ep 23 – State of Crypto: Trends, data, more

Transcript

[Music] welcome to web 3 with Asics and Z crypto I'm your host sonal choxi and editor-in-chief here at Asics and Z crypto but today I invited Robert Hackett features editor and head of special projects on our team to guest host this episode which is all about our latest state of crypto report and this year also introduces a new interactive tool the state of crypto index which helps visualize web3 and Tech progress towards building the next internet which is the theme of the show you can find both of these reports and the index and these accompanying posts and resources at asicsnzcrypto.com state of crypto or Asics and Z crypto.com SOC the report

was co-authored and produced by Darren matsuoka Eddie lazarin Robert Hackett and Stephanie Zinn before we begin none of the following is investment business legal or tax advice see a6nz.com disclosures for more important information including a link to a list of our investments also please note that any charts data or projections discussed are subject to change without notice May differ from opinions expressed by others and are for informational purposes only they should not be relied upon when making any investment decision the content also speaks only as if the date indicated and A6 and Z has not independently verified third-party sources nor makes representations about the enduring

accuracy of the information okay with that now here's Robert to introduce the guess and the episode thanks sonal hi all thanks for joining us I'm here with Eddie lazarin Chief technology officer at a16z crypto Darren matsuoka lead data scientist and Chris Dixon founding General partner of a16z crypto the first half of the conversation digs into the findings and also touches on themes such as infrastructure nfts gaming the Creator economy Energy Zero knowledge and more that's from our recent Twitter spaces and the second half of the episode was recorded separately so we could go deeper into the methodology index and bigger picture the first voice you'll hear after mine is Chris followed

by Eddie then Darren welcome everybody hey hello it's all right Okay so we've seen lots of people tweeting various insights and takeaways from the report but I want to know what your top takeaways are what's the single most interesting or surprising statistic or Trend you came across this year Chris do you want to take this one and I think the key kind of message to take away is a lot of really interesting work progress made on sort of infrastructure side around particularly around the ethereum ecosystem and layer twos you know I think a lot of you know kind of the basic framework came from work we did a couple years ago where um we tried to look at kind of to separate kind of

the fundamental and like the way we kind of think about it is all technology markets have kind of different ways they progress and there's a lot of focus on financial markets um this could be crypto and on crypto there's also is true of you know kind of other kinds of tech um and then there's sort of the fundamental progress so the technology of the user kind of applications infrastructure and so the core idea um with this report which we've been doing now for a couple of years is to really kind of look at the fundamentals and to take what kind of appears to be a chaotic process and try to understand it and sort of see the you see the kind of overall logic and so you know things like the number of developers the number

of applications the progress of the infrastructure you know sort of a lot of computing waves a key metric is the price of performance or Moore's Law and semiconductors and an equivalent in the blockchain space would be kind of the caught the the cost gas costs or block space costs for secure high quality transactions and so um you know there's a lot of data in there I won't go through it I'll let Darren did you talk about some of the details but um which I think show you know kind of nice progress in a lot of Dimensions though that's great yeah so you're seeing a lot of improvement when it comes to price and performance in web3 particularly with respect to how blockchains perform uh Eddie looks like you want to jump in uh there's a ton ton

of things I could pick obviously I'm a little biased like I like I like a lot of the statistics in the report it could definitely choose many Trends maybe one to highlight uh is like nft buyers I thought that one's really neat is that NFC buyers has decreased uh since the recent highs like a last year but they're down a lot less than I think you'd think and down much less than volume which in which indicates that maybe there's some new interesting patterns that we've started to see unfolding in terms of how people buy them and what exactly they do with them we've seen a little bit of a trend this is now more a little more anecdotal but around more patronage style models where people are purchasing nfts and primary

sales and using them as part of a way to support a Creator directly it was basically minimal to zero intermediaries I think it's a really cool pattern it's a little subtle in the data but we already have a little bit another one I point out if I can do two is uh is that ZK slide we have and we show incredible advancements in the pace of proving speeds uh proof sizes and verification speeds and these all make it a lot easier to try to experiment with and incorporate two key benefits ZK technology which is scaling through succinctness and privacy it'll just open up a lot of space for people to start to

experiment with them since now they're finally becoming you know economically easy to do and fast we got a lot of feedback on that zero knowledge slide so we're definitely going to spend some time on that but I want to linger on something he raised at the outset about the number of nft buyers which has uh decreased since the highs in early 2022 but has actually jumped up in recent months uh and actually appears to be possibly starting something of a rebound I want to tease that apart a little bit Eddie what what's going on there why this difference all of a sudden yeah well the the key point and this is a theme of the whole report right is if you zoom out despite the volatility as Chris was alluding to there seems to be

an underlying order on the product cycle but also an underlying trend of maybe smoother growth Trend if you squint a little bit where these Technologies come in they pop there's chaos and then there is adoption right that comes slowly after the FD buyers slide demonstrates this really clearly there's basically no activity in 2020 and it only begins in early 2021 where we've stabilized now is still radically above where we were right so that's kind of the big picture Trend where the excitement is coming in the more recently like manifold open editions and a variety of other projects I've been making it really easy for

creators to experiment not just with new features and new ways that nfts can be incorporated into their projects but also with just the process of minting them and distributing them we've seen a lot of contention on the royalty side that's the fascinating other topics that we should probably unpack some other time but despite the royalty piece primary sales and direct relationships with consumers are being experimented with and that's that's great that's exactly what we want to see just for people who don't know uh you referenced open Editions maybe you could just elaborate on that I'll let Darren say a little bit more on uh open editions but it's it's a way to create mints that often end up being like a little cheaper a little more uh

in the moment and related directly to current effort by a uh a creator that Darren you have any thoughts about open auditions yeah I'd say the big the the big point to make is that it creates a much more accessible experience for people compared to limited editions which often you know the the best ones just increase in price to a point where um it's uh pricing out 99 of potential buyers and so it's a cool way to kind of bring more people into the space and kind of drive those who get organic use cases as opposed to you know the speculative ones that's interesting yeah so it sounds like maybe instead of the big ticket item the high price sort of uh one-off sale nft is now giving away a

