ArkStream Capital 2023 Outlook: Where the billion user on-chain apps will explode

ArkStream Capital 2023 Vision: Where a Billion on-chain Apps will Explode

Source: ArkStream Capital

In July 2018, Dr. Xiao Feng, vice chairman of Wanxiang Holdings, mentioned in a speech that "there may be 5 trillion dollar companies in the blockchain industry". At that time, the total market value of the entire crypto market was only more than 200 billion dollars, but after a long year of decline, the number rose to 100 billion. From the peak of $830 billion on January 7, 2018 to the lowest point of $100 billion on December 15, the whole crypto market fell 88%, and the distance from Dr. Xiao Feng said 5 trillion market value, a gap of 50 times. At that time, almost every Crypto participant was filled with despair and confusion. Most of them lost their way and did not know whether their chosen career had a future. Although Dapps on Ethereum were already taking shape at that time, developers were constantly thinking about how to make more transactions happen on the chain. But few could predict with certainty that two years later, in July 2020, the DeFi craze would ignite the Crypto summer, and Crypto's industry-wide narrative would shift from hard-to-perceive underlying infrastructure to apps that generate real value.

Dr. Xiao Feng's speech in 2018

In this cycle, the application layer and the protocol layer have exploded on a scale: Thanks to multiple DeFi protocols creating value, the debate between "fat protocol" and "fat app" has come into view. The public chain is no longer shackled in breaking through the "impossible triangle", but puts ecological development in the first place, and strategies such as improving developer ecology and establishing ecological fund to attract developers to migrate have become necessary for the development of bottom facilities; blue chip NFT, such as CryptoPunk and BAYC, have successfully come out of the circle, bringing Web3 into the streets of the world.

In November 2021, after BTC hit $69,000, the market value of the entire crypto market reached $3 trillion, less than double the gap of Dr. Xiao Feng's prediction of $5 trillion. According to centralised trading platforms such as Binance, the number of encrypted users worldwide has reached 100 million. Despite the protracted decline that began after November 2021, with the sector further unwinding, it is reasonable to believe that a bear market bottom has been reached and that 2023 will be an important juncture between the past and the next.

Rather than timing, what we should think about is, when the number of users increases by another 10 times, that is, when the number of encrypted users globally reaches 1 billion, and 15% of the human race starts to enter Web3, which track will produce trillion-level applications? How will these applications evolve in the next cycle? We're going to look at a number of tracks from DeFi, gaming, etc., to talk about how we're going to lay out in 2023.

Application or infrastructure?

In order to facilitate readers' understanding, we simply use dichotomy to divide the whole industry. All products that can directly interact with users are collectively referred to as applications, including DeFi protocol, games, wallets, trading platforms, etc. The parts that users cannot perceive during interaction but support Web3 operation are called infrastructure, including public chain. Node service provider, data index, developer tools, etc.

We believe that the next cycle will most likely see the explosion of the application layer, similar to the path of the Internet. At a time when physical devices and hardware were not widely available, most developers focused on building infrastructure because there were no applications available, or the infrastructure did not support large-scale applications, and when a large number of users had the prerequisites to flood the Internet, The giants of the industry became developers of monopolistic apps. After having a large number of users, these developers have the supreme power of "data" on the Internet, which in turn occupies the voice of infrastructure in the "cloud age". The same is true for the path of Web3. After several cycles of exploration, the discourse power of "application" has gradually increased. After the application has captured users, it has become a feasible path to build a public chain suitable for its own users. Binance building BSC and Polygon gaining infrastructure leadership through acquisitions are good examples. Developers have come to realize that the infrastructure is for the application, and that by owning the user, owning the traffic entry, you have the voice of Web3. So, the next cycle, even though the infrastructure is not yet ready to support a billion users, is the dawn of the "high ground" for app developers.

DeFi

After two cycles of exploration, DeFi's future exploration is likely to focus on two areas, one is how to attract the customers of the central financial institutions in the circle, and the other is how to attract the unbanked users outside the circle, i.e. the third world users. After Luna crash in 2022, three arrow thunderbolts, FTX thunderbolts, DCG and other institutions appeared serial stampede events, which made many users question Crypto, believing that this is a world without constraints and rules. Wall Street institutions that promoted the last round of bull market also became the main cause of the crash due to excessive leverage.

