Good morning.
I’m Mitsui, a web3 researcher.

Every Saturday and Sunday afternoon, we’ll deliver articles explaining basic vocabulary. We aim to keep each article concise enough for a quick read, while also making them suitable for revisiting and studying.

Today’s feature is “Seigniorage.”

Please watch until the very end!

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1. What is Seigniorage?

The term “Seigniorage” originates from the medieval French word “Seigniorage” (lord). Its etymology stems from the practice of lords minting coins and profiting from the difference between the face value and the cost of production.

The most straightforward example is coins. If only 5,000 yen worth of metal is used to make a 10,000 yen gold coin, the remaining 5,000 yen becomes the issuer’s profit. With paper currency, this is even more pronounced; the printing cost for a 10,000 yen bill is merely a few dozen yen.

However, modern seigniorage is a bit more complex.

Modern central banks do not directly profit by printing banknotes. The primary method by which central banks issue currency is by purchasing assets such as government bonds. They buy these bonds with newly issued currency, and the interest earned on those bonds constitutes seigniorage.

In other words, modern seigniorage refers to the economic benefit derived from the very position of being able to issue currency.

2. Why do nations want to hold the power to issue currency?

The power to issue currency is one of the most important authorities a nation possesses. There are three main reasons for this.

• Fiscal flexibility.When expenditures cannot be covered by tax revenue alone, the government can raise funds by issuing government bonds, which are then purchased by the central bank. This serves as a last resort to meet sudden fiscal demands during wartime or disasters.

• Control of economic policy.By adjusting interest rates and increasing or decreasing the money supply, we can stimulate the economy or curb overheating. Without the power to issue currency, we would lose this adjustment mechanism.

• Symbol of sovereignty.The issuance of a national currency is also a symbol of economic independence. The difficulties faced by eurozone countries in pursuing individual monetary policies were highlighted during the European debt crisis.

The power to issue currency is not merely the ability to create money. It is the very power to control the entire economy.

3. Inflation and Seigniorage

Seigniorage has another aspect: inflation as an invisible tax.

When new currency is issued, the total amount of currency circulating in the market increases. As supply rises, the value per unit of currency decreases. This means the assets of those who already hold currency are relatively diminished.

This is sometimes referred to as an “inflation tax.”

For example, suppose the money supply in a given economy increases by 10%. If prices rise by 10%, the real purchasing power of savings declines by about 10%. Although the government is not collecting direct taxes, it has achieved the same effect as “taxing” the purchasing power of money holders.

The key point is that this “taxation” is not readily apparent.

For income tax, the amount is listed on your statement. For consumption tax, it’s displayed at the time of purchase. But there’s no bill for the inflation tax. Simply holding currency quietly erodes its value.

The profits from new issuance are concentrated in the issuer (the state), while the costs are distributed across all holders of the currency. This is the fundamental structure of seigniorage.

4. Does Bitcoin Have Seigniorage?

Bitcoin also has a mechanism for new issuance. So, does seigniorage exist?

In Bitcoin, new BTC is issued as a reward each time a miner generates a block. This is called the block reward, which is currently 3.125 BTC per block (after the 2024 halving).

This reward can be seen as similar to seigniorage. Newly issued BTC goes to miners, and existing holders’ BTC becomes diluted due to the increase in total supply.

However, there is one crucial difference from the seigniorage of national currencies.

• The publication schedule is predetermined.The total supply of Bitcoin is fixed at 21 million BTC, with the reward halving approximately every four years. It cannot be increased at anyone’s discretion.

• Publishing incurs costs.Miners perform massive computations and consume electricity to generate blocks. The reward is compensation for that cost, not “profit from nothing.”

• Transparent issuance rules.When and how much will be issued can be verified by anyone through the code written in the protocol.

Bitcoin can also be said to have sought to eliminate the opacity of seigniorage by removing the “issuer’s discretion.”

5. Token Economics and Issuance Revenue

In Web3 token projects, the issue of seigniorage becomes more directly apparent.

Many tokens have an “Initial Token Allocation.” Before launch, the design specifies how much of the total supply is allocated to the team, investors, foundation, community, and others.

Here lies the issue of issuance gains.

• Initial allocation to the team and investors.Teams and early investors hold large quantities of tokens with virtually zero production costs. If those tokens gain value in the market, that is precisely seigniorage. Structurally, it is identical to how a nation issues currency and profits from it.

• Inflation design.Some projects continuously issue new tokens for staking rewards and ecosystem grants. This new issuance dilutes the holdings of existing token holders.

• Who benefits from this structure?When evaluating a project, it is crucial to examine “who benefits from the token issuance.” The vesting schedule, unlock periods, and inflation rate trends reflect the token’s issuance benefit structure.

Reading token economics also means reading the distribution structure of seigniorage.

6. CBDC and Seigniorage

In recent years, the CBDCs (Central Bank Digital Currencies) being developed by various nations strongly reflect national intentions concerning seigniorage.

As cryptocurrencies and stablecoins become more widespread, people will conduct economic activities outside of state-issued currencies. This signifies a loss of seigniorage for the state.

CBDC is an initiative to keep the power to issue currency in the hands of the state, even in a digitalized economy.

Furthermore, CBDCs may be endowed with programmability—the ability to control their purpose and expiration date through code. “Money usable only for specific purposes” or “money that expires if not used within a set period” can be seen as a further extension of the issuer’s authority.

The digitization of currency is not merely a matter of neutral technology. It is an intensely political issue concerning who issues the currency and who sets its rules.

Summary

Currency issuance is not neutral. It is an act wielding significant power, both economically and politically.

Nations have historically gained seigniorage through their right to issue currency. Bitcoin has hardcoded this rule into its code, eliminating discretionary power. In token projects, seigniorage is embedded within the initial allocation and inflation design.

Understanding web3 also means re-examining who issues the currency and where the profits flow.

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Disclaimer：I carefully examine and write the information that I research, but since it is personally operated and there are many parts with English sources, there may be some paraphrasing or incorrect information. Please understand. Also, there may be introductions of Dapps, NFTs, and tokens in the articles, but there is absolutely no solicitation purpose. Please purchase and use them at your own risk.

About us
🇯🇵🇺🇸🇰🇷🇨🇳🇪🇸 The English version of the web3 newsletter, which is available in 5 languages. Based on the concept of ``Learn more about web3 in 5 minutes a day,’‘ we deliver research articles five times a week, including explanations of popular web3 trends, project explanations, and introductions to the latest news.

Author
mitsui
A web3 researcher. Operating the newsletter “web3 Research” delivered in five languages around the world.

Contact
The author is a web3 researcher based in Japan. If you have a project that is interested in expanding to Japan, please contact the following:

• X：@web3researchgl

• Telegram：@mitsui0x

*Please note that this newsletter translates articles that are originally in Japanese. There may be translation mistakes such as mistranslations or paraphrasing, so please understand in advance.

Good morning.
I’m Mitsui, a web3 researcher.

Every Saturday and Sunday at noon, we’ll deliver articles explaining basic vocabulary. We aim to keep each article concise enough for a quick read, while also providing content you can revisit and study.

Today’s topic is the “Byzantine Generals Problem.”

Please watch until the very end!

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1. What is the Byzantine Generals Problem?

This problem was proposed in 1982 by computer scientist Leslie Lamport and others.

Let’s consider this with an analogy.

Several generals of the Byzantine Empire are besieging a city. The generals have established their camps in separate locations and communicate messages using messengers. They must take unified action: either “attack together” or “retreat together.”

The problem is that there may be a traitor among the generals.

A traitor might tell one general to “attack” and another to “retreat.” If everyone makes conflicting decisions, the army will be destroyed.

In other words, the essence of this problem is as follows.

Can everyone arrive at the same correct judgment in a situation where there may be a liar among the participants?

This is the Byzantine Generals Problem.

2. Why is this problem difficult?

At first glance, it seems simple. Why not just take a majority vote?

However, distributed environments present several fundamental challenges.

• The message is not credible.Messages may be tampered with during transmission. There is no way to verify whether the received message truly reflects the sender’s intent.

• I don’t know who’s being honest.On a network, it is difficult to verify participants’ identities and intentions beforehand. A traitor can pretend to be honest.

• There is no central administrator.If there were a trusted “commander” everyone followed, we could simply obey their orders. But in a distributed system, there is no such privileged entity. Everyone is equal, and everyone is a potential traitor.

When these three conditions coincide, reaching a proper agreement becomes extremely difficult.

3. Byzantine Fault Tolerance in Distributed Systems

The ability to handle this problem is called “Byzantine Fault Tolerance (BFT).”

BFT refers to the property that allows a system to maintain correct consensus even if some network participants fail or act maliciously.

In classical BFT research, an important threshold has been demonstrated.

If honest participants make up more than two-thirds of the total, a correct consensus is possible.

Conversely, if traitors account for more than one-third of the total, consensus formation can no longer be guaranteed.

For example, if there are 10 participants, the group can tolerate up to 3 traitors, but if there are 4 or more, consensus may break down.

This “two-thirds rule” lies at the core of the design philosophy for many blockchain protocols.

4. How did Bitcoin solve this?

In 2008, Satoshi Nakamoto published the Bitcoin white paper. This presented a practical and groundbreaking solution to the Byzantine Generals Problem.

Bitcoin adopted a mechanism called Proof of Work (PoW).

The essence of PoW lies in “cost-based voting.”

Network participants (miners) perform massive computations to generate new blocks. These computations incur real-world costs (electricity, hardware). Contributing to a valid ledger earns a reward, but attempting to create a fraudulent ledger wastes those costs.

In other words, Bitcoin replaced the problem of trust with economic incentives.

Creating situations where lying is “not worth the trouble” encourages honest behavior.

This approach differs from classical BFT, which assumes “two-thirds honest nodes.” Rather than relying on participants’ goodwill, it leverages rational economic behavior. As long as a majority of computational resources (51% or more) are honest, the network functions correctly.

5. How is Ethereum (PoS) different?

Ethereum transitioned to Proof of Stake (PoS) following The Merge in 2022.

In PoS, voting is backed by “stake” (collateral) rather than computational power.

Validators participate in the network by staking ETH. They receive rewards for correct validation, but if they act maliciously, their staked ETH is confiscated. This confiscation mechanism is called slashing.

Let’s clarify the differences between PoW and PoS.

In PoW, proof of correctness is achieved by consuming electricity and computational resources. This structure ensures that “lying would result in wasted computational costs.”

In PoS, assets are pledged as collateral to guarantee correctness. It operates on the principle that “if you lie, your assets will be confiscated.”

Both are essentially the same.Economic rationality serves as a deterrent against betrayal.

PoS adheres to the classical 2/3 rule of BFT, guaranteeing finality (confirmation of consensus) as long as more than two-thirds of the stake is honest.

6. The Byzantine Problem Reveals the Essence of Web3

Understanding the Byzantine Generals Problem makes the design philosophy of Web3 clearer.

• Design that doesn’t trust people.Blockchain is designed so that you don’t need to trust specific individuals or organizations. It doesn’t matter whether participants are good or bad. The mechanism itself ensures correctness.

• What is right is decided by the majority.In blockchain, the “correct ledger” is the one selected by majority consensus. There is no absolute truth; instead, the collective judgment of participants becomes the rule.

• There is no such thing as absolute safety.Byzantine fault tolerance has its limits. If a majority of participants or two-thirds of the stake become malicious, the system can fail. Blockchain is not a “magic safety device,” but a consensus system that functions under specific conditions.

Summary

Blockchain is not a “magical ledger that cannot be tampered with.” It can be described as a consensus mechanism designed to function even in a world where there are liars.

The Byzantine Generals Problem is the starting point for this design. How to reach consensus in an environment with untrustworthy parties? Bitcoin proposed a solution through computational cost, while Ethereum proposed a solution through staking.

Understanding Web3 also means accepting the premise of “cooperating under conditions of distrust.”

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Disclaimer：I carefully examine and write the information that I research, but since it is personally operated and there are many parts with English sources, there may be some paraphrasing or incorrect information. Please understand. Also, there may be introductions of Dapps, NFTs, and tokens in the articles, but there is absolutely no solicitation purpose. Please purchase and use them at your own risk.

About us
🇯🇵🇺🇸🇰🇷🇨🇳🇪🇸 The English version of the web3 newsletter, which is available in 5 languages. Based on the concept of ``Learn more about web3 in 5 minutes a day,’‘ we deliver research articles five times a week, including explanations of popular web3 trends, project explanations, and introductions to the latest news.

Author
mitsui
A web3 researcher. Operating the newsletter “web3 Research” delivered in five languages around the world.

Contact
The author is a web3 researcher based in Japan. If you have a project that is interested in expanding to Japan, please contact the following:

• X：@web3researchgl

• Telegram：@mitsui0x

*Please note that this newsletter translates articles that are originally in Japanese. There may be translation mistakes such as mistranslations or paraphrasing, so please understand in advance.

Good morning.
I’m Mitsui, a web3 researcher.

Every Saturday and Sunday at noon, we’ll deliver articles explaining basic vocabulary. We aim to keep each article concise enough for a quick read, while also providing content you can revisit and study.

Today’s topic is “Sovereignty.”

Please watch until the very end!

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Web3 is often described as “the ability to hold your own assets.” But this isn’t merely a technical matter. It represents an attempt to bring the concept of sovereignty—previously discussed only at the national level—down to the individual level.

What is sovereignty? And what does it mean for individuals to possess sovereignty? This article begins with the history of state sovereignty, delving into the meaning of “individual sovereignty” championed by Web3, along with its light and shadow.

What is sovereignty?

Sovereignty means the “ultimate authority” within a given domain. In the context of international law, it refers to a state’s right to make final decisions in all matters of legislation, judiciary, and administration within its own territory. No other state can overturn those decisions.

This concept was established as far back as the 1648 Treaty of Westphalia. Prior to this, supranational authorities such as the Pope and the Holy Roman Emperor intervened in the decision-making of individual states. The Treaty of Westphalia recognized that each state held supreme authority within its own territory, laying the foundation for the modern nation-state.

Sovereignty, in essence, is both the “right to be free from subordination to any other authority” and the “duty to assume responsibility for oneself.” It is precisely because a state possesses sovereignty that it can enact laws, issue currency, conduct foreign affairs, and establish systems to protect its citizens. Conversely, losing sovereignty means surrendering one’s destiny to others. This concept has formed the bedrock of the international order since the modern era.

