State of NEAR Q4 2022

Key Insights

• Daily active accounts set an all-time high in Q4’22. The increase follows a record Q3 and was driven by the success of Sweat Economy, sustained NFT activity, and multiple new protocols either launching or announcing upcoming launches.
• Total transactions are up 50% YoY while average transaction fees remain below one cent. NEAR’s transaction fees adjust based on network compute and bandwidth and 70% of them are burned while the remaining 30% are distributed to the contract from which the transaction originated.
• TVL is distributed evenly across Aurora and NEAR. At the end of Q4, Aurora had $70 million TVL and NEAR had $74 million TVL, bringing the total ecosystem TVL to $144 million.
• Active validators set an all-time high in Q4’22. In September, Phase-1 of Nighsharding was launched on the mainnet, tripling the network’s validator capacity by introducing chunk-only producers.
• Nightsharding Phase-2 is planned for release in late 2023. This will be a significant upgrade that is expected to increase the network’s capacity to 100 shards with no validators tracking all shards.

Primer on NEAR

NEAR Protocol is a smart contract platform that utilizes a Thresholded Proof of Stake (PoS) consensus algorithm to execute transactions. NEAR incorporates a Nightshade Sharding mechanism, which facilitates increased transaction throughput and the scalability of the network. Additionally, NEAR has raised over $500 million for ecosystem development, takes a novel approach to basic network functionality (such as accounts, gas, and transactions), prioritizes developer friendliness, and supports EVM and Substrate via Aurora and Octopus Network.

Key Metrics

Performance Analysis

Financial and Network Overview

The crypto industry experienced a particularly rough Q4 2022, concluding one of the worst years on record. The November 8 collapse of FTX caused a major impact on the industry and drew significant attention globally. Adding to the turmoil, Genesis Global Capital, a lending business and subsidiary of Digital Currency Group (DCG), announced a halt to both redemptions and new loan originations on November 16. As a result, NEAR’s market capitalization experienced a 62% decrease from $2.8 billion to $1.1 billion.

In light of the uncertainty, the NEAR Foundation took prompt action to address the community. They announced that they did not hold any treasury funds on FTX and that FTX and Alameda had limited exposure to NEAR tokens. Additionally, the Foundation pledged to increase communication and transparency by reinstating TownHall meetings, regularly hosting AMAs, and publishing frequent transparency reports.

Despite the difficult market conditions, NEAR continued to see strong growth in network activity in Q4. Daily active accounts reached an all-time high and increased by nearly 3X compared to the previous year. Total transactions also saw a rise Quarter-over-quarter (QoQ) and were up 50% year-over-year (YoY). This was accompanied by an average of less than one cent in transaction fees. While the number of new accounts saw a decrease QoQ, likely due to the launch of the Sweat Economy generating significant interest, it remained consistent with previous quarters. Overall, network activity showed significant growth YoY despite the bear market and unprecedented turmoil.

NEAR’s daily active accounts more than doubled in Q4, following a record high in Q3. The increase was driven by the launch of Sweatcoin as Sweat Economy in July. In Q4, the momentum continued as Sweat surpassed 16 million unique wallets, 4 million daily active users, and 200 million SWEAT staked. While new account creation slowed, the sustained increase in active accounts indicates that the new users are remaining engaged.

Furthermore, multiple new protocols building on NEAR are expected to result in further growth in account-related metrics. These protocols include:

• PlayEmber – A Web3 monetization platform connecting brands, studios and game studios, which already has over 100 million downloads, 5 million monthly active users, and 1.5 million hours played.
• SeatlabNFT – An NFT ticketing marketplace with the goal of revolutionizing the event ticketing industry by addressing secondary market issues, enabling the sale of NFT collectibles for specific events, and implementing features such as royalty splits, to improve the overall ticketing experience for customers.
• Few and Far – An NFT marketplace with launchpad services, minting tools, outbound marketing, and more for NFTs, DeFi, and gaming, which has over 1,000 collections, 350,000 NFTs, and 30+ partnerships, and is backed by investors such as Pantera, Hypersphere, Huobi, and others.

These are just a few examples of protocols within the NEAR ecosystem, many more are expected to announce or go live throughout 2023 as the $500 million in funding begins to yield results.

Similar to the increase in daily active accounts, transactions on the NEAR network have also seen a 50% YoY growth, likely driven by the same factors. Notably, transaction fees on the network remain low and average below one cent. Unlike Ethereum’s auction-style mechanism, NEAR’s transaction fees adjust based on network compute and bandwidth. Of the total transaction fees, 70% are burned and the remaining 30% are distributed to the contract from which the transaction originated. This allocation of a portion of transaction fees to contracts incentivizes and rewards developers for their contributions to the network.

Ecosystem and Development Overview

To understand the underlying drivers of NEAR’s activity, it is important to evaluate its ecosystem, developer engagement, and growth strategy.

