Near Protocol (NEAR): Analysis of the chain abstraction champion

What you need to know 🐳

A product of the "Ethereum killer" generation, Near Protocol now aspires to a more interoperable world, focused on user experience.

With this in mind, the project's Foundation has unveiled its ambitious plans for Artificial Intelligence (AI) and blockchain abstraction.

More recently, on August 22, Near rolled out its most significant update, NightShade 2.0, marking a significant milestone in its development.

Overview 🧬

Near Protocol, formerly Near.ai, sees the light of day during 2020 with the aim of solving the scaling and cost issues faced by Ethereum.

The launch of the core network followed 3 stages:

• Genesis phase (22 April 2020) → Startup in Proof-of-Authority (PoA) → Only the Foundation is authorised to operate validator nodes → Token distribution to investors and contributors;
• Phase I (24 September 2020) → Token transfers between different addresses are still restricted → Whitelisted investors can join the set of active validators ;
• Phase II (13 October 2020) → Validators have overwhelmingly voted to lift restrictions through cryptographic signature → Inflation is now active and the network "permissionless".

Near protocol is a smart contract platform or layer-1 blockchain, in Proof-of-Stake, based on a "sharding" or partitioning solution.

This architecture allows transactions to be parallelized. Without compromising the security and data integrity of the protocol.

Another advantage: the greater the number of nodes, the greater the performance of the network. Provided that all the players can synchronise with each other.

At the time, Ethereum operated under Proof-of-Work and was gradually transitioning to second-layer (L2) solutions.

Their multiplication creates another bottleneck. That of fragmentation. Both for liquidity and applications, and for the overall user experience.

Near Protocol has made this its hobbyhorse.

Function ⛓️

Sharding divides or partitions the network into smaller fragments. The aim being to spread the workload as evenly as possible (computation, bandwidth and storage).

The Near blockchain works by Epoch. And each of them lasts 43,200 blocks, or approximately 12 hours, at a rate of one block every second.

Each "shard" or fragment of the network has its own set of validators. Near Protocol runs 6 Shards in parallel and plans to add 4, by the end of this year.

Within each "shard", a group of validators is responsible for executing transactions. They are then grouped together in a "chunk" by a randomly elected validator. At the same time, an algorithm determines their optimal size before transmission.

The "chunks" from each of the "shards", at regular intervals, are then combined to form a block on the main chain. In the knowledge that the number of "chunks" needed to make a block depends on the number of active "shard".

If it is accepted by the validator, elected once again at random, the network reaches a consensus.

To secure the network, each validator must place in escrow a quantity of tokens equivalent to or greater than the "seat price", i.e. 99,241 NEAR, or more than $400,000, in today's terms. This is known as the 'staking' process.

The greater the amount staked, the more likely it is to be selected.

Under proof of stake, the validator is subject to slashing.

There are two possible scenarios:

• Either, a validator signs several blocks at the same height;
• Or, a validator submits a "chunk" including incorrect data or calculation.

If he acts alone, the validator concerned will lose a negligible amount of tokens, depending on the percentage his share represents of the total bid put into play during the Epoch.

In the opposite case, if the percentage reaches or even exceeds 33% of the share put into play during the Epoch, the main stakeholders will lose all of their tokens placed as collateral.

On the other hand, the Near blockchain implements an EVM-compatible Wasm (WebAssembly) virtual machine for executing smart contracts. In other words, any application native to Ethereum can migrate to Near, without having to rewrite the code.

Unlike Solidity, the learning curve for a developer from outside the web3 ecosystem is virtually non-existent, due to the presence of familiar languages such as Rust or even JavaScript.

On Ethereum, you pay transaction fees to store data permanently. Near Protocol takes a diametrically opposed approach.

In effect, each account, the owner of one or more contracts, must deposit NEAR tokens as collateral to guarantee the storage of the data associated with it.

Users pay, no more and no less, the gas fees. The cost of interaction is passed on to the contract owner.

This can be seen as a self-defence mechanism against the ever-increasing size of the registry.

In the event of deletion, the indexer and archive node retain the data in memory, unlike the validators.

Financing 💰

Between Q3 2017 and Q1 2020, the project will close 7 funding rounds, involving the sale of 236.6 million tokens. The sums raised then peaked at $34 million.

In August 2020, Near Protocol conducted an Initial Coin Offering (ICO) on the Coinlist platform and sold 120.4 million tokens, or 12% of the total offering, for a sum approaching $40 million.

To date, this has been one of the most profitable deals of the previous cycle, presenting a return on investment, between 10 and 50 times greater than the initial capital.

