State of NEAR Q2 2023

Key Insights

• NEAR was among the 13 assets listed in the SEC’s complaint against Coinbase. However, NEAR's financial and network fundamentals remained unaffected by the news.
• The introduction of the Blockchain Operating System (BOS) in March proved to be a significant milestone for NEAR. Within four months, NEAR Social attracted over 15,000 user accounts and witnessed the creation of nearly 6,000 widgets.
• The Sweat Economy continues to be a leading application. Within a year, it accumulated a total of 19 million Sweat wallets and recently conducted one of the largest governance votes in DAO history, attracting over 350,000 participants.
• NEAR made notable progress in achieving its 2023 goal of driving adoption and attracting more users to the NEAR Protocol and the BOS. This progress was fueled by strategic partnerships with established industry players and grassroots initiatives.
• The NEAR Foundation continued to actively pursue a decentralized model of capital allocation. This involved the continued rollout of various community DAOs such as Marketing DAO, Dev Hub, Creatives DAO, and the NEAR Digital Collective.

Primer on NEAR

NEAR is the Blockchain Operating System (BOS), a fully Web3-native stack that unifies the Web3 space into a single interface and a common layer for building, browsing, and discovering experiences on any blockchain. 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 scalability, takes a novel approach to basic network functionality, and supports EVM and Substrate via Aurora and Octopus Network.

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Key Metrics

Introduction

The second quarter witnessed significant developments, including high-profile lawsuits by the Securities and Exchange Commission (SEC) against major players like Binance and Coinbase. During the filing, NEAR was mentioned among other tokens that the SEC alleged to be securities. Immediately following the complaint, the NEAR team responded to the claims, asserting their disagreement and commitment to ongoing development.

Despite regulatory uncertainty in the United States, the NEAR network remained resilient, with financial and network metrics showing stability throughout the quarter. Additionally, NEAR made notable progress in achieving its 2023 goal of driving adoption and attracting more users to the NEAR Protocol and the Blockchain Operating System (BOS). This progress was driven by both top-down partnerships with established industry players and grassroots initiatives.

Financial Overview

Market Capitalization and Revenue

NEAR experienced a decline in both circulating market capitalization and revenue during Q2 2023. The circulating market cap at the end of the quarter stood at $1.25 billion, reflecting a 25% decrease QoQ. In contrast, the total crypto market capitalization saw a 2% increase QoQ, primarily driven by the growth of BTC and ETH, which rose by 7% and 6%, respectively. It is worth noting that NEAR's market cap initially declined following the SEC news but quickly recovered afterward. NEAR ranked as the 40th largest crypto project by market cap at the end of the quarter.

NEAR employs a fee-burning mechanism for transaction fees, with 70% of the total fees burned and the remaining 30% allocated to the contract from which the transaction originated. In Q2, NEAR's revenue, measured by total gas fees spent, amounted to $98,000.

When evaluating base layer protocols like NEAR, it is important to consider multiple factors. Alternative valuation models such as Messari's Expected Demand for Security Model and Multicoin's Sum of the Parts Framework should be taken into account alongside traditional revenue metrics.

NEAR Token

NEAR's native token (NEAR) is used for staking, transaction fees, and storage fees. Transaction fees on NEAR are determined by network compute and bandwidth, in contrast to Ethereum's auction-style mechanism. Storage fees are incurred by accounts and smart contracts for utilizing storage space on the NEAR network, representing long-term resource costs.

NEAR employs a combination of inflationary and deflationary measures, with no fixed supply of NEAR tokens. The network follows a fixed annual inflation rate of 5%, with 90% of the inflationary rewards directed towards validators and the remaining 10% allocated to the protocol treasury. As of Q2, approximately 81% of the total NEAR supply is currently in circulation. NEAR tokens are gradually unlocked at a rate of 4.3 million NEAR per month into the treasury, with full unlocking expected by October 2025. However, these tokens will only enter the market when distributed from the treasury.

Stakers on the NEAR network are earning an annual staking yield of 9.4%, resulting in a real yield of 4.4%.

