Analysis of the Cryptocurrency Industry in 2023: Topics of Interest to Investment and Research Institutions

TinTinLand has compiled reviews or predictions for the crypto industry in 2023 from nine investment and research institutions including a16z, Bitwise, Blockworks Research, Coinbase Research, Delphi Digital, Messari Crypto, Pantera Capital, Thesis, and The Spartan Group. These contents reveal ten major core themes. Hopefully, this can help you better understand the direction of the Web3 industry over the past year and discover the ongoing trends for the new year.

Author: TinTinLand / Source

Translation: Plain Blockchain

2023 witnessed the gradual recovery of the crypto industry from the "crypto winter." This year, the entire crypto market value doubled, indicating that the industry may have passed the trough and is entering a transformation phase.

1. AI + Crypto

The decentralization of blockchain and centralized artificial intelligence are in opposition. Currently, AI models like ChatGPT can only be trained and operated by a few tech giants, as high computing resources and training data costs pose a challenge for smaller participants. However, through cryptocurrencies, a decentralized, global, permissionless market can be established, allowing anyone to provide computing resources or new datasets to help others and receive corresponding rewards. This approach will lower the cost of AI, making it more accessible.

However, as AI changes our information production, leading to societal, cultural, political, and economic changes, it also generates a large amount of AI-generated content, including deepfakes. According to a16z, encryption technology can be used to unravel this black box, track the origins of the content we see online, and more. There is also a need for decentralized AI generation and governance through democratic means to prevent any individual from unilaterally determining the fate of everyone; web3 is an experimental laboratory for exploring this issue. Decentralized open-source encrypted networks will democratize AI innovation, ultimately ensuring consumer safety.

Interestingly, a16z's analysis points out that in games, AI agents must have certain guarantees—they must be based on specific models and operate without errors. Otherwise, the game will lose its integrity. When legends, terrains, narratives, and logic are all generated by programs, players want to ensure that the creators have credible neutrality and know that this world is built on guarantees. The key provided by encryption technology is these guarantees, including the ability to understand, diagnose, and penalize when AI fails. In this sense, "AI alignment" is fundamentally an incentive design problem, similar to dealing with any human agent, and is a core focus of encryption technology.

Kyle Samani, Managing Partner of Mult1C0in Capital, also believes that there is a "significant opportunity" for the crypto industry in the AI revolution. Specifically, there is currently a severe shortage of GPUs (Graphics Processing Units), leading to exponential competition for these resources. Additionally, he added that the computing market and professional cloud service providers driven by the crypto industry have the opportunity to fill this gap.

Messari's report further outlines scenarios combining AI and crypto:

AI agents can use encrypted infrastructure for payments and independently access digital resources.

Innovations like zkML enable smart contracts to securely schedule AI models, supporting more complex application logic.
Tokens provide a reward path for individuals to adjust models and collect valuable real-world data, naturally aligning with DePIN.

2. Bitcoin

This year, the Bitcoin ecosystem has made significant progress. The emergence of Ordinals and improvements in network infrastructure have reignited investors' interest in BTC as the industry develops, indicating significant progress for Bitcoin in 2024, according to reports from several investment institutions.

Paul Veradettakit, a partner at Pantera Capital, believes that Bitcoin is one of the most notable ecosystems in 2024. Users will witness a surge in Bitcoin Layer2 and other scalable layers to support smart contracts, and there may also be integration of the Bitcoin ecosystem with systems that have Turing-complete smart contract languages next year. The trend in Bitcoin development also implies the possibility of DeFi Summer 2.0.

As mentioned by Paul Veradettakit, with the maturation of Bitcoin DeFi infrastructure, the total value locked (TVL) in Bitcoin DeFi may increase. In this transition, many Ethereum DeFi practices may move to Bitcoin and be "localized," such as the recent BRC-20 standard and concepts like staking in Babylon L2. Cody Poh, an investment associate at Spartan Group, pointed out that with the upcoming Bitcoin infrastructure upgrade to Layer2, the BTC ecosystem becomes more practical and usable. Additionally, new asset categories like BRC-20 provide higher value, promoting potential ecosystem growth.

