Author: Josh Stark (Ethereum Foundation) ; Evan Van Ness (Founder of Week In EthNews)

Original Title: The Year in Ethereum 2021

Translated by: Hailsman, Chain Catcher

Ethereum is the foundation of digital civilization

Ethereum is solid, secure, and reliable; it is the essential cornerstone for building digital cities. These "cities" are developing rapidly because Ethereum is open to everyone, and different users can find reasons to build on Ethereum:

• Markets use it as financial infrastructure

• Artists use it to give their works permanent value

• Assets use it as a settlement layer

• Communities use it to manage shared resources

This year, Ethereum applications explosively entered public consciousness. As the world gradually deepens its understanding of the vision of a more decentralized internet built on Ethereum, the old term "web3" has become popular again.

Just like in 2018, 2019, and 2020, our goal is to zoom out and showcase the bigger picture. We believe that the most important developments in Ethereum this year are:

1. The arrival of Layer 2: After years of development, L2 protocols launched on the mainnet and expanded Ethereum's capacity.

2. The creator economy becomes mainstream: NFTs are everywhere, and artists are earning billions of dollars using Ethereum.

3. Core protocol upgrades: The Ethereum development community undertook multiple upgrades in preparation for the transition to proof of stake.

4. DAOs cross the tipping point: DAOs have become viable tools for community governance, accumulating billions in assets and attracting new users.

Before discussing the above topics, let’s first review the development of Ethereum. Over the past few years, we have tracked various core metrics, attempting to place Ethereum in different dimensions. Some of these metrics crossed significant milestones this year.

1. On which blockchains are people paying?

Ethereum has been the most demanded blockchain in the world for the second consecutive year.

Source: Cryptofees (cryptofees.info)

This chart shows the total transaction fees for selected L1 blockchains. It is the sum of all fees paid on each L1—sending transactions or interacting with smart contracts. Overall, they represent the total value of the "block space" of that blockchain—the total transaction capacity of that blockchain in a given year. Total transaction fees are just one metric; viewed alone, they cannot perfectly represent the value of a blockchain or its utility to users. However, it does show us the comparative value of each blockchain to its users. In a well-functioning market, what people are willing to pay for is worth it.

If we broaden the comparison to include applications, L2 networks, and other L1s, we see the following:

Source: Cryptofees (cryptofees.info)

The pink entries are applications built on Ethereum, such as Uniswap or ENS. For these applications, the total fees here are not blockchain transaction fees but other types of fees that users pay to use the applications (e.g., fees paid to liquidity providers on exchanges).

Incredibly, by 2021, the amount paid for using applications built on Ethereum exceeded the total amount paid across all other L1 blockchains. As the demand for Ethereum block space continues to outstrip all other blockchains, we can look elsewhere for meaningful comparisons.

This year, we can compare the fees paid on Ethereum L1 with the revenues of payment networks like Visa and Stripe:

Source: Cryptofees (cryptofees.info), Visa, Backlink

Total transaction fees and company revenues are not directly comparable (Visa and Stripe earn revenue from sources beyond user-paid fees, and Ethereum can do things that Stripe cannot). However, they indicate the scale and market value of Ethereum.

2. How much value has Ethereum transferred?

One of the simplest use cases for blockchains is transferring assets. How much value was transferred on Ethereum this year? Since mid-2020, when it surpassed Bitcoin, Ethereum has continued to be the largest asset settlement blockchain globally.

Ethereum data includes major ERC20s with volumes exceeding $500 million. Bitcoin data includes USDT on Omni. Because we have not accounted for all assets on Ethereum, this chart actually underestimates Ethereum's total transaction volume. Data from Visa (annualreport.visa.com) and CoinMetrics (coinmetrics.io)

This year, Ethereum moved approximately $11.6 trillion. This is more than Visa and over twice that of Bitcoin.

3. Assets locked in DeFi

Finally, we can track the total value of all assets locked in DeFi protocols. Locking assets "in DeFi" means users deposit some funds into a protocol, typically to earn returns for the protocol to use their assets—such as providing liquidity. Ethereum's DeFi sector continues to hold the largest amount of locked assets by a significant margin.

Source: DeFi Llama (https://defillama.com/chains)

Once again, we must look for comparable data outside the blockchain ecosystem. In 2021, Ethereum's DeFi TVL ($153 billion) surpassed the assets managed by Robinhood ($80 billion) and Bridgewater Associates ($140 billion).

