playable game types. The other direction is to build grand narratives and open worlds, creating imaginative ecosystems through expansive worldviews and narratives. However, due to genre limitations, these games are largely confined to the aforementioned types. Creating a groundbreaking game like the next Axie or Stepn requires further exploration and collaboration.

3. Real Demand or False Demand

The biggest challenge and controversy for full on-chain games is whether there is a real demand for them.

Taking the two core advantages of full on-chain games as examples:

1) The transition from PGR to UGR: On one hand, many open games in Web2, like Minecraft, can achieve this. On the other hand, the necessity of server data circulating in different game clients needs questioning. For example, is it necessary for mounts, level 90 characters, and flying wings from an RPG client to circulate into a MOBA game? This needs further exploration.

2) Fairness and Transparency: This is mainly relevant in gambling games. However, the number of online gamblers is far less than offline gamblers (1.2 billion online in 2023 compared to approximately 4.2 billion gamblers globally each year), indicating a low ceiling. Moreover, for serious gamblers, the convenience of depositing and withdrawing money is more important than fairness. Gamblers care more about the speed and convenience of fund and chip transactions, which is a significant weakness of Web3 games given the current infrastructure.

Focusing on the two main features of full on-chain games, UGR and fairness, if some categories can utilize these features well in the future, they might address the real needs of gamers and attract more participants. However, as it stands, there's a long way to go.

4. Fully Decentralized Games May Not Necessarily Be Fun and Could Lead to Chaos

Like the two sides of a coin, the flip side of openness is chaos. Human nature is inherently lazy, and for players who prefer consumption over creation, the most important aspect remains the game's playability, especially for those accustomed to the PGR (Professional Generated Rules) model in traditional games.

It's challenging for genuine game designers to delegate the content creation of games to others. Every user has different abilities, and ordinary players might design games from their perspectives, making it difficult to maintain gameplay balance and playability.

The question of whether professional tasks should be left to professional game developers or whether rights should be given to everyone is a significant and real issue. Balancing democracy and elitism in game design is complex.

Therefore, it's crucial for full on-chain game development teams to not only have interesting and stable core gameplay but also to provide space for players to create and extend new gameplay. Striking this balance is essential. Otherwise, games risk becoming either too centralized or too open-ended, failing to attract players to participate in new gameplay creation.

For full on-chain game teams, it's necessary to play the role of the "initial god" well, designing the core gameplay and using appropriate incentive mechanisms to attract more players to collectively create and enrich the game world.

VI. Reflections on the Business Model of Full On-Chain Games

Finally, let's discuss the business model of full on-chain games, a topic of keen interest to both project teams and investors.

Let's analyze the evolution of traditional gaming business models. The business models of electronic games have gone through several stages, changing with technological advancements, market shifts, and evolving player demands:

1. 1970s: Coin-Operated Mechanism

   • The earliest consumer electronic games date back to the arcade games of the 70s and 80s. Due to hardware requirements to run electronic games, each game was housed in a standalone physical device, such as Pac-Man and Galaga, where players inserted coins to gain playtime or lives.

2. 1980s: One-Time Purchase

   • Early electronic games were mainly console games sold through retail channels, where players purchased physical game cartridges or discs. This era was dominated by product sales, and players could play the game after a single purchase.

3. Mid-1990s: Subscription Model

   • With the spread of the internet, multiplayer online games began to rise. Some game companies introduced subscription services, requiring players to pay monthly fees to access game servers. A notable example is "World of Warcraft."

4. Mid-2000s: Ad-based Model + In-Game Purchases

   • The free-to-play game model emerged, offering games for free while allowing players to buy virtual items or in-game currency for additional benefits. Some games also adopted an advertising model, generating revenue by displaying ads within the game.

5. Early 2010s: In-Game Purchases

   • With the rise of smartphones, mobile gaming became mainstream. In-app purchases became a major profit model, allowing players to buy various items to unlock features or accelerate game progress.

6. 2020s: Cloud Gaming Subscription Model

   • Recently, cloud gaming has entered the public eye, where players stream games from cloud servers without the need for downloads or installations. Additionally, game subscription services like Xbox Game Pass and PlayStation Now have started to gain prominence, offering a range of games through subscription.

These shifts in business models reflect the electronic gaming industry's continuous adaptation and innovation in response to technology, market trends, and player needs. Similarly, the evolution of business models has also influenced game design, development, and player experience to some extent.