However, the data we can see is that the trading volume of DEX doubled rapidly in a few days after FTX thunderstorms. People's fear of centralized institutions turned into their trust in decentralized financial protocols. Therefore, it is not that there are no rules in this industry, but in the Crypto world, only code is the rule, code is the law. We don't have to trust any centralized organization, but rather the security of open source protocols and smart contracts. This is one of DeFi's narratives for the next round, which is to replace existing centralised financial institutions. In 2020, due to trade mining, liquidity mining and other incentives, DEX trading volume once accounted for 15% of CEX trading volume, but after two rounds of decline, there is no longer enough rich mining token incentives, but we see that DEX trading volume has recently recovered to around 15%. This is in line with the emerging technology curve, which is that more and more people are using DEX as a place for daily transactions, rather than CEX, after the bubble has subsided.

DEX and CEX trading volume share (spot) Source: The block

Of course, CEX still has the lion's share of the market, and DEX still has plenty of room to grow. Moreover, this is only the percentage of physical trading volume. If we put this figure into derivatives, we will find that the percentage is less than 2%. However, the trading volume of derivatives and the fees brought by derivatives account for the majority of the profits of many centralized trading platforms. To achieve the same derivative trading experience as CEX, the current decentralized derivative trading platform is far from enough. Although we see some excellent products like GMX, its response speed, high concurrent processing capacity, depth, convenience and so on are still far behind the experience brought by the centralized trading platform. This also means that most users will not choose DEX to trade derivatives such as futures and options at this stage. So this is what DeFi needs to address in the next cycle, and this is where a lot of growth is likely to occur, to grab the users of CEX that are currently in the circle. This requires expansion solutions such as L2, asset cross-chain solutions, account privacy protection, new liquidity solutions and many other areas of exploration.

Another DeFi development direction is how to develop in the low financialization of the third world countries, low barriers to entry to acquire users. Just as China bypassed the development of credit cards and directly introduced mobile payments, DeFi may also help many countries in the third world, Asia, Africa and Latin America, bypass the path of establishing bank accounts, using credit cards and third-party payment, and directly start using digital currency for daily payments. Now in some countries in Africa and South America, shops have begun to accept BTC payments, because even though BTC fluctuates a lot, the fiat currency in their countries is more volatile, and because there is no trustworthy bank, they do not have the habit of opening a bank to deposit money, not to mention the financialization caused by borrowing. But DeFi can help them build a new financial order where there is no centralised trust. In order to realize such a vision, we should not only rely on technological iterations to further lower the threshold, such as the development of AA wallet and smart contract wallet, how to establish a pure credit mechanism on the chain, but also consider how to localize and promote the problem, how to conduct user education, how to establish a localized community.

When DeFi develops into the next cycle, it may be difficult to realize the explosive growth of the above two scenarios by relying on a single agreement and liquidity plan. To a greater extent, it needs to rely on the development of multiple underlying infrastructure within the industry, which requires investors and developers to pay more attention to the construction of underlying infrastructure while paying attention to the solution of the agreement itself.

X to Earn

In 2021, Axie Infinity brings Paly to earn into everyone's vision. The combination of "classical" ERC721 solution, low-cost pet battle game, and Ponds' token economy design will have a huge impact. Once in several countries in Southeast Asia became a national game, so that originally with the crypto world may have nothing to do with the harvest of huge wealth here, the whole family, the old and the young, participate in the cause of gold farming. Earlier this year, StepN's launch pushed Earn's boundaries to "X," and thanks to its sophisticated numerical design and robust anti-cheating systems, millions of runners have joined the ranks.

