(R)Evolution
Today's society is built upon digital databases. All the data we provide, even at the most basic visit to a medical facility or an office, is ultimately recorded and stored in digital form.
Physical folders serve the same purpose but cannot offer the speed and accessibility of data needed in modern society. If modern databases were to be eradicated overnight, an entire world would turn into chaos.
The time of digital databases seems to be coming to an end with the rise of another technology dedicated to storing and processing data - blockchain technology.
Innovations change societies.
A society storing data in physical folders differs from one with digital databases, and a society using Twitter or Facebook differs from one in which such projects have not emerged. The creation and development of Uber, Airbnb and TikTok have had a profound impact on society that might be hard to see due to their wide adoption.
Getting lost in the details and losing the bigger picture is what happens to almost everyone nowadays. Slow changes are hard to spot.
The world is striving for constant growth and evolution. The next innovation, the first sign of which we can already see, is the change in data storage and processing.
Data is the new oil. If so, we need proper infrastructure to maintain its extraction.
Maturation
Many people associate blockchain with cryptocurrencies and cryptocurrencies with Bitcoin. Blockchain = Bitcoin seems to be a well-established pattern among those who remember Bitcoin's first steps.
Does such a correlation also apply to people who first encountered Bitcoin a year ago?
Bitcoin that was not as hyped as NFTs or Ethereum-killers in 2021, might have created a different association than Bitcoin in 2016 or 2018.
Just as people who remember the early days of crypto perceive Blockchain = Bitcoin and Bitcoin = fraud, those experiencing the early years of NFTs see them as worthless images used only for speculation.
Will NFTs be viewed the same way by those entering the market during the next bull run?
Without going into details, let's remember NFT is just a technology we are slowly learning to use. The potential of NFT is enormous, and as the tech becomes more widespread, we will discover its new use cases.
Blockchain technology is entering the mainstream, led by a maturing crypto market and projects offering users much more than sheer speculation. With each passing year, the term "cryptocurrencies" seems more and more inadequate for the market of digital assets and projects built on blockchain technology.
As the history shows, the term we use significantly affects our associations and how we view technology, phenomenon, or even a nation.
The crypto of 2018 is not the same as the crypto of 2022.
The level of projects' sophistication and the maturity of market participants make the future seem bright. The engagement in dire conditions like the ones we see during this bear market - Luna, 3AC, FTX - don't seem to decrease among buildors and those who are here to stay.
As markets evolve, new trends emerge, new narratives are built, and the beginning often takes place in times like this, during bear markets.
Let's stay active and discover the next big thing in crypto.
Let's be one step ahead.
Multi-Chain
By noticing the changes, we can determine the general direction of development, and by seeing the direction, we can spot future trends.
In recent years, the term "crypto market" seems to have become increasingly generalized due to the formation of particular niches such as DeFi, Data Storage, or Metaverse. While DeFi was losing momentum, the NFT niche began to gain recognition. The market has begun to branch into niches.
Sidechains, Rollups, Parachains, Subnets, and others (I'll refer to all of them as Layer 2) might differ in details, but their end goal is the same. You often hear the aim of Layer 2 projects is to offload the main chain or to move computation to L2. While those are true, there is much more to it.
The more transactions a blockchain has to process, the more congested it gets, hence the high network fees users have to pay. Now imagine scaling the blockchain by adding more and more dApps where each of those will only increase the number of transactions on the main chain. It's a road to nowhere.
That is why the idea of specialised chains comes into play.
Avalanche dApps can shift to their own Subnet if they grow too big to be processed on the main chain - DeFi Kingdoms was an example of such growth. Ethereum Rollups are built from day one to be independent chains like Arbitrum, Optimism or zkSync. Cosmos' zones are more independent than Polkadot's Parachains.
But those are the details we often get lost in. We lose the bigger picture.
By deploying Layer 2 chains, an ecosystem can freely branch into various niches, spread its influence, grow network effect and accrue value. As the crypto industry grows as a whole, Layer 2 will build its own ecosystems by introducing Layer 3 and Layer 4 projects. This way, an ecosystem can maximize its efficiency and reach a variety of niches and industries.