With the advent of GameFi, from Axie to Stepn, the business models primarily include the following types:

1. In-Game Economic Systems: Most GameFi games have established their own economic systems, using tokens, NFTs, and in-game assets as mediums of value. Players can acquire virtual assets through in-game activities, which hold value within the game and can be exchanged for real-world currency. For instance, in the well-known game Axie Infinity, players raise virtual creatures (Axies) that are NFTs, which can be traded, sold, and used to earn cryptocurrency rewards in the game.

2. Play-to-Earn Model: Players earn profits by participating in games, which can be in the form of in-game currency, tokens, or other tangible rewards. For example, players joining gaming guilds like YGG can earn profits by playing games such as Axie Infinity and receive incentives and loans from YGG.

3. Integration of DeFi and Financial Products: Some GameFi projects integrate DeFi elements, offering services like loans, liquidity mining, and trading. Players can earn profits or invest using DeFi products within the game. In Decentraland, for instance, players can purchase virtual land plots and build on them. These plots can be used for investment or trading, and some may appreciate in value within the virtual world.

For full on-chain games that are still in their early stages, choosing the right business model is an ongoing exploration. However, given the characteristics of full on-chain games, the future will likely focus more on playability rather than DeFi aspects. Simple Ponzi schemes are unlikely to be effective anymore, especially with users who are experienced with such schemes in the gaming space.

The business model for full on-chain games should ideally leverage their unique features to enhance playability. Depending on the type of game, future business models can be broadly categorized into three directions:

1. For lightweight games like simulation management and pet nurturing:

   • Consider adopting a token-based model with NFTs and Tokens, following a "free-to-play but pay-to-advance" approach.

2. For open-world narrative games with grand storytelling:

   • If the game has high playability, consider setting up a payment barrier similar to independent games, along with related subscription and membership models. However, given the generally low playability in the early stages, it might be more practical to initially adopt a business model similar to lightweight games, to first attract users to start playing.

3. For board and card games:

   • The business model could emulate the traditional/offline approach of taking a commission.

Currently, the full on-chain gaming sector is still in a phase of exploration and value validation. It's anticipated that more innovative and engaging models will emerge, potentially leading to the next mass adoption in gaming.

VII. Conclusion

In summary, the gaming industry has evolved over decades, from its inception to its integration with blockchain technology. Humans, not satisfied with merely being consumers of PGR (Professional Generated Rules) games, have developed a desire to become creators in UGR (User Generated Rules) scenarios.

Just like the origin of Dota, which emerged from the custom map community of "Warcraft III: Reign of Chaos." The map editor allowed players to create their maps, one of which was "Dota." From Eul's initial creation of Dota, followed by Guinsoo taking over the game development, adding new heroes, items, and mechanics, to IceFrog introducing a series of updates and improvements, enhancing the game's balance and depth and incorporating more heroes, skills, and tactical elements, leading to widespread recognition and success for Dota, and eventually the release of DOTA 2 by Valve Corporation in collaboration with IceFrog, achieving global success.

The developers of the Warcraft map editor might not have envisioned the global fame of a game like Dota and the craze of MOBA games. On the path of user creation, it often takes time and opportunity to birth new hit products.

The same applies to full on-chain games. In today's pioneering era, they still have many drawbacks, such as poor user experience and low playability. To become a mass adoption, they face the challenge of attracting new users. Attracting more Web2 players involves overcoming the threshold of entering Web3 – registering wallets, learning to buy NFTs, purchasing tokens, etc., all of which have a steep learning curve and are obstacles for all Dapps. Even if account abstraction and built-in exchanges in Web3 projects simplify game entry and funding, the biggest question remains: What need of game players does full on-chain gaming actually solve?

Narrating for the sake of narrative or being on-chain for its own sake is ultimately a case of a hammer looking for a nail. How to effectively use UGR and the fairness characteristic of full on-chain gaming is a question every builder in this space must address. The unique features of full on-chain games can provide fairness (for instance, the recent non-full on-chain game Fren Pet's daily spin feature, if executed on-chain, would achieve greater fairness, reducing the impression of it being a "money game") and also pave the way for the transformation from PGR to UGR, giving every user the potential to play God.

The development of Web3 cannot be separated from the wealth-creation effect, and the essence of games lies in their playability. How to combine wealth creation with playability still needs more exploration. It's hoped that continuous exploration in the full on-chain gaming track will genuinely bring forth projects that leverage full on-chain features and address real needs. I also look forward to seeing new universes emerging in the ocean of openness on the path of full on-chain gaming.

