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Gayatri

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EIP-4844 is part of Ethereum's long-term roadmap's "The [Surge](https://x.com/VitalikButerin/status/1741190491578810445?s=20)" phase.

As we know, Ethereum, is the go-to platform for blockchain applications but faces a crucial challenge: scalability. The sheer volume of activity on the network, from platforms and protocols to apps and tokens, leads to slow transaction processing and high gas fees.

In the past, transaction fees on Ethereum have peaked at over $200 during busy periods, and they're currently above $20. These high fees make it difficult to use Ethereum for small transactions.

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## Sharding

To address these concerns, Ethereum's roadmap includes various upgrades. The initial plan involved sharding, a technique aimed at cutting down network congestion and lowering gas fees by dividing the vast Ethereum blockchain into smaller segments. While the switch to proof-of-stake with "The Merge" significantly reduced gas consumption, but ethereum still needs some improvements to make transactions truly fast and affordable.

## Danksharding

However, the current solution being explored is danksharding. Unlike sharding, dank sharding seeks to achieve cost improvements and faster transaction speed without the complexities associated with fragmenting the entire blockchain. So, Ethereum's geared up for its next big upgrade, called Proto-Danksharding (PDS), which is all about reducing transaction fees on layer2 rollups.

ProtoDanksharding, the name comes after the main brains behind the concept- [Protolambda and Dankrad Feist](https://www.youtube.com/watch?v=N5p0TB77flM).

***Now, you might be wondering, then, what exactly are these layer2 rollups meant for?***

Well, in the existing market scenario, L2 rollups vie for blockspace alongside all other transactions on the mainnet (layer1 ). Approx. 10-15% of blockspace is consumed by rollups, with nearly 90% of rollup transaction costs allocated to pay for Layer 1 blockspace.

In simpler terms, Layer 2 (L2) rollups handle tasks like computation and compression, and Layer 1 focuses on keeping things in agreement and making sure data is accessible.

Right now, rollups rely on something called CALLDATA, which is basically the most budget-friendly way to stash data on Layer 1. However, call data is permanently stored by nodes and requires 4 or 16 units of gas per byte—depending on whether the byte is zero or non-zero. This where, Proto-Danksharding(PDS) or EIP-4844 steps in-

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## EIP4844: Proto-Danksharding

EIP-4844 lowers the cost of sending bundled transactions to the Ethereum mainnet. It sets the stage for the implementation of danksharding, a development that is expected to boost Ethereum's throughput to 100,000 transactions per second (TPS).

The protocol introduces a new method for managing transactions through the use of "blobs" of data. These blobs are cost-efficient solutions for L2 networks aiming to transmit large amounts of data to Ethereum's mainnet network (L1). They're already used in programming languages like JavaScript and Python. 

But what's new is the idea of using them in smart contracts?!

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## Blobs

Blobs, short for Binary Large Objects, are hefty chunks of binary data, each comprising over a million bits, or bits and bytes. In simpler terms, they're like big containers filled with zeros and ones.

Blobs are designed to store non-essential data for Ethereum's blockchain operations. This data is accessible to off-chain systems, such as Layer 2 scaling solutions like rollups. Blobs are placed within Ethereum's consensus layer, separate from execution layer where the EVM operates, to maintain efficiency.

Unlike Ethereum's traditional method of storing all data indefinitely on every node, which can be quite resource-intensive, blobs offer a more cost-effective solution. They come with an expiration date, lasting roughly 18 days before they're automatically purged. Plus, each blob can hold a substantial amount of data, up to 128 KB, and a single block can accommodate up to 16 blobs. This streamlined approach means Ethereum can store less data per block over the long haul.

![blob.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/e223ac486d542c65cca58eb27b2d6a3e.png)
##### Now, there's something referred to as ***blob-carrying transactions***

Blob-carrying transactions are a fresh addition to the Ethereum network customised for handling blobs. These transactions include a validity proof, enabling the Ethereum chain to verify their authenticity without the need to read the blob itself. They employ a KZG commitment scheme via ZK(zero knowledge) proofs to ensure that while the Ethereum Virtual Machine (EVM) can view a commitment to a blob, it cannot access the blob data directly.

These transactions have their separate mempool from the EVM, which enhances data security while optimizing block space. Furthermore, they feature a new fee mechanism inspired by EIP-1559, where fees are dynamic, fluctuating based on supply and demand. Generally, including more than three blobs per transaction leads to higher fees.

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## Journey of Dencun Upgrade through Ethereum's layers

Ethereum network is made up of two layers: the execution layer and the consensus layer.

1. The execution layer handles smart contract logic and transaction processing, while the consensus layer ensures agreement on the state of the network.
2. Upgrades to Ethereum's layers are implemented simultaneously, and the Cancun-Deneb upgrade is a combination of two separate upgrades: Cancun (execution layer) and Deneb (consensus layer).

![dencun upgrade](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/f357bdb6738515bf205f9fc1c6fcf2ce.png)

#### Upgrading Efficiency in Smart Contracts Layer

These upgrades are part of the execution layer of the Ethereum

1. EIP-1153, known as Transient Storage Opcodes, is set to enhance how Ethereum handles transaction data. By introducing transient storage opcodes, this proposal aims to boost the efficiency of smart contracts and lower gas costs. The focus is on improving the effectiveness and reducing expenses related to storage operations during the execution of smart contracts.
2. EIP-6780 aims to strike a balance between improving security and maintaining compatibility with existing Ethereum smart contracts. It achieves this by **limiting** the functionality of the **SELFDESTRUCT opcode**, a feature that can be misused and cause security vulnerabilities.
3. EIP-5656 introduces MCOPY, a more efficient memory copying instruction, enhancing EVM performance without affecting existing functionalities. Thus making it faster and cheaper for developers to build on the platform.

#### Upgrading Efficiency in Validation Management

Now we focus on the upgrades in the consensus layer of the Ethereum -

1. EIP-7044 simplifies the process for validators to exit their roles in Ethereum staking, making it easier for them to withdraw their funds. Additionally, it ensures that their exit actions remain valid even across future upgrades or forks of the Ethereum network.
2. EIP-7045 upgrade extends the window for including attestations in Ethereum blocks, allowing validators more time to attest to block correctness.
3. EIP-7514 focuses on regulating the pace at which new validators can enter Ethereum's network. By establishing a maximum churn limit of 8 per epoch, Ethereum aims to prevent its system from being inundated with excessive data. This adjustment is designed to maintain the network's operational efficiency and reliability.

EIP-7516 is a proposed update for Ethereum that introduces a new opcode called BLOBBASEFEE. This opcode allows smart contracts to access the current base fee for data blobs directly on the blockchain. This feature benefits rollup contracts by enabling them to effectively manage and predict their data blob costs, leading to improved efficiency and predictability in contract execution.

### EIP-4788 aims to reduce the external dependence

EIP-4788, known as the Beacon Block Root proposal, makes it easier for different parts of the Ethereum layers ( consensus and execution layer) to talk to each other. It does this by adding a special piece of information, called the parent beacon block root, to every block that gets processed on Ethereum. This information is then stored in a new kind of smart contract.

In simpler terms, EIP-4788 acts like a messenger that delivers important updates about Ethereum's overall status directly to the main Ethereum network. This means developers don't have to rely as much on external sources to get information about what's happening in Ethereum. This is especially useful for things like staking pools and arrangements where knowing Ethereum's current status is really important.

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## How Does Proto-Danksharding Reduces Gas Fees?

EIP-4844 reduces the gas fee on layer 2 through following ways-

- Increase data capacity- Blobs are large bundles of information that don't hang around forever on Ethereum. They're like temporary storage units that make room for more stuff by disappearing after they're done.

- Increase Efficiency- Layer 2 Rollups can handle lots of transactions outside of the main Ethereum network. They bundle up all these transactions into one big blob of data and then send it to the main network. This saves time and makes Ethereum work faster.

- Offload the burden on Ethereum Mainnet- Ethereum moves a big chunk of its transaction data away from its main network to blobs. These blobs hold onto the data temporarily, which helps to keep the main Ethereum network running smoothly without getting too bogged down. This shift away from on-chain storage leads to improved performance and speed for Ethereum.

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## Benefits of Implementing EIP4844

- Reduced Transaction Fees: By leveraging off-chain solutions for data storage, EIP-4844 is poised to slash transaction fees substantially. This cost reduction is anticipated to democratize access to Ethereum, making it more inclusive for a broader spectrum of users.

- Enhanced User Experience: The combination of lower transaction fees and quick transaction processing time is expected to elevate the overall user experience within the Ethereum ecosystem. Users can anticipate smoother and more affordable interactions with the network, contributing to a more seamless and satisfying experience overall.

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## Impact of EIP-4844 post its Launch

The founder of zkSync, Alex Gluchowski, shared the gas fee reduction on Layer 2 rollups post-4844 implementation

![blob fee zksync.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/88180dfb49d8d820109e6550cddf1b3a.png)

Jessak Pollak, founder of Base, equally shared the rise in the number of active wallet addresses on Base post 4844 with a sudden fall in gas fees.

![base tweet blob .png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/89e2f0d5dcec404e6bfbed9e805cadb4.png)

Also, based on the data available on the Dashboard by Kofi on [Gasfees.io](http://gasfees.io/) reflects the marginal drop in gas fee post the 4844 upgrade on L2 Rollups with Blobs compared to the L2s without the Blobs.

![gasfees.io.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/265a69ed1815a23775800dab4d56aee5.png)

For an easy peasy go through explainer on EIP4844, you can just swipe in to **[WTF’s EIP 4844?](https://eip4844.wtf/)**

There’s a blob calculator on the page that helps you track gas fee on various L2’s 

![blob gas fee.](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/6908c767f8095de118f02db3902015a8.png)

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## Conclusion

EIP-4844 is poised to decrease transaction fees, signaling a substantial transformation in Ethereum's revenue model. Despite this, the future still looks positive. Cheaper Layer 2 transactions could encourage more activity on the network, potentially resulting in more transactions. Also, reduced transaction costs might make it easier for everyday users to adopt web3 apps by making user-signed transactions less complicated. The implementation of EIP-4844 is a big step in Ethereum's development and requires careful attention from both developers and users.

### References

1. https://medium.com/@chaincom/a-complete-guide-to-ethereums-dencun-upgrade-fb35257c57f5

2. https://medium.com/coinmonks/an-introduction-to-ethereums-next-major-upgrade-proto-danksharding-3b9d73651802

3. https://medium.com/@thecryptologyacademy/unfolding-eip-4844-a-deep-dive-into-proto-dankshardings-impact-on-ethereum-s-future-80c997a271d4 https://medium.com/@devudilip/eip4844-proto-danksharding-with-simple-story-778f0b7cabe1 https://medium.com/@devudilip/eip4844-proto-danksharding-with-simple-story-778f0b7cabe1

4. https://www.coindesk.com/tech/2024/01/17/ethereums-dencun-upgrade-goes-live-but-fails-to-finalize-on-testnet/

5. https://consensys.io/blog/ethereum-dencun-upgrade-explained-part-1

6. https://www.alchemy.com/overviews/danksharding

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EIP-4844, or Proto-Danksharding, improves Ethereum's scalability and reduces transaction fees by managing data more efficiently with blobs, making transactions faster and cheaper on Layer 2 rollups.

EIP-4844: Protodanksharding-Making Ethereum Layer 2 Rollups Cheaper

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Shravan Patel 

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Ever tripped over a password or gotten lost in a sea of seed phrases? Web2 and Web3 both have their authentication headaches. But what if there was a better way? That's where Passkey comes in. This innovative technology promises not only enhanced security but also a smoother user experience. Let's explore its core features, benefits, and challenges to see how Passkeys could reshape Web3 authentication. Before exploring Passkey's potential, let's unpack its foundation-

#### No Web3 wallets are Perfect ! 😕

![passkey ( limitation web3 wallet).gif](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/9bd9481982cf2bf1a282dab17c3ec3ef.gif)
Traditional Web3 wallets open the door to a decentralised world… But they have their own limitations !!

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## Challenges of Traditional Web3 Wallets

- **Complex user experience:** Setting up and managing a traditional wallet can be intimidating for new or users unfamiliar with blockchain technology. The complexity of the private key, seed phrase and blockchain interactions may discourage newcomers from fully engaging with Web3.

- **Lack of recovery options:** Traditional Web3 wallets often depend solely on seed phrases for wallet recovery. If users lose their seed phrases, their assets are locked forever.

- **Risk of scams:** Although Web3 wallets prioritise security, the rise of scams can be a risk for new and inexperienced users.

- **Theft of Private Keys/Seed Phrases:** Private keys or seed phrases can be stolen or phished through increasingly sophisticated and diverse methods. Once compromised, these keys grant attackers complete control over the associated wallets.

This is where passkeys become handy! 🗝️

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## What are Passkeys?

Passkeys are an authentication method designed to replace traditional passwords by leveraging biometrics. Developed by the FIDO Alliance and supported by major tech companies such as Apple, Google, Meta, and Microsoft, passkeys are implemented through the WebAuthn. WebAuthn is a crucial component that supports the functionality of passkeys. Together, passkeys and WebAuthn create a passwordless login experience for the user.

![Web Authn.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/ece0705d4883a5d01c18471b29ccc240.png)

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## How do users use Passkeys?

The sign-in process with passkeys allows users to use facial recognition, fingerprint scanning, or a personal identification number (PIN, the same one used for unlocking the device)

Passkeys are a more secure way to log in compared to passwords. Since, they are generated and managed exclusively on users’ devices, making it difficult for hackers to compromise user login credentials. This not only enhances security but also improves the overall user experience.

![IDs.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/f6e9d3735402141ff82017c72e47cffe.png)

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## Benefits of Passkeys in Web3 Authentication

- **Authentication:** Passkeys eliminate the need for complex passwords and seed phrases, enabling users to authenticate with a simple fingerprint scan or facial recognition.

- **Stronger Security:** Passkeys utilise biometric authentication factors, adding an extra layer of security to user accounts.

- **Reduced Phishing Attacks:** Unlike passwords, which can be stolen when entered on phishing websites, passkeys' device-based authentication makes them immune to such attacks. Think of it like a fingerprint scanner for your crypto – no more typos or leaked passwords can grant access to malicious websites. This significantly reduces the risk of losing your precious assets to scams and empowers you to confidently navigate the Web3 world.

- **Multi-device Support:** Passkeys operate seamlessly across various devices, including smartphones, tablets, and laptops, ensuring consistent UX.

![passkeys.jpg](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/a0ca56fbd820104719f4241e7570b374.jpg)

Despite having great potential to change the way we use Web3 wallets today. There are a few challenges with Passkeys 

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## Challenges in Passkey Implementation

- **Device Dependence:** While Passkeys offer enhanced security by residing directly on users' devices, this dependency also raises concerns about backup and recovery. Apple users enjoy secure iCloud Keychain backups, while Android and Windows users face fragmented options like Google Password Manager.

- **Cost Considerations:** On-chain verification and signatures associated with Passkey transactions may incur higher fees compared to traditional wallets, potentially impacting user adoption.

- **Self-Custody Concerns:** The reliance on existing logins like Apple or Google for Passkey activation has sparked debate about whether true self-custody of crypto assets is fully realised.

- **Server-Side Vulnerability:** Passkeys remain tied to the specific application or server they're associated with. If the server goes down, the relevant Passkey becomes inaccessible, even though the device itself might still be functional.

- **Standardisation Gap:** The current lack of standardised protocols across device ecosystems creates walled gardens, hindering Web3's vision of universal accessibility. Until cross-brand authentication bridges these gaps, the full potential of Passkeys will remain limited.

- **Cross-Device Friction:** Switching between devices like iPhone and Android can be problematic with Passkeys, as seamless logins across ecosystems aren't yet a reality.

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## Pioneering Passkey Wallet Projects:

 [Banana SDK](https://www.bananawallet.xyz/), [Clave](https://www.getclave.io/) and [Silence Laboratories](https://www.silencelaboratories.com) are few examples of passkey wallets. 

Clave and Banana SDK uses special contracts on compatible blockchains (like Ethereum) to process Passkey signatures. While this is cool, it can be expensive (think high transaction fees). For example, one signature might cost as much as a fancy coffee!

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## Conclusion: Shaping a Secure and User-Centric Web3 Future

Passkeys represent a promising advancement in Web3 authentication. No more forgotten seed phrases or phishing scams – passkeys offer seamless biometric authentication and robust security across devices. While high transaction costs pose a challenge, protocols are exploring solutions like dedicated 'sidechains' or 'self-chains' for verifying Passkeys, potentially at the cost of reduced compatibility with other blockchains. Continued development holds immense potential to unlock the full power of passkeys for a user-centric and secure Web3 ecosystem. 

#### References 

1. https://www.theblock.co/post/261435/revolutionizing-the-future-of-web3-in-depth-insights-into-passkey-wallets
2. https://www.openfort.xyz/blog/passkeys-and-account-abstraction
3. https://medium.com/alphawallet/exploring-passkeys-their-relevance-in-the-web3-space-fcd877dcbd4
4. https://talk.nervos.org/t/a-translation-of-revolutionizing-the-future-of-web3-in-depth-insights-into-passkey-wallets-and-their-emerging-role/7511
5. https://web.dev/articles/passkey-google-ux
6. https://www.passkeys.io/who-supports-passkeys

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Step into a new era of Web3 authentication! Passkeys that brings a new dimension to passwordless authentication, prioritizing both security and user experience (UX) 

Decoding Passkeys: The Future of Seamless Web3 Authentication

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Chandher Shekar R

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"In today's digital age, managing and protecting our online identities is more important than ever." However, traditional identity systems are plagued by several problems:

**Lack of privacy**: Users often have little control over how their personal data is collected, used, and shared by these companies.

