HashKey Capital 2024 Web3 Investment Track Full Analysis

Written by: Arnav Pagidyala, Harper Li, Jack Ratkovich, Jeffrey Hu, Junbo Yang, Stanley Wu, Sunny He, Xiao Xiao, Yerui Zhang, Zeqing Guo

As one of the most active crypto VCs, HashKey Capital regularly analyzes and organizes various tracks in Web3. As we approach the New Year 2024, we are open-sourcing our internal track assessments and understandings as our contribution to the industry.

ZK

The ZK track expanded from previous scenarios like scaling and cross-chain in 2023 to more application scenarios, further differentiating into different tracks.

zkEVM

In the zkEVM space, there have been some advancements in type0, type1, type2, and other aspects. In terms of categories, type0 is completely equivalent to Ethereum but still faces technical challenges such as block speed, state publication, and verification due to an overemphasis on equivalence; type1 has made improvements and compromises on the EVM basis, currently standing out in overall application experience and opcode compatibility; type2 and others have launched mainnets earlier, developing ecosystems for their corresponding application types.

Currently, specific project situations vary and need to be analyzed based on their development paths, such as Polygon's CDK and StarkNet's full-chain games.

zkVM

The main technical route in the zkVM field is zkWASM, which has stronger architectural scalability, thus focusing on high-performance DEX collaborations with exchanges. Major projects in the zkWASM space include Delphinus Labs, ICME, wasm0, etc.

In the RISC V architecture direction, RISC0 is exploring, which is more friendly to front-end languages and back-end hardware compared to WASM, but potential issues lie in efficiency and proof times. Current application scenarios are also expanding, such as Reth, which simulates the Ethereum execution environment, FHE runtime environments, and Bitcoin Rollup.

Additionally, there is zkLLVM. Based on this technology, Type-1 zkEVM has recently been launched, utilizing zkLLVM to 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, while FPGAs resemble prototype validation. ASIC scenarios may gradually differentiate, such as special-purpose ASIC chips and new FHE demands.

Moreover, Prover DAOs have significantly increased, with computing power being a core competitive advantage, so the Prover DAOs formed by mining teams will have a noticeable competitive edge.

ZK Middleware

ZK middleware can include zkBridge, zkPoS, ZK Coprocessor, zkML, zk trusted computing, and other verifiable computing scenarios. Among them, the ZK Coprocessor scenarios are relatively clear, with most projects having reached the testnet stage; the zkML track remains quite popular, with certain differentiation in project progress and competition. Additionally, a new track for ZK proof sharing has emerged (jointly sending proofs to a specific network and distributing income after batch processing).

MEV

• Focus on the early stages of the transaction supply chain, specifically the intent stage.
• The next generation of DEX designs and infrastructure aimed at solving LVR and improving LP will increase, attracting more capital.
• Private auctions/trading pools, if they can operate effectively, will greatly improve the transaction supply chain. The developments in FHE, MPC, and ZKPs are worth watching.
• Currently, most systems use centralized relays, permissioned solvers, and trusted builders. However, we believe the ultimate goal of the track will be permissionless to achieve the most competitive market.
• The MEV supply chain will see changes in APS, document execution, PEPC, etc.

OFA

Order Flow Auctions (OFA) began to rise in 2023. High-value transactions will no longer flow to public trading pools but to OFA, rewarding users for the value they create. From RFQ auctions to block space aggregators, various OFA implementation schemes can meet diverse needs in price discovery and execution quality. Looking ahead, it is estimated that more ETH transactions will be conducted through OFA.

Blockbuilder

As we see through relayscan, the builder market is concentrated among a few builders, some of which are high-frequency trading firms serving their own trading needs. In the future, as the arbitrage volume between CEX/DEX decreases, the advantages of high-frequency trading may also diminish.

Relay

The relay market faces two fundamental issues: (1) market concentration among a few companies, namely BloXroute and Flashbots; (2) lack of incentive mechanisms for relays.

In the future, we look forward to seeing 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, the AA wallet track has reached a similar landscape as the overall wallet track, making it increasingly difficult to gain traffic solely through functionality; instead, the wallet factory aspect is worth paying attention to.

In the modular services aspect, Bundler and Paymaster are essential functions that these foundational providers must offer, and in fact, these two services have become standard offerings.

Current trends in the track include:

• Most infrastructure is already in place, and development is relatively stable. From the overall data of the track, it has entered a rapid growth trajectory, with user wallet numbers starting to increase since June, and by November, there have been over 6 million UserOps, with about 200K MAU.
• The AA development in L2 is better than in L1, and EF is considering providing native support for L2.
• The issue of DApps not supporting AA remains serious, and there are also implementation issues regarding cross-chain and cross-Rollup accounts, necessitating new solutions.
• Private mempool will converge with MEV and intent, optimizing user experience.