1. Layer 2 has arrived

After years of research and development, Ethereum's scaling technology was put into use this year. Ethereum's transaction capacity is no longer simply the capacity of Ethereum Layer 1. Instead, it is the capacity of Ethereum's L1 plus all the "Layer 2" protocols that inherit Ethereum's security.

Due to limitations on public information, L2 data is incomplete. For full data click here

The above chart shows the total cumulative transactions on Ethereum in 2021, including L1 and L2.

In 2021, Ethereum's L1 processed about 1.2 million transactions per day (or about 15 transactions per second). With the launch of Layer 2 protocols, Ethereum's effective capacity began to increase, and the overall transaction rate (at the top of the chart) began to curve upward.

All L2 protocols are still in the early stages of deployment, and some have not yet removed all temporary trust assumptions. There are also significant differences in the technologies within this grouping. For example, the StarkEx chain is technically Validiums, meaning their proofs are stored off-chain rather than on-chain.

As L2 protocols continue to mature and gain market share, the L2 portion of this chart will grow until it far exceeds L1's transaction capacity. "Ethereum" no longer refers to a single protocol but to a community of protocols sharing a common public L1.

You may have heard plenty of complaints that "Ethereum is too expensive or slow," but that’s just because people are making the wrong comparisons. Ethereum is the first blockchain mature enough to build multiple production-ready L2s on it. While gas fees remain high for certain use cases on L1, 2021 marks a turning point for the future, where most users interact with Ethereum solely through L2.

Currently, the largest share of L2 transactions is completed on application-specific L2 protocols known as "ZK rollups." These are L2s specifically designed for certain types of applications, such as trading or simple token transfers.

The ZK rollup ecosystem built on Ethereum made progress in 2021:

• Loopring launched a zkRollup decentralized exchange as early as 2020. They completed the v2 release in early 2021 and added support for NFT minting and trading in August 2021.
• Matter Labs launched zkSync in June 2020, which has been integrated into wallets like Argent and applications like Gitcoin (and continues to develop "zkSync 2.0" with EVM compatibility).
• Aztec launched zk.money in March 2021 and added support for the DAI stablecoin in April.
• Multiple projects launched Validiums using Starkware's StarkEx platform, including: DeversiFi (decentralized exchange) launched Rollup in June 2020, ImmutableX (NFT exchange) launched Rollup in April 2021, dYdX (defi trading platform) launched Rollup in April 2021, and Sorare (a fantasy football NFT project) launched StarkEx Rollup in July 2021.

Due to limitations on public information, L2 data is incomplete. Details

This year, two important new members emerged in the Rollup ecosystem: Arbitrum and Optimism.

Arbitrum and Optimism are the first generalized Rollups to go into production. This means each Rollup operates as a natural extension of Ethereum—it is "EVM-compatible." Users can easily migrate Ethereum-based assets to them, developers can deploy Solidity contracts and applications to the Rollup, and users can interact with them.

Arbitrum launched on the mainnet on May 14 and removed the whitelist on August 31. Optimism launched on the mainnet on August 19 and removed the whitelist on December 16. As the L2 ecosystem develops, users will deposit more and more funds into it. At the time of writing, approximately $6 billion is in L2 protocols.

Background on Rollups

For a decade, the crypto community has been working on scaling blockchains using "Layer 2" technologies.

As early as 2012, payment channels for Bitcoin were discussed. While channels ultimately went into production as a relatively niche scaling solution on Ethereum, they could not scale smart contracts.

In 2017, Vitalik and Joseph Poon proposed a new solution called Plasma. The basic idea was to scale Ethereum by creating independent blockchains that would anchor to Ethereum, inheriting security through clever code and economic mechanisms.

This line of research led to a new technology called "rollup." Based on the idea of Plasma, Rollups scale Ethereum by creating a unique L2 blockchain that can be used more cheaply and quickly while still inheriting L1's security.

Applications exist on the rollup chain, and users interact directly with the rollup chain. In the background, the protocol bundles (rolls up) everyone's transactions and stores their records on Ethereum L1. These records ensure that these transactions benefit from Ethereum's robust security.

However, there are two different approaches to achieve this, leading to two different types of rollup designs: Optimism Rollup and Zero-Knowledge Rollup.

