ZK, AI, BTC, DePIN...Full analysis of Web 3.0 track investment in 2024.
Author of the article: HashKey Capital
Article source: PANews
As one of the most active Crypto VCs, HashKey Capital regularly analyzes and sorts out various Web 3.0 tracks internally. On the occasion of the New Year of 2024, we will “open source” our internal track judgment and understanding as our contribution to the industry.
The authors of this article include (in alphabetical order): Arnav Pagidyala, Harper Li, Jack Ratkovich, Jeffrey Hu, Junbo Yang, Stanley Wu, Sunny He, Xiao Xiao, Yerui Zhang, Zeqing Guo.
ZK
In 2023, the ZK track will further expand from previous expansion, cross-chain and other scenarios to more application scenarios, and further differentiate into different tracks.
zkEVM
zkEVM has made some progress in type0, type1, type2 and other aspects. In terms of categories, type 0 is completely equivalent to Ethereum, but it still faces technical challenges such as block production speed, release and verification status due to too much emphasis on equivalence; type 1 has made improvements and compromises based on EVM, and currently overall The application experience and operation code compatibility are the most outstanding; type2 and others have launched the main network earlier and are looking for corresponding types of application development ecosystems.
The current specific project situations vary and need to be analyzed based on the project's own development path, such as Polygon's CDK, StarkNet's full-chain games, etc.
zkVM
The current main technical route in the zkVM field is zkWASM, and the architecture is more scalable. Therefore, in the application direction, it cooperates with exchanges to build high-performance DEX. Major projects in the zkWASM field include Delphinus Labs, ICME, wasm0, etc.
The RISC V architecture direction is mainly explored by RISC0, which is more friendly to front-end languages and back-end hardware than WASM, but potential problems lie in efficiency and proof time. Currently, application scenarios are also expanding, such as Reth, which simulates the Ethereum execution environment, FHE's operating environment, Bitcoin Rollup, etc.
The other is zkLLVM. =nil; Based on this technology, Type-1 zkEVM has recently been launched. Using zkLLVM, high-level languages can be quickly compiled into zkSNARK circuits.
ZK Mining
In the field of ZK Mining, the efficiency of GPU and FPGA is currently similar, but GPU is more expensive, FPGA is more like prototype verification, and ASIC scenarios may gradually differentiate, such as special-purpose ASIC chips, new FHE requirements, etc.
In addition, the number of Prover DAOs has increased significantly, and computing power is its core competitiveness. Therefore, the Prover DAOs produced by the mining machine team will have obvious competitive advantages.
ZK Middleware
ZK middleware can include zkBridge, zkPoS, ZK Coprocessor, zkML, zk trusted computing and other verifiable computing scenarios. Among them, the ZK Coprocessor scenario is relatively clear, and each project has basically reached the test network stage; the zkML track is still relatively popular, and the progress and competition of each project have diverged to a certain extent. In addition, a new track for ZK proof sharing has also emerged (jointly sending proofs to a certain network and sharing the revenue equally after batch processing).
MEV
You can mainly focus on the early stages of the transaction supply chain, that is, the intention stage
Next-generation DEX designs and infrastructure that address LVR and improve LP will increasingly attract more capital
Private auction/trading pools, if operated effectively, will greatly improve the trading supply chain. And the development of FHE, MPC and ZKPs deserves attention.
Currently, most systems use centralized relays, permissioned solvers, trusted builders, etc. But we believe the track will eventually be permissionless to achieve the most competitive market.
The MEV supply chain will have changes in APS, document execution, PEPC, etc.
OFA
Order flow auctions (OFA) begin to take off in 2023. High-value transactions will no longer flow to the public transaction pool, but to OFA, giving users back the value they create. From RFQ auctions to blockspace aggregators, there are various OFA implementations that meet various needs in terms of price discovery and execution quality. Going forward, it is estimated that an increasing number of ETH transactions will be conducted through OFA.
