The last edition of Crypto Exponentials Educational Series for 2022 is “Near Protocol Deep Dive”. Enjoy the read.

“Merry Christmas & Happy Holidays”

Near is basically what Ethereum 2.0 was supposed to be. And while Ethereum is still in the middle of a multi-year upgrade path, Near is already live, with nearly all components fully functional. Catch up on Near in 2022!

Near is focused on being simple to use and easy to build on. It’s creating a friction-less path from Web2 to Web3. And as you’ll see when you read my analysis below, the project is one of the top players among leading layer 1 blockchains.

Let’s take a look under the hood using the T4 (Technology + Team + Tokenomics + Traction) Method.

T1: Technology

The three key metrics for blockchains are time to finality, transaction costs, and throughput.

Time to finality is how long a user has to wait before a transaction is confirmed and final.

Many real-world applications need a time to finality of a few seconds the most. Nobody wants to twiddle their thumbs waiting for a payment to be confirmed or for the next screen to load.

Near has a transaction finality of about two seconds. Not quite as fast as Fantom, but good enough and certainly orders of magnitude faster than Ethereum.

When using Aurora on Near (more on Aurora further below), transaction fees are up to one thousand times cheaper than Ethereum.

In other words, transactions are very cheap.

And when it comes to capacity, Near Protocol’s sharded design allows millions of people to use its network without skipping a beat.

Near offers unlimited scaling thanks to its unique sharding technology called Nightshade.

Vertical vs. Horizontal Scaling

Before the internet, there was only one solution for an application that needed a lot of resources: vertical scaling.

The basic idea of vertical scalability (or scaling up) is to improve the single server the application is running on.

In other words, faster processors, more memory, more disk space, and so on.

(This is the approach the Solana blockchain is using.)

Vertical scalability is simple to manage – you just add more resources.

However, it quickly reaches its limits. A single computer, no matter how powerful, can only do so much.

Not only does the hardware cost of a high-performance computer system grow exponentially, but once you reach a certain level of demand it is simply impossible to further increase capacity.

It’s also difficult to create a very decentralized network with this approach because only professional operators with full-time experts and deep pockets can operate such validator nodes.

Once the internet came along and computer systems had to fulfill the demands of many millions of users simultaneously, leading internet companies such as Google and Facebook developed horizontal scalability solutions to meet this demand.

Horizontal scalability means building a large-scale distributed network of servers, with each server only processing a small fraction of the overall load.

In other words, scaling out.

This comes with two key benefits:

1. Lower cost. Instead of the fastest-possible, highest-performance computers, a simple machine will do.

2. Limitless scalability. By simply adding more computers to this distributed system, it can scale linearly. As the number of users grows, the system can grow with demand by simply adding more nodes (or computers).

What enables these large-scale distributed computing systems is the sharding technology I mentioned earlier.

Sharding simply means that the data is broken into pieces (shards), and a cluster with multiple computers processes each piece in parallel.

Why The Ethereum 2.0 Design Isn’t Great

The original plan for Ethereum 2.0 included sharding as well. The idea was to break Ethereum up into 256 shards. This was later reduced to 64 shards, and then reduced again.

Ethereum has a lot of technical debt that makes it very difficult to implement significant changes. Eventually, it became obvious that the original sharding roadmap was not realistic and it was largely replaced with roll-ups.

Roll-ups bundle transactions into groups that are processed on a second layer while inheriting the security guarantees from the Ethereum mainnet.

The problem with both sharding and roll-ups is that they break composability.

In other words, any complex interaction that involves multiple apps or protocols no longer works because the different pieces can no longer “talk to each other“.

This is where next-generation blockchains like Near Protocol that are being designed from the ground up have a huge advantage.

Near has solved this composability problem almost completely by processing all transactions in parallel and only switching to sequential processing if there is a collision (for example, when one transaction depends on another one).

Near has essentially already solved everything Ethereum 2.0 set out to achieve and has done so in a much more elegant way.

Dynamic Unlimited Scalability

Here’s a quick overview of how sharding works on the Near blockchain:

To make the network more decentralized, blocks are broken up into chunks.

This allows anyone with only a small amount of staked NEAR and no specialized computer to participate in validating and securing the blockchain.

Dynamic re-sharding is the holy grail of Near. This feature increases or reduces the number of shards dynamically according to network demand.

This has two enormous benefits compared to other blockchains.