DeFi

Despite the bear market, the TVL on the NEAR Network has remained steady, with a quarterly decrease of 10% but a YoY increase of 160%, from 43 million to 113 million. This is particularly impressive considering the discontinuation of the USN stablecoin in Q4.

On October 24, it was announced that the independently-operated community project USN, a near-native stablecoin created by Decentral Bank in April 2022, would be winding down. Despite not receiving financial assistance from the NEAR Foundation, to safeguard users and facilitate the orderly wind down, the NEAR Foundation allocated $40 million for a grant for the USN Protection Programme. The NEAR Network remained stable and saw little impact on its fundamentals during the process.

TVL on the NEAR Network is distributed evenly across Aurora and NEAR. At the end of Q4, Aurora had $70 million TVL and NEAR had $74 million TVL, bringing the total ecosystem TVL to $144 million.

The leading protocol by TVL on NEAR is the DEX Ref Finance with $54 million TVL. Ref’s TVL was dramatically affected by the USN news, losing 50% overnight as users rushed to swap their USN for USDT. Despite this, trading volume has remained steady and Ref Finance continues to lead the DEX space on NEAR. Notable investors in Ref Finance include Jump Crypto and Dragonfly Capital.

The second-largest protocol by TVL is Bastion. Bastion, which lives on Aurora, is a lending and stableswap protocol. Bastion uses a cToken model, similar to Compound, and ended Q4 with $45 million in TVL.

The third-largest protocol by TVL on NEAR is Burrow. Burrow is a decentralized, non-custodial interest rate platform that allows users to deposit assets to earn interest, and borrow against them for liquidity, similar to Aave, Compound, and other pool-based protocols. Burrow closed Q4 with around $15 million in TVL and has notable investors such as Jumpy Crypto, Dragonfly, Parafi, and others.

Furthermore, NEAR has approximately $20 million in TVL distributed among three liquid staking protocols: Meta Pool ($12 million), LiNEAR ($4 million), and Stader ($2 million).

NFTs

NEAR’s NFT-related metrics remained relatively unchanged during the latter half of 2022. However, when compared to the same period in the previous year, NFT Sales Volume on NEAR has risen by 374%, and the average daily number of NFT buyers and sellers has increased by 101% and 133%, respectively.

One of the key players in the NEAR NFT market is Paras Marketplace, a platform for digital trading cards, which commands the majority of NFT activity. The interest in NFTs peaked in Q1 2022, following the launch of Paras Comic, a marketplace for artists to publish comic-related NFTs. The Antisocial Ape Club and NEARNauts, the top two collections on NEAR, are available on Paras Marketplace and account for 18% and 35% of all NEAR NFT sales, respectively.

Another notable player to watch is Few and Far, an NFT marketplace that provides launchpad services, minting tools, and outbound marketing for NFTs, DeFi, and gaming. In April, Few and Far received a grant from the NEAR Foundation and has been active with several developments including: a partnership with NEAR to focus on a joint go-to-market strategy to onboard global brands and major IPs from Web2 to Web3, releasing a technical deep dive on the new FnF token standard, and partnering with Sweat Economy for a joint NFT collection which saw over 200,000 users. Overall, Few and Far has over 1,000 collections, 350,000 NFTs, and 30+ partnerships, and is backed by investors such as Pantera, Hypersphere, Huobi, and others.

Furthermore, SeatlabNFT, an NFT ticketing marketplace, announced that they will be building on the NEAR platform. Their goal is to revolutionize the event ticketing industry by addressing secondary market pain points, enabling the selling of NFT collectibles for specific events, and implementing functionality, such as royalty splits, which will ultimately improve the overall ticketing experience for customers.

Gaming

The State of NEAR Q3 report highlights NEAR’s developing gaming ecosystem, with various games and platforms under development. The most successful game to date is PlayEmber, a Web3 monetization platform that connects brands, studios, and game studios. PlayEmber is ranked as the second most popular application by active wallets on NEAR and has over 100 million downloads, 5 million monthly active users, and 1.5 million hours played.

Furthermore, in Q4, NEAR announced a partnership with Press Start Capital, a venture fund that specializes in Web3 gaming, metaverse, and entertainment. Through this partnership, Press Start will invest in and mentor Web3 gaming and entertainment projects built on NEAR, helping to further advance the gaming pipeline. Additionally, NEAR announced a new Web3 gaming hub in South Korea.

Aurora

Aurora is an Ethereum Virtual Machine (EVM) created by core developers from the NEAR protocol. It operates as a smart contract on NEAR, providing benefits such as bridging with the Rainbow Bridge, high throughput, and low transaction fees in ETH. Notable updates in 2022 include the addition of 20x more protocols under development, the introduction of the Aurora+ membership program, and partnerships and integrations with notable companies. These include Brave browser, Covalent, Fireblocks, and Chainstack.

