In Q2 2024, usage measured in contract executions grew 113% YoY, though falling 6% QoQ.
Phala grew the number of AI Agent Contracts deployed to its network by 2,000% QoQ, adding over 4,800 new contracts throughout Q2.
Phala’s monthly active users (MAUs) in June 2024 were up 38% YoY. It peaked in March 2024, when it logged 774 unique users.
Total Phala supply-side network participants (workers) grew 29% YoY and 10%. This growth kicked off after the Phala blockchain went live in April 2023.
Phala partnered with multiple AI-focused protocols, such as Flock, Pond, GM Network, AwesomeQA, Allora, and Artela.
Primer
Phala Network (PHA) is an AI coprocessor that enables smart contracts to control and interact with AI Agents. It uses a blockchain-TEE (trusted execution environment) hybrid design to incorporate offchain elements like artificial intelligence (AI) into blockchain-focused applications. This setup forms the foundation for AI Agents (run by offchain worker nodes) to be controlled by onchain smart contracts while maintaining privacy/user confidentiality. Phala has four core components:
Decentralized Cloud Computing Network: Phala is a backend host of scalable blockchain technology and a trusted execution environment (TEE) to ensure the verifiability and security of compute execution.
TEE (SGX) Framework: The core Intel TEE architecture scheme that ensures secure and verifiable code execution within an isolated hardware-protected area of a computer’s processor.
AI Agent Contracts: AI computing programs that enable EVM smart contracts to extend their capabilities offchain.
Blockchain/Phala Nodes: Attested secure worker nodes that retrieve and execute transactions offchain. These nodes then use the blockchain to organize the decentralized network and incentivize workers.
In 2020, Phala secured a funding round at a $10 million valuation with participation from Candaq Group, InfiChain, Blue Mountain Labs, Incuba Alpha Group, and Exoplanet Capital. Its product was developed to offer AI-enabled, Turing-complete smart contracts, aiming to address the challenges posed by AI and centralized cloud computing. Following this momentum, Phala won a Polkadot parachain slot auction with 1,685 contributors in March 2022. Today, Phala is focused on being an AI coprocessor that provides a secure and verifiable compute solution for integrating crypto and AI at the application layer. For a full primer on Phala, refer to our Initiation of Coverage report.
AI Agent Contracts are AI computing programs that enable EVM smart contracts to extend their capabilities offchain. The code for these AI agents is written in TypeScript/JavaScript and is executed by Phala nodes offchain, though the requests originate onchain. Executions measure demand for Phala AI Agents executed by Phala worker nodes.
In Q2 2024, contract executions grew 113% YoY, though falling 6% QoQ. In one year, Phala processed over 243 million contract executions. Within Q2 alone, Phala partnered with multiple AI-focused protocols, such as Flock, Pond, and GM Network. Executions should continue growing as Phala’s recent partnerships and integrations mature.
Phala grew the number of AI Agent Contracts deployed to its network by 2,000%. This number should also grow alongside Phala’s recent Q2 partnerships and early Q3 partnerships, which include Allora and Artela. The addition of over 4,800 new contracts should diversify the types of compute enabled by Phala, potentially attracting more demand from AI application protocols and their users in the coming quarters.
Monthly Active Users (MAU)
Monthly active users measures the number of unique accounts interacting with Phala contracts on a monthly basis. Some users may use more than one account, which is not accounted for in the data. Phala’s monthly active users saw steady growth until peaking in March 2024, when it logged 774 unique users. Phala MAUs never dipped below 500 in Q2 and saw strong yearly growth, with June 2024 MAUs up 38% YoY. Phala’s increasing agent integrations and partnerships may attract more MAUs in the future.
Service Providers
Worker Nodes provide compute resources to the network. They host AI Agent Contracts (offchain programs) inside the nodes’ TEEs. The TEE protects the workload for code integrity and privacy. To join the network, miners anywhere in the world can deploy Worker Node software clients inside their TEE-compatible hardware setups, getting them verified onchain.
The Phala mainnet currently operates on both the Khala and Phala blockchains. Khala is a parachain on Kusama (a canary network for Polkadot), and Phala is a parachain on Polkadot. The Kusama canary network is a mainnet with its own set of validators that protocols can launch on or use as testnet-like infrastructure. Because the coprocessor mainnet was launched before the Phala Polkadot parachain was live, the project uses Khala as an additional mainnet that will eventually migrate its miners to Phala.
Total workers have grown 29% YoY, with growth largely starting when the Phala blockchain went live in April 2023. While both sets of workers seemed to grow into November, with Phala workers growing more rapidly, Khala workers started to decline due to the migration to Phala. Workers should continue to migrate to Phala. Growth in demand-side activity may also incentivize node runners to deploy more workers, growing the total in the future.
Phala has a non-consensus staking mechanism that manages up to 1 million CPU cores from over 100,000 nodes. Stake Delegation includes a feature called StakePool to connect computing nodes with PHA holders. As such, PoolOwners can create and manage StakePools allowing groups of workers to delegate their PHA to the pool. Workers must have a certain amount of stake to perform network operations; hence, having more PHA staked/delegated increases worker capacity.