little bit to something a little bit more or open and accessible to to broader audiences yeah and I'd also tie this in with what's happening in l2s because it's not a coincidence that you know if if most nft if if transaction fees are very high which is absolutely the norm of what we saw throughout a lot of the late 2021 early 2022 period if transaction fees are really high you're not going to be able to do much with very low priced nfts or things that do that experiment with all kinds of new features that maybe mutate State on chain which is expensive if gas fees come down and there's more high quality

block space at a low price then you can have cheaper nfts you don't have to justify the the expense of a transaction by arguing that it's an investment or some speculatory Behavior instead you can do all the cool kinds of things all the kind of computer behaviors where nfts are their own programs nfts have interesting interactions with other kinds of online objects like that's a really cool behavior and that requires very low transaction fees which requires scaling which we're seeing in l2s so it all kind of comes together in my mind caltus is a huge meaty topic that we're going to also get into but before we do that I gotta say you know one thing that

really stuck out to me in this report is the fact that active addresses is now at an all-time high there are more than 15 million monthly addresses making on-chain transactions that's a pretty surprising statistic and especially when you couple it with a decline in Mobile Wallet users it's it's very odd that on the one hand you have you know active addresses hitting an all-time high and yet at the same time this sort of you know big decrease in Mobile Wallet users over you know the months from the Peaks that we saw in early 2022 what's going on there a lot of people were curious about this why why are we seeing that odd Trend in the data yeah

that's that's a great one I'll let Darren weigh in on this too you know we we have to I admit we have to go another level deeper and probably find additional sources for underlying metrics to really refine the story about why this is but you know personally I use the desktop wallet and uh you know I don't use a mobile wallet in my day-to-day that might change soon I've been seeing some really great products launched like uniswap's wallet very recently that's exciting to see but uh it's hard to say you know I don't know I I can speculate more about how like you know app metrics can be a little imprecise the improvements in desktop wallet software

and the norm that has been set in crypto for some time about custodying and taking your uh you know taking your wallet experience very seriously and kind of leaving it in more do you have any thoughts Darren yeah I guess the only thing I would add is we're seeing more applications that are kind of embedding the wallet experience into the app itself which means that you know they're not requiring users to bring a wallet or their mobile wallet but instead are kind of uh facilitating the transactions on behalf of users in an attempt to really uh make it a better user experience that can attract a more mainstream audience and so that's certainly one Trend that we're we're looking at you know Eddie mentioned the

uniswap bullet I'm also very curious uh you know next month to kind of see what the the numbers look like with uh with that new one included because that's uh you know something we can can certainly do we'll continue to update the data we'll continue to you know look at new players uh it's clear that the mobile wallet experience isn't uh fully solved yet and so we're constantly kind of looking for for new entrants and builders that are uh you know trying to solve some of these hard problems but uh to Daddy's point we will have to to do a deeper dive on some of the specifics there that's a great point just to also continue to tease that apart you know another statistic that was in here uh in the report is how web3 games generate 23

times more on-chain transactions than D5 and there have been a lot of web 3 games that have come out in the past year I mean more than 700 so I I wonder how that uh that trend is affecting what's going on in the industry right now it seems like we're seeing this big uptick in gaming in on-chain gaming what's going on there yeah Linda yeah first games the interaction model of the game is so different from a financial interaction model right and uh with your bank or you know your other financial services I don't know that people like use them you know hundreds of times thousands of times in a session so to speak right you probably issue a couple transactions a

day you know through credit cards and other things like that some days a little busier than others but in a game if you're mutating a lot of State you might do thousands of things right so it makes sense that games would generally be more computationally intensive and engaging in their use of course that means we need better scaling right that means we need lower transaction fees and it's worth pointing out that a lot of those these gaming transactions when you go underneath the hood they're happening on their own networks they're happening on the scaling Solutions we've been seeing many more games in the last year pop up on l2s and pop you know move between them so that's that's no surprise at all and maybe it's around it out in the history of Technology gaming tends to push the envelope in all

Dimensions right demand for better Hardware drove the development of GBS all kinds of Hardware other kinds of Hardware advancements like laser mice and stuff like that were pushed to some extent by Gans and that's also true of software you know Broadband low latency internet connections all these types of things Gamers have intense demands and are very open to experimentation as long as it creates great and novel game experiences so I'm pretty I'm a big gamer and I'm pretty excited to see how it unfolds there and it's just not a huge surprise to me given the amount of interesting economic and uh composability

opportunities there are when you bring crypto into a gaming environment yeah what you said there it called to mind that Meme of that guy with the Domino and he's got the one small Domino and the big domino in the end uh when it comes to um you know the way that totally the small Domino would be like nvidia's gpus is helping Gamers and then at the other end you have like General artificial intelligence yeah yeah exactly at the bottom is like John Carmack fooling around with making a 2d game look 3D and that would doom and then at the top you have like John Carmack making the AGI fun way to look at the timeline for sure Eddie you you said a phrase in there while you were talking about on-chain

games you said mutating State and you know while that's fine for the computer scientists in the room I feel like for the more consumer oriented Gamers out there like what does that look like in on China on-chain gaming why yeah first of all what does that mean like what can you do in an on-chain game that you can't do in another type of game yeah it's a great Instagram so by mutating state I just mean like changing around things like changing around data moving around data manipulating data of course every time someone plays a game there's a lot of data shuffling around there's Graphics data there's network data someone has to run if you're playing a multiplayer game someone has to run a server and that server is managing the mutations of a lot of data that has to do with the state of the game what's

happening in the game an interesting concept and we actually have a podcast on this uh with Ariana and me and sonal where we talk a little bit about web 3 games and on-chain games so I encourage you to listen to that if this topic is interesting to you but the the basic idea is that when you run a multiplayer game server now you have to have that run by somebody and there's a little bit of course it's not a big real big deal in some senses but you have to trust them to run that server and that's that's no problem you know game companies want people to have a great time playing games but what's interesting is that if you can have that state managed in an autonomous way like uh by no one in particular or maybe just governed by specific rules that are set