Whoa, whoa... You're telling me even though we don't have solid Layer 2, we are already building Layers 3 and 4?
Indeed. You have to be ready to scale from day one.
As a side note, we can see zkSync being a Layer 2 itself but having "Enterprise-Ready Blockchains" - Layer 3 - suited for the needs of mainstream companies. This way, well-known brands can enter the world of crypto and instantaneously become a part of the Ethereum ecosystem.
The mutual benefits of such cooperation might exceed our expectations.
That's how blockchains will build vibrant ecosystems with specialized dApps offering services tailored to users' needs.
There is one more thing about the Multi-Chain future that might revolutionize the whole blockchain space - Modular Scalability.
Just to be clear, the modular approach fits well in the narrative of multi-chain and seems to meet the expectations and needs of projects BUT it doesn't have to gain wider interest. Explaining the modular approach exceeds the level of this article so let me just say it allows for separation between the execution and data layer of the blockchain.
Huh?
Well... it means you can access the data you need and execute it on your chain. In other words, you are not limited by compatibility or differences in programming languages. Anyone can use it, anyone can benefit from it. The modular approach might sit in the middle of the multi-chain world, but it's a high-risk bet as Layer 2 solutions might be sufficient for the time being.
Metaverse
Metaverse - a word repeated like a mantra but misunderstood just as often.
What is Metaverse?
The same thing the Internet is today.
The Metaverse, or Web3, is an evolution of the current Internet. The main visible change will be a leap in the graphical quality and its transfer to the "real" world via ubiquitous NFTs - but not in the form we know today.
Metaverse will become the digital veil of reality.
The statement that it will be impossible to live without the Metaverse is the same as saying it is impossible to live without the Internet today. Yes, it is possible to live and function without the Internet. However, it is a significant impediment to living in modern society.
Just as world-renowned brands entering into the Internet era resulted in the Dot-com bubble, we will soon see a growing bubble in the Metaverse space of which the NFT image bubble was a precursor. We can already see articles covering famous brands entering the Metaverse world. Adidas, Nike, Prada, Disney... and the onboarding only accelerates.
What makes those brands enter the Metaverse?
The same thing that made companies join the Internet hype we know as the Dot-com era - a new space to find a potential customer and expand one's influence.
Advertising space is extremely valuable, and in the Metaverse, it seems endless.
But what if we won't ever hear about the metaverse again? Will it be the end of the trend?
Well... does the introduction of "Digital collectibles" by Reddit mean the end of NFT on this platform?
Yet again, we circle back to the idea of "proper branding". Don't be misguided by phrasing. Look what's under the hood and you shall find NFT technology, metaverse structures, crypto assets, and who knows, maybe even the meaning of life.
The Internet has become a backbone of modern society as it does not only serve the purpose of entertainment. The high-level use of the Internet is transferring and sharing data in various forms and ways.
The Metaverse will serve the same purpose and become the backbone of the society we will see in the upcoming years. The digitization process is only accelerating, leading to the further evolution of and within societies. The vision of new markets, new economies, and new clients is too promising to be missed. Not only for us, mere market participants, but also for world-renowned brands that have much more at stake.
"Move forward or stay behind" notion applies to them as well.
If you want to discover the Metaverse in detail, here's my article covering the topic - https://moderneremite.substack.com/p/the-metaverse-future-you-cannot-escape
Just before we'll close this section. Some of you might ask where is the catch if everything is so shiny and revolutionizing.
Well...
In web 2.0 if you weren’t paying for the product, you were the product.
In web3.0, if you don’t get paid for your attention, someone else will.
Attention is key, and you can already see it with TikTok going viral.
Gaming
Games are a significant part of the entertainment world, and as society evolves, entertainment becomes more important.
Only a handful of people can escape the overstimulation of daily life and apps competing for every second of our attention. It's easier to stay in the vicious circle than leave it.
