Top Ethereum & L1 trends for 2023

The Messari report gave an overview of the Ethereum blockchain in the year 2022, citing a possible turn of events in 2023. This is meant to give insights to the blockchain natives before taking decisive steps in this new year. The top Ethereum and L1 trends discussed are:

The updated Ethereum roadmap

The Merge was a significant technical update that took six years to complete. The Ethereum core team’s ambitious goal may not be fully understood by laypeople now that it has been effectively implemented. Many of these upcoming releases will happen sooner than the Merge (and can be worked on in more iterations). The Messari report examined these developmental stages in the roadmap. 

The Merge: The Merge shifted from Proof-of-Work to Proof-of-Stake consensus (the big milestone this fall – Why Proof-of-Stake). Now that stakeholder withdrawal from staking contracts is possible, developers are trying to ensure that transaction validation is evenly distributed. Other more complicated tasks, including improving signature aggregation, are also being worked on.

The Surge: By introducing a new Ethereum transaction type called “blobs,” where rollups will have a specified allocation of block space to post their data, the objective is to attain 100,000 transactions per second. Blobs will be introduced in their first form in EIP-4844, also known as “Proto-Danksharding.” Fees on both L1 and L2 should be decreased while attacking Ethereum’s implementation of Data Availability Sampling, known as “Danksharding” in its full form.

The Scourge: This is a new step that was just added (according to Vitalik’s tweet), primarily in response to community worries that maximum extractable value (“MEV”) would lead to transaction censorship (more on this in two sections). Additionally, all blob transactions are fully Danksharded.

 The Verge: A “completely SNARKed Ethereum” facilitates block verification and adds Merkle trees, which are smaller cryptographic proofs than their Merkle tree counterparts. This opens the door for stateless clients (better mobile support) on Ethereum.

The Purge: Numerous small code cleanups that reduce network costs, simplify the Ethereum protocol, and get rid of technical debt. State expiration will be covered in EIP-4444. Once more, items that boost performance while cutting costs.

What Vitalik refers to as “repair everything else” is The Splurge. These include “quantum-safe” Ethereum development, account abstractions, and enhancements to the EVM.

Merge Economics

The Merge signaled a significant change in Ethereum’s business strategy. By switching to Proof-of-Stake, the protocol’s environmental impact was reduced by over 99%, making Ethereum more appealing as an investment to organizations with an interest in environmental, social, and corporate governance (ESG). Additionally, it decreased almost $500 million in monthly sell pressure from miners and reduced fresh token issuance by 90%. Finally, as a result of the fee burn mechanism Ethereum implemented in August 2021 in EIP-1559, it generated a net deflationary asset with genuine yield.

The Ethereum system has “burned” around 85% of all transaction fees since EIP-1559 went live last summer, with the remaining 15% being distributed to miners as “tips.” If burned transaction fees are greater than the network’s stake issuance rate, the supply of ether will become net deflationary (equivalent to programmatic stock buybacks). Depending on the demand for block space, we believe the network could experience a steady-state deflation of 1% to 2% annually. No other cryptocurrency project has managed to accomplish these supply dynamics.

Yields in 2023 might range from 5-7%, establishing a form of “risk-free rate” for Ethereum’s financial system, depending on the number of active stakers on the network and the level of network activity.

This yield curve is already beginning to be constructed for some DeFi protocols’ investors to track.

Although headline yields are a little higher today, we anticipate that they will eventually decrease and return to normal as staking becomes more accessible and derivatives like Lido’s staked ETH (stETH) become more common.

MEV & Censorship

Maximum Extractable Value, or “MEV,” is one of the most intriguing technical difficulties in all of crypto, and it has drawn some of the greatest technical and financial brains in the business to solve its puzzles.

In a nutshell, MEV is a result of the power dynamics between the users of a network and the security providers (miners and validators) of a blockchain. Users may be charged by security providers (or “sequencers” in the case of a rollup), who decide the order of transactions and which transactions are included in each block.

In some ways, MEV might be viewed as a feature rather than a problem since it is present on every blockchain.

Possibly, MEV can improve the antifragility, efficiency, and fluidity of protocols. The majority of MEV incentives would be distributed to token holders who stake MEVs, and a strong MEV sub-economy would make sure that the “supply chain” for transaction processing separates block proposers (everyone) and block builders (specialists) in a worldwide, decentralized manner.

A system was put forth by Flashbots, one of the top MEV R&D companies, to classify different MEV kinds based on their potential externalities and value accrual. Future protocols that socialize the benefits of MEV might be fairer if we can develop systems that can account for specific sorts of “poor” MEV.

