NexGen: Ten Potential Waves and Directions of Innovation in the Crypto World

Author: NexGen

NexGen Venture is a fund with a scale exceeding ten million dollars, focused on investing in young degens and talented youth, firmly believing that the new generation of young forces has the potential to shape and empower the future of the trillion-dollar cryptocurrency market. In this article, we summarize 10 potential waves of innovation and directions in the crypto world for 2023 and beyond. We will continue to seek and invest in projects that have potential and innovation to further drive the development and success of the crypto world.

Point 1: In terms of the internal structure and performance of blockchain, we can expect the Rollup technology in Layer 2 to continue to evolve, especially the app-Rollup ecosystem, including app-rollup SDKs, RaaS, and decentralized sequencing networks.

Restaking can leverage the rights and value of withdrawal certificates, combined with the high security and decentralized characteristics of Ethereum staking assets, to support the development of other protocols such as EigenLayer. MEV management will be achieved through extraction, redistribution, and reduction of existing MEV. As more cross-chain MEV opportunities arise, more MEV will also be utilized.

Every dApp deployed on Ethereum Layer 2 shares computing resources with all other dApps in that rollup, leading to fierce gas competition for limited block space. The limited block space and lack of customizability have contributed to the rise of application-specific Rollups (also known as RollApps). This idea essentially stems from combining the security of Rollup with the flexibility brought by having its own dedicated environment.

The current application-specific Rollup (RollApp) ecosystem includes three participants: RollApp SDK, Rollup-as-a-Service (RaaS), and Unified Sequencing Network. We expect RollApp SDKs (such as Rollkit) to facilitate the process for developers to create personalized Rollups. Generally, RaaS providers utilize Rollup-SDK to develop their services, eliminating the need to write Rollup deployments and providing an experience similar to developing smart contracts.

While RaaS is primarily designed for smart contract developers (2C), we also anticipate demand for aggregating these different SDKs for developers, providing Rollup-SDK-as-a-Service for 2B service providers. Providers of Unified Sequencing will offer specialized support for certain specific functions of sequencers, such as decentralization, scalability, and security.

Restaking allows leveraging withdrawal certificates and the high security and decentralization of Ethereum staking assets to support application-level protocols, similar to EigenLayer. We expect the narrative of Restaking to drive the next wave of innovation in 2023. While further utilizing MEV through more complex trading strategies (such as JTI) and cross-chain MEV (such as Flashbots SAUVE), the structure of MEV is also being improved to maintain decentralization, democratization, and fairness.

This includes redistributing the profits of MEV, such as Kolibri BEV relay compensating users for submitting MEV transactions, decentralized builders like Flashbots SAUVE providing equivalent order flow access, and implementing MEV protection mechanisms like 1inch Fusion Mode.

Point 2: The current landscape of the multi-chain world indicates that a single chain cannot meet everyone's needs. Therefore, cross-chain interoperability is crucial for enhancing scalability and composability. Interoperable protocol layers can be divided into three types of bridges: native-validated bridges, externally validated bridges, and locally validated bridges.

External validation bridges rely on a set of external validators to transfer data between chains, such as MPC systems, oracle networks, or threshold multi-signatures. While this achieves general messaging between domains, it requires users to place their trust in external validators, making this model inferior in terms of the security of the underlying domains. In 2022, several bridge hacks stole billions of dollars, including the Robin Bridge hack ($635 million) and the Horizon bridge hack ($100 million).

While we can never be certain whether vulnerabilities exist, better solutions are likely to encourage maximum security and limited trust. This brings us to the rise of native validation bridges. We expect native validation bridges to become the winning solution in 2023. However, they face two main limitations: cost and scalability.

Chains must continuously track active validator sets and verify their signatures to confirm consensus, which is computationally expensive, especially if the receiving chain does not support the signature curve related to the consensus mechanism of the sending chain. This also hinders the scalability of bridges across heterogeneous chains. Therefore, to reduce costs and enhance the scalability of native validation bridges, we expect zk-bridges to play a key role in cross-chain innovation in 2023.

• If the signature curve of the sending chain is not supported locally, create an offline signature validity proof and verify it on-chain.
• If maintaining native validation bridges on numerous application Rollups and chains is costly, use recursive zero-knowledge proofs to establish 1-N bridges, which can reduce the workload to O(N), thereby lowering costs.