The current state of blockchain games does not excite the average gamer, and it's not hard to see why. Present games of the crypto world do not offer anything valuable to attract a potential player and keep him engaged. Creating a game is not the same as creating an average DeFi project, where the main drive is greed. Crypto projects seem to forget about this little yet crucial difference over and over again.
Gamers are not trying to make money with games. Gamers are looking for experiences.
The state of blockchain-based games is not a surprise. The crypto-gaming niche is just emerging and taking its first serious steps in the growing world of Metaverse. As more and more activity will shift towards the Metaverse narrative, games will evolve and become its inseparable part. However, it probably will not happen in the first wave of Metaverse hype.
Will already established gaming studios join forces to build AAA games on blockchains? That might be a song of a distant future.
Will we see game studios incorporate blockchain technology with the "proper" branding of NFT? That's more probable.
So far, gamers have been rather reluctant towards NFT implementation, to say the least. It's not hard to understand their point of view because, with NFTs, games would see an inflow of greed-driven players destroying the positive experience gained from a given title.
Wherever there's money at stake, the sheer experience often becomes a second priority. Micro-transactions are openly despised by most gamers, and NFTs would see the same end result if nothing changes. Hopefully, as time flows, we will see the use of NFTs change to more user-friendly in form of Soulbound items, POAPs, and similar concepts rewarding a player for his true devotion, something that cannot be bought.
Games have become an inseparable part of the entertainment industry in the "real" world, and a similar trend will take place in the metaverse. However, for this to happen, the metaverse needs to grow its roots into the mainstream.
The crypto-gaming market is an undiscovered market that is yet to show what it is capable of. In meantime, it is crucial to look for signs of a change in the attitude, where the user will be treated as a potential "gamer" rather than a "customer of the crypto market."
Social Identity
The proliferation of the Internet has allowed for communication on a previously unparalleled scale, and the growth of the social media industry has only accelerated the changes.
Nowadays, our digital identity seems to be sometimes even more significant than the real one.
Portfolios on personal websites, LinkedIn accounts, and digitally-run businesses will only grow in importance. Numerous accounts on Twitter are pseudonymous and yet have a huge impact on what's going on in various niches. It seems you don't have to present your Social Security Number and ID to be trustworthy anymore.
Personal branding has never been as crucial as today - in the era of digital identities.
The Great Online Game Packy McCormick talks about is all about growing a reputation in a given niche, becoming an expert in your field. It has never been as accessible as it is today thanks to the Internet. However, that's not everything. Looking at Mr Beast's success and reputation he has built, is it even possible to value his personal brand? His recent burger place got the level of attention no one expected. What if he wanted to open a chain of such burger places? How successful can it become by being built on top of a world-renowned personal brand?
As Chamath Palihapitiya stated, the future world-renowned brands will be built on personal branding, and most of the advertising will be spent on the creation of personal brands. Cristiano Ronaldo, MrBeast, the Kardashians, Oprah... all of them gained world recognition and built their brands. Imagine how widespread the creation and importance of personal brands will be in the future.
The name should speak for itself; you are the product you are selling.
Okay okay... but Mr Beast is spending millions of dollars for a single YouTube video. Who can afford that?
Almost no one. Agreed.
But... there are two points I'd like to make.
First, there are multiple YouTube channels, blogs, TikTok profiles, and what have you that create incredibly high-quality content, gather an engaged audience, and seem to be winning at the Great Online Game by building their reputation and personal brands.
The second point is that with the use of AI today, the cost of content creation goes close to zero. With DALL-E, you can create your own graphics, and with tools like Lex, you can quickly create immersive articles.
That's not all of it.
There are Twitter tools that will auto-generate and post Tweets for you, and soon you will be able to create videos or whole movies just by talking to your phone. On top of that, let's imagine what other tools we will use in the near future that will be powered by AI.
AI-generated content is flooding the current market, and those who make good use of it can cut their expenses and time spent on creating content to a minimum. The cost of content creation is going close to zero. In fact, even today, with zero cost and a little bit of effort, you can create amazing content and build a personal brand in any niche you like.