It gives the Near blockchain virtually unlimited transaction capacity (it will just spin up more shards as needed).

But it also reduces the number of shards if network activity decreases, so the network never pays more for its security than required.

Here’s another short video that shows how transactions, block chunks, complete blocks and shards all come together to form the NEAR blockchain:

To offer a great user experience and grow a thriving ecosystem, Near has several more important features.

I’ll quickly highlight a couple of them.

The Rainbow Bridge

While Near itself has a large and fast growing ecosystem, it still needs a tight integration with the larger Blockchain Ecosystem around it in order to exchange information and assets with other networks.

This is where the Rainbow Bridge comes in.

Here’s a link to the bridge and a tutorial video that shows how easy it is to use.

Aurora: Near’s Ethereum Virtual Machine (EVM)

Ethereum is still the largest blockchain network and the de facto standard when it comes to smart contracts and decentralized apps.

That’s why it’s crucial for any competing network to be compatible with Ethereum, so any app (such as UniSwap, Aave or Curve) can easily be copied over without hassle.

That’s why Near Protocol has the Aurora EVM.

Aurora offers the exact same user experience as transacting on Ethereum. And all fees are paid in ETH as well.

Octopus Network

Octopus is a network built on top of Near for launching and running EVM compatible, application-specific blockchains, commonly referred to as appchains.

This is great for applications that want to customize different aspects of the network to optimize the blockchain for their own use-case.

Sidenote

This is the same philosophy behind the Cosmos ecosystem.

One example of a project that is making this move right now is dYdX, the leading decentralized perpetual futures exchange. dYdX is moving from an Ethereum layer 2 to its own appchain on Cosmos.

While there is a potential future where most large applications move to their own dedicated appchains, for the medium-term future the majority of new apps will be launched on L1s and L2s.

That’s because appchains have a lot of start-up hurdles to overcome.

They suffer from fractured liquidity, are more complex to deploy, and need additional developer tooling. They offer a lot of benefits but are much more complicated than just launching some smart contracts.

As you can see, the Near ecosystem offers everything a crypto user or developer would want. From simple and very easy to the most advanced features.

And speaking of developers… At present, the Web3 pie is small. There are less than 30,000 developers working consistently across the Blockchain Ecosystem.

To make it easy to onboard new developers, Near Protocol made a strategic decision to support two important programming languages.

It’s supporting Rust because it is the most loved language and it’s supporting Javascript, which is the most popular language with over 20 million developers.

This means basically any web developer can easily build on Near in the language he has already been using.

There is one other developer perk that sets Near apart from all other layer 1 blockchains.

Near Protocol leverages token economics in a unique way. It empowers developers, who earn 30% of the fees their contracts generate.

So any developer who creates a useful tool or smart contract that gets used by other ecosystem participants, gets paid passive income – a very strong incentive to build on Near instead of elsewhere.

Before we move on to the other Ts in the T4 Method, let’s take a look at planned developments for the Near technology stack.

Protocol Roadmap 2023/2024

The roadmap has two major components: Experience and Core. The Experience section encompasses user and/or developer experience and the protocol features needed to enable those experiences.

The Core section, on the other hand, covers major efforts to improve the scalability and decentralization of the protocol. Most notably, this features the launch of phase 2 of sharding, which scales the network to 100 shards.

Phase 2 is planned for 2023. The roadmap goes through 2024 with the delivery of phase 3 of sharding, which dynamically adjusts the number of shards based on demand.

There are a lot of exciting new features on the way. Let me highlight a few of them here.

Meta transactions allow a third party to pay for the transaction cost of any account, which means that users can be onboarded to NEAR apps without having to get NEAR tokens first.

This is obviously a quantum leap forward in usability and makes it easy to onboard newbies.

Secp256r1 key support would allow iPhone users to have an implicit account on the Near blockchain.

This reduces the friction of onboarding to an even lower threshold than existing Web2 approaches. An iPhone user does not have to go through the process of creating an account through some wallet.

Again, a huge step forward that will put Near way ahead of the competition.

Next, let’s take a look at the people behind the project.

T2: Team

Near Protocol has a large, highly qualified team that has built successful companies and implemented some of the only real-world sharded systems at scale.

Near was founded in 2017 by Alexander Skidanov and Illia Polosukhin.