Blockbuilder
As we can see with relayscan, the builder market is concentrated in a handful of builders, some of which are high-frequency trading firms serving their own trading needs. In the future, as the volume of CEX/DEX arbitrage decreases, the advantages of high-frequency trading may also weaken.
Relay
The relay market faces two basic problems. (1) The market is concentrated in a few companies, namely BloXroute and Flashbots; (2) There is no incentive mechanism for relays
In the future we look forward to seeing the rapid development and implementation of optimistic relays, as well as proposals for relay incentives.
AA
The AA (Account Abstraction) track can be mainly divided into two categories: smart contract wallets and modular services.
In terms of smart contract wallets, the related companies in the AA wallet track are actually similar to the pattern of the entire wallet track. It has become increasingly difficult to obtain traffic based on functions alone. Instead, the wallet factory deserves attention.
In terms of modular services, Bundler and Paymaster are features that these basic providers must provide. In fact, these two services have become standard services.
Some current track trends include:
Most of the infrastructure has been set up and development is currently relatively stable. Judging from the data of the entire track, it has entered a rapid growth track. The number of user wallets has begun to increase since June. As of November, there have been more than 6 million Userops and about 200K MAU.
L2's AA development is better than L1, and EF is considering giving native support to L2.
The problem of DApp not supporting AA is still very serious, and there are also issues with the implementation of cross-chain and cross-Rollup accounts, etc. Someone needs to come up with new solutions.
The private mempool will be merged with MEV and intent to optimize user experience.
Intents
Intents has developed rapidly after receiving attention this year. Although it faces some problems such as solver evil and order flow trust, it has relatively feasible solutions.
If Intents wants to develop better, it must consider issues such as order flow and user acquisition. Therefore, from an architectural and business perspective, Intents is very suitable to be combined with the two architectures of MEV and AA. For example, Builder and Searcher are most suitable for matching. and the role of solver.
Telegram Bot is likely to evolve in the direction of Intent. Their advantage in order flow gives them considerable bargaining power over builders and SUAVE. This bargaining power will even exceed wallets that are larger than them.
AND
There are not many overall participants in the DA track. In addition to Ethereum, they mainly include Celestia, Eigenlayer and Avail, etc., and the progress of the projects is variable. The head effect is obvious, leaving few opportunities for the waist and tail. Projects on the DA track can mainly examine security (including data integrity, network consensus, etc.), customizability and interoperability, cost, etc. As Celestia goes online and prices rise, the overall valuation level of the DA track is pulled up. But DA is essentially a to B business, and the income of DA project parties is closely related to the quantity and quality of ecological projects.
From a customer perspective, issuing DA on Ethereum is the safest and most expensive solution. The cost of Ethereum dropped significantly after protodanksharding, so large Rollup projects will still choose Ethereum as the DA layer. At present, the customers of DA projects other than EigenDA are mainly Cosmos ecological projects, RaaS projects, etc.; while EigenDA has a special positioning, related to Ethereum but not directly related, and may be better able to attract some customers in the middle. In addition, there are some relatively early DA projects and DA for specific scenarios such as Bitcoin DA, which may gain a good market share in niche areas.
Rollup Frameworks & RaaS
The rollup market is basically saturated and awaits new development. There are currently at least 30+ VC-backed RaaS projects and infrastructure providers entering the market. There is a need to understand which use cases are successful with RaaS and which interoperability solutions can make a difference.
Some L2/L3 frameworks, such as OP Stacks, have received significant public good funding and developer adoption.
Some specific applications, such as DePIN, may have the potential to use Ethereum rollup by using a custom execution environment.
In addition, there are many new technologies about rollup recently, such as: Risc0 Zeth/other projects can change the way rollup verifies the state without relying on validators or synchronization committees; when used with primitives such as ZKP and MPC, FHE rollup can Providing fully universal privacy DeFi, and more.
