NEAR Ecosystem Progress Research Report: Underlying Technology, Ecological Status, and Financing Situation

Source: Cabin VC

In the second half of 2021, the public chain sector experienced a collective explosion driven by the development of the DeFi ecosystem, leading to intensified competition and a restructuring of the valuation logic of public chain ecosystems. This report mainly organizes the existing ecological development of the decentralized Layer 1 blockchain protocol and smart contract platform NEAR Protocol from the perspectives of underlying technology, ecological progress, and financing situation for reference.

1. Progress in Underlying Technology

1. Current Status of the Platform

NEAR is a public chain that uses full state sharding technology and is based on a proof-of-stake (PoS) consensus mechanism. Initially envisioned as "Ethereum 2.0," it has become one of the competitors in the public chain sector, with a performance target of 100,000 TPS.

The biggest feature of NEAR is its sharding solution. Since the ultimate scalability solution for ETH 2.0 also relies on sharding technology, NEAR's early launch has given it a certain window of advantage. The characteristic of sharding technology is that it allows for parallel processing of transactions by using multiple network devices, thereby distributing the workload of transaction validation to reduce the redundant computational load on network nodes. This sharding technology gives NEAR's public chain a relatively high level of recognition.

In addition, sharding technology not only enhances scalability but also addresses issues of composability, cross-shard communication delays, and cross-shard transaction fees, all of which are significant demands in the DApp and DeFi fields, supporting the development of DeFi projects within the NEAR ecosystem.

2. Technical and Development Progress

In the past year, NEAR has been relatively active in updates. According to cryptomiso statistics, it ranks 21st in terms of code update frequency. The Night Shade sharding design and Rainbow Bridge have progressed rapidly, gaining advantages in the niche field of cross-chain bridges.

(Data Source: github; Ranking Statistics: cryptomiso.com)

(1) Night Shade Sharding Design

The Night Shade sharding design is the sharding technology used by NEAR, which constructs a compatible L1 public chain that can bridge with Ethereum. Compared to the "shard chain" model adopted by ETH 2.0, Night Shade maintains a separate main chain, where block producers and validators jointly construct a single main chain.

The main chain state is divided into n shards. According to public information, NEAR currently has 4 shards, each capable of processing 800 to 1000 transactions per second, with each shard's scalability being 50 to 100 times that of Ethereum 1.0.

NEAR launched its mainnet in October 2020, with a development plan consisting of four phases:

• Phase 0: Simplified Night Shade Protocol (enhancing network throughput);
• Phase 1: Chunk-only Producer (further enhancing network decentralization);
• Phase 2: Night Shade Protocol (lowering the threshold for validator usage);
• Phase 3: Dynamic Sharding (infinite scalability);

In September 2021, NEAR entered Phase 0. The team expects to reach Phase 1 by early 2022, Phase 2 in the third quarter of the same year, and Phase 3 in the fourth quarter.

In comparison to the three main phases and development status of Ethereum 2.0:

• Phase 0: Beacon Chain, launching the proof-of-stake (PoS) network;
• Phase 1: Shard Chains (making sharding possible);
• Phase 2: Transition and Execution (DApps and smart contracts complete migration and achieve cross-chain functionalities);

Ethereum launched Phase 0 in December 2020 and pushed for Phase 1 in 2021. The community estimates that the transition from PoW to PoS will occur around June 2022, with some uncertainty. Overall, NEAR has been faster in implementing sharding technology.

According to NEAR's upcoming development plan, the team expects to achieve Phase 3 (dynamic sharding) in the fourth quarter of 2022, where the network will dynamically split and merge shards based on resource usage, theoretically allowing NEAR to achieve almost infinite scalability.

(2) Cross-Chain Bridge and Ethereum EVM

The new wave of DeFi that began in the first quarter of 2021 has intensified competition among public chains. As the demand for cross-chain asset transfers increases, a segmented cross-chain bridge market has emerged, and NEAR has demonstrated early advantages in its technical layout.

NEAR's Rainbow Bridge is used to achieve interoperability between the Ethereum and NEAR networks, representing a heterogeneous cross-chain solution that connects two independent underlying public chains to address existing ecological barriers.