The concept of currency sovereignty

Among national sovereign rights, monetary sovereignty is particularly closely tied to the economy. Why do nations issue their own currency? Because the very power to issue currency is the most potent means of controlling the economy.

Central banks control inflation and deflation by manipulating interest rates and adjusting the money supply. When the economy weakens, they inject money into the market through monetary easing; when the economy overheats, they tighten policy. These adjustments are possible precisely because the state holds the “ultimate authority” through its power to issue currency.

Looking back at history reveals just how severe the loss of monetary sovereignty can be for a nation. For example, countries that adopted the euro abandoned their own monetary policies, and during the Greek debt crisis of the 2010s, they were unable to resort to the traditional remedy of devaluing their currency. Monetary sovereignty is one of the most powerful authorities in economic management.

Does sovereignty exist for individuals?

So what about us as individuals? Can we truly say the money in our bank accounts is “ours”?

Legally, bank deposits are claims against the bank. In other words, you are merely “lending” money to the bank. If the bank fails, any amount exceeding the deposit insurance coverage may not be returned.

Additionally, accounts may be frozen or transfers restricted based on government decisions. In fact, instances where withdrawals were restricted during economic crises have occurred worldwide, including in Cyprus and Lebanon.

The financial services we use daily may appear to be “owned,” but in reality, they are closer to being “permitted for use.”

Credit cards may be suspended at the issuer’s discretion, and e-money is also bound by the operating company’s terms of service. What individuals possess is not sovereignty, but merely access rights.

The “Individual Sovereignty” Proposed by Web3

Web3 fundamentally challenges this structure. With non-custodial wallets, you are the sole manager of your assets. Neither banks nor exchanges are involved. Only those holding the private key can move those assets.

A private key is the ultimate authority itself.

You need not seek approval from anyone, nor will anyone stop you. Assets recorded on the blockchain are designed so that no state agency can freeze them, provided they follow the protocol’s rules. Bank hours, national borders, and political decisions hold no sway over this system.

This is less about technological progress and more about a shift in thinking. When asked “Who should hold the final decision-making power?”, Web3 answers: “Individuals should.”

This is an attempt to transfer the sovereignty over currency—which the state has monopolized for centuries—to individuals through the power of technology.

Is sovereignty freedom or a burden?

However, having personal sovereignty means bearing all responsibility yourself. If you lose your private key, your assets are lost forever. Unlike forgetting a password, you cannot contact customer support to recover them.

Even if you send funds to the wrong address, you cannot cancel the transaction. If you fall victim to fraud or hacking, there is no central authority you can ask to “reverse the transaction.” In fact, it is estimated that billions of dollars worth of cryptocurrency assets are inaccessible due to lost private keys and human error.

Freedom and responsibility are two sides of the same coin. Just as in national sovereignty, the sovereign state bears the responsibility to protect its citizens, so in individual sovereignty, the individual assumes all risks.

In the traditional financial system, we entrusted our sovereignty to nations and corporations in exchange for convenience. Web3 reverses this dynamic, but reclaiming sovereignty also means relinquishing our safety net.

Can sovereignty be fully realized?

At present, there are significant barriers to the full realization of individual sovereignty.

First, there is the issue of on-ramps and off-ramps for exchanging fiat currency and crypto assets. In many cases, converting to fiat currency requires going through a centralized exchange, which subjects users to Know Your Customer (KYC) procedures and regulatory oversight at that stage. This means that while sovereignty exists on-chain, the points of contact with the fiat currency world inevitably rely on traditional systems.

Furthermore, the blockchain infrastructure itself carries risks of centralization. Many nodes operate on major cloud services, and it is not uncommon for them to depend on specific RPC providers. This creates a contradiction: while touting “decentralization,” it effectively relies on a small number of infrastructure companies.

Regulatory friction cannot be ignored. Governments worldwide are tightening regulations on cryptocurrencies, and a significant gap remains between complete individual sovereignty and existing legal frameworks.

The Future Pointed to by the Idea of Sovereignty

Nevertheless, rethinking the concept of sovereignty within the context of Web3 holds significant importance.

In the digital age, questions such as “What is ownership?”, “Who owns your data?”, and “Do you have the right to manage your own assets?” are expected to become increasingly important.

The relationship between the state and the individual evolves alongside technological progress. While the concept of individual sovereignty proposed by Web3 may not be fully realized in its current form, it serves as a crucial starting point for rethinking ownership and rights in the digital age. Perhaps the value of this idea lies not in whether perfect sovereignty is achieved, but in the very act of “being conscious of where sovereignty resides.”

Summary

Web3 is not merely a “convenient payment technology.” It is an ideology that fundamentally questions the very nature of sovereignty.

However, sovereignty is not something to be protected by others. It only exists when one is prepared to protect it oneself. Choose freedom or choose security. Web3 entrusts that choice to each and every one of us.

That concludes our basic explanation of “sovereignty”!

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Disclaimer：I carefully examine and write the information that I research, but since it is personally operated and there are many parts with English sources, there may be some paraphrasing or incorrect information. Please understand. Also, there may be introductions of Dapps, NFTs, and tokens in the articles, but there is absolutely no solicitation purpose. Please purchase and use them at your own risk.

About us
🇯🇵🇺🇸🇰🇷🇨🇳🇪🇸 The English version of the web3 newsletter, which is available in 5 languages. Based on the concept of ``Learn more about web3 in 5 minutes a day,'' we deliver research articles five times a week, including explanations of popular web3 trends, project explanations, and introductions to the latest news.

Author
mitsui
A web3 researcher. Operating the newsletter "web3 Research" delivered in five languages around the world.

Contact
The author is a web3 researcher based in Japan. If you have a project that is interested in expanding to Japan, please contact the following:

• X：@web3researchgl

• Telegram：@mitsui0x

*Please note that this newsletter translates articles that are originally in Japanese. There may be translation mistakes such as mistranslations or paraphrasing, so please understand in advance.

Good morning.
I’m Mitsui, a web3 researcher.

Every Saturday and Sunday at noon, we’ll deliver articles explaining basic vocabulary. We aim to keep each article concise enough for a quick read, while also providing content you can revisit and study.

Today’s topic is “Modular.”

Please watch until the very end!

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Why doesn’t Ethereum process everything on a single chain? Why are mechanisms like Layer 2 and rollups continuously emerging? The underlying reason is the design philosophy of modularity (division of labor).

Web3 is evolving into a collection of infrastructure components, each with distinct roles, rather than a monolithic entity. This article explains why the concept of modularity emerged, what problems it solves, and where it is headed.

What is monolithic (single-structure)?

To understand modularity, you first need to know its opposite: monolithic design. Monolithic refers to a structure where all functions are handled by a single system.

Early blockchains were precisely this monolithic type. A single chain handled everything: executing transactions, storing data, and reaching consensus. Bitcoin is the quintessential example. Its simple structure offers the advantages of being easy to understand and easy to verify for security.

However, its simplicity poses a problem: it is difficult to scale. Since everything is processed through a single entity, there are physical limits to its processing capacity. As the number of users and transactions increases, fees skyrocket and processing speeds decline. This issue has been the biggest bottleneck hindering the widespread adoption of Web3.

※Please note that this article is written with Ethereum as the primary example. Many other blockchains, such as Solana, Avalanche, Sui, and Aptos, have overcome scalability issues using a monolithic architecture. Furthermore, even recent versions of Ethereum offer a degree of scalability within its monolithic framework. Therefore, please view this article as an introduction to the general concept and terminology of modularity.

Why is there a limit to scale?

Increasing the processing speed of a blockchain is fundamentally different from simply scaling up a typical server. This is because blockchains are built upon a mechanism called “distributed consensus.”

All nodes participating in the network must verify the same data and reach the same conclusion. As the number of nodes increases, the communication cost required to reach consensus also increases.

Then, wouldn’t it be simple to just increase the block size to process more transactions at once? However, doing so would cause the hardware requirements needed to run a node to skyrocket, making it impossible for ordinary users to operate nodes. As a result, only a small number of well-funded players would be able to run nodes, undermining decentralization.

Here lies a dilemma unique to blockchain: it is impossible to simultaneously maximize all three of scalability (processing speed), security (safety), and decentralization (non-centralization). This problem, known as the “blockchain trilemma,” has long remained a challenge for the industry.

The concept of modularity

Modular design is one solution to this trilemma. Rather than processing everything on a single chain, it involves breaking down functions and assigning each to a specialized layer.

Specifically, we divide blockchain functionality into three major components: Execution, Consensus, and Data Availability.

The execution layer handles transaction computation, the consensus layer ensures the chain’s validity and order, and the data availability layer guarantees that transaction data is stored in a state verifiable by anyone.

Specialization across each layer enables individual optimization. This embodies the very concept of “division of labor” widely adopted in modern manufacturing and software development. Rather than building everything in-house, focus on areas of expertise and entrust the rest to specialists. Modular design applies this principle to blockchain.

The Role of Roll-Up

A prime example of a mechanism that embodies modular design is the “rollup.”

Rollup is a technology that batches transactions for processing outside of Ethereum (L2) and records only the results on Ethereum itself (L1).

Users can execute transactions on L2 quickly and at low cost. L2 bundles multiple transactions into a single “batch” for submission to L1, significantly reducing the gas fees borne by individual users. However, the ultimate security and settlement finality depend on Ethereum, the L1.

This relationship resembles that between a branch office and headquarters. While day-to-day operations are efficiently handled at the branch, final approvals and audits are managed by headquarters. By dividing roles, we achieve both overall efficiency and security.

Benefits of Modularization

The greatest benefit of modular design is scalability. When you want to improve a single function, you don’t need to rebuild the entire system. You only need to enhance the relevant layer. If there’s an issue with data availability, you can replace just that layer with new technology.

Flexibility is another major advantage. Different projects can select and combine modules that best suit their specific use cases. While the optimal design differs between a blockchain for gaming and one for finance, a modular design allows each to choose a configuration tailored to its purpose.

Furthermore, there is the advantage of ease of experimentation. When you want to test new consensus algorithms or data compression technologies, you can verify them on an independent layer without impacting existing infrastructure. This flexibility significantly accelerates the pace of innovation.

Disadvantages of Modularization

On the other hand, modular design also has significant drawbacks that cannot be ignored. The most notable is increased complexity. Users must operate across multiple chains and layers, constantly facing decisions like “Which chain should I bridge to?” and “Which L2 should I use?”

Security dependencies also become complex. Inter-module coordination requires bridges and messaging protocols, which can become targets for attacks. In fact, numerous hacking incidents targeting bridges have occurred in the past, with some cases resulting in losses amounting to tens of billions of yen.

The fragmentation of the user experience is also a serious challenge. Assets scattered across multiple chains, each requiring different wallets and procedures, presents a significant barrier for ordinary users.

Is the modular system the final form?

Modular design is still evolving. The biggest challenge is interoperability. How can data and assets be exchanged seamlessly between different layers and chains? Unless this problem is solved, we cannot fully reap the benefits of division of labor.

Additionally, abstraction is gaining attention as a key direction. Efforts to conceal technical complexity are advancing across the board, enabling users to operate without being aware of the underlying complex mechanisms. In the future, users may be able to utilize Web3 services without even being conscious of which chain they are using. Modularity is not a finished product; it is still in the early stages of its evolution.

Summary

Web3 is evolving into a structure where roles are divided and mutually supportive, rather than relying on a massive centralized system. Division of labor creates complexity, but this is both the price of decentralization and its potential.

Choose a monolithic approach or opt for specialization. Web3 is exploring every possible option in response to this question, and one such path is evolution through modular design.

Ethereum itself may eventually return to a monolithic architecture, but the underlying philosophy of modularity—as a feature within Ethereum—will likely endure.

That concludes our basic explanation of “Modular”!

Subscribe now

Disclaimer：I carefully examine and write the information that I research, but since it is personally operated and there are many parts with English sources, there may be some paraphrasing or incorrect information. Please understand. Also, there may be introductions of Dapps, NFTs, and tokens in the articles, but there is absolutely no solicitation purpose. Please purchase and use them at your own risk.

About us
🇯🇵🇺🇸🇰🇷🇨🇳🇪🇸 The English version of the web3 newsletter, which is available in 5 languages. Based on the concept of ``Learn more about web3 in 5 minutes a day,'' we deliver research articles five times a week, including explanations of popular web3 trends, project explanations, and introductions to the latest news.

Author
mitsui
A web3 researcher. Operating the newsletter "web3 Research" delivered in five languages around the world.

Contact
The author is a web3 researcher based in Japan. If you have a project that is interested in expanding to Japan, please contact the following:

• X：@web3researchgl

• Telegram：@mitsui0x

*Please note that this newsletter translates articles that are originally in Japanese. There may be translation mistakes such as mistranslations or paraphrasing, so please understand in advance.

Good morning.
I’m Mitsui, a web3 researcher.

Every Saturday and Sunday afternoon, we’ll deliver articles explaining basic vocabulary. We aim to keep each article concise enough for a quick read, while also providing content you can revisit and study.

Today’s topic is “Public Goods.”

Please watch until the very end!

Subscribe now

Import

Who owns blockchain? It belongs neither to corporations nor to nations. Anyone can use it, yet no one owns it. The key to understanding this seemingly contradictory nature lies in the concept of a “public good.”

We routinely use various public goods in our daily lives. We walk on roads, breathe air, and connect to the internet. These are not monopolized by anyone; everyone can use them. Yet at the same time, they cannot function unless someone maintains them. Blockchain also possesses this characteristic as a public good. And the method of its maintenance is fundamentally different from that of public goods up until now.

What is a public good?

Public goods refer to goods and services possessing special characteristics in economics. They have two defining features: non-excludability and non-rivalry.

“Non-excludability” refers to the property that someone cannot be prevented from using something. Take roads as an example: you can walk on them without paying a toll, and it is difficult to physically exclude someone. Air is similar; you cannot stop someone from breathing. TCP/IP, the Internet protocol, can also be freely used by anyone, and specific individuals cannot be excluded.

