Ethereum’s 2021: Continue to defend the world’s largest asset liquidity layer

Original title: “The Year in Ethereum 2021”

Ethereum is the foundation of digital civilization

It is robust, secure and reliable, and it is the cornerstone necessary to support the digital cities built on it. These cities are developing rapidly. Since Ethereum is open to everyone, many different users have found reasons to build on it:

  • Markets use it as financial infrastructure
  • Artists use it to give permanence to their work
  • Assets use it as a settlement layer
  • The community uses it to manage shared resources

This year, Ethereum applications have exploded into the public consciousness. The old term “web3” is back in vogue as the world begins to understand the vision of a more decentralized internet built on Ethereum.

Just like in 2018, 2019 and 2020, our goal is to zoom out and show the bigger picture. In our opinion, the most important developments for Ethereum this year are:

1. The arrival of Layer 2 – After years of development, the L2 protocol launched on the mainnet and expanded the capacity of Ethereum.

2. The creator economy goes mainstream – NFTs are everywhere, and artists use Ethereum to make billions of dollars.

3. Core protocol upgrades – The Ethereum R&D community has made several upgrades in preparation for the transition to Proof of Stake.

4. DAO crosses tipping point – DAO becomes a viable tool for community autonomy, accumulation of billions of assets, and attracting new users.

Before discussing the above topics, let’s stop and take stock of Ethereum’s growth. Over the past few years, we’ve tracked different core metrics that try to put Ethereum into context. This year, some of these metrics crossed important milestones.

Which blockchains are people paying to use?

For the second year in a row, Ethereum is the most in-demand blockchain in the world.

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The graph shows the total transaction fees for selected L1 blockchains. This is the sum of all fees paid using each L1 – sending a transaction or interacting with a smart contract. Collectively, they represent the value of that blockchain’s total “block space”—the blockchain’s total transaction volume in a given year.

Total transaction fees are just one metric, and taken alone, they do not perfectly represent the value of the blockchain or its utility to users. However, it does show us the comparative value of each blockchain to its users. In a well-functioning market, it’s worth the price people are willing to pay for it.

If we expand the comparison to include applications, L2 networks, and other L1s, we see the following:

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Each pink entry is an application built on Ethereum, such as Uniswap or ENS. For these applications, the total fee here is not blockchain transaction fees, but other types of fees that users pay to use the application (such as fees paid to exchange liquidity providers).

Incredibly, by 2021, the value paid for using applications built on Ethereum exceeds the total value paid for using all other L1 blockchains.

As demand for Ethereum block space continues to outstrip every other blockchain, we can look elsewhere for meaningful comparisons. This year, we can compare the fees paid using Ethereum L1 to the revenue of payment networks like Visa and Stripe:

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Total transaction fees and company revenue aren’t exactly comparable (Visa and Stripe generate revenue from sources other than direct user-paid fees, while Ethereum can do a lot that Stripe can’t). However, they show Ethereum’s size and value to the market.

How much value has Ethereum moved?

One of the simplest use cases for blockchain is to transfer assets, how much value has been transferred on Ethereum this year? Since surpassing Bitcoin in mid-2020, Ethereum continues to be the blockchain for settling the world’s largest asset flow.

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Ethereum data includes all major ERC20s with over $500 million in transaction volume. Bitcoin data includes USDT on Omni. Because we don’t count all the assets on Ethereum, this chart understates the total transaction volume on Ethereum. Data from Visa (annualreport.visa.com) and CoinMetrics (coinmetrics.io),

Ethereum has moved around $11.6 trillion this year, which is more than Visa and more than double that of Bitcoin.

Value locked in DeFI

Finally, we can track the total value of all assets locked in DeFi protocols. “Locking assets in DeFi” means users deposit some funds into the protocol, usually for a return, in exchange for letting the protocol use its assets—for example, as liquidity.

Ethereum’s DeFi sector continues to have the largest amount of locked assets, and by a large margin.