Cosmos
In the future, Cosmos Hub will continue to try to strengthen its position in the ecosystem from all aspects. For example, Partial Validator Security (PSS) can more flexibly allow some validators to provide cross-chain shared security (ICS) without forcing all Cosmos Hubs to do so. The addition of more validators can reduce the pressure on many validators and make it easier to promote; on the other hand, Cosmos Hub plans to enable multi-hop IBC to improve user experience; in terms of protocol implementation, it plans to add the functions of Megablocks and Atomic IBC to provide atomic Sexual cross-chain transactions can form a unified MEV market, similar to the shared sequencer, SUAVE, etc. of the Ethereum ecosystem.
In terms of the Cosmos ecosystem, the application chain development route has recently been affected to a certain extent by development frameworks such as L2, and the number of new projects has declined. However, due to its highly customizable underlying framework and strong flexibility, it can find public chain targets that have been customized and modified as the mainstream narrative continues to evolve.
Security
The security track project has made progress at all levels. The products include tools and protocols at all levels, such as on-chain detection and interception, on-chain tracking tools, manual audit and bounty services, development environment tools, and various technologies. Methodological applications (e.g. fuzz testing), etc.
Each tool is better suited to detecting specific categories of vulnerabilities, and has specific methods for checking vulnerabilities in smart contracts (static analysis, symbolic execution, fuzz testing, etc.), but it is still difficult for a combination of tools to replace a complete audit.
In addition to the above different positionings, the dimensions of the project inspection can also include: maintenance and update speed, vulnerability library size, carrier, actual needs of partners, etc.
AI
The current integration of Crypto and AI mainly includes underlying computing infrastructure, training based on specific data sources, chat tools, data labeling platforms, etc.
Various projects in the field of underlying computing infrastructure and computing networks have innovated at different points, but they are generally relatively early and need to consider future sustainable business expansion paths in addition to creating different types of agents.
The data labeling platform changes the traditional manual labeling business to web3, and the ability to obtain orders is critical. At the same time, because low-threshold data annotation can easily be replaced by AI in the future, it is necessary to better focus on high-value and high-threshold data to obtain more orders.
In addition, there are many new projects that incorporate AI, such as To C chat tools.
As a Crytpo fund, we will pay more attention to ZKML, projects with data advantages in the crypto vertical field, or to C products that are closely integrated with AI, rather than infrastructure such as large language models that we are not good at.
DeFi
One change in 2023 may be that many investors require real yield products, such as yields preferably from LSDfi or RWA, rather than emissions-based yields. At the same time, as centralized exchanges face huge regulatory pressure and assets need to find liquidity, DEX has great opportunities, especially the possibility of high-performance applications brought about by the launch of L2. You can focus on the DEX opportunities on L2.
On the other hand, there is also a huge opportunity for projects that make Web3 yields accessible to non-crypto-native users, including institutions. Projects that abstract away on-chain elements and provide a secure environment for non-crypto-native users will bring in a lot of money.
Specifically, according to Messari’s report, the fees incurred by sustainable DEX, including well-known projects such as dYdX, GMX, Drift, and Jupiter, account for the highest proportion of fees in each segment.
Liquidity staking continues to grow in 2023. Nearly 22% of all ETH is staked, with Lido accounting for around 32% of the ETH staking market share (as of writing). And liquid staking tokens are actually still the largest DeFi track, with a TVL of $20 billion.
Gaming & EntertainmentStudio
Studio projects have different characteristics and required focus based on their own categories, as shown in the following table:
The overall game track can be simply summarized into the above categories. The overall game quality and team professionalism have greatly improved compared to the previous cycle. Next, we continue to look forward to the studio entering Web 3.0 and having mature experience in developing and operating products. And we continue to look for game producer + KOL compound founders who have strong learning ability, are sensitive to Crypto and the community, and are willing to speak out. In terms of Web 3.0, because the current chain games have a short history and there is not much mature experience to draw from, we will pay more attention to whether the team's ideas and ideas are in line with Web 3.0 and a fast learning speed, rather than having rich Web 3.0 experience.
We will continue to pay attention to UGC in the future. Currently, Web 2.0 UGC has problems that cannot be solved by centralization. In addition to providing tools for users to create content, UGC should also provide a completely transparent reward mechanism and freedom of asset transactions, which can be solved by decentralization. A good way to solve these problems is to provide additional value to teams that have Web 2.0 creator resources and introduce these creators to the Web 3.0 UGC platform with transparency and higher profits.