Later, various X to Earn came in, but most of the projects were similar, but the "shoes" were changed into various kinds of NFT, or running was changed into eating, sleeping and other activities in life, essentially not out of the framework created by StepN. After StepN's collapse, there has been a lot of discussion about the token economy: What are the advantages and disadvantages of Pond's token economy design? How does the NFT reservoir change the economic model? How do tokens produced by multiple chains weigh conflicts of interest between new and old players? Can similar designs be added to any scenario that requires user motivation?

Pond's play has been with the coin circle for many years, and its definition can be large or small. We can trace the development of the coin circle over the years, and give some familiar examples. Many token economies are essentially Pond's, but before they crashed, you might have been attacked by their community's language if you had defined them as such; Correspondingly, after its collapse, what we should do is not to comprehensively deny it, but to review and reflect on its exploration in the historical development of token economy. Fcoin's failure was a relic of history, but the "transaction as mining" it created laid the foundation for the "liquidity mining" boom that followed DeFi Summer two years later.

So when we talk about X to Earn, we're not trying to define Pond's, but rather, how should the token economy be tied to user behavior in future Web3 applications? For decentralized applications or protocols, there are now three token schemes that are prevalent in the market for them to choose from:

(1) Governance tokens. Tokens are based on voting rights, or according to the holding of the vote directly, or pledged according to the time weighted vote. The cash holder cannot directly obtain the project income, but needs to cash out the ecological resources brought by the governance right, or trust in the future dividend expectation.

(2) dividend token. Also known as security tokens, project earnings are used for dividends or repurchases, which directly bring benefits to coin holders.

(3) Pledge tokens. Holding a token can increase future output, either based on the pledged share ratio, or based on the holding of other tokens (or NFT) within the ecosystem. We consider the X to earn model, which holds NFT and needs to be accompanied by in-app behavior to obtain token output, to be a variant of this model.

Unlike the previous cycle, with the exception of a few highly compliant projects, the majority of projects in this cycle have started to integrate multiple token types, rather than using a single functional token or a dual token system, i.e., governance tokens + dividend/pledge tokens. Compared to the first two types, pledged tokens place more emphasis on future output, which requires a more refined numerical design of supply and demand. The supply and demand of tokens directly affect the price of tokens. Pledged tokens will inevitably require greater demand due to their larger output. If governance rights and income distribution rights cannot stimulate a large number of token demands in the short term, and the original demand within the application is difficult to reach the expected volume, then a more Ponzi design with original tokens as incentives becomes the final choice. This is the reason why many X to earn their living have to choose Pond's model, and it is the burning question for the next cycle. Pond's key is whether fake demand can stimulate real demand, and whether it can make a soft landing in the face of lengthening recovery cycles and falling returns.

We think that X to Earn emphasizes X, not Earn. Earn can help projects with cold starts, early user outreach, and the "acquisition" part of the growth model. But instead of making Earn the only project, the project should quickly soft-land Pond's model once the cold start is complete, undermining the benefits of early adopters. Because "X" is what keeps the project running, the app itself should generate more user demand, and user "retention" should be based on user behavior within the app, not on getting more tokens. "Positive externality" is a term that has been mentioned by many developers recently, emphasizing how a project can attract external increments to ensure internal revenue capture, so that external demand is greater than internal supply. It is the consensus of the next cycle to lower the threshold of users and attract the traffic outside the circle, and it is also the only way to transform Web2 to Web3.

Pond's projects will still be around in the next cycle, and some of them are bound to hit the big time and have a huge market impact when they crash (just as the Luna crash did for South Korea's national economy). Here's what you need to remember:

(1) There is no such thing as too big to Fail

(2) can make you, often can also easily let you perish

Games and meta-universes

Axie Infinity led the Play to Earn a hit, but that's not all there is to it. According to the 2022 funding figures revealed by the Daily Planet, "GameFi has raised $5.189 billion through 2022," the largest share of all types of funding, not including the "meta-universe" category. Similarly, in the primary market project library list of our own fund, the number of games classified projects is 796, accounting for about 20% of the total project library, second only to DeFi.