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Once again, we have to look for comparable data outside the blockchain ecosystem. In 2021, the total value of DeFi locked on Ethereum ($153 billion) exceeds the assets managed by Robinhood ($80 billion) and Bridgewater Associates ($140 billion).

reach level 2

After years of research and development, the technology that will scale Ethereum goes live this year. The transaction capabilities of Ethereum are no longer the capabilities of the simple Ethereum Layer 1.

Instead, it is the capacity of Ethereum’s L1 plus the capacity of all “Layer 2” protocols that inherits the security of Ethereum.

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L2 data is incomplete due to restrictions on publicly available information. All the data here: https://docs.google.com/spreadsheets/d/1-Is51Do_AgatnUsoxo-Iy7B0clCyxf1VN_gDt8mtly4

This graph shows us the total cumulative transactions on Ethereum in 2021, including both L1 and L2. In 2021, Ethereum’s L1 is doing about 1.2 million transactions per day (or about 15 transactions per second). As the Layer 2 protocol went live, Ethereum’s effective capacity began to increase and the composite transaction rate (top of the chart) began to curve upward.

All L2 protocols are still in the early stages of deployment, and some have not removed all temporary trust assumptions (see L2Beat for more information). There are also significant differences between the technologies grouped here. For example, StarkEx chains are technically Validiums, which means their proofs are stored off-chain, not on-chain.

As the L2 protocol continues to mature and gain market share, the L2 portion of the graph will grow until it far exceeds the transaction capacity of L1. “Ethereum” no longer refers to a single protocol, but to a community of protocols that share a common L1.

You may have read that Ethereum is expensive or slow, but that’s only because people are making the wrong comparison. Ethereum is the first blockchain mature enough to build multiple production-ready L2s on it. While gas fees are still high for some use cases on L1, 2021 marks an inflection point in the future, with most users interacting with Ethereum only through L2.

Currently, the largest share of L2 transactions is done on application-specific L2 protocols called “ZK rollups”. These are L2s dedicated to certain types of applications, such as transactions or simple token transfers.

The ZK rollup ecosystem built on Ethereum is progressing in 2021:

  • Loopring launched the zkRollup decentralized exchange back in 2020. They completed the v2 release in early 2021 and added support for NFT minting and trading in August 2021.
  • Matter Labs launched Payment Aggregation (zkSync) in June 2020, which is integrated into wallets like Argent and applications like Gitcoin (and continues to develop “zkSync 2.0” with EVM compatibility).
  • Aztec launched a private payments rollup (“zk.money”) in March 2021 and added support for the DAI stablecoin in April.

Several projects have launched Validiums using Starkware’s StarkEx platform, including:

  • DeversiFi (Decentralized Exchange) launched Rollup in June 2020.
  • ImmutableX (NFT exchange) launched rollup in April 2021.
  • dYdX (defi trading platform) launches rollup in April 2021.
  • Sorare (a fantasy football NFT project) launched the StarkEx roundup in July 2021.

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L2 data is incomplete due to restrictions on publicly available information. All the data here: https://docs.google.com/spreadsheets/d/1-Is51Do_AgatnUsoxo-Iy7B0clCyxf1VN_gDt8mtly4

This year saw two important new members of the Rollup ecosystem: Arbitrum and Optimism.

Arbitrum and Optimism are the first generalized aggregations to go into production. This means that each rollup behaves like a natural extension of Ethereum – they are “EVM compliant”. Users can easily migrate Ethereum-based assets onto them, developers can deploy Solidity contracts and applications into Rollup themselves, and users can interact with them.

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L2 data is incomplete due to restrictions on publicly available information. All the data here: https://docs.google.com/spreadsheets/d/1-Is51Do_AgatnUsoxo-Iy7B0clCyxf1VN_gDt8mtly4

Arbitrum launched on mainnet on May 14th and removed their whitelist on August 31st. Optimism came a few months later, launching on mainnet on August 19, and removing their whitelist on December 16.

As the L2 ecosystem grows, users deposit more and more funds into it. At the time of writing, there are about $6 billion in the L2 protocol.