Compare this to the past, when publishing your articles was only possible in printed newspapers and being featured on TV was the only way to speak to a larger audience. The transfer of information was very limited. The Internet has changed it.
However... all the social media we use to create our brands are of web2 origin.
Will today's social media like Twitter, Facebook, Instagram or Reddit transition to blockchain technology?
It is unlikely, but some of their parts will use crypto tech in one form or another. Instagram using NFTs and Reddit implementing "digital collectibles" are the first signs of the changes we will soon see. Not to mention Meta and its Metaverse plans.
However, it will be hard for companies established in the Web2 era to transition to the Web3 world while maintaining the same principles. It is very possible they will not gain widespread recognition in the Metaverse as their roots are coming from the "old" Web2 era, where the user was the customer, not the creator and owner. Just as Facebook is rather unwelcome in the crypto world, the place of Instagram or Twitter in the Metaverse may be taken by something new, something built from the ground up on Web3 ideas.
But what if we take well-established web2 companies like Twitter and try to bake them into web3?
Twitter, or Crypto Twitter, to be exact, is an inseparable part of the whole crypto industry. It's where trends are created, where narratives are built, and where people often get introduced to crypto. Twitter has already been a part of web3 in some way. That is why it will be easier for Twitter to sneak into the new digital era. I'm not going to describe all the theories and rumours as it has already been well-articulated by @CroissantEth in the thread you can find below.
In short, it seems Twitter aims at becoming something similar to WeChat. One app to rule them all. One app to navigate and live in the digital era.
What about native web3 dApps?
Lens Protocol resembles Twitter in functionality but is built from the ground up in the spirit of the web3. Will it gain wider recognition and enter the mainstream? Hard to say as the mainstream still lives in the world of web2. Will it gain recognition from niche groups and thus enter the mainstream "through the back door"? This is much more likely.
Okay, but for shifting into the metaverse we will need not only platforms to express ourselves but also digital IDs.
Here we come to the projects like Ethereum Name Service - ENS - and their path to serve the purpose of digital IDs. Even today, instead of signing in with your public key, you can use your ENS name to enter various sites, send and receive funds or even enter events where a ticket is stored on your Metamask.
Imagine the future where your digital ID resembles your reputation. Imagine that by holding Soulbound tokens expressing associations with particular groups, you will be granted access to their DAOs, closed communities, or even physical events. Social Identities built in the digital space might - and I believe will - become more significant than the real ones.
Staying pseudonymous will become a standard.
Zero Knowledge
During the recent bull market, Ethereum implemented its first Rollup projects.
If you're not familiar with the concept of rollups, these are projects whose goal is to offload the main chain by shifting the computation to Layer 2 blockchains, i.e. rollups.
The first Rollups were designed as Optimistic Rollups, or Fraud Proofs if you like - Arbitrum and Optimism being the two largest projects by TVL, holding 52,63% and 28,52% of TVL respectively according to L2Beat. However, Optimistic Rollups have their limitations and drawbacks - some quite significant - that could make future adoption much more difficult.
On the other hand, as it is with technology, tools might be developed that will minimize the limitations and ease drawbacks. Will it happen? It might, but if the industry shifts to Zero Knowledge... will there be enough incentive to do so?
Not long after the introduction of Optimistic Rollups, the crypto space got hyped on the Zero Knowledge technology, which is extremely complex and relatively new. However, Rollups based on Zero Knowledge technology allow for much more advanced and complex designs.
One can see a growing belief that ZK Rollups are the future of Ethereum or even its end-game solution.
Before we begin, let's establish four main competitors in the race for supremacy.
zkSync and StarkNet aim for scalability.
Scroll and Polygon aim for EVM compatibility.
It is crucial to note the differences are not implying whether the project is better or worse. The aim is to show the trade-offs made by the teams having to find a balance between Performance and Compatibility. To illustrate the differences, let's look at the chart made by Vitalik and posted on his personal blog.
https://vitalik.ca/general/2022/08/04/zkevm.html
Now let's get to the details. What makes ZK Rollups so great?