Thesis has specifically released an article reviewing the Bitcoin ecosystem over the past year. The article emphasizes new technologies such as the Lightning Network and new token standards, demonstrating Bitcoin's continuous evolution, making it closer to other popular networks but not relying on centralized patches and workarounds that support many blockchain projects. Bitcoin's development is not limited to technological innovation but also includes innovation in financial services, gaming platforms, and other areas.

3. Ethereum

At the end of 2023, Ethereum developers initiated key steps before the Dencun upgrade. The Dencun upgrade, through the implementation of the improvement proposal EIP-4844, will further scale ETH and L2. Dencun represents a significant milestone on the Ethereum roadmap. With Dencun deploying through EIP-4844 in March and April 2024, gas fees for Ethereum L2 will be significantly reduced, improving scalability. There are high hopes for Ethereum's performance in 2024.

Bitwise observed that in 2023, users paid approximately $2.3 billion in fees for using Ethereum, and this number is expected to at least double in 2024, making Ethereum one of the fastest-growing major technology platforms globally.

Blockworks Research's year-end review mentioned several major focus areas for Ethereum developers, researchers, and the broader community in 2024. One of the main tasks is the Dencun (Cancun and Denub) upgrade, including EIP-4844, also known as Proto-Danksharding. This will introduce the concept of "Blobs," optional appendices to Ethereum transactions, with a size of 125KB and an independent fee market. The saved fees will be directly applied to users trading on these L2s, providing a certain level of scalability for the entire ecosystem and enhancing the user experience.

**Another aspect is the development of EigenLayer, planned to launch on the mainnet in the first half of 2024. Blockworks Research believes that this will be followed by the rise of liquidity staking, the launch of EigenDA, and the new Active Validation Service (AVS) using staked ETH. After Dencun, Ethereum will continue to discuss protocol-level MEV design space and propose two possible construction methods—Protocol Building Separation (PBS) and Protocol Enforcer Proposer Commitment (PEPC). These, along with single-slot finality, are important components of the Danksharding and Ethereum scaling roadmap. If implemented correctly, they will strengthen Ethereum's protocol.

Coinbase Research also found that the direction towards staking is currently dominated by EigenLayer, which may become a way for validators to secure data availability layers, oracles, sequencers, consensus networks, and other services on Ethereum. The potential returns obtained through this process may represent a new source of income for validators, known as "security as a service." Coinbase Research believes these developments are worth watching, observing how much staked ETH will be allocated to additional security measures when EigenLayer is fully open to the public.

4. Solana

After the collapse of FTX, 2023 was an exciting year for the Solana ecosystem as market participants gradually began to understand the vision and practicality of this unified, high-performance, low-cost L1. The rapid launch of new products on Solana, the significant increase in on-chain liquidity, and the continuous expansion of developer tools are all reasons for excitement.

Expectations for Solana in 2024 are focused on several areas:

Messari Crypto points out that through Firedancer and Sig clients, Solana has achieved over 10x throughput and performance improvements. Firedancer enables Solana to process 1 million transactions per second. Improvements in user experience can attract more developers to use Solana and build on it, enriching the prosperity of the ecosystem. Additionally, Solana's native fee market and state compression technology make many applications "only possible on Solana."

Blockworks Research's annual report also indicates that 2023 brought a new token standard for Solana, called Token-2022, opening up new potential. Before Token-2022, most tokens on Solana were SPLTokens and did not necessarily correspond to Ethereum's ERC-20 token standard. It introduced several new features, such as adjusting the base, soul-bound tokens, and anonymous transfers, further driving innovation in the Solana DeFi space.

5. DeFi

Tushar Jain, Managing Partner at Mult1C0in Capital, predicts the emergence of "a new network bank, DeFi infrastructure, payment applications, on and off-ramps, and DEX" in 2024 to fill the void left by centralized lending and trading platforms that were cleared out in 2023. He states, "These products will surpass previous DeFi projects and provide a user experience comparable to custodial providers."

Additionally, bridges between traditional finance (TradFi) and DeFi, such as stablecoins and mirrored assets, will increase. Pantera Capital's forecast mentions that traditional financial assets will be "mirrored" in DeFi, increasing exposure to crypto assets in traditional financial markets, thus bridging the gap between these two worlds, enhancing investor liquidity and decentralization. At the same time, stablecoins will become one of the most important links between traditional finance and the DeFi world, with stablecoins like USDC and PYUSD gaining wider acceptance as portfolio choices and payment tools.