Summary in context

For a decade, the crypto community has been working on scaling blockchains using “Layer 2” technology. Bitcoin payment channels were discussed back in 2012. While channels will eventually go into production on Ethereum as a relatively niche scaling solution, they cannot scale smart contracts.

In 2017, Vitalik and Joseph Poon proposed a new solution called Plasma. The basic idea is to extend Ethereum by creating independent blockchains that will be anchored to Ethereum, inheriting security through clever code and economic mechanisms.

This research direction has led to a new technique called “summary”. Building on the idea of ​​Plasma, Rollups extends Ethereum by creating a unique L2 blockchain that can be used cheaper and faster while still inheriting the security of L1.

Applications exist on the rollup chain, and users interact directly with the rollup chain. Behind the scenes, the protocol bundles (“aggregates”) everyone’s transactions and stores their records on Ethereum L1. These records ensure that these transactions benefit from Ethereum’s strong security.

But there are two different ways to do this, leading to two different types of rollup designs: optimistic rollup and zero-knowledge rollup.

In zero-knowledge aggregation, cryptography is used to prove that a transaction is valid and that proof is stored on Ethereum. Most of the data can be discarded (meaning you don’t need to store it on-chain), leaving only a small fraction of the data. But it is enough to prove the transaction is valid mathematically.

There are many application-specific rollups today, which we covered above. But generalized ZK (zero-knowledge) rollups are still in progress, being built by teams including Matter Labs, Starkware, Polygon Hermez, Scroll Tech, and the Privacy & Scaling Explorations group.

To simplify a complex topic: ZK rollups work by converting the code that operates on rollups into special mathematical equations. This equation gives us a succinct proof stored on mainnet.

Defining such an equation is much easier when the possible inputs are limited. For example, if we only intend to do simple token transfers. These application-specific equations are easier to design.

In contrast, it is much harder to define equations that can accept any possible code input and create proofs from them. This is the challenge of creating ZK summaries that can be used in general arbitrary code.

This “universal” computation (also known as “EVM equivalence”) is easier to achieve with Optimistic rollups.

Using Optimistic Rollups, the L2 rollup chain leaves a bundled transaction record on L1. In most cases, however, the “proofs” that guarantee these results are valid don’t actually run. The protocol is optimistic – it assumes every block is valid, but we reserve the right to always prove it if necessary.

Because Optimistic Rollups need to save the data so someone can run the proof later, they need to publish large amounts of transaction data onto the chain (instead of tiny proofs that have been verified using zero-knowledge techniques). But because no new cryptographic innovations are required, fully general-purpose Optimistic Rollups (like Arbitrum and Optimism) already exist in production today.

In either case, this means that you are very confident that your aggregated transaction is final. If someone sends you ETH in the rollup, the proof of that transfer exists on Ethereum and you will always be able to withdraw that ETH to L1 if needed.

The long wait for Tier 2 is over. It’s here now – just very unevenly distributed. It will take months for applications, exchanges, wallets to support L2 and help users with the transition.

Ethereum’s creator economy goes mainstream

In last year’s blog post, we noticed that Ethereum’s “creator economy” was showing signs of growth. Cryptoart volumes rose sharply in December, with signs that more and more artists are experimenting with the tools Ethereum offers them to capture the value of their work, and the following year exceeded expectations.

In 2021, artists, musicians, writers, and other creators will earn a combined $3.5 billion using Ethereum. This sum makes Ethereum one of the largest global creator platforms.

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Note: Ethereum data is 2021, all other data is 2020 due to public information limitations. All data documented here: https://docs.google.com/spreadsheets/d/1-Is51Do_AgatnUsoxo-Iy7B0clCyxf1VN_gDt8mtly4/

In 2021, Ethereum will earn more for artists and musicians than OnlyFans or Patreon, and almost as much as the world’s largest creator platform.

What is the creator economy?

Ethereum’s “Creator Economy” is a set of tools, services, and marketplaces that enable creatives around the world to use Ethereum to make money from their work.

