Advanced Blockchain’s investment thesis in NEAR protocol
Advanced Blockchain AG is excited to announce our 7-figure strategic investment into NEAR protocol, a decentralized application (dApp) platform with a strong focus on ease of developer use and user-friendliness for end-users. Three Arrows Capital led the round with participation from Mechanism Capital, Dragonfly Capital, Andreessen Horowitz (a16z), Alameda Research, and many other leading crypto VCs.This post outlines the uniqueness of NEAR Protocol among other smart contract platforms and our investment thesis behind our vision for NEAR’s long-term success.
What is NEAR Protocol?
Similar to other Layer 1 (L1) blockchains like Ethereum and Polkadot, NEAR is a generalized computation smart contract platform designed to support the development of highly scalable and usable decentralized applications (dApps). Founded in 2018 by Ilya Polosukhin and Alexander Skidanov and launched in 2020, NEAR, since its inception, has always caught the eyes of top brass VCs in the space, garnering significant early-stage financing.As an L1, NEAR has maintained a rigorous focus on solving the blockchain trilemma, a concept highlighting blockchains' compromises on decentralization, security, and scalability. A significant portion of people have characterized NEAR as a sleeping giant. Understandably, this perception persisted because it has been under the radar especially with other layers like Ethereum, Avalanche, Solana, etc., making the rounds in the ongoing DeFi boom that picked pace since the summer of 2020. With its ethos as “blockchain built for mass adoption” has continued to push through with its superior UX, core technology, and robust community.
A technical deep dive is a bit out of scope for this piece, but let’s cover NEAR’s salient differentiators below.
NEAR protocol is a sharded proof-of-stake (POS) blockchain leveraging the Nightshade consensus mechanism built to increase scalability commensurately with the system's number of nodes and validators. Current performance data of Nightshade, even during its first stage of deployment, shows NEAR being one of the performant blockchains in the market today. NEAR has one of the fastest times to finality at approximately 2 seconds and is able to execute almost 5,000 tx/second. This high performance enables extremely low (and predictable) transaction fees, almost always lower than $.01 per transaction.It is important to note, this is only Phase 1 of its deployment. During phase 2, the computation requirements to run validator nodes will be reduced, most likely securing 400 validators during this phase of the rollout. Phase 2 fundamentally optimizes for current and future decentralization. Phase 3 further optimizes the consensus to increase throughput before phase 4 ultimately “dynamically Reshards” the chain. As a result, one can argue that NEAR has built one of the best tech stacks of any blockchain in the industry.
Best-in-class UX & Dev-X
One of the undisputed barriers to Web 3.0 mass adoption is the complicated user experience (UX) it poses to its users. For example, the UX feel of most web3 wallets cannot compete with their counterparts in the fintech and traditional finance (TradFi) sector. Coupled with that is the fact users have to pay gas fees for signing transactions from their wallets which can be exorbitant at peak times, thus promoting widespread user aversion. NEAR abstract these difficulties as well other challenges plaguing other L1s.
As an example, the ability to stake NEAR tokens directly through a NEAR wallet or an EVM compatible wallet is incredibly useful for stakers helping you secure the network presenting an opportunity for them to earn staking rewards. Furthermore, predefined token list as present in NEAR wallet’s design removes the need to manually add tokens, as with Metamask and other Ethereum wallets.
Another compelling differentiator is the inherent functionality enabling new users to interact with NEAR without a wallet through the protocol’s native provision of temporary access keys. In addition, app developers can pre-load temp keys with gas to enable new users to interact with protocols without transaction fees.
Other differentiating features include predictable gas costs, accessible subscriptions automating app permissions (removing pop-up windows as often seen with products like Metamask), and clean user interfaces.
On the Dev-X side, NEAR is an incredibly flexible and adaptable blockchain. For example, it is intrinsically compatible with Rust, WASM, and EVM (Solidity). As a result, programmers spanning multiple languages can easily begin building on NEAR. This is in contrast to Ethereum, which is only compatible with Solidity, which is objectively niche. Other developer-friendly components of the platform include myriad middleware solutions, one-click deploys, SDKs, simple front-end integrations, and much more.
Focus on Interoperability
Interoperability and the “cross-chain future” sit at the core of our investment thesis at Advanced Blockchain AG. In the future, we believe the underlying blockchain under which applications are deployed will be largely abstracted away by leveraging interoperability and cross-chain infrastructure. To that end, an attractive facet of our investment into NEAR is its focus on supporting interoperability.