in place at the beginning of that game or the Genesis of that game universe that becomes really interesting because then you can have all kinds of different people build things on top of that game world or that game State and extend it and remix it and recombine it and take the objects and have them composed with each other in ways that make modding and different kinds of game changes a first class part of the game and you don't have to rely on the game creator to moderate it instead you can have the whole game governed by rules that are set in place at the beginning which means anybody can change the game but they can't make it unfair or they

can't cheat or they can't you know shut down and blow up the game for everybody else so it's just to sum it up it really in brief it's there are interesting things made possible when no one in particular controls the game server that you couldn't do if only if a specific person is the one responsible for running it well I think it's that point Eddie I think that to me the most exciting part of that architecture is the composability of the Mabel and so once you have a you know a trustless server you have an incentive for third-party developers to build on top of it and you have the sort of you know Bottoms Up kind of creativity where people can sort of build on sort of like the way people build a city or something where somebody builds a core and then

people build around it and and yeah you can imagine sort of something as Source off as a small game evolving into a much larger world and eventually into sort of a set of Worlds so I think you know to me that it all starts with uh the trust model of having nobody nobody running the back end of the game yep that's a really good point and actually it segues nicely into a question we received do you feel there's enough Community involvement in the steering and development of the industry um you know given what you said about including more Network participants and to kind of becoming owners and operators of this stuff is there enough Community involvement in web 3 from what we're seeing kind of an interesting question I I admit I'm not 100 sure how to parse it

because maybe I'm being a little silly I feel like crypto is obsessed with the community uniquely in a fascinating way sometimes in a way that's silly but often in a way that's incredibly Earnest and serious and material because you know one of the underlying core ideas to me is that you can hand control of a project or software or a network or system to a community and like authentically hand them control in a way that can't be done in web 2 world or in uh you know without legal agreements right so are they involved enough I mean I think I'd have to go project by

project to say but uh I think crypto rightly is incredibly preoccupied with the way that communities can become involved and incentivized and owners and collaborators all with each other to develop the future Protocols of the internet and maybe just one data point that we can add from from our report is if you look at participation in Dow governance as measured by the number of monthly active voters on Snapshot which is the most popular platform for uh Dao voting and proposals that number has pretty consistently grown even during the bear Market which uh I I was surprised to see you know 13 million

total votes have been casted almost 2 million unique voters uh 78 000 proposals so these stats just around Community Driven governance uh with these Dows has been growing nicely yeah that's great to point out um it is pretty interesting to see that going up um it is really interesting to see some of these maintained in upward slope generally even despite you know whatever prices and the financial markets are doing Eddie at the top you mentioned scaling blockchains and that's obviously a huge area and in particular it has to do with what we were just talking about about increasing Community participation because if you can scale blockchains uh more people can get involved at lower

price points uh there are fewer obstacles than to participation what did we find there uh in terms of scale yeah how the challenge of scaling blockchains coming along yeah that's a great one this is one of my one of my favorite graphs uh and this shows the increase in Block space on ethereum L1 being consumed by l2s and the the the graph shows that seven percent of ethereum fees now are paid by L2 Roll-Ups and there's a whole bunch in that category that's been a we we've published this last year uh updated it again this year that has been a pretty

steady and healthy Trend upward that to me is the strongest direct evidence that ethereum is scaling and we expect that number to keep going up right because uh as L2 technology improves as the marginal cost of transactions goes down there's more things you can do that are worthwhile more ways that you can experiment there's a variety of technological choices represented in that set we've got optimistic Roll-Ups we have ZK Roll-Ups it's a variety of different approaches so I think it's going really well I think this year is going to be a year of a lot of discussion around l2's the trade-offs between them developer Tools around using them user experience improvements so that users kind of can abstract or

Reason about what exactly they're using headed in the right direction and if of course after the recent upgrade it sounds like the next big ethereum technological upgrade is likely to focus at least in part in Tech to help scale these l2s even further so I'm excited to see that I'm personally of the camp that radically decreasing the cost of blocks of high quality block space is a key ingredient in allowing for experimentation that people need to do to discover the new types of products and things that can really go mainstream so I'm excited for that let me repeat that stat you just mentioned because it

is kind of mind-blowing two years ago we didn't have a before two years ago but if you look back retroactively at 2021 the fees being paid by l2s on ethereum was effectively zero percent now last year when it was the first time we put out this report uh it was about 1.5 percent and now it's up to seven percent so l2s are paying seven percent of all ethereum fees right now that's a big jump and a lot of that actually happened in the past month it was 4.5 percent uh a month ago and now it's seven percent how are we expecting these numbers to change moving forward through through the year yeah they're going to be bouncing all around like up and down

it's far from like I think it'd be like one of the repeated motifs of our conversation the report is that there's no graphs that are straight lines right so this is not going to be a straight line up or straight line sideways or down or anything it's going to have its Ebbs and flows you know I think it is funny that the more activity that goes on to l2s then the uh cheaper it is to transact on L1 so there's some kind of countervailing forces where if tons of activity of all the activity moves to l2s then this actually could uh L1 could get a lot cheaper which could bring in more transactions I don't mean to get confusing but point is I think it'll get uh it'll remain a little bit volatile

but in the long term this is likely to equilibriate much higher than seven percent Eddie you mentioned in upgrade that's uh in the works on ethereum that would help scale blockchains more um it would uh it would be a nice fit for uh for L2 progress maybe share a little bit more insight about that yeah but that upgrade many call proto-tang sharding and it's known as eip4844 and it's an upgrade that sets aside a special uh pocket for data called blob data that's necessary to use in the operation of optimistic Roll-Ups but also to some degree zero knowledge

