Web3 automation letters. Part 1: The natural evolution to automated Web3
One of the huge trends evolving in the space is automated on-chain execution of on-chain/off-chain/mixed algorithms and strategies.
The Web3 future is automated. In three years, so-called Keeper networks will handle 40% of mainnet transactions.
We consider on-chain automation as one of the main pillars for future web3 user adoption and further L1/L2 ecosystem development. Developing the decentralized automation network last years, we see rapid evolution of the recently tiny Web3 sector. This series of articles is devoted to sharing our insights and vision of what happens today, what we expect tomorrow, and what Web3 will look like when 40% of mainnet transactions are automated.
Welcome to the PowerPool’s Automation Letters 1st installment.
Part 1: The natural evolution to automated Web3.
The natural evolution to automated web3
Why does Web3 tend to be automated, and will it finally be automated more broadly than now? The fundamental factors are still the same and unlikely to change in the foreseeing future:
- Smart contracts don’t automate themselves
In the case of deferred execution based on time or any other type of logic, a third-party agent should execute the Smart Contract when the condition is met. - Defi tends to be more complex, and more and more protocols require automation to be used conveniently.
The list of what should be automated for ease of use starts with yield strategies (Vaults), Uniswap v3 liquidity provision, and liquidation protection on lending markets. It ends with scheduled payments, automatic allocation of DAOs treasuries, etc. The wide range of protocols provides value based on offering automated products to users. - Users need simple solutions that abstract complexity ‘under the hood’ for Web3 mass adoption.
Common examples include the need to provide liquidity without manual position management, to set up automated limit orders instead of manual token purchases, to be protected from liquidations on lending markets and CDP-based stablecoin protocols, and to place and cancel NFT trading orders based on market conditions.
Note that we are discussing other types of tasks that do not have a built-in incentive to be performed using permissionless methods that anyone can trigger (or it is not economically efficient to do so). We are not discussing tasks such as liquidations.
But user demand isn’t the only reason. When we talk about natural evolution, it means that all kinds of Web3 actors are in line with the trend, and the whole space is benefiting from the rise of keeper networks, rather than a privately owned bot executing transactions. These ecosystem players include
- L1/L2 networks and their validators
- Web3/Defi protocols and DAOs managing them
- DAOs not related to any particular protocols (investment DAOs, creators’ DAOs, etc.)
In recent years, centralized bots have been a temporary (but fairly common) solution to automation needs. However, the space doesn’t benefit from them and would even lose some value in the long run if their use continues on a large scale.
Let’s take a closer look at how these ecosystem participants benefit from decentralized automation solutions and lose value by using centralized bots:
How L1/L2 networks and their validators benefit from decentralized automation networks
With the adoption of blockchain networks, such as Ethereum, the number of assets participating in the consensus (e.g., staked ETH) is constantly growing:
The more significant number of ETHs staked in validators increases the network's security but decreases the yield of validators per 1 ETH staked. At the same time, the total amount of information that must be stored in full nodes continues to grow. While the planned transition to Verkle trees would partially alleviate this problem, it would impose additional hardware requirements on node runners. Running and maintaining a full node will become more expensive and complex, and at the same time, the ultimate vision for Ethereum is a broad set of independent validators.
Thus, any additional incentive that increases the attractiveness of running a full node would increase the feasibility for potential node operators, thereby encouraging network decentralization. Keeper networks fit perfectly with the needs of validators.
On the one hand, keepers need to run a full node to access on-chain data without relying on centralized RPCs. On the other hand, keepers receive execution fees (in addition to compensated gas costs), providing an additional revenue stream in addition to ordinary validators income.
Thus, users who want to become keepers need to operate full Ethereum nodes, and validators (who can easily operate keeper network nodes in addition to their validator setup) can generate additional income, thus increasing node returns and the overall attractiveness of operating independent validators. Both of these reasons will lead to an increasing number of full nodes in the network.
Such a consideration suggests that automation networks generally benefit the network's health, allowing a more significant number of full-node operators to exist. Furthermore, the distribution of automation revenues among a large number of node operators, rather than a small number of centralized solutions, promotes the core values of the blockchain.
How protocols and DAOs benefit from decentralized automation networks
Protocols use on-chain automation for the following needs: (1) Operation of protocol-offered products (harvesting vaults, position management, etc.) (2) Operation of the core protocol.
DAOs use on-chain automation mainly for treasury management (which includes a wide range of needs, tools, and products) and scheduled payments.
Both protocols and DAOs could create and run a custom bot to oversee their automation needs. However, it has certain drawbacks, some of which can lead to losing users’ funds or incorrect protocol operation:
- Centralized bots possess a single point of failure (since they can fail execution for multiple reasons). It results in possible incorrect protocol operation, losing funds in DAO treasury management, and more.
- The economy of scale reason: it is much more efficient to run full nodes and, therefore have personal RPCs shared between multiple projects that aimed just at a single one
In contrast, decentralized automation networks provide the following value to protocols and DAOs:
- Share the cost of running an infrastructure among many protocols, DAOs, and private users while being more robust and resilient.
- Significantly decrease risks of failure.
In a large enough network, the probability of having at least one keeper node with the ability to execute transactions is close to 100%. On top of it, Keeper nodes are required to place the skin in the game to gain access to task execution, which means that the prospect of financial loss deters malicious actors. It motivates Keepers to keep all infrastructure running correctly, fix issues if there are any, and behave honestly. - Save time and effort by outsourcing infrastructure maintenance
As a result of using decentralized automation solutions, protocols, and DAOs reduce their risks and can completely outsource their automation needs as a set-and-forget solution without running infrastructure and the time and effort to do so. - Could provide insurance from no-execution events.
For homegrown solutions, it is nonexistent. For centralized solutions, it is a matter of trust. Automation networks can create On-chain automatic insurance pools (since the solution for automating these pools is present in the network itself) while introducing no additional trust requirements and no way to compensate for losses when they occur.
The pathway of evolution
According to our view, the Web3 space is now in the transition period. The manual Web3 ended in 2020–2021 with the emergence of centralized bots to automate simple on-chain strategies and first automation networks. Now, more and more protocols include decentralized automation solutions:
Decentralized automation network adoption will be significantly enhanced when these solutions can use off-chain triggers and computations in a reliable, decentralized way.
Using off-chain conditions and computations for automation opens up many new use cases. These include offloading heavy computations from on-chain environments to off-chain, executing algorithms that are not exposed on-chain, as well as cross-chain automation, oracles, and more. We expect massive use of decentralized off-chain computations and triggers by 2024, contributing greatly to the 40% automated transactions hypothesis.
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