**Centralized control**: Most identity systems are controlled by a small number of companies, creating single points of failure and increasing the risk of data breaches.

**Limited interoperability**: Different identity systems often don't work well together, making it harder for users to control and manage their online identities across different platforms.

This is where Distributed Identities come in.

Blockchain technology offers a new paradigm for digital identity, with the potential to revolutionize the way we think about identity management. By providing a decentralized, secure, and tamper-proof way to store and share identity data, blockchain technology can help address various challenges associated with traditional identity systems.

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## Concept of Distributed Digital Identities

Distributed digital identities (DDIs) are closely aligned with the principles of Web3, which advocates for a more decentralized and user-controlled Internet. DDIs represent a shift towards a more user-centric Internet, where users have greater control over their online identities, presence, and privacy.

By leveraging decentralized technologies, DDIs provide a more secure, robust, and flexible approach to online identity management. This paves the way for a more open and inclusive internet that is more resilient and trustworthy than the current web, which is controlled by a few large centralized platforms.

It ultimately reverses the direction of permissioned data sharing — "where instead of users requesting permission from platforms, platforms request permission from users "- recasting the Facebooks and Twitters of the world more as indexers than gatekeepers. This structure enables use cases that would open the door to a new digital identity economy.

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## How do Distributed Digital Identities Work?

In a decentralized identity system, the following parties interact with the blockchain:

 **Credential Holder:**
 
The credential holder is an individual or entity that possesses a digital identity stored on a blockchain. This digital identity includes a unique digital identifier (DID) and an associated public key. The use of a blockchain ensures the security and immutability of the stored information, as the data is distributed across a network of nodes.
    
**Issuer:**

The issuer is an organization or entity responsible for granting and verifying credentials. This could be a licensing organization, educational institution, or any entity issuing digital credentials. The issuer utilizes its own DID (Digital Identifier) and a private key to sign the credential. By signing the credential with its private key, the issuer adds a cryptographic signature to the information, creating a verifiable link between the credential and the issuing entity. This process ensures the authenticity of the credential, as only the legitimate issuer possesses the private key required to produce a valid signature.
    
**Verifier:**

The verifier is a party that needs to confirm the authenticity of a credential presented by the credential holder. The verifier checks the blockchain to validate that the credential was indeed issued by a trusted entity (the issuer). The verification process includes confirming that the credential is associated with the DID of the credential holder who is claiming it. The decentralized and transparent nature of the blockchain allows verifiers to independently and reliably verify the credentials without relying on a central authority.
    
In summary, this system leverages blockchain technology to ensure the security, authenticity, and decentralized verification of digital credentials. The blockchain serves as a tamper-resistant and transparent ledger that enhances trust in the digital identity ecosystem.

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###### _Image source- dock.io_

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## Types of Distributed Digital Identities

There are several different types of distributed identity systems in use today, including:

### Self-Sovereign Identity (SSI)

Self-Sovereign Identity (SSI) systems empower individuals to take ownership and control over their personal identity data, eliminating the need for intermediaries like governments or corporations. Users can create multiple "personas" for different online services and choose which data to share with each service. SSI systems typically use decentralized technologies like blockchain to provide security and trust. Example use cases include secure login and authentication, digital wallets, and personal data management. 

Example: Veramo, SelfKey, Civic

### Decentralized Identity (DID)

The decentralized identity uses blockchain technology to create secure digital identities that are under the user's control. It eliminates the need for a central authority to manage and verify identities, providing greater privacy and security. Users can share only the necessary information with online services without the risk of data breaches. This technology has the potential to revolutionize the way we manage online identities and interactions in the digital world. 

Example: Ethereum Name Service (ENS), Sovrin, Blockstack

### Federated Identity

Federated identity simplifies the login process by allowing users to use a single set of credentials to access multiple online services. It uses a central identity provider to authenticate users and share their identity data with other services. This makes it easier for users to access various systems and applications while maintaining security and privacy. Federated identity is widely used in enterprise and corporate environments.

Example- Metamask, Brave, Coinbase Wallet.

### Verifiable Credentials (VCs)

VCs are digital credentials that can be issued, stored, and verified on a blockchain network. They can represent anything from educational qualifications to professional certifications. 

Example- Digital employee identification cards, digital birth certificates, and digital educational certificates.

<div id="benefits"></div>

## Benefits of Distributed Digital Identities

The blockchain plays a key role in enabling secure and decentralized identity management in a few ways:

1. **Immutability:** Transactions on a blockchain are recorded in an immutable ledger, making it difficult for any party to alter or delete identity data.
2. **Decentralization**: By distributing data across multiple nodes on a network, blockchain creates a decentralized and tamper-proof system for identity management.
3. **Smart Contracts**: Smart contracts on a blockchain can be used to automate identity verification and validation processes, reducing the need for intermediaries and increasing efficiency.
4. **Privacy**: By encrypting identity data and using zero-knowledge proofs, blockchain can help protect user privacy while still enabling identity verification.

In essence, the blockchain serves as a secure and transparent ledger for verifying the authenticity of digital identities and credentials.

<div id="usecases"></div>

## Use Cases of Distributed Digital Identities

Distributed Digital Identity systems could have some pretty transformative effects on the world, here's a few ways:

1. **More Access to Services**: Individuals who may not have access to traditional identity documents, like birth certificates or passports, could use a blockchain-based identity to access vital services like healthcare, education, and financial services.

2. **Reduced Fraud and Identity Theft**: Distributed identity systems can help reduce the risk of fraud and identity theft, as they make it more difficult for criminals to steal or forge identities.

3. **Increased Privacy**: Blockchain-based identity systems give individuals more control over their personal data, which can help protect their privacy and prevent unauthorized access to sensitive information.

4. **Greater Transparency and Accountability**: Distributed identity systems can increase accountability and help reduce corruption and unethical behavior by creating a transparent and auditable record of identity-related transactions.

5. **Boosting Financial Inclusion**: Distributed identity systems can help provide access to financial services for underbanked and unbanked individuals, particularly in developing countries, by providing a secure, verifiable, and cost-effective means of identity verification. This could lead to greater economic opportunities and more inclusive financial systems.

6. **Revolutionizing Voting Systems**: Distributed identity systems can enable secure, transparent, and tamper-proof electronic voting systems that could increase voter turnout, reduce voter fraud, and increase confidence in election results.

7. **Enabling New Forms of Digital Ownership**: Distributed identity systems can also enable new forms of digital ownership, such as non-fungible tokens (NFTs) and digital collectibles. This could unlock new forms of economic activity and creativity online.

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## Adoption Challenges

All is not merry in the world of distributed identities; the challenges of adoption are real, and these include:

1. **Regulatory Hurdles**: Governments and regulatory bodies may be hesitant to embrace distributed identity systems due to concerns about cybersecurity, privacy, and compliance with existing regulations.

2. **Technical Challenges:** Developing and deploying distributed identity systems can be technically complex and require significant investment in infrastructure and expertise.

3. **User Adoption**: Distributed identity systems must be user-friendly and widely accepted by individuals and organizations to succeed. This may require significant education and outreach efforts to overcome skepticism and lack of awareness.

4. **Lack of Interoperability**: Different distributed identity systems may not be compatible with each other, creating silos of data that limit the potential for widespread adoption and usage.

5. **User Control and Consent**: Ensuring that users have control over their identity data and can give consent for its use can be challenging, particularly in cases where multiple parties need access to the data.

6. **Data Portability**: Users should be able to move their identity data between different systems and services easily. However, this requires standardized data formats and protocols that may not yet be widely available.

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## Conclusion

In the ever-expanding digital world, secure and trustworthy digital identities have become essential. Decentralized identity systems provide a new way to manage digital identities, leveraging the security and transparency of the blockchain to store and verify identities and credentials. These systems offer several benefits, including increased privacy and security, improved efficiency, and greater control for individuals over their digital identities. While the adoption of distributed identity systems is still in its infancy, the potential for growth and innovation in this area is vast, and many believe it could revolutionize the way we manage our digital identities online.

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Distributed Digital Identity empower users, enhance data privacy, and revolutionize identity verification. Explore technical details, benefits, real-world applications, and challenges.

How Decentralized Digital Identities are Reshaping Future of User-Centric Experiences

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Atharv Bobade

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In the world of blockchain, the Ethereum Virtual Machine (EVM) stands as a central and indispensable piece of the puzzle. It's the software responsible for executing smart contracts, enabling decentralized applications, and facilitating secure and transparent transactions. In this article, we'll take you on a journey to unravel the wonders of the EVM, exploring what it is, how it came into existence, and the pivotal role it plays in the realm of blockchain.

<div id="evm"></div>

## Ethereum Virtual Machine Explained

thereum Virtual Machine, or EVM, is a powerful and versatile software environment that runs on the Ethereum network. Think of it as a global, decentralized computer that processes code and executes smart contracts. Smart contracts are self-executing agreements with the terms of the contract between buyer and seller being directly written into lines of code. EVM is responsible for the execution of these contracts, ensuring that they perform as intended.

The EVM is often compared to a real-world computer, but it operates in a different realm. It is [Turing-complete](https://www.geeksforgeeks.org/what-is-meant-by-turing-complete-in-ethereum/), meaning it can perform any computation that can be described algorithmically. However, there's a twist – it's not entirely unlimited in its capabilities. The EVM is intrinsically bounded by a parameter called "gas," which limits the total amount of computation it can perform. This limitation ensures that malicious or poorly written code cannot overburden the network, making it a secure and reliable platform. Hence we call it as quasi-turing-complete.

<div id="history"></div>

## Brief History of EVM

 Ethereum Virtual Machine came into existence alongside the Ethereum blockchain, which was proposed by a young, brilliant developer named Vitalik Buterin in late 2013. The Ethereum project gained widespread attention and quickly attracted the interest of Web3 enthusiasts and developers. The concept of a decentralized platform that could run applications without the need for a central authority captured the imagination of the blockchain community.

Ethereum's development team, led by co-founder Gavin Wood, began crafting the technical underpinnings of the platform. This included the creation of the EVM, the engine that powers Ethereum's unique capabilities. Gavin Wood, an accomplished computer scientist and one of the co-founders of Ethereum, played a pivotal role in shaping the EVM and Solidity, Ethereum's programming language for smart contracts.

<div id="virtualmachine"></div>

## Virtual Machine - A Primer

### Exploring the World of Virtual Machines

Before we delve into the intricacies of the Ethereum Virtual Machine (EVM), let's first demystify the concept of a virtual machine (VM) itself. VMs are like computers within computers, serving a variety of purposes. Let's uncover the basics of virtual machines, their architecture, and why they are crucial in modern computing.

### What is a Virtual Machine?

At its core, a virtual machine (VM) is a software-based emulation of a physical computer. It's as if you're running a computer within your computer, creating a self-contained environment where you can execute software just like you would on a physical machine. This virtualization concept is a game-changer in computing, and here's why.

### The Architecture of Virtual Machines

![virtual machine architecture ](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/1313c6189669d88735e20acbefe3c748.png)

Virtual machines have their own architecture, which consists of two primary components:

**1. The Hypervisor:** This is the software that manages and controls the VMs. It's responsible for allocating resources and ensuring that each VM runs smoothly without interfering with others.

**2. Virtual Machine Monitor (VMM):** The VMM is the secret sauce that enables VMs to function. It provides an isolated space for each VM, ensuring that they can't interfere with each other or the host system.

These components work together seamlessly to create a virtual environment that mimics a physical computer. The VMs within this environment are often referred to as guests, while the underlying physical system is the host.

<div id="arch"></div>

## Architecture of EVM

![architecture of evm.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/9a1edaf5f4f37ce8c9a6baf81ca9be3e.png)

Understanding the architecture of the EVM is key to comprehending its functioning. It operates on a stack-based system, maintains state and storage components, and relies on opcodes for executing smart contracts. Additionally, we'll explore the concept of "gas" and why it's intrinsic to the EVM's operation.

### How the Stack Works

Imagine a stack of plates in a cafeteria. You can add a plate to the top of the stack, and when it's time to take a plate, you naturally pick the one from the top. Similarly, in a stack-based system, you push data onto the top of the stack and pop data off the top as needed for calculations.

![Stack.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/ec0011c2cbfab968e50961e9539a529e.png)

🤿 The word size of the machine (and thus size of stack items) is 256-bit. This was chosen to facilitate the Keccak256 hash scheme and elliptic-curve computations. The memory model is a simple word-addressed byte array. The stack has a maximum size of 1024. The EVM also has an independent storage model; this is similar in concept to the memory but rather than a byte array, it is a word addressable word array. 

Unlike memory, which is volatile, storage is non volatile and is maintained as part of the system state. All locations in both storage and memory are well-defined initially as zero. The machine does not follow the standard von Neumann architecture. Rather than storing program code in generally-accessible memory or storage, it is stored separately in a virtual ROM interactable only through a specialised instruction. 

The machine can have exceptional execution for several reasons, including stack underflows and invalid instructions. Like the out-of-gas exception, they do not leave state changes intact. Rather, the machine halts immediately and reports the issue to the execution agent (either the transaction processor or, recursively, the spawning execution environment) which will deal with it separately.

<div id="state"></div>

## State and Storage Management

In the Ethereum ecosystem, the Ethereum Virtual Machine maintains two crucial components: the state and storage.

### 1. The State

The state represents the current condition of all accounts on the Ethereum network. Each account has a state, including information such as its balance and contract code. When a smart contract executes, it can read from and write to the state, updating the values associated with Ethereum addresses.

State management is fundamental to Ethereum's decentralized nature. The state of all accounts is maintained and updated across the entire network. The EVM ensures that this state remains consistent, even in a trustless and distributed environment.

### 2. Storage

While the state represents the current condition of Ethereum accounts, storage is where contract data is permanently saved. Storage is used to store data that persists across multiple transactions and block confirmations. This data can include contract variables, records of transactions, and more.

Ethereum's ability to store data in a decentralized and immutable way is a critical feature that underpins smart contract functionality. The EVM manages this storage, ensuring that data remains accessible and unchanged over time.

<div id="opcodes"></div>

## Opcodes and Smart Contract Execution

The Ethereum Virtual Machine relies on a set of instructions called opcodes to execute smart contracts. Opcodes are predefined commands that dictate specific actions within the EVM. These opcodes are included in the bytecode of a smart contract, and the EVM interprets and executes them.

Each opcode corresponds to a particular operation, such as adding two numbers, checking the balance of an account, or transferring funds between accounts. Smart contracts are essentially sequences of these opcodes, which the EVM processes in a step-by-step manner.

Smart contract developers use opcodes to define the rules and behavior of their contracts. The EVM's opcode set is intentionally limited to maintain efficiency and security while enabling powerful functionality.

| OPCODE | NAME | MINIMUM GAS | STACK INPUT | STACK OUTPUT | DESCRIPTION |
| --- | --- | --- | --- | --- | --- |
| 00 | STOP | 0 |  |  | Halts execution |
| 01 | ADD | 3 |   a                 b | a + b | Addition operation |
| 02 | MUL | 5 |   a                 b  | a * b | Multiplication operation |
| 03 | SUB | 3 |   a                 b | a - b | Subtraction operation |
| 04 | DIV | 5 |   a                 b | a / b | Integer division operation |

You can see the full list of [opcodes here](https://www.evm.codes/?fork=shanghai)

<div id="evmwork"></div>

## How EVM Works

### Bringing Smart Contracts to Life

EVM's primary role is to take the code written in Solidity or Vyper or Yul language EVM compatible langauge for smart contracts, and execute it on the Ethereum blockchain. Here's how the process works:

- **Smart Contract Deployment:** Smart contract developers create their applications in Solidity / Vyper / Yul. Once the code is ready, it's compiled into byte code.
- **Blockchain Transaction:** When a user initiates a transaction on the Ethereum network, such as interacting with a DApp or sending Ether, it includes instructions for executing smart contracts/transactions.
- **Mining and Consensus:** Miners, who validate and add transactions to the blockchain, pick up the transaction. They run the bytecode through the EVM to execute the smart contract's code.
- **State Changes:** The EVM executes the contract's code and may result in state changes, such as transferring funds between accounts or updating data. These state changes are crucial as they define how the blockchain evolves over time.
- **Gas Consumption:** Gas, the computational resource unit, is used during execution. Each operation consumes gas, and transactions require users to pay gas fees. Gas ensures that the network remains efficient and that malicious or poorly written code doesn't disrupt it.
- **Consensus and Confirmation:** After execution, miners reach consensus on the validity of the state changes. Once confirmed, these changes are permanently recorded on the blockchain.

### The Role of Miners

Miners play a crucial role in the execution process. They select transactions from the pool, execute the associated smart contracts, and attempt to reach consensus with other miners. Here's how miners contribute:

- **Smart Contract Execution:** Miners execute the bytecode of the smart contract using the EVM. They initiate the code and produce the resultant state.
- **Validation and Consensus:** Miners validate that the state changes are consistent with the transaction's intent. They ensure that the execution adheres to the rules of the EVM and the Ethereum protocol. Miners compete to find the next block, with the first miner to achieve consensus earning a reward.
- **Recording State Changes:** Once consensus is reached, the state changes are permanently recorded on the blockchain. This forms a new block in the chain.

### The Need for Gas

Gas is a unique aspect of Ethereum's operation. It ensures that computation on the blockchain remains efficient and secure. Gas limits the amount of work a smart contract can perform in a single transaction, preventing it from running indefinitely. This mechanism is crucial for network stability and protection against malicious code.

