A Crypto VC's Monologue: The Evolution Trend of Mainstream Core Tracks in the Past Year

Author: Jingwei Zixi, SevenUp DAO

The recent main theme can be summarized in a few words: compliance, compliance, compliance; lowering the entry barrier to attract users from outside the circle; ZK, derivatives, gaming, new public chains, DID, social. (New terms are welcome for suggestions)

The main theme in terms of geography might be: 1. Large financing and big projects are increasingly North American; 2. Singapore is merely a surface crypto hub, lacking local entrepreneurial spirit, with most teams coming from the Chinese application layer. Local dollar funds, crypto funds, and project owners are predominant. Rather than being called the capital of web3, it is more of a financial center for funds, project owners, and bosses. 3. Domestic projects should not be underestimated; the power of the Chinese community remains strong.

I. Infra

Leading Market Cap 10B-50B: Node Infrastructure

The mainstream in the market is represented by centralized node providers like Infura (Consensys) and Alchemy. However, when centralized node providers encounter issues, the entire chain can face downtime (which happens frequently). This has led to the emergence of decentralized node providers like Pocket Network, but the market space for decentralized node providers remains small. (Perhaps it still needs to go to North America)

5B-10B: Oracles

In the past, third-party oracles like Chainlink dominated, but issues such as trust and unnecessary high fees have led to the emergence of first-party oracles represented by API3.

1B-5B: Storage

Filecoin, represented by IFPS, is great, but its essence is to fill storage with garbage data first. Subsequently, decentralized storage projects like Arweave have emerged. Recently, various storage projects have appeared in the market, focusing on share-to-earn, web3's Baidu Cloud, and privacy storage due to Arweave's inability to guarantee privacy, among other directions. (But storage might still be better handled by web2 giants? My understanding of this track is not very deep; discussions are welcome :) )

1B-5B: Security Auditing

Certik is the project with the highest market share in this track, but its reputation has somewhat declined, giving other security auditing firms the opportunity to capture market share. Other security auditing firms have seen rapid project growth within a year, such as SlowMist, ChainSafe, Blocksec, etc. The industry shows significant regional and 2G characteristics, and it is gradually moving towards automated auditing to reduce costs and improve efficiency, with features like hacker attack warnings. Blocksec has also developed technologies to block hacker attacks. (Embracing compliance and cooperating with 2G will undoubtedly be a major direction)

1B-5B: Wallets

Metamask is incredibly powerful, the only god. The remaining competitors can only enter from usability, non-EVM compatible chains, no mnemonic phrases or private keys, lowering entry barriers, cross-chain, fiat deposits and withdrawals, and buying and selling NFTs. It is not easy to create a wallet now. (Security and lowering barriers are the direction)

II. Public Chains

100B and above: Layer1

Layer1 has become extremely competitive. Currently, it is a bit overhyped to create a technically impressive EVM-compatible public chain, with 3B Aptos and 2B Sui being typical examples of mainnets that have not yet launched but are highly valued in the North American market. Combining Solana's frequent downtimes but ability to process transactions in parallel with ETH's stability but inability to process transactions in parallel, a high-performance public chain that can process transactions in parallel and not go down has been created. The current innovation direction for Layer1 lies in modular public chains and parallel processing. However, the impressive public chains are still being developed in Silicon Valley and the Greater Bay Area, making it difficult for Asian funds to invest. (It still needs to go to North America)

10B-50B: Layer0

Layer0 has primarily been represented by cross-chain public chains like Polkadot and Cosmos. However, Polkadot has been slow in development; Cosmos has performed well, as each chain's security is independent, allowing other hubs to remain secure even after issues with Terra. Coupled with its relative friendliness to developers, it has become a direction for many projects to migrate to (e.g., dydx). The current direction may be Cosmos or lightweight cross-chain interaction protocols represented by Layer0 Labs.