Most relevantly, NEAR is fully EVM-compatible via the Aurora implementation. Ethereum compatibility provides a plethora of benefits by enabling the implementation of apps on an EVM-compatible environment and the ability to use tools and infrastructure that are otherwise Ethereum-native while simultaneously benefiting from NEAR's performance and scalability enhancements.
Another core interoperability feature specific to NEAR is the implementation of the Rainbow Bridge. Rainbow is a trustless bridge facilitating the seamless movement of NEAR assets to Ethereum, and vice versa. Other bridging infrastructure worth noting includes Advanced Blockchain AG’s portfolio company Composable Finance’s Substrate <> EVM bridge, which solidifies interoperability between Polkadot and Kusama to EVM chains, including Aurora/NEAR protocol.
In addition, similar to Cosmos SDK chains or AVAX subnets, app-specific chains are enabled through an initiative called Octopus network, and interoperability of "appchains" is further enabled through the Octopus Relay. Octopus Relay allows appchains interoperability with NEAR and Ethereum (through rainbow) as well as IBC enabled blockchains by utilizing a specialized IBC pallet.
Robust Support Ecosystem and Backers
Advanced Blockchain fundamentally believes blockchains are inherently community-oriented technologies. Thus, strong support bases are integral for the success of every blockchain. Some would argue that community is the most important predictor of long-term success, with the most prominent example being Ethereum in spite of its obvious technical deficiencies has corresponding support ecosystem like ConsenSys. Let’s break down the different components of their ecosystem.
First, and arguably most importantly, is the size of their developer base. According to Electric Capital’s developer report from 2021, NEAR has the 6th largest developer base in the industry, boasting a larger base than chains with higher market capitalizations such as Algorand and Avalanche. More developers = more applications = more users. By capturing significant value, it is only a matter of time before value catches up with price.
Secondly, NEAR has a massive war chest to support innovations leveraging its technology to build innovative applications. The NEAR ecosystem fund is worth over $1.2B, with approximately $800m allocated for grants. By doling out grants, NEAR is setting itself up for the domino effect that results with increased developer and network activity, thereby bootstrap needed TVL in the entire ecosystem.
Lastly, NEAR is supported by some of the top VCs in the industry, including Dragonfly Capital, a16z, CoinFund, Mechanism Capital, Three Arrows Capital, and Jump Capital to name a few. These groups have continued to support NEAR in every phase of development, alluding to their conviction in the long-term viability of the blockchain.
Network Activity Growth
There are a plethora of data points which outline the immense growth of platform activity on top of NEAR. For instance, on March 1st 2021, daily transaction volume recorded on NEAR reached 7,380. A year later, on March 1, 2022, transaction volume has grown by 45x reaching 346,000.
Another staggering figure is the growth of active accounts over the same period. March 1st 2021 saw 1,166 active accounts vs March 1st 2022, which registered 16,460 active accounts. This growth equals 14x growth, which again represents staggering growth. There are tons of other data points which articulate the growth story, all of which can be found here: https://explorer.near.org/stats
While there are quite a few key value metrics of NEAR (some of which are not captured in this piece), there are two other points that necessitated our decision to invest in NEAR and its thriving ecosystem.
Interestingly, we entered the NEAR ecosystem orthogonally through an investment we made a few months ago (still in stealth). This company mentioned they received a grant from the NEAR foundation and have been in talks to get further integrated into the wider ecosystem. At that point, we had not thought much about NEAR but were intrigued by its ability to attract top talent (i.e. the CEO of the undisclosed portfolio company). After extensive due diligence and completion of our investment, we decided NEAR exposure was independently an attractive opportunity and also meant the strategic alignment of incentives with our new portfolio company.
A final important factor, we feel the token utility model of NEAR token is sensible and supports long-term token value accrual. Specifically, the NEAR token is used for transaction fees, therefore increasing demand linearly with network adoption. Furthermore, the NEAR token is used to secure the network via its proof-of-stake consensus mechanism, awarding stakers and validators with staking rewards for economically securing the network.
We maintain strong conviction, in the NEAR protocol, due to the network’s superior technology, rigorous emphasis on UX (and thus mainstream adoption), ability to facilitate interoperability, robust supports networks (ecosystem fund + strong VCs), and astonishingly strong growth metrics. By all indications, NEAR is a promising layer 1 blockchain assuredly positioned to enter and maintain its position in the pantheon of relevant smart contract platforms.