As one of the most active crypto VCs, HashKey Capital regularly analyzes and organizes Web3 tracks internally. On the occasion of the 2024 New Year, we are releasing our internal track analysis and understanding of "open source" as a 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
The ZK track expanded from previous scalability and cross-chain scenarios to more application scenarios in 2023, further differentiating into different tracks.
zkEVM
zkEVM has made progress in aspects such as type 0, type 1, and type 2. In terms of categories, type 0 is equivalent to Ethereum, but still faces technical challenges in block speed, state publishing and validation due to excessive emphasis on equivalence. Type 1 has improved and compromised on the basis of EVM, with outstanding overall application experience and opcode compatibility. Type 2 and others have been launched on the mainnet earlier and are developing their respective application ecosystems.
The specific project situations currently vary and need to be analyzed based on their own development roadmap, such as Polygon's CDK, StarkNet's full-chain games, etc.
zkVM
The main technical direction in the zkVM field is zkWASM, which has stronger architecture scalability, thus focusing on collaborating with exchanges to build high-performance DEX. Major projects in the zkWASM field include Delphinus Labs, ICME, wasm 0, etc.
In the RISC V architecture direction, RISC 0 is the main exploration. Compared to WASM, it is more friendly to front-end languages and back-end hardware, but potential issues lie in efficiency and proof time. The application scenarios are also expanding, such as Reth simulating the Ethereum execution environment, FHE's runtime environment, Bitcoin Rollup, etc.
In addition, there's zkLLVM. =nil; Based on this technology, Type-1 zkEVM has recently been introduced, and zkLLVM can quickly compile high-level languages into zkSNARK circuits.
ZK Mining
In the ZK Mining field, the efficiency of GPUs and FPGAs is currently similar, but GPUs are more expensive and FPGAs are more like prototypes for verification. The ASIC scenario may gradually differentiate, for example, with ASIC chips for special purposes and the addition of FHE requirements, and so on.
In addition, there is a noticeable increase in Prover DAOs, and computational power is a core competitive advantage. Therefore, mining teams that have Prover DAOs will have a more significant competitive edge.
ZK Middleware
ZK middleware can include zkBridge, zkPoS, ZK Coprocessor, zkML, zk Trusted Computing, and other scenarios of verifiable computation. The scenario of ZK Coprocessor is relatively clear, with various projects having basically reached the testnet stage. The zkML track is still relatively active, with some differentiation appearing in project progress and competition. In addition, a new track of ZK proof sharing has emerged (sending proofs to a network and sharing the income after batch processing).
MEV
- Early stages of the MEV supply chain can be focused on, namely the intent stage
- Next-generation DEX designs and infrastructures that solve LVR and improve LP will multiply, attracting more capital
- If private auctions/trading pools can operate effectively, they will greatly improve the trading supply chain. The developments in FHE, MPC, and ZKPs are worth paying attention to.
- Currently, most systems use centralized relays, licensed solvers, and trust-dependent builders. But we believe that the end game of this field will be permissionless to achieve the most competitive market.
- The MEV supply chain will undergo changes in APS, document execution, PEPC, and more.
OFA
Order Flow Auction (OFA) emerged in 2023. High-value transactions will no longer flow into the public trading pool but instead into OFA, rewarding users for the value they create. There are various OFA implementation schemes, from RFQ auctions to block space aggregators, to meet various needs in price discovery and execution quality. Looking ahead, it is estimated that an increasing number of ETH transactions will be conducted through OFA.
Blockbuilder
As we can see through relayscan, the builder market is concentrated in a few 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 advantage of high-frequency trading may also diminish.
Relay
The relay market faces two fundamental problems: (1) market concentration in a few companies, namely BloXroute and Flashbots; (2) lack of incentives for relays.
In the future, we expect to see rapid development and implementation of optimistic relays, as well as proposals for relay incentives.
AA
The AA (Account Abstraction) track can mainly be divided into two categories: smart contract wallets and modular services.
In terms of smart contract wallets, companies in the AA wallet track have already reached a similar scale to the entire wallet track. It is increasingly difficult to rely solely on features to attract traffic, and the focus should be on wallet factory.
In terms of modular services, Bundler and Paymaster are the essential functions that these infrastructure providers must offer, and in fact, these two services have become standard.
Some current trends in the track include:
Most of the infrastructure has been built, and the development is relatively stable. From the data of the entire track, it has entered a rapid growth track. The number of user wallets has been increasing since June, and as of November, there have been over 6 million Userops and about 200K MAU.
L2's AA development is better than L1 and EF is considering providing native support for L2.
The problem of DApp not supporting AA is still serious, and there are also implementation problems such as cross-chain and cross-rollup account, which require someone to propose new solutions.