Roll-Ups and this separate little temporary area of data storage serves the needs of these Roll-Ups but without having to permanently store the data and the underlying L1 in ethereum which is what happens now so it's just a different type of mechanism that means we don't have to store permanently what doesn't need to be stored permanently and that just takes a ton of the pressure off the Storage costs because you know you need to store less and so yeah what's the outcome of that yeah it's it's so it's always hard to say exactly and actually think that like I'm going to say something and I'm going to contradict myself a little bit but the uh some think it could drop L2 transaction

fees by more than an order of magnitude maybe even two orders of magnitude and there's a lot of reasons to believe that that's true and that it makes sense uh the part where I disagree slightly is that I think where ethereum transaction costs or any blockchains transaction costs end up is a function of their demand and as the price goes down there become more and more things that are worthwhile like just to give a kind of obvious example if it really consistently cost less than a penny to send money on ethereum or near ethereum then payments would all of a sudden become a viable thing again which was often talked about in early ethereum at least a primitive form of payments if

that became feasible then that would increase demand which would mean that the cost would equilibriate at the marginal value of using of emitting a transaction so all that's to say the cost could go down very significantly I don't think it'll go down like uh to an outrageously low amount because then it would be too easy to submit transaction everyone would be doing them all the time so I think the net effect though would be much much much cheaper very high quality very safe block space which is we've never really had on ethereum what you're describing sort of reminds me of that principle in economics where uh you know you might think if you add another highway it's going to reduce

traffic but actually end up just using the highway more it invites more people to come uh and use that infrastructure and and travel across it yep that's that's exactly right another similar idea is uh jevin's Paradox that's j-e-v-o-n's Paradox that people can look up where technological progress can make a valuable resource more abundant but actually increases its demand because now there's more of it that you can use for that valuable end so it's not to say that ethereum is going to become more expensive because of uh upgrades like uh EIP 4844 it just means that they may not drop linearly like if we get 10 times or

100 times the throughput that doesn't mean the cost is going to drop 100 times yeah I would expect I think they call it induced demand and economics I would expect that and that's that's basically the pattern that happens at every with every Computing resource so you know CPU memory bandwidth most recently gpus with AI you basically have this sort of back and forth right between the the kind of a Computing resource and the Apple locations and so you you know the the computer resource gets more efficient sort of Moore's Law or some other price to Performance curve um that then kind of inspires and unlocks new application use cases those things come along right and they kind of use up that new resource you know drive on the new highways

um but that in turn then creates a sort of back and forth and that process takes you know because sometimes can go in fits and starts that's one of the things we're trying to kind of highlight in the report right okay so try to see the long-term pattern because it's not instantaneous right like you have the new you know new infrastructure comes along so for example famously in the early 2000s there were all these talks about how there was this cool dark fiber we had over built um a lot of smart people thought we'd over built long-haul internet fiber and it would never get used during the 90s you know it got overbuilt of course you know then what happened is you had this kind of Last Mile uh Broadband catch up you had applications like video like YouTube in 2005 and then very quickly we

used up all that that dark fiber and and much more and keep playing cables to this day so it's not always a completely smooth process but I would expect the same thing will have my block space that you'll have you know as as sort of forward gets implemented you know l2s give more sophisticated other blockchains just all sorts of various kind of scaling solutions that you know unlocks new categories Eddie was talking about gaming earlier with the category that you know really requires much lower transaction fees than we have today and then that in turn will probably use up that resource and create incentives to create even more of those resources and I think we'll continue to see that back and forth over you know the next decade pluses and

this is you know it's we're projecting out the future but I mean this pattern has just happened so many times in the last seven years in the in the history of computing that I think we can now look back and and and observe and kind of learn from that so yeah we're going to be going from dark fiber up to dark block space I suppose and by the way uh At The Mention of jevin's paradox I saw Scott commoners uh resident Economist on team a16z crypto he was pretty excited about that and threw a uh a 100 emoji up there so you got a nod from from Scott since we've been talking about technical upgrades you know there was one that actually just went off uh quite recently uh the chappella upgrade and of course there was the merge the upgrade to POS

and this sort of encapsulates the whole transition from proof of work to proof of stake we captured the start of that in the report uh talking about the impact of the merge Darren tell us a little bit about that what were the energy consumption implications of that whole long process that culminated in the merge yeah sure so uh kind of as you mentioned uh in September of last year which feels like a long time ago now ethereum transitioned to a new consensus mechanism which resulted in a drastic reduction in energy consumption it was more than 99.9 percent of energy consumption has been reduced and if you compare that to other well-known

products and industries you can see and we do this exactly in our report you can see that proof of stake ethereum is very very kind of low on that comparison and when you look at something like YouTube uh ethereum now consumes about .001 of the energy that YouTube consumes annually and we have kind of different sources that we've third-party sources that we've pulled from the ethereum foundation you can compare it against uh you know things like global data centers which is 78 000 times more than proof of stake ethereum uh gaming in the USA is 13 000 times the energy consumption of proof of stake ethereum and just remarkable to to see this all happen in

the way that did it was truly a uh you know uh incredible upgrade that I think will will go down in in history as one of the most significant upgrades in the history of Open Source software development you can check out all these comparisons and and numbers in our report but really just the cool kind of experience to to see unfold and as of uh a couple days ago we now kind of have withdrawals enabled which I think completes uh that story with uh proof of stake and just awesome to see the ethereum community deliver on uh you know these upgrades that have been years in the making uh you know we're really excited to see that happen we actually

got some questions on this slide so I figure I'll just ask one you know Darren some people were acquiring about YouTube having a higher energy consumption per year than global data centers and why that would be uh given that YouTube presumably runs on data centers yeah and maybe first I'll say you know we pulled these from third party sources of course this stuff is difficult to measure and so we recognize that and show these figures really just to illustrate a point now with respect to YouTube specifically um I will say that uh maybe one thing that we could have made clear is that the YouTube number actually reflects the end user devices that are being powered in order to watch these YouTube videos