Without going too deep into technicalities, Zero Knowledge solutions allow for greater safety via creating so-called "proofs". In contrast, Optimistic Rollups assume transactions are correct and then proceed to a phase where malicious actors can be caught. Hence 7-days-delay while transferring our funds back to Layer 1 - Ethereum, from Layer 2 - e.g. Arbitrum.
In the case of StarkNet, a single proof might contain 12,000 - 500,000 transactions and is created rather swiftly. Not to mention there is no delay between sending funds between Layer 1 and 2, or the delay is negligible compared to Optimistic Rollups.
Why such a vast range of transactions, you might ask?
The range depends on the complexity of transactions processed on the blockchain. This way, Zero Knowledge Rollups open doors to including more complex transactions in the Ethereum ecosystem. In case you are not aware of the implications, in the next section, you'll find out how DeFi might evolve thanks to the introduction of ZK Rollups.
Okay, now imagine if we took those compressed proofs and made proofs out of them. It's like decreasing costs by another x1000 a while after we made a similar compression.
It's called Recursive Prooving and is being built by StarkNet.
Now add scalability of Rollup ecosystems by introducing Layer 3 and Layer 4 projects which is not only possible in StarkNet. To be more precise, it's something zkSync is working very hard on, and the fruits of their labour will be unveiled in the near future.
Without knowing the details, we can already establish they are working on "Enterprise-ready blockchains", i.e. Layer 3 solutions to boost their ecosystem growth. On top of that, those projects are said to be quite significant mainstream brands that have already shown interest in joining forces. If this happens to be true and zkSync onboards world-renowned brands into the Ethereum ecosystem through their own, it's a huge win for both.
A little mention of two approaches to ZK technology - STARKs and SNARKs. It will be short and easy, I promise.
The whole idea of Zero-Knowledge proofs is that you can prove something to be true without revealing the content. Imagine you want to prove that you have keys to someone's phone without explicitly showing it.
You can take the phone, go to another room, change the wallpaper and then return. The person knows you have the access without you having to reveal how the change was done.
SNARK - Succinct Non-Interactive Argument of Knowledge
STARK - Scalable Transparent Argument of Knowledge
Just by reading the full names, you can see the difference. While one of them needs a trusted environment (SNARK), the other does not, as it is transparent. However, with being transparent comes a little bigger proof size and higher gas requirement - some say more than x3 compared to SNARKs.
Another difference is Post-Quantum safety or Post-Quantum resistance. While STARKs are quantum resistant, SNARKs are not. However, some iterations of SNARKs are said to be quantum resistant, so maybe we will see both approaches being fully resistant.
It's hard to say which approach is better, as both have trade-offs. My point here was to show that by saying "Zero Knowledge" someone might mean different things.
Overall, Zero Knowledge technology can revolutionize the way we use blockchain, not only in crypto. That is why taking a closer look at projects building with the use of ZK tech and picking future winners might turn out to be worthwhile in the long run.
DeFi
Every market needs liquidity to develop and thrive.
The crypto industry has changed dramatically since stablecoins were introduced. It opened the door to broader liquidity to flow within and to crypto.
DeFi Summer was the evolution of stablecoin utility and another step in providing the whole industry with higher liquidity. Indicators like Total Value Locked - TVL - went through the roof, lending and derivative protocols were gathering insane valuations. Not to mention farming protocols where the only drive was greed, and the music played as long as there was liquidity - if you hold for too long, though luck.
With recent events like the collapse of Terra Luna and its contagion across markets, the whole fucked-up story of FTX and Alameda, and the overall number of scams across the space, the awareness of being the owner of your funds, i.e. self-custody, increased.
Not your keys, not your coins. The slogan repeated by many but applied by few.
The next DeFi adoption wave seems to be centered around the following points:
- DEXes offering futures, perpetuals, and other trading tools
- DeFi Hubs
- Precise DeFi protocols using Zero Knowledge
- Easy Onboarding
- Wallets + DEXes underneath - you swap and don't know it's going through Uni e.g.