In Zero-Knowledge Rollups, cryptography is used to prove the validity of transactions, and the proofs are stored on Ethereum. Most of the data can be discarded (meaning you don't need to store it on-chain), leaving only a small portion of data. But mathematically proving that transactions are valid is sufficient.

Today, there are many application-specific rollups, which we have introduced above. But generalized ZK Rollups are still in progress, built by teams like Matter Labs, Starkware, Polygon Hermez, Scroll Tech, and Privacy & Scaling Explorations group.

To simplify a complex topic: ZK Rollups work by converting the code running on the Rollup into special mathematical equations. This equation provides us with a concise proof stored on the mainnet.

Defining such an equation is much easier when possible inputs are limited. For example, if we only intend to perform simple token transfers. These application-specific equations are easier to design.

In contrast, defining an equation that can accept any possible code input and create proofs from it is much more challenging. This is the challenge of creating ZK rollups that can be used for general arbitrary code.

This "general" computation (also known as "EVM equivalence") is easier to achieve through Optimistic rollups.

With Optimistic Rollups, the L2 rollup chain leaves bundled transaction records on L1.

However, in most cases, the "proof" that guarantees these results are valid is not actually run. The protocol is optimistic—it assumes every block is valid, but we retain the right to prove it whenever necessary.

Because Optimistic Rollups need to save data so that someone can run the proof later, they need to post a large amount of transaction data on-chain (rather than the small proofs already verified using zero-knowledge technology). But because no new cryptographic innovations are needed, fully generalized Optimistic Rollups (like Arbitrum and Optimism) are already in production today.

In either case, this means you are very confident that your rollup transactions are final. If someone sends you ETH in the rollup, the proof of that transfer exists on Ethereum, and you will always be able to withdraw that ETH to L1 if needed.

The long wait for Layer 2 is over. It is here now—just distributed very unevenly. Applications, exchanges, and wallets will take months to support L2 and help users transition.

2. The creator economy of Ethereum becomes mainstream

In last year's blog post, we noted that Ethereum's "creator economy" was showing signs of growth.

The trading volume of crypto art surged in December, with indications that more and more artists were trying to use Ethereum as a tool to capture the value of their works. The following year exceeded expectations.

In 2021, artists, musicians, writers, and other creators earned a total of $3.5 billion using Ethereum. This total makes Ethereum one of the largest global creator platforms.

In 2021, the income earned by artists and musicians on Ethereum surpassed that of OnlyFans or Patreon, nearly matching that of the largest creator platform in the world.

What is the creator economy?

Ethereum's "creator economy" is a set of tools, services, and markets that enable creative individuals around the world to earn from their work using Ethereum.

So far, the internet's "creator economy" has been dominated by large centralized platforms. Most of these use a similar model, where platforms like YouTube or Spotify earn revenue from ads or subscriptions and then leave a small portion of that revenue to creators.

This business model has turned Spotify into a $40 billion company. But it has left most artists dissatisfied, as they earn only a small fraction from each stream. In 2020, only 13,400 artists earned more than $50,000 from Spotify (out of 1.2 million artists on the platform).

More artists are working unpaid by posting their works on Instagram or Twitter. Artists are compensated through "exposure," while platforms capture the value.

Ethereum provides creators with new tools to monetize their work. One tool stands out in particular: NFTs. Digital certificates representing ownership of any digital file, ranging from art, music, photography, video, or gaming projects. In 2021, platforms like OpenSea, Rarible, Foundation, Zora, and Mirror enabled artists to create, sell, and trade NFTs.

The NFT ecosystem is in a very early stage. Remember, a year ago, the NFT market barely existed. Today, the vast majority of trading volume and users are concentrated on one platform (OpenSea). However, competitors are emerging, including decentralized exchanges. As we learned from the history of decentralized exchanges (dex) and the incredible growth of Uniswap, decentralized projects that give ownership to users can compete meaningfully with existing centralized businesses.

The rapid expansion of the NFT market has attracted mainstream interest. Steph Curry, Eminem, and Shaquille O'Neal purchased Bored Apes. Adidas also bought digital land and released its own NFT collection. Budweiser, Paris Hilton, Trey Songz, Drake Bell, and the CEO of Shopify all registered ENS names and featured them in their Twitter bios.

In addition to soaring NFT valuations and celebrity interest, the emergence of Ethereum's creator economy marks a period of calm before the storm for the community.