um so that would explain specifically why it's greater than the global data centers because it accounts for specifically the laptop or the phone or whatever that's used by the end user in order to watch these these videos now you know I always kind of make this caveat because I think the the world is so Dynamic and it's hard to kind of measure these different things but you know the energy consumption that's spent to watch a video on YouTube could have otherwise maybe been spent to go get in your car and drive to a movie theater which I think just further underscores this point that it's hard to measure and I think that the real when when it comes to proof of stake ethereum is that it eliminated what was really by definition wasteful energy associated with the

proof of work mechanism and so eliminating what is kind of true wasted energy uh for a system that is uh you know run much more efficiently I think is the the big win but uh maybe to answer your question specifically it's uh the Youtube end user devices are also accounted for in that number yeah and I want to throw in Robert like I really enjoy seeing this complaint from crypto Skeptics because we used to hear so much about so many complaints about ethereum's energy consumption and that was a that was a big story just a year ago we were hearing about Non-Stop and a bunch of different Avenues and that that problem has been solved that

has just been totally and completely solved and now it's the best complaint has to do with sort of the application of an illustrative specific statistic like we've made a lot of progress you know the the exact like YouTube number is may or may not be right it's very difficult to measure but the decrease in ethereum's energy consumption is undisputable and the point is sort of its its size and puts ethereum in contrast which a bunch of it with a bunch of other means of consuming energy that are maybe less controversial or less disputed out in the Zeitgeist so I I'd say like the key Point sort of stands and is exciting and Incredibly

positive development in my opinion you know in addition to all that Eddie I think there's also a meta or macro play to be made about the ability to measure this stuff at all and you know the numbers are super clear on ethereum because all the data is public and that kind of goes into the whole purpose of the report highlighting all these public data sources and and showing all the various metrics yeah that that's exactly right and I'd even like like Darren was saying I'm not even sure how we would quantify how much energy is consumed by people driving to movie theaters right that was never that's never been like a metric debated and you know I'm not saying that we need to or that movie leaders are some

problem or something but just I think crypto maybe gets a punished to some degree by the fact that it is so transparent and measurable which means it can it is easy to scrutinize in public like that's kind of what we're doing with our report obviously and I think that's one of its virtues but it's important to take into its big context which things aren't easily scrutinized which things are opaque yeah I totally agree it's a great point and a lot of these private companies they don't have uh this data readily available um whereas in web 3 a lot of these things you can look them up this sort of segues nicely into

um into privacy we could talk about uh zero knowledge cryptography which a lot that was another slide that a ton of people really latched on to really loved and were sharing let's just quickly dive into what we saw there what's been going on in the field of zero knowledge Darren maybe you want to take this one or Eddie I see you on music I can say in short that the zero knowledge field is gaining incredible momentum um this is happening across a number of different data Dimensions that we track uh one you know we look at academic Publications and we built out a data pipeline that allows us to kind of extract this data tie in the metadata and pull out kind of ZK related

Publications and that uh trend has been uh very much up into the right over the last few years as the space has really moved from from Theory to practice I think uh more uh academic uh people are interested in the potential applications for crypto we also looked at GitHub Stars across key ZK repositories that trend has uh also been very much up into the right and so has the daily transactions verifying ZK proofs on ethereum that's kind of a measure of how ZK proofs are being used in production to day and all of these numbers just show really kind of big momentum in the the trend particularly over the last few

years we also worked with our research team to pull together some specific benchmarks that show that the tech itself is improving at an incredible Pace just when you look at Dimensions like prover time proof size verifier Time Each of which is kind of important to a ZK scheme in in different ways that has even just in the last couple of years seen dramatic Improvement which speaks to some of the stuff that we were talking about earlier but uh that's kind of the the data Trends I don't know if Teddy has anything to add about kind of the development of the the space itself yeah that's that's all exactly right I'd say if you look at the advancements in

the underlying technical capabilities like proof size verifier time proving time them advancements in Hardware we have some really cool posts on this Elena Berger from our team has some great write-ups documenting different aspects of how zero knowledge proofs and zero knowledge systems have advanced over the last year or two it's accelerating very quickly and that's because there's this kind of interesting thing where specific fields of cryptography have been revitalized by interest in crypto you can see that in the academic data academic slide our academic chart that we have in the report there's been this big pop and increase in attention that academics pay

our research team is an example of that and there's all kinds of interesting things that can be done we're seeing privacy systems built out and experimenting using this Tech we've seen all the scaling we've seen in L2 and it's kind of the beginning just to add to that I was chatting the other day just sort of casually with two cryptographers on our team danbone and Justin Taylor and we were talking about the history of cryptography and you know it's an interesting field right because you basically had from a theoretical side kind of very little happened up until public encryption in the 60s and 70s um you had of course significant engineering improvements so you know if you look at things like the codes using World War II they were they were very

sophisticated but they were really just sort of more sophisticated versions of the old kind of cesarean codes you know replacing one letter with another the key feature was you still had to get together ahead of time and and with the with the person you're communicating with and trade the codes right and so the big breakthrough with public encryption was that you could now I could send information to somebody else who I've never met before never traded codes with just by using their public key which of course you know at the time seemed seemed you know interesting but not that broadly applicable turned out to be the foundation of SSL and all the kind of encryption we use in the internet imagine if every time you go to a website you had to have pre-gotten together with the website and treated codes like it wouldn't work so it turned

out to be incredibly important and also you know very important feature public encryption writers that has two use cases one is encryption so you know kind of privacy preserving features and then the other is Authentication proving that you know this this document was actually mine and I signed it and of course the authentication use case is really kind of the primary use case in in crypto as we describe it yeah which also of course creates confusion you watch I was watching a TV show the other day and they talked about crypto private you know which of course was actually a difficult only partially solved problem um anyway so I think of zero knowledge proofs as sort of the other in my mind is the other big major theoretical