Lastly, a huge thanks to Phyrex Ni, Constance, Joven, Karvin, Yolo, Xiao Hu, Manda, Xiao Ran, Norman, Alex, Carl, Justin, frost, Haiyu, Nico, Golem, yafon, Gink, Robinn, and other partners for their help, as well as everyone who was willing to share and patient during our discussions. I sincerely hope that all builders in this track continue to thrive!

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We are going to set up an ar.io gateway, step by step, on a Raspberry Pi. If you are a beginner to self-hosting, fear not, we’ll walk through each step of the process to get you from zero to a core contributor to the Permaweb. We will be referencing the fantastic YouTube video series created by the ar.io team, as well as their docs, available at ar.io/docs/.

Before learning about Arweave and ar.io, a quick note on self hosting.

What is self-hosting?

Running services like a gateway on a private server that you control is known as self-hosting. Self-hosting allows people to have more control over their data, privacy and computing infrastructure, and has become more and more popular with the growth of cloud computing providers like AWS and Digital Ocean. To add an extra layer of privacy and control, as well as save on monthly server costs, a growing number of people are opting to host services at home using their own hardware. 

The Raspberry Pi is a great choice for self hosting. It is a small, affordable, single-board computer (SBC) developed in the UK by the Raspberry Pi Foundation. It was originally designed to promote the teaching of basic computer science skills in schools, particularly in developing countries. Since its launch, it has become popular among hobbyists, creators, and educators because of its low cost, low power requirements, portability, and versatility. It is used in applications from IoT projects and home automation, to commercial displays and PoS kiosks - and even Bitcoin nodes!

Arweave and ar.io

Arweave is a groundbreaking protocol that stores data in a secure and permanent manner, making it ideal for preserving information for the long term. Unlike traditional storage systems that can be vulnerable to data loss, via accidental deletion or intentional corruption / censorship, Arweave uses blockchain technology to ensure that data remains accessible and unchanged over time on a blockchain-like data structure known as the blockweave. Its focus on permanent storage sets it apart from other technologies like filecoin which is more of a low-cost alternative to temporary storage.

The ar.io ecosystem is dedicated to cultivating products and protocols for sustaining access to digital permanence. It is a network of decentralized gateways and permanent domains for the Arweave ecosystem consisting of:

• Decentralized, independently operated, gateway nodes

• The IO Token

• The ArNS Domain Name System

• Token incentive structures

• A community of digital permanence pioneers

What is an ar.io gateway?

A gateway’s primary role in the Arweave ecosystem is to act as a bridge between the Arweave network and the outside world. It is a front door to the Permaweb - a permanent, decentralized web built on top of the Arweave network. Gateways simplify the technical processes of writing, reading, and discovering data on the blockweave, in a trust-minimized fashion. ar.io gateways are different from standard Arweave gateways in that they are optimized for:

• Data retrieval

• Caching

• Serving

• Indexing transactions

Furthermore, gateways make the network more resilient by:

• Proxying Layer 1 transaction headers to one or more healthy and active Arweave nodes (miners) to facilitate inclusion in the mempools of as many nodes as possible.

• Proxying chunks for Layer 1 Arweave transactions to Arweave nodes to help facilitate storage and replication of the chunks on the blockweave.

• Receiving and bundling so-called Layer 2 data items (e.g., ANS-104 spec) as Layer 1 transactions.

Why run your own gateway?

Here are some of the many benefits to running your own gateway at home:

1. Access to the Arweave network: By running a gateway, you can provide access to the Arweave network to users and developers who want to interact with data stored on the platform. This can help expand the reach and usability of the Arweave ecosystem.

2. Trustless and private data retrieval: Running a gateway allows users to retrieve data from the Arweave network without relying on a central authority. This enhances data resilience and availability. Gateways can also be configured for enhanced user privacy by disabling logging and data requests tracking.

3. Support for dapps and developers: Developers often require access to the Arweave network to build and test their apps. Your gateway can serve as a valuable resource for developers, fostering the growth of the Arweave ecosystem.

4. Be your own network: Serve your own data or build your own apps. Become a developer and contribute to data permanence.

5. Make permanent data convenient. Gateways facilitate friendly-subdomain-name routing to Arweave transactions via a direct integration with the Arweave Name System (ArNS). They also allow easy consumption of telemetry data for internal and external monitoring and alerting.

6. Share the load: Gateways provide connectivity to a decentralized network of other ar.io gateways, enabling data sharing and other shared workloads.

7. Educational opportunities: Operating a gateway can be a valuable learning experience, as you gain insights into Permaweb structure and have full control over data traversal.

