New Order is a孵化DAO driven by the Web3 community, acting as co-founders of emerging crypto projects to build the Web3 world together with Builders. Earlier this year, they published an article titled "2023 Crypto Thesis." This piece highlights some of the key trends in blockchain for this year, which I found quite interesting. However, due to its length, I have summarized some of the main points below. Those who wish to read the original can do so at the following link: https://thesis.neworder.network/#the-construction-of-key-liquidity-infrastructure-will-address-the-bottleneck-of-liquidity-fragmentation-in-2023
Part One
Still in a Bear Market
Due to the impacts of Luna, Three Arrows Capital, FTX, and others, liquidity issues and bankruptcies may continue to be discovered in CeFi and DeFi services, seriously hindering the regulatory process, investor activity, and consumer confidence.
EigenLayer will be Ethereum's most important innovation
EigenLayer is a set of smart contracts on Ethereum that allows ETH stakers at the consensus layer to choose to validate new software modules built on the Ethereum ecosystem. It is a "re-staking" protocol that allows ETH stakers to secure different networks and services such as data availability layers, sequencers, bridges, or other services built on Ethereum.
Blob transactions won't solve scalability issues
EIP-4844, as the core content of the Cancun upgrade, introduces a new type of transaction (blob-carrying transaction) to reduce Ethereum's transaction costs. Blob-carrying transactions are similar to regular Ethereum transactions but carry additional data called blobs. Compared to current immutable call data storage and read-only memory, blobs offer greater storage capacity and are cheaper. However, blob transactions will not become a magical fix for Ethereum's scalability before modularization is achieved. Modularization will come with significant technical barriers and delays. The sharp increase in on-chain data will also drive the need for state expiration to mitigate state bloat and could even lead to changes in Ethereum's peer-to-peer structure.
ZK-Rollups won't gain significant attention in 2023
ZK-Rollup uses zero-knowledge proofs to perform off-chain computation and storage, then sends batches to Layer 1 where they are immediately validated or rejected. Due to the lack of production readiness (virtual machines and proof generation time) and inability to achieve sufficient decentralization, ZK-Rollups will not gain significant attention in 2023. Instead, it is expected that ZKPs will be widely used, especially in non-interactive state proofs, using them for various data-sharing purposes requiring on-chain or cross-chain storage proofs. Many bridges are expected to start using ZKPs for interoperability purposes.
L3s will become Cosmos' true competitors
Layer 2 (L2s) enhance Ethereum's scalability by reducing gas fees and increasing throughput. Due to these scalability factors, there are trade-offs, and L2s must choose to optimize for specific projects. Layer 3 (L3s) are application-specific blockchains built on top of L2s, aiming to reduce these trade-offs and make further improvements. They are similar to app-chain environments like Cosmos, Avalanche, and Polkadot but benefit from being built on a modular blockchain protocol stack rather than a monolithic one. Therefore, deploying a fully modular blockchain infrastructure stack that includes a general-purpose L2 and customizable L3s will mark the end of the era of monolithic app-chain ecosystems and the beginning of a new era of decentralized application development.
Part Two
Cosmos: The current version of ICS will face challenges in 2023
Cosmos is hailed as the "Internet of Blockchains," aiming to connect various blockchains. Interchain Security (ICS) in its current state will not find market fit in terms of popularity and implementation, but this goal can be achieved through more customized and marketable solutions like Saga. This is because for small teams like independent game studios and projects that cannot afford Golang developers experienced with the Cosmos SDK, simply obtaining a validator set is not enough. By providing a customized app-chain solution with all building blocks, such as agnostic VM selection, validator sets, and simple setup, ICS may truly be adopted.
Cosmos: Mesh security will lead to validator centralization
Mesh Security is essentially Interchain Security v3, allowing interconnected blockchains to mutually ensure each other's security in both directions. Cross-chain staking is at the core of Mesh Security, where validators verify transactions across multiple chains and are incentivized for good behavior on both chains. However, Mesh Security will increase the power of certain validator groups, leading to centralization and collusion, concentrating power heavily into a few validators (some of whom already possess significant power).
Celestia: Data availability sampling will revolutionize blockchain development
Data Availability Sampling (DAS) will be the biggest innovation in building multiple aspects of blockchains. DAS allows you to increase decentralization (number of nodes) without losing throughput. Monolithic blockchains require every node to execute every transaction, making them inherently unscalable. Therefore, a multi-chain world is inevitable, and modular blockchains (modular blockchain) may be the best path to a multi-chain world. Celestia is the first true modular blockchain, whose vision is to combine Cosmos' sovereign interoperable zones and rollup-centric Ethereum, sharing security.