Furthermore, Messari explicitly mentions in its report that if there is one sub-area of DeFi to focus on this year, it should be Perp DEX. The report emphasizes that with dYdX migrating to a custom Cosmos app chain, dYdX's centralized limit order book may provide a trading experience closer to CEX. Considering the regulatory pressure faced by CEX, the distance between dYdX and CEX may further shrink.

In addition to the Perp DEX in the Solana ecosystem (Drift and Jupiter), Synthetix is also worth extra attention. With the release of the Andromeda version, Synthetix will introduce full collateralization, support for multiple new collateral types, and a series of improvements in trading, clearing, and more. Synthetix is also discontinuing its token inflation mechanism, potentially transitioning to token deflation.

In the DeFi space in 2023, tokenization is also an important direction. Coinbase Research expects it to become a key part of the new cycle in the crypto market, as it is "a critical part of updating the financial system." This mainly involves automated workflows and eliminates certain intermediaries no longer needed in the asset issuance, trading, and recording processes. Tokenization is not only applicable to distributed ledger technology (DLT) product markets but is even more important than two years ago, especially in the current high-yield environment. That is, for institutions, the cost of holding funds for even a few days in a high-interest rate environment is much higher than in a low-interest rate environment. By 2024, we may see tokenization expand to other market tools, including stocks, funds, insurance, and carbon credits.

6. DePIN

The biggest surprise in the crypto space in 2023 is undoubtedly DePIN. According to the crypto research company Messari's forecast, the overall industry scale of DePIN is currently about $22 trillion and is expected to grow to $35 trillion by 2028. With topics like Mobile and Honey sweeping the network, and old projects like Fil and Storj re-entering the spotlight, it seems that the DePIN track is the current trend. Coupled with the synergistic effect between the Solana blockchain and DePIN protocols, DePIN may occupy an extremely important position in the new cycle.

Messari specifically emphasizes four sub-areas in the DePIN track:

1) Decentralized storage: The current market size of cloud storage is about $80 billion and continues to grow at a rate of 25% per year. Although the cost of decentralized storage services is 70% lower than cloud service providers like Amazon S3, the current market share of decentralized storage is still less than 1%, indicating a huge market opportunity for decentralized storage.

2) Decentralized databases: Decentralized databases have historically had performance and latency issues, which are expected to be resolved in 2024. The emergence of applications such as DeSoc, games, dynamic NFTs, ML, AL, and others will greatly increase the demand for decentralized databases.

3) Decentralized wireless networks: DePIN projects represented by Helium Mobile are gradually finding product-market fit, leading to increased user adoption. For example, by offering low-cost services and tokens to attract users, early adoption of Helium Mobile has further driven token price growth, attracting more users and payments, creating a growth loop.

4) Decentralized AI machines: Currently, AI development faces computational bottlenecks and collaboration restrictions. However, DePIN projects focused on the AI field can effectively address these issues. Gensyn can provide sufficient decentralized computing power for AI model training, while Bittensor allows individuals to participate in open-source AI model training. The combination of DePIN and AI has a natural integration scenario.

Under the grand narrative of the DePIN track, Coinbase Research also points out specific expansions of DeComp.**

DeComp relies on a distributed computing network to complete specific tasks. With the mainstream adoption of generative artificial intelligence, this concept is gaining momentum once again. The cost of training AI models can be high, and the industry is exploring opportunities to use decentralized solutions to mitigate this issue. For example, a related research area called Zero-Knowledge Machine Learning (ZKML) focuses on privacy and promises to fundamentally change the way AI systems handle sensitive information. ZKML may enable large language models to learn from a set of private data without direct access to that data.

7. Gaming

The heat of Web3 games is gradually rising again. Currently, this field is mainly focused on attracting the attention of mainstream players, surpassing many "crypto-first" communities.

Delphi Digital's annual report on Web3 games summarizes 20 key points in the gaming industry:

1) The total market value of 183 gaming projects in 2023 remained between $400 billion and $700 billion, a decrease of 86% from the historical high in 2022. However, the gaming industry still has enormous growth potential.

2) Gaming giants' interest in the Web3 market is increasing.

3) Mobile games are becoming increasingly attractive to Web3 developers due to improved onboarding processes and more relaxed regulations.

4) The primary markets for blockchain games are the Philippines, Nigeria, Pakistan, Singapore, Vietnam, South Korea, Hong Kong, China, and the United Arab Emirates.