8. Customization and control: When you set up your own gateway, you have control over its configuration, performance, and availability, allowing you to tailor it to your specific needs and requirements.

As you can see, gateways serve a vital role in the ecosystem. By operating a gateway, you contribute to the availability of data on the Arweave network, proxying transactions to nodes, help to support the Arweave network and ensure that important information remains accessible for the long term. It is a fantastic way to actively contribute to the Arweave community. For more information on the benefits of gateways, visit https://ar.io/docs/gateways/#overview.

What kind of resources does a gateway use?

Minimum - for consumer grade hardware for smaller projects:

4 core CPU

4 GB Ram

500 GB storage (SSD recommended)

Stable 50 Mbps internet connection

Recommended - for larger projects

12 core CPU

32GB RAM

2TB SSD storage (for more cached data and larger L2 index)

Stable 1 Gbps internet connection

Raspberry Pi Gateway Requirements

You will need:

• PC / Mac and internet connection.

• Raspberry Pi: We are using a 4B, 4GB model (approx $55 as of writing). Note: In this tutorial, we may refer to the Raspberry Pi as RPi / Pi interchangeably, for succinctness.

Source: raspberrypi.com

• RPi Case: Many options available, usually around $10.

• USB-C power supply: Usually $5-10.

• Heat management: The RAM and CPU chips on a RPi can get hot. It's best to get a small GPIO pin powered fan, adhesive heat sinks or a case with passive cooling. Fans and heatsinks are inexpensive. You can pick up an aluminum case with passive cooling for around $15. You can also use a combination of all the above for extra cooling, if case dimensions allow.

• SSD: An external SSD with USB 3 support is recommended. A 2TB SSD will cost around ~$120.

Why an SSD? SSD stands for Solid State Drive and is a newer generation storage medium to a Hard Disk Drive (HDD). They are non-mechanical (no spinning plates / pins like a HDD) and thus shock / drop resistant - as well as faster.

• Raspberry Pi Imager (free software): While there are other ways to flash a microSD card with an operating system, e.g. Balena Etcher, the open source Raspberry Pi Imager software is one of the most popular and most convenient. Find it at raspberrypi.com/software/.

• Ethernet cable (optional): We can either plug our Pi into a router directly using a network cable, or configure WiFi when installing the OS.

Most of the necessary equipment above can be bought together in a handy bundle e.g. the CanaKit is quite popular.

• Domain (optional): While not required for personal use inside your own local home network, to “expose” your gateway to the outside world it’s best to have a domain name. GoDaddy and Namecheap will have many options.

Note: We recommend purchasing the GoDaddy Domain Protection or equivalent add-on for a few extra dollars. Among other things, it ensures domain owners remain anonymous from tools like who.is.

What we're using

• Raspberry Pi 4 Model B (4GB RAM)

• Cluster case w/ fan

This acts as both a protective casing and provides CPU and RAM cooling via the fan.

Alternatively, an aluminum passive case like the one below (Argon NEO) is a good option if you travel a lot and plan on taking your gateway with you. They are also a good option for IoT projects as they expose the GPIO pins for easy access.

Today we will simply add another unit to an existing Raspberry Pi cluster.

• SanDisk Extreme Portable SSD (2TB) w/ travel case and protective cover.

What about a keyboard / mouse?

These are not needed for gateway setup. We will be installing Ubuntu Server (as opposed to Ubuntu Desktop) which does not have a GUI. This saves on disk space and comes with different software preinstalled. This non-GUI Pi setup is also known as a “headless” setup. We can connect to and configure the Pi gateway over SSH from a computer.

Don’t Raspberry Pi’s usually use SD cards?

Yes, however our 2TB SSD will more than suffice for both OS installation and indexing storage. Thus we do not need a microSD and will be installing the OS directly on the SSD, which Raspberry Pi Imager will automatically format for us as a Linux compatible ext4 format.

1. Install the OS (flash your SSD)

We are going to install our gateway on Ubuntu Server, a linux based operating system and one of the most user-friendly and widely-used server platforms available.

1. Connect your SSD to your computer and run Raspberry Pi Imager. Click "Choose OS".

2. Click "Other general-purpose OS" -> "Ubuntu" and choose Ubuntu Server 22.04 LTS. Our Raspberry Pi 4B is 64-bit, so we will be choosing that image. This is the latest stable (Long Term Support) image as of writing and the version tested with the latest version of ar.io gateway.

   Note: You will need to be connected to the internet for this list to populate as the software needs to fetch the latest releases list.

