Review and Outlook of the Cryptocurrency Industry: Which Tracks Are Worth Paying Attention to in 2024?

Author: Zixi.eth

Continuing from the article I wrote last December, we are opening another article to summarize what happened in 2023 and look forward to the future of 2024. The year 2023 was a process of starting low and rising high, with the secondary market continuously climbing, but at the same time, the primary market remained quiet, giving me the impression that the primary market might be even quieter than in 2022. This could stem from: 1. The primary market lags behind the secondary market by about six months, and new entrepreneurs have not yet entered the field. 2. Old entrepreneurs are continuously fading away (many have gone into AI). 3. There is a severe lack of new stories; most of the stories in the market are just old stories being rehashed.

The entire article, like last year, is divided into three parts, mainly discussing what we were optimistic about this year that turned out to be wrong, what we are optimistic about for next year, and what we need to observe next year.

1. What were we optimistic about this year that turned out to be wrong?

1.1 Developer Tools ------ The world is bustling for profit

Compared to the same period in 2022, crypto MAD has decreased by 27%, but fortunately, there is still a 66% increase compared to two years ago. Due to the decrease in new developers and the loss of old projects, the market size of developer tools has seen a certain decline this year. Additionally, as the primary market for AI is exceptionally strong in North America and China, many engineers have chosen to join the AI gold rush. Therefore, overall, the market size of developer tools has declined this year. This is reflected in the valuation of Alchemy's primary and semi-primary market—compared to the previous valuation of $10.5 billion, the current valuation is only about $3 billion. Consensys's $7 billion valuation is now also only around $3 billion.

However, we are still confident about this market in 2024-2025. We have also seen growth in domestic developer tool data; for example, the number of developers on the Chainbase platform increased from 800 last year to 6,000 this December. As the most direct beneficiary track for developers, if 2024-2025 turns out to be the next bull market, the incremental growth in the developer tools track will be very significant. Moreover, I believe that a series of M&A opportunities for developer tools will emerge in 2024-2025.

1.2 NFT ------ What else can it be besides PFP?

The traditional PFP story has become hard for everyone to buy into. The following chart shows the recent price trends of BAYC over the past year or two. In 2022, Yugalabs launched the APE+Monkey combo, which caused a temporary FOMO in the market. However, this year's NFT market has been very quiet, and it has become difficult for big players to pay tens of thousands or even hundreds of thousands of dollars for NFTs. Additionally, Azuki has also disappointed the market; the AZuki Elemental launched this year essentially just copied and pasted to start printing money, making it hard to feel the team's sincerity.

However, it is worth noting that there have been some interesting projects in this year's NFT market, such as the little penguin NFT + offline toys route, which has indeed received unanimous praise in the North American market, showing us a new direction for PFP NFTs.

Although the popularity of NFTs has been declining this year, we have also seen other uses for NFTs beyond PFPs, such as the commercial value of physical + NFT (Li Ning/adidas + monkeys), brand pass cards (Starbucks), opera/concert ticketing, etc. NFTs may gradually evolve into a kind of "technology" in traditional industries in the coming years.

2. What are we optimistic about for next year?

2.1 AI + Crypto ------ 2B or 2C?

Let me present an interesting viewpoint: if there is a bull market in 2024-2025, we will see a certain number of 2C game/social/C.AI/chatbot-type web2 AI projects moving towards web3 and issuing tokens. This viewpoint comes from the observation that many 2C AI projects this year have a high degree of homogeneity, relatively low revenue ceilings, and are constrained by the rising cost of computing power, making it difficult to balance profit margins. After securing funding from investors, they also need to consider exit strategies.

When revenue/play/momentum stagnates, issuing utility tokens to enhance gameplay is an idea worth considering—on one hand, issuing tokens to drive up prices is a good marketing strategy, and on the other hand, it can attract web2 users (the technology for wallet and account abstraction has improved significantly). Thus, it may be a win-win approach for both web2 and web3. Additionally, this batch of AI 2C entrepreneurs is very young and highly receptive to new things, which could also contribute to this trend.

