Went through the a16z 2023 State of Crypto and pulled out some interesting slides + my own notes. I also recorded a podcast episode about it (as part of the 5 minute daily update):
Here we gooo:
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Web1 was decentralized (email protocol, web protocol) but limited functionality, and no value accrual
Web2 was centralized into Google, Facebook, etc, advanced functionality, but value accrued to big tech
Web3 is decentralized again, community governed, and value accrues to participants
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Web2 take rates are something like 30-100%
30% for services like Spotify and Apple App Store
100% for FB, Twitter
Web3 take rates are much lower – or even pay participants (like ETH’s PoS)
OpenSea is 2.5%, Uniswap is 0.30%
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With each cycle, the market gets larger
-higher price
-more usage
-more developers
-more projects
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ETH is scaling through rollups
In 2022, L2s paid less than 2% of all ETH fees
Now it’s closer to 7%
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The big brands are all here – from mass consumer brands like Starbucks and Adidas and Budweiser to luxury brands like Tiffany and LV and Porsche
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DAO governance is growing
From barely 50K monthly proposals in 2021 to more than 200K today
2M unique DAO voters
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More than 50K monthly crypto developers on Github
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Active addresses steadily growing
From less than 5M in 2018, to more than 15M today, across all blockchains
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What A16z expects in the coming years
-Zero knowledge tech will accelerate
-On chain games will grow in popularity
-Light clients will accelerate web3 and mobile
-in the US, bipartisan crypto regulation will pass
Hosts: Hasu and Mike
Hasu – advisor to Flashbots, Lido
MEV value chain
-money from reordering / censoring transactions
–any value a privileged actor can extract – eg, Central Bank printing money, can be considered MEV
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People use crypto to escape MEV in real world
Should build crypto systems resilient to MEV
Principles in reducing MEV
-more competition = lower fees, less MEV
-more private = harder to extract MEV
-more user control
MEV is invisible – even looking at transaction data in Etherscan, won’t see sandwich attack
MEV schools
1. Democratizing MEV – hard to minimize MEV, isolate builders role, make it competitive
2. Minimize MEV –
User/wallet layer – order flow auctions – users don’t send to public mempool or block builder, auctions off right to execute your transaction, if there are competing bidders, the price rises, and value goes to user (instead of to MEV capturer)
Mike: “Payment for order flow” – Robinhood offering zero fees, selling order flow to Citadel / hedge funds
Mike: In past, equity brokerages would charge you for trades – now people have opted for free trades / invisible fees (eg, Robinhood)
We can do better in Defi – especially the transparency
World of Cosmos and Ethereum are converging – ETH community has been better at executing Hard to say in future if X project is ETH or Cosmos project – there’s increasing convergence
MEV accrues to whomever gets to order the transactions
Mike: MEV will accrue to execution layer
L2 sequencers today are centralized – with plans to decentralize – will eventually face same MEV problems as ETH L1
L2s all need PBS (proposer builder separation)
Sequencers today in L2 does 4 things
-receive transactions
-decide on ordering of transactions
-give user a receipt
-send order batch to data availability layer — that’s what creates finality
MEV should not be counted towards security budget — that’s how core devs think about it, want to minimize and not enshrine it
Minimum security should be paid from inflation + base fee
“MEV is very hard to track”
Different forms of MEV
-arbitrage – different prices on different exchanges, or underpriced asset
-sandwich attacks – buy before a user, then sell it to the user at higher price
-liquidations – searchers typically do this
Statistical arbitrage – take balance sheet risk, small period of time where you have to hold asset before selling it
Many top Defi traders are also block builders – want to maximize inclusion guarantee, greater control over trading strategy – can make trade at last moment, can see all other transactions and order / cancel them
In systems we build, must make sure they’re not sensitive to latency — otherwise there’s incentive to colocate near each other, more centralization
Phil Daian post on this: https://collective.flashbots.net/t/decentralized-crypto-needs-you-to-be-a-geographical-decentralization-maxi/1385
Turn latency into price / auction, auctions are generally more fair, and price (ability to pay) is easier to decentralize than geographic proximity
Users love Robinhood because good feature is very visible (free trades) and bad feature is very invisible (selling user order flow)
Mike: Optimism and Arbitrum have very different approaches to MEV
“Solana is case study for why to not build low latency blockchains”
1 of 2 Solana block builders is operating liquid staking protocol
If you don’t have robust mempool and fee market design, get a lot of spam 58% of Solana transactions are failed arbitrage transactions
What’s novel in Cosmos —
-Osmosis doing something very interesting – onchain block building and searching
-Noma (sp?) & Penumbra – intent based transaction framework
Mike: Cosmos has very different opinions, diversity of ideas
Hasu: Big drawback is everyone has different validator sets, but as shared security grows, what compromises will be made?