3. Click "Storage" and select your SDD.

4. You will note after selecting the OS, a settings icon appeared in the bottom right. This feature helps configure basic settings on the Pi and saves doing them manually later. Click the icon. We will be configuring:

   1. An easily identifiable hostname. This makes it easier to SSH into the device. If this is not set, we will be assigned a random one by our local network 192.168.X.X . In such a case, a tool like Angry IP Scanner can be used to view all devices on your local network.

   2. SSH. Secure Socket Shell sets up an encrypted connection between two computers (e.g. our computer and the Raspberry Pi) allowing us to set up a device, run commands etc. via a remote connection without the need for a mouse, keyboard and monitor plugged into the device.

      We will set up a username and password login to begin with but strongly recommend the more secure private key authentication system in production. Follow this tutorial to set up.

As we will be plugging our Pi directly into a router, we do not need to configure WiFi (WLAN). Click "Save".

5. Click "Write" to write the OS to our Pi using the selected settings. This may take a while depending on internet connection as a Ubuntu Server image will need to be downloaded and written to the SSD. Click "Yes" to the prompt reminding you that flashing the SSD will delete all current files on the drive. If you have any important files on the drive, back them up elsewhere before proceeding.

You can now plug the SSD into the Pi and turn it on. We will connect the to one of the blue colored USB ports (the faster USB 3.0 ports). The Pi will automatically detect our Ubuntu OS on the ext4 formatted drive.

2. Test and update the Pi

1. Connect to the Pi

Make sure your computer is connected to the same internet network as the Pi, via wifi or cable. We are using a Mac for this setup, though many of the following commands will also work in Windows Powershell.

Open up a terminal window. Lets first check if the Pi is successfully online (feel free to copy and paste code blocks directly into your terminal, replacing “ariogateway” with the hostname you chose above).

ping ariogateway.local

✅ Success. Our Pi is running and was assigned a local address of 192.168.50.16. Remember, this IP is private to our local (home router) network and cannot be accessed from the internet.

2. Run some basic checks

Let's access our Pi using the SSH settings we configured in Raspberry Pi Imager, choosing "Yes" when asked if we want to add the Gateway address to our `known hosts` file, and entering our password when prompted.

ssh ryze@ariogateway.local

✅ We’re in!

Following along with the tutorial, Let's run some further commands.

df -h

✅ Our 2TB SDD is online and still has 1.8TB left.

lsusb

✅ Our USB ports are working fine. We can see our SSD is plugged in, with 1 remaining USB 3.0 port and two USB 2.0 ports.

lscpu

✅ We are running a 64bit ARM CPU with 4 cores, meeting the minimum requirements for a gateway.

3. Update the system

Before installing new packages it is best practice to update the our system by updating the package list then upgrading the packages themselves. This can be done in one line by joining commands with && (the AND operator). We use sudo (super user do) to execute the command with admin privileges, as is required, and pass in the -y flag which will automatically confirm Yes to any confirmation requests during the update process. We may be asked to enter our password again due to the sudo command. Allow some time for the process to complete.

Note: apt is the Advanced Packaging Tool of Linux and is used when installing packages. apt-get is similar but provides more control and is more commonly used with system packages. Package Managers are useful as they not only install packages but manage versions, track and install other dependencies etc.

sudo apt-get update -y && sudo apt-get upgrade -y

Press the Enter key to accept any default behaviour that isn't caught by the -y flag.

4. Restart the Pi

After that update, its a good idea to restart the device by running the shutdown command, passing the -r restart flag and specifying we want it to happen now. Note this will automatically disconnect us from the device.

sudo shutdown -r now

3. Install packages and dependencies

After a few minutes, let’s SSH back into our Pi.

ping ariogateway.local

We need to install some prerequisite packages for our Gateway to run properly. Let’s go through each one.

1. Docker

Docker is a popular software that allows users to run software in packages called "containers" that are pre-packaged, run out of the box and include most of the necessary packages and infrastructure needed for a particular program. It offers portability, consistency, and scalability for deploying applications in different environments.

In the above example, the Physical server is our Raspberry Pi, and the Host operating system is Ubuntu Server. Docker allows us to plug-and-play a host of free and open source docker images with ease. Install using:

sudo apt install docker-compose -y

Run a quick test with:

sudo docker run hello-world

✅ This successfully pulled the hello-world image from hub.docker.com and executed it. You can see the steps it took in the terminal window, confirming everything is working ok.

We will double confirm that Docker is installed correctly by checking it's version using:

sudo docker-compose --version

2. NodeJS

In case we want to run our Gateway outside of Docker and have more control over configuration, we will also install NodeJS - a server environment that allows us to run Javascript and Typescript code on our device (at.io Gateways are written in TypeScript).