Non-rivalry refers to the property that one person’s use does not prevent others from using the same resource. If you walk down a road, others can walk down the same road. If you breathe air, it does not typically prevent others from breathing. Using the fundamental protocols of the internet does not prevent others from using it.

However, there is a problem here.

Public goods cannot be sustained by market forces alone. After all, who would pay for something everyone can use for free? Building and maintaining roads costs money. Preserving air quality requires environmental measures. Maintaining internet infrastructure demands massive capital investment. But if everyone can use it for free, who will provide the funds to maintain it?

This is the fundamental dilemma of public goods. Everyone needs them, everyone uses them. Yet it remains unclear who will bear the burden of maintaining them.

Why Are Public Goods So Fragile?

Public goods have a structural vulnerability known as the free-rider problem.

Free riding refers to reaping benefits without bearing the costs. You can use roads without paying for their maintenance. You can breathe air without contributing to environmental protection. You can use the internet without contributing to its infrastructure. From an individual’s perspective, free riding is a rational choice. After all, the impact of one person bearing the burden is negligible, and one can expect someone else to shoulder it if they don’t.

But what would happen if everyone thought this way? No one would bear the burden, and everyone would try to free-ride. As a result, public goods would no longer be maintained and would ultimately collapse. Roads would fall into disrepair, the air would become polluted, and internet infrastructure would deteriorate.

This is the phenomenon known as the “Tragedy of the Commons.” Anyone can use it, but no one takes responsibility. Because there is no manager, resources become depleted and the system collapses.

The reason public goods are fragile lies precisely in this structure. Everyone enjoys the benefits, yet no one is willing to bear the costs. And there is no mechanism to prevent free-riding. Unless this problem is solved, public goods cannot be sustainable.

How the Internet Has Been Maintained

So, how has the Internet, as a public good, been maintained?

The Internet has been supported by the division of roles among three main entities: nations, corporations, and open-source software communities.

The state was responsible for investing in basic research and establishing regulations. Companies were responsible for building and operating infrastructure, as well as providing commercial services. The OSS community was responsible for developing and maintaining protocols and software.

However, there is an important underlying structure. Many services that appear free are actually centrally managed.

Google and Facebook provide their services for free. However, in exchange, they collect user data and generate advertising revenue. In other words, while the services are free, users are paying with their own data. And this structure inevitably creates dependence on the platform.

Platform dependency refers to a state where one is forced to rely on a specific company’s services. Data is stored on the platform, networks are built on the platform, and users must follow the platform’s rules. If the platform changes its policies, users have no choice but to comply. If the service ends, they lose everything.

The public nature of the internet has been maintained through this centralized management. As the price for its free access and universal availability, we have accepted a structure dependent on specific corporations.

Blockchain: A New Public Good

Blockchain is one challenge to this structure. It aimed to create infrastructure that anyone could use, transcended borders, and had no central authority.

Blockchain is accessible to anyone. You don’t need to be a citizen of a specific country, nor do you need an account with a particular company. As long as you have an internet connection, anyone in the world can access blockchain. This is true non-exclusion.

Blockchain transcends borders. Bitcoin and Ethereum have no concept of borders. They can be used equally from Japan, the United States, or anywhere else. They require no national regulation or permission. This is their nature as a global public good.

And most importantly, blockchain has no central authority. There are no Google servers. There are no Facebook data centers. Blockchain is maintained in a decentralized manner by thousands, even tens of thousands, of computers around the world. Even if someone shuts down, the system keeps running.

This is a fundamentally different characteristic from previous public goods. Roads have been managed by the state, and internet services have been managed by companies. But blockchain is managed by no one. It is a public good in the purest sense, maintained by all participants.

Why can’t I use it for free?

However, blockchain has one characteristic: it cannot be used for free.

Sending Bitcoin incurs a transaction fee. Executing a smart contract on Ethereum requires a Gas Fee. Why is that? Why is blockchain fee-based when many internet services are free?

The answer lies in the principle that “free = vandalized.”

If blockchain were completely free, what would happen? Everyone would send an infinite number of transactions, flooding it with spam. Massive amounts of meaningless data would be recorded, the network would become congested, and it would ultimately become unusable. This is a classic pattern of resource depletion in a public good.

Blockchain is a limited resource. There are limits to block size and processing capacity. If everyone could use it without restriction, capacity would quickly run out. This is where the concept of price-based usage adjustment becomes necessary.

Gas Fee is a mechanism that determines transaction priority. Transactions paying higher fees are processed first. This ensures that only those who truly need it can use the network, and only to the extent necessary. Unnecessary usage is economically discouraged. Since sending spam incurs significant costs, spam decreases.

In other words, the fact that blockchain incurs fees is not a flaw but by design. It is an essential mechanism for maintaining a public good.

Viewing Gas Fees from a Public Goods Perspective

Gas fees are often called “transaction fees.” However, from the perspective of public goods, they are not fees but maintenance costs.

A fee is a payment made to a company providing a service. Bank transfer fees are compensation for the bank’s service. However, a Gas Fee is not paid to any specific company. It is a mechanism for all users to share the costs necessary to maintain the blockchain infrastructure.

Gas fees primarily serve two purposes. One is the resource allocation mechanism mentioned earlier, distributing limited resources through a price mechanism. The other is as an incentive—rewarding those who maintain the blockchain, namely miners and validators.

This gas fee maintains order on the blockchain. Spam is suppressed, and only truly valuable transactions are recorded. Those who maintain the blockchain receive rewards, giving them the motivation to keep supporting the system.

This is a new model for maintaining public goods. It is neither a state-mandated levy like taxes, nor is it operated by companies for profit. Public goods are maintained through fees paid voluntarily by users. That is the mechanism for public goods on blockchain.

Who is supporting blockchain as a public good?

The three entities that actually support blockchain as a public good are:

First, there are validators and miners. They run their computers to verify transactions and generate blocks. This requires electricity costs and high-performance equipment. However, they receive Gas Fees and block rewards as compensation. This is the direct labor that maintains the blockchain.

Second, there are node operators. They store all transaction histories, participate in the network, and relay transactions. Many of them receive no rewards. They still operate nodes to support the blockchain’s decentralization. The more nodes there are, the stronger the system becomes. This is a volunteer contribution.

Third, developers and the community. They improve the protocol, fix bugs, and propose new features. Often, this is also unpaid labor. Some receive grants, but many participate purely out of interest or belief in the future of blockchain.

These three entities maintain the blockchain by fulfilling their respective roles. There is no unified chain of command like in a corporation. Nor does it possess the coercive power of a nation-state. Yet, through each entity’s voluntary participation and contributions, the system continues to operate.

This is a new way to maintain public goods. Even without a central authority, people cooperate through incentives and a shared purpose. That is the defining characteristic of blockchain as a public good.

Is blockchain succeeding as a public good?

So, is blockchain succeeding as a public good? The answer is, “We don’t know yet.”

The current situation presents numerous challenges. Gas fees have skyrocketed, making usage difficult for many people. Operating nodes requires advanced technical skills, and participation barriers remain high. Validators and miners are increasingly concentrated among a few large entities. This state is far from the ideal of a public good.

Furthermore, the uneven distribution of users is also problematic. Those actually using blockchain are primarily tech-savvy individuals in developed countries. It has yet to reach the people who truly need blockchain—such as those without access to financial services. This raises questions about its public nature as a public good.

However, blockchain still has value. That value has not been lost.

Bitcoin has been operational for over 15 years without a single outage. Ethereum, too, continues to function despite overcoming numerous challenges. Many blockchains have been maintained for years without a central authority. This is truly remarkable.

In a typical company, bankruptcy, acquisition, or a change in direction occurs within 15 years. Even nations see policy shifts when governments change. But blockchain, precisely because it belongs to no one, cannot be stopped by anyone. No one can force changes upon it. It evolves solely through the consensus of all participants.

This is one successful form of a public good. It’s not perfect, but it persists. While challenges abound, it also demonstrates potential. Blockchain may truly be capable of creating public goods independent of nations or corporations.

Summary

Blockchain is not infrastructure that someone else protects for you. It is a public good supported by everyone who uses it, each contributing a little.

Gas fees and decentralization are not inconveniences. They are the costs we pay to maintain this public good. They are essential mechanisms for realizing a public good that persists without relying on central authorities or state coercion.

Blockchain as a public good is still a work in progress. Challenges abound. Yet it also represents new possibilities. Blockchain is exploring what it means to be a public good: owned by no one, usable by all, and supported by everyone.

Whether blockchain, as a public good, will succeed remains to be seen. Yet the very attempt poses a crucial question: Can public goods be sustained without states or corporations? Can society’s infrastructure be supported solely by people’s voluntary participation? Blockchain continues to seek the answer.

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Disclaimer：I carefully examine and write the information that I research, but since it is personally operated and there are many parts with English sources, there may be some paraphrasing or incorrect information. Please understand. Also, there may be introductions of Dapps, NFTs, and tokens in the articles, but there is absolutely no solicitation purpose. Please purchase and use them at your own risk.

About us
🇯🇵🇺🇸🇰🇷🇨🇳🇪🇸 The English version of the web3 newsletter, which is available in 5 languages. Based on the concept of ``Learn more about web3 in 5 minutes a day,'' we deliver research articles five times a week, including explanations of popular web3 trends, project explanations, and introductions to the latest news.

Author
mitsui
A web3 researcher. Operating the newsletter "web3 Research" delivered in five languages around the world.

Contact
The author is a web3 researcher based in Japan. If you have a project that is interested in expanding to Japan, please contact the following:

• X：@web3researchgl

• Telegram：@mitsui0x

*Please note that this newsletter translates articles that are originally in Japanese. There may be translation mistakes such as mistranslations or paraphrasing, so please understand in advance.

Good morning.
I’m Mitsui, a web3 researcher.

Every Saturday and Sunday at noon, we’ll deliver articles explaining basic vocabulary. We aim to keep each article concise enough for a quick read, while also providing content you can revisit and study.

Today’s topic is “Verification.”

Please watch until the very end!

Subscribe now

Import

We routinely accept bank balances, transaction histories, and payment completion notifications as “correct.” We feel reassured seeing the numbers on our smartphone screens, believing payments are complete, and trust the amounts recorded in our passbooks as our assets. But is that really correct?

The “Trustless” philosophy championed by Web3 does not mean ceasing to trust people. It is an attempt to reestablish verifiability—a state where anyone can verify things for themselves—as a fundamental premise of society.

We are replacing the judgments we have entrusted under the name of “trust” with a transparent system that anyone can verify. That is the essence of verification in Web3.

What do we usually “believe” in?

When checking our balance at a bank ATM, we trust that the number displayed is correct. When we click the payment button during online shopping, we feel reassured upon seeing the “Payment Complete” screen. Why is that? It’s because we trust the organizations behind them—the banks and payment processors.

What underpins this trust? It is the organization’s brand, its long-standing track record, legal regulations, and the compensation system in place should any issues arise. In other words, we users are making a cost-cutting decision: we skip the hassle of verifying each transaction individually and instead place our trust in the organization.

Trust is essentially a mechanism that eliminates verification costs.

If we were to verify everything ourselves every single time, daily life would grind to a halt. That’s why we’ve entrusted decisions to trusted entities and prioritized efficiency. However, this structure has a critical flaw: when the party we trust makes a mistake or acts with malicious intent, we have no way to verify it.

If a bank’s balance display is incorrect, can we prove it? If a payment processor is improperly manipulating funds, can we detect it? In many cases, the answer is “no.” Because the data itself resides within the organization and is invisible to us.

How “Correctness” is Determined in Web2

The world of Web2, meaning most modern internet services, operates on centralized systems. Data is stored on corporate servers, and the companies themselves guarantee its accuracy. Google, Amazon, Meta, banks, payment processors—these companies possess massive data centers where all information is aggregated.

In this structure, “correctness” is determined by the administrator. If the bank says your account balance is ¥100,000, then it is ¥100,000. If Amazon says this item is included in your order history, then that is the fact. As the user, you have no means to overturn that judgment.

Of course, there are remedies available when problems arise. You can inquire about incorrect charges, and legal action is possible in cases of fraud. However, these are ultimately after-the-fact responses. And above all, the responsibility to prove that a problem occurred often lies with the user.

This structure has functioned because many people have judged companies to be trustworthy. However, data leaks, unauthorized access, corporate bankruptcies, system failures—events that shake trust are by no means rare. And once trust is broken, the damage is immense. Because we have entrusted everything to them.

The Premises Reexamined by Web3

Web3 poses the question: “Isn’t it possible that the administrator isn’t necessarily right?”

This is not to say you should distrust companies or organizations. Even the most well-intentioned organizations make mistakes. Systems have bugs, humans make errors, and sometimes malicious individuals infiltrate from within. The problem is that when such fraud or tampering occurs, users lack the means to detect and prove it.

The philosophy of Web3 brought about a fundamental shift here. It is the choice to eliminate the “trusted authority.” Rather than entrusting judgments of correctness to specific companies or servers, correctness is determined by publicly accessible records that anyone can verify. This is the core of verifiability in Web3.

The birth of Bitcoin embodied this philosophy. Even without trusting central banks or financial institutions, anyone could verify the validity of transactions by checking the records on the blockchain. It was a system that judged correctness not by the vague concept of trust, but by an objective standard: mathematical proof.

What does it mean to be verifiable?

So, what exactly does “verifiable” mean? In Web3, it consists of three elements.

First, anyone can view the transaction history. Blockchain is a public ledger where all transaction records are stored chronologically. Your transactions and others’ transactions are all recorded in the same ledger, and anyone can see its contents. No special permissions are required. Anyone in the world with an internet connection can view all records at any time.

Second, the rules are published as code. Web3 systems, especially smart contracts, have their operational rules written and published as program code. This means anyone can read and verify “how this system works.” This is vastly different from how outsiders cannot know how a bank’s internal systems operate.

Third, there are no entities with special privileges. Web2 systems always have administrators. Only administrators possess the authority to rewrite databases, suspend user accounts, or alter system operations. Web3, however, seeks to eliminate such privileged entities. Everyone follows the same rules, and no one can unilaterally make changes. That is the ideal state.

Why Verifiability Matters

The reason verifiability is important is not to “prevent” fraud, but to create a state where fraud “gets caught.” This distinction is crucial.

Every system has the potential for fraud. Perfect security does not exist. However, if people know fraud will be quickly detected, fewer will attempt it. This is the deterrent effect of transparency.

