Research Summary
The report delves into the complexities and challenges of the blockchain ecosystem, focusing on the fragmentation of liquidity, the increasing importance of aggregation, and the evolution of rollups and app-chains. It explores the technological innovations and solutions being developed to enhance cross-domain interactions, including path unwinding, Packet Forward Middleware, and the use of Units as an intermediate. The report also discusses the competition and monetization challenges among rollup providers, the disruptive nature of open-source software, and the ongoing efforts to improve user experience in cross-chain interactions.
Key Takeaways
The Increasing Importance of Aggregation in the Blockchain Ecosystem
- Fragmentation of Liquidity: The report highlights the growing fragmentation of liquidity in the blockchain ecosystem, leading to scattered yields and dispersed users. Aggregation is becoming increasingly vital to address challenges related to infrastructure, trust minimization, interoperability, and language expression.
- Challenges with Rollups: The increase in rollups and app-chains has led to communication concerns, as they act like siloed expansions of Ethereum liquidity. The underlying layer’s finality, congestion, and throughput are limiting factors in cross-rollup communication.
- Need for Simplified Transaction Mechanisms: The report emphasizes the need for simplified yet customizable transaction mechanisms to address persistent oracle issues, liquidity fragmentation, and compatibility with different virtual machines.
Improvements in Cross-Domain Interactions
- Path-Dependent Token Routes: The report discusses the path-dependent nature of token routes in IBC’s current form, leading to non-fungibility. Solutions like path unwinding and Packet Forward Middleware are being developed to alleviate these issues.
- Relayer Incentivization: The report highlights the importance of relayer incentivization to increase decentralization and censorship resistance. It also discusses the potential challenges and solutions related to incentivization.
- User Experience Concerns: The report acknowledges the less-than-stellar user experience in cross-domain interactions and emphasizes the ongoing efforts to create a seamless experience.
Development of the Modular and Cross-Domain Thesis
- Evolution of the Modular Ecosystem: The report reflects on the development of the modular thesis over the past year, highlighting the growth of rollup SDKs and as-a-service providers.
- Challenges with Profitability: Questions remain unanswered regarding the profitability of rollup service providers. The report discusses the potential cost challenges and competition in attracting applications.
- Future Prospects: The report predicts a Cambrian explosion of application-specific rollups and general smart contract chains, emphasizing the need for solutions to UX problems and the potential for native cross-chain applications.
Monetization and Competition Among Rollup Providers
- Challenges in Monetization: The report discusses the difficulties in monetizing SDKs and MEV-software, emphasizing the importance of running key infrastructure within the stacks.
- Competition and Cost Considerations: The report highlights the intense competition among providers and the potential “race-to-the-bottom” in attracting applications. It also discusses the potential cost challenges for providers with smaller war chests.
- Open-Source Software and Innovation: The report emphasizes the disruptive nature of open-source software and its ability to iterate faster and gain network effects, contrasting it with closed-source software.
Technological Innovations and Solutions in Cross-Domain Interactions
- Utilizing Units as an Intermediate: The report describes the innovative use of Units as an intermediate between pools on various chains, allowing swaps to be computed based on a chain’s local state and eliminating the need for state synchronization.
- Streamlining Cross-Chain Swaps: The report highlights the development of functions to streamline cross-chain swaps, enabling existing message relayers to facilitate the process.
- Enhancing User Experience: The report emphasizes the ongoing efforts to enhance user experience in cross-chain interactions, including the development of Catalyst’s architecture and the use of Units to simplify implementation and enable cross-chain swaps.
Actionable Insights
- Invest in Aggregation Solutions: With the growing fragmentation of liquidity, investing in aggregation solutions that address infrastructure, trust minimization, and interoperability could be a strategic move.
- Focus on User Experience: Enhancing user experience in cross-domain interactions is a priority. Investing in projects that aim to create a seamless experience can provide a competitive edge.
- Explore Open-Source Opportunities: The disruptive nature of open-source software offers opportunities for innovation and rapid development. Engaging with open-source projects may lead to strategic advantages.
- Consider Rollup Monetization Challenges: Understanding the challenges in monetizing rollups and SDKs can guide investment and development decisions. Focusing on key infrastructure within the stacks may provide monetization opportunities.
- Stay Abreast of Technological Innovations: Keeping up with technological innovations such as Units as an intermediate and streamlined cross-chain swaps can inform strategic decisions and investment opportunities.