During 2022, Near Protocol began a new round of financing with renowned venture capital funds such as Tiger Global, DragonFly and a16z. The project has secured $500 million for an undisclosed valuation and price per token.

Three Arrows Capital and FTX Ventures held or may still hold stakes in the project. Both companies have since entered receivership in the US, leading to a forced sale of assets (OTC & public) in order to repay their creditors.

Team and community 👾

Alexander Skidanov and Illia Polosukhin are the two visionary co-founders behind Near.

They have both contributed to research into sharding.

Here are the various bodies in charge of development:

• The foundation: Non-profit organisation supporting community initiatives and accompanying the gradual decentralisation of the protocol;
  • Management team: Management of day-to-day operations by 60 people,
  • NFC: Governing body / board of directors overseeing major decision-making,
  • Near.ai: Branch of the foundation supporting research into open-source Artificial Intelligence models.
• Near One (ex. Pagoda), 30 contributors, its aim is to develop and implement the technical changes specified at roadmap level;
• Chain Abstraction Spinout: Independent team whose efforts are focused on the new "Chain Signatures" communication protocol;
• Near DevHub: Autonomous organisation bringing together individuals, projects and ideas;
• Proximity: Research and development company for Near Protocol and Aurora.

According to Artemis, Near Protocol has nearly 100 active developers in its ecosystem on a weekly basis.

Near Horizon is listed as the benchmark incubator and accelerator for launching ecosystem projects.

At a local level, communities coordinate around regional Hubs. There are three main ones: the Balkans, Vietnam and South Korea.

The Twitter / X account for the protocol has 1.8 million subscribers.

Ecosystem 🤝

Despite numerous crowdfunding schemes, DeFi apps are struggling to find an audience on Near.

The total locked value (TVL) within smart contracts has reached $200 million. Its previous high was $480 million in May 2022. In contrast, the market capitalisation of its stablecoins is close to $660 million. An increase of 800% over 12 rolling months.

During the 2nd quarter, the daily trading volume on DEX was 8.6 million. An increase of 600% over 12 sliding months. By way of comparison, Fantom handles a daily trading volume of $16.6 million. While Solana passes on a daily trading volume of $1.7 billion.

Near Protocol has 1.9 million active addresses daily. An increase of 620% compared with the same period 12 months earlier. At the same time, there are 330,000 new addresses being created on the network every day.

Overview of the Near ecosystem:

• Rainbow Bridge → Gateway to Ethereum

Gaming / Social category:

• KAIKAI → Singapore-based Shopping app with an integrated crypto rewards system;
• HotDAO → Telegram Wallet hosted on Near;
• Sweat → Fitness app with an integrated crypto rewards system. The associated token peaks at $162 million TVL on-chain;
• Playember → Web3 mobile game publisher

DeFi category:

• Burrow → Money market;
• Ref Finance → Decentralised exchange platform (DEX);
• All Stake → Omnichain restaking protocol;
• Atlas Protocol → Liquid staking protocol for Bitcoin, hosted on Near;

Modular category:

• Aurora → EVM-compatible second-layer solution enabling more accomplished interoperability between Near and Ethereum applications;
• Nuffle → Fast End Layer built on top of EigenLayer intended for Ethereum ecosystem rollups ;
• Near DA → Modular availability layer for data exploiting high throughput and low transaction costs, from which the protocol inherits;
• Neat → Second shower (L2) solution dedicated to AI and Gaming applications. The Foundation has delegated 1 million NEAR to support the project.

Near Protocol is preparing for mass adoption. To achieve this, the project intends to dissociate the underlying technology from the user experience, becoming a genuine operating system (BOS)!

The objective remains the same: to simplify interactions between users and protocols.

At the heart of this (r)evolution: the "solvers".

These trusted third parties who are entrusted with the execution of intents (specific tasks or problems to be solved). Technical complexity disappears in favour of more intuitive navigation.

Near Protocol provides an array of unique tools and features. Here's a brief overview:

• Chain Signatures → Sign a transaction on any blockchain (with ECDSA elliptic curve), from its Near address.

Use of bypass paths to create the account on the destination blockchain and multi-party calculation system for signature generation (MPC).

This innovation is significant in that ecosystems that do not natively support smart contracts will see the emergence of DeFi-related use cases. In short, there is no longer any need to use a bridge.

Atlas and All Stake have already integrated the protocol.

• Multi-chain Gas Relayer → The NEP-141 standard frees the user from the constraint of having gas on any destination blockchain.
• Meta-transactions → A relayer takes care of covering the gas costs for the user. This can be subsidised by a protocol.
• FastAuth → System for retrieving or creating an account by email. The user's private key is distributed in several pieces to nodes (MPC).