Let's go through each of those.
DEXes offering various trading tools aim at taking the major advantages of CEXes off the table. If you can maintain self-custody of your funds and still be able to use trading tools, CEXes seem to lose their importance. Additionally, DEXes do not require KYC and AML procedures which is more than important for some market participants. Also, by evolution in onboarding protocols people will be using DEXes without even knowing what those are - users will only see a well-designed UI, and underneath we will have multiple DEXes and other tools.
DeFi Hubs can be seen as liquidity aggregators helping ecosystems to provide deeper liquidity, instead of having it scattered across various dApps. Imagine having a single project in the ecosystem where most of the liquidity is stored allowing for easier liquidity management within the ecosystem for both, users and protocols. I covered the idea of DeFi Hubs in the article here.
Implementation of ZK technology in DeFi protocols will allow not only for cheaper fees, and by cheaper, I mean orders of magnitude cheaper, but also more complex computation. In return, protocols will offer more precise tools like much higher leverage and very precise oracles. Also, the protocols will gain every benefit of using ZK technology, briefly discussed in the previous section.
In the near future, we might also see trading protocols where transaction fees do not exist because costs will be negligible.
By easy onboarding, I mean protocols enabling seamless conversion of fiat money into crypto - not via offering synthetic assets, but 1:1 tokens. Also, protocols tying together purchases in the real world with cryptocurrencies will boost the overall adoption and add additional liquidity to the market. It is crucial as one of the major bottlenecks is the sheer part of entering the market - it might seem too complicated for some or too risky for others. The aim for particular dApps is to show that it is as simple as using any mobile app. An example of such dApp might be Nested, where users can easily convert fiat money to crypto, create and manage their portfolios, as well as copy other people's portfolios. <FYI I am not partnering with the project, I just like their idea>
Coming back to the overall view of the DeFi niche, protocols will try to be more transparent after all the collapses and personal tragedies that took place. Even today, we see the evolution of CEXes via the Proof of Reserves standard that might become solidified in near future.
As a side note, Vitalik has recently published an article in which he discusses different approaches to Proof of Reserves, one of which - allegedly the most beneficial one - is based on Zero Knowledge technology.
The truth is, as DEXes will mature and offer more robust tooling, CEXes will have to fight for high-value customers who will not be so easily blinded by fake slogans. The next bull run will unveil which protocols have solidified themselves and offer high-quality services, and which ones are just passers-by looking to capitalize on retail's naivety and greed.
Scams will take place, greed will take its toll, fake valuations and opportunistic projects will rise and fall. It's an inseparable part of every market involving money or power. However, as crypto evolves and matures, high-quality protocols will accrue value from those mature enough to see it - including smart money and long-term investors from traditional markets.
The market matures along with its participants, and the evolution of DeFi will be a sign of the changes.
Closing Thoughts
Continuous evolution is changing both the world and societies. From one generation to the next, the changes seem to accelerate. How will society look in 10/20/50 years? It's hard to predict, but it will be very different from the one we see today.
Will blockchain technology dominate the world of data processing and storage, just as digital databases previously dominated physical folders?
This is very likely to happen, as we can already see the limitations and drawbacks of digital databases. Years go by, and along with the evolution of society, more advanced data processing mechanisms are needed to meet the needs of individuals and institutions.
In this case, we shall take a closer look at the trends emerging in the crypto industry as it is the cradle of the blockchain revolution, the early days of which we see today.'
Crypto is changing, evolving, and developing.
Crypto is here to stay.
Let me leave you with some idea you might not fully get at first.
There are two kinds of trends on the markets.
The ones driven by hype and fake narrative built only to bring profit.
The ones created due to structural needs of the industry.
Try to differentiate trends you see and learn to ride both.
If you enjoyed the article, find me on Twitter - https://twitter.com/ModernEremite
Till next time!
~M.E.
Feature picture created by DALL-E