To date, the Internet’s “creator economy” has been dominated by large, centralized platforms. Most of these use a similar model, with platforms like YouTube or Spotify earning revenue from ads or subscriptions and then passing a small percentage of that revenue on to creators.

That business model turned Spotify into a $40 billion company. But this has been frustrating for most artists, who earn a small percentage from each stream. In 2020, only 13,400 artists made more than $50,000 from Spotify (from 1.2 million artists on the platform).

More artists work for free by posting their work on Instagram or Twitter, artists get paid for “exposure” and platforms get value.

Ethereum gives creators new tools to monetize their work. One tool in particular stands out: NFTs. A digital certificate representing ownership of any digital file, including art, music, photography, video or gaming items. In 2021, platforms like OpenSea, Rarible, Foundation, Zora, and Mirror enable artists to create, sell, and trade NFTs.

The NFT ecosystem is in a very early stage. Remember, a year ago, the NFT market barely existed. Today, the vast majority of trading volume and users are concentrated on one platform (OpenSea). However, there are many projects working on launching competitors, including decentralized exchanges. As we know from the history of decentralized exchanges (“dex”) and the incredible growth of Uniswap, decentralized projects that hand ownership to users can make sense with centralized incumbents competition.

The rapid expansion of the NFT market has attracted mainstream interest. Steph Curry, Eminem and Shaquille O’Neal acquire Bored Apes. Adidas did the same, they also bought digital land and released their own series of NFTs. The CEOs of Budweiser, Paris Hilton, Trey Songz, Drake Bell, and Shopify have all registered ENS names and put them in their Twitter handles.

In addition to soaring NFT valuations and celebrity interest, the emergence of Ethereum’s creator economy marks a quiet revolution in our community.

For most of the history of the crypto industry, most people who could make a living using these technologies belonged to only a few categories: investors, developers, or people working for crypto companies.

But in 2021, things have changed.

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This year, more people from new and very different professional backgrounds started using Ethereum to support their finances. By 2021, people will be able to make money using Ethereum without any pre-existing capital, no technical skills, no financial or investment background, and no need to work at a crypto startup.

These creators are not just regular users, but core members of the Ethereum community who depend on it and have significant interests in the ecosystem. This change has resulted in an influx of new people, ideas, communities, talents, perspectives, and concerns, changing the Ethereum ecosystem and influencing its future.

Most notably, many new users of Ethereum are concerned about the energy consumed by proof-of-work. Fortunately, they are joining a community that shares these concerns. Since 2014, the Ethereum community has known that proof-of-work consumes too much energy and has been working hard to end it.

3. Core protocol upgrade

In 2021, the Ethereum community has made steady progress in the transition to Proof of Stake, with two major mainnet upgrades bringing changes such as a new fee market and many small optimizations.

The research, development, coordination and implementation of these upgrades is carried out by independent teams around the world through open research and collaboration. As always, Ethereum is a bazaar, not a cathedral.

Much of the work is done by teams that build and maintain individual clients. Ethereum is the only blockchain with multiple independent teams actively building production client software.

User diversity has always been a priority for the Ethereum community, although it remains challenging in practice. Client diversity helps prevent bugs in a particular client that could destroy its monetary value, but also serves as a check on governance captured by the core developer group. Ethereum is a “spec-first” blockchain, which means that the rules of the protocol are independent of any specific software or collection of individuals maintaining that software. Anyone can implement the spec and build their own client to compete with the existing ones.

This year, user teams and the larger R&D community made two substantial upgrades to the Ethereum mainnet: “Berlin” in April and “London” in August. These upgrades include several changes. Most notably EIP-1559, which reformed the Ethereum fee market (discussed in depth below), but also includes key changes like EIP-2929, which improved Ethereum’s defenses against DOS attacks.

Teams also upgraded “Altair” to “Beacon Chain” – the proof-of-stake chain that has been running in parallel with the Ethereum mainnet since December 1, 2020. Altair upgrades allow both light clients to reach consensus, as well as update slashing and vitality incentives.