Game UA
To sum up, game UA projects are all centered on establishing user portraits. Together with the three dimensions of on-chain, off-chain and social, they are divided into customer acquisition direction (Carv) and operation strategy direction (Helika), but all acquisition directions Customer platforms often face retention challenges, but it is undeniable that player data is valuable, and this value will increase with the growth of the number of users. If the application is optimistic about bringing large-scale adoption, game data analysis can capture part of the value.
Extending to the game distribution platform, the distribution platform with infrastructure and tools as its core products in the last cycle has gradually lost its competitiveness. Now, what determines whether the distribution business can be successful still relies on core game products that can bring in a large number of users.
User/Fan engagement
The projects mainly involve industries related to entertainment, sports events and film and television. According to the cooperation relationship with the IP party, it can be roughly divided into two forms: direct operation by the IP party and IP authorized cooperative operation. The IP cooperation form puts less pressure on the platform operation, but its effect depends on How much resources are given to the IP side? The direct operation of the IP side will be more operational, but it can usually better connect IP events/and content with terminal products, and at the same time grant users more ancillary rights, fan incentives and feedback through NFT. The performance may be better. In addition, through tracking and observation of several projects, we found that platforms with a certain community base (such as Karate Combat) can turn existing users towards IP fans more often than a fan engagement that starts from scratch and is completely based on IP. Be easy to succeed. Next, we will focus on users/audiences/fan groups with high IP value, overlap with game/betting portraits, and more direct cooperation IP targets.
Institutional Service
The institutional service track can be mainly divided into the following sub-tracks:
Trading/brokerage services: including exchanges, liquidity providers, brokers/dealers, clearing/settlement, etc.
Asset management: including fund management, high-frequency trading, arbitrage, custody, etc.
Banking/Payment: Including payment processors/deposits and withdrawals, card issuance, bank-related services, etc.
Other services: including trading technology providers, etc.
Overall trends for this track include:
The institutional services track is expected to continue its steady growth in the coming years.
Compliance is an important trend in the institutional service field, and every company is actively carrying out compliance construction.
The division of responsibilities among various service providers is becoming increasingly clear. Each participant in the track focuses on their core responsibilities and checks, balances and supervision of each other in subdivided areas, which is conducive to making the market more honest and efficient. operation.
The market share of PB service companies is expected to gradually increase, and companies that provide fields that are still blank in crypto but are already relatively mature in traditional fields (ECNs, Fully regulated clearing house, Cross Margin capabilities) deserve continued attention.
During this window period for ETF application, crypto-native service companies will be impacted by traditional financial companies, the demand for compliance-grade products will further increase, and the market structure will be reshaped.
Europe is a hot area for the development of institutional services, and emerging markets such as South America also have certain potential.
Bitcoin
Although Bitcoin has attracted much attention recently due to inscriptions, etc., the Bitcoin chain does not share global state, and the entire idea (state, account, calculation model) of Ethereum is very different. Therefore, in the medium and long term, the basics of Bitcoin The construction of facilities and applications requires different ideas.
On this basis, it is worth paying attention to Taproot Assets, Rollup, Lightning Network, etc.; in addition, new technology routes such as Statechain are also worth tracking.
side chain
The side chain technology route including Stacks has long occupied the mainstream narrative of Bitcoin's second-layer network, because the technical baggage is relatively small (can be directly outside the chain) to achieve relatively high programmability, and it is easy to achieve better ecological effects. But it will mainly rely on technologies such as cross-chain and anchoring with the main chain, and may be attracted more traffic and attention by other new technical routes.