Currently, companies such as zkBridge, Polyhedra, Succinct, Electron Labs, Polymer Labs, and Nil Foundation are focusing on using zk proofs to address the cost and scalability issues of native validation bridges. However, the generation time (latency) and proof size (verification cost) of zk bridge solutions often require trade-offs.

For a better user experience, we expect future efforts to focus on addressing this issue by combining different proof systems (such as deVirgo + Groth) or introducing new primitives. Additionally, we anticipate that the maturation of general cross-chain messaging will drive innovation in cross-chain dApps that emphasize cross-chain composability.

For example, Mars and Prime are cross-chain lending applications that allow users to borrow on one chain while using their collateral on another chain. Interchain Account and Interchain Atomic Swap protocols also focus on bringing cross-chain dApps into the Cosmos ecosystem.

Point 3: Through zero-knowledge technology, we can abstract simplified and encrypted proof standards and use them to replace the initially complex on-chain verification. This brings two main functionalities: outsourcing verifiable computation and private computation. We believe that relatively foundational infrastructure and application protocols built on zero-knowledge technology, such as zkRollup and zkEVM for scalability and compatibility, zkBridge for better cross-chain solutions and user experience, and zkPass for generating and verifying DIDs under strong privacy protection, will continue to develop.

Due to the involvement of numerous expensive mathematical operations, the generation speed of ZKPs is slow and costly. We expect that ZKP-specific hardware and other optimizations will be crucial factors in promoting ZK applications to mass adoption in the future.

Zero-knowledge proofs (ZKP) are versatile tools with two main applications in the blockchain space: outsourcing verifiable computation and private computation. We expect ZKP to continue evolving in the following areas.

• Layer 2 scaling: ZKP enables Layer 2 scaling, allowing Layer 1 to outsource transaction processing to high-performance off-chain systems, scaling the blockchain without compromising security.
• Private Layer 1: ZKP allows Layer 1 chains like Aleo, Mina, and Zcash to hide the sender, receiver, or amount through ZKP, which can be used by default (e.g., Aleo) or as an option (e.g., Mina).
• Decentralized storage: Filecoin uses ZKP to prove that nodes in the network correctly store data.
• Blockchain compression: Zero-knowledge proofs (ZKP) can be used to compress blockchains (e.g., Celo), allowing synchronization to the latest state of the chain through small proofs.

Zero-knowledge proofs (ZKP) have the potential to achieve scalable private payments and smart contract platforms. However, their adoption has been limited by expensive overhead. ZKPs are slow and require hardware acceleration to achieve in complex computations. We believe that field-programmable gate arrays (FPGA) will become the most important technology for ZK hardware acceleration.

Additionally, we expect the cost of generating proofs to decrease. Higher proof generation costs may make transactions more expensive and could lead to longer times to achieve finality. We anticipate several improvements to reduce proof generation costs in 2023 and beyond, including optimizations at the proof generator level (such as Hyperplonk and Caulk), general optimizations, and the aforementioned ZKP-specific hardware.

At the same time, there is a trend towards EVM compatibility, with different types of ZK-EVMs balancing compatibility and proof generation costs. For example, Type 1 ZK-EVM prioritizes compatibility over proof generation costs (e.g., Talking), while Type 4 ZK-EVM prioritizes proof generation costs (e.g., Zksnyc).

Moreover, there will be a trend for Type 3 compatible systems to shift towards using Type 2 ZK-EVMs (e.g., Polygon Zkevm, Scroll) in the coming years.

Point 4: Improvements in blockchain-based entity detection data analysis tools will enhance the utility of numerous open-source data and enrich the value behind them. We can expect more blockchain developer toolkits or platforms to emerge in the next round, which will help developers easily build on-chain protocols and projects, reducing the costs associated with monitoring and operational management.

Regarding the foundational dApp wallets in the crypto world, we have already seen a trend and attempts to transition from EOA (Externally Owned Accounts) wallets to smart contract wallets, which utilize the latest and innovative technologies such as MPC (Multi-Party Computation) and AA (Account Abstraction), laying the groundwork for the scalability of these programmable wallets to ensure the security of user ownership and execution rights over their wallet accounts.