In blockchain, it is technically possible to alter a transaction once it has been recorded. However, executing such an alteration requires enormous computational resources, and above all, the tampering would be immediately detected by other participants. This is because all records are publicly visible. The cost and risk of tampering far outweigh any potential benefit gained from it. Therefore, fraud is unlikely to occur.

More importantly, it’s a design that minimizes damage the moment trust breaks down.

In Web2 systems, if a company goes bankrupt or a service shuts down, all data is lost. However, in Web3, data is decentralized and does not depend on any specific company. Even if the service provider disappears, the records on the blockchain remain.

This means it does not depend on any trusted entity. Trust can be betrayed at any time. Companies go bankrupt, systems fail, and people make mistakes. However, in a verifiable system, the damage can be localized. One failure does not cause everything to be lost.

Verification always incurs costs.

However, verifiability comes at a cost. That cost is expense.

Blockchain has all participants maintain every transaction record. This means data is replicated across thousands, even tens of thousands, of computers. This consumes far more storage than storing data on a single central server.

Furthermore, verifying the validity of transactions requires computation. Bitcoin mining is the prime example of this. It uses enormous amounts of electricity to perform calculations, thereby guaranteeing the validity of transactions. This consumes far more energy than a bank’s servers processing transactions.

Furthermore, it takes time. With blockchain, transactions require a certain amount of time to be confirmed. Bitcoin takes about 10 minutes, and Ethereum takes over ten seconds. Compared to credit card payments that complete instantly, this is clearly slow.

Why does this incur such high costs? It’s because achieving verifiability requires multiple independent entities to perform the same tasks. What a central server could handle with a single operation must be repeatedly executed by thousands of nodes. This is the inherent cost of distributed systems.

Web3 is neither faster nor cheaper than Web2 because of bugs or flaws. It is a fundamental trade-off between verifiability and scalability.

Centralized management is efficient, but it cannot be verified. Decentralization enables verification, but efficiency declines. Web3 prioritizes verifiability over efficiency, even at the cost of efficiency.

The Responsibility of “Not Having to Believe”

Web3 has given us the freedom to “not have to believe.” But with that freedom comes responsibility.

Having an account at a bank means entrusting everything to the bank. Even if you forget your password, you can go to the bank, verify your identity, and have it reissued. If there are any unauthorized transactions, the bank may compensate you. This is the advantage of having an administrator.

However, in Web3, you must manage your own private keys. If you lose your private key, your assets are lost forever. If you send funds to the wrong address, you cannot get them back. If a smart contract has a bug, you could lose your assets. And no one will compensate you for it.

This is a harsh world. Yet this is the very essence of “verifying for oneself.” Not relying on others for protection, but verifying and judging for oneself. In exchange for that freedom, users must accept responsibility.

To do so, understanding is essential. What is blockchain? What is a transaction? What is a smart contract? Without grasping these concepts, verification is impossible. Web3 demands advanced knowledge from its users.

Summary

Web3 is not a cold world that distrusts humans. It is an attempt to minimize the damage when trust is betrayed by providing a structure that can function without relying on anyone.

Verifiability is the foundation for simultaneously embracing freedom and responsibility. It means everyone can verify things for themselves. No one holds a privileged position. Everything is transparent, and everything is recorded.

Verifiability means not doubting, but being able to confirm. Creating a state where anyone can verify, rather than blindly trusting someone, is the true meaning of the “trustless” society Web3 aims to achieve.

Subscribe now

Disclaimer：I carefully examine and write the information that I research, but since it is personally operated and there are many parts with English sources, there may be some paraphrasing or incorrect information. Please understand. Also, there may be introductions of Dapps, NFTs, and tokens in the articles, but there is absolutely no solicitation purpose. Please purchase and use them at your own risk.

About us
🇯🇵🇺🇸🇰🇷🇨🇳🇪🇸 The English version of the web3 newsletter, which is available in 5 languages. Based on the concept of ``Learn more about web3 in 5 minutes a day,'' we deliver research articles five times a week, including explanations of popular web3 trends, project explanations, and introductions to the latest news.

Author
mitsui
A web3 researcher. Operating the newsletter "web3 Research" delivered in five languages around the world.

Contact
The author is a web3 researcher based in Japan. If you have a project that is interested in expanding to Japan, please contact the following:

• X：@web3researchgl

• Telegram：@mitsui0x

*Please note that this newsletter translates articles that are originally in Japanese. There may be translation mistakes such as mistranslations or paraphrasing, so please understand in advance.

Good morning.
I’m Mitsui, a web3 researcher.

Every Saturday and Sunday afternoon, we’ll deliver articles explaining basic vocabulary. We aim to keep each article concise enough for a quick read, while also providing content you can revisit and study.

Today’s topic is “Mempool.”

Please watch until the very end!

Subscribe now

Introduction｜Why Ethereum Seems Slow

When you send a transaction on Ethereum, you’ll see the transaction status as “Pending” on the transaction screen. You may have experienced it staying Pending indefinitely, even after waiting 5 minutes or 10 minutes.

Based on these experiences, many people get the impression that “Ethereum is slow.” However, what is actually happening is completely different. Ethereum’s speed itself is fast. The problem lies in the mechanism called the Mempool.

Understanding the mempool reveals the reality that the network isn’t “slow,” but rather has “capacity limitations.” Furthermore, you’ll see that this capacity limitation is actually an extremely rational design. The mempool is the result of transparently visualizing the physical constraints faced by the blockchain.

What is the Mempool? | The True Nature of the Waiting Area

The Mempool (Memory Pool) is a temporary storage location for transactions that have not yet been included in a block. When a user sends a transaction, it does not immediately enter a block. It propagates across the network and arrives at each node’s Mempool. There, it waits for the opportunity to be included in a block.

A key characteristic is that the mempool is not a single entity across the entire network; each node maintains its own independent mempool. This means Node A’s mempool and Node B’s mempool contain different information. In Web2 systems, there is one central “waiting room” where everyone waits their turn. However, in Web3, “countless waiting rooms exist.”

The contents of each node’s mempool are synchronized. By propagating transaction information among nodes on the network, the mempool contents become largely unified. However, they are not completely identical.

A transaction received by Node A may not yet have been received by Node B. This characteristic—where each node operates independently yet remains somewhat synchronized—enables web3’s decentralization.

Equivalent in Web2｜History of Queues

The mempool is not a concept unique to Web3. Rather, it is a phenomenon commonly observed in Web2.

Consider how banks process transfers. When you request a transfer, that request joins a massive processing queue. While a bank’s system handles thousands of transfers per second, it cannot process them all simultaneously. That’s why the processing queue exists. This is essentially the same as the Mempool.

The job queue in cloud computing works the same way. When you send a compute job to a server, it enters the queue and waits for other jobs to finish processing. The same applies to authorization queues in payment systems. In credit card processing, a massive volume of authorization requests flows through the payment network, but they cannot all be processed simultaneously.

So, what is the difference between Web2 and Web3? It’s “who decides the priority.”

In bank transfer processing, the bank determines the priority. Banks set criteria such as “VIP customer transfers take top priority” or “earlier submissions take precedence for identical amounts.” Similarly, in cloud job processing, the cloud provider sets the priority. In Web2, a central administrator completely controls the priority.

In Web3, this prioritization is entrusted to market mechanisms (price). This relates to the Gas Fee, which will be explained in the next section.

Why the Mempool Exists | How to Deal with Physical Constraints

The fundamental reason the mempool exists is simple: the physical capacity of the blockchain is finite.

Ethereum periodically generates blocks. Currently, Ethereum generates a new block approximately every 12 seconds. There is a limit on the amount of data that can be included in each block. For example, suppose a block has a restriction that it can contain “up to 100 transactions.”

However, during peak times, thousands of transaction requests per second reach the network. If 5,000 transactions arrive in 12 seconds, but a block can only contain 100 transactions, where do the remaining 4,900 go? That’s the Mempool. They are gradually processed: 100 are handled in the next block, then another 100 in the following block, and so on.

Furthermore, validators consume computational power when processing transactions. They must perform verification tasks beyond merely recording data—checking whether transactions are valid, account balances are sufficient, and smart contract execution results are correct. All of these constitute computational costs, which are subject to physical limitations.

In other words, the “true resources” web3 provides are not token transfers, but computational power and block space (the capacity for records within a block). The question becomes how to allocate these extremely finite resources. The mempool is where this allocation problem is visualized.

The Relationship Between Mempool and Gas Fee｜Exposing Market Mechanisms

Block space is finite. So, which transactions should be allocated this limited space? Ethereum’s answer to this problem is the Gas Fee.

When users send a transaction, they can decide how much Gas Fee to propose. Validators use Gas Fee as a key criterion when selecting which transactions from the mempool to include in a block. Generally, transactions proposing a higher Gas Fee are prioritized.

As a result of this mechanism, multiple phenomena occur.

During network congestion, everyone wants their transactions processed quickly, intensifying competition for Gas Fees. As a result, Gas Fees skyrocket. Meanwhile, transactions offering low Gas Fees end up waiting for multiple blocks.

The key point is that the mempool is where market forces are directly exposed.

No one manages the validators; each validator independently calculates which transaction is most profitable. Financial incentives determine the priority of all transactions.

This is an extremely unique mechanism not seen in Web2. Whereas in Web2, banks decide to “prioritize transfers from VIP customers,” in Web3, a market mechanism functions where those who pay get priority.

Mempool as the Intersection of Multiple Concepts｜The Big Picture of Web3

The mempool is where several key concepts of the blockchain intersect. Understanding this reveals the structure of web3 as a whole.

Block space is the storage capacity within a block. It is a finite resource. Multiple transactions compete for this limited space.

Gas Fee is the “price” in this competition. When space is limited, those who pay a higher price are prioritized.

Validators have the authority to choose which transactions to include in a block. To maximize their profits, they select transactions with higher gas fees.

MEV is a phenomenon that only occurs because we can observe the mempool. Validators see transactions in the mempool and realize, “If I execute my own transaction before processing this one, I can profit.” They then execute it. Without mempool transparency, MEV would not exist.

In other words, the mempool is not merely a “waiting area,” but rather a crossroads where all key concepts—block space, gas fees, validators, and MEV—converge.

Challenges Posed by the Mempool｜The Price of Transparency

The existence of the mempool and its transparency create multiple challenges.

Front-running is the act of observing transaction information displayed in the mempool and sending one’s own transaction before it. For example, a validator who sees a large sell order displayed in the mempool can insert their own transaction (to buy that asset) before the sell order, thereby profiting from the resulting price movement.

Sandwich attacks are even more malicious. They force losses onto users by inserting their own transactions before and after the user’s transaction. For example, upon finding a swap transaction (exchanging A for B), they insert their own swap before it to cause rate fluctuations, worsening the user’s exchange rate, and then profit from their own transaction afterward.

Transaction experience also becomes opaque. Users are left wondering why their transaction keeps waiting despite high gas fees, or why it suddenly failed.

However, there is an important perspective here. These are not “defects,” but rather “realistic side effects” of distributed networks.

The absence of a central authority is precisely what enables the transparency of the mempool. At the same time, that transparency makes front-running possible. This is a trade-off. If transparency were completely lost, front-running would cease, but so would the fundamental value of the blockchain. Web3 consciously accepts this trade-off.

The Essence Revealed by the Mempool｜A Design Philosophy That Doesn’t Hide Constraints

The mempool demonstrates that blockchain is not an “instantaneous, magical entity,” but rather a computational system with physical constraints.

Computing power is finite. Storage is finite. Network bandwidth is also finite. It is technically impossible to process every transaction instantaneously. Web2 systems share these same constraints, but a central administrator hides them. Banks promise customers that “transfers are reflected immediately,” internally concealing the queues.

The design philosophy of Web3 is different. Ethereum did not hide this constraint; instead, it made it public. That is the mempool. Every user can see for themselves where their transaction is and when it will be processed. This complete transparency is a core value of Web3.

At the same time, this transparency enables front-running and sandwich attacks. However, web3 embraces this not as a security vulnerability, but as a “result of design choices.” Multiple scaling solutions (such as Layer 2) are being developed for a better future, but these too are extensions of the same design philosophy.

Understanding the mempool makes it clear that all of Ethereum’s seemingly strange behaviors are not “bugs,” but “design outcomes.” Slow, unstable, complex—all of these can be seen as the result of web3 choosing “transparency,” “decentralization,” and “autonomy.”

Subscribe now

Disclaimer：I carefully examine and write the information that I research, but since it is personally operated and there are many parts with English sources, there may be some paraphrasing or incorrect information. Please understand. Also, there may be introductions of Dapps, NFTs, and tokens in the articles, but there is absolutely no solicitation purpose. Please purchase and use them at your own risk.

About us
🇯🇵🇺🇸🇰🇷🇨🇳🇪🇸 The English version of the web3 newsletter, which is available in 5 languages. Based on the concept of ``Learn more about web3 in 5 minutes a day,'' we deliver research articles five times a week, including explanations of popular web3 trends, project explanations, and introductions to the latest news.

Author
mitsui
A web3 researcher. Operating the newsletter "web3 Research" delivered in five languages around the world.

Contact
The author is a web3 researcher based in Japan. If you have a project that is interested in expanding to Japan, please contact the following:

• X：@web3researchgl

• Telegram：@mitsui0x

*Please note that this newsletter translates articles that are originally in Japanese. There may be translation mistakes such as mistranslations or paraphrasing, so please understand in advance.

Good morning.
I’m Mitsui, a web3 researcher.

Every Saturday and Sunday at noon, we’ll deliver articles explaining basic vocabulary. We aim to keep each article concise enough for a quick read, while also providing content you can revisit and study.

Today’s word is “Nonce.”

Please watch until the very end!

Subscribe now

Introduction｜Why Transactions Get Congested on Ethereum

One of the most frustrating experiences when using Ethereum is encountering situations where “transactions don’t go through.” You send a transaction from your wallet, yet it remains pending for hours. Or, you send multiple transactions, but only some fail. When faced with these issues, many people assume “the Ethereum network is congested” or “the gas fee is too high.”

However, the actual cause lies entirely elsewhere. That is the Nonce.