breakthrough in you know I don't know long-term history of cryptography really since public encryption but because it was so kind of obscure and the method so complex it was not very practical and Eddie and Darren could feel free to correct me I'm just on the on the details here if I'm getting wrong but but essentially it was just so computationally intensive and so one of the nice side effects of you know the kind of crypto blockchain movement is that there's been just a lot more investments in this area and as a result you've seen dramatic improvements in these algorithms in the performance and also by the way the other really kind of nice symmetry here is that as with public encryption there's sort of these dual inverted use cases yeah encryption and authentication and

zero knowledge is also kind of two dual use cases there's the ability to prove something to somebody without disclosing information you don't want to disclose that's the kind of where the word zero knowledge comes from but then there's also this ability to prove that you did a computation correctly which is what where all the scaling benefits come from so I can compute something on my computer and then send the results and then kind of quote a receipt that I did that proof and then someone else can verify that I did it correctly without having to run the computation which would be much more computationally intensive so it has all these really interesting properties and it's been around since the 80s but only kind of practical recently and getting more so very rapidly and I would expect this to

have many other spillover benefits to other areas in technology outside of the space we work in so I think it's a very broadly important and probably underestimated Trend just in the in cryptography and in general kind of computer science yeah I think that's a really great point you mentioned that this technology is likely or it might spill out into other areas you know if we're going to talk about one area and that's just gotten so much attention lately given the advances going on it's Ai and Eddie you mentioned a piece from one of our deal Partners Elena Berger she wrote about the potential implications of zero knowledge technology in machine learning that might be interesting for people to hear

about here oh man I I feel like we could spend an hour on it so I don't know how much we should unpack it but it's a fascinating one uh I mean in short I think I don't know there's actually no sure way to put it but maybe the ultra shortest way there's two key parts for me one is AIS are sophisticated computer programs and one of the core ideas in crypto is who controls those programming and as people interconnect and interweave these types of programs with important services on the internet and throughout the world you should ask how are these controlled how do we trust them how do we verify them how do we know what they're doing and how the

economic systems built around them work that's what crypto's all about so that's a very crypto topic to me and the second maybe more specific piece is that when a model makes an inference or puts some output for you to use or for another program to use there are a lot of reasons why you want to you want to be able to trust that output and right now if you trust that out that you're trusting the company and the API that serves that but at the limit you can imagine extreme and fascinating cases where people tweak or modify these complex programs to produce outputs that serve their interests and that's just yours kind of like how uh you know a large social media Network might modify

the feed to serve their interests there's no reason why someone could modify an AI model to serve their interests and you probably want to be able to know that the model is executing exactly what you gave it and working exactly the way that you want and that that is verifiable computation and that has been a story one of the core stories in crypto from the beginning so I think that Ai and crypto really overlap and zero knowledge technology is one of the ways that we will probably come about being able to verify what AI models do and the economics around them I just can't wait to see how it unfolds and if you look at some of the data just around the internet consolidation that we've seen three companies control a third of

all Global web traffic five companies represent fifty percent of the NASDAQ 100s total market cap that's up from 25 a decade ago it's very clear that the internet is is consolidating power into the hands of a few giant Tech corporations and AI is only going to kind of make that problem worse now I think the credible counterbalancing force of web3 and a decentralized network for compute uh I think makes uh makes me at least very interested to see how this all unfolds in what role web3 and blockchain can play in the the current trend let's talk about how we can quantify the

activity that's going on so the Keystone of this year's state of crypto report is this accompanying tool that we've created the state of crypto index which tries to consolidate and combine all these different metrics to give you a picture of the the health of the state of crypto Eddie talk us through what the state of crypto index is what it represents the key thesis to me of the index is that there are product cycles and there are Financial cycles and it's very easy to see a price and to measure the price action of different assets and mistake that for a synoptic view into the health of an ecosystem the prices can change

that doesn't mean that the builders and the underlying Tech is changing and vice versa during periods of very exciting development it's not the case that those things will be reflected in the price for the short or long term it may actually have very little to do with prices that you see so how do you tease apart these things and get a sense of how crypto is actually doing one way that we think about it is that on the one hand there's Innovation on the one hand there's adoption and we think that there's key underlying indicators that you can find from public sources that reflect those things so I think if you look at the charts that we've shared these are just some of the key indicators we think are most interesting and maybe most

representative of what's happening on the Innovation side the supply side and the adoption side the demand side they're not meant to be perfect index is obviously a little bit of a metaphor it's not like the S P 500 or some sort of rigorously defined measure far from it these are just indicators that we think are really interesting that we look at when we try to get a macro view of how the space is unfolding and to that end the way that we blend and calculate them to create the aggregated Innovation side and adoption side we invite you to think of different blends on our site you will see a page that allows you to look at each of these

metrics individually and to get a sense of how they accumulate together into our larger measures you can adjust the weights and you can even drop some out to zero because maybe you disagree with how we've Blended them together or how we measure them that's totally no problem we're not trying to be authoritative here we're just trying to show public measures that we think are interesting that point at the way we see the product and financial Cycles developing somewhat independently so markets are this interplay between supply and demand and when you look at a price chart you know you go to coin market cap or coin gecko or something supposedly you're seeing what people are willing to sell a token at and what price people are willing to buy it at sort of netting out creating the price for that token on the open market but

that's really focusing like you said on the financial side of things when also there are these Tech markets these product markets of like what are Builders actually building what applications are they putting together how many smart contracts are they deploying and who's actually using this stuff who's transacting with it and so that's why you get that supply side correlating to Innovation the actually what's being built and then the demand side being adoption who's actually using the stuff I think it's a really interesting way to look at a market in a non-financial way because it still involves supply and demand just at a different angle than people are usually accustomed to yeah I think that's exactly right and we hope over the coming months and years to improve and adapt this we'd love

people's feedback thoughts about interesting types of measures of course we prefer public measures that everybody can see and everybody can understand together but we'd love to update it we'd love to refresh it we hope to add new categories as they unfold it's just meant to be a wide view that we think is a little bit more legible and a little bit more indicative of what's actually developing than just prices Darren walk us through some of the data points that went into here sure so you mentioned we split it out between the Innovation which is the supply side and adoption which is the demand side and maybe just to list out the specific metrics that are included in each of those categories on the Innovation side we look at something we call Active