What is Buterin excited about this year?

1. Stablecoins that protect privacy and are backed by real-world assets (this seems to map to my thoughts from the previous chapter, although I swear I didn’t look when I was writing mine.)
2. Vitalik enjoys using prediction markets within DeFi. Prediction markets, in my opinion, are a total waste of time, and nobody has yet worked out how to make them entertaining. If I’m wrong, this could turn out to be a contrarian wager that pays out handsomely in the future, but even V admits that he doesn’t anticipate them to make “multibillion-dollar splashes,” so perhaps the interest is purely academic.
3. Identity modules centered on concepts like authentication (sign-in with Ethereum), names (ENS), attestations (decentralized social), proof-of-humanity, etc.
4. DAOs, which he categorizes as decentralized communities for robustness, efficiency, or interoperability.
5. Applications that combine blockchain technology with non-blockchain ones, such as voting, “auditable centralized services,” etc.

Exploding Bridges

One of the top three most significant upcoming areas of development to monitor, according to Messari, is the interoperability of blockchain and bridging protocols.

A hacker stole $600 million from Axie’s Ronin “sidechain.” The $320 million loss on Wormhole’s ETH-SOL bridge and the $200,000,000 lost by Nomad. The bridges of today have shown to be somewhat fragile.

Rollups are a little bit unique. They are essentially nothing more than blockchains with built-in value transfer bridges and settling transactions amongst chains of EVMs. Rollups are blockchains that handle their transactions, as their name suggests, but “roll up” to Ethereum for settlement and take advantage of Ethereum’s strong security.

Revealing the reason why he feels cross-chain bridges are not that right, Buterin revealed that There are “fundamental limits to the security of bridges that hop across multiple ‘zones of sovereignty’” and the modular blockchains thesis where “you can’t just pick and choose a separate data layer and security layer. Your data layer must be your security layer.”

The L1 “blockchain wars,” according to Messari, will parallel the browser wars and mobile OS battles in response to this. To put it another way, the EVM and a few other systems might succeed on a large scale, but we won’t witness the emergence of numerous L1 blockchains.

Rollups and Modularity

By processing transactions on different blockchains, rollups increase the scalability of blockchains. The transaction data is then posted, and compressed, to an underlying L1. With the release of Arbitrum and Optimism Layer-2s in 2021, conventional roll-ups that depend on Ethereum L1 for data availability, consensus, and settlement were first to market.

The “modular” theory, which gained popularity in 2022, was introduced by the neighbourhood newcomer Celestia. Traditional rollups process transactions and rely on Ethereum to settle, verify and store their data, but modularity enables developers to choose how their protocols handle each step.

For rollups, there are two categorizations of these rollups. We have the Smart contract roll-ups and the sovereign rollups.

Smart Contracts Rollups: A smart contract on L1 checks batches of compressed transactions using various types of “proofs,” and they are “enshrined” to the L1 because they rely on the smart contract for final approval. Optimistic rollups and Zero-Knowledge Rollups (ZK Rollups) are types of smart contract Rollups.

“Sovereign” Rollups: Just as a virtual server can be set up by a cloud provider with a single click, programmers can create sovereign blockchains for very little money upfront and avoid the hassle of bootstrapping a distributed validator set. Sovereign rollups process and verify transactions, upload data to a consensus and data availability layer like Celestia, Polygon Avail, or Ethereum, and execute transactions.

Too close to Solana

According to Messari, a segmented approach with different layers that are optimized for different levels of performance and decentralization may be more effective for scaling a blockchain ecosystem than wrapping transaction execution, settlement, network consensus, and data availability on one main chain. This is comparable to the microservice architecture used in conventional app development.

Messari went ahead to list some of the things it will take for an alt-L1 like Solana to stand a fighting chance against other modular blockchains. These are what he listed:

1. Developments in computation that will eventually reduce the cost of operating powerful nodes
2. Rollup delays or securities concerns
3. User choices and expertise
4. Product-market fit of a chain of killer apps
5. The users’ level of tolerance for centralization and MEV

The report also delved into Solana’s connection with the now-bankrupt exchange FT and how it affected Solana. Elaborating on this, it was revealed in the report that according to bankruptcy records, SOL and SRM were significant holdings on FTX’s financial sheet. FTX, Alameda, and some of its closest investors were active, enthusiastic backers of Solana’s early ecosystem. However, the Solana team and its founding neighbourhood were keen to adopt an “eating glass” mentality during the previous bear market and may be able to recover once more after this hurricane passes.