The technical principle of the Rainbow Bridge is that it uses two lightweight clients (an Ethereum lightweight client executed in Rust and a NEAR lightweight client executed in Solidity) to allow both parties to verify their tracked states in a trustless manner. Once finality is confirmed, data is transferred to the other ecosystem via a relay layer.

This enables cross-chain asset transfer and interoperability with Ethereum, allowing users, DApps, and developers to transfer assets between Ethereum and NEAR without permission.

In December 2020, NEAR officially launched the Ethereum cross-chain Rainbow Bridge; in the first quarter of 2021, the Rainbow Bridge began operating between the NEAR and Ethereum mainnets, with over 40 DeFi projects starting to build in the early stages; in April 2021, the Rainbow Bridge officially went live; and in November 2021, the Rainbow Bridge 2.0 version was officially launched. In February 2021, NEAR announced its EVM plan, and compatibility with Ethereum EVM means that Ethereum applications can run on NEAR with almost zero difficulty.

NEAR's early launch of the cross-chain bridge and Ethereum EVM has benefited from the trend of cross-chain bridges in public chains, attracting some Ethereum ecosystem projects to migrate.

3. Network and Platform Activity Levels

Since July 2021, the number of new addresses on the NEAR network has increased exponentially. Over a span of more than 7 months, the total number of addresses exceeded 4.1982 million, with the number of active addresses reaching 4.0008 million. In January 2022, NEAR added 1.882 million new addresses in a single month, an increase of 404.08% compared to the previous month.

(Daily New Account Numbers, Data Source: explorer.near.org)

(Total New Account Numbers, Data Source: explorer.near.org)

The number of contracts on the NEAR network has grown steadily, with monthly contract growth exceeding 3,000 in July and November 2021; in December 2021 and November 2022, monthly contract growth exceeded 4,000. Meanwhile, the number of daily active contracts has more than doubled since July 2021 and has maintained an active trend thereafter.

(Daily Active Contract Numbers, Data Source: explorer.near.org)

(Total New Contract Numbers, Data Source: explorer.near.org)

NEAR's early launch of the cross-chain bridge and Ethereum EVM has given it a certain first-mover advantage in the niche concept of cross-chain bridges, attracting some Ethereum ecosystem projects to migrate. There is still potential for expansion in the niche concept of public chains.

2. Ecological Progress

1. Ecological Overview

As of February 21, 2022, the NEAR ecosystem mainly includes infrastructure, scaling tools, development tools, DeFi, NFT, and other fields, with a total of 293 ecological projects and cooperative projects, including more than 17 fully native projects.

In the Coinmarketcap classification of the Near Protocol ecosystem, the total market capitalization of this ecosystem currently reaches $18.527 billion. The top ten projects by market capitalization within the ecosystem and cooperative projects are: Chainlink, NEAR, The Graph, Maker, Siacoin, Ontology, Band Protocol, Covalent, Balancer, Somnium Space Cubes. Among these, the DeFi sector has the most projects, and native projects still have room for development.

According to defillama data, the TVL of the NEAR DeFi ecosystem first surpassed $100 million in September 2021, peaking above $200 million. The recent average TVL has maintained at around $132 million. The top three projects by total locked value are: Ref Finance (REF), Meta Pool (META), and Oin Finance (OIN), which are considered DeFi blue chips on the NEAR chain, with Ref Finance contributing a staggering 70% of the TVL.

(Data Source: defillama)

2. Ecological Style and Main Tracks

Observing the market capitalization changes of NEAR, it can be seen that NEAR started slowly in public chain competition but showed signs of acceleration in 2021. Due to the relatively long timeline for the full implementation of ETH 2.0, the market has focused on NEAR's development during this window period.

NEAR has a strong focus on cross-chain capabilities, aiming to bridge the Ethereum ecosystem and directly compete with ETH 2.0. NEAR's scalability and reduced transaction fees lower the usage threshold, and the purpose of the Rainbow Bridge is also to achieve interoperability with Ethereum, supporting EVM and related tools. With the development of the NFT and DeFi sectors and the migration of some Ethereum ecosystem projects, NEAR's EVM Aurora data has shown stable growth.