How does regulation bump into MEV?
Crypto is about fair and equitable markets for users with less manipulation and exploitation Execution on public blockchains is continually improving
Regulators are largely pragmatic
“If a single regulatory regime can make rules in crypto, then crypto has just failed”
Why pseudonymous identity
Very intrigued by NFTs in late 2020s
Initially thought it was cute games for kids
Saw Gmoney, Punk4156 – inspired by idea
Idea behind bitcoin – provable ownership
“If you’re not sure, you should just try it” With tech, you can’t just read about it, you gotta use it
Now he checks in and out of 2 different ecosystems – Facebook is his pre-existing / real identity life
Twitter is his NFT and crypto community – noticed it’s as easy, if not easier, to cooperate and collaborate here, didn’t expect this at first
Fact that NFTs are always visible in wallets – security flaw, but solvable (especially expensive ones, eg, Fidenza)
On bulletin boards 20 years ago — didn’t know ID of those people, just had pseudonymous handles “It’s not weird at all — you’re all gonna do it”
People present differently online, on LinkedIn v IG v Facebook
The NFT makes the pseudonymous ID provable
RSA: “Don’t trust anyone in crypto who hasn’t used Uniswap”
“No constitutional rights without freedom to transact”
There’s a progressive erosion of freedom
One is tech intermediated —
NYC yellow cabs, pay cash, no one can stop you from using them – decentralized physical activity
Now, Uber can stop you any time for any reason
Two is post 911 AML/KYC
Cash now viewed with suspicion
Impossible to launch “cash” as a product today
End state of all this is a few large databases that intermediate everything — it’s a chokepoint, a honeypot
No thinking about second order effects
Some very ambitious politicians will take control, shut down and control large numbers of people, including their opponents
All of this runs outside of due process
Starts with good intentions, but grows and grows
Network effects which become chokepoints
Crypto’s own permissionless architecture becomes an important counterweight – Bitcoin has no CEO
RSA: there will be 2 types of money — controlled money and free money
NFTs are our best shot at achieving decentralization — that’s why he started 6529
Most of his friends are completely clueless — lots of them think he’s lost his mind about NFTs and crypto
Caught in a MLM scheme or Ponzi
What’s funnier — lots of BTC people can’t get into ETH or vice-versa, or NFTs and DeFi — “have you looked at yourself in the mirror?”
“Hardened veteran of being yelled at”
A lot of super technical crypto lovers shit on NFTs, “kid stuff”
Because crypto was too obsessed with the technology, it was clear it was pre-product market fit
NFTs changed that
You don’t buy a CryptoPunk because it’s on Ethereum
When you talk about applications instead of the tech, you’re at the beginning of consumerization
eg, Dolce Gabbana at an NFT conference!
NFTs = generic carriers for intangible assets
Many things you can do with NFTs that you can’t do with crypto, eg, personal IDs
Big companies are using NFTs, but not bitcoin / ethereum
NFTs are infinitely expressive
Metaverse is just the internet, it’s not gonna be one website
Right now you’re 2 inches tall on my laptop, but in the future you’ll be full size – visualization will improve
You’ll need persistent digital objects — NFTs!