Note: ar.io Gateways require NodeJS v16 or higher. The NodeSource Github repository, which provides easy scripts for installing specific node versions, has been updated. Thus, we will be following these steps to install the correct version.

1. Remove old local (on our Pi) repository (if any)

sudo rm /etc/apt/sources.list.d/nodesource.list

2. Define the version we require

NODE_MAJOR=16

3. Update packages

sudo apt-get update

4. Install necessary packages for downloading and verifying new repository information

Note: Some of the above packages, particularly curl, are so common that they are probably already installed by default.

sudo apt-get install -y ca-certificates curl gnupg

5. Make a new directory (if it doesn't already exist) for the repository's keyring (like Apple Keyrings - a secret password / credential).

sudo mkdir -p /etc/apt/keyrings

6. Download the new repository's GPG (GNU Privacy Guard) key and save it in the keyring directory.

curl -fsSL https://deb.nodesource.com/gpgkey/nodesource-repo.gpg.key | sudo gpg --dearmor -o /etc/apt/keyrings/nodesource.gpg

7. Add the new repository's source list with its GPG key for package verification. Note how we are using the NODE_MAJOR variable we set above.

echo "deb [signed-by=/etc/apt/keyrings/nodesource.gpg] https://deb.nodesource.com/node_${NODE_MAJOR}.x nodistro main" | sudo tee /etc/apt/sources.list.d/nodesource.list

8. Update packages and install NodeJS

sudo apt-get update

sudo apt-get install -y nodejs

After install we can confirm it was successful by checking the node version:

node -v

3. Yarn, GCC, G++

The Yarn package manager is not included in the standard Linux repository of packages, so we must securely add it before installing. We add Yarn to our core apt package manager by adding the official public key to our apt-key manager. This ensures we never install any unofficial or malicious packages not approved by Yarn.

You may get a deprecated warning for apt-key, this can be ignored.

curl -sS https://dl.yarnpkg.com/debian/pubkey.gpg | sudo apt-key add -

We then add the official package list to our apt sources list

echo "deb https://dl.yarnpkg.com/debian/ stable main" | sudo tee /etc/apt/sources.list.d/yarn.list

Finally, we then update our local apt packages list so we can begin installing Yarn approved packages.

sudo apt-get update

Now, we can install all packages at once (GCC, G++ and Make are already in the official repository), accepting all installation prompts with -y:

sudo apt-get install gcc g++ make yarn -y

4. git, nginx, certbot, sqlite

All of these are common packages and in the standard repository. Install directly using:

sudo apt install git certbot nginx sqlite3 -y

4. ar.io Gateway Setup

1. Download codebase

The time has come! We've laid the ground work and fully prepared our Pi device for gateway set up. Time to add the codebase.

Using git which we installed earlier, we will clone the codebase from the main branch of the official ar.io Github repository to a new folder at the root (/) of our system called ar-io-node.

sudo git clone -b main https://github.com/ar-io/ar-io-node.git /ar-io-node

Depending on your internet connection, the files should be cloned within a few seconds.

Lets change directory (cd) and have a look around by listing (ls) the files.

cd /ar-io-node

ls

✅ Looking good, the files have downloaded ok.

2. Set environment variables.

We will create a new file to save some settings we will be using later. Lets create a new file named .env with nano text editor.

sudo nano .env

Note: Filenames beginning with . are usually system or configuration files and thus hidden by default in the OS file manager. To view all files in a folder, including hidden files, use ls -a.

We will set values for our public Arweave wallet identifier (you can set one up using Arconnect), as well as the directories where we will store different data types. Finally we specify that we'll be using standard unencrypted http in our sandbox environment.

AR_IO_WALLET=<enter a wallet address here>
CHUNKS_DATA_PATH=/data/chunks
CONTIGUOUS_DATA_PATH=/data/contiguous
HEADERS_DATA_PATH=/data/headers
SANDBOX_PROTOCOL=http

To save our file, we exit -> save changes -> overwrite filename.

Press Ctrl + x to exit

We need to create the data folder that we specified in our environment variables above. While inside the /ar-io-node folder, we run the following command:

sudo mkdir /data

The Gateway code will create the subfolders (/chunks etc) automatically.

3. Run the codebase

We’ve downloaded the codebase and prepped our variables, now let’s install and run it.