5) The number of blockchain networks focused on gaming is increasing every year. The report notes that 76 new networks emerged in 2023, including general L1, L2, and app chains. Therefore, a key theme in 2024 will be the competition for player liquidity.

6) By 2023, the average on-chain transaction volume generated by blockchain games was 23 times that of DeFi protocols, indicating that many networks, subnets, and blockchains targeting games will focus on this area.

7) Slightly over 5% of playable blockchain games have daily player counts exceeding 100 user wallets.

8) The costs of player incentives, game releases, and operational maintenance are continuously rising, posing economic challenges for Web3 games.

9) The user acquisition costs for blockchain games may be very high. Some case studies indicate that in the blockchain space, the user acquisition cost for mobile casual games is 77% higher than non-Web3 games.

10) To achieve profitability and scalability, many Web3 games will have to expand their commercial user base, increase spending from large investors, or both.

11) Approximately 1.2 million unique active wallets participate in games daily, with daily game transaction volumes ranging from 15 million to 25 million.

12) Optimism and OP Stack are the most popular choices for Full On-Chain Games (FOCG) developers. Starknet is another popular infrastructure for FOCG.

13) Telegram (TON) encrypted games are a new trend.

14) AI-driven "generative agents" will create entirely new player experiences.

15) Projects worth noting at the intersection of AI and crypto games include Parallel, Today-, AI ARENA, Geppetto AI, and AVALON.

16) The infrastructure for Web3 game development is rapidly expanding.

17) The most promising projects are HYTOPIA and Ronin Network.

18) AAA-level games have undoubtedly become a focus of the blockchain gaming industry in the past two years.

19) At a higher level, AAA games not only compete with each other but also compete with the broader Web2 shooter game market.

20) 2024 is expected to be an exciting year for the Web3 gaming industry.

Coinbase Research points out, "Many mainstream players may have greater skepticism towards web3 games."

Developers are trying to combine the network effects of high-quality AAA games with sustainable financial mechanisms. For example, game studios are considering using Web3 narratives, such as NFTs that can be used, transferred, or sold in specific in-game markets. However, surveys show that most players do not like NFTs, reflecting a widespread rejection of "playing games to earn money." The value of Web3 architecture lies in its potential to improve user acquisition and retention rates. However, this is still an unproven argument so far.

8. Social

Creators have contributed $230 billion in revenue to the social media field, but only a few creators have received a corresponding share of the income. Friend.tech shared $50 million in revenue with its creators within a few months of its launch. In 2023, the social field is re-emerging with growth momentum.

Dana Gan, Consulting Assistant at Spartan Group, expects more applications targeting retail consumers to emerge in the cryptocurrency field: The success of Friend.Tech, along with potential future airdrop projects, has sparked a surge in imitation projects. This is just the beginning. This trend marks a significant shift in industry focus towards consumers and social applications. These products have better user interfaces and experiences, improved incentive mechanisms and token utility, and more sustainable business models.

9. Modular Blockchains

Modular blockchains have become one of the recognized trends in the crypto community for 2024, as recognized by a16z and other investment firms. Meanwhile, the upcoming Ethereum Cancun upgrade has sparked diverse discussions within the community about modular blockchains and holistic blockchain technology.

a16z believes that in the digital world, there is always an inevitable force that dominates other forces: network effects. Network effects are usually very strong, to the point that there are basically only two ways to modularize—either to enhance and expand network effects, or to decentralize and weaken network effects. In almost all cases, only the former makes sense, especially when it comes to open-source technology.

According to a16z, the advantage of a holistic architecture is the ability to achieve deep integration and optimization, crossing the potential module boundaries, resulting in higher performance, at least initially. However, the biggest advantage of an open-source, modular technology stack is that it unlocks permissionless innovation, allowing participants to specialize and encouraging more competition.

Coinbase Research also observes that the concept of modular blockchains has garnered more attention in the crypto community, with many Layer1 networks intervening to meet the needs of one or more core blockchain components, including data availability, consensus, settlement, and execution. In particular, the launch of Celestia on the mainnet at the end of 2023, reignited discussions about modular blockchain design by providing an always-available plug-and-play data availability layer, allowing other networks and Rollups to use Celestia to release transaction data and ensure that the data is verifiable on-chain for anyone. Other Layer1 networks compatible with the Ethereum Virtual Machine (EVM) focus on smart contract execution and transition to Ethereum Layer2, such as Celo.