5B-10B: Layer2

Layer2 essentially aims to solve the expensive and slow issues of Ethereum. However, OP and Arbitrum, represented by OP Rollup, can quickly become EVM compatible and get the ecosystem running, but OP Rollup is still slow and expensive, and optimistic verification is not as secure as ZK's algebraic verification. Therefore, the main direction remains ZK Rollup, which has made significant progress in the past six months. The entire ZKevm is divided into Language, Bytecode, and Consensys levels, with technology becoming progressively more complex from left to right, but EVM compatibility is gradually being improved. The Language level is being advanced by Starkware, which has already managed to warp Solidity into a native language that Starknet can understand through Cairo (although the major client dydx has already left).

The Bytecode level is being worked on by the Hermez team, which was once on the brink of collapse and acquired by Polygon, and has now launched the so-called Bytecode level zkevm (reportedly somewhat subpar); another team is the Chinese team Scroll, which has also made good progress and is expected to launch zkevm this year; zksync has also modified its original direction from zkvm to zkevm, with progress unknown. I hope to see a Consensys level zkevm in my lifetime. (ZK hardware acceleration will be a direction) Additionally, Starkware's recursive capabilities are excellent, with the potential to infinitely nest on top of layer2, establishing layer3 and layer4 app chains. Overall, the story of layer2 is not yet finished.

0.5B-1B: Privacy

The development of native privacy layer1 public chains has not been satisfactory, mainly due to development difficulties and slow ecosystem growth. Therefore, the narrative for privacy public chains may return to Ethereum, gradually becoming privacy layer2 based on zkzk rollup leveraging the Ethereum ecosystem. Everything seems so beautiful, but zkzk rollup is difficult to implement, and achieving a good zkevm will be even harder.

III. DeFi

50B-100B: Stablecoins

2022 and 2023 have been years of regulation. Although Tether's issuance remains the highest, Circle, which actively embraces compliance, has slowly caught up with Tether in terms of acceptance and usage. In the first half of the year, the purely algorithmic stablecoin UST also perished, marking the end of the narrative for purely algorithmic stablecoins. The collateralized algorithmic stablecoin represented by Frax is also lukewarm. The future narrative for stablecoins may still focus on compliance, and this story will likely unfold in the United States. (It still needs to go to North America)

10B-50B: DEX

DEX has already shown signs of monopoly; it is very difficult for new DEXs to emerge on old chains. No matter how impressive the model is, if no one uses your DEX and continues to use Uni, what’s the point? New DEXs will only emerge on new or relatively new chains. Additionally, the phenomenon of liquidity fragmentation between DEXs remains significant, but there are already cross-chain aggregators like 1inch and Chainge to consolidate liquidity. Furthermore, DEXs are gradually becoming more infrastructure-like, with on-chain derivatives protocols relying on the liquidity of major DEXs to better serve users. Therefore, DEXs on new chains will not only have the ability to control liquidity on that chain but also the ability to control derivatives on that chain.

1B-5B: Lending

The direction of lending in the past six months may be institutional borrowing and non-overcollateralized lending based on DID. General lending is not worth mentioning; it doesn't produce much innovation. Large market makers usually have an infinite demand for funds; as long as the APR is below 10%, they can borrow indefinitely to make markets, as funds are essentially their production tools. For project owners, there is also a demand for issuing bonds; they prefer to issue long-term bonds to serve as their operating funds. However, it is challenging in the crypto space to find funders willing to issue long-term bonds with low APR, and project owners with positive cash flow remain few. Therefore, the bond market can now consider moving towards B2B, especially with major market makers like Maple Finance and Solv Protocol trying to explore this direction (Solv has recently made significant breakthroughs in this area). Additionally, non-collateralized lending based on DID is also promising, as branding can reduce collateral requirements, and asset management firms, market makers, and large LPs still favor this narrative.

1B-5B: Derivatives

Derivatives represent a massive market in traditional finance, and the same applies to crypto. Current derivatives are no longer limited to synthetic assets, on-chain options, futures contracts, and dual-currency wealth management; there are now also primary and secondary markets, yield certificates from gold mining guilds, and other methods worth exploring.

1B-5B: Staking Pool

Outside of the Ethereum market, projects are now starting to expand their business to other POS chains. Not much has changed.

0.5B-1B: Insurance, Gun Pools

Not much interest here…

IV. Gaming

Current games have basically moved away from the 1.0 Ponzi model and are slowly shifting towards several directions:

1. Strong competitive games as the focus, with the overall model becoming zero-sum games + platform taxation.

2. Casual games, similar to Mintcraft, or building your happy little home, etc.

3. AAA titles, which have high production thresholds and burn a lot of money, making it difficult for small developers to get involved.