To get back on track, I simply categorize crypto + AI into 2C and 2B. 2C includes projects like Myshell, NFprompt, Worldcoin, etc., while 2B includes more projects like Modulus Labs, ChainML, EZKL, Questlab, http://Flock.ai, Gensyn, etc. The AI products in the 2C category are not elaborated here; whether in games or http://C.AI-type products, they have already been validated in web2, and we see communities like Myshell's voice bot thriving in web3. Since Crypto + AI is still in its early stages, it is currently dominated by 2B, such as serving project parties by creating on-chain agents; serving project parties and companies to perform ZKML verification; or crowdsourcing data labeling for LLM/Text to Video models or AI-related companies, etc.
Another interesting point about 2B AI companies, especially on the data and computing power side, is that they are platform-based businesses—upstream are the demand side for computing power/data labeling (e.g., various model companies), midstream are the distribution platforms for computing power/data labeling, and downstream are various large and small C users. Blockchain can mobilize the long tail of retail investors through incentive mechanisms, but currently, data labeling scheduling seems easier to implement, and teams have secured numerous data labeling contracts from large model companies. Scheduling computing power is challenging, especially when it involves large-scale heterogeneous GPU scheduling.

We have seen robust growth in many directions in 2B and look forward to the performance of AI + Crypto in business and token issuance next year.

2.2 Regulatory Compliance ------ Institutions are entering the market

Regulatory compliance is an eternal theme. In fact, a significant part of the price increase at the end of this year is due to everyone's anticipation of the approval of the Blackrock BTC ETF, and the increase over the past month has proven this well—"Just imagining that traditional funds could enter the market can lead to significant growth."

At the beginning of 2023, the market cap of stablecoins was $150 billion, and by September 2023, it was at its lowest in the past couple of years, with a market cap of $132.4 billion, indicating a market outflow of nearly $18 billion. However, BTC rose from $17,000 to $26,000, which means mainstream funds withdrew, and liquidity in the market shifted from altcoins to Bitcoin. But from September to December this year, stablecoins only saw an inflow of $4 billion, while BTC rose from $26,000 to $44,000. Assuming that not much traditional money is entering the market (after all, traditional funds still think blockchain is a scam, and the primary market has not seen much investment), this portion of money could be from crypto veterans and traditional funds that are aware of ETFs manipulating the market. If the BTC ETF is approved, and mainstream institutions flow in $10 billion to $20 billion over the next year or two, how much could crypto rise? This analysis will be revisited in the year-end summary of 2024.

I believe there are several good themes related to regulatory compliance: 1. Stablecoins 2. Exchanges (Onchain/Offchain, especially for Perpetual) 3. Asset management. This part will not be elaborated further.

2.3 DePIN ------ How to use Crypto for distribution

Recently, I have seen many interesting projects, among which DePIN is the most intriguing. It can be summarized as XX + Crypto. XX is the main business, and Crypto is the distribution method. For example, Helium's main business is WiFi, and Crypto/token is the distribution method; Hivemapper's main business is users providing map data to suppliers in need, but using Crypto for distribution; Questlab's main business is helping AI companies with data needs to do data labeling, but using Crypto for distribution. Why use Crypto for distribution? I believe it is similar to the logic of trading/speculating; rather than directly telling users they can earn $100 a year, it is better to give them a hope of making money. Additionally, using tokens as a settlement method can be more convenient than cash, especially for cross-border settlements among a broader user base.
To successfully execute a DePIN project, I break it down into three fundamental questions.

The first question is, what problems exist in the real demand upstream? For example, in Helium and Helium mobile, the real demand is that communication data is expensive and the signal is poor; setting up 4G/5G base stations requires a lot of money, and there is no centralized large company in the U.S. that can do similar things, so we need decentralized expansion; data labeling is a real need for AI companies, requiring someone to help solve the data labeling problem; rendering is a real demand, thus needing idle GPUs for offline rendering; inference and training are also real AI needs, requiring idle computing power to serve AI companies.

The second question is, how to connect and syndicate these fragmented resources to the DePIN platform to serve B-end clients? Rapidly pushing to the C-end has actually been a challenging issue; in traditional web2 businesses like e-commerce, community group buying, ride-hailing, etc., the essence is burning VC money for growth. However, in Web3, it has turned into a Ponzi scheme for growth, with communities relying on Ponzi (essentially burning the money of later investors) to replace burning VC money for growth, which has already been a mature model in many cases like Axie/YGG/Stepn/Helium. Moreover, for reaching the downstream, the simpler the product, the easier it is to connect; for example, playing games online in GameFi, running in Stepn, data labeling, or installing a smart socket are all relatively simple tasks. However, promoting something that doesn't exist in daily life, like installing a signal box at home, would be relatively more challenging.

Regarding how to syndicate the downstream to meet upstream demand, some can be relatively simply solved using scheduling theory, such as offline rendering, data labeling, bandwidth crawling, etc.; but some complex upstream demands, like heterogeneous GPU scheduling for inference/training, are very difficult to achieve.