Alex started his professional career in 2009 at Microsoft. He then joined memSQL (a high-performance, cloud-native distributed database used by Uber and Goldman Sachs) in 2011 as their #1 engineer and worked there for 5 years as Architect and Director of Engineering.

Illia has more than 10 years of development experience, including 3 years at Google, where he was a major TensorFlow contributor and managed the team building question-answering capabilities for the core Google search. He has also authored several notable research papers.

Apart from the two accomplished founders, Near has assembled an impressive team.

I’ll just highlight a few more team members. You can check out the full roster below.

Damon Sicore led engineering and product for Wikipedia for seven years. And he led Mozilla’s engineering team to create Firexfox 3 through 29.

Mikhail Kever was a senior software engineer for a distributed database project for four years. He’s one of only nine people to become an ICPC two-time world champion. (ICPC is a global software programming contest).

Near is exceptionally strong when it comes to software development and engineering talent.

On the business development side, there are several employees with relevant experience and a whole group of team members that have successfully founded and exited their own businesses.

Mildred Idada spent years working at NYSE-listed KKR, one of the largest asset managers worldwide.

Yessin Schiegg has 15 years of experience in finance and private equity. He has served on the Ethereum Foundation’s advisory board and in various roles in the blockchain industry since 2015.

The bottom line: Near protocol has the manpower and intellectual capital to grow a major blockchain ecosystem.

Now, let’s look at the financial side of the project.

T3: Tokenomics

At genesis, the Near blockchain was created with one billion tokens. Since then, the supply has increased to around 1.1 billion. This number steadily rises due to inflation.

90% of the 5% annual inflation is sent to validators to be paid out as staking rewards, with the other 10% sent to the Near foundation treasury.

NEAR currently trades at $1.76 and has a market capitalization of $1.5 billion.

Approximately 42% of the total token supply is being staked across 131 validators.

NEAR staking distribution across validators

As you can see, there’s a broad distribution, making Near fairly decentralized.

The Near foundation has a Stake Wars program to grow the number of validators to 300 over the coming months. For 2023, the target is 400 validators.

Near is systematically working on further decentralization. That’s good to see.

Why are validators important?

In a decentralized network, multiple people collaborate in order to keep it safe. We call such people validators.

In order to make sure that all the transactions in the network are valid, i.e. that nobody is trying to steal money, the validators follow a specific consensus mechanism.

Near Protocol uses Proof-of-Stake to keep the blockchain working correctly and resistant to attacks.

In Proof-of-Stake, users show support to specific validators by delegating NEAR tokens to them. This process is known as staking. The main idea is that, if a validator has a large number of tokens delegated, it’s because the community trusts them.

Validators have two main jobs. The first is to validate and execute transactions, aggregating them into the blocks that form the blockchain.

Their second job is to oversee other validators, making sure no one produces an invalid block or creates an alternative chain (for example, with the goal of creating a double spend).

If a validator is caught misbehaving, then they get “slashed”, meaning that their stake (or part of it) is burned.

An attempt to manipulate the chain would require taking control over the majority of the validators at once, so that the malicious activity won’t be flagged.

However, this would require putting a prohibitively huge amount of capital (hundreds of millions or even billions of dollars) at risk, because an unsuccessful attack would mean the slashing of your staked tokens.

In summary, validators and stakers ensure the network stays secure and operates correctly.

A public token sale raised $33.6 million in August 2020 at between $0.29 and $0.40 per coin. The longest lockup already expired in August 2022.

This means there are no big seed round investors trying to lock-in profits, putting selling pressure on the price.

Near Protocol has backing from some of the top funds in the space, including Coinbase Ventures, Pantera, a16z, Multicoin Capital, and others.

In addition, the Near Foundation has received $560 million from additional key backers like Tiger Capital, a16z, Circle, Dragon Fly, and many others.

The foundation has been very conservative with its treasury. Exposure to non-NEAR assets has been limited, with over half a billion dollars of funds raised held in fiat in Swiss bank accounts. This strategy ensures that the foundation maintains sufficient resources no matter what the crypto market does.

This approach has left the Foundation in an extremely strong position compared to many other competitors to continue to distribute funds to high quality projects for the foreseeable future.

(As a quick side note: The same is true for our portfolio project Fantom, which also maintains a huge war chest and has 30 years of runway.)

Near foundation war chest (Keep in mind NEAR was trading at $3.30 at the end of June, so the value of the NEAR blance is around $689million now.