The backdrop for all this work is the ongoing progress towards “merging” — the moment when Ethereum’s proof-of-work system will shut down forever in favor of proof-of-stake (discussed in depth below).

Even during this time of change, the Ethereum mainnet continues to process and secure billions of dollars without interruption.

EIP-1559 – Toll Market Reform

On August 5th, EIP-1559 went live on the Ethereum mainnet. The upgrade introduces several reforms to Ethereum’s “fee market,” a set of rules that define a market where users pay to have their transactions recorded on the Ethereum blockchain.

EIP-1559 has multiple goals:

  • Reduce the likelihood that users will overpay for their transactions.
  • Reduce transaction stall rate.
  • Enhances protocol security by reducing the likelihood of reassembly and making DOS attacks more expensive.
  • Burning part of the fee can add value to ETH and improve the economic security of Ethereum.

As with most Ethereum protocol upgrades, this is the result of years of research, development, testing, and debate in the Ethereum community. A 2014 blog post by Vitalik shared early ideas, followed by an ethresear.ch article in July 2018, and a 2019 EIP (“Ethereum Improvement Proposal”) draft. Two years of analysis and discussion followed, including by Tim Loughgarden.

The adoption of EIP-1559 is not yet complete. Some wallets, exchanges and other applications will need to upgrade their software to take full advantage of the new fee market.

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Source: Pintail (https://pintail.xyz/posts/gas-market-analysis/)

The figure shows a breakdown of Ethereum “Type 2” (tx using EIP-1559) and “Legacy” transactions. By the end of 2021, about 35% of transactions on Ethereum are still using “legacy” transactions. However, even legacy transactions can benefit from EIP-1559 as it improves how gas estimates are generated.

Many wallets and exchanges have enabled EIP-1559 trading, including MetaMask , Rainbow, MyCrypto, Frame, Trezor, Brave, Coinbase (and Coinbase Wallet), Blockfi, FTX, and more.

Four months after the changes went into effect, EIP-1559 is fulfilling its goal of improving the user experience of Ethereum:

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Source: Pintail (https://pintail.xyz/posts/gas-market-analysis/)

In this graph, the blue line shows the median gas price for traditional transactions, and the orange line shows gas prices for Type 2 (EIP-1559) transactions. After implementing EIP-1559, Type 2 transactions are on average lower than traditional transactions.

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Source: Pintail (https://pintail.xyz)

The figure shows the benefits in more detail. The blue line shows the gas price difference between the two transaction types since EIP-1559 went live (the higher the line, the more savings). The cost of traditional transactions is always 10-20 gwei higher.

EIP-1559 also appears to reduce the likelihood of transactions getting stuck without requiring users to pre-emptively pay overage fees for inclusion (which many users accustomed to stuck transactions do all the time). If you’re interested in learning more, see this article from pintail, this article from Coinbase, and this article from blocknative.

feel the burn

EIP-1559 also introduced a change whereby a portion of the fees each user paid to use the protocol was destroyed (“burned”). This means that every transaction removes a certain amount of ETH from the total supply.

This creates a mechanism for adding value to ETH – an important part of the broader vision of making Ethereum the most secure blockchain in the world.

Ethereum’s consensus mechanism depends in part on the value of ETH. Under PoW this is because miners are paid in ETH to secure the network, and under PoS this is true because stakers are both paid in ETH to secure the network and because they need to stake ETH to provide this security sex.

Burning a portion of the fee creates a relationship between the usage of the protocol (transaction fees) and the value of ETH itself (by reducing supply). Since August, 1.32 million ETH has been burned in 2021.

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The yellow bars represent days and weeks of negative issuance, where Ethereum was heavily used – and enough fees were paid – that the burn from EIP-1559 exceeded the new issuance that occurred every block. Keep in mind that these are results under the current PoW system, moving to PoS next year will result in lower issuance.

merge

The migration from proof-of-work to proof-of-stake has been the earliest vision of the Ethereum community. While proof of work may have been necessary to launch the first experiments in blockchain design, in the intervening 12 years it became clear that better designs were possible. The design is safer and does not consume excessive energy for a strong economic security.