Given the unprecedented growth in trading volume in the crypto market, we are facing a crypto world filled with open-source data, growing exponentially in scale. Therefore, we believe there is an urgent need for specialized data analysis tools with independent entity detection mechanisms in the market to meet users' demands for valuable analytical results in targeted areas.

With the trend of multi-chain structures, we have gradually grasped the increasing demand from more builders and projects for deploying and achieving interoperability across multiple chains, as well as for developer toolkits for dApp coding, operation, and maintenance. However, the main issue with developer platforms and toolkits is how to capture potential value and build a positive and healthy loop.

Aside from so-called "cold wallets" (non-custodial offline wallets), wallets, as well-known foundational components in the crypto world, have undergone significant changes and improvements: from EOA wallets like Metamask to smart contract wallets that offer additional features such as multi-factor authentication and social recovery to achieve true decentralization and self-sovereignty.

Considering the impact of MPC on account security and AA on better managing multiple online wallet accounts, new wallets can address some limitations of smart contract wallets and provide effective products and services to attract the next million Web3 users. Given the current market filled with competitors, we believe that innovative technology, suitable business scenarios, and effective GTM are crucial for successful wallet projects.

Point 5: In the DeFi space of 2023, we expect several key developments and trends to emerge to facilitate its rapid growth and adoption. The demand for increased security through trustless transactions will drive the shift from centralized exchanges (CEX) to decentralized exchanges (DEX).

With new mechanisms, substantial trading volumes, and abundant resources, liquidity supply and lending platforms are expected to further develop. Additionally, the continuous complexity and diversification of DeFi services will lead to the rise of DeFi aggregators. Meanwhile, stablecoins will continue to play a significant role, holding substantial market share and importance.

In the past year of 2022, black swan events like FTX triggered seismic changes in the global cryptocurrency community, and we believe it will alter the narrative of cryptocurrency exchanges in 2023. With the growing demand for decentralization, security, and transparency, the market capitalization of DEXs will be higher than ever.

As CEXs face further challenges from DEXs, trading mechanisms are also evolving, shifting from traditional order book-based models to automated market maker (AMM) models, ultimately developing into hybrid models that combine the best features of order books and AMMs to address issues such as low capital utilization, significant interest rate differences in lending, and over-reliance on oracle price quotes. Beyond DEXs, we will also see significant opportunities for decentralized protocols acting as liquidity providers in the cryptocurrency market.

Aggregator protocols leverage DeFi liquidity to serve end-users, extending these services beyond limited domains and providing cryptocurrency enthusiasts with top-notch, one-stop comprehensive products and services without directly interacting with the liquidity layer, effectively improving user experience.

Furthermore, we expect to explore the use of stablecoins further, such as algorithmic stablecoins and collateralized stablecoins, which can be more strongly pegged to the US dollar or other major fiat currencies. Notably, algorithmic stablecoins with cross-chain deployment capabilities have the potential to achieve true decentralization, cross-chain interoperability, and unlimited scalability through free issuance, transfer, and trading on any chain.

Point 6: We also anticipate the emergence of new trends, such as the shift from over-collateralized loans to low-collateral loans, and even to unsecured loans. New derivatives are also highly anticipated, such as strategy products and structured financial products.

From a lending perspective, we expect more attempts similar to TrueFi, adopting low-collateral and unsecured loan approaches, which can lower borrowing costs for traders, promote the circulation and utilization of funds, enhance capital efficiency, and increase arbitrage opportunities. However, several issues still need to be addressed, such as establishing on-chain financial credit for cryptocurrency users, fostering trust, promoting universality, and implementing governance and regulation.

Additionally, there is a trend from spot to various derivatives (including perpetual contracts, futures, options, etc.). We look forward to new derivatives, insurance, and new structured products that help users better hedge or speculate on the risks of specific fixed-value assets, such as stablecoins and major cryptocurrencies.

Point 7: The NFT market is expected to undergo significant evolution in the coming cycles and beyond, focusing on user ownership and consensus communities, which is likely to drive the emergence and improvement of loyalty score projects, NFT access technologies, and decentralized identifiers (DID) for domains, fostering stronger connections between creators and collectors in private domains.