The Ethereum Virtual Machine acts as the engine behind the execution of smart contracts and DApps on the Ethereum blockchain. It translates code written in Solidity into real-world actions, ensuring security, transparency, and efficiency. Miners validate transactions, execute smart contracts using the EVM, and reach consensus, while gas ensures that the network remains reliable and secure.

With a clear understanding of how the EVM operates, you can better appreciate the remarkable capabilities it brings to the world of blockchain and decentralized applications.

<div id="pros"></div>

## Pros of EVM

The Ethereum Virtual Machine (EVM) and the broader Ethereum ecosystem come with a myriad of advantages:

### Smart Contract Capabilities

Smart contracts, executed by the EVM, enable self-executing agreements without the need for intermediaries. These contracts can automate complex processes, such as financial transactions, without relying on a third party. The EVM ensures that smart contracts execute faithfully, increasing trust and efficiency in various applications.

### Security Features

EVM's architecture is designed with security in mind. By employing a stack-based system, gas mechanisms, and limited opcodes, it mitigates vulnerabilities that could be exploited by malicious actors. This focus on security has made Ethereum a preferred platform for DeFi, NFTs, and various blockchain applications.

### Transparency in the System

Ethereum's blockchain is public and transparent. The EVM records all transactions and smart contract executions on the blockchain, creating an immutable ledger of activities. This transparency fosters trust and accountability in a wide range of applications, from financial services to supply chain management.

<div id="cons"></div>

## Cons of EVM

No technology is without its challenges. In this section, we'll explore the limitations of the EVM, including scalability issues, the impact of gas costs, and the complexities involved in development.

### Scalability Issues

One of the most prominent and widely recognized limitations of the Ethereum platform is its scalability. Scalability refers to a blockchain's ability to handle a growing number of users and transactions while maintaining efficiency and speed. Ethereum, like many other blockchain networks, faces challenges in this regard.

### Gas Costs and Network Congestion

Gas, the mechanism designed to limit computation, also contributes to scalability challenges. During times of high demand, gas prices can skyrocket, making transactions and smart contract executions costly and sometimes economically unviable. This not only affects individual users but also poses a barrier to entry for developers looking to build DApps on the Ethereum platform.

### Development Complexity and Barriers

Developing on the Ethereum platform, especially for newcomers, can be challenging. Ethereum employs its unique programming language, Solidity, which developers must learn to write smart contracts. Writing secure and bug-free smart contracts adds to the complexity.

<div id="conc"></div>

## Conclusion

In conclusion, the Ethereum Virtual Machine (EVM) is at the core of Ethereum's transformative capabilities. As a platform that executes smart contracts and drives the world of decentralized applications, the EVM enables secure and transparent transactions while offering both benefits and challenges. The EVM is a symbol of blockchain's potential to reshape industries and processes, and its continued evolution is poised to overcome current limitations. While challenges remain, the EVM remains a beating heart of innovation in the blockchain space.


large_EVM Cover.png

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EVM Cover.png

Delve into the intricate architecture of the Ethereum Virtual Machine (EVM), the cornerstone of Ethereum's decentralized ecosystem and foundation upon which smart contracts and DApps are built. 

Decoding Ethereum Virtual Machine (EVM)- Powerhouse of the Ethereum Ecosystem 

<div id="intro"></div>

Blockchain technology is a revolutionary way to store and manage data in a decentralized, secure, and transparent way. However, blockchains face some challenges, such as network congestion and high transaction fees, as all transactions are processed on the base layer. Additionally, high energy consumption is also a concern. Layer 1(L1) blockchains must choose between sacrificing decentralization or security in order to scale. Fortunately, Layer 2 scaling solutions provide an alternative solution.

![Layer2](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/ff8bf21161ff5a1db81392488a2d1830.png)
###### Blockchain Trilemma


<div id="eth_scale"></div>

## **Ethereum scaling solution**

A network that helps L1 blockchain improve scalability without sacrificing security or decentralization.

#### **Objectives**

- Process tens of thousands of transactions per second
- Reduce the transaction fee.
- Do all of this while maintaining security against attacks from significant portion of the network and without relying heavily on centralized full nodes.

There were several attempts made to solve Layer 1 scalability issues. Plasma and Sidechains are two of the most talked scaling solutions for Ethereum. But what exactly are they? 

<div id="plasma"></div>

## **Plasma**

Plasma chains are separate blockchains that are connected to the Ethereum mainnet. They process transactions off-chain, which means that they are faster and cheaper than transactions on the Ethereum mainnet.

**Plasma chains use a system called "fraud proofs" similar to Optimistic Roll-up to ensure that transactions are valid.**

Fraud proofs are a way to prove that a transaction is invalid without having to prove that it is valid. This makes them very efficient, and it is one of the reasons why Plasma chains are so fast.

Plasma chains can be stacked on top of each other, which means that they can be used to scale Ethereum infinitely.

Read more about Plasma [here](https://ethereum.org/en/developers/docs/scaling/plasma/#what-is-plasma)

#### **Limitations**

However, Plasma chains have some limitations. For example, A malicious operator could create fake transaction data and submit it to the Plasma chain. This would allow them to steal funds from users or reverse valid transactions. Plasma chains can be less secure than the Ethereum mainnet, and they can be difficult to use.

- **Data unavailability:** Plasma chains only store transaction data with the operator, and do not publish it to the main Ethereum blockchain. This means that users must rely on the operator to provide this data if they need to create fraud proofs to challenge invalid transactions.
- **Mass exit problem:** If a large number of users try to withdraw from a plasma chain at the same time, it can cause network congestion on Ethereum and make it difficult for users to withdraw their funds before the operator drains every account on the plasma chain.

![Plasma chain](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/beb3e9fea29f8d90de78434cc6c4ef25.jpg)
###### Plasma chains

<div id="sidechain"></div>

## **Sidechains**

Sidechains are separate blockchains that are connected to a main blockchain, such as Ethereum. This enables different blockchains to interact and exchange assets, improving interoperability between different blockchain networks.

Sidechains are not secured by the main blockchain, so they must have their own security mechanisms, such as proof of stake (PoS) or proof of work (PoW).

Read more on the Sidechain [here](https://ethereum.org/en/developers/docs/scaling/sidechains/)

#### **Limitations**

- Sidechains are less decentralized and trustless than Ethereum, but they are more scalable.
- Sidechains use their own consensus mechanisms, which are not as secure as Ethereum's.
- Sidechains require users to trust the validators on the sidechain, who could potentially commit fraud.

![Sidechain.jpg](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/3c45dcbcf4f9949c1fecaeec00cab775.jpg)
###### Sidechains

<div id="l2s"></div>

## **What is Layer 2 in Blockchain?**

Layer 2 refers to a set of off-chain solutions that are built on top of Layer 1 blockchain to address scalability issues. This works by creating a secondary framework that does not require the Layer 1 chain.

Layer 2 can improve on two fronts:

1. **Transaction Speed** (the amount of time it takes to complete a transaction), and,
2. **Transaction Throughput** (the number of transactions that a network can process in a given amount of time).

On top of that Layer 2 can drastically reduce the gas fee.

![Layer 2.jpg](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/1eac77878d8aae98f0b3fd97d65ccebe.jpg)
###### Layer 2
There are a few more scaling solution that the blockchain community have worked on, i.e. Channels and Rollups. 

- **Channels** are peer-to-peer protocols that allow two parties to make many transactions between themselves off-chain and then only post the final results to the blockchain. This reduces congestion and increases transaction processing speeds. Each channel is managed by a multi-sig smart contract, which ensures that both parties agree to the final state of the channel before it is closed. Channels are particularly useful for high-frequency transactions, such as micropayments or gaming.

Example: Alice and Bob want to play a game where they bet small amounts of ETH on each hand. They could open a channel and then make all of their bets off-chain. At the end of the game, they would close the channel and the smart contract would distribute the winnings to the winner.

- **Rollups** provide scaling by bundling hundreds of transactions into a single batch and submitting it to layer 1, Ethereum's mainnet. This spreads the cost of Ethereum's transaction fees across all users in the rollup, making it cheaper for everyone. Rollups are executed off-chain, but the transaction data is submitted to layer 1, which gives rollups the same security as Ethereum. Once the data is uploaded to layer 1, it is very difficult to reverse a rollup transaction, as it would require reverting Ethereum itself.

Example: A decentralized exchange wants to offer high-frequency trading pairs. They could use a rollup to bundle all of the trades together into a single batch and submit it to Ethereum. This would allow traders to execute trades quickly and cheaply.

Let's dive deeper into these scaling solutions.

<div id="channel"></div>

## **Channels**

Here, channels are again divided into two categories: **payment channels** and **state channels**. 

- **Payment channels** are a fast and cheap way to do transactions off the main blockchain. They allow two parties to create a private payment channel and conduct a series of transactions off the main blockchain. Payment channels work by locking funds in a contract and recording the final state of the transactions on the blockchain when the channel is closed.
- **State channels** are a type of scaling solution that allows users to execute smart contracts off-chain, without having to submit a transaction to the Ethereum network. This can significantly improve the scalability and performance of smart contracts, but it comes with some security trade-offs.
State channels are similar to payment channels, but they allow users to track the current state of a smart contract's storage, in addition to holding the user's balances. This makes it possible to execute a smart contract off-chain between two users.

Although channels can perform thousands of transactions per second at lower transaction fees. They have some limitations, including:

- **Liveness assumptions:** State channels assume that peers will always be online and available. If a peer goes offline, a malicious peer could steal their funds.

Example: Alice and Bob open a state channel to bet on a football game. If Bob goes offline before the game is over, Alice could steal his funds by closing the channel and claiming the full bet.

- **Data unavailability:** State channels require users to have access to the latest state of the channel. If a user loses this data, they could lose their funds to a malicious peer.

Example: Carol opens a state channel with a merchant to buy goods. If Carol loses her phone containing the latest state of the channel, the merchant could steal her funds by closing the channel and claiming the full payment.

- **Liquidity issues:** To establish a blockchain channel it require users to lock funds in a smart contract for the channel's lifecycle. This can reduce liquidity and make state channels inaccessible to some users.

Example: David wants to open a state channel with a friend to play video games. However, David does not have enough funds to lock in the smart contract to establish the channel. As a result, David is unable to play video games with his friend using the state channel.

- **Griefing attacks:** State channels are susceptible to griefing attacks because the honest party must respond to every dispute, even invalid ones, or risk losing funds that's where a malicious peer could force the honest party to spend money on gas fees.

Example: A malicious peer could repeatedly send the honest party invalid state updates, forcing the honest party to pay gas fees to respond to each dispute. 

Read more on the state channel [here](https://ethereum.org/en/developers/docs/scaling/state-channels/)

<div id="rollup"></div>

## **Roll-ups**

There are two types of rollups: Optimistic rollups and Zk rollups.

![Rollups.jpg](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/7f3c9d011140e5b8c196433dd7aad61c.jpg)
###### Rollups

## **Optimistic rollup**

As mentioned above, the [optimistic rollup](https://blocktheory.com/blog/optimistic_rollups/) executes transactions outside of Ethereum but posts transaction data to the Mainnet.

Optimistic rollups assume that off-chain transactions are valid and do not provide proof of validity for transaction batches posted on-chain. This is different from zero-knowledge [rollups](https://blocktheory.com/decoded/rollups/), which publish cryptographic proofs of validity for off-chain transactions.

Optimistic rollups use a fraud-proving scheme to detect incorrect transactions. After submitting a rollup batch on Ethereum, there is a challenge period where anyone can challenge the results of a rollup transaction by providing fraud-proof.

#### **Limitations**

- **Fraud proof delay:** Delays in transaction finality due to potential fraud challenges. Users must wait for the one-week challenge period to expire before withdrawing funds back to Ethereum.
- **Data availability problem:** Ensuring off-chain accessibility of full-block data is a challenge, as unavailability or corruption of data can compromise system security and integrity. Centralized and decentralized data availability solutions exist, but each has its own trade-offs.
- **Compatibility trade-off:** Optimistic rollups use the same execution model as Ethereum, so they share some of Ethereum's limitations and inefficiencies, such as high gas fees for complex computations.

## **Zk Rollups**

Zk rollups and optimism rollups are similar in how they process and bundle a large number of transactions. They handle computations off-chain and then consolidate them into a simpler transaction that is published to Ethereum's execution layer. Zk rollups also provide validity proofs to verify the accuracy of their changes.

In the Zk roll-up protocol, transactions happen on a separate virtual machine in the Ethereum blockchain. Off-chain virtual machines are used to execute Zk rollup transactions. Validity proofs on the Ethereum blockchain make sure that transactions on the off-chain virtual machine are accurate. Off-chain protocols work independently but are protected by the Ethereum mainnet. Ethereum guarantees the validity of updates and the availability of data after each update to the rollup's state. This makes Zk rollups safer than sidechains.

Read more about Zk rollup [here](https://zebpay.com/blog/what-are-zk-rollups#:~:text=Zero%2Dknowledge%20rollups%2C%20or%20Zk,than%20sending%20each%20transaction%20individually.)

#### **Limitations**

- **Trusted setup:** A potential risk for ZK rollups. This means that there is a small group of people who are responsible for generating the keys that are used to verify zero-knowledge proofs. If these people are compromised, the security of the ZK rollup could be at risk.
- **Centralisation risk:** ZK rollups rely on sequencers to order and batch transactions. If the sequencer is controlled by a single entity, that entity could censor transactions or manipulate their order.

<div id="future"></div>

## **What is the future of L2?**

Despite their limitations, optimistic and ZK rollups are promising scaling solutions for Ethereum. They have the potential to make Ethereum much more scalable and efficient and could revolutionize blockchain development.

Layer 2 solutions can address current challenges and shape the future of the industry. We can expect to see specialized and versatile scaling solutions emerge, as well as increased integration with Ethereum to improve usability and security. This integration will unlock new use cases and accelerate mainstream adoption.

large_Layer 2 scaling solution.png

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Layer 2 scaling solution.png

Discover Layer 2 scaling solutions like Plasma, Sidechains, Payment, State Channels, Rollups, and their transformative role in enhancing blockchain scalability, efficiency, and security.

Ethereum Layer 2 Scaling Solutions: Plasma, Sidechains, and Beyond

thumbnail_Adil_Profile_Picture.jpeg

Adil_Profile_Picture.jpeg

Adil Shaik

<div id="view"></div>

## Overview

As 2023 comes to its final quarter, we thought it would be an amazing idea to summarise some of the best Web3 reports out there on the latest happenings. Right from cryptocurrencies DeFi to the most hyped upcoming use cases, we've tried to list them all in short, digestible bullets.

We'll cover the market perspective, including the big crashes of '22 and the performances of cryptocurrencies. Trends on the Ethereum merge, and its impact, institutional investors' preferences, V.C. behaviour patterns for 2023, layer-2 scaling solutions, and NFTs are all included.

Next up, we’ll also cover global regulations and specific updates from countries like the US, UK, Hong Kong, and the EU. Lastly, we further explore the biggest developments in 2023, including new application-specific blockchains, rollups, corporate involvement in web3, game-fi, developer activity, and regulatory news.

In order to better understand how 2023 fared for crypto, it is key to understand how it was setup in 2022 because Web3 heavily relies on momentum.

<div id="market"></div>

## So, how was 2023 setup from a general market perspective for Web3?

- In short, not very good
- 3 big market crashes ([Terra](https://uk.finance.yahoo.com/news/how-crypto-fell-2022-eight-charts-story-of-cruel-crash-060058350.html?guccounter=1#:~:text=Brian%20McGleenon,Terra%27s%20UST%20stablecoin) in May '22, [FTX](https://uk.finance.yahoo.com/news/how-crypto-fell-2022-eight-charts-story-of-cruel-crash-060058350.html?guccounter=1#:~:text=The%20fifth%20domino%20%E2%81%A0%E2%80%93%20FTX) & [BlockFi](https://uk.finance.yahoo.com/news/how-crypto-fell-2022-eight-charts-story-of-cruel-crash-060058350.html?guccounter=1#:~:text=Sixth%20domino%20to%20fall%20%E2%81%A0%E2%80%93%20Blockfi) in Nov' 22) occurred, which impacted the overall market-cap of crypto to fall by 64% in 2022 vs 2021
- While this dropped the liquidity from $2.2Tn → $0.8Tn, the overall industry performed in-line with NASDAQ and other global indices when compared via the Sharpe Ratio of risk-adjusted returns, this was good news.
- A key trend predicted was that institutional investors would select digital assets based on factors like sustainable tokenomics, ecosystem maturity, and relative market liquidity, thus giving the edge to O.G.s like Bitcoin and Ethereum and while this was mostly true, investors also rallied on stablecoins USDT, USDC & BUSD to seek refuge from the bear run.

>Interestingly, bluechip tokens (BTC, ETH) had outperformed US bonds and stocks significantly even during the crypto winter

- Stablecoins shed $27.3 billion despite their increased dominance; USDT saw a decline in market cap of 16% ($12B). Conversely, USDC & BUSD each saw similar growth of ~$2B.
- Layer-2 scaling solutions were set to be the next big thing that would disrupt the market in 2023 with their promise of low fees and faster transactions, therefore making Ethereum the go-to base chain for new products.
- The successful Ethereum merge drastically reduced energy usage in Ethereum transactions by over 99%, addressing environmental concerns related to blockchain technologies.