For most of the history of the crypto industry, the majority of people who could make a living using these technologies belonged to just a few categories: investors, developers, or people working for crypto companies.

But in 2021, that changed.

This year, more people from new industries and diverse professional backgrounds began investing in Ethereum. By 2021, people could earn from Ethereum without any pre-existing capital, technical skills, financial or investment backgrounds, or working for crypto startups.

These creators are not just ordinary users; they are core members of the Ethereum community who rely on it and have significant stakes in the ecosystem. This shift has led to an influx of new ideas, communities, talent, perspectives, and attention, changing the Ethereum ecosystem and impacting its future.

Notably, many new Ethereum users are concerned about the energy consumed by proof of work. Fortunately, they are joining a community that can share the anxiety together. Since 2014, the Ethereum community has known that proof of work consumes too much energy and has been working to end it.

3. Core protocol upgrades

In 2021, the Ethereum community made steady progress in transitioning to proof of stake, with two major mainnet upgrades that brought changes such as a new fee market and many small optimizations.

The research, development, coordination, and implementation of these upgrades were carried out by independent teams from around the world through open research and collaboration. As always, Ethereum is a marketplace, not a cathedral.

Most of the work was done by teams building and maintaining individual clients. Ethereum is the only blockchain with multiple independent teams actively building production client software.

Client diversity has always been a priority for the Ethereum community, although it remains challenging in practice. Client diversity helps prevent bugs in a specific client that could undermine its monetary value, but it can also serve as a check against governance capture by a core group of developers. Ethereum is a "specification-first" blockchain, meaning the rules of the protocol are independent of any specific software or the individuals or groups maintaining that software. Anyone can implement the specification and build their own client to compete with existing ones.

This year, client teams and the larger development community made two substantial upgrades to the Ethereum mainnet: the "Berlin" upgrade in April and the "London" upgrade in August. These upgrades included several changes. Notably, EIP-1559 reformed Ethereum's fee market (discussed in detail below), but also included key changes like EIP-2929, which improved Ethereum's defenses against DOS attacks.

The teams also upgraded "Altair" to the "Beacon Chain" (which has been running in parallel with the Ethereum mainnet since December 1, 2020). The Altair upgrade enabled light clients to reach consensus and updated slashing and vitality incentives.

All this work is in the context of the "merge," which is ongoing. Ethereum's proof of work system will be permanently shut down in favor of proof of stake (discussed in detail below).

Even during this period of change, the Ethereum mainnet continued to process and secure billions of dollars without interruption.

EIP-1559 - Fee Market Reform

On August 5, 2021, EIP-1559 went live on the Ethereum mainnet. This upgrade made several reforms to Ethereum's "fee market," which is a set of rules defining how users pay to have their transactions recorded on the Ethereum blockchain.

EIP-1559 has multiple goals:

• Reduce the likelihood of users overpaying for transactions
• Reduce transaction congestion rates
• Enhance protocol security by lowering the likelihood of reorgs and making DOS attacks more expensive
• Burn a portion of fees, which can appreciate ETH and enhance Ethereum's economic security

Like most Ethereum protocol upgrades, this is the result of years of research, development, testing, and debate within the Ethereum community. Vitalik shared early ideas in a blog post in 2014, followed by an article on ethresear.ch in July 2018 and a draft EIP ("Ethereum Improvement Proposal") in 2019. This was followed by two years of analysis and discussion, including contributions from Tim Roughgarden.

The adoption of EIP-1559 is not yet complete. Some wallets, exchanges, and other applications need to upgrade their software to fully utilize the new fee market.

The above chart shows the breakdown of Ethereum's "Type 2" (transactions using EIP-1559) and "Legacy" transactions. By the end of 2021, about 35% of transactions on Ethereum were still using "legacy" transactions. However, even legacy transactions can benefit from EIP-1559, as it improves the way gas estimates are generated.

Many wallets and exchanges have enabled EIP-1559 transactions, including MetaMask, Rainbow, MyCrypto, Frame, Trezor, Brave, Coinbase (and Coinbase Wallet), Blockfi, FTX, and others.

Four months after the changes took effect, EIP-1559 is achieving its goal of improving the Ethereum user experience:

In this chart, the blue line shows the median gas price for traditional transactions, while the orange line shows the gas price for Type 2 (EIP-1559) transactions. After implementing EIP-1559, Type 2 transactions averaged lower than traditional transactions.