The third question is, is this a local or global business? I won't elaborate much on this; a global business can reach B and C faster, while a local business will take longer to reach, which reflects how many users and how much demand can ultimately be achieved, as well as how large the project can grow.

3. What to observe next year

3.1 GameFi√/SocialFi?

First, it is essential to understand that the market cap of Crypto and tokens serves as a significant emotional amplifier and a great marketing tool.

In 2022/2023, we saw excellent teams from both the East and West entering the gaming space, such as Funplus/Xterio, Matr1x in the East, and bigtime in the West. Coupled with the sudden release of the online gaming opinion draft on December 22, I believe this will (forcefully) help Eastern game entrepreneurs go global. This is a significant boon for Web3 games. We are looking forward to seeing whether we can witness another phenomenon-level game product from the East, similar to Axie/Stepn, in 2024.

We previously discussed that social products may not be suitable for web3 because social networks have already become very entrenched in web2, and there is no need to reshape social relationships. However, this year, http://Friend.tech provided a very good gameplay by trading friends' keys, which is essentially no different from issuing assets through IEO (both are just schemes). We still hold a relatively conservative attitude towards social aspects in web3.

3.2 L2 ------ Internal and external challenges

The narrative theme of infrastructure in 2022 was modular blockchain, with optimism surrounding the composability of execution, consensus, settlement, and DA. Moreover, from 2020 to 2022, the technical barriers for L2 were indeed very high, leading to high valuations for Arbitrum, OP, and several ZK projects. I remember in 2021, when analyzing L2, we believed that the development of L1 and the first-mover advantage of ecosystems were crucial, so we were optimistic about OP L2 in the next 3-5 years. However, due to technological iterations, we are now more optimistic about ZK L2 in the coming years.

However, the pace of technological iteration seems to have far exceeded our expectations; OP Stack can launch OP L2 with one click; current Rollup as a service companies can even launch ZK L2 with one click, making composability very high. In 2022, we could only name four ZK L2s, but now in 2023, there are at least over ten ZK L2s in the market, along with at least five RAAS companies. The competition among L2s in 2024 will be very fierce. Even Blur/Blast has shown VCs and retail investors that NFT marketplaces can not only attack OpenSea but can also attack other L2s.

Furthermore, the surviving EVM competitors each have their strengths, such as Tron focusing on payments, BSC on gaming, and Solana on DePIN. How L2s will emerge victorious in internal competition and how they will compete externally with EVM competitors will be a very brutal battle, possibly rivaling the battles of various factions, e-commerce wars, and large model wars.

It is no longer 2020/2021; the technical barriers for public chains have significantly lowered. In 2024, it will no longer be an environment dominated by public chains; leading DApps can freely choose top public chains, but top public chains will find it challenging to select leading DApps (unless they spend money). Currently, the ecological path validated by public chains is to leverage their strengths and take paths that others have never taken; they cannot be copycats; only by leveraging their strengths can they compete successfully through differentiation.

3.3 Bitcoin Ecosystem ------ Is it a value return or a bubble?

First, I strongly agree with a viewpoint from a senior in Singapore: a 1% overflow of Bitcoin funds can create a massive ecosystem, and due to the congestion of the Bitcoin network, the speed and effect of fund overflow will be even greater.

In 2023, we witnessed the frenzy of the Bitcoin ecosystem, which indeed followed the four-year path of the Ethereum ecosystem in just one year. However, can it truly create a unique ecosystem rather than just replicating Ethereum's old path (DeFi trifecta + oracles + meme issuance)? This still needs to be observed for institutions, while individuals can be more flexible.

This year, the market has focused on a rebound from the bottom. When the token2049 event ended in September, I felt the industry was nearing its end, especially after going through AI + crypto investments, it was hard to see any meaningful new stories. However, after October, the market warmed up, and the rise brought back confidence.

Upon reflection, this market has undergone too many iterations from 2022 to 2023. In the DeFi market, DEX has gradually transitioned from spot trading to derivatives, and institutions are increasingly accepting DeFi; in the gaming market, developers from major web2 companies have basically completed their developments and will start issuing in 2024; L2 has overcome many technical difficulties, and we can now launch OP and ZK L2 with one click; AI + Crypto has many market opportunities, such as data and computing power; social aspects have also seen the emergence of http://Friend.tech; and many developers have entered the Bitcoin ecosystem; Solana has been reborn, and DePIN is developing rapidly.

2024 may be even more exciting than the bull markets of 2020/2021. The next article will continue to update.