At the same time, another trend is the shift towards specialized trading platforms to cater to segmented NFT categories and provide users with customized solutions. Furthermore, the introduction of financial contracts recorded with NFTs will facilitate the tokenization of physical assets and various financial contract products, seamlessly connecting the real world and the digital world, opening new opportunities for investment and trading in the NFT space.

Notably, we have already seen some compelling projects, such as Starbucks Odyssey, which utilizes NFTs to record scores and build a community consensus with consistent loyalty and high user retention rates. To further enhance this business scenario, we need more NFT-Gated toolkit solutions and healthy incentive mechanisms to optimize the user experience in private communities and provide interaction with public markets.

Regarding the trend of specialized markets, the trading volume of the NFT market has surpassed thresholds, causing comprehensive markets like Opensea to suffer losses, and we anticipate the rise of specialized markets, such as Blur. With the specialization of the NFT market, we look forward to innovative directions and products that meet specific user needs.

Based on the content recording capabilities of NFTs, we have infinite expectations for the application of NFTs in new standards, which may unleash new possibilities for recording more complex contracts or financial legal benefits of products such as real estate, treasury bonds, options, futures, bonds, and lease contracts as RWA. Finally, we expect that NFTFi mechanisms, such as lending, tax splitting, and AMM trading, will enhance the liquidity and price discovery capabilities of the entire NFT market.

Point 8: We anticipate that Web3 protocols will redefine content distribution and establish social/community dApps to achieve efficient experiences and decentralization. At the same time, we expect community toolkits to enhance effective coordination and operation within Web3 communities. Additionally, we expect that AI-generated content-related creator economies can lower barriers, reduce costs, and improve efficiency through technology.

As an ordinary user, have you ever found your account suddenly disabled? Or, if you are a creator on social media, have you ever considered why Web2 platforms can easily throttle your content, even though it is creators like you who produce content for the platform's growth? If so, then community tools and SocialFi applications are working to address this issue.

Today, the Web2 era is filled with centralized platforms where a single trusted party can dominate the network, inevitably leading to issues such as privacy violations, algorithm abuse, and data monopolies. This is why people choose to move towards a future that is fundamentally decentralized at both the technological and application levels.

For example, inspired by the original RSS standard, the RSS3 protocol proposes a new feed standard aimed at achieving efficient and decentralized content distribution. There are also notable examples attempting to redefine social networks and graphs.

In the Nostr network, "relays" are responsible for storing and broadcasting messages to clients, while the Lens Protocol aims to redirect the value of data to its owners by turning user profiles into NFTs and introducing modularity through the Web3 social graph. These protocols pave the way for the development of community/social dApps, such as the Nostr-based social media platform Damus.

We value the open-source and trustless nature of these dApps, which may alleviate creators' concerns about unfair treatment. However, we also recognize that this will increase the difficulty of recommending high-quality content, as it allows everyone to exploit scoring rules to monetize their content.

We also expect these dApps to set new paradigms for user acquisition, activation, and retention, such as Galxe and QuestN being used for customer acquisition and launching marketing campaigns. Meanwhile, with the arrival of decentralization, a decrease in efficiency is inevitable, so we expect community toolkits to enhance effective coordination and operation within Web3 communities.

For instance, Utopia is designed for DAOs to manage finances and send salaries, while Dework helps DAOs with task management and efficiently provides grants and bounties to contributors. Additionally, with the revolutionary development of artificial intelligence, AIGC and its related creator economy will become the vanguard of the next wave of cryptocurrency innovation.

As AIGC lowers technical barriers and significantly reduces workloads, more people will be able to participate in the creator economy, and we expect AIGC tools to improve market efficiency. Notably, the benefits of artificial intelligence will also extend to other areas beyond the creator economy, such as NFT curation and on-chain game rendering.

Point 9: We expect advancements in GameFi infrastructure to improve distributed cloud computing and rendering, and to build robust SDKs to manage in-game NFTs. We also look forward to the diversification of GameFi types, such as full-chain games, casual games, X-to-Earn games, game publishing platforms, and AAA games. Furthermore, innovations in in-game economic models and the sustainable development of guilds are also expected to inject fresh vitality into the next era of GameFi.