The above chart shows the benefits in more detail. The blue line shows the difference in gas prices between the two transaction types since EIP-1559 went live (the higher the line, the more savings). The cost of traditional transactions has always been 10-20 gwei higher.

EIP-1559 also appears to have reduced the likelihood of transactions getting stuck without requiring users to preemptively overpay (many users accustomed to stuck transactions have been doing this). If you are interested in learning more, check out this article from pintail, this article from Coinbase, and this article from blocknative.

Burn Mechanism

EIP-1559 also introduced a change where a portion of the fees each user pays for using the protocol is burned ("destroyed"). This means that each transaction removes a certain amount of ETH from the total supply.

This creates a mechanism for appreciating ETH—an important part of the broader vision of making Ethereum the most secure blockchain in the world.

Ethereum's consensus mechanism partly depends on the value of ETH. Under PoW, this is because miners earn ETH rewards for securing the network, while under PoS, this is true because stakers earn ETH rewards for securing the network and because they need to stake ETH to provide that security.

Burning a portion of the fees establishes a relationship between the protocol's usage (transaction fees) and the value of ETH itself (through reducing supply). Since August 2021, 1.32 million ETH have been burned.

The yellow represents days and weeks of negative issuance, during which Ethereum was heavily used, and the fees paid from EIP-1559 exceeded the new issuance occurring per block. Keep in mind that these are the results under the current PoW system, and transitioning to PoS next year will result in lower issuance.

The Merge

The migration from proof of work to proof of stake has been one of the earliest visions of the Ethereum community.

While proof of work may have been necessary for the initial experiments in blockchain design, it has become clear over the subsequent 12 years that better designs are possible. Designs that are more secure and do not consume excessive energy to provide strong economic security.

Ethereum's proof of stake system is the culmination of over 7 years of research and development. Why did it take so long? Since the beginning of this process, the Ethereum community has been unwilling to compromise on decentralization.

While different proof of stake systems exist on other chains today, most of them have made significant compromises on decentralization. They rely on some form of delegation, meaning the actual role of block validation is concentrated in the hands of a few stakers.

While some communities settled for this, Ethereum innovated. Advances in new technology have allowed Ethereum to maximize decentralization and guarantee security. Advances in BLS signatures used in Ethereum PoS allow thousands of nodes to participate in consensus, meaning Ethereum's PoS does not require delegation. Thousands of individual validators participate instead of a few professional staking organizations.

At the same time, Ethereum's design keeps the technical requirements for staking low enough that anyone with a laptop can stake at home and be on par with professional staking services.

Ethereum's proof of stake system is live—it just hasn't been used to secure any user activity yet. The Beacon Chain—Ethereum's proof of stake mechanism—has been running since December 1, 2020, without any major issues.

Last year, users staked over 8 million ETH on the Beacon Chain, worth about $26 billion:

The remaining work is to merge the existing Ethereum L1 into its new proof of stake infrastructure to replace proof of work.

As the Beacon Chain achieves self-operation, the Ethereum community has passed several milestone merges:

• In April, the Rayonism project witnessed developers bringing together a simulated merge testnet and some early shard designs.
• In October, client teams gathered in Greece for the Amphora retreat, which produced a brief multi-client testnet.
• In November, the Kintsugi testnet continued to collaborate with a long-term multi-client testnet based on the latest specifications.

Once the specifications are finalized and end-users and application developers widely use the new testnet, the existing testnet will be used for dry runs of the Merge. Assuming these dry runs go smoothly, the focus will shift to the final step: executing the merge on the mainnet and permanently ending proof of work.

User Diversity

Ethereum has many client implementations, each with a different share of the total number of validators participating in Proof of Stake. Today, client diversity is far from optimal:

Ideally, no single client should own more than 33% of the network. If each individual client is below this percentage, the risk of a bug found in a client affecting the network can be reduced.

Ideal client diversity is a theoretically achievable goal: Ethereum has four excellent staking clients—Lighthouse, Nimbus, Prysm, Teku—and a fifth candidate, Lodestar, has recently emerged.

Before the merge, it would be beneficial if no client owned more than 50% of the network. Without going into too much detail, in the (unlikely) case of a chain fork, keeping clients below 50% would provide a safety buffer for client developers to resolve issues without a large-scale slashing event.

