Author: Jiawei, IOSG Ventures

Before we know it, 2023 is about to enter its fourth quarter.

In general, the primary market has been rather dull recently, with the majority of projects being old wine in new bottles.

Judging from the valuation alone, the heat is still unabated. This article aims to share some personal views based on the recent observations of the primary market of the infrastructure track.

Transaction Lifecycle

According to the life cycle of a transaction, some basicXiaobai NavigationFacility projects can be divided into the following categories:

• Validator

  • Validators can be divided into Solo Staker, Staking Service Provider, CEX Staking and Liquid Staking, or they can be divided into two categories: crypto-native (Lido) and compliant (Liquid Collective).

  • The current Ethereum pledge rate is about 22%. I estimate that there is still room for growth of about 15% in the next one to two years, and this part of the incremental market is likely to flow in from traditional institutions as a means of asset allocation. The Ethereum pledge exposure held by traditional institutions is conducive to consolidating and diversifying the Ethereum validator set.

  • Custodians (such as Fireblocks and BitGo) mostly work with Staking Service Providers to provide customized, one-stop Yield Aggregation services.walletEspecially the hardwarewalletIt also provides an entry point for Staking. This type of cooperation belongs to the Distribution Partnership on the Staking side, which has a large degree of freedom, and even competitors can cooperate and provide support to each other. Among them, as a Staking solution provider, it gets about 10%-30% of profit, and the end that provides user traffic gets more profit sharing.

  • Currently, the Ethereum staking market presents a dynamic competition landscape driven by events (such as the SEC's blockade of Kraken's staking business in the United States), price war orientation (reducing staking service fees), and target customer differentiation (crypto-native and compliance). The author believes that the compliance market will be a battleground in the future. In terms of geography, with the United States'cryptocurrencyAs regulations tighten, most Staking services are seeking a way out in the Asia-Pacific region. Asia-Pacific and the Middle East are new growth points for Staking business.

• Builder

  • Builder integrates Orderflow resources through various channels and bids against each other in the auction to win block space. From the reverse perspective, what Builder does is wholesale block space from Proposer, disassemble it and sell it to Searcher, earning part of the price difference as a middleman. Builder's core competitiveness mainly lies in two points: Orderflow and Infrastructure.

  • The former is the most basic means of production for Block Building. The more Orderflow you get, the more opportunities you have to demonstrate MEV. If the Builder cannot control enough Orderflow, even if you have the best strategy, it will be useless and you will have almost no competitiveness in the market.

  • The latter can also be called Simulation Capability, which means that it is necessary to continuously simulate the incoming transactions and update the bids, and also observe the bids of the opponents and make corresponding updates. This process is accurate to the millisecond level, and the Builder may update hundreds of bids in a slot of just 12 seconds.

  • Builders also need to make appropriate subscriptions (i.e., burning money for subsidies) to help themselves win or maintain market share. Roughly speaking, the market share of Block Building can be roughly understood as Execution/Inclusion Guarantee, that is, when Searcher gives you the Bundle, you can ensure the probability that this Bundle will be included in the next block. Since it is directly related to its profit and loss, Searcher has high requirements for Execution guarantees. Therefore, subsidies are regarded as a means of marketing. The bids between builders may differ very little, so the subsidies for each slot do not need to be too much. In this competitive environment, how to wisely choose whether to subsidize or not, and how much to subsidize, is also where the game space lies.

  • Since the gradual adoption of MEV-Boost after The Merge, the competitive landscape of Builders has undergone several changes. Based on the advantages of Orderflow and Infrastructure and the accumulation of experience, the head Builders can form a monopoly position, and this monopoly position is difficult to shake. Overall, the author believes that Builders have presented a winner-takes-all situation, and the top four Builders occupy 85% of the market. From a business model perspective, its profits are relatively meager, and its stability and sustainability are uncertain. It is difficult for midstream or downstream builders to obtain sustainable and sufficient economic incentives, and they may eventually have to give up the competition, which further strengthens the dominance of upstream builders. (The discussion here is about Neutral Builder. If it is Searcher-Builder Entity, the situation will be better, but because it involves arbitrage between CEX-DEX, the profitability is difficult to estimate.)

• User and wallet side

  • OFA (Orderflow Auction). OFA refers to the user or wallet sending an order to OFA and providing part of the order information for the buyer to judge the value of the order. The buyer bids based on this information to choose whether to participate in the auction. The final bid will be sent back to the user or wallet as a rebate. Currently, there are two main products: MEV-Share and MEV Blocker. So far, the latter has returned 443 ETH in rebates to approximately 320,000 users.

  • OFA is generally a good thing for users (although a recent article by Blocknative pointed out that OFA leads to greater slippage and slower execution speeds), because the value generated by their order flow in the network is reflected, and they get rebates that they didn't have before; it also avoids front-running and sandwich attacks. In addition, wallets can also use order flow as a means of monetizing traffic. On the other hand, OFA, as a new channel for Searchers and Builders to obtain Orderflow, provides some diverse options. However, if more users and wallets adopt OFA instead of sending transactions to the public memory pool, it means that the cost of obtaining Orderflow becomes higher, squeezing the profits upstream of the supply chain.