Ethereum’s proof-of-stake system is the culmination of more than 7 years of research and development. Why did it take so long? Since the beginning of this process, the Ethereum community has been reluctant to compromise on decentralization.

Although different proof-of-stake systems exist on other chains today, most of them make significant concessions in terms of decentralization. They rely on some form of delegation, which means the actual role of block validation is concentrated in the hands of a small number of stakers.

While some communities settled, Ethereum innovated. New technologies and advancements in new technologies make Ethereum as decentralized and secure as possible. Advances in BLS signatures used in Ethereum PoS enable thousands of nodes to participate in consensus, meaning that Ethereum PoS requires no delegation. Thousands of individual validators participate instead of a few professional staking organizations.

At the same time, the design of Ethereum keeps the technical requirements for staking low. Low enough that anyone with a consumer laptop can staking at home and in a similar position to professional staking services.

Ethereum’s proof-of-stake system is live—it just hasn’t been used to protect any user activity. The Beacon Chain — Ethereum’s proof-of-stake mechanism — has been live since December 1, 2020, and it runs without any major issues.

Last year, users staked more than 8 million ETH on the Beacon chain, worth about $26 billion:

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Source: @Carvas (https://dune.xyz/queries/252741/473336)

The remaining work is to incorporate the existing Ethereum L1 into its new proof-of-stake infrastructure to replace proof-of-work.

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Source: (https://twitter.com/trent_vanepps)

As the beacon chain buzzes, the Ethereum community passes multiple milestones for the merger:

  • In April, the Rayonism project saw developers hack together a mock merged testnet along with some early sharding designs.
  • In October, the client team gathered in Greece for the Amphora retreat, which resulted in a brief multi-client testnet.
  • In November, the Kintsugi testnet continued to work with a long-term multi-client testnet based on the latest specs.

Once the specification is finalized and the new testnet is widely used by end users and application developers, the existing testnet will be used for a trial run of Merge.

Assuming these trials go well, the focus will shift to the final step: performing the merge on mainnet and ending proof-of-work forever.

Diversification of users

Ethereum has many client implementations, each with a different share of the total number of validators participating in the Proof of Stake. Today, customer diversity is far from optimal:

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Source: https://twitter.com/sproulM_/status/1481109509544513539

Ideally, no client should own more than 33% of the network. If each individual client is below this percentage, the risk of bugs found in the client affecting the network is reduced.

Ideal client diversity is a theoretically achievable goal: Ethereum has 4 excellent staking clients (Lighthouse, Nimbus, Prysm, Teku), and a fifth candidate (Lodestar) has recently emerged.

Before the merger, it would be beneficial if no client owned more than 50% of the network. Without going into too much introduction, in the event of a (unlikely) chain fork, staying below 50% of clients will provide a safe buffer for client developers to resolve issues without a massive slash event.

It’s in everyone’s interest to move towards better customer diversity – even the developers of most customers. To their credit, Prysmatic Labs recognizes this fact and is working to reduce their majority.

Staking ecosystem expands

Ethereum’s Proof of Stake allows everyone, from hobbyists to institutions, to stake ETH and participate in securing the network. As the stakeholder community has grown, an ecosystem of services, tools, infrastructure, and applications has grown:

  • Rocketpool is the highly anticipated decentralized staking protocol launching in November 2021. Rocketpool is a protocol that allows users to deposit ETH and share staking rewards without having to manage any staking infrastructure themselves. In short, users of the protocol securely deposit their ETH into a network of single node operators coordinated by the Rocketpool protocol. The decentralized staking protocol is an important infrastructure for fostering a healthy staking ecosystem. At the time of writing, 74K ETH has been staked to Rocketpool.
  • Lido is also a staking protocol, but with additional trust assumptions in its current implementation. By January 2021 (2 months after Beacon Chain launch), 100K ETH is pledged by Lido. By the end of the year, 33,000 unique depositors have staked $13 billion worth of 1.6 million ETH on Lido Recently, Lido has made good progress in terms of customer diversity in the network of operators that serve the protocol.
  • At the same time, the ecosystem of staking tools is growing
  • The StakeHouse community released eth-wizard (a CLI installer for hobbyists) and Wagyu (one-click Eth2 staking installer).
  • Existing node hardware providers Dappnode and Avado have expanded their Ethereum staking offerings.
  • Stereum launches open source node setup tool.