Layer2
Many of the current so-called Bitcoin Layer 2 are still more like a side chain form from the core technical principles, but will build a complete project framework of execution, settlement, verification/challenge, and DA according to the technical model of Ethereum. . The difference between the current Bitcoin Layer2 projects is mainly due to the different technology stacks selected at each level, such as Cosmos SDK, OP Stack, Polygon zkEVM, Taiko, etc. used in the execution layer; the DA layer is currently implemented by some third-party projects, and there are also Implement it yourself; in addition, a layer of "account abstraction" or the integration of multi-chain wallets is usually done to support both the address formats of Ethereum and Bitcoin to facilitate user operations.
Client validation
Client-side verification technologies, including RGB and Taproot Assets, can realize functions such as asset issuance and trading while minimizing the footprint on the chain, which deserves continued attention.
Lightning Network
Lightning Labs plans to launch stablecoins and other assets on Taproot Assets next year. In addition, the promotion of products that can achieve native asset income, including LSP (Liquidity Service Provider), is also worth looking forward to.
Class BRC20
BRC20-type assets rely heavily on some specific infrastructure, such as indexer, etc. It is worth paying attention to this part of the infrastructure and some new asset types such as ARC20, etc., but it is necessary to pay attention to the technical implementation risks.
DLC
Although DLC was proposed earlier, it was difficult to promote because of the low demand before. With the subsequent large-scale expansion of ecological construction, the application of DLC technology may become more popular, especially after cooperation with some oracles. However, attention should be paid to some centralization risks introduced during the implementation of DLC.
DePIN
DePIN is an easy track to start trading in the bull market. Similar to games, DePIN is also a track where it is easy to break out of the circle and convert traditional users, so it has also attracted industry attention. DePIN has several key elements: 1) It is decentralization, as well as the gameplay and mechanism. It can be said that it is the lifeblood of DePIN. Investment in DePIN projects needs to look at the mechanism first. 2) It’s timing. A good mechanism needs to be matched with good timing. It is definitely easier for projects launched in the early stages of the bull market to acquire customers early, so the team is required to be sensitive to the web3 market. 3) It is the fundamentals of the industry, the type of hardware selected by the project party, and the user characteristics targeted at it, which may determine the success or failure of the project. The following is a classification based on hardware type:
Pay attention to toC scenarios, and markets where similar hardware has not yet become popular, revolutionary changes may occur: For hardware that is frequently used in ToC (such as wearable devices), Web3's gameplay and mechanisms actually provide project parties with better and more An efficient product crowdfunding channel reduces barriers for both users and merchants. In the world of DePIN, because there are clear token incentives, users will be more motivated to purchase hardware (the money will be paid back quickly), and merchants can even pre-sell before producing; with flexible cash flow, merchants can purchase later. Do fundamentals, such as how to enrich the software ecosystem, how to link it with other hardware, how to empower tokens in the ecosystem, etc. Especially for underdeveloped areas, some hardware may never be purchased without DePIN, but the speculative mentality of early participation in mining may lead to large-scale real hardware popularization.
Be cautious about improving hardware: For ToC placement type or low-frequency but necessary hardware (such as routers), which have a large user base and ownership, DePIN can be an opportunity to improve the experience. In theory, DePIN realizes the redistribution of costs and income by redistributing resources and needs between suppliers and users, forming more reasonable unit economic benefits and making user-side services cheaper. But there are also difficulties: 1) Whether it is technically possible to achieve decentralization over centralized solutions. For example, many decentralized computing or storage solutions are even more expensive and less efficient than centralized solutions; 2) It is commercial Will it offend against the interests of large centralized manufacturers? The rigid demand and large holdings mean that there are many large manufacturers in this direction. They have accumulated many years of users, brands, and funds. If the DePIN solution cannot make a revolutionary breakthrough in fundamentals , or cannot unite to surpass the influence of big brands, it is actually difficult to compete with web2 competitors.
Wait and see the direction of unique mining machines: For other low-frequency uses, hardware that is dispensable in daily life, or even directional mining machines purchased specifically for mining, DePIN may be able to bring short-term returns, but it may not be able to form a User stickiness. It is not ruled out that DePIN has really cultivated new user habits, but there is a certain degree of chance and it is difficult to predict. We will analyze specific projects in detail.