• IntentIt is a concept with a long span in the transaction life cycle. Intent can be seen asBlockchainA shift in trading paradigm.

  • In traditional transaction mode, users specify the path. For example, when I invite someone to dinner, I choose a restaurant, specify what each dish is, how to match meat and vegetables, etc. The core of Intent is to put forward the demand and how much you are willing to pay for it, conduct bidding, and finally select the best one. I can set a per capita consumption of 500, let different restaurants arrange it, and finally I will choose the best one. When the same demand is met, competition will be reflected in the price. Restaurants conduct reverse bidding, which reduces the cost of users.

  • The author believes that Intent is an important investment direction. There are three main reasons: first, transactions are the basic form of self-expression for entities on the chain, and Intent has achieved a paradigm shift on this basis; second, this field is relatively early, including projects, developers, including Flashbots and Essential.CommunityIt is still in the exploratory stage and the pattern is not yet determined; third, Intent is relatively complex, and the design space including technical architecture and economic incentives is relatively broad. Different solutions may vary greatly, and it is impossible to conclude who will be the winner too early.

  • Despite this, I believe that for a long time, there will still be an intermediate state where traditional transaction and intent transaction paradigms coexist. It seems too early to mention the term intent-centric.

In summary, by dividing the transaction life cycle, we can see the trend of infrastructure exploring the upstream of the transaction life cycle. In this process, the degree of specialization and refinement has been significantly improved, while the diversity of competition has been continuously introduced and balanced competition conditions have been ensured.

Rollup-centric roadmap

Vitalik proposed a Rollup-centric Roadmap in October 2020, which means that Ethereum needs to centrally support Rollup in the short to medium term. First, Ethereum's base layer expansion will focus on expanding the data capacity of blocks to provide more space for data availability, which will be reflected in the introduction of data sharding and EIP-4844. Second, Ethereum's infrastructure will be adjusted to support Rollup (such as ENS's L2Support, wallet L2 集成和无缝跨 L2 资产转移）。

Based on the current booming development of various modular components, we already have the prototype of the Rollup-centric Roadmap vision. Under this architecture, Ethereum gradually takes a back seat, unloading the burden of the execution layer and becoming a sufficientSafetyThe settlement layer and data availability layer of Ethereum. The general Rollup is mainly responsible for capacity expansion, carrying most of the application and user traffic, and further supports dedicated execution environments for privacy, gaming and other applications through L3 (i.e. Fractal Scaling). RaaS provides developers with tools for rapid infrastructure startup. Restaking leverages existing Ethereum staking exposure to provide economic trust, decentralized trust and Ethereum Alignment for new modular components. As the utility of ETH continues to expand, these components are also strengthening Ethereum's position as the base layer and providing value feedback.

Monolithicization and modularization have always been a topic of endless debate. When the system reaches a certain level of complexity, modularization is usually a proven choice. For example, a car is a typical modular product. As an engineering design principle, modularization has the advantages of standardized interfaces, independence, reusability, and flexibility.

Infrastructure projects are still driven by narratives and problem solving, and cannot support huge valuations from a business model perspective alone. In this modular context, competition between modular projects is increasingly leaning towards BD Game. The bear market's low market sentiment has magnified the importance of BD, testing the project's ability to operate, market, and build brands. Rollup and DA projects need users and customers, needless to say. The premise for Sequencer to achieve network effects is that there is enough value to be captured by the adopters. RaaS is not a new story. Substrate achieved one-click chain issuance in 2019. The tool itself is secondary. The key lies in what kind of applications developers using the tool can create, and then we can talk about value feedback. In terms of Shared Security projects, the growth of EigenLayer and Babylon also depends on the demand side to provide sufficient economic incentives and sustainability. Copying a DEX or similar application on each Rollup cannot be called an ecosystem, but requires differentiated products like Friend.tech.

From the current perspective, Ethereum and its L2 ecosystem still occupy an advantageous position, with more mainstream applications, a more solid user base, and a long-testedSafetyThe moat of this ecosystem is constantly being strengthened. As L1, Celo has also recently turned to Ethereum L2 and is supported by Restaking. After the Alt-L1 narrative gradually declined and the volume of the application chain narrative was gradually replaced by App-Rollup, new projects had to answer the question of "whether to rely on Ethereum". For example, although Celestia dominates modularizationBlockchain, but it has no direct connection with Ethereum itself. As a general DA layer, from a broad perspective, Celestia faces competition from Ethereum, and at the same level, it also faces competition from EigenDA based on Restaking. Under this psychological model of project classification, orthodoxy seems to dominate people's macro judgment of projects. But in any case, returning to the investment logic, it mainly depends on whether it solves practical problems rather than creating demand out of thin air; whether it actively speaks out to the outside world rather than working behind closed doors.

The article comes from the Internet:A brief analysis of the new trend of block transaction life cycle to Rollup-centric

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