As of February 21, in the NEAR ecosystem counted by awesomenear, the number of projects in infrastructure, NFT, and DeFi fields is the highest, reaching 81, 75, and 75 respectively; among the existing 147 DApps, the project categories are mainly NFT, DeFi, Gaming, and DAO. In more representative NEAR native projects, the number of infrastructure and scaling tools is the highest:

At the same time, infrastructure and protocols are expanding in their respective fields, forming localized ecosystems, such as Octopus and Aurora. Aurora supports 66 cooperative projects, including The Graph, Math Wallet, imToken, DefiLlama, API3, Cobo, etc.

Additionally, NEAR's underlying sharding technology has introduced combinatorial concepts across different tracks, such as "sharded storage"; furthermore, in overseas communities, the discussion around NEAR's "environmentally friendly blockchain" concept has gained significant attention.

3. Representative Samples and Funding Support

NEAR has relatively complete infrastructure, with NEAR's Ethereum Virtual Machine Aurora and cross-chain bridge Rainbow Bridge providing the foundational conditions to become "ETH 2.0," attracting some development teams from Ethereum to settle in. The officially launched Rainbow Bridge is the first fully decentralized Ethereum cross-chain bridge that operates without trust, allowing for asset transfers without permission and accelerating the construction of financial infrastructure.

In addition to supporting asset transfers, the cross-chain scenarios developed by the Rainbow Bridge also include NFT trading, contract information transmission and storage, creating a friendly environment for NFT and DeFi development.

In mid-2021, the NFT and GameFi concept project ZED RUN stood out among many chain games in the NEAR ecosystem, becoming one of the market's hot games with the participation of leading gaming guild YGG. This game is a typical case of migration from Ethereum to NEAR, signaling some potential within the NEAR ecosystem.

In the DeFi and cross-chain bridge market, DeFi protocols such as Ref Finance, Flux Protocol, Meta Pool, and 1inch have become blue-chip projects on the NEAR chain, providing key roles such as DEX, cross-chain lending, liquid staking, and aggregators.

On this basis, NEAR's official support for the DeFi sector and funding has exceeded market expectations. In October 2021, NEAR launched an $800 million ecological development fund (later increased to $1.6 billion), with DeFi being a key focus of this plan, including $350 million (later increased to $700 million) allocated for DeFi and liquidity mining-related fields.

Compared to the ecological funds of other public chains in the same sector, NEAR's $800 million ecological development fund is substantial enough to support the long-term development of projects within the ecosystem during market cycles:

Additionally, NEAR's first global hackathon has a total prize pool of $1 million, comparable to the prize amounts of previous hackathons held by other public chains like Solana.

NEAR places a high emphasis on its DeFi special fund, with the special fund amount accounting for over 40% of the total amount. Furthermore, the team has independently established the Proximity Labs department to support the ecosystem through Grants DAO. The official announcement states that each grant can receive funding ranging from $5,000 to several million dollars. It is expected that DeFi projects on the NEAR chain will enter a period of explosive growth.

With the incentive of a massive ecological fund, it is anticipated that a large number of DeFi, NFT, and DAO concept projects will emerge in the coming year, leading to a project explosion in subsequent cycles.

4. Ecological Cooperation

In the fourth quarter of 2021, the speed of ecological cooperation for NEAR accelerated: in October 2021, NEAR announced the launch of the test version of the data indexing and querying service The Graph; in November 2021, the Ethereum scaling solution Aurora based on NEAR integrated Chainlink price feeds. According to records, the main cooperative projects within the NEAR ecosystem include:

(Data Source: Community Compilation)

It is expected to primarily target NEAR holders, ecological network validators, DeFi users, NFT players, GameFi players, and others. It will also continuously receive support from the technical developer community, secondary market capital, and institutional supporters.

3. Latest Financing Situation

1. NEAR Financing Scale

Before 2022, NEAR had accumulated over $65.9 million in financing, with investors including DCG, Pantera Capital, Electric Capital, Coinbase Ventures, Blockchain.com, Baidu Ventures, and others.