Private mempool will merge with MEV and intent to optimize the user experience.
Intents
Intents have developed rapidly after receiving attention this year. Although they face some issues such as malicious solvers and order flow trust, there are viable solutions for them.
If Intents wants to develop better, it must consider issues such as order flow and user acquisition. Therefore, from the perspective of architecture and business, Intents is very suitable to be combined with MEV and AA architectures. For example, Builder and Searcher are the most suitable roles for matching and solving.
Telegram Bot is likely to evolve towards the Intent direction. Their advantage in order flow gives them considerable bargaining power with builders and SUAVE, and this bargaining power may even exceed that of wallets with larger user base.
DA
There are not many participants in the DA track, mainly including Celestia, Eigenlayer, and Avail, besides Ethereum. The progress of projects varies. The winner-takes-all effect is obvious, leaving little opportunity for the long tail. DA track projects can mainly be examined for security (including data integrity, network consensus, etc.), customizability and interoperability, cost, etc. With the launch of Celestia and the rise in price, the overall valuation level of the DA track has been raised. However, DA is essentially a B2B business, and the income of DA projects is closely related to the quantity and quality of ecological projects.
From a client's perspective, releasing DA on Ethereum is the safest and most expensive solution. The cost of Ethereum has significantly decreased after protodanksharding, so large Rollup projects still choose Ethereum as the DA layer. Currently, the main clients of DA projects, except for EigenDA, are Cosmos ecosystem projects, RaaS projects, etc. EigenDA has a unique positioning, which is indirectly related to Ethereum but not directly related, and may attract some clients in the intermediate zone. In addition, there are also some early DA projects and DA projects targeting specific scenarios, such as Bitcoin DA, which may gain a good market share in niche areas.
Rollup Frameworks & RaaS
The rollup market is already saturated and awaits new developments. Currently, there are at least 30 RaaS projects supported by VCs and infrastructure providers entering the market. It is necessary to understand which use cases have been successful on RaaS and which interoperability solutions can be effective.
Some L2/L3 frameworks (such as OP Stacks) have gained significant adoption by public goods funding and developers.
Specific applications such as DePIN may be able to use Ethereum rollup by using a customized execution environment.
Recently, there have also been many new technologies related to rollup, such as: Risc 0 Zeth/other projects that can change the way rollup verification states are handled without relying on validators or synchronous committees; When used in conjunction with primitives like ZKP and MPC, FHE rollup can provide fully universal privacy DeFi, and so on.
Cosmos
In the future, Cosmos Hub will continue to try to strengthen its position in the ecosystem in various ways. For example, Partially Secured Staking (PSS) allows some validators to provide cross-chain shared security (ICS) in a more flexible manner, without requiring all Cosmos Hub validators to join, which can reduce the pressure on validators and be easier to promote; On the other hand, Cosmos Hub plans to enable multi-hop IBC to improve user experience; In terms of protocol implementation, plans include adding Megablocks, Atomic IBC functionality to provide atomic cross-chain transactions, which can form a unified MEV market similar to Ethereum ecosystem's shared sequencer, SUAVE, etc.
Cosmos ecosystem, the development of application chains has been influenced to some extent by L2 and other development frameworks, resulting in a decrease in the number of new projects. However, due to its highly customizable underlying framework and strong flexibility, it can be customized and modified to correspond to the continuous evolution of mainstream narratives.
Security
Security projects have made progress in various aspects, including tools and protocols at various levels, such as on-chain detection and interception, on-chain tracing tools, manual auditing and bounty services, development environment tools, and various technical method applications (such as fuzz testing), etc.
Each tool is more suitable for detecting specific vulnerability categories 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 aforementioned different positioning, dimensions for examining projects can also include: maintenance and update speed, vulnerability library size, carrier, and actual needs of partners, etc.
AI
The current directions in which Crypto and AI are combined mainly include underlying computing power infrastructure, training based on specific data sources, chat tools, data labeling platforms, etc.
Projects in the underlying computing power infrastructure and computing power network domains have innovation at different points, but they are generally in the early stage and need to consider future sustainable business expansion paths other than creating different types of agents.
The data labeling platform transforms traditional manual annotation businesses into web3 forms, and the ability to obtain orders is crucial. At the same time, because low-threshold data annotation can easily be replaced by AI in the future, there is a need to focus on obtaining more orders around high-value, high-threshold data.
In addition, there are many new projects combining AI with To C chat tools, etc.
As a Crypto fund, we will pay more attention to projects such as ZKML, projects with data advantages in the crypto vertical field, or To C products closely integrated with AI, rather than infrastructure projects that are not good at large language models, etc.