Source: Daily Planet

On the one hand, it is due to the "meta-universe" investment fever caused by Facebook after changing its name to Meta. On the other hand, it is due to the organic combination of Axie Infinity in NFT and games. The bonus from both aspects makes investors flock to the game, and they are bound to invest in the next one hundred times the explosive market. However, speaking of "game" and "metaverse" together does not mean that they are the same thing. On the contrary, we think of them as very different. They may be "virtual people" to non-gamers, but we think games are more about competition or growing up, while "metacomes" are about the "mapping" of the real world into the virtual world. Most projects that call themselves "meta-universes" are technically nothing more than an MMORPG, and many that call themselves "Web3 games" are nothing more than old-fashioned games with NFT re-sales.

In our view, neither scenario is the end game. I would like to insert a story here, when FTX thundered, there was news that SBF had been playing Storybook Brawl, the card game they acquired by Alameda, but now if you look at the reviews of this game on Steam, it's all about SBF, Tell him not to add digital currency and all that dirty stuff to their favorite games. They just want to play the games. These views, published before the FTX explosion, are at odds with the accepted wisdom in the industry, because they are real gamers. These comments reflect that the reason why games make money is because they make people happy.

Whether it's a pay-to-earn online game or a competitive Moba or FPS, the original intention is to make people happy, and to leave the troubles of the world, rather than the torture of working during the day and mining gold at night. This is not to say that gold farming, or joining the Token economy is wrong, but the game first serves consumers, consumers can get happiness here, will be willing to spend, will bring "positive externality", second behind the token economy.

Web3 can improve things like data ownership for players, faster cold starts with tokens, and verification of equipment or item rarity with NFT, but these are not fundamental issues. The fundamental problem with games is always how to make them fun, and then add the Web3 stuff.

Going back to the original question, how will the game track develop over the next cycle? We believe that most of the triple-A games that were not played before, with Token economies, without detailed numerical design and without being fun, will die out in this bear market.

A game is always interesting because it's fun. The meta universe's emphasis on immersion and reality mapping, along with the Ponzi model and economic benefits of the NFT and Token economy, only complement the gameplay, and the "playability" of the game itself is the real hard power of a game. The next generation of Web3 games should be based on the original Web2 games that are fun enough to engage players and have positive cash flow, coupled with a lightweight Token model that uses the token as a dividend rather than a strong tie to user behavior. Compared with stocks, Token has stronger liquidity and can serve as recharge/behavioral incentive for game players. However, players and investors should be separated, so that players who like to immerse themselves in the virtual world can continue to have their "heroic dream", and investors who want to get financial returns do not have to force themselves to play games, but only need to make decisions. Just get the revenue. As for who the data belongs to, 90% of players don't care. If Blizzard pulls out of China, what's the use of giving all the data back to the players? It's just an urn for remembrance, and if given the choice, all the player wants is to continue playing the game.

The game industry is divided into three categories: infrastructure, publishing platform, and game ontology. While focusing on game ontology, we are also focusing on building game infrastructure. This category is closer to the concept of a "meta-universe", because rather than creating a game, they are focusing on creating a new way of interacting, allowing the mind to expand in dimensions where it doesn't exist. Over the past year, we've invested in infrastructure projects such as Fragcolor, which provides a native blockchain game development engine, Anima, which builds in-chain AR interactions, Matrix World and ChapterX, which provide multi-chain universe solutions, The metaverse project SecondLive has accumulated hundreds of thousands of users. Decentraland and Sandbox are just a few sandbox games taking the title of "meta-universe". Virtual lands alone are not the way to get most gamers to agree, but products that change the world are those that bring us novel experiences and imagination. We know that today's physical facilities and technology are far from the VR/AR world depicted in Ready Player One and Out of Control, but Web3 deserves a place in the new virtual world of the future.

In addition, the path of the publishing platform is much clearer and more predictable than the infrastructure and the games themselves. Whether it's through trial and error with a large number of small, low-cost games, or after building a hit and letting gamers settle into the launch platform, there are many examples in the history of Web2 like 4399 or Steam that have been replicated successfully. For Web3, it's all about adding a token economy to the payment model of platform users, or making data interconnect between games, and the nature of its success is not that different from that of the Web2 era. A game platform may only need one or two blockbuster games as an entry point, but with the addition of the concept of a "meta-universe" or Web3, the story becomes much larger and more exciting. It could be a public chain, a data center, or a hub across the meta-universe.