The nonce is a concept rarely displayed on wallet screens and seldom consciously considered, yet it is a system that always functions when sending transactions on Ethereum. The nonce is like an invisible backbone that ensures the consistency of your account’s actions.

Understanding the nonce reveals that many seemingly strange behaviors in Ethereum are actually the result of rational design choices. It also clarifies how to handle situations when transactions become congested. For web3 beginners, the nonce is one of the first concepts you should grasp.

What is a Nonce? | Definition and Mechanism

A nonce (number used once) is a sequential number assigned to transactions sent from a specific address. The first point to understand is that a nonce has absolutely nothing to do with cryptography. A nonce is simply a sequence of numbers.

Let me explain in detail.

When your address sends its first transaction on Ethereum, the Nonce value for that transaction is 0. The Nonce for the next transaction you send will be 1, then 2 for the following one. It will increase by 1 each time you send a transaction thereafter. This simple mechanism plays an extremely important role in maintaining the overall order of the Ethereum network.

The key point is that the Nonce is managed per account. The Nonce for Address A and the Nonce for Address B are completely independent. Furthermore, the Nonce increases regardless of whether the transaction succeeds or fails. Even if a transaction fails, a used Nonce cannot be reused for the next transaction.

Equivalent in Web2｜Number management existing around us

Nonce actually exists in the Web2 world as well. In fact, it’s a concept that exists everywhere in Web2.

Consider making a bank transfer. When you go to the bank to request a transfer, you are issued a queue number. This is a sequential number assigned to your transfer request, and bank staff use this number to manage the order of processing.

Similarly, when you purchase an item through online shopping, an order ID is issued. This ID is a unique identifier assigned to your order request. Developers using APIs also manage multiple requests using request IDs.

The purpose of all these systems is the same.

These are two principles: “Do not process the same operation twice” and “Maintain the exact order of processing.” If the same bank transfer were executed twice, it would be a major problem.

On e-commerce sites, it’s problematic when the same order is processed multiple times. In Web2, such number management systems are operated by a central authority. Trusted central authorities—such as bank employees, e-commerce site administrators, and API servers—assign numbers to maintain order.

The fundamental difference in Web3 is the absence of this central authority. So who assigns the numbers? The answer is self-declaration by the users themselves—that is, the Nonce.

Why is a Nonce Essential in Blockchain?｜Order in a World Without Central Administrators

Ethereum possesses a major feature not found in traditional systems.

First, there is no central authority determining the processing order. While banks have bank employees, Ethereum has no equivalent administrator. Second, numerous nodes perform verification tasks simultaneously. While a single system handles processing in banks, thousands of nodes worldwide verify the same transactions in Ethereum.

In this structure, someone must decide which transaction comes first. How can this order be determined in the absence of an administrator? The answer is for each account to assign a number to its own transaction. That is, the account declares, “My first transaction is Nonce0, and my next transaction is Nonce1.”

The validator checks the Nonce value when receiving a transaction. If it matches the expected Nonce value (previous Nonce + 1), the transaction is valid.

If they do not match, they must be processed later. This simple mechanism maintains order without administrators. The nonce is a self-declared ordering system in a trustless world.

What Happens Without a Nonce｜A Chain of Serious Problems

Imagine a world without nonces. Understanding the chaos that would ensue makes the importance of nonces abundantly clear.

First, it becomes possible to send the same transaction multiple times. Suppose you create a transaction to send 1 ETH. It should only be executed once.

However, without a nonce, the same transaction could be sent multiple times to the network. As a result, instead of 1 ETH, 3 ETH might be sent. This double-spending problem is a fundamental threat to blockchain.

Next, it enables “replay attacks” that allow past transactions to be executed again. Attackers can capture past transaction data and resend it, enabling fraudulent transactions to be carried out.

Furthermore, the integrity of the account balance completely breaks down. Even basic information like “what is the current balance?” becomes unreliable. Because the sequence of who sent money, when, and how much becomes unclear, calculating the final balance becomes impossible.

These issues represent not merely security vulnerabilities, but a fundamental disruption that could undermine the very existence of the blockchain system itself.

You don’t know how many times a transaction will be executed, you don’t know when it will be executed, and you don’t know how much will ultimately be deducted. Who would place trust in such a system? The nonce is the minimal defense line to prevent all these problems.

Relationship Between Nonce and Other Concepts｜Comprehensive Understanding of Web3

A nonce does not function in isolation but is closely intertwined with other key concepts in web3. Understanding these relationships reveals how web3 operates as a whole.

A transaction represents any operation executed on the Ethereum blockchain. Sending funds, executing smart contracts, transferring tokens—all of these are transactions. And every transaction contains a parameter called a Nonce. A transaction cannot be completed without a Nonce.

When considering accounts, the Nonce is account-specific information. Even on the same Ethereum network, the Nonce for Address A and the Nonce for Address B are completely independent. Understanding the Nonce is also understanding the essence of account management.

The mempool is where transactions wait before being included in a block. Transactions with incorrect nonce sequences remain stuck in the mempool. For example, if a transaction with Nonce 2 is sent before Nonce 0 is confirmed, Nonce 2 will continue to wait in the mempool. If the nonce sequence is not complete, mempool efficiency is significantly reduced.

Gas fees are the charges required to execute transactions, but no matter how high the gas fee you pay, you cannot skip the nonce sequence. This is the point most beginners misunderstand. While a high gas fee increases priority, without the correct nonce value, you can’t accomplish anything.

In other words, a nonce is an “invisible constraint that binds the whole.” It doesn’t appear on the front stage of web3, but it supports the order of the entire system behind the scenes.

The Web3 Value Symbolized by Nonce｜A World of Self-Governed Rules

A nonce is merely a number, yet it symbolizes the essence of web3 philosophy. It embodies the concept of “the minimal rules needed to maintain order in a world where no one is in charge.”

In the traditional financial system, a central authority—the bank—determined “what the next number would be.” Vast numbers of bank personnel and systems were dedicated to maintaining this order.

In Ethereum, this role is handled entirely by automated code and numbers. Validators simply verify the Nonce value. There is no room for judgment or discretion.

Understanding this mechanism makes it abundantly clear that web3 is not simply about “freedom,” but rather a world where you take responsibility for the rules yourself. On Ethereum, instead of having a central authority, every user bears the responsibility for maintaining order.

The true value of Web3 lies in liberation from central authorities. Nonce is an extremely practical and rational mechanism that symbolizes both aspects.

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Disclaimer：I carefully examine and write the information that I research, but since it is personally operated and there are many parts with English sources, there may be some paraphrasing or incorrect information. Please understand. Also, there may be introductions of Dapps, NFTs, and tokens in the articles, but there is absolutely no solicitation purpose. Please purchase and use them at your own risk.

About us
🇯🇵🇺🇸🇰🇷🇨🇳🇪🇸 The English version of the web3 newsletter, which is available in 5 languages. Based on the concept of ``Learn more about web3 in 5 minutes a day,'' we deliver research articles five times a week, including explanations of popular web3 trends, project explanations, and introductions to the latest news.

Author
mitsui
A web3 researcher. Operating the newsletter "web3 Research" delivered in five languages around the world.

Contact
The author is a web3 researcher based in Japan. If you have a project that is interested in expanding to Japan, please contact the following:

• X：@web3researchgl

• Telegram：@mitsui0x

*Please note that this newsletter translates articles that are originally in Japanese. There may be translation mistakes such as mistranslations or paraphrasing, so please understand in advance.

Good morning.
I’m Mitsui, a web3 researcher.

Every Saturday and Sunday at noon, we’ll deliver articles explaining basic vocabulary. We aim to keep each article concise enough for a quick read, while also making them suitable for revisiting and studying.

Today’s topic is “gas fees.”

Please watch until the very end!

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Users often complain that gas fees are too high. However, this perspective misses the point entirely. Gas fees are not merely a charge; they are the price of a carefully designed order that prevents the destruction of a shared, finite infrastructure.

Why “Free” Doesn’t Last

The history of the internet is littered with examples of free services collapsing. Email spam proliferated because sending it was free. DDoS attacks against websites became possible because the cost of consuming bandwidth was effectively zero per byte.

If it’s free, malicious actors can consume resources without hesitation. Spam bots send millions of messages per day. Attackers send thousands of requests per second. As a result, legitimate users’ messages get buried, and legitimate requests go unprocessed.

This is a classic problem in economics. Resources inevitably become contested. Shared resources available to everyone will be depleted if each individual consumes excessively. This is called the “tragedy of the commons.”

Blockchain is no exception. If free transactions are allowed, the network will be flooded with spam in no time.

The true resources provided by blockchain

What’s crucial is that blockchain provides not merely the transfer of tokens, but an extremely finite resource.

Blockchain has limited space within blocks generated periodically (e.g., every 12 seconds). In the case of Ethereum, the amount of data that can be included in each block is restricted. This means the number of transactions that can be included in each block is finite.

Furthermore, validators consume computational power to process this data. When modifying the state—updating account balances or executing smart contracts—nodes perform computations and consume storage. All of this is supported by finite physical resources.

What circulates in Web3 is not digital assets called “tokens,” but a tangible resource called “blockspace.”

What exactly are we paying for with our gas fees?

To understand the essence of gas fees, users need to look closely at exactly what they are paying for.

First, there’s computational cost. Executing a smart contract requires nodes to perform calculations. The more complex the calculation, the more computational power it consumes. Users pay gas fees for this consumed computational power.

Next is the state change cost. When updating account balances or modifying smart contract storage, nodes must persist this information to disk. Storage is finite, and its use requires compensation.

And then there’s the load on the entire network. Each transaction must propagate through the network. This propagation also consumes bandwidth as a resource.

Gas fees are paid for all this resource consumption. In other words, users are not paying merely to “execute a transaction,” but rather for “consuming real resources.”

Why the auction system?

So why doesn’t Ethereum set gas fees at a fixed rate, but instead determines them through an auction system?

The answer lies in how priorities are determined. Block space is limited, and not all transactions can be processed simultaneously. So which transactions should be prioritized?

The most rational solution is to let price determine priority. Those who want faster processing pay more, and in return, miners and validators prioritize their transactions. This mechanism ensures that transactions maximizing value are processed first.

It strikes a balance between fairness and efficiency. The wealthy do not monopolize unlimited priority, nor is there complete egalitarianism. Market mechanisms achieve optimal allocation.

What happens if there’s no gas fees?

If gas fees were zero, what would happen?

Instantly, the network becomes flooded with spam transactions. Attackers send millions of meaningless transactions. Legitimate users’ transactions get buried and may take days to be processed.

Miners and validators cannot distinguish between junk transactions and legitimate ones. Consequently, spam is processed relentlessly. As a result, the network’s bandwidth and computational power are rapidly depleted, eventually causing the network to halt.

In this situation, legitimate users are excluded. Blockchain was originally supposed to have the advantage of being “accessible to anyone.” However, spam could cause this feature to be lost.

How did gas prices change in L2?

In recent years, Layer 2 solutions (such as Optimism and Arbitrum) have significantly reduced gas fees. Why have they been able to reduce them, and why can’t they be reduced to zero?

L2 can reduce costs because it can batch multiple transactions and compress them into a single L1 transaction.

In other words, a single L1 block space can process hundreds of L2 transactions. This efficiency dramatically reduces the cost per transaction.

However, it does not become zero. The reason is simple: it ultimately depends on L1. L2 transactions must also be periodically recorded on the L1 blockchain. This cost of recording on L1 does not disappear entirely.

Furthermore, state changes also occur within L2, consuming the computational power and storage capacity of L2 nodes. In other words, while scaling reduces costs, the fundamental problem of finiteness remains.

Who is the gas fees protecting?

Gas fees, like slashing, protect multiple stakeholders.

First, we protect the network itself. Without costs, spam and malicious load would cause the network to become dysfunctional. The existence of gas fees ensures the network’s stability.

Next, we protect validators. They invest massive amounts of storage and computational power to operate the network. Without gas fees, they would receive no rewards, and their economic incentive would be lost.

And it protects legitimate users. If spam proliferates, legitimate transactions won’t be processed. Gas fees deter spam, increasing the likelihood that legitimate users’ transactions will be processed reliably.

In other words, by paying gas fees, users are actually purchasing order.

Is “high gas fees = bad”?

Often, when gas fees surge, comments like “Ethereum has failed” appear. However, this judgment is inaccurate.

High gas fees are actually an indicator of strong demand. Because many users want to use the network, competition for priority intensifies, resulting in higher costs. This is proof that the network holds value.

The issue lies not in the price itself, but in the design. Certainly, costs that are too high for the average user can hinder access. However, this is not without solutions and can be addressed through more efficient scaling solutions (such as L2).

The surge in gas prices serves as a key indicator that network demand is exceeding supply.

Public infrastructure made possible by gas fees

Ultimately, the existence of gas fees is essential to realizing the “public infrastructure” that Web3 aims to achieve.

Traditional public infrastructure (roads, bridges, airports, etc.) is maintained through taxes and fees. Web3 has no government to levy taxes. However, a mechanism exists where infrastructure is automatically maintained through a “price mechanism” known as gas fees.

Users pay gas fees → Validators earn rewards → Validators keep nodes running → The network remains stable. This cycle is fully decentralized and not controlled by anyone.

Furthermore, usage rights are automatically adjusted based on price. As demand increases, costs rise, prompting users with limited resources to reduce their usage. As a result, network load automatically converges to an optimal level.

In a world where no one trusts anyone, we are building an order independent of the state. Gas fees are the core of this grand experiment—an extremely practical and rational mechanism.

That concludes our explanation of “gas fee”!

Subscribe now

Disclaimer：I carefully examine and write the information that I research, but since it is personally operated and there are many parts with English sources, there may be some paraphrasing or incorrect information. Please understand. Also, there may be introductions of Dapps, NFTs, and tokens in the articles, but there is absolutely no solicitation purpose. Please purchase and use them at your own risk.

About us
🇯🇵🇺🇸🇰🇷🇨🇳🇪🇸 The English version of the web3 newsletter, which is available in 5 languages. Based on the concept of ``Learn more about web3 in 5 minutes a day,'' we deliver research articles five times a week, including explanations of popular web3 trends, project explanations, and introductions to the latest news.

Author
mitsui
A web3 researcher. Operating the newsletter "web3 Research" delivered in five languages around the world.