Challenges (and controversy) 🥵

During the bear market, the "social recovery" system in the ecosystem's native wallet contained a security breach. The cause? The failure of a third party. No private keys were compromised as a result of this incident. Yet the main stakeholders were only kept informed 2 months later.

In April 2022, the autonomous organisation Decentral Bank, announced the launch of the algorithmic stablecoin USN, backed by a pool made up of NEAR and USDT tokens.

In October of the same year, extreme market conditions caused the stablecoin to plummet and its under-collateralisation forced the Foundation to implement protective measures, including a $40 million conversion programme. This story shares disturbing similarities with the UST of the infamous Terra Luna.

At the start of this year, The Foundation announces a restructuring and is shedding 40% of its workforce, affecting the marketing, business development and community departments.

The aim is clear: to direct the Foundation's efforts towards higher-impact activities.

In addition, the Foundation's finances have rarely been in better shape with:

• 305 million NEAR tokens;
• $285 million;
• As well as $70 million in investments and loans.

This is a veritable war chest.

As well as being head of Near Protocol, Illia Polosukhin will take over as director of the foundation in November 2023, succeeding Marieke Flament (ex-Circle).

On a large scale, Near could encounter limitations inherent in "sharding", including (non-exhaustive list):

• Fair distribution of the workload, with a view to optimising the use of resources, or risk creating a bottleneck;
• Periodic shuffling of nodes results in variable synchronisation times, to prevent collusion and guarantee decentralisation of shards;
• Difficult communication between different shards to prevent possible reorganisation attacks at chunk level. An invalid state transition would be disastrous. Especially as Near's operation could create a situation where few nodes would notice;
• Complexity of cross-shard transactions.

Near Protocol's governance is relatively immature and unstructured. Anyone can in theory submit proposals gathered under the abbreviation "NEP" from the Forum.

Near Digital Collective remains arguably the most involved independent community movement. During its existence, it has already funded more than 100 projects and injected more than 400,000 NEAR tokens into the ecosystem.

Its operation is based on a democratic election process, the credibility of which is guaranteed by two governance bodies: "House-of-Merit" and "Council of Advisor".

Each vote is unique thanks to the "Proof-of-Humanity" system.

In the space of 2 years, the number of participants is said to have fallen drastically, from 503 to 109 members. A direct consequence of the lack of economic incentives.

This is why the Foundation, along with other contributors, has taken the lead by teaming up with risk manager Gauntlet to develop a governance framework, in line with the expectations of the ecosystem.

This vision is formalised in the "House-of-Stake" proposal.

The Near Protocol community is therefore entering a period of transition towards a "vote-escrowing" model.

In practical terms, once the proposal is adopted and the contracts deployed, you will be able to block a variable amount of NEAR in exchange for veNEAR, for a period of between 3 months and 4 years.

The longer your token is blocked, the greater your voting power.

VeNEAR holders will receive a portion of the annual inflation. There is even talk of reducing the rewards awarded to validators.

Keep in mind that some details may change between now and then.

The community's main concerns relate to the organisation of committees. Indeed, the latter could face conflicts of interest and a centralisation of decision-making power. As is currently the case for the right to produce blocks on the network.

The NEAR token 🌕

NEAR acts as a native utility token. As a unit of account, it is used to cover the transaction fees required to transfer value, store data or even interact with smart contracts, hosted on the platform.

Through staking, NEAR also helps to secure the network by providing a collateral function, which can be seized in the event of non-compliance with the rules.

In terms of market capitalisation, the project ranks 11th among blockchains operating under the Proof-of-Stake mechanism behind Toncoin and Celestia.

Currently, half of the NEARs in circulation - i.e. 615 million tokens - are involved in the staking process.

Until now, NEAR holders have opted to delegate to 210 institutional validators. There are around 233,000 stakers.

Since November 2023, the emergence of "liquid staking" protocols, Meta Pool and LiNear, is changing the game.

In addition, it will offer a right of governance over proposed changes to the network.

As mentioned above, discussions are underway to implement a new system.

The total initial (or Genesis) offering includes 1 billion NEAR tokens.

It is broken down as follows:

• EU grants and programmes (17.2%) → Linear release over a period of 60 months from 13 October 2020.
• Major contributors (14%) → Allocation locked for 12 months → Straight-line release over a period of 48 months
• Investors (23.7%) → Straight-line release over a period ranging from 12 to 36 months depending on the terms of each funding round.