developers which is the number of unique GitHub users who have committed to or forked a public crypto repository during the month all of these metrics by the way are aggregated monthly we can also expand that set into a category that we call interested developers which includes anybody any unique GitHub user that has committed to fork or starred a crypto repository so that is the second category in The Innovation bucket the third category is the number of contract deployers so developers who are deploying smart contracts on one of the tracked blockchains that we look at we can also look at something called verified smart contract which is what we think is an indicator for product

launches because you know once you deploy your smart contract the first thing that a developer usually does is get that smart contract verified so it's another indicator of developer activity we also look at developer Library downloads specifically web3.js and ethers.js and how that Trend looks month over month we look at academic Publications so we have a tool that allows us to extract all of the crypto related Publications from the academic world and track that metric over time and then we also look at job search Trends so people who are searching the web for crypto related jobs and those seven metrics make up the Innovation indicator bucket again we

track those metrics over a monthly aggregation period And Roll those into the index along with the adoption indicators and just by the way one thing that's interesting about the Innovation indicators when you look at the charts just generally a lot of them sustain a lot of them have been increasing over time and just kind of going up and it just goes to show that that despite the market seasonality or what it might appear prices are doing what people are actually building is totally separate from that the building activity continues undaunted Winters are for building so they say that's right exactly and that's a key takeaway from the work we've done here with the Strait of crypto index is that the Innovation

indicators are much more steady a lot less volatile than what we're seeing on the adoption side which maybe is a little bit more tied to the market cycles and it's a function of everything that we've been talking about right the fact that Builders tend to stick around you know Builders keep building in the bear Market all of that stuff I think is really Quantified by that Trend that we're seeing which is the Innovation or supply side is much more steady than the adoption or demand side it's funny that we might be in a winter and yet in terms of the product cycle things are going pretty well there's a lot of really amazing activity happening right now is there a place for winter then is winter a good thing I think both sides are important right I think the thesis is that there is a

upside to the hot summer as crazy as it is as much as it sometimes Financial excitement exceeds our current technological capabilities because it attracts new people who stick around and will continue building as I think a lot of the metrics that we show demonstrate they'll continue building even when prices cool down so the summer winter is how to think about the new entrance a revolving door of people who come into crypto and kind of see what it's capable of in the long term and want to stick around and help build that although honestly I don't know that it's as seasonal in the product cycle kind of reminds me of California weather's always the same there's no winter

there's no summer I think it's a coincidence that it's such a fit nice Springtime is breaking over here in New York it's quite lovely part of the reason why I think we look so much at product Cycles is because Financial Cycles are just very hard to predict right they fluctuate very unpredictably based on macroeconomic conditions whereas product Cycles follow their own internal logic and it's often based on consumer behavior and broader Tech trends that we've seen play out over history and if you look back since 2000 you can see that good companies have been created in every Financial Market cycle and I think that's an important point to recognize here for example if you would have decided to ignore Tech

after the.com crash you would have missed industry defining companies like Facebook and YouTube that were born in that era similarly if you would have been spooked by the Global Financial crisis you would have missed iconic companies like Instagram and WhatsApp and many others and so we often look at these product cycles and through our own internal perspective that we build meeting with these entrepreneurs and technologists the product cycle is something that we feel very excited about and is something that we've seen continued progress despite the down Market from a financial cycle point of view what you can kind of see if you zoom out and this is in our slide deck is that although that looks kind of chaotic on the shorter time Cycles when you zoom

out you see a real predictable pattern and steady growth steady compounding growth overall and maybe to get a little bit more specific with the data what's cool about the insights here is that you can actually align these very specific metrics on the same x-axis the same time axis and you can see when do the big swings happen and the key Insight that I think comes out of this analysis is that the big swings in things like developer activity which is measured as the activity that we're seeing on public GitHub crypto repositories that upswing tends to happen in the months shortly after the price swings which implies that the price brings interest and with that interest that turns into new

developers that are building new products and you can see on the time axis just how the price comes first as a leading indicator for are some of the developer activity the startups the social media interest often is really triggered by the price itself and you can visually see that with the data and just to complete the list so people can understand exactly what goes into this index on the adoption or demand side we look at active addresses so unique on-chain addresses that initiate transactions during the monthly period across the track blockchains that we have we look at the raw transaction counts over time we look at transaction fees that are paid by users in aggregate over the period across the different

blockchains we look at Mobile Wallet users from apptopia which is a metric that we look closely at we look at volume on decentralized exchanges we look at the number of buyers of nfts each month and then the on-chain transaction volume for stable coins and those seven metrics make up the adoption indicators category and Together We Roll that into the state of crypto index which really is just a culmination of all this data analytics and market research that we do and we like to bring it all together in a a way that is very flexible we as Eddie mentioned give users the ability to update the weights and the thresholds themselves it's just

a data tool that is designed to give people a point of view on how the non-financial oriented metrics are performing when it comes to the health of the crypto industry so something we're really excited to be sharing that's a lot of metrics that's a lot of data to combine to roll up into one single kind of output one number that sums up the whole state of crypto Eddie maybe you could share a little bit about what that number represents yeah it's an interesting one you should consider it the net percent growth for that category so of course we have to pick a time to begin measuring a specific metric let me give you an example of like an absurd choice if you decided to start measuring Facebook's

growth starting from the first user they've grown to more than 1.3 billion 1.4 I don't know the latest metrics but billions of users if you considered that a percent growth 1.3 billion percent growth it'd be a little absurd you need to pick a specific time period against which to measure growth typically what data people do to avoid introducing weird biases as a result of how they start measuring one of these metrics is they'll aggregate to a natural period like a month or a year and the round it out that way and say all right this year we had this number next year we have this number and so on and measure growth against the yearly aggregates in cases where we could when there's