The number of delegators measures the number of PHA holders that are contributing stake to the network. Though workers have grown steadily throughout the year, delegators have remained largely stagnant at about 3,500. That said, percentage of delegators on Phala has been trending upward since the Phala mainnet launched. It may not be intuitive, but a growing number of delegators (or at least the percentage of delegators) on Phala should further attract more worker deployments on the network, as workers seek to gain delegator stake.
Rewards
The PHA price ended Q2 up 43% YoY despite dropping 50% QoQ. The price increase kept Q2 2024 rewards above those in Q3 2023 (+$2 million) and Q4 2023 (+$1.6 million) in USD terms, despite PHA rewards dropping 49% throughout the year. Price appeared to lag increases in MAUs and contract executions in 2024.
Qualitative Analysis
Key Events
Agent Wars
Agent Wars is a Web3 game that enables users to launch their own AI agents with tokenomic structures tied to the agent in the form of keys (similar to friend.tech). Agents are represented as an ERC-721 NFT with a unique avatar linked to an X account. An agent is created through a three-day onchain auction, with bids based on the account's follower count. The auction funds then cover the hosting and training costs. While Agent Wars is currently only operating on Base, it has seen steady growth since starting in mid-May 2024. It ended the quarter with 309 AI Agent contracts, 62 users, and $13,000 in TVL.
Partnerships and Integrations
Throughout Q2 and early Q3 2024, Phala has made some key partnerships and integrations to help accelerate its role in pioneering decentralized AI.
Hyperbolic AI
Hyperbolic is a cloud computing marketplace that provides GPU access and inference services to AI projects. Phala partnered with Hyperbolic to run AI models and inference services on its coprocessor and provide compute to the Hyperbolic open-access AI Cloud via its TEE-based worker nodes. Phala’s integration with Hyperbolic will enable Hyperbolic’s users to deploy and verify AI models onchain.
Morpheus and Lumerin
Morpheus incentivizes a network of general-purpose AI agents (i.e., Smart Agents) that can execute smart contracts on behalf of users. Lumerin was originally designed to manage hash power distribution in Bitcoin mining; however, today Morpheus uses Lumerin’s architecture as core node software to decentralize and allocate AI compute. Phala runs the Lumerin Node inside its H100 TEE, integrating its coprocessor into the Morpheus network.
RiscZero
RiscZero creates developer tooling that enables builders to leverage zero-knowledge technology in their own protocols or applications. Phala uses RiscZero architecture to implement its multi-prover strategy, using zero-knowledge proofs (from RiscZero) and TEEs. Phala integrated the RiscZero host runtime into its own JavaScript runtime environment to make this possible. This integration adds another layer of security and privacy to the protocol.
FLock.io
FLock is building decentralized machine learning models whose fine-tuning and inference will be community-governed. In this setup, user feedback will be used to improve FLocks machine learning models. It will offer a modular machine-learning marketplace that can power any network using its models, like Phala. Integrating Phala’s smart contracts with FLock’s large language models (LLMs) will enable Phala to take advantage of FLock’s AI infrastructure to improve the intelligence and responsiveness of AI Agent Contracts, monetizing these LLMs in the process.
AwesomeQA
AwesomeQA provides community management AI bots to answer user questions on various platforms (Discord, Telegram, websites, etc.). Phala partnered with AwesomeQA to improve support in its Discord server and website.
Pond
Pond is building a decentralized graph network that will leverage AI models to analyze onchain behavior and forecast future trends. Pond calls its network a Graph Neural Network (GNN) because it can be applied to the blockchain's graph-structured data, where transactions of various types form a complex network of data. Phala partnered with Pond to develop trading AI agents and work on research and development to encourage AI-powered trading strategies. It will primarily focus on standardizing datasets and structuring complex onchain data.
GM Network
GM Network connects AI with IoT (termed AIoT), aiming to provide personalized interactions based on real-time data collected from IoT devices. As an Ethereum Layer-2, GM Network was built from the OP Stack and uses AltLayer’s Restaked Rollup framework with EigenDA for security. Phala partnered with GM Network to support its future AI Agents on the Phala coprocessor.
Allora
Allora built a self-improving, decentralized AI network where AI agents use a particular forecasting task to predict the performance of other AI models under live conditions. In short, Allora is a marketplace that incentivizes data scientists to offer high-quality inferences (predictions or decisions based on a trained AI model). Phala partnered with Allora in a collaboration that adds a privacy layer (via TEEs) to Allora’s machine learning processes, while Allora powers AI Agents on Phala with market-responsive inferences.
Artela
Artela is an extensible blockchain with parallel execution and modular VMs. Artela enables developers to build EVM-based smart contracts while adding WASM-native extensions to their applications. Phala partnered with Artela to provide an AI coprocessor layer to the chain that will facilitate AI-enabled native extensions.
Closing Summary
Phala ended Q2 2024 on a strong note, showing growth across various metrics throughout the year and announcing partnerships and integrations with leading industry protocols. On the demand side, Phala processed over 243 million contract executions, seeing contract executions grow 113% YoY. Additionally, MAUs in June 2024 were up 38% YoY. On the supply side, Phala worker nodes grew 29% YoY and 10% QoQ to support the 4,800 new contracts deployed on Phala in Q2 2024. Phala also announced partnerships and integrations with multiple protocols, including FLock, Pond, GM Network, AwesomeQA, Allora, and Artela. The protocol has built momentum as it heads into the second half of 2024.
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