• Public sale (12%) → Immediate release of 25M tokens → Linear release of the remaining 95M tokens over a 12-month period.
• Ecosystem - participation in the testnet, development of the first dApps and infrastructure tools (11.7%) → Immediate release → Linear distribution to "builders" over a period ranging from 6 to 48 months.
• Endowment funds allocated to the Foundation (10%) → Immediate release of 50M tokens → Linear release of the other half over a period of 24 months
• Operating grants (11.4%) → Linear release over a period of 36 months

By 31 August 2024, and according to our estimates, between 10 and 13% of the tokens would still be blocked. As mentioned above, these are part of the allocations for subsidies, community programmes and team members.

In addition, the NEAR token is experiencing a 5% annual increase in its money supply, 90% of which subsidises validators. The remaining 10% is redirected to the protocol's treasury. This is still administered by the foundation. Despite a desire to place it in the hands of the community. The current supply amounts to around 1.207 billion NEAR tokens.

Staking delivers a return of around 9% annualised interest, derived from inflation but also from fees collected by the protocol.

In absolute terms, issues or "Epoch rewards" would represent between 219 and 230 million NEAR tokens, almost 1/5 of the supply.

This inflationary trend is likely to reverse in the future. Because 70% of transaction fees are burnt up. In the case of a simple transfer, this is the entire gas fee. While the remaining 30% goes to the contract(s) involved in the transaction.

A mechanism not unlike EIP-1559 on Ethereum.

The goal? To reach 1.5 billion transactions per day over the course of a year.

Since its creation, users of the network have paid out nearly $11.2 million in NEAR tokens in exchange for block space. Lastly, the protocol has processed more than 2.1 billion transactions in its short history.

In other words, the road to profitability is still full of pitfalls!

Regulation ⚖️

Although the Foundation is based in the Canton of Zug in Switzerland, the offices of the Near Protocol teams are in San Francisco, California. In other words, this geographical area falls under the jurisdiction of the Security and Exchange Commission (SEC), the US financial regulator.

In June 2023, the federal agency defined the NEAR token as a security, as part of its lawsuit against the Coinbase platform.

Roadmap 🗺️

In the long term, Near Protocol plans to move from "state sharding" to a fully "sharded" system. This means that the entire network, including transactions, smart contracts and user accounts, can be split into smaller fragments to improve node efficiency.

Recently, Near has introduced "stateless validation", allowing validators to no longer keep the entire network on their machine. Instead, they use 'state cookies' based on Merkle proofs to validate transactions. If an anomaly is suspected, validators can consult the archive nodes.

The protocol is also exploring ways to improve account aggregation, a key feature for interoperability between blockchains, which combines well with the development of Chain Signatures.

Near is collaborating with Polygon to develop a zero-knowledge disclosure proof system (zkWASM) for its virtual machine. This would make it possible to prove the validity of transactions without revealing the data, paving the way for new uses.

Finally, Near plans to implement "dynamic resharding" in the final phase of its development, making it possible to adjust the number of "shards" according to network requirements for better optimisation of resources.

Learn more about the roadmap.

Competition ⚔️

Aside from smart contract platforms, Near Protocol faces many contenders for the title of leader in the string abstraction theme.

As a reminder, fragmentation refers to the main challenge posed by the modular nature of today's blockchain infrastructure.

Particle Network

• Status: Tesnet
• Creation date: May 2022
• Features: Smart Wallet-as-a-Service; BTC Connect: Account Abstraction for Bitcoin (ERC-4337), Dual Staking: native token and BTC (via Babylon); AggDA : Publication of data on Celestia, Avail and Near DA; Compatibility: EVM, BTC UTXO and Solana
• Value proposition: One account, one balance, all chains, sovereign blockchain (L1) as proof of stake in the Cosmos ecosystem
• Team size: 30 employees
• Financing: 48.8M$
• Known valuation: 40M$

Xion

• Status: Tesnet
• Creation date: March 2021
• Features: Fungible Duality; Meta Accounts: onboarding process with email or biometric data; CosmWasm : Virtual Machine; Rust language
• Value proposition: Sovereign Blockchain (L1) as proof of stake in Cosmos ecosystem; Use of "Inter-Blockchain Communication"
• Team size: 18 employees
• Funding: $36M
• Known valuation: $500M

Socket 2.0

• Status: Mainnet
• Creation date: May 2021
• Features: FOMA or "Modular Order Flow Auction": free market where execution agents compete to best satisfy user requests, transmitted by cryptographic off-chain signature.
• Value proposition: intention-based modular layer for cross-chain capital flows.
• Team size: 35 employees
• Funding: $12.8M
• Known valuation: Undisclosed