DeFi
One possible change in 2023 could be that many investors will need actual yield products, such as the best yield from LSDfi or RWA, rather than emission-based yields. At the same time, due to the enormous regulatory pressure faced by centralized exchanges and the need for assets to find liquidity, DEX has a great opportunity, especially with the possibility of high-performance applications on L2, which can focus on DEX opportunities on L2.
On the other hand, there is a great opportunity for projects that enable non-crypto-native users (including institutions) to access Web3 yields. Projects that can abstract on-chain elements and provide a secure environment for non-crypto-native users will attract a large amount of funds.
In particular, according to Messari's report, perpetual DEX fees generated by well-known projects including dYdX, GMX, Drift, and Jupiter account for the highest proportion in various sub-tracks.
Liquidity staking continues to grow in 2023. Of all ETH, nearly 22% is staked, with Lido accounting for approximately 32% of the ETH staking market share (at the time of writing). And liquidity staking tokens are still the largest DeFi track, with a TVL of $20 billion.
Gaming & Entertainment
Studio
The Studio projects have different characteristics and focus areas depending on their category, as shown in the table below:
The overall gaming track can be summarized in the above categories. The overall game quality and team professionalism have improved significantly compared to the previous cycle. We also look forward to studios entering web3, with experience in developing and operating mature products, and continue to seek founders who have strong learning abilities, are sensitive to crypto and communities, and are willing to speak out. In terms of Web3, because the history of chain games is short and there are not many mature experiences to draw on, we will pay more attention to whether the team's ideas and strategies align with Web3, as well as their learning speed, rather than having extensive Web3 experience.
Future will continue to focus on UGC, currently web 2 UGC has centralized issues that cannot be solved. In addition to providing tools for users to create content, UGC should also provide a completely transparent reward mechanism and freedom in trading assets. Decentralization is a good way to solve these problems and can provide additional value. I am optimistic about teams with web2 creator resources, introducing these creators to web3 UGC platforms through transparency and higher returns.
Game UA
When summarizing projects in the Game UA category, the focus is on building user profiles, combined with on-chain, off-chain, and social dimensions. They are divided into customer acquisition (Carv) and operational strategy (Helika) directions. However, all customer acquisition platforms often face the challenge of retention. Nevertheless, player data is valuable, and this value increases with the growth of user numbers. If there is a favorable outlook for mass adoption, game data analysis can capture some of this value.
Extending to game publishing platforms, in the last cycle, infrastructure and tools as the core products of publishing platforms gradually lost their competitiveness. Now, the ability to succeed in publishing business still relies on core game products that can bring in a large number of users.
User/Fan engagement
The project mainly involves the entertainment, sports events, and film and television related industries. According to the cooperation relationship with the IP party, it can be roughly divided into two forms: direct operation by the IP party and authorized cooperative operation with the IP party. The IP cooperation form puts less pressure on platform operation, but its effectiveness depends on how much resources the IP party provides. Direct operation by the IP party involves heavier operation, but usually better connects the IP events/content with end products and can also grant users more affiliated rights through NFT, resulting in potentially better fan engagement and feedback. Additionally, through tracking and observation of several projects, it is found that platforms with certain existing community foundations (such as Karate combat), which redirect existing users towards IP fans, tend to be more successful than starting from scratch and solely relying on IP-based fan groups for fan engagement. The focus will be on targets with high IP value, users/audiences/fans with overlapping profiles with games/betting, and more direct cooperation with IP.
Institutional Service
The institutional service track can be divided into the following sub-tracks:
Trading/Brokerage Services: Including exchanges, liquidity providers, brokers/traders, clearing/settlement, etc.
Asset Management: Including fund management, high-frequency trading, arbitrage, custodianship, etc.
Banking/Payment: Including payment processors/deposit and withdrawal, card issuance, bank-related services, etc.
Other Services: Including trading technology providers, etc.
The overall trends in this track include:
The institutional service track is expected to continue stable growth in the coming years.
Compliance is an important trend in the institutional service track, with companies actively working on compliance development.
The responsibilities of various service providers are becoming increasingly clear, with each participant in the track focusing on their core responsibilities and balancing and supervising each other in specific areas, which is conducive to a more honest and efficient market operation.
PB service companies are expected to gradually increase their market share. It is worth continuing to pay attention to companies that are already mature in the traditional field but still blank in the crypto field (ECNs, Fully regulated clearing house, Cross Margin capabilities).
During the window period for ETF applications, native cryptocurrency service companies will be impacted by traditional financial companies. The demand for compliant products will further increase and the market landscape will be reshaped.
Europe is a hot spot for the development of institutional service tracks, and emerging markets such as South America also have potential.