long enough time period and it makes sense to aggregate to a nice level of granularity we choose a starting period to measure growth from there for each submetric of course you can actually in our website you'll see you can adjust that period so that if you disagree with how we used our best judgment to decide when you should start measuring percent growth you can do so but the point is just to say for each of these metrics how much did they grow from that starting point that means they can go negative this especially makes it not a real index in some scientific sense of the term but it should be an accurate measure of how to think about how much those categories those measures grew all

together for that whether that's the adoption side or the Innovation side maybe just to summarize it I think the actual value of the index is the weighted average monthly growth of all of the included metrics under certain assumptions that Eddie has gone into detail on but it's that weighted average monthly growth since 2016 for the included metrics which we believe is a fair representation of how the industry as a whole is performing especially given that we allow the users to go in and adjust the weights adjust the thresholds based on their preferences but we feel it's a after spending many hours litigating the details of the methodology we feel it's a pretty fair

representation of just simply the weighted average growth of the metrics that's a great pity summary of what it's displaying it's like you're throwing all these metrics in a blender and outputting how much the industry is growing along all these various dimensions it'll be interesting to see where we're at a year from now I don't think we really know what it's going to look like does anybody have an expectation are we going to be out of winter into Springtime into summertime still in Winter such a brutal prediction well to ease it maybe not from a financial perspective but strictly based on the kind of building activity you see going on or the sort of things that the index is measuring that's true I mean I feel very confident about the Innovation

side I just I cannot imagine what it would take for all the things that we're seeing develop now to not play out there are going to be more transactions there are going to be more interesting types of projects that are possible and as a result I hope more Developers I see that going very well the demand side is the crazy one I just don't know that's just tied to so many external factors who knows what's happening with the money supply the global economy oil like I I don't know but we will be able to track it using the state of crypto index Chris what's your sense of how things will Shape Up in one year from now whether there will be more Innovation more adoption yeah or

less but look I mean this is what I do full time and I obviously believer deeply in it and continue to I think my experience just in general as an entrepreneur formerly and then as an investor is that maybe some people like read dalio or something can predict macro Cycles I can't and don't try to so I have no idea what happened with the economy and potential recession inflation all those things including prices of any Tech assets whether they be crypto or non-crypto we just really try to keep our head down and focus on infrastructure applications technology Founders working with our founders to make sure they have the resources they need to build what they want to build

and ultimately they're the ones that build these great things and given what I see there I'm very excited over the next year of all the products that we'll launch so that's what I'm keeping my own and I think it's very exciting how's the US shaping up against other countries in the world of crypto in terms of both developer activity and user activity we're seeing the numbers decrease over the last few years in terms of Us's market share and influence over the crypto industry the number of crypto developers as measured by a great report produced by Electric Capital has decreased from 40 percent down to under 30 percent in terms of developers that are based in the United States Building in crypto and that has consistently decreased yeah and this is despite a

very strong retention and even overall growth in the number of active crypto developers so it's not a reflection of the space shrinking it's a reflection of the proportion of interests moving overseas exactly Chris you've got this great conceit around this tug of war between two cultures within crypto in our world there's at least two maybe more but two significant different movements slash motivations of people involved in the space and our view as we make very clear in this report and generally throughout the years is that a blockchain is a new type of computer that has a particularly useful application of building new networks that have a bunch of positive

features so that's kind of the lens by which we view our investing is how can we further advance that mission and hopefully nudge the internet into a new era where we have networks that are owned and operated by communities that are built through composability where the bulk of the money flows to the edges to the creators and software developers who build it that's what excites us so in our culture the computer the technology vision is primary to the extent there are speculative markets that's a byproduct as it is in real estate and that's fine I mean obviously there has to be rules around these things and there need to be strict enforcement and Regulation and obviously it's not fine when there's bad behavior as there was with FDX but I do think

it's important to call out this distinction because I think in the public imagination these two have been conflated and that when you see politicians saying you know we should ban crypto which is becoming kind of a meme now I believe they're referring to the casino aspects of it I think that if they understood the deeper technological Vision that they would be actually quite supportive of that so that's why I think that two cultures distinction is important and I think not as widely understood as it should be excellent well thank you all for joining tons of great insights all right thanks everyone great to see you thank you thanks for having us [Music] thank you for listening to web3 with A6

and Z you can find show notes with links to resources books or papers discussed transcripts and more at asicsncrypto.com this episode was technically edited by our audio editors Sevin Morris and Justin golden credit also to moonshot design for the art and all thanks to support from Asics and Z crypto to follow more of our work and get updates resources from us and from others be sure to subscribe to our web 3 Weekly Newsletter you can find it on our website at asicsnzcrypto.com thank you for listening and for subscribing let's go [Music] how ideally would you like to see people using this tool out in the wild

crypto is an incredible thing we have all this public data it's all visible you can see how different projects are playing out live in front of you otherwise we have to beg companies and startups to share what little information they're willing to I'd like to see people using that information more richly and we see a lot of that to be fair I'm not saying it's not happening we see tons of it on social media people love sharing the latest of what's happening with their pet projects their favorite projects but I'd like to see these other types of measures take a larger market share mind share of the way people measure crypto the price is one thing but progress is another and I'd like

people to measure that and if anyone has ideas on how to make this better or feedback that they can share just come talk to us this is the stuff that we love talking about every day so would encourage people to try it out obviously it's just a data tool but if you have ideas or feedback or things you want to chat more about we're definitely open to talking so keep that in mind definitely I would love to see people create their own views on this manipulate the data and then share some of it take a screenshot tweet at us also tell us what metrics you might like us to add or change why you disagree with us on the default view I think it's cool that this thing is pretty much open source and people can do with it what they want I don't really know how people

are going to use it but hopefully they find it valuable yep the way I think about it is always important to have more tools and more data sources and things people understand kind of a situation awareness of what's going on but I also think it's what Darren and Eddie created here is important because going back to this computer versus the casino idea there's all sorts of numbers that track prices we don't think about that we think about the products people pay attention to metrics and the more metrics we have the track the fundamental progress the important progress the product progress the technology progress the better so people will pay attention to them and when you measure something you can optimize it as a community