Contact
The author is a web3 researcher based in Japan. If you have a project that is interested in expanding to Japan, please contact the following:

• X：@web3researchgl

• Telegram：@mitsui0x

*Please note that this newsletter translates articles that are originally in Japanese. There may be translation mistakes such as mistranslations or paraphrasing, so please understand in advance.

Good morning.
I’m Mitsui, a web3 researcher.

Every Saturday and Sunday at noon, we’ll deliver articles explaining basic vocabulary. We aim to keep each article concise enough for a quick read, while also providing content you can revisit and study.

Today’s theme is “Slashing.”

Please watch until the very end!

Subscribe now

In the world of web3, mistakes are punished. For example, if a validator breaks the rules, the tokens they staked as collateral are confiscated—this is called slashing.

Many may perceive this as rule by fear, but that is not the case. Slashing is an extremely rational and necessary safety mechanism for maintaining order in a world where no one trusts anyone.

Why Systems Relying on “Goodwill” Fail

In the real world, many systems are designed on the assumption of human goodwill. Bank tellers are trusted not to embezzle customer funds. Doctors are trusted not to harm patients. However, this trust only holds because of mechanisms for surveillance and legal penalties.

So, are humans truly sincere? For instance, a small number of people harboring even slight ill will can destroy the entire system. Spammers, scammers, and those who engage in bribery will always exist.

Security design cannot be based on the assumption that people are inherently good. Rather, systems must be built on the premise that all participants will seek to maximize their own interests. This is the essence of “trustless.”

The mechanism of “punishment” that exists in the real world

The real world has already perfected its system of punishment. Laws penalize violators. Contracts stipulate penalties for breach. Companies dismiss employees who commit misconduct.

All these penalties are actually the cost of maintaining order. Without penalties, no one would bother to follow the rules. Penalties are a mechanism that supplements trust and are essential for the system to function.

In the real world, the state acts as the central authority enforcing punishment. The police arrest thieves, the courts pass judgment, and prisons isolate criminals.

However, blockchain has no such central authority. So who enforces penalties? The answer lies in the economic incentives themselves.

What are validators promising in PoS?

In blockchain Proof of Stake (PoS), validators bear the responsibility of safeguarding the network’s security. They enter into an implicit contract to “continue validating correctly.”

Staking serves as collateral for this contract. Validators deposit a certain amount of tokens and receive rewards in return. Without staking, validators would have nothing to lose by maliciously attacking the system. However, with staking, attempting an attack would result in the loss of their own assets.

Furthermore, validators are also responsible for remaining online on the network. Excessive downtime will also subject them to slashing. This means validators are constantly monitored, and their obligation to comply with the rules is enforced at the system level.

What is Slashing?

What is actually slashed is the validator’s stake—that is, the tokens deposited as collateral. There are several actions that can trigger slashing.

The most critical issue is double-signing. If a validator signs two different blocks at the same block height, it directly threatens the network’s security. Such actions are deemed intentional attacks and result in severe slashing penalties.

Next, prolonged offline periods are also subject to slashing. If a validator disappears from the network for a certain period without notice, block validation stalls and the entire network becomes dysfunctional. In this case, the slashing amount is not as severe as for double-signing, but it is definitely deducted from rewards.

The crucial point is that slashing is not merely a fine. If it were just a fine, wealthy individuals could pay any amount and continue their misconduct. However, slashing confiscates tokens, so losing them could mean losing eligibility to participate in the system altogether.

Why the strong design of “confiscation”?

A light penalty does not provide sufficient deterrence against malicious attacks. If the benefits gained from an attack outweigh the penalty, a rational actor will choose to attack.

Therefore, Web3 was deliberately designed to make attacks prohibitively expensive. Slashing ensures that attempting an attack will inevitably result in significant losses. This makes economic rationality itself the mechanism that suppresses malicious intent.

Validators face a simple scenario: “Act correctly to earn rewards, or cheat and suffer losses.” This scenario underpins the system’s security.

Who is Slashing protecting?

Slashing is not merely punishment; it protects many people.

First, it protects the entire network. If a malicious validator distorts validation, all transactions on the blockchain become untrustworthy. Without slashing, there is no means to counter such attacks.

Next, we protect honest validators. If malicious validators can reap rewards, acting honestly becomes a foolish choice. However, if slashing inflicts losses on attackers, honest behavior becomes relatively advantageous.

Ultimately, all users are protected. It is precisely because blockchain integrity is maintained that users can confidently transfer assets and execute contracts.

Why Slashing Isn’t Needed in Web2

Traditional Web2 systems do not require mechanisms like slashing. This is because a centralized administrator exists, and they act as the enforcers of penalties.

If a bank improperly moves a customer’s funds, regulators will investigate, impose fines on the bank, and revoke its license if necessary. If a doctor harms a patient, the medical board will revoke their license. If a platform violates its terms of service, the government will regulate it.

In the Web2 world, administrators act as “enforcers of punishment.” Slashing is unnecessary and actually gets in the way. This is because administrators can respond flexibly based on their own judgment.

However, blockchain has no central authority. That is precisely why a mechanism exists to automatically and mechanically enforce penalties. Slashing is the necessary alternative in this world without a central authority.

Is the UX getting worse because of slashing?

Many people feel that UX is more demanding when using web3 compared to Web2. The burden on users is significant, including non-auto-recovery, gas estimates, and wallet security.

Slashing complicates this issue. Validator operators become extremely cautious to avoid slashing. Automation and delegation become difficult, increasing operational costs. As a result, the barrier to entry for validators rises, indirectly impacting user experience.

However, this is a trade-off. Prioritizing security compromises UX. Prioritizing UX compromises security. Web3 did not choose the latter.

Trustless transactions are made possible by slashing.

The greatest value proposition of Web3 is “trustlessness.” That is, you don’t need to trust the other party; the system guarantees security.

However, this trustlessness only becomes possible because slashing exists. A design that does not trust good faith—that is, a design premised on attacks—is what generates slashing. And it is precisely because slashing exists that economic incentives maintain order.

Slashing is indeed a harsh mechanism. Yet it is the most realistic and rational solution for maintaining order in a world where no one trusts anyone. This design chosen by web3 can be seen as the result of looking squarely at human nature.

That concludes our explanation of “Slashing”!

Subscribe now

Disclaimer：I carefully examine and write the information that I research, but since it is personally operated and there are many parts with English sources, there may be some paraphrasing or incorrect information. Please understand. Also, there may be introductions of Dapps, NFTs, and tokens in the articles, but there is absolutely no solicitation purpose. Please purchase and use them at your own risk.

About us
🇯🇵🇺🇸🇰🇷🇨🇳🇪🇸 The English version of the web3 newsletter, which is available in 5 languages. Based on the concept of ``Learn more about web3 in 5 minutes a day,'' we deliver research articles five times a week, including explanations of popular web3 trends, project explanations, and introductions to the latest news.

Author
mitsui
A web3 researcher. Operating the newsletter "web3 Research" delivered in five languages around the world.

Contact
The author is a web3 researcher based in Japan. If you have a project that is interested in expanding to Japan, please contact the following:

• X：@web3researchgl

• Telegram：@mitsui0x

*Please note that this newsletter translates articles that are originally in Japanese. There may be translation mistakes such as mistranslations or paraphrasing, so please understand in advance.

Good morning.
I’m Mitsui, a web3 researcher.

Every Saturday and Sunday afternoon, we’ll deliver articles explaining basic vocabulary. We aim to keep each article concise enough for a quick read, while also making them suitable for revisiting and studying.

Today’s topic is “Block Time”

Please watch until the very end!

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Introduction

One of the first things people learn about blockchain is that “Bitcoin’s block time is approximately 10 minutes, Ethereum’s is approximately 12 seconds.” Newcomers naturally wonder: “Why not simply make it faster?” and “Why these specific numbers?”

However, block time is far more than just numbers. It embodies fundamental tradeoffs that distributed networks face—a profoundly strategic design decision. Block time represents the line drawn between transaction speed and network robustness. It is the value chosen between decentralization and security.

Many think naively that “faster is better,” but this very thinking demonstrates a failure to grasp blockchain’s design philosophy. This article delves deeply into block time’s true meaning, examining why protocol designers have chosen such “slow” values. Through this understanding, the essence of blockchain becomes visible.

The Precise Definition of Block Time and Common Misconceptions

Block time is defined as “the average interval at which new blocks are generated.” Bitcoin: approximately 10 minutes. Ethereum: approximately 12 seconds. While the definition is straightforward, many people misunderstand it.

Here, caution is necessary. Block time does not mean “transaction processing time.” Many beginners mistakenly believe “Ethereum completes transactions in 12 seconds.” This is a serious error. For a transaction to be truly considered complete, the block containing it must become finalized, which requires multiple blocks to accumulate.

Block time is simply a metric indicating how frequently blocks are generated—the physical timing of “how far apart blocks appear on average.”

For example, suppose you sent a transaction to Ethereum one minute ago. That transaction might be “included in mempool” after approximately 12 seconds (the next block). But this only means the transaction is “visible”—not yet “complete.” Reaching a stage truly considered “complete” requires additional blocks to accumulate.

Comparing “Time” in Everyday Systems

To understand this distinction, consider everyday financial systems. When you swipe a credit card at a department store and the machine displays “approved,” the customer feels the payment is “complete.” However, the card company has not fully confirmed the transaction at this point. Confirmation may occur in batch processing days later. The possibility exists that one week later, the transaction could be disputed as fraudulent.

Similarly, when a bank transfer displays “transfer complete,” funds do not immediately reflect in the recipient’s account. Even domestic transfers typically require the next business day. International transfers take days as standard. Critically, “seeing it happen immediately” and “having it truly finalized” are temporally and procedurally distinct.

In blockchain, similarly, transactions being “visible” and transactions “finalizing” have temporal distance between them. A transaction entering mempool and being included in the next block represents the “visible” stage. Actually reaching a “finalized” stage requires many more blocks to accumulate. This time gap is crucial to understanding block time’s significance.

Why Blocks Must Be Generated at Regular Intervals ― Physical Constraints and Consensus

Why must blocks be generated at regular intervals? The answer lies in fundamental physical constraints of distributed networks.

If multiple nodes simultaneously created blocks, conflict would arise over which block is legitimate. One network node might claim “this block is legitimate,” while another insists “no, this different block is legitimate.” Resolving such contradiction is extraordinarily difficult.

Additionally, propagating blocks across the entire network requires physical time. If a node in Tokyo generates a block, this block information must propagate via network to all worldwide nodes. A node in New York might take several hundred milliseconds to receive this information. A node in Singapore receives it somewhat faster, while an Australian node might take longer.

If blocks were generated at extremely short intervals—say, one second—nodes could not keep pace with information propagation across the network. New blocks would continuously appear while not all nodes know about them. Multiple “legitimate blocks” would coexist, dramatically increasing blockchain fork probability. This situation, called “forking,” destroys the blockchain’s unity.

Establishing regular intervals mitigates such problems. Ethereum’s 12 seconds, for instance, provides nodes a 12-second window between block generation intervals. This timeframe allows information to propagate worldwide.

Block Time and Security Tradeoffs

Read more

Good morning.
I’m Mitsui, a web3 researcher.

Every Saturday and Sunday afternoon, we’ll deliver articles explaining basic vocabulary. We aim to keep each article concise enough for a quick read, while also making them suitable for revisiting and studying.

Today’s topic is “State.”

Please watch until the very end!

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Introduction

When people learn about blockchain, many fall into a common misconception: “Blockchain stores all transaction history.” However, this is fundamentally mistaken. To truly understand blockchain, we must recognize the crucial difference between “history” and “state.”

When you send 1 ETH on the blockchain, what the blockchain stores is not “1 ETH was sent on December 26, 2024 at 15:30” as a historical record, but rather “this address currently holds X ETH” as a state. This difference is not merely semantic—it directly impacts blockchain architecture, scalability, and security. It represents a fundamental difference in design philosophy.

This article thoroughly explores the concept of State. What is State? Why is it so important? How does it connect to crucial issues in the blockchain industry? We will carefully explain these questions. This knowledge will become the foundation for truly understanding web3.

The Meaning and Importance of State

State is a fundamental term in computer science. In English, it translates as “state” or “status.” State represents information that describes “how things currently are,” and it captures a snapshot of the present moment rather than recording past events.

Let us provide a concrete example. Think of a video game’s save file. What gets saved is not every choice a player has made in the past, nor a record of all events they have experienced. Rather, it saves the current status: “Current character level is 25, current funds are 100,000 gold, current location is the throne room in the castle.” With this information, a player can continue their game from that point.

Similarly, a bank account balance is also State. What gets recorded is not the complete history of deposits and withdrawals, but simply “the current balance”—a single number. Bank executives do not review past transaction records of all customers daily. Instead, they monitor real-time State information such as total deposits and total loans.

The most important characteristic of State is that it is not history itself. State records the present, not the past. If this distinction becomes blurred, we fundamentally misunderstand the nature of blockchain.

The Banking System and State as Analogy

By deeply considering how State functions in banking systems, we can gain a clearer understanding of State in blockchain.

Banks do not recalculate the entire history of deposits and withdrawals each time a customer requests a withdrawal. Rather, each account has a “current balance” State that exists permanently in the bank’s database. This State updates immediately whenever a new transaction occurs. If a customer withdraws 10,000 yen, the balance is reduced by 10,000 yen. If they receive a 50,000 yen transfer, the balance increases by 50,000 yen. The core of the banking system is managing these changes to the “current balance” State.

Using analogy, transaction history is a log, while balance is State. A log is a record of “what happened”—”withdrawal of 10,000 yen on January 15, 2024; receipt of 50,000 yen transfer on January 20, 2024.” In contrast, State is a record of “how things stand now”—”as of December 26, 2024, the balance is 500,000 yen.”

Read more

Good morning.
I’m Mitsui, a web3 researcher.

Every Saturday and Sunday afternoon, we’ll deliver articles explaining basic vocabulary. We aim to keep each article concise enough for a quick read, while also making them suitable for revisiting and studying.

Today’s topic is “Finality.”

Please watch until the very end!

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The unfamiliar term “finality”

The term “Finality” refers to the concept translated in Japanese as “最終確定性” (sōgō kōtei-sei). In other words, it means that a transaction has reached a state where it can no longer be reversed and is now finalized.