Treasury

At the end of Q2 2023, NEAR Foundation’s treasury totaled $0.9 billion, which included $349 million in fiat reserves, 315 million NEAR ($435 million at a closing price of $1.38), and $90 million in loans and investments. Total treasury holdings declined $0.2 billion in the quarter, led by a fall in the price of NEAR to $1.38 from $1.99. The treasury is managed with a risk-minimization approach, utilizing highly rated Swiss bank accounts and maintaining limited exposure to non-NEAR assets. The NEAR Foundation emphasizes transparency and accountability, providing regular updates through its transparency report.

Decentralized Funding

In early January, the NEAR Foundation announced that it is actively working towards a more decentralized model of capital allocation by handing over decision-making to community DAOs. This approach involves the creation of community DAOs that will have more control over the allocation of funds for NEAR-related projects. The first community DAOs have already been created, each with a specific focus and mandate:

• Marketing DAO: Created to unify and improve the allocation of funds for marketing-focused projects. It is actively reviewing proposals related to amplification and marketing, with a core focus on content and social media.
• Dev Hub: Created to help decentralize the NEAR developer ecosystem and encourage broad innovation from the developer community. It is currently ramping up and reviewing proposals supporting technical ecosystem projects.
• Creatives DAO: Created for all creative contributors in the NEAR ecosystem, with the goal of empowering artists and creators by providing them with a platform for collaboration, as well as the tools and resources they need to monetize their work and connect with their audience. It is currently accepting proposals for funding.
• NEAR Digital Collective (NDC) - A new governance body being developed to help govern the NEAR ecosystem. The NDC aims to allow any member of the network to have a say in how NEAR is run. During Q2, the NDC surpassed 1,000 verified users after running the I-AM-HUMAN campaign.

In addition to the NEAR Foundation's controlled treasury, the NEAR ecosystem benefits from a community treasury. The community treasury has a balance of $5.7 million and is an integral part of the NEAR Digital Collective, serving as a decentralized treasury that allocates funds to support a range of grassroots initiatives. Its primary objective is to foster the operation and advancement of the NEAR network.

Network Overview

Blockchain Operating System (BOS)

In March, NEAR introduced the Blockchain Operating System (BOS). The BOS is an open-source platform that gives developers the ability to build on any blockchain using familiar languages and a broad set of community-built components. Simultaneously, it provides users the opportunity to connect with various communities and applications while maintaining their data's privacy, all without the requirement of owning crypto at the start, thus vastly improving the onboarding process. By offering a unified, interoperable platform, the BOS addresses the complexities often associated with Web3 and the limitations of centralization seen in Web2.

The BOS is a comprehensive Web3 stack that provides developers and users with a single interface and a common layer for building, browsing, and discovering Web3 experiences on any blockchain. Key features of the BOS include FastAuth, Developer Enablement, Universal Search, Gateways, Trust and Safety Content Moderation, and NEAR tasks. The BOS will support and enhance every component of the NEAR ecosystem. It will also persist in receiving significant attention and development resources from the NEAR Foundation, Pagoda, and other core development teams. For an in-depth review of the BOS, check out this Messari report.

NEAR Social serves as the social layer of the BOS. It offers a peer-to-peer network for social interactions, content creation, and distribution. Users own their data, developers can access public data to create apps, and customizable widgets foster innovation. Today, NEAR Social is the central hub of activity on the BOS.

NEAR Social was officially launched on March 2, 2023, during ETHDenver via NEAR.org. Since its launch four months ago, NEAR Social has gained significant traction, attracting over 15,000 user accounts. Notably, NEAR experienced heightened engagement in late May during the NEAR - CoinGecko NFT mint.

A key aspect of the NEAR Social framework is the utilization of widgets as reusable and open-source components. These widgets serve as the building blocks for developing applications on top of the SocialDB contract. They encompass a wide range of functionality, from smaller components like buttons to more substantial elements such as profile pages or complete applications resembling social networks. The creation of widgets has exhibited healthy growth and will be an important metric to monitor moving forward.