On January 13, 2022, NEAR completed its latest round of financing of $150 million, led by Three Arrows Capital, with follow-on investments from Mechanism Capital, Dragonfly Capital, a16z, Jump, and MetaWeb.vc (NEAR ecological fund). Most of the investors are native crypto funds, including influential individual investors from leading institutions, providing solid institutional support.

2. Representative Sample Financing Situation

NEAR previously established the Open Web Collective in 2020 to assist with financing, focusing on providing technical support for developers. In 2021, with the support of the aforementioned NEAR ecological $800 million fund, a large amount of capital flowed into the key supported areas of DeFi and NFT within the ecosystem.

From the financing situation, these projects raised millions of dollars during their private placement phases, most of which received support and funding from the NEAR ecosystem during their seed stages. Blue-chip and star projects raised over $10 million in Series A financing, similar to the financing ranges of blue-chip projects on leading public chains. Some migration projects have seen increased narrative and attention after integrating NEAR's underlying technology.

The financing situation of representative samples is as follows:

(1) Infrastructure:

Aurora:

Aurora is the Ethereum Virtual Machine created by the NEAR team and is an important infrastructure within the ecosystem. Aurora's TVL currently stands at $471 million, with migrated Ethereum projects including Terra (LUNA), DODO, Oin Finance, Multichain, The Graph, and others.

In October 2021, Aurora raised $12 million in its first round of financing.

Octopus Network:

Octopus Network is the first application chain development protocol launched on NEAR, providing infrastructure through the validator market of application chains launched by Octopus, where validators can receive tokens for the application chains they are responsible for.

In January 2021, it received a $1 million strategic investment from the NEAR Foundation, with a valuation of $20 million; in April 2021, Octopus Network completed a $3 million seed round financing, maintaining a valuation of $20 million; in July 2021, it raised $5 million in Series A financing, with a valuation of $40 million; in August 2021, it raised approximately $10 million through IDO, obtaining 996,900 NEAR tokens.

(2) DeFi

Ref Finance:

Ref Finance is the first decentralized AMM (automated market maker) trading platform on the NEAR chain, building a complete set of DeFi services and products around its core AMM, making it a typical blue-chip project in the NEAR ecosystem, comparable to Uniswap. In September 2021, Ref Finance launched on the NEAR blockchain, with an APR exceeding 400% in the first two weeks.

On February 18, 2022, Ref Finance raised $4.8 million in financing.

(3) NFT

ZED.RUN (ZEST):

The horse racing game ZEST was previously deployed on Ethereum before migrating to NEAR. In June 2021, Yield Guild Games (YGG) announced investments in NFTs within ZED RUN, attracting significant market attention.

The game development company Virtually Human Studios raised $20 million in Series A financing, led by TCG (The Chernin Group).

Paras:

Paras is an NFT trading platform for crypto digital collectibles built on the NEAR chain. In addition to digital collectibles, it has introduced a paid reading model for comics, gaining popularity within the community; last July, the platform's virtual character IP "Baldy Rich" NFT series attracted community attention.

(4) Others

Machina:

Machina is a POS storage solution that uses NEAR's Night Shade technology to expand stored data. Machina has proposed a unique "sharded storage" concept, gaining market attention. According to official information, Machina currently has over 2,200 active developers, with the storage network expected to launch in the fourth quarter of 2022.

3. Representative Capital and Ecological Connectivity

NEAR has received support from top industry investment institutions, including Coinbase, early on, making it a strong competitor in the public chain sector. Its most recent financing was led by Three Arrows Capital, with participation from former ParaFi Capital partner Santiago Santos, Aave founder Stani Kulechov, hedge fund giant Alan Howard, and other active investors in the crypto space. This reflects a certain recognition in the native crypto field and a solid community foundation.

From the investment style of Coinbase Ventures, according to public data, Coinbase Ventures currently has approximately 32 invested crypto assets, with NEAR ranking 8th in market capitalization. In the public offering information listed on Coinlist, NEAR has achieved returns exceeding 1000%, comparable to other popular public chains like SOL.

Looking at the latest significant financing led by Three Arrows Capital, this hedge fund registered in Singapore was quite active during the 2020-2021 bull market and is also an investor in SOL and AVAX, which saw significant increases last year. One of its founders, Su Zhu, is quite active in the crypto community and holds a certain influence. Currently, Three Arrows Capital's support in the DeFi and NFT directions is quite clear.