![a16z web3 report.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/a31802f1c37f28c3488e2655eae8900a.png)
###### Here’s a great infographic to understand the significance of why the merge was such a big deal! / Image: a16z web3 report 

- The NFTs industry underwent a healthy correction mainly due to the skeptical atmosphere, but the overall industry was hopeful of cracking newer use cases in 2023
- Lastly, a key thing is the overall regulations that law-makers across the globe imposed on the industry in 2022 and the planned developments in 2023
    - In **10 of 20** G20 countries, representing over 50% of the world's GDP, cryptocurrencies are fully legal. Regulation is under consideration in all G20 countries.
    - Consumer protection rules are lagging. **Only one-third of the countries reviewed have rules in place to protect consumers.**
    - Of the 45 countries analyzed, **over 90% have active central bank digital currency (CBDC) projects** in addition to cryptocurrency regulations.
    - **Country Specific Regulation Updates**
        
        - US had a bipartisan approach, with congress divided on its views on cryptocurrencies. While it has people on extreme ends of the spectrum, an overall board has been set up that is actively creating regulatory frameworks on how new companies are established and how they can be kept in-check.
        - U.K.'s House of Commons, in Oct '22, voted to give H.M. Treasury (HMT) the power to make crypto-assets a regulated financial instrument
        - Hong Kong continues to lead global research and testing of a potential wholesale Central Bank Digital Currency (CBDC). In September 2022, the HKMA announced it would start paving the way for a possible implementation of the e-HKD through a 3-rail approach.
    - E.U.'s MiCA (Markets in Crypto-Assets Regulation) was all set to enter into force in 2024 based on its clearance in the European parliament in early 2023

>Overall, 2022 was a hallmark year for the industry as it pushed us into an extremely bearish market.

2023, therefore, was set up to become one of the toughest crypto winters for new entrants to survive while also giving enough room for tech to scale and let the corrected market recover itself.

And with that, onto 2023.
<div id="quarter_wise"></div>

## Quarter-wise Highlights of 2023

<div id="q1"></div>

### Q1 ‘23

- The CAGR of key metrics like Marketcap, General Interest, Developer Activity, and Number of Projects have all steadily increased despite the setbacks.
- Q1 had an extremely strong starting with almost 50% ($0.4Tn) of the lost market cap recovering.
- The Play-To-Earn (P2E) sector also saw a rather strong recovery, with 3 of 5 top tokens – WEMIX (+286%), IMX (+196%), and MANA (+98%) outperforming BTC.
- Besides building blockchains solely as ledgers for financial records, new application-specific blockchains have taken center-stage, like zksync, cosmos, optimism and polygon, which are laser-focused on specific use cases.
- 2 noteworthy product launches happened at the end of Q1 in the zero-knowledge (zk) space, namely zkSync Era & Polygon zkEVM; more on this in Q2
- BTC outperformed all other asset classes (Crude oil, Gold, NASDAQ, TLTs, Major Currencies) by a huge margin
- [Lido ](https://blocktheory.com/decoded/liquid-staking-derivatives/)Finance leads the Ether Staking DeFi Space with nearly a third of all transactions on its platform, followed by Coinbase and Kraken.
- Liquid Staking($4.2B) had the highest QoQ % Change (+210.9%) and overtook lending to become the 3rd largest DeFi category after DEX's ($11.7B) and Oracles(~$5B)


>Spot trading in DEXs grew by 18%, thus making DEXs grow faster than CEXs by almost 2x

<div id="q2"></div>

### Q2 ‘23

- Rollups were the latest advancement and the talk of the town in Q2. These claim to be pre-packaged services primarily built on layer-2 solutions which assist in offloading transactions from layer-1 and make them lightning quick and almost gasless.
- As of now 7% of Ethereum’s fees are being paid via L2 rollups and this percentage will soon skyrocket as demand increases.

>Zero Knowledge or ZK is the latest tech proposed which will enable chains to process more transactions per second and the tech advancements in this field are supposedly improving at Moore’s Law like pace (growing at 2x every 2 years)

- zkSync Era's TVL nearly 7Xed between Q1 & Q2, showing the amazing promise in zk tech.
- In the stablecoin space, USDT has regained its #1 position with a 66% market share. BUSD continues to drop to < 3%.
- Overall, in Q2, crypto companies globally raised $2.3 billion in venture capital across 371 investment rounds, representing a 14.7% decrease in QoQ deal value and a 16.3% decrease in the number of deals. Investors are far more picky and want to engage with serious players, given the jolting market correction.
- Other key tech advancements were in the fields of key management and making the DeFi experience more natural. Noteworthy topics were related to protodank-sharding, [account abstraction](https://blocktheory.com/decoded/account-abstraction-use-cases/), [multi-party computation](https://blocktheory.com/decoded/multi-party-computation/) and inter blockchain protocols.
- In the DeFi space, Liquid Staking Derivatives (LSDFi's) made headlines as they leveraged on the growing interest in Liquid Staking

We have decoded some of these new Tech & DeFi concepts in visually engaging stories in our series [Decoded]((https://blocktheory.com/decoded/)), do give it a try!

- An extremely thorough survey conducted by the team at Consensys & YouGov in Q2 revealed quite some interesting stats about the perception of Web3 in the global landscape; here are the key highlights.
    - **Strong Crypto Awareness** - Over 92% of the 15k surveyors demonstrated awareness of crypto
    - **Crypto Ownership** - Over 20% of participants owned some form of crypto, and over 57% believed it was an eco-friendly tech
    - **Entry Barriers** - Volatility + Fear of Scams was the highest barrier, closely followed by the complexity of the ecosystem and understanding its purpose and use cases.
    - Nigeria (65%) and Argentina (56%) show the highest motivation to own cryptocurrencies as a means to store value, given the instability of their local currencies; India (43%) considers it as an investment for the future.
- A major development was when the SEC in the U.S. filed Lawsuits against the industry OGs Coinbase and Binance on account of selling unregistered securities. More updates on this in Q3.
- Another big development was when the world's largest asset-managing fund house, BlackRock, announced that it was filing for a spot Bitcoin ETF, suddenly shifting the market sentiment into a bullish trend with a lot of traditional managers now wanting to jump on the bandwagon. More updates on this in Q3.

<div id="q3"></div>

### Q3 ‘23

- Web3 games have generated 23x more transactions than DeFi and can become one of the most important entry points for new users; Q3 saw Web3 gaming projects secure $600 million, pushing 2023 total investments to $2.3 billion.
- Both developer activity and the number of smart contracts that are being verified on the chain have been on the increase, which is an extremely good indicator of new product launches, growth, and general interest.

![a16z web3 report 2.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/9d57b64c71375e5a6a4e4a866bbe2be9.png)
###### A visual representation of the active number of verified smart contracts / Image: [The state of crypto by a16z crypto](https://a16zcrypto.com/posts/article/state-of-crypto-report-2023/)

- Another serious metric to measure the industry is the number of academic publications in the industry, and we've seen a rise in this, too, as more and more academia seem to be publishing papers on subject matters and tech advancements
- The average number of daily Unique Active Wallets (dUAW) interacting with decentralized applications surged 15% from Q2 2023, reaching an average of 2.2 million dUAW.
- Companies building in the broad Web3 categories have dominated V.C. deal counts, while companies specifically in the Trading category raised the total capital. Interest in A.I. demanded the creation of a new sector, focusing on the overlap between A.I. and crypto.
- While US-based crypto startups accounted for more than 35% of all deals completed and raised more than 34% of the capital invested by V.C. firms, the U.S. is now notably losing share on both deals and capital to countries like the United Arab Emirates, Singapore, and the U.K., all of which have more progressive crypto regulatory frameworks.



>With more than $699 million lost across 184 security incidents, Q3 has been 2023's most eventful quarter security-wise. 
>
- For reference, Q1 saw a total of $320 million lost and Q2 $313 million, meaning Q3's losses eclipse those throughout all of H1 2023.
- North Korea's state-affiliated Lazarus Group is one of the key actors currently exploiting the security space. Private key compromises were the next highest contributing factor.
- As for the allegations charged by the SEC on Binance and Coinbase, the request made to freeze's Binance's U.S. assets was rejected by the court and the latest update is that [Coinbase will respond to the SEC on Oct 24th](https://www.binance.com/en/feed/post/1258248) having filed a motion to dismiss their case.
- A social media rumor claiming that the SEC had approved BlackRock's ETFs rallied Bitcoin and other blue-chips instantly, and when BlackRock denied this news, nearly $100M of short trading positions were liquidated in 24 hours. Despite this, the global crypto market cap currently stands at $1.06 trillion (as of Oct 16th), reflecting an increase of 0.89% in the past 24 hours, which is great news for the market as a whole.

And that's about it! You're now upto speed with all the biggest noteworthy updates of the year!

<div id="conc"></div>

## End note

Though 2023 was slow and bearish for the greater part, a major outcome was the disappearance of all the gimmicky products that had plagued the industry. With investors being on the edge and keeping a tight check on their purse strings, only serious builders now have the runway to sustain.

A much-needed correction coupled with a global recession has currently put the surface of Web3 on a standstill (of course, lots of ongoing micro-movements remain)

Interestingly, a large part of 2022's market cap loss has been successfully recovered, which can't be said the same for tradfi spaces as the undercurrents are still buzzing with cutting-edge developments, and the potential of the future of the web rests amongst these builders.

### References

[2023 Crypto Market Outlook](https://www.coinbase.com/institutional/research-insights/research/market-intelligence/2023-crypto-market-outlook)

[2023 State of Crypto Report: Introducing the State of Crypto Index - a16z crypto](https://a16zcrypto.com/posts/article/state-of-crypto-report-2023/)

[Web3 Development Report (Q4 2022)](https://www.alchemy.com/blog/web3-developer-report-q4-2022)

[Cryptocurrency Regulation Tracker](https://www.atlanticcouncil.org/programs/geoeconomics-center/cryptoregulationtracker/)

[Web3 and crypto global survey 2023 | Consensys web3 report](https://consensys.io/insight-report/web3-and-crypto-global-survey-2023)

[Q2 2023 Crypto Report | PitchBook](https://pitchbook.com/news/reports/q2-2023-crypto-report)

[2022 Annual Crypto Industry Report | CoinGecko](https://www.coingecko.com/research/publications/2022-annual-crypto-report)

[2023 Q1 Crypto Industry Report | CoinGecko](https://www.coingecko.com/research/publications/2023-q1-crypto-report)

[2023 Q2 Crypto Industry Report | CoinGecko](https://www.coingecko.com/research/publications/2023-q2-crypto-report)

[Crypto & Blockchain Venture Capital](https://www.galaxy.com/insights/research/crypto-and-blockchain-venture-capital-q3-2023/)

[State of the Dapp Industry Q3 2023](https://dappradar.com/blog/state-of-the-dapp-industry-q3-2023)

[Hack3d: The Web3 Security Quarterly Report - Q3 2023 - Blog - Web3 Security Leaderboard](https://www.certik.com/resources/blog/1dloJV023Tm4ajXiluRctb-hack3d-the-web3-security-quarterly-report-q3-2023)


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Get in depth insights on the Crypto market via quarterly compiled Web3 reports

We read the best Web3 reports of 2023 and compiled the highlights so you don’t have to (Here’s all that you need to know)

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Murugan Dhamodharan

<div id="intro"></div>
Scalability is the major issue when it comes to Ethereum & other EVM-based blockchain networks. These networks have limited processing capacity, which results in high transaction fees & long transaction processing time. To overcome this problem, Layer 2 scaling solutions, such as Rollups, Plasma, and Sidechains, have emerged. In this article, we will focus on how Layer 2 solutions are scaling Ethereum & other EVM-based networks, specifically via optimistic rollups. 

<div id="layer2"></div>
## What is Layer 2 in Blockchain? 

Layer 2 refers to a set of off-chain solutions that are built on top of Layer 1 blockchain to address scalability issues. This works by creating a secondary framework that does not require the Layer 1 chain.

Layer 2 can improve on two fronts:

1. **Transaction Speed** (the amount of time it takes to complete a transaction), and,

2. **Transaction Throughput** (the number of transactions that a network can process in a given amount of time).

When the Layer 1 network gets overloaded,  Layer 2 can pick up the load to improve transaction time and lower transaction fees.

There are various other ways through which LAYER 2 can solve the scalability issues and one such way is via Rollups

<div id="rollups"></div>

## LAYER 2 Rollups

Layer 2 (Rollup) helps Ethereum handle more transactions efficiently. It works by processing transactions separately from the main Ethereum network (L1). However, Rollups still rely on the main Ethereum network to validate and keep a permanent record of the transactions.

The main idea behind rollups is to free up space on Ethereum's main network (L1) while making sure that L1 can verify everything is accurate and correct. This means we can handle more transactions and keep gas fees low, all while keeping Ethereum secure.

Now, Rollups are divided into two broad categories- optimistic rollups and zk-rollups. 

<div id="types_rollups"></div>
Let's understand the difference between the two below-

### Optimistic Rollups vs ZK-Rollups

| Optimistic Rollups  | ZK-Rollups  |
| --- | --- |
| Optimistic Rollups are called "optimistic" because they assume that all Layer 2 transactions are valid by default until proven otherwise. | ZK-Rollups use advanced cryptographic techniques known as zero-knowledge proofs to prove the validity of transactions without revealing the specific details of those transactions. |
| Transactions are processed off-chain, and only a summary of these transactions, often called a "rollup," is periodically submitted to the Ethereum mainnet (or the relevant Layer 1 blockchain). | ZK-Rollups do not rely on a challenge period because the cryptographic proofs themselves serve as strong evidence of validity. These proofs demonstrate that the execution of transactions is correct without disclosing the transaction data. |

Let's talk about Optimistic Rollups in detail-

<div id="opti_rollups"></div>

## What are Optimistic Rollups?

Optimistic Rollup is an off-chain scaling solution built on top of the Ethereum network. It works by grouping off-chain transactions into big bundles before sending them to Ethereum Mainnet. This way, optimistic rollups can spread out the fixed costs over many transactions, which means lower gas fees for users.

It does not require building an entirely new security infrastructure from the base. Instead of creating its own security rules, Optimism takes a different route. It extends an invitation to Ethereum, saying, "Hey, Ethereum, you're exceptionally good at keeping things secure. Can we borrow your security protocols for our transactions?"

Hence, Optimistic rollups rely on Ethereum's tried-and-true security measures to ensure the safety and integrity of its transactions. Once a rollup batch is sent to Ethereum Mainnet, there's a time period called the "challenge period." During this time, anyone can question a rollup transaction by providing evidence of a problem.

If the evidence shows there's a problem, the rollup system will redo the transaction and fix the issue. Also, the person in charge (the sequencer) who made the mistake will face consequences. If no one challenges the batch after the time period, it means transactions are accurately executed, and Ethereum accepts it as a valid transaction.

Users have often complained about optimistic rollups- that it takes 7 days to execute transactions on the Ethereum main network (L1). However, this one-week wait only affects certain types of transactions, specifically when you want to move your digital assets from the Rollup back to Ethereum.

But for regular transactions within the rollup system itself, things happen almost instantly. This quick confirmation is possible due to the sequencer- responsible for order and execution. It does not take advantage of making a profit via user transactions.

Let's dig in deeper and look at the architecture of optimistic rollups -

<div id="arch_op_rollups"></div>

## Architecture of Optimistic Rollups

Optimistic Rollups are a layer 2 scaling solution for blockchain networks designed to improve scalability and reduce transaction costs. In this system, the "sequencer" plays a crucial role, much like a librarian. Here's how it all comes together:

### Transaction Handling (Checking Out Books)

Users submit transactions to the Optimistic Rollup network, which are similar to borrowers in a library checking out books. The sequencer, acting as the librarian, receives these transaction requests. Just as a librarian checks if books are available and borrowing forms are correctly filled out, the sequencer verifies the validity of these transactions. It ensures they adhere to the rules of the blockchain.

![Transaction-handling_1.gif](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/5a8755ed4233599d1061ce2c0f2e288c.gif)

### Block Creation(Creating Borrower's List)

With valid transactions in hand, the sequencer compiles them into a new block into what we call L2 blocks, akin to creating a borrowing list. To maintain the integrity of this block, the sequencer calculates a unique code (cryptographic hash). It adds a timestamp to it, much like stamping the borrowing list with the library's seal.

![Block-creation_1.gif](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/8d7d2f2c5a9c81c0714715ed65e21b9f.gif)

### Sequencer Batches (Grouping Borrowers):

To efficiently manage the increasing number of transactions, the sequencer groups them into batches, just as the librarian organizes borrowing lists from multiple people into batches. Batching transactions streamlines the process and reduces the computational load on the network, ensuring scalability.

![Batch-sequencer_1.gif](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/8b4d377b55f931267fe46983b38231e0.gif)

### Data Delivery (Sharing the Borrowing Lists):

Now, the sequencer broadcasts the completed block (borrowing list) to the Optimistic Rollup network. The batcher's mission is to send these sequencer batches to a data availability provider, such as Ethereum Calldata. In the library analogy, this is similar to the librarian announcing over the intercom that a new batch of borrowing lists is ready for review (data delivery).

![Data-Delivery_1.gif](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/dbfd1550e2769824cdad4d3fda50eaf7.gif)

In the Optimistic Rollup network, there are other participants known as **"validators"** or **"challengers."** Validators are like diligent library staff who double-check the borrowing lists.

They verify the correctness of the transactions within the block by examining the cryptographic proofs provided by the sequencer, just as library staff ensure that the books borrowed match the list and that the library seal is intact (validation).

If a validator detects any fraudulent or invalid transactions, they can raise a challenge, much like a library staff member questioning a borrowing list. Once the block is deemed valid and any disputes are resolved, it becomes an integral part of the Optimistic Rollup blockchain's history.