Accounts

In the second quarter, the NEAR network maintained a stable level of daily active accounts, averaging 58,000 active accounts per day. A notable upward trend was observed in Q3 and Q4 of 2022, driven primarily by the introduction of the Sweat Economy. During this period, daily active accounts increased fourfold compared to the figures from Q2 2022 and set consecutive all-time highs.

The number of new accounts declined during this Q2, falling by 19% on a QoQ basis. New accounts saw a considerable spike in April with the announcement of Sweat Economy. Subsequently, daily new account creation seems to have found stability, leveling off in the ten-thousands range.

Transactions

In alignment with the account metrics, transaction activity within the NEAR network was constant on a QoQ basis during Q2. The network handled an average of 358,000 daily transactions, marking a decrease of 9% compared to the previous quarter. Transaction fees remained sub $0.01.

NEAR's mechanism for transaction fees deviates from Ethereum's auction-style system, adjusting fees based on the network's compute and bandwidth utilization. Of the total fees generated from transactions, 70% are burned, while the remaining 30% are distributed to the contract that initiated the transaction. This unique allocation strategy effectively incentivizes and rewards developers.

Active Contracts - Developer Activity

NEAR network prioritizes developer convenience. In addition to the aforementioned contract-reward mechanism, NEAR also supports smart contract development in several programming languages: JavaScript, Rust, AssemblyScript, and Solidity. To bolster its infrastructure, NEAR has partnered with multiple cloud providers including Google, Seracle, and Alibaba Cloud.

NEAR has established the NEAR Dev Hub as part of its decentralization efforts. The Dev Hub serves as a resource repository for developers, facilitating collaboration and innovation within the NEAR ecosystem. Early successes include sponsored hackathons, the formation of community groups, and collaboration on NEAR Enhancement Proposals. The implementation of Dev Hub and the BOS, which are designed to support developers, is expected to catalyze development activity.

Over the last three quarters, NEAR has maintained an average of 700 daily active contracts. With a total of 66,000 total contracts created, this number is expected to increase as the NEAR ecosystem continues to expand and the adoption of the BOS gains momentum.

Leading Contracts

Contract activity within the NEAR network can be evaluated via receipts, stateful messages used for cross-contract communication. In Q2, the Sweat Economy contract led the way in receipt volume with over 14.3 million receipts. This figure was nearly triple the next closest contract. Sweat Economy’s success is further underscored by a total of 19 million Sweat wallets.

In Q2, the Sweat Economy ran the Learn & Earn Campaign. The program, which spanned from May 23 to May 31, rewarded Sweat Wallet users with 1 USDT upon the successful completion of the "What are Stablecoins?" lesson and a corresponding interactive quiz. During the nine day campaign over 245,000 users initiated the lesson, approximately 219,000 completed it, and 130,000 finished both the lesson and the quiz.

NEAR Crowd and Aurora were the second and third most active contracts during the quarter, measured by receipt count. NEAR Crowd, a task-oriented platform that rewards users with NEAR tokens, has reported over 5 million task-solutions submitted to date. Aurora, functioning as an EVM within the NEAR network, also contributes significantly to the ecosystem's overall activity. A more comprehensive analysis of Aurora's ecosystem is presented in our preceding reports. Other contracts exhibiting consistent engagement during the period were Spin, Ref Finance, and Play Ember.

NEAR Horizon

NEAR Horizon, an accelerator program launched by the NEAR Foundation, aims to support and empower Web3 founders. It provides a marketplace connecting founders with service providers, mentors, and backers, offering resources and credits for critical areas such as marketing, legal, and infrastructure. Strategic partnerships with organizations like Dragonfly, Pantera, and Fabric Ventures enhance the program's offerings. NEAR Horizon aligns with NEAR's vision of becoming the Blockchain Operating System (BOS) for an open web, contributing to the growth of Web3 startups and the development of a decentralized ecosystem.

Ecosystem Overview

DeFi TVL

The second quarter of 2023 marked the fifth consecutive quarter of decline in NEAR's TVL. The quarter concluded with NEAR boasting $60 million TVL, a reduction of 39% on a QoQ basis. The decline in NEAR’s TVL was primarily attributed to Alameda's liquidity withdrawal and the closing of DeFi positions in early April. Notably, the SEC claiming NEAR was a security had minimal impact on the TVL.