NFTFi

While DeFi and GameFi are still discussing the feasibility of the agreement and the token economy model, NFT has already opened a gap in the cultural market with PFP. The identity and cultural transmission brought by PFP has formed a huge influence around the world, and also formed a huge consensus in the circle. In the past two years, chatting with a PFP profile picture under the head of a blue chip like BAYC/Punk is like touching a Rolex in your hand while having coffee with someone. However, the PFP summer never came back, and the lack of liquidity in the NFT market was highlighted by the precipitous drop in Opensea trading volumes in June 2022. An AMM Dex-like solution to the long tail of NFT liquidity was urgently needed when it was discovered that the lack of liquidity in PFP heads other than blue chips during the down cycle would lead to rapid price declines. While the search for NFT liquidity solutions has continued throughout this cycle, Opensea's orderbook model has continued to dominate the market.

Opensea Monthly Transaction Volume ETH (Source: Dune)

However, Arkstream does not despair of NFT market, NFT has shown incomparable value on Social Money, BAYC and Punk avatar's social charm has not decreased with the market recession. Facebook, Twitter and Instagram, the mainstream social platforms of Web2, also embrace NFT and provide the landing scene of NFT. Over time, trading volumes in the NFT market have stabilised. Instead of falling off a cliff, the argument is that tens of thousands of dollars of Social Money is already beyond its proper value, and the market returns to the stage of conscience growth.

In 2022, whether Crypto or the NFT bear market, developers never stopped searching for NFT liquidity solutions.

For NFT, the biggest difference between NFTfi and DeFi is that the current mainstream NFT works, PFP, are both consistent and inconsistent. The problem of consistency can be easily solved by DeFi's AMM DEX and P2Pool Lending. However, the inconsistency of superposition can only be solved by the traditional order book trading platform and P2P Lending. This bifurcation between consistent and inconsistent treatment means that NFTfi does not grow as fast as DeFi did in its early days.

In terms of transaction liquidity, there are three types of solutions: Marketplace/AMM Protocol/Aggregator. The first Aggregator players were Gem and Genie, which were acquired by Opensea and Uniswap respectively. They are more like batch operation tools than Aggregators. Of course, there were not many Opensea challengers when Gem and Genie were popular. After Opensea challengers gradually appeared, Aggregator Blur emerged. Blur, however, is more of a drain on its own Marketplace. An Aggregator that doesn't want to be a Marketplace is not a good Aggregator.

Marketplace is very competitive. Marketplace from the List, can be divided into art and comprehensive NFT Marketplace two categories.

2022 has been a down year for art NFT, perhaps in response to Beeple's words, "To be honest, I definitely think it's a bubble." According to media sources, Beeple converted all ETH into US dollars after receiving US $53 million worth of ETH at the record-breaking NFT art auction in March 2021.

Beeple: Everydays -- The First 5000 Days

Monthly trading Volume of Art NFT (Source: Dune)

Sales of NFT art fell sharply throughout 2022. The decline is also steeper than that of NFT trading platforms such as Opensea, which is dominated by PFP.

SuperRare/Foundation/AsyncArt/KnownOrigin/Marketplace, these players in 22 years less we hear their voices.

This is not difficult to understand, NFT works of art high and few, poor liquidity. However, in the Internet era, Social media occupy most of people's time, and PFP has a good value of Social Money.

The integrated NFT market, led by Opensea (which is still mostly PFPS), is relatively healthy despite the NFT hype bull market. But Opensea also faces competition from challengers.

Blur offers a more professional trading experience. The Blur experience is really ahead of other NFT trading platforms when it comes to bulk operations, providing a much easier page operation, and licensing only requires one license as opposed to multiple licenses in other Marketplaces.

Rarible, the old Opensea challenger, has struggled in this race.

As a second-tier NFT market, X2Y2 has a very good data performance in the second-tier position, and has opened P2P lending mode. Relying on the advantages of the trading platform, the growth rate is very good.