Intents

Intents have rapidly developed this year after gaining attention, despite facing issues such as solver malfeasance and trust in order flow, but there are feasible solutions for these problems.

For intents to develop better, they must consider order flow and user acquisition issues, so from an architectural and business perspective, intents are well-suited to integrate with MEV and AA architectures, where Builders and Searchers are the most suitable roles for matching and solving.

Telegram Bots are likely to evolve towards intents, as their advantages in order flow give them significant bargaining power over builders and SUAVE, potentially exceeding that of larger wallets.

DA

The overall number of participants in the DA track is limited, mainly including Celestia, Eigenlayer, and Avail, with varying project progress. The head effect is evident, leaving little opportunity for mid and tail projects. DA track projects mainly examine security (including data integrity, network consensus, etc.), customizability and interoperability, and cost. With the launch of Celestia and rising prices, the overall valuation level of the DA track has increased. However, DA is essentially a B2B business, and the revenue of DA project parties is closely related to the quantity and quality of ecosystem projects.

From the client's perspective, publishing DA on Ethereum is the safest and most expensive solution. After protodanksharding, Ethereum's fees have significantly decreased, so major Rollup project parties will still choose Ethereum as the DA layer. Currently, clients of DA projects other than EigenDA are mainly Cosmos ecosystem projects, RaaS projects, etc.; EigenDA has a unique positioning, being related to Ethereum but not directly, which may attract some clients from the middle ground. Additionally, there are some earlier DA projects and DA solutions for specific scenarios, such as Bitcoin DA, which may capture a good market share in niche areas.

Rollup Frameworks & RaaS

The rollup market is basically saturated and awaits new developments. Currently, there are at least 30 VC-supported RaaS projects and infrastructure providers entering the market. It is essential to understand which use cases have succeeded on RaaS and which interoperability solutions can be effective.

Some L2/L3 frameworks (like OP Stacks) have already received significant public goods funding and developer adoption.

Certain specific applications, such as DePIN, may utilize Ethereum rollups through customized execution environments.

Additionally, there are many new technologies related to rollups, such as Risc0 Zeth/other projects that can change the way rollup verification states are handled without relying on validators or sync committees; when used with primitives like ZKP and MPC, FHE rollups can provide fully generic privacy DeFi, etc.

Cosmos

Cosmos Hub will continue to strengthen its position in the ecosystem from various aspects in the future, such as allowing a portion of validators to provide cross-chain shared security (ICS) more flexibly without requiring all Cosmos Hub validators to join, which can reduce pressure on validators and facilitate promotion; on the other hand, Cosmos Hub plans to enable multi-hop IBC to enhance user experience; in terms of protocol implementation, it plans to add Megablocks and Atomic IBC functionalities to provide atomic cross-chain transactions, potentially forming a unified MEV market similar to Ethereum's shared sequencer, SUAVE, etc.

In the Cosmos ecosystem, the application chain development route has recently been influenced to some extent by L2 and other development frameworks, leading to a decrease in the number of new projects. However, due to its highly customizable underlying framework and strong resilience, it can evolve with mainstream narratives to find corresponding public chain targets that have undergone customized modifications.

Security

Projects in the security track have made progress at various levels, with products including tools and protocols across different layers, such as on-chain detection and interception, on-chain tracking tools, manual auditing and bounty services, development environment tools, and various technical methodologies (e.g., fuzz testing).

Each tool is better suited for detecting specific types of vulnerabilities and has specific methods for checking vulnerabilities in smart contracts (static analysis, symbolic execution, fuzz testing, etc.), but the combination of tools still struggles to replace a complete audit.

In addition to the different positions mentioned above, dimensions for examining projects can also include: maintenance and update speed, vulnerability database size, carrier, actual needs of partners, etc.

AI

The current integration directions of Crypto and AI mainly include underlying computing power infrastructure, training based on specific data sources, chat tools, and data labeling platforms.

Various projects in the underlying computing power infrastructure and computing power network fields have innovations at different points, but they are generally quite early and need to consider sustainable business expansion paths beyond creating different types of agents.

Data labeling platforms transform traditional manual labeling businesses into web3 forms, where the ability to acquire orders is crucial. Meanwhile, due to the low barrier to entry for data labeling, it will be easily replaced by AI in the future, necessitating better strategies to acquire more orders around high-value, high-barrier data.

Additionally, many new projects combining AI are focused on consumer-facing chat tools.