Make sure we’re in the root of our codebase folder, then run the install command.

cd /ar-io-node

sudo yarn install

Next step is to migrate the required database tables and run a test.

sudo yarn db:migrate up

sudo yarn test

Note: It’s ok to see some errors as they are mostly performance related. This is a personal gateway that we can optimize in the future.

Let's start our gateway.

sudo yarn start

Everything looks good, but as soon as we exit our terminal, the start command will stop. This is where Docker also comes in useful. Let’s start the application in Docker, using up and run it in detached mode using the -d flag so it can run in the background and allow us to exit the terminal at any time.

sudo docker-compose up -d --build

The first container takes a while to build, so be patient.

Now that its up and running, lets check the logs.
The -f flag is for follow, which prints new logs live as they are generated, while --tail=0 states that we want no historical logs, only new logs that come in after we run the command.

sudo docker-compose logs -f --tail=0

✅ The Gateway is importing blocks successfully as expected.

We can access the local IP / hostname from our browser on port 3000 to check out our running gateway. Visit http://ariogateway.local:3000/ and see basic info like block height and number of peers.

There is no need to worry if your browser has a “Not Secure” icon in the address bar. This is expected as we have not set up SSL yet, and should not be feared as we are still sandboxed inside our own local network.

We can view more detailed metrics at http://ariogateway.local:3000/metrics, though this is quite technical and can always be analyzed later.

A useful feature of running a node yourself is the ability to query data easily. Conveniently, the gateway codebase comes with GraphQL pre-bundled.

GraphQL is a query language for APIs and a runtime for executing those queries with existing data. Unlike traditional REST APIs that require loading from multiple URLs, GraphQL APIs get all the data your app needs in a single request.

We can visit our GraphQL Playground at http://ariogateway.local:3000/graphql. We will run the following command to retrieve the first transaction on the Arweave blockchain.

query {
  transactions(
    first: 1
    sort: HEIGHT_ASC
  ) {
    edges {
      node {
        id
        block {
          height
          timestamp
        }
        owner {
          address
        }
        tags {
          name
          value
        }
        data {
          size
          type
        }
      }
    }
  }
}

The data returned as expected. We have just made our first query on the Arweave blockchain using our own secure Gateway!

We can query data directly from our browser at any time by visiting <hostname>.local:3000/<transaction_id>. Head over to https://viewblock.io/arweave/txs and find a transaction with an image. We can copy the transaction ID and view the data in our browser, privately and trustlessly. Let’s check out http://ariogateway.local:3000/xVaYiidJ6tvZj1ekxmkEbaFY4Q5hbmmPDM5JfTttUs4.

Pretty cool right?

Next, lets visit the Ardrive decentralized app. The DApp IDs can be found at https://ardrive.io/dapp-history-of-ardrive/. The latest as of writing is 2.13.0, at UdkSGsqhfAt9McTfoCcgbvH4fz623ZKQCxSV1Pfqu3I. Let’s head over to http://ariogateway.local:3000/UdkSGsqhfAt9McTfoCcgbvH4fz623ZKQCxSV1Pfqu3I/.

Congratulations, you have everything you need to privately query the Arweave blockchain. In the following steps, we will make some final configurations to open our node to the world.

Final Configurations

Before making more changes, lets turn off the Gateway by stopping all docker containers.

The $(...) is a handy syntax that acts like a variable, first executing then returning output; here it returns a list of docker containers.

sudo docker stop $(sudo docker ps -a -q)

1. Allow access to your Pi from the internet

1. Set Raspberry Pi IP

Before we allow access to our Pi, we need to know where it is, reliably. Recall that when we pinged our Pi, it returned an IP address 192.168.50.16. This was randomly assigned by our router, using Dynamic Host Configuration Protocol (DHCP). That IP may expire or change any time we power off our router. Now that we know that this IP is free and valid for assignment, we will permanently assign it, changing it from a "dynamic" to a "static" IP.

First lets change our netplan directory using:

cd /etc/netplan

As described in the official website, netplan configures our network based on simple settings in a YAML formatted file. The default file will be /etc/netplan/<some file name>.yaml. lets list our netplan directory:

ls

Ours is called 50-cloud-init.yaml by default. If you are following along with this tutorial, it is likely yours has the same name.

Lets edit the file using the built-in nano text editor for Linux.

sudo nano 50-cloud-init.yaml

As you can see, DHCP was running as expected. Lets change our file, adding the address we want for our Pi, our router (also known as a network gateway) IP - which should be found underneath the router casing, as well as our nameservers.