Aurora’s activity peaked in the first half of 2022 and has remained relatively steady throughout the latter half of the year. As previously mentioned, Bastion is the leading application on Aurora by TVL, representing 66% of the TVL. Aurora can be accessed through various bridges including Allbridge, Axelar, the Rainbow Bridge, and Synapse.

Rainbow Bridge

The Rainbow Bridge connects Ethereum, NEAR, and Aurora. It is a light client-based bridge that uses an optimistic design when connecting to Ethereum. It relies on third-party watchdogs to submit fraud proofs and challenge any false information relayed to the bridge’s light clients. The bridge successfully dealt with two attacks in 2022. In Q4, about $100 million was transferred via the Rainbow Bridge, a decrease of 34% QoQ and 80% YoY. In total, $3 billion has been transferred through the Rainbow Bridge.

Octopus Network

Octopus Network is a network of Substrate-based, EVM-compatible, application-specific blockchains (app-chains) that, like Aurora, are built as a set of smart contracts on NEAR. As with Polkadot, app-chains must register and pass a vote by holders of Octopus’s native token, OCT, before joining the network. There are currently five app-chains on mainnet. In 2023, the primary focus of the core developers will be on developing Octopus 2.0, which will expand the Inter-Blockchain Communication (IBC) to protocol chains that are not based on the Cosmos-SDK.

Developer Activity

The NEAR protocol places a strong emphasis on being developer-friendly, and one of its key features is the flexibility for developers to choose their preferred programming language for application development. In August, NEAR released a JavaScript Software Development Kit (SDK), which allows developers to build smart contracts on the NEAR blockchain using JavaScript, in addition to the already supported languages such as Rust, AssemblyScript, and Solidity (through Aurora). Additionally, NEAR tokens are automatically distributed to developers as a financial incentive. 30% of total transaction fees are given to the contract from which the transaction originates, while the remaining 70% is burned.

In October, NEAR announced a partnership with Google Cloud, which will provide technical support for all NEAR grant recipients. Google Cloud will provide the necessary infrastructure for NEAR’s Remote Procedure Call (RPC) node provider to Pagoda, a Web3 startup platform developed by NEAR. Pagoda provides developers with a library of pre-audited templates and auto-generated contract user interfaces, which makes it easy to launch applications on the NEAR blockchain.

Electric Capital’s annual developer report recently featured the NEAR network, highlighting a 22% increase in full-time developers and a 40% increase in total developers in 2022. Additionally, the report noted that the NEAR network has seen over 20X growth in total developers since 2018, growing from less than 50 to over 600. The report also ranked NEAR alongside Solana and Polygon as having the highest number of monthly active developers and the fastest pace of growth in 2022 outside of Ethereum.

Decentralization and Staking

The NEAR network utilizes a Thresholded Proof of Stake (PoS) consensus algorithm for transaction execution. The minimum validator participation threshold is set algorithmically, with validators bidding for participation. There are three validator roles in this network:

• Block producers – validate transactions on all shards, with a maximum of 100.
• Chunk-only producers – validate transactions on one shard, with a maximum of 200.
• Hidden validators – act as third-party monitors for illicit activity. (Note: hidden validators are not currently live.)

In September, Phase-1 of Nighsharding was launched on the mainnet, tripling the network’s validator capacity. This was achieved by introducing chunk-only producers, with a maximum of 200, in addition to the existing 100 block producers. As a result, the total number of validators increased by 31% QoQ to 155. However, the percentage of the circulating supply staked decreased by 6% QoQ to 57% (equivalent to 485 million NEAR).

Qualitative Analysis

Ecosystem Funding

The NEAR Foundation has raised $500 million for ecosystem development and is actively working towards a more decentralized model of capital allocation. This will involve the creation of several DAOs, including the DeveloperDAO, MarketingDAO, CreativesDAO, with an additional DAO that will begin formation in Q1 of 2023. As a result of this change:

• The NEAR Foundation will no longer allocate capital directly from the inbound start-up grants program, with the exception of the current events grants, which will be handed over to the MarketingDAO when they are set up to manage them.
• In January and February, NEAR will be working directly with community members to outline a clear application process for funding via the DAOs, with processing time expected to take 6-8 weeks.
• Projects that have already received a portion of their funding and are working towards their agreed milestones will continue to be supported through the remaining milestones.
• Any application that is not already in the approval stage will not receive funding.