According to incomplete statistics, Three Arrows Capital invested in nearly 20 DeFi and DAO concept projects from the end of 2020 to the end of 2021. In 2021, the number of Three Arrows Capital's investment portfolio ranked second only to a16z, with DeFi projects accounting for over 80%. In August 2021, Three Arrows Capital launched the NFT fund Starry Night.

Additionally, Three Arrows Capital has invested in some projects within the Solana ecosystem. Since NEAR operates in the same sector as the Solana and AVAX ecosystems and competes with them, the institutional support methods for the Solana ecosystem can also be applied to support the NEAR ecosystem.

4. Key Development Nodes

1. Competitiveness

The core competitiveness of existing public chains lies in their difficult-to-migrate ecological systems, which include users, developers, and communities. Earlier public chains have formed a certain moat, which has become more apparent after the explosion of the DeFi ecosystem.

As a public chain project from the previous cycle, NEAR has a large scale of funds to support ecological development, sufficient to sustain long-term ecological growth. With sharding technology at its core and the early introduction of the Rainbow Bridge, NEAR has already established a certain market, community, and user base.

In 2021, public chains such as BSC, Solana, Polkadot, Avalanche, NEAR, and Fantom experienced new waves of growth, with most public chains that already have ecosystems possessing technical advantages such as high throughput and low costs. The development of DeFi and cross-chain directions has led to an update in the market's valuation logic for public chain ecosystems.

Taking the typical Solana ecosystem as an example, in July 2020, the crypto trading platform FTX announced the construction of the DEX Serum on Solana, giving Solana the concept of a "exchange public chain," with its token price rising by 170% within a month. In June 2021, the cross-chain bridge Neon Labs was launched between Ethereum and Solana, further enhancing market expectations for the Solana ecosystem.

Subsequently, many institutions have compared public chains and ecosystems from the same period to some extent with the Solana ecosystem, adjusting their valuation expectations, and NEAR is one of them. Currently, NEAR's valuation ranks in the middle of public chains. The TVL ranking of public chains also has significant room for growth.

(Data Source: defillama, ranked by TVL)

During the window period before ETH 2.0 fully matures, NEAR has captured certain early benefits through an "available ETH 2.0." NEAR is rapidly advancing cross-chain bridges and Ethereum EVM, providing a foundation for the development of NFTs and DeFi, benefiting from the trend of public chain bridging. Given the uncertainty regarding the time required for the official migration of Ethereum 2.0's DApp ecosystem, NEAR's narrative still has room for growth.

Currently, NEAR has a market capitalization of $6.233 billion, fluctuating around the 25-35 range in market capitalization rankings. Compared to public chains in the same sector like Solana and Avalanche, its market capitalization is still positioned in the middle of the public chain sector. Considering the market's changing valuation logic for public chain ecosystems and benchmarking against competitors, NEAR's current market capitalization still has room for growth, with advantages in public chain characteristics, supporting institutions, and DeFi ecosystem support.

Moreover, the funding within the NEAR ecosystem is sufficiently ample. Given that the market is likely to remain in a fluctuating downward range, the competition and development of public chain ecosystems require long-term financial support. It is expected that NEAR's global ecological incentives worth $1.6 billion and Proximity Labs' Grants DAO valued at nearly $700 million will play a very important role in project incubation.

From the market response, the announcement of NEAR's ecological fund had a strong impact. Footprint Analytics shows that after the fund's announcement, NEAR's total locked value in DeFi quickly surpassed $140 million, increasing by 20% on the same day, and the native token NEAR also reached an all-time high the day after the announcement.

2. Risk Points

(1) Intensified competition in ecological development: The pattern of multiple chains coexisting in underlying protocols has emerged and is strong in sustainability. Each public chain ecosystem needs to develop its independent ecosystem, and the competition and cooperative relationships between ecosystems are becoming increasingly complex, with intensified resource competition among ecosystems.

(2) NEAR has invested heavily in resources in the directions of DeFi, NFT, and DAO. The market cycle of DeFi may have a significant impact on the overall development of the on-chain ecosystem.