Bitcoin
Although Bitcoin has recently attracted attention due to inscriptions, the Bitcoin blockchain does not have a globally shared state. Its entire concept (state, accounts, computational model) is very different from Ethereum. Therefore, in the medium to long term, the construction of Bitcoin infrastructure and applications needs to be approached differently.
On this basis, it is worth paying attention to Taproot Assets, Rollup, Lightning Network, etc. In addition, new technological routes such as Statechain are also worth tracking.
Sidechains
Sidechain technologies, including Stacks, have long dominated the narrative of Bitcoin's second-layer network because they have less technical burden (can be implemented directly off-chain), achieve high programmability, and facilitate good ecological effects. However, they will mainly depend on cross-chain communication, anchoring with the main chain, and may be attracted by other new technological routes that garner more traffic and attention.
Layer 2
Currently, many so-called Bitcoin Layer 2 solutions still resemble sidechains in terms of core technical principles. However, they have built a complete framework for execution, settlement, verification/challenge, and decentralized applications based on the Ethereum technology model. The differences among current Bitcoin Layer 2 projects mainly lie in the choice of technology stack at different levels. For example, different execution layers use Cosmos SDK, OP Stack, Polygon zkEVM, Taiko, etc. There are already some third-party projects implementing the decentralized application layer, and some projects have their own implementations. Additionally, there is usually a layer of "account abstraction" or integration with multi-chain wallets to support both Ethereum and Bitcoin address formats, making it convenient for users to operate.
Client Verification
Client verification technologies including RGB and Taproot Assets can achieve asset issuance and trading on the chain with minimal footprint, which deserves further attention.
Lightning Network
Lightning Labs plans to launch stablecoins and other assets on Taproot Assets next year. Additionally, the promotion of native asset yield products through Liquidity Service Providers (LSP) and others is also worth looking forward to.
BRC 20
The assets of the BRC 20 type heavily rely on specific infrastructure such as indexers. It is worth paying attention to this infrastructure and new asset types such as ARC 20. However, the technical implementation risks should also be taken into account.
DLC
Although DLC was proposed early on, its adoption has been challenging due to limited demand. As the ecosystem expands on a large scale, the application of DLC technology may become more widespread, especially with the cooperation of some oracles. However, it is necessary to pay attention to the centralization risks introduced in the process of implementing DLC.
DePIN
DePIN is a track that is easily driven by volume in a bull market. Similar to gaming, DePIN is also a track that is easy to convert traditional users, which has attracted industry attention. DePIN has several key elements: 1) decentralization, gameplay, and mechanics are the lifeline of DePIN, so the investment in DePIN projects needs to consider the mechanism first. 2) timing, good mechanisms need to be combined with good timing. Projects that go online in the early stages of a bull market are definitely easier to attract customers, so it requires the team to have sensitivity to the web3 market. 3) industry fundamentals, the type of hardware chosen by the project party, and the characteristics of the target users may determine the success or failure of the project. The following is a classification based on hardware types:
Focus on toC scenarios and markets where similar hardware is not yet popular, revolutionary changes may occur: For hardware that is frequently used by toC (such as wearable devices), the gameplay and mechanisms of Web3 actually provide project parties with a better and more efficient crowdfunding channel, reducing barriers for both users and merchants. In the world of DePIN, because there is a clear token incentive, users' motivation to purchase hardware will be stronger (quick return on investment), and merchants can even pre-sell before production; with flexible cash flow, merchants can then focus on fundamentals, such as enriching the software ecosystem, interacting with other hardware, empowering tokens in the ecosystem, and so on. Especially for underdeveloped areas, without DePIN, they may never purchase certain hardware, but early speculation in mining can bring about large-scale real popularization of hardware.
Be cautious about improving hardware: For toC placement or low-frequency but essential hardware (such as routers) with a large user base and installed base, DePIN can be an opportunity to improve the experience. In theory, DePIN reallocates resources and demands between suppliers and users, achieves a more rational unit economic benefit, and makes services on the user side cheaper. However, there are difficulties: 1) whether it is technically feasible to achieve decentralization better than centralized solutions, such as many decentralized computing or storage solutions, which may be more expensive and less efficient than centralized solutions; 2) whether it violates the interests of centralized giants in a business sense. The large user base and installed base imply that this direction has numerous major players who have accumulated years of users, brand influence, and capital. If the DePIN solution cannot make a revolutionary breakthrough in fundamentals or unite a force that surpasses the influence of major brands, it is difficult to compete with web2 competitors.
Observing the unique direction of mining machines: For other low-frequency uses and hardware that is optional in daily life, or even directional mining machines specifically purchased for mining, DePIN may bring short-term returns, but it does not necessarily create user stickiness. It is not ruled out that DePIN has truly cultivated new user habits, but there is a certain element of chance, making it difficult to predict. We need to analyze our specific project in detail.