Similarly, in the library, once borrowing lists are validated and disputes, if any, are resolved, they become part of the official library record. The borrowed books are considered checked out and added to the library's ledger.

<div id="block_batch"></div>
In the context of Optimistic Rollup, where validators ensure the integrity of transactions and maintain the blockchain's historical record, it's crucial to recognize the importance between an L2 block and a sequencer batch.

## L2 Block: 
Imagine an L2 block as a complete chapter in a book. It's a self-contained entity that comprises a set of transactions. Moreover, it includes a reference, known as the L2 state root, which summarizes the state of affairs after those transactions have been executed. It's the chapter with a title and a summary.

## Sequencer Batch: 

In contrast, a sequencer batch is akin to an annotated timeline of events. It precisely indicates when specific transactions occurred within an L2 block, much like time stamping each event in chronological order. It's the detailed record of events within the chapter.

Why does this distinction matter? Well, even if there's an unexpected hiccup in how the sequencer processes the state within an L2 block, fear not! The sequencer batch remains steadfast, storing the record of individual transactions.

Rest assured; stringent validation procedures are in place for both sequencer batches and individual transactions within them to ensure correctness. Any anomaly, such as incorrect encoding or faulty signatures, is promptly identified and discarded.

In rare events, the sequencer commits a substantial error and provides an inaccurate output root. A failsafe mechanism stands ready to challenge & rectify the mistake, safeguarding the accuracy and integrity of data.

While validators and the distinction between L2 blocks and sequencer batches play a central role in Optimistic Rollup, another pivotal component in this ecosystem is the batcher.

<div id="role_of_batcher"></div>

## Streamlined Data Propagation: The Role of the Batcher

The batcher, a critical component in this ecosystem, handles the submission of batcher transactions to a data availability provider. These transactions contain one or multiple channel frames, which are chunks of data belonging to a channel.

But what exactly is a channel? A channel is a carefully curated sequence of sequencer batches spanning multiple L2 blocks compressed together. The rationale behind grouping multiple batches into a single channel is to optimize data storage and reduce data availability costs. It's akin to bundling chapters from various books into a single, more efficient volume.

Now, considering that channels can sometimes become voluminous, much like lengthy chapters in a book, there's a need to break them down into more manageable parts known as "channel frames." These channel frames serve as smaller subsections, akin to chapters within a chapter. They are the finer segments of the overarching story.

The beauty of this design lies in its flexibility. It empowers us to aggregate batches into channels and distribute channels across more batch transactions in the most efficient manner possible. This flexibility ensures that we make the most of our data resources, even allowing us to cleverly pack a smaller fragment from one chapter with larger segments from another.

Furthermore, in the future, this design allows multiple 'signers' with private keys to work together and submit several transactions or data channels simultaneously. This teamwork becomes essential when the order of transactions and their interconnections matter.

One of the most noteworthy aspects of this approach is that we don't need to predetermine the eventual size of a channel. It's akin to starting to read a book without having a clue about the total number of chapters it holds.

By segmenting channels across multiple data transactions, we gain the ability to handle more extensive datasets than the traditional data-availability layer might conventionally support. It's like having a book with chapters that are too numerous to fit in a single volume, so we cleverly distribute them across multiple volumes for ease of access.

Please keep in mind that the process we've explained is specifically for regular L2-to-L2 transactions. However, it's important to note that there are different steps for two other types of transactions: when you're moving assets from Ethereum to the rollup, called Deposit(L1-to-L2) and when you're moving assets from the rollup back to Ethereum, called Withdrawal (L2-to-L1).

### Deposit:

Deposited transactions, often called deposits, are transactions that start on Ethereum's main network (L1) and then move to the Layer 2 network (L2) for execution. These transactions have some important differences compared to regular ones:

#### Origin from Layer 1 Blocks: 

Deposited transactions emerge from Layer 1 blocks, and they are an integral part of the protocol. They carry the legacy of Ethereum's main network.

#### No Signature Validation: 

Unlike standard transactions, deposited transactions don't require signature validation.

#### L2 Gas Payment on L1: 

Deposited transactions cover their L2 transaction costs right from Ethereum's main network (L1). These costs are non-refundable, ensuring a seamless financial transition.

### Withdrawal:

Withdrawals are like transactions that start in one place (L2) and finish in another (L1). They can be used by an L2 account to do things like interact with an L1 contract or move ETH from L2 to L1.

Here's a closer look at the different stages of withdrawals:

#### Withdrawal Initiation: 

To kickstart the withdrawal process, an L2 transaction is sent to the Withdrawals pre-deploy on L2.

#### Withdrawal Verification: 

Now, on the L1 side of things, we have an L1 transaction that serves as proof, confirming that the withdrawal is legitimate. This proof shows that the withdrawal has been included in a Merkle tree, with its root accessible on L1.

#### Withdrawal Finalization:

The final step happens back on L1. An L1 transaction takes charge of finalizing and transmitting the withdrawal, ensuring that the fault challenge period has passed since the withdrawal proof was established.

What makes withdrawals unique is that unlike deposits, which have a dedicated transaction type in the execution engine client, withdrawals rely on smart contracts on L1 for their completion. It's a journey that spans both Layer 2 and Layer 1, offering versatility and functionality.

We'll explore Deposits and Withdrawals further in upcoming articles, offering in-depth explanations.

## Reference

https://community.optimism.io/docs/protocol/2-rollup-protocol


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A closer look at how Optimistic Rollups work and their significance in addressing scalability issues in blockchain networks.

Optimistic Rollups-Supercharging Ethereum Scalability for Lower Gas Fees

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Goutham JM


<div id="intro"></div>
Have you wondered why MEV attacks have become a critical issue in a blockchain network?

In April  2023, Ethereum MEV bot was attacked, reportedly by one of the blockchain's validators, causing a loss of over $20 million. Moreover, [Bank of International Settlements](https://laweconcenter.org/resources/mev-on-ethereum-a-policy-analysis/?doing_wp_cron=1695259431.8508939743041992187500) (BIS) has estimated that somewhere between $550 - $650 million of total MEV has been extracted since 2020.*

Let's understand the concept of Maximum Extractable Value/ Miner Extractable Value (MEV) in detailed manner-
<div id="mev"></div>
## What is the Maximum Extractable Value (MEV)?

MEV is the acronym for Maximum Extractable Value or Miner Extractable Value. MEV occurs when the miners can make money by rearranging, adding, or leaving out transactions in a block. Simply put, these block producers can decide which transactions go first on the blockchain and use that control to benefit themselves at the expense of users.

<div id="his"></div>
## History of MEV

#### 2014

The concept of Miner Extractable Value (MEV) was initially discussed in 2014 on Reddit when an algorithmic user under the pseudonym Pmcgoohan speculated that miners might have the ability to manipulate transactions within the mempool to gain a profit. Pmcgoohan raised concerns about the transparency of miners being able to see and potentially reorder transactions, raising the possibility of front-running and other forms of manipulation.

#### 2019

However, the term "MEV" gained widespread recognition in a 2019 research paper titled "Flash Boys 2.0," authored by Phil Daian and a team of smart contract researchers. In this paper, MEV was formally introduced as "miner extractable value," referring to the total amount of digital assets (ETH in Ethereum's case) that miners could extract by manipulating the order and including transactions within a given time frame. At that time, MEV was primarily discussed in the context of proof-of-work (PoW) consensus mechanisms, where miners held significant control over transaction processing.

#### 2022

When Ethereum transitioned from a PoW to a proof-of-stake (PoS) consensus mechanism during The Merge in 2022, the term "MEV" evolved to "Maximal Extractable Value" to encompass a broader range of methods that miners and validators could use to max their profits.

<div id="mevwork"></div>
## How does MEV Work?

_"Blocks recorded in a blockchain are immutable. Once the information is stored, it cannot be changed. However, before a transaction is approved, validators can include, remove, or reorder it in a future block. Every unconfirmed transaction is first routed to the public mempool. Validators then choose which transactions from the mempool to include in the block. Consequently, transactions are chosen based on profitability, meaning those with high gas fees are chosen first. This is why, during peak periods, users pay higher gas fees (or transaction fees) to ensure their transactions are prioritized."_

Validators benefit more if they select transactions with the highest fees. As a result, lower-fee transactions have to wait longer to be included in a block. In this way, the validators make the most profitable combination from the user transactions for themselves.

A significant portion of MEV is extracted by searchers and their automated tools rather than validators. When a searcher spots a chance to make a profit, they bundle together a group of transactions. Validators then approve these transactions to extract MEV.

![MEV Flow.jpg](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/3499e0dc29d316b271bee378841c2f03.jpg)

_Let's consider a hypothetical example and understand MEV concept in a more simplified manner-_

Imagine you want to exchange 50,000 US dollars (USD) for 500 ETH on a decentralized exchange (DEX) with a USD/ETH liquidity pool. Here's what happens:

Mempool runs an automated bot on the Ethereum network that closely watches unconfirmed transactions. These bots collect data from various DeFi applications, including their liquidity volume, price, etc.

When the bots detect that a user intends to buy ETH by submitting a transaction to the DEX, they intervene and manipulate the situation.

Bot decides to increase the price of ETH just before your transaction gets executed. To achieve this, bots add a significant amount of USD to the USD/ETH liquidity pool, which reduces the total ETH the user will receive for their USD.

Due to the bot's actions, your expected exchange rate of $100 per ETH changes instantaneously. Let's say it increases to $120 per ETH due to the bot's intervention.

Eventually, the user's transaction is executed, but not at the rate they initially expected. Instead of receiving 500 ETH for their $50,000, they ended up with only 416.67 ETH due to the altered exchange rate.

The entity behind the bot, typically a validator or a specialized MEV extractor, earns the difference between the original exchange rate and the manipulated rate. In this case, they profit from the 83.33 ETH difference (500 ETH - 416.67 ETH at $120 per ETH) minus any commission or transaction costs associated with their MEV strategy.

<div id="players"></div>
## Key Players in the MEV Process

![mev 2.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/69630f857da53818214d14779ee8548a.png)

### Users

Users are the individuals who initiate transactions from big institutions to everyday retail users. These users set the stage for MEV opportunities with their transactions and orders. By default, these users send their transactions into the public memory pool, where all the action unfolds.

### dApps

dApps serve as the bridge between users and the blockchain. They provide users with the means to interact with the blockchain. Users can send transactions through a private relay.

**Example**: Uniswap , Aave
### Searchers

Searchers identify MEV opportunities in the mempool and generate transactions that extract value from those opportunities.Searchers are always looking for MEV opportunities and employ various strategies.

They actively participate in the MEV process by often engaging in a bidding war with outrageous gas prices in on-chain Priority Gas Auctions (PGAs). This bidding frenzy aims to influence how transactions are ordered within blocks by block producers.

Additionally, they use MEV extraction tools like Flashbots to communicate their transaction sequencing preferences to block producers off-chain. It's a way of orchestrating the order of transactions to their advantage.

**Example:** bloXroute , Flashbots

### Builders

Builders are individuals or organizations who assemble blocks by selecting transactions from the mempool and ordering them to maximize MEV.
**Example**: Eden , Flexpool

### Block Producers

In the MEV process, block producers can seize opportunities in several ways. First, they can sell precious block space to non-miner MEV extractors. This is often done through Priority Gas Auctions (PGA), and it involves charging high gas fees in exchange for access to the limited space within a block.

Alternatively, block producers can opt to capture MEV for themselves directly. They do this by re-sequencing transactions, which can involve adding, removing, or altering the order of transactions to benefit their interests.

<div id="mevattack"></div>

## Most Common MEV Attacks

The most common types of MEV attacks are mentioned below-

### Front-Running

Here, Hacker jumps ahead of a known pending transaction in the queue. They do this with the help of specialized front-running bots that monitor DEX for large orders. These bots then submit their own transactions with higher gas fees, ensuring they get processed before the user's transaction. Front-running is largely used for DEX arbitrage, where arbitrage bots purchase tokens on one DEX at a lower price and sell it on another exchange at a higher price.

![Front running .png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/89e3fa6e9c5aa0211d1b457fa39f2d34.png)

### Back-Running

Back-running occurs when a validator places their transaction right after a known pending target transaction. To do this, searchers employ back-running bots, which keep an eye on the mempool for new token pair listings or liquidity pool creations on DEXs.

When these bots spot a new token pair listing, they swiftly place a transaction order just after the initial liquidity setup. They aim to purchase as many tokens as possible, leaving only a small quantity for other users. Subsequently, the bot waits for the token's price to rise after other users buy what's left and then sells the tokens at a higher price to make a profit.

![backrunning.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/4387da00ff98ba6c39cd2c37b2a52bdb.png)

### Sandwich Trades

A sandwich attack is a combination front-running and back-running where a validator strategically places two transactions around a pending user's transaction - one before and one after. This tactic commonly extracts MEV from unsuspecting users on decentralized exchanges.

The validator's goal is to manipulate the price of a specific asset. They achieve this by identifying a token that the user intends to buy. Then, they execute a trade to push the token's price higher. After that user's buy order further raises the token's price, the validator sells the token and makes a profit at a high price.

![sandwhich trade.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/464ae020e993a3a7744191393ecdd03f.png)

**Example:**

In this [transaction](https://eigenphi.io/mev/ethereum/tx/0x4cb14b19dfff6d4aee93b92bcfdf9f4e01b15ef35f1b3aff24f20327cab4ae36
), the attacker launched a sandwich attack, where users were trying to swap from OCISLY token to WETH and made a profit of $65,217

![example.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/a4b887310f8b3b479c61f74ff62b30f1.png)
![victim.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/7b13a80a09958a84c814751c9ef0608a.png)
![backrun.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/29746e466fc1163d30b1171566ce3b0d.png)

### Loan Liquidation

Liquidation aims to extract MEV by focusing on collateralized loans within decentralized on-chain protocols. To execute these liquidations, searchers use automated bots to monitor the network continuously. These bots actively seek out transactions that present opportunities for liquidation.
The liquidators then take swift action, either front-running or back-running these transactions, to be the first to liquidate a loan. Their method involves extracting MEV from borrowers by initiating the liquidation before the borrowers can repay their debt. Subsequently, the liquidators profit by selling off the collateral the borrowers had put up as security.

**Example:**

In this [transaction](https://eigenphi.io/mev/ethereum/liquidation/tx/0x54755dc479bcd0f3db933dabcee925615666a664e6960e198cad139f100278dc), the attacker used flash loans and made a profit of $22,446.20

![liquadation attack.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/e25b0fb794589afc7c8f42f36ddbefef.png)

### NFT Snipping

When new NFTs are minted, people usually use regular Ethereum transactions to buy them. Searchers looking to make the most of the priority game in these NFT drops usually use traditional MEV extraction techniques - gas fee bidding, to gain priority in block ordering and secure a minted NFT. But these searchers go way ahead. They leverage platforms like Flashbots to incentivize validators. Their objective is to bundle multiple NFT purchases within a single block. Once the block is successfully mined, the NFT creator cannot adjust floor prices or delist NFTs. This occurs even if the searcher has acquired every NFT in the drop at its initial floor prices. This type of extraction was first seen in full when an entire line of CryptoPunk NFTs was sniped by a single buyer with the help of a validator.

**Example:**

One prominent [NFT](https://etherscan.io/txs?a=0x650dCdEB6ecF05aE3CAF30A70966E2F395d5E9E5&p=23) MEV attack occurred when a searcher spent $7 million buying every Cryptopunk at the price floor.

![NFT snipping .png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/bfea30b3282f9a7eda0a12acca57098a.png)

<div id="effects"></div>
## Effects of MEV

There are several repercussions of the MEV attacks -

1. MEV significantly impacts the effectiveness and fairness of the market within blockchain networks by distorting the system of natural price discovery. It creates market inefficiencies, resulting in higher transaction costs and decreased trust in the ecosystem.

2. MEV tactics like front-running and back-running may exacerbate volatility in the markets.

3. MEV can give rise to "dark pools," controlled mempools operated by block producers that directly share MEV profits with users, giving rise to concerns regarding centralization.

4. The surge in gas prices also impacts regular users, who must either match high fees or risk experiencing delays in their transactions.

5. Priority gas auctions (PGAs) further exacerbate the situation. Bots engaged in this practice send the same transaction multiple times, resulting in an increased volume of transactions and causing node operators to invest in higher bandwidth capacity to run nodes.

<div id="con"></div>
### Conclusion

In conclusion, while MEV attacks have presented significant challenges in blockchain, it's important to recognize that the blockchain community is actively working to address these issues. MEV mitigation strategies are continually evolving, driven by the collaborative efforts of developers, researchers, and the wider crypto ecosystem. From smarter contract design to innovative protocols like Flashbots and even fundamental changes in consensus algorithms, the landscape of MEV solutions is dynamic and adaptive.

_The next article explores the solutions and the prospective strategies for countering MEV attacks._
### Reference links

https://explore.flashbots.net/
https://docs.flashbots.net/
https://collective.flashbots.net/


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Comprehensive Guide to Maximum Extractable Value -  Learn what MEV is, how it works, key players involved in the process, and types of MEV attacks

Rise of Maximum Extractable Value (MEV): How Miners Make Profit 

<div id="intro"></div>
This article delves into the realm of securing digital assets and explores different methods for delegating key responsibilities among multiple parties. And, how innovative solutions like Multi-Party Computation (MPC) and the Threshold Signature Scheme (TSS) have paved the way towards secure MPC based TSS wallets, addressing the intricate challenges associated with managing digital assets.