Additionally, many web2 gaming giants are starting to dive into web3 chain games, such as Ubisoft, Shengda, Funplus, etc. These large companies have rich gaming experience, ensuring game quality, team experience, and technology, but currently, there are no specific projects launched. From the current perspective, among various tracks like gaming, social, music, NFT, and DeFi, gaming is still the most likely to produce a million or ten million user-level Killer APP.

V. Social/Music

DID has emerged as a new direction in the past six months, with the entire chain lacking a good DID or SBT system. DID seems to be the infrastructure for social and some DeFi/GameFI applications, and future developments in non-collateralized lending, social, and gaming will all be based on DID, indicating significant potential that needs attention.

However, I still maintain a relatively conservative attitude towards social products. The small number of on-chain users and the mismatch in user profiles, coupled with the current bear market's low morale, the challenges of cold-starting social mining, the difficulty in defining social token utility, and the balance between centralized and decentralized management are still difficult issues to solve. It may not be the right time to launch strong social products, but I still believe that impressive social products will emerge in the future.

VI. Data Analysis Tools

1B-5B: On-chain Data Tools for Projects

Apart from Dune, new analytical tools represented by Footprint have emerged in the market, lowering the entry barrier for creators, featuring low coding, multi-chain support, and low latency as competitive advantages in this track.

0.5B-1B: Address Data Analysis

Although Nansen has been doing well and has good analyses of smart money, the current issue is that there is a bit too much smart money data from Nansen, and its smart money database is still not precise enough. The user experience is somewhat challenging, and the overly complex smart money data needs to be refined. The entire track still has significant room for improvement at the trading level, with the core focus on streamlining the database, improving win rates, and lowering user entry barriers. Additionally, tools like address graphs have emerged this year, helping project owners better resist witch attacks, distribute airdrops more accurately, assist VCs in due diligence, and help security auditing firms catch hackers. But are there other use cases? The direction is promising, but it remains to be observed.

VII. NFT

10B-50B: NFT Exchanges

Opensea remains the leader, but thanks to the emergence of NFT aggregators and successful attacks from other exchanges, its market share is gradually being taken by decentralized exchanges like X2Y2 and Looksrare. Opensea has long been the first in the Ethereum chain and major NFT markets, which is undeniable. However, the segmented tracks have already been carved out. We have seen NFT exchanges like Magic Eden and Fractional, represented by gaming, gradually starting to gain volume on Solana. (Refer to an article by IOSG regarding the potential segmentation of NFT exchanges) I am looking forward to seeing if NFT decentralized exchanges and NFT order flow protocols can capture market share from Opensea.

1B-5B: NFT Labs

Simply discussing IP is no longer a good direction. However, in the past six months, especially in the North American market, NFT+XX has become a promising direction, such as NFT+AI, NFT+offline toys, NFT+membership, NFT+marketing, etc.

0.5B-1B: NFTFI

NFTFI has seen good development in the past six months (although its market cap is still small). It includes not only lending, fragmented index trading, crowdfunding, and BNPL but has gradually shifted to NFT trading based on the AMM model since the emergence of Sudoswap. If we consider Uni gradually becoming the infrastructure for trading or derivatives, we can expect that based on Sudoswap, many interesting derivatives like NFT market maker options and futures contracts will emerge.

Conclusion

Overall, various tracks have been flourishing at a visible speed over the past year. There are still many tracks I haven't mentioned, such as CEX, payments, music, DAOs, the metaverse, and enterprise services (which is quite interesting, as various enterprise service tools targeting web3 have emerged, similar to traditional finance, such as financial accounting ledgers, human resource management, smart contract management, etc.).

In the span of a year, we have experienced the rapid return of an invincible bull market and the violent retreat of a bear market. But as a VC with a strong curiosity for new things, willing to contribute to the construction of a new world, I am eager to see how the crypto world, which was all about speculation five years ago, gradually moves towards a more stable ecosystem in the next five years.

The revolution has not yet succeeded; comrades still need to work hard.