Moving towards better client diversity is in everyone's interest—even the developers of the majority client. It is commendable that Prysmatic Labs recognizes this and is working to reduce their majority.

The Staking Ecosystem Expands

Ethereum's proof of stake allows everyone, from hobbyists to institutions, to stake ETH and participate in securing the network. As the stakeholder community grows, the ecosystem of services, tools, infrastructure, and applications has developed:

• Rocketpool is a highly anticipated decentralized staking protocol that launched in November 2021. Rocketpool is a protocol that allows users to deposit ETH and share staking rewards without managing any staking infrastructure themselves. In short, users of the protocol securely deposit their ETH into a network of node operators coordinated by the Rocketpool protocol. Decentralized staking protocols are important infrastructure for nurturing a healthy staking ecosystem. At the time of writing, 74K ETH has been staked in Rocketpool.
• Lido is also a staking protocol but has additional trust assumptions in its current implementation. By January 2021 (two months after the Beacon Chain launched), 100K ETH had been staked with Lido. By the end of this year, 33,000 independent depositors had staked 1.6 million ETH worth $13 billion with Lido, and Lido has made good progress in client diversity within its network of operators providing services for the protocol.
• Meanwhile, the ecosystem of staking tools is also growing:
• The StakeHouse community released eth-wizard (a CLI installation tool for hobbyists) and Wagyu (a one-click Eth2 staking installer).
• Existing node hardware providers Dappnode and Avado have expanded their Ethereum staking products.
• Stereum launched an open-source node setup tool.

Want to stake your ETH? The best starting point is ethereum.org.

4. DAOs cross the tipping point

One of Ethereum's earliest dreams was to enable "Decentralized Autonomous Organizations" (DAOs). Because Ethereum allows anyone to write arbitrary rules in code, we can use these rules to design organizations or governance systems that allow a group of people to make decisions collectively through voting or other mechanisms.

The DAO ecosystem had a breakthrough moment this year. A simple yet viable tech stack came together, enabling existing DAOs to get work done, while newcomers broke through the boundaries of DAOs and who could be part of them.

The number of unique monthly voters participating in DAOs on Snapshot grew throughout the year, with explosive growth in November and December:

Today, there are hundreds of DAOs managing daily activities, paying membership fees, building products, and voting on the use of shared funds. DAOs on Ethereum collectively manage assets worth over $16 billion.

What is a DAO?

"DAO" is used to describe a wide range of structures. Typically, a DAO refers to any group of people using a blockchain like Ethereum to collectively manage something on-chain. This can sometimes be money (like ETH or tokens in a DAO treasury), but it can also include NFTs, parameters of on-chain protocols like MakerDAO, or all of the above.

While DAOs have existed on Ethereum since 2016, these early experiments were more scientific projects than real products.

But in the past few years, DAOs have become a practical necessity. The first major driving force was DeFi protocols, which wanted to decentralize credibly—handing control of their protocols to a user base that votes with tokens ("governance tokens").

The basic structure pioneered by protocols like Compound in 2020 has become the de facto standard for many DAOs launched since September 2020, such as Uniswap.

In 2021, the growth of DAOs was remarkable as it occurred outside of the first major entrants, the DeFi protocols. These DAOs began to showcase the breadth of design space for on-chain organizations.

• ENS: Launched in 2017, ENS is a decentralized naming protocol that allows users to create simple usernames (yourname.eth) that can be used as Ethereum accounts, receive non-ETH cryptocurrencies (including Bitcoin), or serve as web URLs. In 2021, ENS launched a DAO to manage certain parameters of the ENS protocol, as well as a community fund to support the ongoing development of the ENS ecosystem.
• ConstitutionDAO: In just a few days in November, strangers from the internet collectively raised $44 million to buy a copy of the U.S. Constitution. A total of 17,521 different accounts contributed. The project received mainstream coverage and sparked a frenzy of live bidding, with a group of confused auctioneers mediating the bidding competition between the new organization representing the internet and the old financial world.
• PleasrDAO: Starting from a single tweet, it quickly grew into an investment club. PleasrDAO is exploring different parts of the DAO design space—it is not a large organization with tens of thousands of members but a relatively small investment club where members pool funds for joint purchases. Notably, PleasrDAO has purchased some highly sought-after cultural assets, such as a Doge 1/1 or an unreleased Wu-Tang album.
• Friends with Benefits (FWB): An online social community where membership takes the form of ownership of the $FWB token. This token is used to control access to various online and offline spaces: chat groups, parties, dinners, events, etc.
• MakerDAO: Originally a DAO, but later established some traditional organizational structures in 2018. MakerDAO is the creator of the DAI stablecoin, the first decentralized stablecoin on Ethereum and one of the most successful DeFi projects to date. This year, MakerDAO fulfilled its commitment to decentralization by shutting down its underlying network and transferring control of the Maker protocol to a DAO managed by its token holders.