Want to stake your ETH? The best place to start is ethereum.org.

DAO crosses tipping point

One of Ethereum’s earliest dreams was enabled: Decentralized Autonomous Organizations (DAOs), because Ethereum allows anyone to write arbitrary rules in code that we can use to design organizations or governance systems that allow a group of people to vote or Other mechanisms make decisions together.

The DAO ecosystem had a breakthrough moment in his year. A simple but viable technology stack comes together to enable existing DAOs to get the job done, while new entrants push the boundaries of what a DAO can be and who can be a part of it.

The number of unique monthly voters participating in the DAO on Snapshot grew throughout the year and exploded in November and December:

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Source: Snapshot

Today, there are hundreds of DAOs that can view daily activities, pay membership fees, build products, and vote on the use of shared funds. The DAOs on Ethereum collectively manage over $16 billion worth of assets.

But first: what is a DAO?

“DAO” is used to describe a wide range of structures. Generally, a DAO refers to any group of people who use a blockchain such as Ethereum to collectively manage something on-chain. Sometimes that’s money (like ETH or tokens in the DAO treasury fund), but it can also include parameters of on-chain protocols like NFTs, MakerDAO, or all of the above.

While The DAO has existed on Ethereum since 2016, these early experiments were more of a scientific project than a real product.

But over the past few years, DAOs have become a practical necessity. The first major driver is DeFi protocols, which want to be trusted to decentralize — handing control of their protocols to a user base that votes with tokens (“governance tokens”).

The basic structure pioneered by protocols like Compound in 2020 has become the de facto standard since the launch of many DAOs like Uniswap in September 2020.

The DAO’s growth in 2021 is notable because it occurs outside of DeFi protocols that are the first major entrants. These DAOs are starting to demonstrate the breadth of the design space to on-chain organizations.

  • Ethereum Naming Service (ENS). First launched in 2017, ENS is a decentralized naming protocol that allows users to create a simple username (yourname.eth) that can be used as an Ethereum account, receive non-ETH cryptocurrencies (including Bitcoin), or as a web URL . In 2021, ENS launched a DAO to manage certain parameters of the ENS protocol, as well as a community fund to support the ENS ecosystem.
  • Constitutional DAO (People). In just a few days in November, strangers from the internet collectively raised $44 million to buy a copy of the U.S. Constitution. In total, 17,521 different accounts contributed to this work. The project garnered mainstream coverage and sparked a frenzied live broadcast, with a bewildered group of auctioneers mediating the bidding competition between the newly organized Internet representatives and the old world of finance.
  • PleasrDAO started with a single tweet and quickly grew into an investment club. PleasrDAO is exploring different parts of the DAO design space — not a mass organization with tens of thousands of members, but a relatively small investment club where members pool their funds for joint purchases. Notably, PleasrDAO has purchased some high-profile cultural assets, such as Doge 1/1 or the unreleased WuTang album.
  • Friends with Benefits (FWB) is an online social community whose membership comes in the form of $FWB token ownership. This token is used to control access to various online and offline spaces: chat groups, meetups, dinners, parties, etc.
  • MakerDAO started out as a DAO, but then established some traditional organizational structures in 2018. MakerDAO is the creator of the DAI stablecoin, the first decentralized stablecoin on Ethereum and one of the most successful DeFi projects to date. This year, MakerDAO accomplished its promised decentralized returns by closing its foundation and handing over control of the Maker Protocol to a DAO governed by its token holders.