In the context of Web3, the concept of finality is extremely important. This is because one of the defining characteristics of blockchain is that “once recorded, transactions cannot be altered.”

But when does this “tamper-proof” property actually begin? At what point can users say, “This transaction is complete; the money has truly moved”? The concept needed to understand this is finality.

“Finality” in the existing financial system

To understand finality, it is useful to know how “settlement” is handled in existing financial systems.

Read more

Good morning.
I’m Mitsui, a web3 researcher.

Every Saturday and Sunday at noon, we’ll deliver articles explaining basic vocabulary. We aim to keep each article concise enough for a quick read, while also providing content you can revisit and study.

Today’s topic is “Scalability.”

Please watch until the very end!

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Misunderstandings About the Term “Scalability”

When people hear the term “scalability,” they often associate it with “slow processing” or “low performance.” However, this is a misconception.

Scalability is not merely about processing speed; it is a concept that questions whether a system can grow without breaking as the number of users increases, and how much the system can expand or contract.

For example, imagine a ticket gate at a train station in the morning. It can process a single passenger instantly, but during rush hour, lines form. Yet the gate itself isn’t broken. This is a scalability issue. On the other hand, if the gate’s parts wear out within an hour, that’s a performance issue.

The same applies to web3, particularly in the context of blockchain. The reason Ethereum appears slow is not due to technical flaws, but because it faces an extremely difficult design challenge: growing while maintaining security and decentralization.

How do existing systems achieve “speed”?

The reason Visa, Mastercard, or bank transfer systems appear so fast is because they operate on the premise that “not everyone is participating equally.”

For Visa, transactions (card payments) are processed in the following sequence:

Even when a merchant sends payment information to Visa, the transfer of funds is not finalized at that point. Visa’s central server records the information, and settlement then occurs between banks via the payment network. In other words, it’s a “perceived acceleration.” In reality, it can take several days from the payment being processed until the funds actually move.

The same applies to bank transfer systems. Using a mechanism called batch processing, they handle large volumes of transactions collectively every hour or once a day. This distributes the verification costs for individual transactions, ultimately increasing overall processing speed.

In other words, the true nature of the “speed” in existing financial systems relies on the existence of a centralized authority. Only when this authority judges “this transaction is valid” does the system function. Furthermore, this authority can cancel transactions as needed. This is why mechanisms like reversals and chargebacks exist. It is precisely because of this power to “reverse” that the entire system can be kept simple.

Why Blockchain Seems Slow

The slowness of blockchain stems from its design philosophy. At its core lies the concept of “full node verification.” Whether Bitcoin or Ethereum, every node (computer) participating in the network must verify and maintain the same transaction history.

This is akin to having every station employee individually verify whether each passenger passing through the ticket gate actually holds a valid ticket. While certainly secure, it is time-consuming.

Furthermore, distributed systems face an unavoidable constraint. This is known as the “scalability trilemma,” which states that it is theoretically impossible to fully achieve all three characteristics—distributed nature, security, and scalability—simultaneously.

For example, prioritizing scalability to speed up processing reduces the number of nodes participating in validation, diminishing decentralization. Alternatively, enhancing security increases the computational load required for validation, sacrificing scalability.

The Block Size Problem: The Origin

To understand the essence of this problem, examining Bitcoin’s history is the most straightforward approach.

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Good morning.
I’m Mitsui, a web3 researcher.

Every Saturday and Sunday at noon, we’ll deliver articles explaining basic vocabulary. We aim to keep each article concise enough for a quick read, while also making them suitable for revisiting and studying.

Today’s topic is “Derivatives.”

Please watch until the very end!

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Why do derivatives feel so difficult?

When people hear the word “derivative,” they often think of complex and difficult financial instruments. Indeed, the media frequently reports on derivatives as the cause of failures and losses. However, their essence is surprisingly simple. A derivative is nothing more than a mechanism for trading future risks.

The history of derivatives’ emergence reveals their very essence. In medieval Europe, farmers worried about grain price fluctuations until harvest time. Meanwhile, bakers and merchants sought to lock in future grain prices. When these two parties with conflicting interests began trading, the first derivatives were born.

In other words, derivatives are a technology that transforms “someone’s risk” into “another’s speculative opportunity.”

What are Derivatives? (Overview)

The definition of a derivative is “a financial instrument whose value depends on the price of an underlying asset.” Any asset subject to price fluctuations—such as stocks, commodities (grains, oil, etc.), indices (Nikkei Average, S&P 500, etc.), and cryptocurrencies—can be the subject of a derivative.

To understand the essence of derivatives, the perspective of “risk transfer” is essential. One party holds a risk, and another party assumes it. That exchange process is the entirety of derivatives.

For farmers, falling grain prices pose a fatal risk, but for speculators, they present a profit opportunity. The derivatives market is where this exchange of “unpleasant risk” and “favorable speculative opportunity” takes place.

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Good morning.
I’m Mitsui, a web3 researcher.

Every Saturday and Sunday at noon, we’ll deliver articles explaining basic vocabulary. We aim to keep each article concise enough for a quick read, while also providing content you can revisit and study.

Today’s topic is “collateral.”

Please watch until the very end!

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Why is “collateral” the starting point of finance?

The most fundamental activity underlying the financial system is “borrowing and lending.” Yet this simple act conceals complex issues: the issues of “credit” and “risk.” Lenders must trust the promise that the money lent will be repaid. But how is that trust formed?

This is where the concept of “collateral” comes into play.

Collateral is a technique where lenders “guarantee the borrower’s creditworthiness in another form.” Rather than taking the borrower’s word, it reduces the lender’s risk by securing assets in advance that can be sold if repayment fails. In fact, web3 lending protocols (such as Aave and MakerDAO) also faithfully inherit this fundamental banking model.

In other words, understanding the mechanism of collateral can be considered the most fundamental principle that underlies both traditional finance and Web3.

What is collateral?

Collateral is a guarantee that lenders use to reduce risk. Specifically, it refers to assets that lenders can sell or recover if the borrower becomes unable to repay.

The existence of collateral enables something innovative: even those with low credit scores can borrow.

From the bank’s perspective, if a borrower has low creditworthiness, they would typically refuse to lend. However, if sufficient collateral is available, the risk is offset by the collateral’s value, making lending possible. This is a key concept in financial inclusion.

Historically, secured loans have enabled people with low credit scores to gain access to capital. From microfinance to mortgages, the collateral model has supported the democratization of finance.

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Good morning.
Mitsui from web3 researcher.

Today we researched Confidential balances, which was just announced by Solana on April 9.

📝Summary｜What are Confidential balances?
🤫Comparison｜Relation to other privacy features
🖐️ use cases｜Corporations and institutionsBoosting investors
💬Summary and discussion

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🧵TL;DR

• Confidential Balances is a feature added to Solana's Token-2022 extension, a token privacy feature that guarantees legitimacy while encrypting balances and transfer amounts.

• It utilizes zero-knowledge proof and quasi-isomorphic cryptography to keep transaction "amount" and "balance" information private, while allowing for opt-in disclosure by auditors.

• The system is designed for use cases that require confidentiality, such as payroll, B2B payments, and OTC transactions, and has already been implemented by Agora and others.

• It is designed to ensure both privacy and regulatory compliance, and is expected to become popular among general users through future wallet integration and UX improvements.

📝Summary｜What are Confidential balances?

Confidential balances" is a new feature that encrypts token balances and transfer amounts on Solana to ensure confidentiality on the public blockchain.It is part of Solana's new token standard (Token-2022 extension), which leverages zero-knowledge proofs and quasi-isomorphic cryptography to provide a mechanism to guarantee the validity of transactions while hiding balances and transaction amounts.

By the way Solana Token 2022 is a new token program designed to have more features andThe Solana 2022 token is a new token program designed to be more versatile and flexible than the existing Solana standard tokens (SPL tokens).Developed to allow for customization and extensibility of tokens, which was difficult to achieve with traditional SPL tokens, Token-2022 allows for extensions to be built into the token.

Back to the story.

So, one part of this Token 2022, and a new feature that allows anonymity logic to be built into tokens, is "Confidential balances".

The announcement was made on Solana's official X on April 9, 2025 Japan time, and was accompanied by the announcement "Confidential Balances: Empowering Confidentialityin the Solana Ecosystem", so we will basically explain based on the contents of that blog.

◼️ Background

In Solana's enhanced token program, Token-2022, an enhancement called Confidential Transfers was initially considered and implemented.

This was intended to increase user privacy by encrypting the token transfer amount so that it would not be visible to third parties.Now, however, this feature has evolved into a more comprehensive functionality and has been extended under the collective name "Confidential Balances".

Confidential Balances go beyond mere transfer value concealment, providing asset holders and token issuers with multiple cryptography-based extensions that add a new layer of confidentiality without compromising regulatory compliance.

◼️Confidential Balances include features

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Good morning.
Mitsui from web3 researcher.

Today we researched PrivacyPools.

🟦What are PrivacyPools?
⚙️ specific mechanisms
💬The privacy domain is maturing

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🟦What are PrivacyPools?

On March 31, 2025, Ethereum developer team 0xbow (zerobow) announced the mainnet go-live of its new on-chain privacy tool, Privacy Pools.

"Privacy Pools" is a new protocolaimed at both privacy protection and regulatory compliance on the blockchain.

The original idea came from a white paper published in September 2023 by Ethereum co-founder Vitalik Buterin, Chainalysis principal researcher Jacob Illum, and scholars Matthias Nadler and Fabian Schär of the University of Basel, Switzerland.The name derives from a white paper published in September 2023 by Chainalysis Principal Investigators

In this paper, Blockchain Privacy and Regulatory Compliance: Towards a Practical Equilibrium, the concept of "Privacy Pools" to balance financial privacy and regulatory complianceThe paper presents the concept of "Privacy Pools" for reconciling financial privacy and regulatory compliance.In the paper, the authors state that "in many cases, privacy and regulatory compliance are perceived as incompatible," but "this is not always the case, as this protocol allows users to prove certain characteristics about the origin of their funds," suggesting that privacy and regulation may be compatible.The paper also states that "in many cases, privacy and regulatory compliance are compatible.

The core idea of "Privacy Pools" isa mechanismfor users to prove by zero-knowledge proof that their deposited funds are included in an "Association Set" consisting only of good funds.Association Set" with a zero-knowledge proof that the user's deposited funds are included in the "Association Set".

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Good morning.
I am Mitsui, a web3 researcher.

Today, I have conducted research on "DUNA".

«Table of Contents»
1. Overview｜What is DUNA?
-Solving three challenges of DAO
-Counterargument to the Howey Test
2. Transition and Outlook｜Why Wyoming is pushing for DAO and the future of DUNA
-Why Wyoming is pushing for DAO
-DUNA will be the standard for future DAOs
3. Consideration｜The birth of a commons from DAO is finally here

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Overview｜What is DUNA?

"DUNA" is an acronym for decentralized unincorporated nonprofit association, which translates to "decentralized unincorporated nonprofit organization". On March 7, 2024, SF50 (Wyoming Decentralized Unincorporated Nonprofit Association Law) was signed in Wyoming, USA, and went into effect on July 1, 2024.

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Good morning.
I'm mitsui, a web3 researcher.

Today, I will explain about "ERC-404", which has been a hot topic for the past few days. I have summarized its overview, origin, and notable projects, so please take a look!

Table of Contents
1. Overview | What is ERC-404?
2. Specific Example | What is the first project of ERC-404, "Pandora"?
3. Origin and Value | Where does the intrinsic value of ERC-404, which creates excitement in just a few days, lie?
4. Other Cases and Prospects | Is the ERC-404 standard boom coming? Will it be proposed as an official standard?
5. Consideration | Is ERC-404 a temporary craze or a new standard that fundamentally changes the way NFTs are?

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Overview | What is ERC-404?

"ERC-404" is a hybrid standard that combines ERC-20 and ERC-721.

It should be noted that it is "not yet an official standard". In addition, since it has not been submitted to EIP or discussed, it is easier to think of it as the project name "ERC-404". When I first heard this name, I was wondering, "Even though EIP has already reached four digits, why go back to the three-digit range?" But it seems that ERC-404 is simply a name set for convenience.

According to the founder team,

We named it ERC-404 after the error message of a typical website.

Since the whole thing was very experimental, we thought this name was appropriate. Also, because the functions of ERC-721 and ERC-20 are mixed, we knew that many protocols and DApps would be confused at the time of release.

So that's the story.

Now, let's explain what kind of standard "ERC-404" is, which is the main topic.

ERC-404 is a standard that allows ERC-20 tokens to be associated with NFTs issued under the ERC-721 standard. To explain its greatness, let's first talk about the challenges of NFTs (ERC-721).

Since each token of NFT is unique, low liquidity is mentioned as a challenge. The uniqueness is also the strength of NFTs, but assets with low liquidity hesitate to be purchased, and as a result, the ecosystem does not grow.

Luxury brands like GUCCI are expensive, but they can be resold, so they are easier to buy even at high prices. Luxury watches are also the same; even if the value drops a little, they can be sold in the secondary market. While there is secondary circulation for NFTs as well, because each one has a unique design, it requires a match or a fan (if it's CryptoPunks, any design is wanted) for a transaction to take place.

The "ERC-404" is a new standard (new proposal) that solves the liquidity problem of NFTs.

In simple terms, it issues ERC-20 tokens associated with the issued NFTs. By buying and selling these tokens, the liquidity of NFTs is realized.

??? It's complicated, so the ERC-404 proposal team will introduce an example of the released project "Pandora".

Example | What is the ERC-404 First Project "Pandora"?

Pandora is the project name that sold 10,000 tokens called "$PANDORA" and 10,000 associated "Pandora NFTs (called Replicants)".

"Pandora NFTs (Replicants)" have five levels of rarity.

• Green: approximately 39.45%

• Blue: approximately 23.44%

• Purple: approximately 19.53%

• Orange: approximately 11.72%

• Red: approximately 5.86%

So, what does it mean for this NFT to be associated with a token? First, as usual, the NFT can be bought and sold.

In addition, you can trade "$PANDORA" on DEX platforms like Uniswap. This functionality is actually the main focus as it links NFT liquidity with ERC-20 tokens to solve liquidity issues.