As discussed in the [previous](https://blocktheory.com/blog/current-web3-wallet-key-management-landscape-and-how-mpc-is-reshaping-it/) blog post , that conventional crypto wallets have a problem , *once key is lost, all the assets associated with the wallet is lost*. Instead of getting caught up in the idea of making copies of the key, let's think about doing something different ! 

What If, we **share the responsibility of managing the key with multiple parties** 

This responsibility of distributing the key with multiple parties strengthen the security of private keys by reducing the chances of permanent loss due to misplacement or attacks. Moreover, in situations of urgency, a multi-party key management system has the capability to retrieve lost keys.


Lets look at the evolution of different methods that have been designed to make your digital assets ‘SECURE’ - 
<div id="multi_sig"></div>
##Multi Signature Wallets ( Multi Sigs)

Imagine you have a self custodial wallet that holds your digital assets. Now, instead of just having one lock and one key to open your wallet, multisig sets up multiple locks and keys for this wallet. This means that to access your digital assets, you need a certain number of keys to work together. This sharing of key responsibility adds an extra layer of security to your assets.

![Multisig.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/1ac2f33fd3d8a1bd2a67f5497ee5d561.png)



| Pros | Cons |
| --- | --- |
| The security of wallet is strengthened- incase even one key is compromised, the entire wallet remains secure. | Multi Signature wallets are not compatible with all the blockchains. |
| It's possible to recover and create backups through trusted parties. | One significant downside of multisig wallets is that their transaction speed is relatively slow because they depend on multiple parties to approve the transactions. |


<div id="shamir_secret"></div>
## Shamir-Secret Sharing Scheme (SSSS)

It divides the key into multiple parts, or shares, and distributes them among different participants. A predefined number of shares are required to sign the transactions, but any subset of shares(shares=n) is fewer than that threshold value(threshold value = t) , the results aren’t generated. (t<n).

![Shamir Secret Sharing.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/75bedd312e7420ee0f6a75cef2d644cc.png)


| Pros | Cons |
| --- | --- |
| It provides a unique advantage in terms of flexibility and extensibility. The algorithm allows the secret owner to adjust the number of shares, add new shares, modify existing shares, or even remove shares without requiring any changes to the original secret. | SSSS has a major drawback: When the key is generated initially or reassembled to unlock the wallet, it is again stored in its original full form. This weakness or storage of keys locally is prone to cyberattacks.  |
| SSS supports disaster recovery scenarios. If some shares are lost or compromised, the secret can be reconstructed by gathering the required threshold of shares. This ensures data resilience. | The reconstruction process depends on a stable network connection if shares are distributed across different locations. Network disruptions could impact the process. 


Can we design a system where multiple keys are always kept separate and never combined, while still appearing as a single lock?

This is precisely what Threshold Signatures achieve. These signatures are built on the principles of Multi-Party Computation (MPC) in cryptography. Think of Threshold Signatures as a fusion of the strengths from both Shamir's Secret Sharing Scheme (SSS) and MultiSig.

<div id="threshold_sign"></div>

##Threshold Signature Scheme (TSS)

At its core, TSS operates by necessitating a selected subset of authorized participants to collaboratively generate digital signatures on behalf of a collective entity. The crux of this mechanism rests upon the concept of a "threshold" value, denoted as 't,' which signifies the minimum number of participants  required for the successful generation of a valid signature. Correspondingly, the aggregate number of participants is designated as 'n.' This threshold safeguard ensures that no single participant—whether unintentionally or maliciously—can autonomously execute a signature. Instead, the collective participation of a  minimum number of signatories is requisite, thus adding extra layer of security.

In a broader context, the integration of TSS has the potential to profoundly impact the architecture of key management systems in crypto wallets, and pave the way for seamless integration within decentralized finance (DeFi) use cases.

![TSS.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/a64740cba7d797720b94c04b596ccdd4.png)


| Pros  | Cons |
| --- | --- |
| It is significantly harder for attackers to gain access to a TSS-based crypto wallet, because there is no single point of failure – multiple parties must be compromised in order to get access to the private key. | TSS wallets might have limited compatibility with existing cryptocurrency networks and platforms. Not all blockchains support TSS-based transactions, which could restrict their usage. |
| By involving multiple parties in transaction signing, MPC-based TSS wallets distribute trust. This minimizes reliance on a single trusted entity or third-party, aligning with the decentralized nature of blockchain technology. | TSS are primarily designed for secret sharing and reconstruction, which may not be suitable for all cryptographic applications. Their usage is mainly focused on scenarios where a secret needs to be distributed among multiple parties securely. 


<div id="multi_party_comput"></div>

## What is **Multi- Party Computation ?**

Multi-Party Computation (MPC) stands as a cutting-edge cryptographic innovation, offering a secure haven for collaborative computations among multiple participants. This technique help individuals to collectively process functions over their individual private inputs, all while keeping those inputs hidden from each other. 

Instead of entrusting sensitive data to a central entity, MPC orchestrates a unique approach: it fragments the data into encrypted fragments, enabling a group of participants to carry out computations on this distributed information without compromising its confidentiality.

> MPC is a ‘**keyless solution’** since no private keys are shared across the network, only ‘separate’ key shares form the signature.
> 

##How Does MPC Work ?

Imagine a scenario where John, Alice, and Charlie want to find out who among them has the highest salary, but they don't want to reveal their actual salary amounts to each other. They decide to use MPC to solve this problem securely.

1. **Setup**: John, Alice, and Charlie agree on a secure MPC protocol and generate cryptographic keys. These keys are used to encrypt and protect their private information.
2. **Input Sharing**: Each person privately shares their salary information using a cryptographic technique called secret sharing. For example, Alice splits her salary into two parts: one encrypted share goes to John, and another encrypted share goes to Charlie. John and Charlie do the same with their salaries, sharing encrypted pieces with the other participants.
3. **Computation**: Using the encrypted shares they received, John, Charlie, and Alice can jointly perform computations without decrypting the shares. In this case, they compare the encrypted salary shares to determine the highest one.
4. **Result Extraction**: After the computation, the MPC protocol produces an output without revealing any individual's salary. For example, the output could indicate that "Alice” has the highest salary" without disclosing the actual salary values.

In this hypothetical example, MPC allows John, Alice and Charlie to collectively determine the highest salary without exposing their individual salary amounts. Each participant keeps their salary private and only contributes their encrypted share for the computation. Through MPC, they can collaborate on finding the answer while keeping their personal information confidential.

Multi-party computation (MPC) protocols must guarantee two fundamental properties: privacy and accuracy.

1. **Privacy**: A robust MPC protocol ensures that the private information held by the participating parties remains concealed and cannot be deduced from the protocol's execution. This means that even if an adversary actively observes the protocol's interactions, they should not gain any knowledge about the individual inputs or any confidential information of the parties involved. Privacy protection is crucial to preserve the integrity and confidentiality of sensitive data throughout the computation. 

2. **Accuracy**: Another critical property of an MPC protocol is accuracy. It ensures that even if a subset of parties collude or deviate from the prescribed instructions during the protocol execution, they cannot manipulate the honest parties to generate incorrect outputs or reveal their confidential information. The protocol should maintain the integrity of the computation, guaranteeing that the final result reflects the agreed-upon rules and inputs provided by the honest parties.


<div id="mpc_tss_wallets"></div>
## **MPC -TSS Wallets**

MPC wallets offer a solution to eliminate the vulnerability posed by a ***single point of failure*** by implementing a Threshold Signature Scheme (TSS). In this approach, the private key is divided into multiple shares, ensuring that no individual person or machine possesses complete control over the private key. This cryptographic technique is known as Distributed Key Generation (DKG).

In an MPC-based threshold signature scheme, the secret key is split into pieces and these pieces are divided among different participants. When a signature is needed, these pieces work together without actually coming together to create the signature. It's like a puzzle where each piece contributes to making the signature without revealing the whole secret key.

*The original private key never appear together.*

TSS based wallet has an additional security feature- private key rotation. Private key rotation refers to the process of periodically changing the secret shares that constitute a private key without altering the corresponding public key and blockchain address. 

This time-based dimension adds an extra layer of complexity for potential attackers, enhancing the overall security of threshold wallets by making it difficult for attackers to attack/hack.


| Pros | Cons  |
| --- | --- |
| TSS-based wallets have an additional security feature that allows private key rotation without updating the public key or blockchain address.  | The reliance on multiple parties to sign transactions in MPC-based TSS wallets means a stable network connection is crucial. Delays or network issues can slow down transaction processing compared to some other wallet types. |
| MPC-based TSS wallets simplify the user experience. Users don't have to manage their private keys directly, which can be complex and error-prone. This user-friendliness encourages broader adoption. | The technical complexity of MPC-based TSS wallets and their relatively limited availability might hinder their widespread adoption. 

<div id="examples_web3_wallets"></div>

## ****Which Web3 wallets are using MPC?****

Few real life examples of Web3 wallets are listed below- 

**[Fireblocks](https://www.fireblocks.com/):**
It  provides a secure digital asset management platform for institutions. They utilize MPC technology to secure private keys across multiple parties. Their platform is designed to enable secure storage, transfer, and issuance of digital assets.

**Curv:**
It is a cloud-based institutional digital asset wallet that employs MPC technology for securing private keys. It supports a wide range of cryptocurrencies and enables secure management of assets without the need for traditional hardware wallets.

**[ZenGo:](https://zengo.com/)**
It is a mobile cryptocurrency wallet that employs MPC to enhance security and user experience. The wallet aims to simplify the process of managing and transacting cryptocurrencies, while maintaining a high level of security through its MPC-based architecture.

**[OKX](https://www.okx.com/web3)**
In April 2023, OKX enhanced its decentralized wallet with MPC technology. This wallet is non-custodial, ensuring users have full control over their assets. It supports numerous blockchain standards and is particularly beneficial for active traders who frequently exchange tokens and seek to earn yields. Additionally, the OKX wallet comes with a bridge aggregator that links to more than 200 decentralized exchanges (DEXs).

**[Spatium](https://spatium.net/)** 

It is a ‘no-fee’ MPC wallet loaded with comprehensive security features. Available as an MPC app on both iOS and Android platforms, it offers safeguarding through fingerprint ID, facial recognition, and dual-factor authentication. Users can also set up transaction limits and even add whitelisted IP wallet addresses. Thousands of cryptocurrencies are supported, including Bitcoin, Ethereum, and BNB.

<div id="conc"></div>
## **Conclusion**

In summary, MPC wallet development introduces a novel and forward-looking approach to enhance the security of cryptocurrency wallets. It brings about elevated security protocols, guarding against potential breaches, and minimizes the susceptibility to human errors.The implementation process of an MPC wallet involves the careful selection of trusted participants, requisite number of parties necessary for configuration, integrating threshold signatures, and opting for a crypto wallet that aligns with compatibility. MPC technology emerges as a dependable avenue for ensuring the secure custody of  digital assets.


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Deep dive into different methods of securing digital assets & delegation of key responsibilities among multiple parties

MPC-TSS wallets - Next Wave of Digital Asset Security

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Yash Belavadi

<div id="intro"></div>

This article aims to delve into the fundamental architecture of Web3 wallets, where users hold control over their keys and engage with preferred decentralized applications (dApps). The framework outlined below primarily pertains to conventional wallets but can also be applied to conceptualizing other wallet types. Some well-known examples of Web3 wallets include MetaMask, Coinbase(Web3 wallet), Trust, Frontier, etc. 

*If you are building in Web3, be it a protocol, chain, or Wallet, this blog post should help you break down the overall Wallet structure and see what's under the hood.*

The role of Web3 wallets is pivotal as it empower users to engage seamlessly with their preferred dApps and blockchain networks. Distinct components within these wallets significantly influence users' choices between one Wallet and another. Ongoing innovation are taking place across these layers and components, as per users choice & ever-evolving landscape of Web3.



Let's delve deeper to understand in detail-

<div id="arch_web3_wallet"></div>

## **Architecture of Web3 Wallets & its components**

A high-level framework applicable to the majority of Web3 wallets includes-

1. Key Management
2. Blockchain support & dApps connectivity
3. Native functionalities
4. User Interface Design

![Web3 wallet overall architecture (1).png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/641ec165f2d9b0eb719074a5449e18ca.png)

These core architectural components define the distinctive nature of each Wallet, resulting in varied use cases achieved through mix and match. These features provides an opportunity for the Wallet market to remain fragmented with no one-player fit approach.



Let's examine each component of the Web3 wallet -

<div id="key_mgt"></div>

### **Key Management in Web3 wallet**

At the core of Web3 wallets lies the essential element of key management, composed of several interconnected sub-components that collaborate seamlessly. It is the core component, as the complete functionality of the Wallet depends on its existence.

The sub-components of key management are as follows-

1. Key generation
2. Key recovery
3. Key storage & control
4. Signature generation ( Interconnected to blockchain )

![The Key Management (1).png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/9088c8b7664ec98f6713d27386737828.png)

Public and private keys are familiar to everyone, as they grant users access to their Wallet or Externally Owned Accounts (EOA) across various blockchains, including Ethereum. The public key is a hash that can be shared with others or is visible in transactions, while the private key remains confidential; you are not supposed to share with anyone/external party.

The typical workflow within a conventional wallet like MetaMask unfolds as follows:

1. You first generate a 12/24 word seed phrase, which can be used later to recover the Wallet.
2. Subsequently, a pair of keys—a public and a private —are generated.
3. The private key is stored on your local device- whether your desktop or mobile device—operating through the interfacing application.
4. Concurrently, the public key is presented to you within the Wallet's interface.
5. Whenever you engage in on-chain interactions or execute transactions, the collaborative efforts of your public and private keys come into play, that results in the creation of a signature through **ECDSG** (Elliptic Curve Digital Signature Generation).
6. MetaMask facilitates the creation of multiple accounts, each linked to a private key derived from the same recovery seed phrase.

Both the seed phrase and the private key represent single points of failure, and losing access to them can indeed result in the permanent loss of funds. Moreover, if these keys are compromised, malicious actors can gain unauthorized access to a user's funds.

**Recent innovations related to the key management include -**

1. Multi-signature (Multi-sig) Wallets: This approach involves multiple wallets to sign the transaction. These are popular among institutions.
2. Social Recovery: It allows you to connect your social profiles like Google and Meta. You need not worry about the keys; it acts as a recovery method. Some conventional Wallets have adopted it; Web3Auth is a good example.
3. MPC-based Wallets (Multi-Party Computation): Wallets utilize MPC technology to fragment the key into shards and distribute them across various devices for enhanced security.
4. Smart Contract Wallets: These wallets enable customization, like introducing a guardian to recover the Wallet, sign-transaction, etc. Although not easily categorized, they contribute to easing key management challenges. It cannot be fully categorized, but it still makes some effort to ease key management.


<div id="blockchain_compat"></div>

### **Blockchain Compatibility & Connectivity to dApps**

The scope of blockchain support in a Web3 Wallet has far-reaching architectural implications. The range of supported blockchains can significantly differentiate from one Wallet to another. Consider the example of MetaMask that supports any EVM-compatible chain. Similarly, Phantom was initially tailored to Solana, but now it has expanded to EVMs, while Leap Wallet bridges the Cosmos and Near ecosystems.

> *When we worked at Frontier Wallet, it was focused on multi-ecosystems like EVMs, Solana, Cosmos, Near, etc. That was a huge target and as well a unique differentiator.
> 

In the realm of blockchain ecosystems, most Layer 1 networks develop official wallets to engage and onboard their community. Such wallets enable users to seamlessly interact with the blockchain and the dApps built atop it. For instance, Aptos introduced the Petra Wallet for this purpose.

Moreover, blockchain can also influence key management, including the key generation and signing. DApps typically offer the flexibility to switch between various supported blockchains. The degree of integration between wallets and dApps—be it direct, or facilitated by tools like WalletConnect, [Web3](https://blocktheory.com/blog/current-web3-wallet-key-management-landscape-and-how-mpc-is-reshaping-it/) onboard, Rainbow kits, etc.—substantially shapes [user experience](https://blocktheory.com/blog/lets-talk-about-self-custodial-wallets/) and their capacity to engage with dApps. While the dApp connectivity alone will not determine the Wallet capabilities, it's primarily influenced by the underlying blockchain on which they are deployed.

![Blockchain Ecosystems Support (3) (1).png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/c724603961f1bbbd96c052e402662a68.png)

1. Wallets have strived to encompass support for multiple blockchains or ecosystems through a unified interface. However, I am on the fence about this approach for two reasons.
2. Every blockchain/ecosystem has uniqueness and use cases; if Wallet doesn't bring this    personalization, it's hard. So it takes more effort to achieve this once you spread across.
3. As an industry, we are early, and this level of simplification or ease might be too early a move. With the effort required to be successful, a multi-ecosystem wallet is an uphill battle.
4. A significant development in this realm is the advent of Account Abstraction (AA) for the EVM ecosystem. This advancement will continue to shape the landscape of native functionalities, a topic I'll delve into further below.


<div id="native_func"></div>

### **Native functionalities**

Embedded within wallets, native functionalities constitute the third layer of a generic wallet architecture. You must have observed and used these functionalities like Swapping the token inside the Wallet, bridging, on-ramping, etc. 

Native functionalities are pivotal in enhancing the user experience, and facilitating the effortless management of assets. Additionally, they can serve as means of ‘revenue generators’ for wallets; considering the fees accrued from each token swap.

Notably, MetaMask exemplifies this by amassing significant revenue through swap fees in the millions. It's a hard nut to crack; only a few players have proven the model. 