DAOs are a very versatile toolkit that provides a large design space. With private keys and smart contracts, we can design almost any arbitrary system through which humans can collectively manage on-chain assets and protocols.

As a result, we are seeing a wide range of applications for DAOs. Soon, it may be difficult to discuss them as a useful category. DAOs are a means of moving protocols away from founder control, a tool for online communities to quickly and seamlessly pool funds to achieve common goals, a new type of social network, and a new way to collectively fund public goods.

The growth of DAOs this year has benefited from a set of easy-to-use software tools.

Many DAOs use a simple combination of tools. For on-chain smart contracts, most use a branch of the Compound system. Voting itself is handled by projects like Snapshot, while discussions and debates on individual proposals take place on forums like Discourse.

In 2021, the range of tools available for creating and managing DAOs expanded:

• Mirror launched a set of tools to help people create "media DAOs": collaboratively publishing and owning content created on Mirror.
• Coordinape spun out of the Yearn community and provides a framework for distributed teams to collaboratively decide on the compensation for the work done by DAO members.
• Rabbithole launched several tools to onboard new users into DAOs and cultivate skills and credentials for working in DAOs.
• Forward-thinking governments have established new legal structures to simplify the formation and reporting of DAOs, such as Wyoming.

As DAOs expand to meet the needs of millions of users globally, they face numerous challenges and issues to overcome. Several key challenges remain in 2022:

• Today, most DAOs use some form of token voting. This means decisions are made based on the ownership proportions of certain "governance tokens." Coin voting systems have many known drawbacks. Experiments like Proof of Humanity and BrightID provide a way to build governance systems based on individuals rather than tokens.
• Finding governance structures and workflows that enable distributed teams to meaningfully build products and coordinate actions.
• Legal systems can be very slow to adapt to new forms of productive human activity, and DAOs are no exception. The lack of a clear legal framework can pose risks for DAO members. Jurisdictions around the world continue to work on this—see this paper by David Kerr and Miles Jennings for recent work in the U.S.

New organizations are emerging to address these and other challenges. The DAO Research Collective is one such organization aimed at making it easier for DAO founders to find answers and information on these issues.

5. Moving Forward!

As with every year, there is too much happening in the Ethereum ecosystem to summarize in just one blog post. But Ethereum is much larger than the four themes mentioned above—some other developments in 2021 include:

• Identity: Ethereum Name Service (ENS) saw breakthrough growth, expanding to hundreds of thousands of users, hundreds of integrations, and a new DAO community treasury ($1.9 billion) to fund the ongoing development of the ecosystem. Proof of Personhood and BrightID were used as anti-sybil mechanisms, and logging in with Ethereum standards gained traction, making having an Ethereum identity fashionable.
• Gaming: The user base of Axie Infinity astonishingly grew to 2.9 million, making it the most successful game based on Ethereum. New cryptocurrency organizations like Yield Guild sparked interest in play-to-earn gaming ecosystems. Skyweaver launched on Polygon, Dark Forest released v0.6, and continued to build a fervent following around its crypto-native on-chain strategy game.
• Public Goods Funding: CLRFund (a protocol that allows anyone to run their own CLR) completed their trusted setup ceremony and facilitated multiple rounds of funding. Gitcoin continued their successful CLR product, raising over $24 million throughout the year. Optimism conducted an experiment to provide retroactive funding for public goods, and the Ethereum Foundation launched a client incentive program to sustainably fund client development and maintenance. A new public goods organization, 0xPARC, was established to focus on application-level innovation.

2021 was a bullish year for the Ethereum community. The ecosystem passed significant milestones, and proof of work is nearing its end.

When the market is in your favor, it’s easy to feel like a winner. It’s easier to get distracted.

But this city won’t build itself—see you on the other side of proof of work.

------Josh Stark & Evan Van Ness