Hillstone Finance Weekly Update (Dec 19~ 23)
Welcome to the weekly update from Hillstone Finance. We have brought two news for this week:
1. Jehyung Lee(Hillstone finance CTO) participated in the NBN news
NBN News (Dec 23, 2022)
Jehyung Lee — Hillstone Partners Technical Director
Q1.
What is your technical evaluation standard on crypto asset investment?
A.
Talking about evaluating virtual asset projects, I had various attempts and considerations on the industry from 2017 — when blockchain ICO popped off.
Numerous issues were required to be solved in the early era of blockchain technology. There was nothing standardized in the industry before Bitcoin and Ethereum, various technical ideas flooded while adverting their specialty.
Also, many investors were investing in such blockchain tech’s specialty, and evaluating the base foundation of technology was important.
But it was hard work to evaluate the early projects member’s abilities, investigating who is on developing or operating in the background.
Thanks to the blockchain’s personality, the projects open their source to the network. Based on their public asset movement, It was a point to observe the developed output and guess which party invested.
In conclusion, the main development subject for the devs at that time was building up the main network. Because it’s hard to develop, I mainly evaluated whether they can produce it or not — their developing ability.
Also, there were many cases of copypasting Bitcoin or Ethereum’s code and swapping their name. So I evaluated if they were made by themselves, developed under a proper design, and the disparity between the other mainnets.
Afterward, in mid-2019 decentralized financial platforms like Uniswap were released. De-Fi’s came out that worked as the using & exiting way of tokens and formed the industry and market.
Q2.
Which technology would lead the blockchain trends?
A.
In order to look over the next year’s technology trends, it’s necessary to look back on this year’s trends. In this case, I can tell two main things.
This year, NFT had a bullish market, and De-Fi platforms like Terra are declining. Also, the algorithm-based stablecoins collapsed in a series. Lately, the FTX, the world’s second-largest exchange, went bankrupt too.
These are the instances highlighting the risks of cryptocurrency as a financial asset. These also impact the virtual asset market’s overall price drop.
Many were concerned that the end of the blockchain industry is near, as virtual assets’ prices dropped since late 2021. But taking a look at the past there were many cases of industries maturing through this bear market.
In 2017 when the era of ICO ended, there were many concerns about how to utilize the value of virtual assets in 2018. As this sure is the value in result, De-Fi products like De-Fi loan platform are released and platforms like Opensea could come out.
What should we be concerned about is, that De-Fis couldn’t attract external values and became its own league, reproducing the value inside the market has reached its limit.
Therefore, it seems that looking for a way to let external users utilize these will be the main concern to have. (a.k.a “mass-adaption”)
Q.
What are the types and characteristics of Layer 2 virtual assets?
A.
To make mass-adaption and financial transactions, blockchain networks should be swift and have cheap fees. It’s uncomfortable for general users in the current status.
Ethereum for example, more fees are required for a faster network.
It’s been told that good NFT products are better to be issued as fast as could. For general users, supporting credit card payment is demanded but it will take a large concern carrying the high fees and slow network speed of it.
Layer 2 Technology is made to point out this problem.
Layer 2 Technology is a technical attempt to provide a cheap & fast network preserving Ethereum’s security and users.
Typically, transactions are made on blockchain networks such as Ethereum and Bitcoin, and blocks created are similar to voting on an agenda to finalize a transaction at a general shareholders’ meeting. As users increase, shareholders increase too.
Agreeing with many shareholders requires more time and cost. So shareholders’ meeting creates small groups to let them decide on transactions that occur internally.
Finally, the shareholders’ meeting only confirms the approved documents, The stability of the meeting is recognized and time and costs are saved.
There are two methods; Optimistic Rollup and the ZK Rollup.
For Optimistic Rollup, the chairperson exists in each group.
Members trust the optimistic transactions in series through the chairperson. Where the problem occurs, they open and inspect the ledgers.
It’s easy to make, fast and cheap.
Therefore, the current Layer 2 market’s most share is a virtual asset called Optimism as representative. Currently, it accounts for 3% of the total Blockchain De-Fi deposits.
They’re issuing and selling the governance token. It’s the only asset that can be invested in Layer 2, except for the polygon network.
For ZK Rollup, It is made to reinforce the instability of Optimistic Rollup, creating an electronic signature that can be verified without checking the ledgers directly through knowledge proof.
It has the advantage of speed and safety. But the technology of knowledge certification itself is early, so additional costs are incurred for this certification.
Supporting this network is Polygon’s ZK EVM, which is a separate network for knowledge certification.
The reason I speak Layer 2 will be the trend good to have investment, is that the Layer 2 networks didn’t develop their token. When the tokens are developed and listed on the market, I expect an overall investment momentum will happen.
Q.
There can be an issue about anonymity for Zero-Knowledge Proof. What do you think about it?
A.
The word “Zero-Knowledge Proof” sure has a suspicious thought that some data may be hidden and there’s a case of Tornado Cash, for ZK Rollup it’s about the proof of transactions using knowledge so the transaction itself cannot be hidden.
Networks support technology to develop private transactions since they already did the knowledge development. Rather than telling the technology is bad, It is just a risk from the people exploiting it.
Q.
But there’s a concern that there can be a value decline on the current networks like Ethereum.
A.
Scaling Blockchains which came out targeting Ethereum like Solanar may get harmed. But in the case of Solanar, it lost its power due to node outages and wallet hacking incidents.
Layer 1 has been told its value will be declined due to Layer 2’s rise. But there will be demand for the Layer 1 ecosystem because Layer 2’s security parts are still relying on Layer 1.
Q.
If Layer 1 Blockchains like Ethereum reinforce the weakness themselves, wouldn’t Layer 2’s utilization be decreased?
A.
For Ethereum, there’s a Shanghai Fork scheduled on March 2023, and there will be a new technology called EOF. This will reduce the general Layer 1’s fee and get a fast speed.
But Layer 2 will still have less fee and faster speed thanks to this, Layer 2 is made to follow Layer 1 so Layer 2 will still preserve its utilization.
Q.
How can technological trends or on-chain data be used for investment?
A.
Since the blockchain field requires a lot of technical and professional knowledge, it is difficult to ask non-experts to grasp trends.
As a result, it is important to study a lot on your own.
Unlike early markets, there are various reports easily written by professional institutions such as Andreessen Horowitz — known for startup investment — It has become easier to grasp past to future trends to keep track of technology trends.
However, since they are investment institutions, they may have their own exposure. It may have been written in their favor, don’t believe every context but if you cherrypick the assessments that are being told commonly, you can see the technical trends easily.
If a non-expert wants to only look at the publicly opened data, there are explorers like Etherscan that let you investigate where the funds went. Find out if the project is getting investment from professional investigation services such as Dune or Nansen, or how many transactions are created per month. Various on-chain analysis data are disclosed in real-time.
Rather than simply investing using charts alone, I recommend making investments in a long-term and safe way from a technical perspective.
That is all for this weekly update.
Thank you and have a nice day.
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