NEAR's top protocols in terms of TVL maintained their positions during the quarter. TVL is well distributed among the leading protocols, with notable players including:

• Burrow: Lending protocol with $17 million TVL (+15% QoQ).
• Ref Finance: DEX with $14 million TVL (-62% QoQ).
• Orderly Network: DEX with $9 million TVL (+31% QoQ).
• Aurora Plus: Membership program with $6 million TVL (-6% QoQ).
• Bastion: Lending and stableswap protocol with $4 million TVL (-81% QoQ).

Among these, Ref Finance and Bastion were the most impacted by Alameda's withdrawal, experiencing decreases in TVL of $22 million and $15 million, respectively. Conversely, Burrow and Orderly Network emerged as the quarter's most significant gainers, with TVL increases of $2 million and $2 million, respectively.

Looking ahead, NEAR's core developer teams and the DeFi teams within the ecosystem have several initiatives lined up. These include the introduction of accessible stablecoin on-ramps, user-friendly onboarding options, engagement campaigns for core trader products, one-stop-shop DeFi experiences, and joint initiatives for on-chain traders. Additionally, the BOS is set to contribute to the development of accelerated and innovative DeFi applications on the network.

DEXs and Perps

In the second quarter, the average weekly volumes of DEXs Ref Finance and Orderly Network stood at $5.4 million and $2.4 million, respectively. These volumes represent a split of approximately 70% to 30% of the total DEX volume across the NEAR network. Additionally, Veax, another DEX, launched on mainnet in late April.

Spin, the first perpetual futures protocol on NEAR, saw continued growth. During Q2, Spin’s lifetime volume increased 62%, bringing its cumulative volume to $55 million. Spin has several catalysts on the horizon including launching on Polygon's zkEVM and the introduction of the SPIN token. In addition, Derivio, a derivatives platform building on zkSync and NEAR, launched its testnet. Derivio aims to differentiate itself with market-neutral liquidity and a unique risk management strategy, which ensures the liquidity pool continuously adjusts to volatile market conditions while generating organic yield.

Liquid Staking

Following a significant increase in Q1, the TVL in NEAR's liquid staking protocols remained relatively unchanged QoQ, culminating at $33 million by the end of Q2. LiNEAR concluded the quarter with a TVL of $16 million. Notably, LiNEAR introduced the Automatic Validator Selection Optimization during this quarter. The algorithm is engineered to automatically allocate users' NEAR to validators in an effort to optimize both yield and network security. Meta Pool finished the quarter with a TVL of $13 million. Meta Pool extended its operations to Aurora, with plans to subsequently launch on Ethereum. Completing the trio of liquid staking protocols is Stader, which ended the quarter with a TVL of $4 million.

Stablecoins

The stablecoin market cap on the NEAR network, as of Q2, was $112 million, divided between NEAR and Aurora, contributing $93 million and $19 million, respectively. Bridged-USDC led the market with a cap of $46 million, while the winding-down USN from Decentral Bank had a market cap of $38 million. Native-USDT followed with $23 million, and other stablecoins collectively accounted for $5 million.

NFTs and Gaming

NEAR's NFT activity continued to decline in Q2 2023, following the trend from previous quarters. Marketplaces Paras Marketplace, Few and Far, and TradePort maintained their leadership positions. NEAR also established partnerships with several companies to support their NFT experiences, including NEAR Balkans’ Tekuno, Rove World V2, Shemaroo, Taco Labs, Knaq, and Skoda Ventures.

In the gaming sector, playEmber and Land to Empire maintained their leadership positions. Additionally, several gaming partnerships were announced, including PipeFlare, ARterra, MARBLEX, and Vortex Gaming. All of the partnerships will leverage NEAR’s scalability and BOS for their specific endeavors.

Aurora, Octopus Network, and the Rainbow Bridge

Aurora, Octopus Network, and the Rainbow Bridge play significant roles in the NEAR ecosystem, facilitating interoperability and expanding the capabilities of the network.