Key infrastructure will be established to address the bottleneck of liquidity fragmentation in 2023
The fragmentation of liquidity - whether cross-chain or within a chain - creates noticeable price differences, creating an unfavorable environment for liquidity providers and traders. Liquidity providers struggle to accurately predict which trading venues have the highest volume and lowest fees to maximize capital utilization and income. Traders, on the other hand, suffer from high slippage, significantly worsening trading pricing and user experience. Trading infrastructure includes liquidity-oriented engines and communication protocols that allow efficient cross-chain asset and message transfers by providing a cross-chain liquidity guidance toolkit. This allows liquidity providers to allocate capital based on predictive models about capital utilization, slippage, and generated fees. Such infrastructure allows liquidity to be allocated to environments experiencing maximum trading volumes, thereby maximizing liquidity providers' capital utilization and minimizing traders' price impact.
The most important issue to resolve in 2023: Exclusive Order Flow
The primary goal of block builders is to extract the maximum value from a series of "orders" or order flows. They ultimately have the motivation to receive private order flows as much as possible. This is known as the Exclusive Order Flow (EOF) problem. This is harmful to blockchain networks because builders who obtain exclusive rights to order flows, i.e., toxic order flows, gain an undue advantage over other builders, creating a centralized point on the network that could lead to market manipulation and transaction censorship. Moreover, the portion of value extracted from EOF (known as MEV, such as sandwich attacks) remains entirely with the extractor (builder/searcher), without redistributing rewards to other participants (validators/users). This situation is likely to result in a small group of colluding builders eliminating all other competitors and controlling the entire blockchain stack's order flow. Although many working solutions exist to prevent EOF from harming the network, none are currently fully operational. For the long-term prospects of any blockchain network, this threat indeed exists.
Part Three
Native cross-chain assets: the unwrapping of complex wrapped assets has begun
As developers recognize the immediate efficiency gains and security advantages of issuing cross-chain native assets, the gradual unwrapping of complex wrapped assets (such as cross-chain wETH) has begun. Governance, DAO tools, and liquidity systems are expected to increasingly focus on cross-chain capabilities.
DeFi: Stablecoins and Pegged Assets will dominate DeFi
Pegged Assets refer to any derivative asset whose underlying value is pegged 1:1 to an external asset, including stablecoins like USDT and USDC, as well as Liquid Staking Derivatives (LSD) like stETH and sAVAX. Y2K Finance launched in October 2022, pioneering structured products that allow users to hedge or speculate on the risks of different pegged assets to profit.
DeFi Landscape: Power concentration among a few dominant players
The total locked value (TVL) of the DeFi market is currently around $39 billion, with a large proportion controlled by its largest applications and expected to grow larger. According to DeFi Llama, the top five DeFi applications account for nearly 50% of DeFi's total TVL, while the top ten control approximately 86%. It is expected that by 2023, due to the emergence of application-specific blockchains and the development of combined applications utilizing the capabilities of dominant applications, the dominance of top DeFi dapps in the market will become more pronounced.
DAOs and Governance: New on-chain governance primitives will define decentralized efforts in 2023
In the current state of DeFi, there exists a fundamental contradiction where so-called decentralized applications are owned by the multisignature of "trusted" protocol founders and can be arbitrarily modified by governance. If on-chain governance systems are not thoroughly checked and tested, these pressures will further intensify because vulnerabilities in "code is law" cause further damage. This fear of governance vulnerabilities that cannot be "controlled" by centralized multisignatures is the main reason for the current centralized status quo. With the launch of Metropolis (previously Orca), ensuring a prudent decentralization roadmap without complete governance overhaul at the outset. With the introduction of pods, ownership of each critical smart contract can be isolated and delegated to a specific group of participants. This group can decentralize according to the needs of the protocol. Pod members can propose proposals, which are voted on by other Pod members and executed on-chain.
2023 will see major application-level security upgrades and decentralization of auditors
In 2022, losses hit record highs due to smart contract and bridge attacks, social engineering, phishing, and targeted advanced persistent threat attacks, making web3 security challenges more apparent than ever. 2023 will be the year of the rise of security enhancement technologies, including AA wallets (shared in yesterday's article), reversible transactions, and cross-chain technology. Cybersecurity service providers (such as smart contract audit services) will continue to decentralize, increasingly acquiring characteristics of DAOs.
NFTs: 2D liquidity transitions to 3D
Some existing projects are attempting to capitalize on this potential demand for NFT perpetual contracts. Given the virtual Automated Market Maker (vAMM) construction, this model eliminates the need for liquidity providers and order books, creating a player-versus-player (PvP) environment where traders profit from others' losses. In terms of NFT liquidity, innovation is not limited to perpetual contracts (like DeFi). We also explore innovations with oracles and how they help open new liquidity venues and bring trading volume to more niche areas of the NFT market.