As a Crypto fund, we will pay more attention to ZKML, projects with data advantages in crypto verticals, or consumer-facing products closely integrated with AI, rather than foundational infrastructures like large language models that we are not proficient in.

DeFi

One change in 2023 may be that many investors require actual yield products, preferably yields from LSDfi or RWA, rather than yield based on emissions. Meanwhile, as centralized exchanges face significant regulatory pressure and assets need to seek liquidity, DEXs have immense opportunities, especially with the potential for high-performance applications brought by L2 launches, making L2 DEX opportunities worth focusing on.

On the other hand, projects enabling non-crypto-native users (including institutions) to access Web3 yields also have tremendous opportunities. Those that can abstract on-chain elements and provide a secure environment for non-crypto-native users will attract significant capital.

Specifically, according to Messari's report, perpetual DEXs, including well-known projects like dYdX, GMX, Drift, and Jupiter, account for the highest proportion of fees generated across various sub-tracks.

Liquid staking has continued to grow in 2023. Among all ETH, nearly 22% of ETH is staked, with Lido holding about 32% of the ETH staking market share (as of the time of writing). Liquid staking tokens remain the largest DeFi track, with a TVL of $20 billion.

Gaming & Entertainment

Studio

Studio-type projects vary in characteristics and focus points based on their categories, as shown in the table below:

The overall gaming track can be simply summarized into the above categories, with overall game quality and team professionalism significantly improved compared to the previous cycle. We continue to expect studios to enter web3, possessing mature development and operational product experience, and continuously seeking game producers + KOLs who are sensitive to crypto and the community, with strong learning abilities. In Web3, due to the historical shortness of blockchain games, there are not many mature experiences to draw from, so we will place more emphasis on whether the team's ideas and thoughts align with web3, as well as their learning speed, rather than their extensive web3 experience.

We will continue to focus on UGC, as current web2 UGC faces centralization issues that cannot be resolved. UGC should not only provide tools for users to create content but also offer a completely transparent reward mechanism and freedom of asset trading, with decentralization being a good solution to these problems, providing additional value. We are optimistic about teams with web2 creator resources that can attract these creators to web3 UGC platforms through transparency and higher returns.

Game UA

Projects in the game UA category focus on establishing user profiles, integrating on-chain, off-chain, and social dimensions, divided into customer acquisition (Carv) and operational strategy (Helika). However, all customer acquisition platforms often face retention challenges. Nevertheless, it is undeniable that player data is valuable, and this value increases with the growth of user numbers. If we are optimistic about applications leading to mass adoption, game data analysis can capture some of that value.

Extending to game publishing platforms, those that relied on infrastructure and tools as core products have gradually lost competitiveness in the last cycle. Currently, the success of publishing businesses still relies on core game products that can bring in a large number of users.

User/Fan Engagement

Projects mainly involve the entertainment, sports events, and film-related industries, which can be broadly divided into two forms based on cooperation with IP parties: direct operation by IP parties and IP licensing cooperation. The IP cooperation form places less operational pressure on the platform, but its effectiveness depends on the resources provided by the IP party. Direct operation by IP parties tends to focus more on operations but can better connect IP events/content with end products, and can also grant users more ancillary rights through NFTs, potentially enhancing fan incentives and feedback. Additionally, through tracking several projects, we have found that platforms with a certain community foundation (like Karate Combat) that transition existing users towards IP fans often succeed more easily than starting from scratch with a fan engagement model based entirely on IP. We will focus on targets with high IP value, overlapping user/audience/fan profiles with gaming/betting, and more direct cooperation with IP.

Institutional Service

The institutional service track can be mainly 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, custody, etc.
• Banking/Payments: including payment processors/deposits and withdrawals, card issuance, banking-related services, etc.
• Other Services: including trading technology providers, etc.

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 building compliance frameworks.
• The responsibilities of various service providers are becoming increasingly clear, with each participant in the track focusing on their core responsibilities, balancing and supervising each other in niche areas, which is conducive to more honest and efficient market operations.
• The market share of PB service companies is expected to gradually increase, and the fields they provide services in are still blank in crypto but are mature in traditional sectors (ECNs, fully regulated clearing houses, cross-margin capabilities) and deserve continued attention.
• During this window for ETF applications, crypto-native service companies will face pressure from traditional financial companies, and the demand for compliant products will further increase, reshaping the market landscape.
• Europe is a hotspot for the development of the institutional service track, and emerging markets like South America also have certain potential.

Bitcoin

Although Bitcoin has recently gained attention due to inscriptions, the Bitcoin chain does not share a global state, which is quite different from Ethereum's entire approach (state, accounts, computation model). Therefore, in the medium to long term, the construction of Bitcoin's infrastructure and applications needs to adopt a different approach.