OneBalance

• Status: Tesnet
• Date created: May 2024
• Features: CAKE or "Chain Abstraction Key Elements" is a framework developed by Frontier Research, involving 3 layers: Permission, Solver and Settlement. In particular, it addresses the challenges posed by the orderflow trilemma: cross-chain atomicity, scalability and equal treatment. Its development is based on an industry-wide working group.
• Value proposition: Credible Account: extension of existing account formats (EOA, smart contract...) propagating intentions, without global consensus.
• Team size: Unknown
• Funding: $5M
• Known valuation: Undisclosed

According to OneBalance, an address can reside and migrate between 4 "Credible Commitment Machine" architectures depending on the user's needs, namely:

• Trusted Execution Environment (TEE);
• Multi-Party Computing (MPC);
• Smart Contract Based Account;
• Modifications to a virtual machine. Including state transitions.

The project calls a "Credible Commitment Machine" any secure computer that is  mutually trusted to perform various operations, deterministically and transparently.

Each "Credible Account" encapsulates the user's history across all channels and replicates it inside a virtual environment, secured by "Credible Commitment Machine".

The latter issues state transition requests in the form of "resource locks" and executes them via cross-chain proofs. We can draw a parallel with issuing an approval to spend ERC-20 tokens. Except that no action occurs on-chain.

In other words, the user undertakes to comply with certain conditions, within a sufficiently long timeframe.

This process acts as an assurance to the network's "Solvers":

• Li.Fi;
• Everclear (e.g. Connext);
• Across;
• or Enso.

In this way, OneBalance removes the uncertainty between the time the transaction is executed and the time it is finalised on the network. As a result, the state transition can take place on the destination chain, without the need to wait for the sending chain.

For its part, Polygon Labs continues to deliver and reach key milestones on its roadmap. Its "AggLayer" interoperability protocol brings together a network of L1 and L2 blockchains. Starting with its scalability solutions: Polygon PoS, zkEVM, Miden, ID and its Supernets (L3). Near Protocol will also be able to connect to it!

At the same time, the migration of the MATIC token to POL (1:1 ratio) begins on 4 September. It will become the new unit of account for the Polygon PoS network and will play a crucial role later, when the AggLayer is rolled out.

This unique protocol will be compatible with shared sequencers and third-party data availability (DA) layers. Each asset will have the unique feature of being native, not wrapped, by an intermediary.

With the AggLayer, Polygon plans to execute tens of thousands of cross-chain transactions almost instantaneously.

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Market analysis by Chadi El Adnani, Head of Content & Research at SUN ZU Lab 📈

NEAR is currently ranked 20th in terms of market capitalization, with a valuation of $4.3 billion. The token has increased by about 7% in 2024, a performance similar to ETH and significantly better than other major altcoins such as DOT (-50%), MATIC (-59%) or ADA (-44%).

Like many other tokens, NEAR's daily volumes have largely decreased compared to March. They currently stand at around $100 million on average. The average market depth levels at 50 basis points are also very high. NEAR therefore displays significant liquidity levels on centralized exchanges. On the DeFi side, the Total Value Locked (TVL) on NEAR Protocol has doubled in 2024, going from about $100 million to $200 million.

The Big Whale's opinion 🐳

Rather than choosing between a monolithic or modular approach, Near proposes a hybrid solution where gas abstraction, key management and transaction fluidity play a central role. These elements function as a "universal translator" facilitating access to and use of blockchains.

It is noted that the introduction of second-layer (L2) solutions for Ethereum, while they have attracted much liquidity and developers, have also generated new questions about their effectiveness and impact on the ecosystem.

In contrast to Ethereum, Near Protocol is moving forward quietly but decisively, thanks to the active involvement of its co-founders and a clear governance structure that encourages ongoing development.

Near Protocol has some attractive features, including a scalable architecture that accommodates a wide range of popular applications, including social and gaming platforms. Its ability to provide high-performance storage and efficient indexing enables it to meet the needs of these applications, strengthening its position in the sector. In addition, Near Protocol is renowned for its resilience, having suffered no major outages since its launch, although this may also reflect a lack of traction.

A key innovation of Near Protocol is the "Chain Signatures" protocol, which facilitates integration and interoperability between different blockchains such as Bitcoin, Ethereum, Solana and Cosmos. This protocol allows Near accounts to be linked to other blockchain addresses, simplifying cross-chain transactions for users without them being aware of it, thanks to a complex but transparent process involving multi-party signatures.

Near Protocol, although less visible than other blockchains, continues to progress by offering a simplified user experience and meeting the technical requirements of the sector. Its unique approach and commitment to resilience and innovation could enable it to play a crucial role in the mass adoption of blockchain in the future.

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