This could be a key differentiator, but most Wallets are developing basic functionalities in the current landscape. We recently saw some players trying to create differentiation with functions as driving factors, like Wallets focused on Staking. Still, I need to determine the success factor as I see them pivoted already. The importance of these native functionalities spans across various user levels- institutional, retail, and enterprise segments.

Some of the native functionalities offered include-

1. Swap tokens within an ecosystem/blockchain
2. Bridge tokens
3. On-ramp tokens
4. Staking
5. IBC ( specific to Cosmos )
6. Governance voting capabilities
7. dApp explorer
8. Revoke allowance

![Native wallet functionalities used by different user types (2).png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/b777df3c361cf6cabda7a6a1379afa17.png)


**Recent innovations related to native functionalities have been around-** 

1. MetaMask Snaps: Despite not gaining significant traction, the introduction of MetaMask Snaps marked a credible endeavor to integrate native functionalities directly into the wallet interface.
2. Frontier's Native dApp Integration on Mobile
3. AA in the EVM ecosystem - The bigger one I am excited about is Account abstraction (AA) in the EVM ecosystem. This could fundamentally shift how the functionalities are consumed and the interaction with blockchain or ecosystem happens. AA is interconnected and might be applicable at both layers.
4. Avocado Wallet serves as an excellent example. It showcases the practical realization of integrating native functionalities into the Wallet.


<div id="user_interface"></div>

### **User Interface Design**

Undoubtedly, the user interface (UI) plays a crucial role in the success of a Web3 wallet. It's the bridge between the complex underlying blockchain technology and the end user, shaping their experience, interactions, and perceptions of the crypto ecosystem.

Among the prevailing options — browser-based extensions, mobile interfaces, desktop apps, and web apps — certain categories have experienced varying levels of popularity. Notably, web apps and desktop apps have witnessed declining interest, while browser extensions and mobile interfaces have garnered substantial user traction.

Can user interfaces be the key differentiators?

Yes, to an extent. For example, mobile can be considered much more secure in storing your private keys. Since, mobile wallets are often encrypted with advanced security features that enables biometric/face-id kind of 2FA to protect against hacking and other threats.

**Recent innovations related to the user interface are -**

1. Within the realm of mobile applications, have indeed been notable. These strides in innovation at the wallet architecture layer have focused on enhancing the mobile app experience.
2. When examining the current adoption of Web3 wallets, major players like MetaMask and Trust have significantly captured user attention. However, a significant challenge in achieving broader adoption lies in the complexity of user interactions across different layers. This complexity can deter users from fully embracing Web3.
3. Centralized exchanges like Coinbase and Binance are great examples of how abstraction could simplify it but it comes alongwith the cost of losing control of your custody.

<div id="look_frwd"></div>
### **Looking Forward**

The current state of Web3 wallets is marked by fragmentation, where each wallet operates within its distinct ecosystem, offering unique features, user interface, and other intricacies. This situation makes it challenging for individuals to select the most suitable option. While these distinctive features are understandable in the early stages of tech adoption, but it often results in interoperability issues, that hinders users from seamlessly engaging with various decentralized applications (dApps) and blockchain networks. This confinement within specific ecosystems also steepens the learning curve for users.

A more unified approach could streamline the onboarding process, making it more accessible for individuals to enter the Web3 ecosystem. While centralized exchanges have successfully onboarded a wide range of non-technical users by simplifying core functionalities such as trading, wallet management, and fee structures, but there's a need to broaden our focus.

We should start leveraging technological advancements like Account Abstraction (AA) and Multi-Party Computation (MPC) in Web3 wallets with different use cases by creating a user-friendly, secure, and self-custodial ecosystem that should empower -enterprises, institutions and everyday retail users, to fully embrace Web3. By implementing abstraction at each layer of Web3 wallet development, we can foster the adoption of these wallets, offering a unified experience that caters to the needs of both crypto enthusiasts and newcomers alike.
 


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Discover the intricate layers of Web3 wallet architecture, with insights into key management, blockchain connectivity, native functionalities, and user interfaces

Under the Hood: The Architecture & Components of Web3 Wallet

<div id="intro"></div>
With the recent collapse of FTX, centralized exchanges as 'custodians' have failed to provide users with actual ownership over their cryptos.

This has piqued a lot of interest in MPC technology.


Why?

Because MPC has some exciting applications that can make your crypto wallets even more 'SECURE'!

<div id="mpc"></div>
## Few reasons why people are eager to shift to MPC technology -

First, traditional custodial wallets rely on a single private key for access, making them the potential point of a single failure.

Second, conventional wallets, especially those offered by centralized exchanges or custodial services, store private keys on centralized servers. This concentration of keys is prone to cyberattacks

<div id="hot_and_cold_wallets"></div>
Here's the key insight: 

When we look at the current landscape of custodial wallets , it is divided into two distinct categories – hot wallets and cold wallets.


| Hot Wallets | Cold Wallets |
| --- | --- |
| Hot wallets encompass a variety of cryptocurrency wallets ( Metamask, TrustWallet, Frontier Wallet, and Exodus Wallet) accessible through internet-connected devices. This includes desktop wallets, mobile wallets, and even wallets provided by exchanges.  | Cold wallets (hardware, paper wallets) represent a form of crypto storage that prioritizes security. They keep your private keys offline, completely detached from the internet. |
| These wallets offer convenience for day-to-day transactions, allowing swift access to your assets. However, the trade-off lies in their security vulnerability. Since your private keys are exposed to potential online threats such as hacking or malware attacks, there's an inherent risk involved. | While they might be less convenient for everyday transactions since you'll have to import keys to an online device when required, they provide robust security against online threats. 


![Hot v Cold.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/bd885e339dd5bda9a3f34f4da3529e99.png)

Whenever you examine a hot wallet or a self-custodial wallet like MetaMask, two vital factors should always be taken into consideration-

- **Key Storage**: How are those private keys actually stored in the wallet?
- **Access and Control**: Whether you have direct access and control over these keys?

These two factors are intricately intertwined and play a pivotal role while evaluating the **functionality** and **security** of a wallet.


*This article seeks to provide you with insights into the current paradigm of key management in self-custodial Web3 wallets-*
<div id="type_custody"></div>
Let's take a closer look at the crypto wallet spectrum to get a comprehensive understanding-


| Custody  | Types ||
| --- | --- | -- |
| Self-Custody | Non Distributed Self-Custody | Distributed Self-Custody |
| Shared-Custody | Enterprise Shared Custody  | P2P Shared Custody  |
| Delegated Custody | Designated non distributed custody  | Designated distributed custody |


<div id="self_custody"></div>
## **A. Self-Custody**:

When you use self-custody wallets, you have  perpetual access and control over your digital assets. The great thing is, the self-custody wallet service provider can't hold you back from exporting your wallet or switching to another one. Whether the private keys are stored in their entirety or distributed among multiple parties (such as in MPC wallets), users retain absolute control over their keys. This control is crucial for securing their assets against unauthorized access.You're always in the driver's seat!

This is further subdivided in two parts - 


 | Non Distributed Self-Custody | Distributed Self-Custody |
 | --- | --- |
 | A non-distributed self-custodial wallet is a wallet where the entire responsibility of storing and controlling private keys lies with a single location or device. This setup can offer convenience but might carry a higher risk if that single point of control is compromised, such as loss or theft of the private key. | A distributed self-custodial wallet refers to a type of wallet where the responsibility of storing and managing private keys is spread across multiple locations or devices. This approach enhances security by reducing the risk of a single point of failure. It's like having backup keys in different places.|
 | Hardware or paper wallets are the real life examples of several types of non distributed self-custodial wallets. | MPC-TSS wallets - Zengo, Jade , Unipass, Particle network are the real life examples of the distributed self custodial wallets.  
 
<div id="shared_custody"></div>
## **B.** **Shared-Custody**:

Under some approaches, wallets are linked to distributed key shares that are divided among the user, the wallet provider (or a group of enterprises), or a group of guardians. To perform actions like generating signatures, a minimum number of these parties need to come together and participate, either at the same time or independently. Alternatively, multi-sig smart contract wallets can also involve a minimum number of affiliated guardians to validate transactions. This adds an extra layer of security and flexibility to the wallet setup.

This is further subdivided in two parts - 



| Enterprise Shared Custody  | P2P Shared Custody  |
| --- | --- |
| In this setup, signatures in wallets involves sharing key shares between phone wallets, enterprise servers, cloud services, or storage. | In this setup, signing authorities, which allow transactions to be authorized and executed, are divided among the peers. Each peer holds a portion of the private key or a unique key share and come together to execute the transaction. |
 | Zengo and Coinbase are real life examples that have significantly improved security compared to traditional wallets relying solely on seed phrases and single private keys.  | Examples of P2P Shared Custody wallet implementations include social multi-sig wallets like Gnosis SAFE and custody solutions based on Multi-Party Computation (MPC). 

<div id="delegated_custody"></div>
## **C.** **Delegated Custody**:

Delegated Custody is another method in which the management of keys or key shares is entrusted to external entities- ‘delegated enterprises or a network’. In this setup, user delegate the control and storage of their private keys to these external entities. A common example is when users hold their digital assets on centralized exchanges.

This is further subdivided in two parts - 



| Designated non distributed custody | Designated distributed custody |
 | --- | --- |
 | The key responsibility for holding and managing the private keys or access to the digital assets is entrusted to a one specific delegated enterprise or a network.  | The key responsibility for managing the private key is shared or access to digital assets is distributed among a group of enterprises or nodes. |
 | BitGo , Free wallet are few examples of designated non distributed custody  | Coinbase, Free wallet are few examples of designated distributed custody |



The current state of private key storage in crypto wallets raises concerns due to the challenges and risks associated with each category. While self-custody provides maximum control, the entire key is locally stored on your device, which means if you lose access to your device for any reason, you lose access to your wallet. Thus, your device becomes a **single point of failure (SPOF).** On the other hand, shared custody and delegated custody introduce complexities around trust, reliance on third parties, and potential vulnerabilities.

What if your self-custody wallet not only supercharges security but also takes away the hassle of remembering, storing, and protecting private keys?

Exactly! This is where the concept of Multi-Party Computation (MPC) comes into the picture, where you, as a user of a self-custodial wallet- distribute your private keys among several trusted devices.

<div id="conclusion"></div>
##Conclusion

To sum up, the idea of "distributed - self custody" is the ideal spot in managing digital assets at both enterprise and retail level . By dispersing ownership or control of private keys among multiple entities, the risks associated with a single point of failure is reduced.

This concept stands in contrast to shared and delegated custody , which have demonstrated vulnerabilities in real-world use cases.

Whereas, distributed self-custody approach resonates with the core principles of decentralization, security, and individual empowerment that form the cornerstone of the entire crypto industry.
<br/><br/>
*The next article discusses different methods of securing digital assets while also highlighting how innovative wallet solutions rooted in MPC (Multi-Party Computation) and TSS (Threshold Signature Schemes) have opened pathways towards adoption of distributed self-custody.*
</div>
### References

https://medium.com/silence-laboratories/redefining-nomenclature-of-custody-81ee28f20731



Insights into the current paradigm of key management in Web3 wallets

Current Web3 wallet key management landscape and how MPC is reshaping it?

<div id="intro"></div>
BlockTheory recently hosted a meetup with Harish Narayanan, a marketer who has created world-class teams that have broken records and grown businesses exponentially. With a remarkable career spanning over a decade, Harish has held executive roles at **P&G, Google, Myntra, and UpStock**. During the talk, he shared his insights on self-growth and productivity.

Harish first drew our attention to the value of time and the limited opportunities to make a meaningful impact in this world. He puts it into perspective:

Imagine you are 40 years old. From this point onward, you have approximately 2,000 weeks left before age 80. Within these weeks lies the potential for you to make a significant difference in the world, provided that you are productive.

 He emphasized the importance of ***creating a burning desire within each of us*** and shared his journey of self-exploration ***on how to get better.***  He emphasized the importance of ***creating a burning desire within each of us*** and shared his journey of self-exploration ***on how to get better.*** 

Starting from uncertainty to finding clarity about who he is, what he wants to do, and where he wants to go. He explained how his journey perfectly aligned with his career, team management, and leadership success. And encouraged us to embark on our journey of self-discovery, where we can truly understand ourselves and work towards our calling.



<div id="self_growth"></div>
## 📈 Now, let's dive into the 3 steps of Self-growth that Harish highlighted:
<br/>

### 🪄 1. Be- Recognize the Miracles Within Us

He wants us to see our self-worth and not get caught up in everyday complaints and urges, "Don't settle for mediocrity." He underlines the importance of flipping the script and recognizing that we are all amazing miracles on this planet. Furthermore, he shares profound spiritual and philosophical reflections, pointing out the interconnectedness between rare elements in the universe and within the human body. These deeply spiritual encounters serve as a means for him to recognize that we all possess unique and special qualities, and each of us is a miracle.

### 💬 2. Think - Even if you come across a seemingly negative person, take the good from them and become unbeatable.

It's about absorbing the positive qualities of others, even in challenging times. We can become unstoppable if we take the good we see in people. He quotes a beautiful example drawing inspired by the remarkable tale of *Bali* in Ramayana, who derived strength from whomever he encountered. We can interpret this as "even if we meet an average person or a new person and try to take whatever is good of them into ourselves, then we become unbeatable."

### 💁🏻 3 . Do - Your life is shaped by what you pay attention to.


<div id="practical_tips"></div>
Harish firmly believes that our life is a series of moments we choose. And he gave us ***practical tips*** to apply in our daily lives:

**🎧 Focus on your priorities in the first four hours of your day** -Don't avoid uncertainty or procrastinate. Tackle the most challenging tasks, as they are often the most important. The more resistance you feel, the more you must prioritize those tasks.

**📵 Ensure that you don't let responsiveness hinder your progress**-Focus in accomplishing the main tasks, such as crafting compelling brand stories or launching large campaigns. By avoiding constant back-and-forth messages and notifications, we can experience a noticeable boost in productivity.

**🗓️ Goal Management**- This is a game changer in terms of successful planning. We should begin planning yearly, quarterly, monthly, weekly, and daily. Whereas a week is an adequate period to accomplish anything. —it's a manageable yet predictable scope for goal planning. Apply color-coding methods to effectively organize tasks by categorizing them into personal and work-related priorities.

**💡 Calendar is your best friend -** He says, "*Calendar is our best friend, and the to-do list is our enemy."* To-do is a list that demands our time, whereas Calendar is used for allocating specific time slots for different goals/activities. He highlights that our mind is a beautiful machine that should be used only for ideas, so don't use it to remember anything." The toughest part is to predict how much time a certain task will take, but eventually, we get better at it; once we make this a practice of putting down our day-to-day tasks on the calendars. Harish highlighted the importance of using calendars to externalize tasks, freeing up mental space for generating ideas and concepts.



<div id="thinking_framework"></div>
>In nutshell, Harish really wants us to recognize the miracles within ourselves. Even if we meet negative people, we can still take the good from them and become unstoppable, just like Bali in the Ramayana. 

He gives us practical tips to follow in our daily lives, like focusing on priorities in the first four hours of the day and avoiding distractions that hinder our progress. Harish drew attention to goal management and planning on different time scales, from yearly to daily. He also highlights the importance of using calendars instead of to-do lists to allocate specific task time slots. By doing this, we free up our minds for creative thinking.

He further touched upon the **Level 4 Thinking Framework** - inspired by a beautiful blog, "*[Wait, But Why](https://waitbutwhy.com/), "- wherein he further explains it -*

1. Level 1: Imagine a scenario where John approaches the cashier to make a payment. After handing over the required amount, the cashier throws the change while returning it. Surprised by this unexpected incident, John exclaims, "How dare the cashier behave like this!" At this moment, John's ego takes control, and his focus is solely on himself. He fails to see beyond his perspective and the obstacle before him.

2. Level 2: As John steps forward, the human part of his brain kicks in. Empathy plays a bigger role, and he becomes more aware of the cashier's perspective and emotions. Instead of solely focusing on himself, he takes a moment to consider that the cashier could be having a bad day. John's reaction shifts from anger to curiosity and understanding.

3. Level 3: John realizes that he and the cashier share a connection. He understands that everyone is prone to making mistakes and that finding a solution requires working together. Instead of dwelling on the incident, he approaches the cashier with empathy and calmly asks if everything is alright. They work together to resolve the situation, knowing their interaction goes beyond a simple transaction.

4. Level 4: After practicing Level 3 for years, John achieves a higher level of consciousness. He seeks the ultimate truth with humility, even in difficult situations. He maintains peace and open-mindedness in this state, enabling him to navigate challenges with grace and wisdom. *Destruction of Ego is such a powerful concept at that moment where you don't matter anymore. It's about the entirety of the environment and people around you.* *Many people yell at you, or something bad is happening, but instead, you are seeking knowledge."*


<div id="conclusion"></div>
To wrap it up, Harish finally shared the *secret to all his habits and learnings—Reading*. He believes it's the fundamental habit that creates all other habits. He encouraged us to "**fall in love with reading, devour any material that interests us, and dedicate time in our calendars for reading. It truly has the power to transform our minds**."

> ***Remember, productivity isn't the ultimate goal—it's a means to free up time to embark on our self-growth journey from level one to level four.***


[Watch the full talk ](https://www.youtube.com/watch?v=uQ2hZUCRQU0)

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Harish musings on the journey of self-discovery and creating a strong desire to work towards one's calling for self-growth and productivity.

Key Insights from Harish's Talk on Self-Growth and Productivity

<div id="intro"></div>
According to recent research conducted by CryptoAssetRecovery.com, a large number of Ethereum owners have lost access to their wallets. The study revealed that approximately 7% of the Ethereum purchased during the initial "presale" in 2014 has remained untouched in its original wallets, indicating that the owners have lost control of their private keys. 