On this basis, it is worth paying attention to Taproot Assets, Rollup, Lightning Network, etc.; additionally, new technical routes like Statechain are also worth tracking.

Sidechains

Sidechain technologies, including Stacks, have long occupied the mainstream narrative of Bitcoin's second-layer networks due to their lighter technical burden (allowing for higher programmability directly off-chain) and the potential for good ecological effects. However, they mainly rely on cross-chain and anchoring with the main chain, which may attract more traffic and attention from other new technical routes.

Layer2

Many so-called Bitcoin Layer2 projects still resemble sidechains from a core technical principle perspective but have constructed a complete framework for execution, settlement, verification/challenge, and DA based on Ethereum's technical model. The differences among current Bitcoin Layer2 projects mainly lie in the different technology stacks chosen at various levels, such as execution layers using Cosmos SDK, OP Stack, Polygon zkEVM, Taiko, etc.; some third-party projects are already implementing DA layers, while others are self-implemented; additionally, there is generally a layer for "account abstraction" or multi-chain wallet integration to support both Ethereum and Bitcoin address formats for user convenience.

Client-side Validation

Client-side validation technologies, including RGB and Taproot Assets, can achieve asset issuance and trading functions while minimizing on-chain footprints, which is worth continued attention.

Lightning Network

Lightning Labs plans to launch stablecoins and other assets on Taproot Assets next year. Additionally, LSPs (Liquidity Service Providers) that can promote native asset yield products are also worth looking forward to.

BRC20 Class

BRC20 assets heavily rely on specific infrastructures, such as indexers, making it important to pay attention to this infrastructure and new asset types like ARC20, while also being cautious of the technical implementation risks involved.

DLC

Although DLC was proposed relatively early, it faced challenges in promotion due to low demand. With the subsequent large-scale expansion of ecosystem construction, the application of DLC technology may become more widespread, especially after collaborating with some oracles. However, it is essential to be aware of the centralization risks introduced during some DLC implementations.

DePIN

DePIN is a track that can easily gain traction in a bull market. Similar to gaming, DePIN is also a track that can easily convert traditional users, thus attracting significant industry attention. DePIN has several key elements: 1) decentralization, along with gameplay and mechanisms, which can be said to be the lifeblood of DePIN projects; investment in DePIN projects needs to first consider the mechanisms. 2) Timing; a good mechanism needs to align with a good timing. Projects launched early in a bull market will find it easier to acquire users, so teams need to be sensitive to the web3 market. 3) Industry fundamentals; the type of hardware chosen by project parties and the characteristics of the target users can determine the project's success or failure. Below is a classification based on hardware types:

Focus on toC scenarios and markets where similar hardware has not yet become widespread, which may lead to revolutionary changes: For hardware that is frequently used in toC (like wearable devices), web3's gameplay and mechanisms provide project parties with better and more efficient crowdfunding channels, lowering barriers for both users and merchants. In the world of DePIN, due to clear token incentives, users will have stronger motivation to purchase hardware (quickly recouping costs), and merchants can even pre-sell before production; with flexible cash flow, merchants can then focus on fundamentals, such as enriching the software ecosystem, linking with other hardware, and empowering tokens within the ecosystem. Especially in underdeveloped areas, without DePIN, certain hardware may never be purchased, but early participation in mining may lead to widespread real hardware adoption.

Cautiously view improvement-type hardware: For toC placement-type or low-frequency usage hardware (like routers) that have essential needs, with a large user base and ownership, DePIN can be an opportunity to improve experiences. Theoretically, DePIN can redistribute resources and demands between suppliers and users, achieving cost and revenue redistribution, forming a more reasonable unit economic benefit, making services cheaper for users. However, challenges exist: 1) whether it can technically achieve decentralization that surpasses centralized solutions, as many decentralized computing or storage solutions can be more expensive and less efficient than centralized ones; 2) whether it commercially infringes on the interests of centralized giants, as essential needs and large ownership mean many big companies are involved, with years of user, brand, and capital accumulation. If DePIN solutions cannot achieve revolutionary breakthroughs in fundamentals or unite forces that surpass the influence of major brands, it will be challenging to compete with web2 counterparts.

Observe specific mining machine directions: For other low-frequency usage hardware, which may be optional in daily life, or specifically purchased directional mining machines, DePIN may bring short-term returns but may not necessarily create user stickiness. It is possible that DePIN could cultivate new user habits, but there is a degree of randomness, making it difficult to predict; we will analyze specific projects on a case-by-case basis.