Aurora, an Ethereum Virtual Machine (EVM) created by NEAR core developers, operates as a smart contract on NEAR. Notably, in Q1, Aurora introduced Aurora Cloud, a suite of products designed to offer Web2 companies access to Web3 infrastructure. The platform includes Borealis Business, enabling companies to add blockchain capabilities to their applications; Aurora Pass, a mobile digital wallet; and Aurora Silos, which facilitates the creation of customer-specific, dedicated blockchains running on the Borealis Business infrastructure.

Octopus Network is a network of Substrate-based, EVM-compatible app-chains on NEAR. It houses various app-chains, including Fusotao, Myriad, Atocha, DeBio, and Discovol. Octopus plans to expand the Inter-Blockchain Communication to non-Cosmos-SDK chains with Octopus 2.0. Additionally, it aims to implement a NEAR restaking plan, similar to EigenLayer, and enable DAO members to vote for new app chains, further decentralizing the network.

The Rainbow Bridge, including the newly launched Fast Rainbow Bridge, serves as a light client-based bridge, facilitating the connection between Ethereum, NEAR, and Aurora. The Fast Rainbow Bridge offers significantly faster token transfers compared to the classical Rainbow Bridge. It leverages an LP-Relayer, NearFastBridge contract on NEAR, and EthereumFastBridge contract on Ethereum to enable fast transfers with multiple relayers providing liquidity. Additionally, independent developers Electron Labs and Zpoken are developing zero-knowledge technologies for it. The Rainbow Bridge has a lifetime bridge volume of over $3 billion.

During Q2, NEAR announced two new bridge partnerships with Wormhole and Composable Finance.

Decentralization and Staking Overview

Validators

NEAR's consensus algorithm, Thresholded Proof of Stake (PoS), utilizes block producers, chunk-only producers, and hidden validators to validate transactions. Block producers validate transactions across all shards, while chunk-only producers focus on a single shard. Hidden validators serve as third-party monitors. In September 2022, Phase-1 of Nightshade sharding was implemented, expanding the network's validator capacity threefold. Currently, NEAR has 100 block producers. The number of Chunk Only Producers has increased to 119, as they have lower requirements and have reduced the seat price for running a validator.

Validators in NEAR earn rewards through a fixed reward rate and storage staking. Notably, validators do not receive rewards from transaction fees; instead, those rewards go-to smart contract developers. Validators aim to earn a specific amount of NEAR tokens per epoch, targeting at least 4.5% of the total supply annually. Storage staking involves account owners paying for smart contract storage using tokens, which are locked and taken out of circulation based on the amount of stored data. This process indirectly benefits validators by reducing the available tokens for regular staking and the circulating supply.

Stake

The percentage of NEAR supply staked continues its gradual increase, reaching 534 million NEAR (47% of the total supply) by the end of Q2.

Closing Summary

Despite being mentioned in the SEC's complaint against Coinbase, NEAR made significant progress towards its 2023 goal of driving adoption and attracting more users to the NEAR Protocol and the Blockchain Operating System (BOS). The rollout of the BOS continued, resulting in NEAR Social gaining over 15,000 accounts and the creation of 6,000 widgets. The Sweat Economy continued as a leading application, accumulating a total of 19 million Sweat wallets and achieving a record-breaking participation in DAO governance. The NEAR Foundation remained committed to a decentralized model of capital allocation, actively implementing various community DAOs such as the Marketing DAO, Dev Hub, Creatives DAO, and the NEAR Digital Collective (NDC), which surpassed 1,000 verified users in Q2.

Despite a challenging regulatory environment, NEAR's financial and network fundamentals remained stable. NEAR will continue its growth trajectory through strategic partnerships with established industry players and grassroots initiatives.

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This report was commissioned by NEAR Foundation. All content was produced independently by the author(s) and does not necessarily reflect the opinions of Messari, Inc. or the organization that requested the report. The commissioning organization does not influence editorial decision or content. Author(s) may hold cryptocurrencies named in this report. This report is meant for informational purposes only. It is not meant to serve as investment advice. You should conduct your own research, and consult an independent financial, tax, or legal advisor before making any investment decisions. Past performance of any asset is not indicative of future results. Please see our Terms of Service for more information.

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