You can survive without Twitter, but not really without email
Politicians can’t ban email — it’s a protocol
Architecture of web 1 was open, inter-operable, came out of academia (eg, email, websites)
Architecture of web 2 came out of Silicon Valley, should have been protocols but was captured by large companies
Metaverse will be your all encompassing ambient digital environment
We have moment in time, next 2-3 years – while others think this tech is a joke – we have opportunity to win a technology shift
Twitter was thought as a joke, a curiosity – 11 years later, huge debate about how POTUS uses it
BTC won’t displace state money – state has tremendously powerful tools
ETH won’t be global computing platform – it’s AWS
You can make NFTs as first amendment protected speech – there will be a Supreme Court case on first amendment grounds
NFTs are
—first mainstream crypto consumer app
—possible to get large companies using and integrating
—less threatening to the state
Intangibles on corporate balance sheets are $70T dollars – far more than gold – and many more intangibles that aren’t on balance sheets at all
NFTs can carry any arbitrary intangible on the internet
“Yes We Can” and “Make America Great” are examples of intangibles that bind humans – memes – intersubjective realities and myths
It’s the underlying fabric of society – and now we can make it composable on the internet
Guest: Tim Ferriss
Host: Carly Reilly (w/ Bankless)
“The way you do anything is how you do everything”
Experimented with NFTs for last 2 years
Describes himself as writer or podcaster to unfamiliar people
Very competitive person – wants to suffer a little
Cockpunch – origin story
-Started w/ desire to be less precious about creative projects, looking for joy and fun and laughter
–Likes playing with new technology sandboxes
-Was drawing characters with gauntlets – the name Cockpunch popped into his mind
-Lets him play with 3d modeling, rigging, voice acting, music – lets him acquire skills that can be transferred to other places – vehicle for learning
AI art competition
-entrants had to show their work
-based on Cockpunch characters
-teaching himself – and then teach others
Chose fiction to let himself focus less on metrics, a “quantitative prison”
“Most people who want feedback…want positive reinforcement”
In any new space, tries to find someone with 10K foot view across many projects to get advice
Lots of folks get lost in weeds with NFTs / web3
Decided on 5555 mints – wanted to make sure it sells out
“There are a lot of whiny bitches in web3”
Likes advice of Scott Adams (Dilbert creator)
Thinks in terms of 6 month projects and 2 week experiments
Snowball of relationships and skills from project to project
Created term “Emergent Long Fiction”
Fiction lets him learn from new people
Set a few conditions upfront – a few characters, realms, drivers
There’s competitive games But where it goes from here – he doesn’t necessarily know (hence “emergent”)
Set constraints and explore how creative you can be
Most people don’t know what they want
Hard to get clear signal when you ask a large audience what they want
Bullish on tokenized assets and digital scarcity
Been thru many cycles of tech
Always some new tool / platform that people say you have to use (eg, Vine)
“Assume there’s always a market for quality in any medium — and just get fucking great”
Web3 isn’t going away
But NFTs – he doesn’t know – it’s one of the meanest most aggressive communities
In this bear market, he’s down 70% net worth – but it doesn’t entitle him to behave like an asshole
Public perception of NFTs (in his audience) has soured tremendously – like a dirty word
But he likes to cull his audience from time to time if they don’t have patience or understanding
Cockpunch as an unlock has exceeded all his expectations – relationships, what he’s learning
Fiction doesn’t always mean a novel – it means story telling
Didn’t plan to do a Discord – it self-organized
In Discord – use your Cockpunch NFTs, with attributes – uses ChatGPT to write a match summary (blow by blow) of a cock fight
Others added music, voice commentary
2022 accomplishments: PoW>PoS reduced energy consumption by 99%
faster, more consistent block confirmation times – every 12secs
ZkEvms – multiple implementations with mainnet launch in 2023
Sign-in with Ethereum adoption (Farcaster, Lens)
Russia invasion of Ukraine – crypto proven to be useful
Continuing adoption in LatAm (eg, Argentina)
Crypto as international payment system for philanthropy
Post-peak price is often when major innovations launch (eg, Ethereum itself, Uniswap, PoS transition)
MtGox was, in a way, FTX of first cycle – but Mark Karpeles has proven himself a responsible actor in aftermath unlike Su Zhu and Kyle
But back then, MtGox implosion felt like existential crisis for bitcoin, for legitimacy
2023 will be year of rollups, Ethereum in its “scalable era”
Crypto no longer in 0.1—>10% stage Now it’s about 10%—>70%, requires new strategies – eg, can’t keep losing $5B in hacks
Esperanto is failure case
A constructed language in 19th c – easier to learn because simpler spelling, more regular grammar
Hope for path to world peace, everyone can speak same language
Didn’t succeed – just enthusiasts, niche community
Beautiful technical properties – but adoption went nowhere
Linux is middle case – kind of succeeded, kind of hasn’t
Linux desktop is mostly a failure – very usable but low adoption
But lots of backend adoption – eg, Android and many servers run on Linux
Internet is big success case
Will Ethereum / crypto end up as Esperanto, Linux, or the Internet?