On the positive side, Solana has maintained its gains in node decentralization and speed, if not in server/cloud-level decentralization. A different enterprise-grade rug pull might have a more significant long-term effect, even though the liquidation of FTX/Alameda was a setback for some of Solana’s main backers. Through the development of the cryptocurrency mobile phone Saga in 2022, Solana has also made efforts to promote the adoption of blockchain.

Cosmos and Appchains

The Cosmos community is experimenting with a new era that it refers to as “ATOM 2.0,” which attempts to establish the Hub as Cosmos’ primary data router and source of security. According to Messari, Cosmos will probably continue to be the leading ecosystem for “sovereign” app chain developers as the developer discussion over ATOM 2.0 plays out. ATOM 2.0 has faced resistance to its ambition due to a request for its adoption being rejected by the community.

The ecosystem is attractive to those with the technical know-how to vertically integrate their apps because Cosmos gives developers the freedom to create their chains with the flexibility they need (custom inflation schedules, transaction fees, transaction types, security models, coding languages, etc.). The IBC also gives app chains access to value accrual mechanisms (MEV, transaction costs, etc.). Consider dYdX, which last year switched from a ZK-rollup to an app chain and is perhaps the biggest crypto application.

Sei and Canto, two new L1s built on the Cosmos SDK with an emphasis on DeFi apps, were both created in 2022. Sei has a parallelized order-matching engine and an integrated central limit order book (CLOB). Messari claims that Sei is aiming to become the NASDAQ of the cryptocurrency world and that its centralized order book mechanism and shared liquidity make it ideal for DeFi use cases. An EVM-compatible L1 with built-in core protocols like an AMM DEX, a lending protocol, and a stablecoin was recently introduced by Canto. It intends to make these fundamental protocols accessible to users and developers for free.

For user acquisition, Canto has opted for a more democratic strategy. There is only the chain; there are no venture funders, pre-sales, or foundations. The goal is to reduce rent-seeking behaviour and provide straightforward, free infrastructure to users and developers. While admirable, without the opportunity for profit, goods (and people) aren’t driven to compete, and developers can be reluctant to create improved features.

Other L1s

Cardano: Cardano experienced significant technical advancements in 2018, including Plutus smart contract functionality and the Vasil hard fork with improvements to Plutus and greater scaling. Cardano has so far been dwarfed by larger ecosystems in terms of volume (transactions, TVL, and development activity). Messari revealed that the year 2023 will be crucial for Cardono.

Polygon: The Roll Up and Modularity sections above contain many distinct parts that Polygon traverses. You can learn more about the project by reading Messari’s most recent quarterly report and the ongoing analyses of EVM, rollups, and modular blockchains. Setting new all-time highs in active addresses and NFT wallets, they were a shining light in Q3. Additionally, they own one of the top BD teams in the cryptocurrency industry, one that this year signed deals with Reddit, Meta, and Starbucks.

Polkadot: It should come as no surprise that Polkadot’s proposal for an interoperable “chain of chains’ resembles Ethereum after the Merge as Polkadot’s creator Gavin Wood was also an Ethereum co-founder and its technical architect.

Technically speaking, Gavin is frequently one step ahead, and the Polkadot developer community consistently ranks favourably in comparison to similar groups. In the coming year, we’ll see if that results in more game-changing ecosystem applications. (In 2023, Gavin will no longer serve as the project’s director but will still function as its lead architect.)

MOVE technology Blockchains

Facebook’s abandoned Diem project gave rise to both Aptos and Sui. From a top-notch engineering team, Aptos and Sui inherit years of R&D and collaboration negotiations. Move, their brand-new smart contract development language developed from Rust seeks to give programmers more command over the management of their data and safer execution. Both projects advertised themselves as high-speed, high-scalability chains (they decouple consensus and parallelize transaction processing to complete transactions in under a second). Strong teams, supporters, and networks are behind these projects.

The early deployment of Aptos encountered problems, and Sui is still only accessible on the testnet. Sui might be experiencing clawback problems as a result of the FTX bankruptcy proceedings, according to Messari. Of the $350 million that Aptos raised this year, FTX Ventures committed $75 million, but it appears that the transaction was completed beyond the customary 90-day bankruptcy clawback deadline. Sui’s $100 million is a different matter. According to the study, it appears that a third of Sui’s $300 million in Q3 funding was obtained before the 90-day clawback period. If FTX investments are significant for either of the network’s progress, 2023 will make that clear.

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