>The cumulative value of these lost wallets is estimated to be around $1.6 billion, with the largest individual wallet holding approximately $60 million worth of Ethereum.

Crypto wallets are often secured with private keys that the wallet owner must securely store. If users lose or forget the private key, they can no longer access their wallet. With a private key, all the power lies in the hands of the user, so there is no central authority that can assist in retrieving the private keys if it is lost.


<div id="crypto_work"></div>
## 🧐 Let's understand how the Crypto wallet or accounts on Ethereum work

Ethereum has two main types of accounts: Externally Owned Accounts (EOAs) and Contract Accounts.

### 🔗 Externally Owned Accounts

Ethereum accounts are secured using a pair of cryptographic keys: public and private keys. An Ethereum Externally Owned Account (EOA) is active, can initiate transactions, pay gas fees, and execute operations on the Ethereum Virtual Machine (EVM). However, EOAs are solely controlled by a private key. Losing access to the private key means losing control over the account and the associated funds.

### 📄 Contract Accounts

Contract accounts (CA) in Ethereum have a distinctive characteristic: the smart contract code determines the ownership and control of assets within them. However, contract accounts are considered "passive" in practice. This means they can only initiate transactions when triggered by transactions from externally owned accounts (EOA). Their actions are governed by the logic defined within their code.


>_In 2021, Wallet Recovery Services, a company specializing in assisting individuals in locating their lost digital keys, witnessed a significant surge in demand. They received an average of 70 recovery requests daily._


In the blockchain world, private keys are the gatekeepers to our digital wealth but have inherent flaws. Once lost, they are gone forever, along with all the digital assets they protect.

Wait, what if I told you that the concept of account abstraction is here to revolutionize how we handle private keys? Imagine a world where our private keys become smart, allowing us to create fallback mechanisms and regain control of our digital assets if it's lost or even disappear entirely.


<div id="acc_abs"></div>
### Let's dive into the concept of account abstraction and explore in detail-

Account abstraction has emerged as a powerful concept that aims to blur the boundaries between EOAs and Contract Accounts (CAs) in Ethereum. CAs are passive and require EOAs to trigger their actions. But with account abstraction, a new paradigm comes into play-

Account abstraction ( AA) tackles these concerns by merging CAs and EOAs into a unified framework. The process involves separating the transaction signing logic from the account itself, resulting in the term "Account Abstraction."

AA in Ethereum is about making managing our accounts easier and more flexible. It brings in these "smart contracts" that take care of our Ethereum account. Instead of relying solely on private keys, Ethereum now allows delegating authority to smart contracts. These smart contracts act as intermediaries, abstracting away the complexities of account management.

And the best thing is we can set up all sorts of custom rules for spending our cryptos, initiating transactions, and maintaining our crypto assets. It's like having a trusted assistant to handle our account on behalf of us!

Okay, let's break it down -

Now, from a **user perspective**, account abstraction means we don't have to worry about the technical complexities of interacting with Ethereum accounts. The tricky stuff is hidden behind user-friendly interfaces, making it easier for users to use their wallets.

But let's clear up some confusion. Account abstraction doesn't mean our accounts are completely detached from us. We still have a wallet address to receive funds, and we'll have a signing key to ensure we can only spend those funds. It's more like using a smart contract account that handles some blockchain interactions while we still have control over our tokens.

This breakthrough in account abstraction brings a whole new level of flexibility. It allows us to create accounts with add-on features like multi-signature support, two-factor authentication (extra security!), withdrawal limits (spending control!), and even adding trusted guardians (like having backup buddies!). It's like the blockchain version of credit cards but with even more possibilities.

<div id="use_cases"></div>
### 
## Top use cases of Account Abstraction

### 💵 Batching Multiple Transactions

In Externally Owned Account (EOA) wallets, there is inefficiency and inconvenience of executing multiple transactions sequentially, resulting in long wait times and high gas fees. It often occurs when attempting a simple task, such as swapping one token for another, which requires multiple transaction steps.

Account abstraction addresses this issue by enabling the batching of multiple transactions into one transaction. With AA, users can initiate a series of actions or transactions as a single unit, reducing the overall gas fees and waiting time while interacting with DApps or smart contracts. This batching capability allows us to complete multiple steps or actions in a single click or interaction, streamlining the user experience and making it more efficient.

### ⛽️ Pay Gas fees on your choice of token

In the Ethereum network, gas fees are exclusively paid in Ether. This means that whenever we want to initiate a transaction or execute a smart contract on the Ethereum blockchain, we must have enough Ether in our account to cover the associated gas fees. With account abstraction, this limitation is overcome. Account abstraction enables users to pay gas fees using any token they hold, not just Ether. This means that we can utilize the tokens from our wallets to directly pay for gas fees without converting them to Ether first.

### 🏢  Gasless Transactions

Gasless transactions, also known as sponsored transactions, allow users to initiate transactions without directly paying the associated gas fees. In this process, a smart contract or program acts as a sponsor, taking care of the gas fees on behalf of the user. This feature brings users a lot of convenience and simplicity, especially in decentralized finance (DeFi) applications.

With gasless transactions, users are no longer required to hold and spend the native cryptocurrency for gas fees. Instead, the sponsor steps in and covers those fees. The sponsor can consider it an "acquisition cost" or ask the user to pay in a different token. This mechanism effectively bridges the gap between DeFi and traditional finance by allowing users to transact without the need for specific tokens for gas fees.

![Gasless Transactions](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/b071d347442504a4da978480fd528716.png)

### 🤝🔒 Social Recovery

In current wallet recovery methods, we typically rely on a recovery phrase or seed phrase to regain access to their wallet. However, if we lose the recovery phrase, wallet funds become permanently inaccessible. Account abstraction with social recovery addresses this issue by introducing a more secure recovery process. By designating multiple trusted individuals as recovery agents, we can distribute the responsibility of account recovery among a network of trusted contacts. This decentralized approach mitigates the risks of relying solely on a single recovery phrase.

![Social Recovery.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/3dc965793444b70c6a503c124a3e33d2.png)

### ✍️👥 Multi-Signature Authorisation

Traditional blockchain systems typically implement multi-sig wallets as separate smart contracts interacting with externally owned accounts (EOAs). The process involves EOAs initiating transactions, paying the gas fees, and then calling the multi-sig smart contract to request transaction execution. Once the required number of signatures is obtained, the multi-sig contract refunds the initial gas fee paid by the EOA.

However, with account abstraction, every account is inherently a smart contract. In this scenario, when we initiate a transaction from our account (smart contract), the account's programming includes the requirement for multiple signatures. The account logic verifies that the transaction proposal includes the necessary valid signatures before processing the transaction. Hence, it simplifies the process and eliminates the additional steps and complexity associated with interacting with a separate multi-sig contract.

### 🛡️ Transaction Guards

Wallets can potentially transform users' self-custody experience by implementing an account abstraction concept called "Transaction Guards." This concept allows users to establish predefined conditions and rules that must be satisfied before a transaction can be executed. By incorporating Transaction Guards, wallets provide an additional layer of security and control, empowering us to enforce specific transaction requirements according to our preferences. This use case encompasses various features, including the ability to set withdrawal limits, define daily spending limits, etc.

![Transaction Guards.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/cfe827baa5fd3bceb984847fab27778e.png)

<div id="future_aa"></div>
## 🔒 The Future of Account Abstraction

The adoption of account abstraction, introduced by Vitalik Buterin, continues to be in discussions and debates even years later. EIP-4337 has received broad support within the Ethereum community as it offers a viable approach to implementing account abstraction without requiring significant changes to the Ethereum protocol. It signifies a paradigm shift that brings about profound changes and advancements-multi-signature support, withdrawal limits, two-factor authentication, etc.

One of the key beneficiaries of account abstraction will be DApps, particularly those in the decentralized finance (DeFi) and non-fungible token (NFT) sectors. The synchronization of user wallets with smart contracts, made possible by ERC-4337, will create a seamless and intuitive user experience. Moreover, DApp developers will no longer be bound by the limitations of a single blockchain, as smart contract wallets will eventually be able to connect and interact across different chains. This interoperability will allow developers to create chain-agnostic services, expanding the reach and impact of their projects.

In conclusion, ERC-4337 has paved the way for a more user-friendly and inclusive blockchain ecosystem. By simplifying complex tasks and abstracting the underlying technicalities, this standard has made blockchain applications more accessible to everyday users. As the technology continues to advance, we can expect even greater simplification and accessibility, opening up new opportunities for individuals to engage with and benefit from the transformative potential of blockchain technology.

As the Ethereum community evaluates the various proposals and their implications, finding a consensus on the best way to implement account abstraction remains an ongoing process. The ultimate goal is to balance introducing innovation and minimizing disruption to the existing Ethereum ecosystem.


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Discover the concept of account abstraction and its significance, and explore its primary use cases.

What is Account Abstraction and it’s use-cases?

<div id="intro"></div>
Okay so self-custodial wallets, simple, secure and privacy focused; oh wait let’s scratch the ~~simple~~ out, they are certainly not simple, just yet. If you’re unaware about self-custodial wallets then here’s a great [explainer article](https://www.makeuseof.com/what-are-self-custody-wallets/).

Undeniably, wallets have become the backbone of the crypto industry, and besides your usual day to day regulation changes, over engineered tech, and a billion new tokens and chains, UX has become a key differentiator between what stays and what doesn’t. Don’t believe us, then take a look for yourself-
<br/>

 ![reviews.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/e3762d1b4be34ea408ec3411165c9920.png)
 
######  Few of the many reviews which some of the biggest self-custodial wallet apps have on Google PlayStore

<div id="landscape"></div>
##🗺️ The self-custodial wallet landscape in 2023
To better understand the UX challenges, we’ve tried to score some of the most popular self-custodial wallets in the key user journeys wrt ease of usage and here’s what we found


![graphs.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/4f1336c85fca4d56645a1655bf41f601.png)
###### We’ve scored these apps relative to each other based on our experience using them as well as by gauging the majority ratings in the playstore feedbacks.
<br />
As is clearly visible, each of these apps is focusing on solving specific sections but none of them have made the entire journey seamless, yet.

Another interesting stat is to observe the average ratings of legacy wallets (metamask, phantom, coinbase, trust & exodus) vs the newer ones. This is important because the legacy wallets had the [first mover advantage](https://academy.binance.com/en/glossary/first-mover-advantage) and onboarded a huge number of users whilst making things just work but neglecting the overall experience (exception trustwallet & coinbase). These products have influenced the design of most wallets and targeted people who already understood the complexities of crypto. 

>The user was given significant power and responsibility with little to no context.

<div id="best_wallet"></div>
### G2- Best Cryptocurrency Wallets

This website aims to capture a large map of over 147 crypto wallets and rates them on 2 factors
1. Quality of Support
2. Ease of Use

Well this suggests that the average crypto user considers a good experience only when both criteria are met of a satisfying support desk as well as an easy to use platform.

To be fair, as products grow larger, offering support on a case to case basis becomes significantly more difficult thus decreasing the overall satisfaction levels. But this is just one study and it doesn’t paint the overall picture.

![comapre.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/362cbcdb147a9beda9add2f62c3bb28a.png)
###### We picked some of the most popular ones and here's how they fared. An important note is that this is not an exhaustive scoring system and relies on user feedback so it is not absolute.

<br/>

###Google Playstore & Chrome Webstore

The majority audience tends to leave feedback directly at the market places, so we took the same apps and tried to create a normalised distribution to see if it correlates with the G2 study

This is an interesting outcome and here’s why Trust wallet beats all the others by a huge mile. Trust has managed to get **4.4⭐️ from over 1.5M users!** Compared to Metamask & Exodus which have gotten 4.6⭐️(220k users) & 4.5⭐️(98k users) making it one of the highest rated self-custodial wallets out there. 

![Playstore.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/3afd991b4e0fe3fd2927a2e009197b1d.png)
######  If you’re interested to know the exact procedure of how this was calculated, [checkout this](https://chat.openai.com/share/f2fc5131-3f0a-494c-a038-648b517f233f)

<br/>

What did trust do that went right? That’s something that needs to be unpacked in a separate article altogether but in short here’s the answer

<br/>

![Reviews TRUST.png](https://ds-storage.sgp1.cdn.digitaloceanspaces.com/blocktheory/website/strapi/uploads/24afa811d959f5e4a52705648aa0f69a.png)
###### User reviews of Trust Wallet on Google Playstore

<br/>

###Let’s summarise the self-custodial wallet landscape in 2023
1. There are approximately **over 240** listed self custodial wallets in the Android and Chrome market place in 2023
2. Most wallets have built extensively to make transactions smoother but very few have cracked the creation step of the user-journey. Sign-up flows to create and import wallets are currently riddled with challenges for users.
3. It is clear that for a product to be mass-adopted it needs to make sure that it balances the equation of ease of usage along with a good support system on the user end.
<br/>

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## 🏦 Learning from the evolution of banking in web2

The idea of DeFi was built on solving problems faced in the TradFi systems. Although these systems themselves have weathered many more difficult challenges and have found some creative solutions. Hence referencing these could give us a potential breakthrough or help us identify mistakes we’re repeating here.

Digital banking was revolutionary as it made physical banking obsolete followed by [neo-banking](https://www.forbes.com/advisor/in/banking/what-is-a-neobank/) which is currently attempting to one up digital banking. If you are unfamiliar with these terms then here’s a great article which covers the [evolution of digital banking](https://profinch.com/evolution-of-digital-banking-system/).

###Deloitte's study on the digital banking momentum

A very interesting [study conducted by Deloitte](https://www2.deloitte.com/us/en/insights/industry/financial-services/digitalization-in-banking.html) surveyed people from a very diverse age range and here’s what they found-

1. Younger consumers prefer both physical and digital channels, but are less satisfied with their primary banks and more likely to switch. 
2. They also seek innovative services offered by neo-banks, including automated spending insights, P2P payments, and "get gas" and "get food" buttons that find and pay for the nearest gas station and restaurant.
3. Banks should consider positioning mobile apps as the central platform for their consumers’ various banking needs instead of their branches. Acting as the hub of interconnected experiences, these apps can help integrate the banks’ otherwise siloed channels and become a go-to tool for consumers.

###Revolutionary Payment Infrastructures
Another great reference point is to see how web2 products tackled large scale problems to scale some payment models, which are no short of revolutionary:

**UPI & Alipay**

1. India’s UPI (Unified Payments Interface) and has acquired over 300M monthly active users in less than 7 years. This is a major achievement as the rural-urban penetration of this technology has been almost at par. At it’s core it relied on simplicity. 1 QR code per person/business and 1 scanner to connect these two entities.
2. Similar to UPI, Alipay is a much older platform with over 1.3B users and it relies on similar strategies of onboarding consumers and producers on 1 aggregated platform with its robust tech having a simple intuitive end user interface

🎯 The takeaway is how products can cut down their reliance on their user to understand the technicalities and jargon of payments and to focus more on making it intuitive and human

**Apple pay**

1. Apple launched it’s payment platform back in 2014 backed by its already huge network of devices
2. Building essentially a wallet app that housed all your cards, it instantly made every single iPhone user a digital payment interface without any additional effort.

🎯 The takeaway is how a product can seamlessly integrate into the current infrastructure for maximum adoption without much effort from the user’s end

The banking industry experiences frequent disruption due to complacency and a lack of empathy towards its users. Neo-banks have successfully empathized with consumers and offered modern technologies and conveniences, leading to continued customer inflow. This pattern is now also observed in the crypto markets.

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## 👀 Looking at custodial wallets and their patterns
Custodial wallets promise the perks of crypto along with the ease of usage of web2 banking. The only caveat they have access to your keys and any points of failure within the system would take your money down too, like in the case of the FTX crash.

What used to make custodial wallets such a hot avenue for crypto traders is no longer the case as self-custodial wallets are catching up in terms of usability but there are still features (like wallet recovery, device cross-compatibility) which need to be migrated into the self-custodial ecosystem to make them as popular as these centralised ones.

> 43% of Trust Wallet users use centralized exchanges to store their crypto holdings, while the remaining 57% self-custody most of their assets on Trust Wallet.

🎯 Product builders must make significant improvements in account abstraction, easier wallet recovery and sign-in, and on-ramp flows to make self-custodial wallets the default choice. Issues of transaction speeds and high failure rates need to be fixed to compete with big custodial players.

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## 🤔 Right so why hasn’t someone already figured it out?

Well to be honest, this isn’t as simple as it seems and a lot of products out there are now more aware about this situation and are trying out various approaches to make it big. Some of the biggest breakthroughs will be in the direction of account abstraction with tech like MPC making wallet recovery flows simple and reducing the chances of locked crypto.

###Going the Apple Way…
Apple knew that to appeal to the widest possible audience it would need to keep its product line super simple and that could even mean axing some obvious features at the stake of make the core features more intuitive. For example-

Whilst android users boasted about widgets and customisation from the beginning, iPhones continuously outperformed them as they usually were the no-brainer pick if a phone was to be recommended right from a 8 to an 80 year old.

This meant that apple knew how to empathise with the most diverse audience and it has continued to do so even now.

>The impact of a self-custodial wallet being done right will be no smaller than Apple launching the first iPhone in 2009, causing significant downstream effects into how crypto wallets will be designed and which portions of UX will be prioritised.


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In this digital age, where cryptocurrencies and decentralized finance (DeFi) are gaining momentum, self-custodial wallets play a pivotal role in empowering individuals to have complete control over their digital assets.

Let’s talk about UX in Self Custodial Wallets