Probably not Esperanto but possible that it’s between Linux<->Internet
Possible that adoption bifurcates between developing and developed countries
If good people are passive, the things that win will be drama queens of the world – we need to drown out the drama queens
Vitalik intentionally using the word “crypto” less and “Ethereum” more
Crypto is ungovernable commons with no barriers to entry – but just because you’re “crypto” doesn’t mean Ethereum is your partner or ally
IOTA, XRP – still completely centralized, but they’re still on Coinmarketcap
XRP wrote documents to US government accusing BTC and ETH of being China controlled
Cosmos ecosystem – deeply respect it
One of few genuinely trying something different, modularity, different design space, have a technical vision, have not been pump-and-dumpy
DH: even though Terra / Luna was built on Cosmos, no one blames Cosmos for its failure
2022 lessons learned:
-crypto at its most honorable when it takes core principles seriously (decentralization, self custody, transparency)
-some apps that grew quickly tried too hard to integrate w/ mainstream, and compromised their values
-what’s succeeded: Uniswap (DEX); Rai (stablecoin); ENS
-privacy tech hit a speed bump
5 use cases that excite Vitalik:
1 – Money – charitable donations; investing in startups; crypto as frictionless international money
Even if CBDC is adopted, likely hard to use / transmit across borders
In developing world, crypto is easiest way to send money home to families, to store value
Developed world activism or industries at risk of de-platforming (eg, adult content)
Make a wallet that 1B people use
2 – Defi – most important are the most simple use cases eg, stablecoins, DEX, prediction markets (stuff that’s been around for longer)
Newer stuff is very complicated, yield farming, high APR/APY, short-term focused
4 years ago even the ponzis were more honorable; now there’s a lot more obfuscation going on Make a stablecoin that can survive USD hyperinflation
3 – Identity – authentication; attestations; domain names; ENS; proof of personhood Don’t think identity focused blockchains will work
RSA: Identity is emergent, a byproduct of what you’re building (eg, Facebook is useful and ID emerged, same with Google / Gmail)
ETH wallets vs PGP keys – PGP used to be strongest cypherpunk meme, now ETH wallet just works and is being adopted and is public/private key pair – possible bc big username
Standards emerge over time – eg, POAP as attestation protocol
Crypto is not just product, but also a community
4 – DAOs – set to replace things other than corporations (which are big and need the infrastructure);
Where DAO makes sense -Quickly spin up multi-sig of 7 people -Setup a truly decentralized org that is resistant to attacks
Less bullish on DAO as VC fund
How to setup non financial governance? How to resist 51% attack from token holders?
eg, Maker has 7B in capital (TVL), but governance token is only worth 500M mcap – could buy up token and get access to capital
5 – Hybrid apps – partially onchain; more centralized services
eg, Centralized exchanges with proof of reserve attestations, or games / social media that post occasionally to chain
DH: similar to L2s post data to L1 that forces them to play by set of rules
DH: Blockchain is a check on human folly
How do we achieve this?
-continue interacting with regulators
-give grants to enable builders working on important problems (eg, self custody wallets)
What is Vitalik’s role in 2023
Helping projects, explore app space, ETH protocol stuff, push EVM in good trajectory, connect with various ETH communities around world, helping ETH ecosystem be stable and self-supporting
Rumor that he wants to turn “gas” into “mana” – he even proposed splitting gas into several types of gas, and naming one of them mana