• DNS (Domain Name System) nameservers are simply IP address databases that computers reference to find other computers. Try pinging Google in your terminal, you will also see it also has an IP address. The domain google.com is just a handy name that "resolves" to that IP. DNS providers save a record of what IP google.com points to. We are specifying the default most popular DNS providers below: 8.8.8.8 (Google DNS) and 1.1.1.1 (Cloudflare) to query when looking for IP resolution.

network:
    ethernets:
        eth0:
            addresses: [192.168.50.16/24]
            gateway4: 192.168.50.1
            nameservers:
                addresses: [8.8.8.8, 1.1.1.1]
    version: 2

2. Forward traffic to the Pi

Note: Exposing home services and networks to the internet involves risk and caution should be exercised. The following steps are for information purposes only, proceed at your own risk. If in doubt, contact your ISP.

Find your home router URL or IP by viewing the underside of the router itself or by using terminal commands like netstat. Head over to that IP in your browser.

This will bring you to your router’s login page (login info underneath the router).

Next find the settings for port forwarding, and forward ports 80 (http) and 443 (https) to the Raspberry Pi IP we set above. Exact steps will differ on every router.

You can find the public IP address of your router by searching Google for “What’s my IP?“. Assuming you’re not using a VPN, this will be your public router IP. You should now be able to visit this IP and be forwarded directly to the Pi, viewing the basic stats page we saw before.

3. Set up https certificates

Head over to a domain name provider of your choice, e.g. GoDaddy, and pick up a domain name of your choice. We’re using ario-gateway.com.

You will need to add two A records which point to your root (@) which is the domain name itself, as well as wildcard (*) which will resolve to any subdomains, e.g. https://look-at-my-potato.ario-gateway.com/.

SSH back into your terminal.

Next run the following command, updating with your new domain.

sudo certbot certonly --manual --preferred-challenges dns --email <your-email-address> -d <your-domain> -d '*.<your-domain>'

Certbot will ask you to add another record to your domain, this time it is a TXT record. This will verify that you own the domain.

4. Configure NGINX to use our certificate

We want to use NGINX, a server and load balancer, to do three things:

1. Redirect all http requests to secure http (https)

2. Listen for those https requests and secure them using certbot certificates

3. Forward these requests to port 3000, where our gateway is running.

Here we can edit our default NGINX config, located at /etc/nginx/sites-available/default.

It’s easier to just remove the file with rm, create a new one with nano and paste in the text.

Lets delete the default file

sudo rm /etc/nginx/sites-available/default

…and start a new one

sudo nano /etc/nginx/sites-available/default

Here is the config template. Remember to replace <your-domain> with the domain you purchased earlier.

# Force redirects from HTTP to HTTPS
server {
    listen 80;
    listen [::]:80;
    server_name <your-domain> *.<your-domain>;

    location / {
        return 301 https://$host$request_uri;
    }
}

# Forward traffic to your node and provide SSL certificates
server {
    listen 443 ssl;
    listen [::]:443 ssl;
    server_name <your-domain> *.<your-domain>;

    ssl_certificate /etc/letsencrypt/live/<your-domain>/fullchain.pem;
    ssl_certificate_key /etc/letsencrypt/live/<your-domain>/privkey.pem;

    location / {
        proxy_pass http://localhost:3000;
        proxy_set_header Host $host;
        proxy_set_header X-Real-IP $remote_addr;
        proxy_set_header X-Forwarded-For $proxy_add_x_forwarded_for;
        proxy_http_version 1.1;
    }
}

Paste in the config text, exit and save.

Let’s check for errors using

sudo nginx -t

✅ No errors found

Let’s restart the service so it will run using the above config.

sudo service nginx restart

Now let’s update our gateway environment variables to use https, referencing our domain.

sudo nano /ar-io-node/.env

Add the following line, replacing with your domain:

ARNS_ROOT_HOST=<your-domain>

Also, we update the SANDBOX_PROTOCOL value from http to https.

That’s it, lets shut our gateway down then start it up again. Remember you must be in your /ar-io-node directory to run the code below. Wait until the shutdown is complete before starting it again.

sudo docker-compose down -v

sudo docker-compose up -d --build

2. Test our live Gateway over the internet

Lets try our some ARnS names, lets visit the homepage of Sam Williams, the founder of Arweave at:

https://sam.ario-gateway.com/.

Tip: You can also view what transaction ID the page resolves to using browser developer tools -> "Network" -> Click the page name -> Select "Headers".

Conclusion

Congratulations, you have set up an ar.io gateway in your own home and allowed it to be securely accessed by anyone in the world. Thank you for supporting the Permaweb!

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