However, Coinbase Research also acknowledges that integrated chains like Solana still hold an important position in the crypto ecosystem, meaning the debate between modularity and integration may continue. According to their viewpoint, the increasing differentiation trends between chains—both industry and function-wise—will continue into 2024. However, the ultimate value of these blockchains still depends on the projects built on them and the attention they receive.

LBank also believes that modular blockchains and holistic blockchains should not be seen as opposing, but complementary, with modular chains serving as middleware for holistic chains, and holistic chains serving as specific layers for modular chains. They learn from each other's strengths and weaknesses, promoting mutual development.

10. Zero-Knowledge Proofs (ZK)

In the application of zero-knowledge proofs, ZK Rollups gained attention in early 2023, improving Ethereum's scalability and interoperability with the release of zkSync and Polygon zkEVM.

Blockworks Research believes that richer interoperability is the most promising aspect of ZK Rollups. These solutions enable fast asynchronous communication between chains, something Optimistic Rollups cannot achieve. The concept is that chains sharing the same validators and bridging contracts can trust each other and quickly pass messages.

ZK is also expected to integrate more closely with the previously mentioned modular blockchains, becoming interfaces between different components of the modular blockchain stack. As ZKP becomes a public interface between different providers, a new era of smart contract composability is expected, providing greater flexibility for DApp developers and lowering the barrier to entry for blockchain stacks.

In the ZK field, more user-friendly zk-SNARKs (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge) have also attracted attention from some institutions.

According to a16z, SNARKs are about to become mainstream, allowing for the creation of "cryptographic receipts" that cannot be forged by untrusted "verifiers" to compute certain workloads: in the past, the cost of computing such receipts was 10^9 times higher than the original computation; recent advances have reduced this number to about 10^6. Therefore, when the initial computation provider can bear the cost of 10^6, and the client cannot re-execute or store the initial data, SNARKs become feasible.

a16z's analysis indicates many potential use cases: edge devices in the Internet of Things can verify upgrades; media editing software can embed the authenticity of content and transform data; re-edited memes can pay homage to the original source; LLM reasoning can include authenticity information. The future will see self-verifying tax forms, tamper-proof bank audits, and many other consumer-friendly applications.

11. Others

In addition to the aforementioned top ten themes, some crypto directions have attracted the attention of institutional investors and researchers:

1) Decentralized Prediction Markets

Over $100 million is staked in prediction markets, and Bitwise suggests that "prediction markets" will become the new "killer app" for cryptocurrencies. Decentralized prediction markets will become the primary venues for event-based and more traditional sports-related betting.

2) DeSci (Decentralized Science)

As the limitations of traditional scientific "ivory towers" become increasingly apparent, there is a growing need for DeSci solutions. DeSci enables scientists to access resources, share data, obtain funding, conduct peer review, and transparently and collaboratively publish research. This groundbreaking alternative paves the way for a more accessible, decentralized, and inclusive scientific community.

Spartan Group's co-founder, Ma Yan, believes that DeSci, as a powerful use case for blockchain, will attract more attention—using Web3 technology to establish secure and enduring records of scientific contributions, thereby achieving fair credit allocation, simplifying transactions, promoting global resource sharing, and overcoming economic barriers.

Messari also sees potential in the DeSci field, believing that blockchain can effectively optimize key processes in scientific research, such as peer review and funding, driving the development of critical scientific areas through DAOs and token sales.

3) Formal Verification

a16z's predictive analysis emphasizes a new wave of formal verification tools that have significantly better developer experience than traditional formal systems over the past year. These tools leverage the relative simplicity of smart contracts in architecture, with atomic and deterministic execution compared to traditional software; no concurrency or exceptions; low memory usage and fewer loops.

The performance of these tools is also rapidly improving, leveraging the latest breakthroughs in SMT solver performance. As tools inspired by formal methods are widely adopted by developers and security experts, the next wave of smart contract protocols is expected to be more robust and less susceptible to hacking.

Source: https://medium.com/@tintin.land2021/2023-annual-crypto-industry-analysis-themes-of-interest-for-investment-and-research-institutions-ceb6ff2f12b2

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