We anticipate that GameFi infrastructure will lay a solid foundation for the next scale and level of GameFi. For example, Phala Network is dedicated to building decentralized cloud computing infrastructure, allowing game projects to leverage cloud resources for computation, with speeds comparable to large centralized providers while maintaining data privacy.

For rendering, we expect projects like Caduceus to provide low-latency, high-throughput distributed rendering computing capabilities. Compared to traditional offline games, the management of NFTs also requires infrastructure to enhance efficiency and credibility. Projects like Enjin and Forte are providing support in this area to assist with the publishing, use, and trading of NFTs. Beyond infrastructure, we also expect different types of on-chain games to become the next hotspot, such as full-chain games.

We believe that games of chance, such as Dark Forest and poker, are very suitable for being fully on-chain. Due to immutability and consensus mechanisms, the randomness of shuffling and dealing can be guaranteed, eliminating players' concerns about fairness. Additionally, casual games are also expected to attract more players in the global market and bring playability back to the GameFi market, which is currently filled with wealth speculation.

As another promising type, although X-to-Earn has been criticized for potential Ponzi schemes and attracting speculators rather than loyal players, we still expect new paradigms to fix its flaws and write new stories. Similarly, we also look forward to Web3-specific game publishing platforms and engaging gameplay introduced in AAA games like Illuvium to immerse us in a highly immersive metaverse.

Furthermore, we expect improvements in in-game economic models. We focus on the utility of tokens and how they meet consumer needs, how tokens carry value both within and outside the protocol, and how token models ensure sustainability throughout the entire process from minting to burning.

Finally, we will also pay attention to the role of guilds in the GameFi wave. While many guilds aim to profit by providing liquidity and lending NFT assets, such as Yield Guild Games (YGG), we recognize that this may attract speculators and undermine player loyalty, conflicting with the interests of game companies aiming for long-term growth.

Therefore, we also expect guilds with other objectives, such as player engagement, marketing, community, and esports, as well as win-win cooperation between guilds and game companies. As popularity increases, the infrastructure and foundational tools of guilds will also become new growth points, such as open-source guild management scripts, guild incubators, and guild comparison services.

Point 10: After several catastrophic collapse events in 2022, compliance and security have become focal points. In this area, we expect the continuous growth of auditing departments to protect customers' digital assets and identify risks in smart contracts.

We anticipate that payment tools will strengthen KYC/AML solutions under regulatory frameworks and improve the cryptocurrency trading experience. We will also closely monitor other compliance-related topics, such as data transparency, NFT copyrights, and whether cryptocurrencies will be considered securities to comply with stricter regulatory requirements.

In the auditing industry, we expect the application of new technologies in B2C and B2B solutions to continue to grow. We will closely monitor B2C auditing platforms that provide dynamic risk detection for digital assets and other customer concerns, such as anti-phishing websites, tools for phishing emails, and community fraud. In addition to pre-chain testing and on-chain monitoring, we also value the specialized application of innovative technologies in B2B auditing, such as witch attack detection.

Besides auditing, we believe payment tools are another focus. By leveraging the advantages of reduced settlement times and eliminating third-party verification, cryptocurrency payment tools are expected to become alternative solutions in regions with high inflation of fiat currencies or difficulties in cross-border payments. As the Web3 industry develops, it will also become a rigid demand. However, we still recognize its limitations, such as security issues and the difficulty of changing user habits.

To address these issues, we hope to establish a crypto-oriented KYC/AML regulatory system and provide reliable tools related to KYC/AML services. Additionally, to adapt to current user habits, creating specialized cryptocurrency payment tools may be another promising trend.

For example, focusing on Web3 payroll solutions, Zebec converts payments into continuous streams, allowing workers to leverage the time value of their wages. Many exchanges have also partnered with credit card issuers to launch crypto credit cards, such as Binance Pay, which can be used for offline purchases as long as users have an account on Binance.

Furthermore, we are closely monitoring other compliance-related topics, such as the use of customer data disclosure. In terms of NFTs, we expect clearer distinctions between legitimate derivative works and intellectual property infringements, as well as explicit clarifications on what legal rights should be granted to NFT holders.

We will also closely monitor whether institutions like the Securities and Exchange Commission will view cryptocurrencies and their related services (such as lending and staking) as securities, in which case the crypto industry will inevitably face stricter regulatory requirements.