The NEAR Protocol - A fourth alternative Layer 1 "Ethereum Killer" alongside Solana, Luna, and Avalanche?
State of Stake #15. A weekly newsletter by Staking Rewards.
Since staking is a loan of your infrastructure or assets for blockchain payment, early analysis of new blockchains is key to deciding whether a new blockchain is worth staking or not.
A new blockchain protocol, NEAR, just raised $350m in a round led by Tiger Global. NEAR also announced the launch of their own algostable (USN) with a deposit APY of "around 20%," a clear reference to Anchor's famous 20% deposit rate. This comes on the heels of a $150m raise just three months ago, and $21.6m in May 2020.
Its cap table is a who's who of crypto venture capitalists: a16z, Alameda Research, FTX Ventures, Dragonfly Capital, ParaFi Capital, and Three Arrows Capital (3ac), to name just a few.
From a staking perspective, NEAR's two recent rounds have eliminated NEAR's project-abandonment risk. Its staking economics (currently ~12% nominal / 7% real) is secure, as well as attractive. However, as we have learned from experience, high staking yields in the absence of end-user demand just mean a high rate of inflation, a rapidly devaluing currency, and ultimate net losses for stakers. For stakers, it all comes down to end-user demand: Is the NEAR network providing a differentiated product with the potential for demand to sustainably exceed supply?
Let's have a look.
NEAR's Aspiration: the Proof-of-Stake Rail of Consumer dApps
NEAR was founded by Illia Polosukhin, an ex-Google machine learning engineer, and Alexander Skidanov, a former researcher for OpenAI. Polosukhin was an early investor in 1inch and several other protocols, while Skidanov seems to be the key protocol engineer and author of the NightShade consensus. NEAR is a highly ambitious attempt to build the core decentralization layer of web3 apps, and its ambition is reflected in the inspiration for its name, The Singularity is Near (Ray Kurzweil's thesis on human evolution hitting an exponential tipping point).
As NEAR's very readable white paper states:
NEAR is a decentralized application platform with the potential to change how systems are designed, how applications are built and how the web itself works.
It is a complex technology with a simple goal — allow developers and entrepreneurs to easily and sustainably build applications which secure high value assets like money and identity while making them performant and usable enough for consumers to access.
To do this, NEAR is built from the ground up to deliver intuitive experiences for end users, scale capacity across millions of devices and provide developers with new and sustainable business models for their applications.
While that probably sounds similar to the mission statements you read from other blockchains, NEAR's focus on competing with web2 consumer apps makes it unusual. Most crypto protocols focus on financial use cases, because the typical new crypto user is focused much more on maximizing his own returns than any other activity. NEAR seems to reject this avenue as too crowded, and focus on a smaller pond with no sharks. In this respect, NEAR's nearest competitor seems to be Avalanche (AVAX), which also has a strong focus on consumer-facing dapps, especially games.
NEAR's Key Attributes
NEAR features a remix of other blockchains' most successful recent innovations, plus a couple of their own.
Proof of Stake: NEAR, like Terra (and BNB, SOL, ADA, AVAX, DOT, ATOM, and post-Merge ETH) is a PoS blockchain.
Algostable rails: NEAR has stated an intention to launch its own algorithmic stablecoin, USN. Interestingly, this announcement came just four months after NEAR integrated with UST, suggesting that UST encountered technical interoperability issues with the NEAR blockchain, causing NEAR to build a native replacement.
NEAR's decision to go with an algostable structure over a centralized stablecoin, despite algostables' much higher execution risks, further underscores the fact that algostables, and not centralized stablecoins, are the stablecoins of crypto's future for all purposes other than being a fiat onramp or offramp.
Hybrid consensus: Like DOT and SOL, NEAR utilizes so-called hybrid consensus, splitting block production from transaction finality. In plain English, hybrid-consensus models use randomized committees of nodes to execute transactions, instead of all nodes on the network, to minimize the amount of communication required between nodes to finalize a transaction.
Burned transaction fees: Like ETH post the London Fork, NEAR burns transaction fees over a certain threshold (1M tx/day to be exact). The network inflation rate is 5% minus burning. NEAR inflation would go to zero at around 1.4 billion transactions per day (15.4k tx/second).
Developer-centric economics: By default, 30% of all transaction fees are paid to the creator of the smart contract used. This is a powerful structural incentive to use the NEAR protocol, on top of NEAR's massive, $800 million Ecosystem Fund grant pool.
Financials at a Glance
NEAR's VCs own ~22% of protocol emissions to date. Management (Core Team and Foundation) own another 25%. Over 4 years, central agents will be naturally diluted by ~30%, plus secondary market sales. This is similar to Terra, and in-line with the progressive decentralization consensus amongst younger crypto protocols today.
Like other alt-L1s, NEAR is racing against the Ethereum Serenity clock to demonstrate that it's differentiated enough to evolve faster than Ethereum can evolve itself. At the same time, it must build a scalable, interoperable-if-possible / sustainable-if-standalone ecosystem. NEAR's $520m of funds raised, platinum-plated backing, sharding/consensus evolutions, and relatively more niche specialization give NEAR an attractive risk/reward profile.
NEAR's ambition, to become the base layer for on-chain consumer dapps, is also somewhat unique. As NEAR notes in their white paper, centralized networks will always be "orders of magnitude more efficient" than decentralized networks. This has led many blockchains to de-emphasize the consumer dapp space, as they feel users don't truly value privacy and permissionlessness nearly as much as they think they do -- hence L1s' focus on financial applications (where the extractable value per record is much higher than it is for most consumer applications).
However, that hasn't stopped NEAR's smart contract growth from growing exponentially, albeit off a small base.
NightShade: Shard the Block, Not the Chain
Most "ETH killers" have attacked ETH's obvious weaknesses (cost-effectiveness & interoperability) via distinct tradeoffs. SOL delivers cheapness and speed at the cost of hypercentralization. AVAX created a three-chain model, with one chain optimized for each corner of the famous trilemma triangle. ATOM delivers interoperability. Terra, uniquely, decentralized the stablecoin layer, and married it with the Cosmos SDK for maximum interoperability (essential for a dominant cross-chain stablecoin) and high network centralization (for lowest transaction costs, also uniquely essential for a competitive stablecoin).
NEAR offers an innovative consensus solution: the NightShade consensus. NightShade shards individual blocks, instead of would be the first major evolution at scale over the Tendermint, Avalanche, and Polkadot consensus mechanisms. AVAX and especially SOL have hit unexpected scaling problems with their own unsharded networks, significantly dampening their scalable-differentiable-runway relative to ETH and leaving the market hungry for a new alternative.
Given that NightShade has not been implemented yet, the devil will be in the details. However, this is an asset worth watching.
Staking at a Glance
The number of global stakers registered its first week-on-week decline in many weeks with the market’s sharp drawdown. Cumulative net staking flow, a new metric tracking net incremental dollar staking value (separate from total staked dollar value), continued to grow, registering +1.3% week-on-week growth, amidst a very soft overall market.
Many better-known protocols like Eth2.0, AVAX, and Cosmos saw continued inflows. The largest outflows came from Waves, still staggered from the implosion of their Neutrino algostable, and Mina, a privacy-focused protocol.
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