The Near foundation is on a continued decentralization journey.

The community has come together to implement an ecosystem-wide self-governance treasury called the NEAR Digital Collective (NDC).

The purpose of the NDC is to further decentralize NEAR’s ecosystem governance, distribute more of the foundation’s token holdings to the community and move decision-making on-chain in order to make the community more resilient, transparent, and fair.

A community working group is now forming to take the next steps to launch and implement the NDC framework.

Already, several sub-DAOs have been formed that are responsible for different areas of focus: the DeveloperDAO, MarketingDAO, and CreativesDAO.

It’s great to see Near Protocol take the lead when it comes to better and more sustainable self-governance on a global scale.

Why This Potential CeFi Bankruptcy Is A Gift For You

Right now, a wounded crypto giant is giving us a no-brainer entry opportunity.

Digital Currency Group is the owner of the Grayscale Bitcoin and Ethereum Trusts that hold billions of dollars worth of crypto.

DCG also owns crypto news outlet CoinDesk as well as Genesis, the most important prime broker in the Blockchain Ecosystem that is used by many big players (such as Crypto.com, Gemeni and dozens more).

Right now, DCG is suffering from a liquidity crunch and they are trying to raise one billion dollars.

Near Protocol is DCG’s third biggest liquid holding (after only Bitcoin and Ethereum). DCG seems to sell whatever liquid assets they have right now. This has crushed the NEAR token price, which was already trading at bear market lows.

NEAR’s all-time high was at $20.44.

You can buy NEAR right now for a 91% discount on that price.

This is incredibly cheap for one of the leading blockchain ecosystems.

True bottom of the bear market shopping 🙂

Let’s complete our analysis with the remaining T.

T4: Traction

Near offers excellent financial transparency that makes it easy to monitor progress.

The NEAR foundation offers monthly reports on its grant program, milestones and effectiveness of its funding, and external funding in the Near ecosystem.

The team also publishes quarterly transparency reports so anyone can understand the health of the ecosystem.

In Q4 of 2021, the Near Foundation announced the launch of an $800 million ecosystem fund. The fund was to be split into four broad groups:

$350M to grow the DeFi ecosystem on Near.

$250M for foundation grants to support projects building on Near through direct investment and grants.

$100M for startup funds. These funds are run by external teams to decentralize capital deployment into dedicated investment funds within the ecosystem.

$100M for regional funds to establish physical hubs in key regions around the world to provide a local presence.

The Near foundation will continue to invest and deploy capital in key verticals like infrastructure, integrations, gaming/entertainment, NFTs, and DAOs.

With its regional funds, the Near team is setting the stage for global adoption in the regions where crypto is growing the fastest.

In the last 3 quarters, the Near Foundation deployed $540M in fiat and tokens to grow the ecosystem.

That’s over half a billion dollars in 9 months!

This makes Near Protocol one of the most powerful projects when it comes to boosting its own ecosystem.

Unsurprisingly, the allocation of these funds has helped the ecosystem grow at an unprecedented rate.

The number of accounts on the Near Protocol has grown from 1.1 million at the beginning of 2022 to 15.6 million accounts at the end of Q2, and currently stands at over 22 million.

New accounts are created on Near at an average rate of around 35,000 per day.

Another big reason for this rapid growth is that Near Protocol has the easiest onboarding among blockchains because it uses human-readable accounts.

Instead of having to deal with long blockchain addresses consisting of random numbers and letters, users can have accounts like alice.near.

(Near accounts can also have multiple keys, each with its own set of permissions. This allows us to grant specific authorizations to third-parties, while keeping the option to revoke them at any time.)

The number of weekly active developers deploying on mainnet has grown from 250 to 1,500 per week.

DAOs have surged from 50 to 700 and the number of projects deployed on NEAR has increased from 100 to 750.

The earliest data available for the daily number of transactions is from the second week of November. The data shows that daily transactions have been trending upwards and there are just under one million transactions per day.

In Summary..

NEAR has evolved tremendously in the two years since the mainnet launch in October 2020. More than 20 protocol upgrades went live, most recently the launch of Sharding Phase 1.

Among Layer 1 blockchains, Near Protocol is in an excellent position to thrive despite the temporarily difficult market conditions.

And with 5+ years of runway, Near has a lot of firepower to grow much faster than many other competitors.

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