Additionally, the NEAR Foundation published a Q3 Transparency Report highlighting capital deployment. Notable highlights include:

• Startup Funds – To help decentralize NEAR, the Foundation has decentralized capital deployment and allocated grant funds to MetaWeb, Lyric Capital, Stealth Capital, and Open Web Collective, each of which is focused on funding projects within the NEAR ecosystem according to their own vision. So far, the Foundation has committed $28 million, of which $10 million were allocated in Q4.
• Foundation Grants – Foundation Grants cover a broad range of investments from grant allocation to direct investment. Grants are primarily focused on the following verticals: Infrastructure & Integrations, Gaming & Entertainment, NFTs, and DAOs. In Q3, NEAR distributed $26 million to over 100 projects, including Mintbase, Circle, Satori, Clear Street, and OnMachina, as well as to Caerus to set up an Entertainment Venture Studio, bringing the total to $159 million.
• Regional Funds – NEAR Hubs host local events in local languages to find the best people and projects and to forge partnerships with local organizations. To date, NEAR Foundation has launched seven regional hubs Ukraine Hub, Kenya Hub, Balkans Hub, India Hub, South Korea Hub, US Hub, and an extension for the Balkans Hub and the launch of the US hub were announced in Q3.

Governance

In August, the NEAR Foundation introduced the NEAR Digital Collective (NDC), which aims to facilitate the decentralization of the NEAR ecosystem. The NDC will work in conjunction with the NEAR Foundation, Pagoda, and other ecosystem partners to establish a cohesive structure that allows the entire NEAR ecosystem to influence how it runs. The NDC’s objectives include effective treasury management, validator operations, core development, transparent governance, increased brand recognition, support for core business units, and application layer development.

As part of decentralization of the development, NEAR launched Developer Governance DAO that currently encompasses 15 developer groups that lead ideation and implementation of various development projects from tooling to protocol research.

Nightshade

NEAR is a horizontally scalable network that utilizes a sharding design called Nightshade. The implementation of Nightshade is divided into four phases, starting with Phase 0, which split the network into four data shards and required validators to store and validate transactions from all shards. With the launch of Phase 1 in September, a new role was introduced: chunk-only producers, who only validate a single shard, increasing the network’s validator capacity and decentralization. Nightshade’s two remaining phases, Phase 2 and Phase 3, will bring full data and processing sharding and dynamic resharding, respectively.

Roadmap

Despite facing challenges throughout 2022, NEAR is pushing forward with its goal of helping Web2 applications and communities transition to Web3, also known as Web2.5. To achieve this, NEAR has set out several strategies:

• To increase usage, NEAR is focusing on partnerships and has established collaborations with major companies such as Google Cloud, Sweat Economy, and Grupo Nutresa.
• To engage the community and further decentralize, NEAR is launching the NEAR Digital Collective (NDC). Additionally, NEAR is decentralizing capital deployment via multiple DAOs and planning on forming an early-stage accelerator that will provide support to promising projects.
• To scale, NEAR’s developers will continue to improve the technical infrastructure. The release of Phase 2 of sharding, scheduled for late 2023, will be essential to this scaling effort. This update will increase the network’s capacity to 100 shards, with no validators tracking all shards.

The overarching objective for the ecosystem in 2023 is to reach 10 million monthly active accounts by the end of the year. To achieve this, NEAR will focus on product development for NEAR Discovery, building a strong community from the ground up, forming strategic partnerships through the NEAR Foundation, and continuously improving the user experience and onboarding process for Web3. Both the Pagoda and NEAR Foundation teams will work together to drive usage and growth throughout the year.

Closing Summary

Despite the crypto industry facing a difficult year, the NEAR Protocol made progress in terms of development, adoption, and community engagement.

During Q4, the NEAR Protocol saw strong growth in network activity with a surge in daily active accounts, reaching an all-time high and increasing nearly 3x compared to the previous year. Total transactions also saw a rise and were up 50% YoY, with an average transaction fee of less than one cent. The growth was driven by the DeFi sector, which saw a 160% increase in TVL (NEAR) YoY. This growth was well dispersed among leading protocols, including Aurora, Ref Finance, and Burrow. The launch of new NFT marketplaces such as Few and Far, and the emergence of successful games like PlayEmber, also contributed to the heightened activity. Overall, network activity showed strong growth YoY, despite the bear market.

NEAR has seen growth in developer activity as well. According to Electric Capital’s annual developer report, the number of developers working on NEAR has grown 20X since 2018, from less than 50 to over 600. This includes a 22% increase in full-time developers and a 40% increase in total developers in 2022. To support this growth, NEAR has announced a partnership with Google Cloud to provide technical support for all NEAR grant recipients and released a JavaScript Software Development Kit (SDK) for smart contract development.

Despite facing a tough year, NEAR doubled down and made progress. As we enter 2023, NEAR plans to continue growing by forming partnerships to increase usage, engaging the community through the NEAR Digital Collective and implementing a more decentralized capital allocation model, and pushing forward with Nightsharding Phase-2. Keep an eye on NEAR as it competes in the crowded base layer sector.