"$PANDORA" and "Pandora NFT" are linked one-to-one, so when you trade "$PANDORA", the following events occur:

• Purchasing 1 token of "$PANDORA" mints 1 NFT (you will have 1 $PANDORA and 1 NFT)

• Selling 0.1 token of your holdings burns the corresponding NFT (you will have 0.9 $PANDORA)

• Buying 0.1 $PANDORA on a DEX with 0.9 $PANDORA holdings automatically mints 1 NFT, resulting in a total of 1 $PANDORA and 1 NFT (you will have 1 $PANDORA and 1 NFT)

• Purchasing an additional 0.5 $PANDORA will not trigger any events (you will have 1.5 $PANDORA and 1 NFT)

I hope this is clear. The $PANDORA token freely moves with high liquidity, and for every 1 $PANDORA held, an NFT is minted or burned.

Please find the attached diagram for a comprehensive overview. ERC-404 is explained below.

The very interesting aspects of this mechanism are:

• The guarantee of liquidity provided by tokens

• The automatic burning and minting of NFTs

In particular, the second aspect of the automatic burning and minting of NFTs is revolutionary.

As mentioned earlier, Pandora NFTs have five levels of rarity, and when you hold 1$PANDORA, a randomly generated NFT can be minted, which means there is a possibility of minting high-rarity NFTs.

This allows for multiple reveal events, creating an incentive for repeated transactions. Due to this characteristic, $PANDORA saw over $100 million in trading volume on Uniswap in just a few days, generating $1 million in fees for Uniswap (which charges a 1% fee).

The token's market capitalization has also reached 27 billion yen, and the token price has risen by 438% since launch.

The trading volume of NFT has reached 1,128 ETH in just a few days, and the floor price is 9.89 ETH. It is known that there are currently 5,508 NFTs in existence due to repeated minting and burning. The listing rate is unusually low at 0.4%, but this may be because people do not want to sell in anticipation of price increases in the bubble. It is also believed that the desire to keep high rarity NFTs minted is influencing this decision.

I will also check the other data. The number of holders is about 1,500, and the number of transactions and trades on the DEX remains high as before.

Origin and Value | Where is the Intrinsic Value of ERC-404 That Generates Enthusiasm in Just a Few Days?

I think you might have already grasped the concept of ERC-404, but let's delve deeper into its origin and value.

◼️ Origin

The team behind ERC-404 and Pandora consists of four individuals known as ctrl, Searn, Acme, and Hohenheim. The initiator, ctrl, became interested in a new token called Uniswap Emerald ($EMERALD) in early February 2024. $EMERALD was a project that embodied the ideology of ERC-404, attracting attention as a project that combines NFTs with ERC-20 elements.

Ctrl, who became the initiator of ERC-404, also seemed to have invested in $EMERALD. However, the contract was quickly exploited, resulting in the loss of funds and a significant drop in token price (it became electronic waste). Many people were outraged by this, but ctrl was intrigued by the concept itself and immediately contacted the $EMERALD developers to propose collaboration for recovery.

It was later revealed that the $EMERALD developers were not actual engineers but had used ChatGPT to write the contract, leading to flaws in the code that went unnoticed. Furthermore, the $EMERALD developers showed no interest in assisting with the recovery. As a result, ctrl and the team took it upon themselves to develop proper technology based on that ideology and released Pandora as ERC-404. The release took only a few days.

It quickly became a hot topic worldwide. Not only did Blur and OpenSea already support ERC-404, but wallet services such as Binance Wallet have also started to support it.

◼️Differences from existing solutions and inherent value

Why has ERC-404 become such a hot topic? As a fundamental premise, it is undeniable that the excitement surrounding this new standard has created speculative meaning and a bubble-like frenzy. It is also a fact that trading volume has surged due to the ability to mint and burn tokens repeatedly. Furthermore, since there are still many unverified technical aspects, it is necessary to consider these differences.

With that premise, ERC-404 has the potential to be an innovative technology that solves the liquidity issues of previous NFTs.

The liquidity problem of NFTs has been pointed out in the past. The mainstream solution so far has been to fractionalize NFTs into smaller portions called fractional NFTs to increase liquidity. It is true that it is more accessible to buy 1/1000th of a CryptoPunks for 10,000 yen than to buy a CryptoPunks worth 10 million yen.

However, there were problems with this approach.

• To convert all the divided portions back into a single NFT, one would need to collect all of them, which is extremely difficult.

• Are there really people interested in owning a 1/1000th portion of an NFT?

• The original NFT needs to be locked, so there is always a risk of hacking with the protocol (similar to bridge protocols).

Therefore, although it was technically possible to divide NFTs, in reality, they were not being utilized to that extent due to practical demand and technical considerations.

On the other hand, ERC-404 solves these challenges.

• Since it does not issue tokens specific to NFTs, owning one token randomly mints an NFT.

• Since minting and burning are repeated, there is no need to continuously lock NFTs, eliminating the risk of hacking.

• The price of divided tokens is likely to be equivalent to the floor price of low-rarity NFTs, providing a certain value guarantee.

• There is an element of excitement and fun through repeated transactions.

For example, applying NOT A HOTEL NFT to the ERC-404 standard would result in the issuance of NOT A HOTEL TOKEN (tentatively called $NHT) as follows:

• Owning 1 $NHT automatically mints an NFT equivalent to 1/365th of a day ✖️○ years.

• When no longer meeting the requirements for 1 $NHT (token sale), the NFT is burned (= that date becomes available).

With this mechanism, even people who were left with unpopular dates can easily sell their NFTs. In addition, the increase in transaction volume of $NHT to mint popular dates could potentially lead to an overall increase in floor price.

Later, I will provide a more detailed analysis of the inherent value, including my own thoughts. Generally speaking, I believe that the value of ERC-404 lies in the following two points:

The ability to provide liquidity to NFTs.

Increasing transaction volume through gamification.

Other cases and prospects | Is ERC-404 set to become an official standard?

What happens when a bubble occurs in the world of web3? Numerous similar projects emerge, the movement spreads to other chains, and fraudulent projects also appear. ERC-404 experienced all of this in just a few days.

◼️Other cases

CoinMarketCap listed 13 projects. The top three, Pandora, MNRCH, and DeFrogs, have recorded significant trading volumes.

MNRCH (Monarch) is a game that incorporates ERC-404, allowing owners to evolve NFTs through on-chain competition. It's impressive that on-chain games are already possible.

Most of them are on the ETH chain, but "MYSTCL is on the Base chain" and "Crystal is on the Arbitrum chain," aiming to become pioneers on each chain.

◼️ Concerns

There are also fraudulent projects, and a project called Punks experienced a rug pull after skyrocketing from $350 to over $20,000 in just 2 hours, with the operators making a profit of about $100,000 and disappearing. Similar incidents have occurred with four other ERC404 collections using variations of Punks in the past two days.

In addition, ERC-404 transactions are more complex than regular transactions, which raises concerns about the surge in gas fees. In fact, this boom is contributing to the surge in gas fees for ETH (although gas fees can also rise for reasons other than ERC-404 when a bubble occurs).

However, in response to this criticism, the team commented in the project's Telegram chat that gas costs are expected to be reduced by 300-400% through improvements in ERC404.

◼️ Outlook

There are four main directions that can be considered for future prospects.

Many projects issue NFTs and FTs using the ERC-404 standard.

Apply as an official EIP standard.

Expand the scope of token utilization in DeFi protocols.

Build tools and infrastructure for products that include ERC-404 tokens.

① Many projects issue NFTs and FTs using the ERC-404 standard

This is already happening. Other projects are following suit, and expansion to other chains has begun. New use cases are emerging, such as in gaming and RWA, and it feels like the bubble will grow even bigger.

② Apply as an official EIP standard

The team also commented that they plan to apply as an official standard at this stage. If approved, they could receive support from the ETH community and undergo enhanced technical audits, which may lead to widespread adoption, similar to ERC-721 and ERC-20.

③ Expand the scope of token utilization in DeFi protocols

The on-chain index project, Peopods Finance, has already added the Pandora token, which can be wrapped and used to generate yield. The Terra lending platform allows it to be used as collateral, and the Wasabi Protocol trading platform enables permanent trading of tokens.

By tokenizing in this way, all the features existing in DeFi protocols can be utilized. This would further enhance the value of NFTs.

④ Build tools and infrastructure for products that include ERC-404 tokens

The team has also stated that they are developing infrastructure tools to enable creators to easily issue NFTs and tokens using the ERC-404 standard.

Analysis | ERC-404 is a new standard that will fundamentally change the way NFTs are perceived!?

Lastly, let's discuss the analysis. Please keep in mind that this analysis includes my personal biases.

My initial impression was "This standard has tremendous potential." Even after conducting research, my impression remains unchanged, and I believe that ERC-404 will become a widely adopted common standard, similar to ERC-20 and ERC-721.

Since the use cases are different, I don't think that all NFTs will be issued using ERC-404. However, just like how ERC-721 and ERC-1155 are used interchangeably, I believe that ERC-404 will become one of the options in the future.

I believe that the future of NFTs can be categorized into two types:

• NFTs that serve as assets

• NFTs that serve as proof

NFTs that serve as assets include existing PFPs and NFTs associated with RWAs. They have certain value and provide utility through ownership. They have brand value and speculative value. These serve as assets.

The latter type, which serves as proof, is exemplified by POAP. In the future, NFTs will be issued as self-identifying tokens (sometimes SBT) to provide royalties using NFTs. These do not directly serve as assets but have the function of proving one's identity.

To maintain the value of NFTs that serve as assets, it is essential to consider liquidity. While those with overwhelming recognition and value, like the Mona Lisa, are an exception, most assets hesitate to be purchased without liquidity, and their value gradually decreases.

Digital items such as existing PFPs, which are not associated with RWAs, are particularly vulnerable. However, with the ERC-404 standard, if NFTs can be tokenized, this problem may be solved.

If a CryptoPunks Token ($CPT) is created, each transaction of $CPT would involve minting and burning NFTs, creating a gaming element. Furthermore, $CPT is a token backed by the value of CryptoPunks, which will attract those who engage in speculative trading. People may start using $CPT in DeFi or use $CPT as collateral to borrow and invest in other tokens.

If the trading volume of $CPT increases, the price of CryptoPunks, which serves as the foundation, is likely to rise. And as the price of CryptoPunks rises, the price of $CPT also rises, creating a positive cycle.

Moreover, ERC-404 has the advantage of attracting stakeholders beyond the issuance limit of NFTs. Many NFTs are issued with a limit of 10,000. In that case, the number of stakeholders does not exceed 10,000. If more are issued, the value of the 10,000 NFTs would be diluted, and the uniqueness, which is the greatest strength of NFTs, would diminish.

ERC-404's mechanism solves this problem as well. While CryptoPunks remains at 10,000, it becomes possible for $CPT holders to reach one million, removing the upper limit of the community with vested interests. Though subtle, I believe that this problem-solving aspect holds significant value.

One concern is that if all the rare NFTs are minted and everyone holds onto them, the motivation to trade tokens and participate in gacha may decrease, leading to a potential decrease in trading volume. However, if that happens, the price of NFTs may also decrease, leading to people selling NFTs at a loss and a revival of the probability of minting new rare NFTs. In that sense, it may have a self-cleansing mechanism.

Other possible use cases include compatibility with generating game items like gacha and compatibility with RWA NFTs, as mentioned earlier with NOT A HOTEL NFTs. It would also be interesting to combine them with ticket NFTs to automatically mint seats or ticket ranks with each trade.

In fact, there is even the possibility that all utility tokens in future GameFi will become ERC-404 tokens. By incorporating elements of gacha into token trading, it can activate trading. The ability to make trading itself the purpose is one of the groundbreaking aspects of ERC-404.

Furthermore, it has a high affinity with AI-generated art. By combining it with a mechanism like Nouns, where artworks are generated using certain algorithms, art is automatically generated and minted with each trade. Since the artwork is unique and will be burned when the token is sold, it cannot be owned again. It has a sense of "once in a lifetime" encounter.

However, the difficulty of operation is likely to increase. If all NFTs and FTs are circulated at once, liquidity cannot be guaranteed, and control becomes impossible afterward. Just like designing tokenomics, it will be necessary to gradually circulate them while determining vesting and unlock schedules.

I have written down various thoughts, but personally, among the new standards (technologies) I recently studied, this is the one that excited me the most. If there were tools that allowed anyone to issue ERC-404, I would like to try issuing them myself (although I need to research Japanese laws and taxation again).

There are many things to consider, such as designing the rarity of NFTs, the utility of NFTs, the balance between NFTs and FTs, the speed of providing liquidity, and tokenomics. That's why I am excited because I believe it allows for the design of interesting experiences!

I expect an enormous number of projects to emerge in the next month, so I plan to write a report specifically on ERC-404 projects (use cases) in a few weeks. Please look forward to it (although there is a possibility that I may not write it if there is not much excitement).

That concludes the research on "ERC-404"!

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Reference Links:

• ERC404: Everything We Know So Far About Pandora

• These developers are mashing ERC-20 tokens and NFTs together: Will it work?

• Ethereum experiment ERC404 is an NFT-cryptocurrency hybrid — and it’s already generated $87m in trades

• https://twitter.com/maybectrlfreak

• https://twitter.com/Pandora_ERC404

Disclaimer：I carefully examine and write the information that I research, but since it is personally operated and there are many parts with English sources, there may be some paraphrasing or incorrect information. Please understand. Also, there may be introductions of Dapps, NFTs, and tokens in the articles, but there is absolutely no solicitation purpose. Please purchase and use them at your own risk.

About us
A web3 newsletter delivered in five languages around the world. We deliver various articles about web3, including project explanations, news and trend analysis, and industry reports, every day. You can subscribe for $8 per month ($80 per year) and receive research articles that took 100 hours to complete every day.

Author
mitsui
A web3 researcher. Operating the newsletter "web3 Research" delivered in five languages around the world.

Contact
The author is a web3 researcher based in Japan. If you have a project that is interested in expanding to Japan, please contact the following:

• X：@web3researchgl

• Telegram：@mitsui0x

*Please note that this newsletter translates articles that are originally in Japanese. There may be translation mistakes such as mistranslations or paraphrasing, so please understand in advance.