DAO is a very general toolkit that can provide a lot of design space. With private keys and smart contracts, we can design almost any arbitrary system through which humans can collectively manage on-chain assets and protocols.

As a result, we see a wide range of uses for DAOs. Soon, it may be difficult to discuss them as a useful category. DAOs are a means for protocols to meaningfully decentralize themselves from the control of their founders, a tool for online communities to pool funds quickly and seamlessly to achieve a common goal, a new type of social network, and a new way to collectively fund public goods. Way.

The DAO’s growth this year has benefited from a set of easy-to-use application tools. Many DAOs use a simple combination of tools. For on-chain smart contracts, most use a fork of the Compound system. Voting itself is handled by projects like Snapshot, and individual proposals are discussed and debated on forums, just like discourse.

In 2021, the range of tools available to create and manage DAOs will expand:

  • Mirror has launched a set of tools to help people create a “media DAO”: co-publishing and owning content created on Mirror.
  • Coordinape breaks away from the Yearn community and provides a framework for distributed teams to collaboratively decide how DAO members are paid for the work they do.
  • Rabbithole has introduced tools to allow new users to join the DAO and develop the skills and credentials to work for the DAO.
  • Forward-thinking governments have instituted new legal structures to simplify DAO formation and reporting, as in Wyoming.

As DAOs scale to meet the needs of the millions of people around the world who want to use them, DAOs have no shortage of problems and challenges to overcome. A few key challenges we hope to make progress on in 2022:

  • Today, most DAOs use some form of token voting. This means that decisions are made based on the proportion of ownership of certain “governance tokens”. Coin voting systems have many known drawbacks. Sybil-resistant experiments like Proof of Humanity and BrightID offer a way to build governance systems based on individuals rather than tokens.
  • Look for management structures and work systems that enable distributed teams to meaningfully build products and coordinate actions.
  • Legal systems can be very slow at adapting to new forms of productive human activity, and DAOs are no exception. The lack of a clear legal framework can create risks for DAO members. Jurisdictions around the world continue to do this – for more recent work in the US, see this paper by David Kerr and Miles Jennings.

New organizations are emerging to meet these and other challenges. The DAO Research Collective is one such organization whose goal is to make it easier for DAO founders to find answers and information about these questions.

Start

As with every year, there is too much happening in the Ethereum ecosystem to summarize in one blog post. But Ethereum is much bigger than the above 4 topics – some other developments in 2021:

  • Identity: Ethereum Name Service (ENS) sees breakthrough growth, growing to hundreds of thousands of users, hundreds of integrations, and a new DAO community vault ($1.9B) to fund the continued growth of the ecosystem. Proof of Humanity and BrightID were used as anti-witch mechanisms, using Ethereum standard logins gained traction, and having an Ethereum identity became fashionable.
  • Gaming: Axie Infinity has grown to an astonishing 2.9 million users, making it the most successful game ever built on Ethereum. New cryptocurrency organizations like the Yield Guild have sparked interest in the gaming ecosystem for making money from games. Skyweaver launched on Polygon, Dark Forest released v0.6, and continues to build a cult following around its crypto-native on-chain strategy game.
  • Public Goods Funding: CLRFund (a protocol that lets anyone run their own CLR) completed their trusted setup ceremony and facilitated multiple funding rounds. Gitcoin continues their successful CLR product, raising over $24 million throughout the year. Optimism conducted an experiment in retroactive funding of public goods, and the Ethereum Foundation launched a customer incentive program to sustainably fund customer development and maintenance. A new public goods organization – 0xPARC – was launched to focus on application-level innovation.

2021 has been a bullish year for the Ethereum community, with the ecosystem passing major milestones and proof-of-work coming to an end.

When the market moves in your favor, it’s easy to feel like a winner and more easily distracted. But the city won’t build itself – we’ll see you on the other side of the proof of work.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/ethereums-2021-continue-to-defend-the-worlds-largest-asset-liquidity-layer/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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