LooksRare initially got a lot of attention from the market for deal mining, but when the bubble deflated, it was mediocre compared to other trading platforms.

The third type of liquidity solution, AMM Protocol, is currently the most well-known one, Sudoswap. Sudoswap solves the inconsistent liquidity problem through market pricing in the way of multiple pools, and then aggregates liquidity through the front end. However, in actual processing, liquidity is dispersed. It doesn't solve the liquidity problem very well.

The main players in the NFT lending market are P2P NFTfi, Arcade, x2y2; There is also a BendDAO for P2Pool mode.

NFTfi is currently the leading P2P model, and x2y2 is growing rapidly with the advantage of NFT Marketplace traffic.

We think peer-to-peer lending will continue to be squeezed by Marketplace.

BNPL (Buy now pay later) and lease, as an extension of lending, did not get development opportunities in the early stage of NFTfi market.

NFT Lending Transaction Volume (Source: Dune)

Due to the existence of inconsistency, the pricing of NFT has also become a problem. The mainstream schemes include peer pricing and AI pricing. Peer pricing has had the Upshot and Abacus. Upshot has since transitioned to an AI pricing scheme, while Abacus' so-called Spot adds more token economy gameplay to peer pricing. The header items for AI pricing are NFTbank and Upshot. In our opinion, the solution of peer pricing has its inherent defects. The demand for pricing mainly occurs in the lending scenario, while the P2P order Offer or actual occurrence is essentially a peer pricing, without additional external peer pricing. The P2Pool model deals only with consistency, without pricing. However, AI pricing also faces the problem of value capture. They are often presented as third-party services, and to capture more value, it is necessary to go one step further to the user side of the product.

Fragmentation was also a direction in which NFTfi had high hopes, but with the head project Fractional renamed Tessera, and the decline of NFTX, NFT20, and Unicly no longer being taken seriously by investors. The vast majority of NFT fragmentation schemes do not address the question of why fragmentation is taking place and what fragmentation does to liquidity. The fragmentation of NTFX and NFT20 does not offer much more liquidity than a direct NFT transaction like Sudoswap. The landing point of Unicly became the trading of fragmented tokens, rather than being satisfied with the trading of NFT first, which lost the original intention of an NFTfi product.

Arkstream sorted out more than 30 subdivisions of NFTfi, including options/futures in derivatives, etc., which did not get a good opportunity to develop in the early stage of the whole NFTfi, so it did not start all at once.

Looking at the NFTfi market as a whole, we can see that it is still in the very early stages, and the NFT liquidity solution is the current priority, the lowest building block of the entire NFTfi stack. We believe that Marketplace, AMM Protocol and Lending Protocol, which are at the bottom of liquidity, are still the most important segments for investors to pay attention to. As far as NFT liquidity is concerned, AMM Protocol does not provide a better solution for dealing with inconsistencies in the short term, so Marketplace will remain the main solution in the short term, but the processing of order flow will be more specialized and convenient.

wallet

When we talk about how apps explode, we tend to overestimate the learning capacity of our users, as when we assume that all Web3 users are using DeFi, CEX still accounts for over 80%. The user threshold is a major pain point that prevents users from moving from Web2 to Web3, and the wallet, as the largest user entry, plays an indispensable role in lowering the user threshold. In the early days, this pain point was not obvious because most Web3 users were attracted by the idea of "making money", and because of the huge wealth effect, the difficulties of remembering a bunch of private keys, ordering Gas before transferring money, or even understanding international macroeconomics were trivial for early adopters. But when the purpose of users becomes social, gaming, and other scenarios that are not strongly related to making money, every "hurdle" becomes an obstacle to dissuade users, sifting a large number of users through the hourglass of the growth model.

With the development of applications in recent years, the development of wallet has been divided into two branches, namely smart contract wallet and MPC wallet. Smart Contract started with Gnosis Safe, and all major public chains have similar schemes to manage multiple signings with smart contract. The MPC+TSS solution was originally developed by Fireblock for hosting wallets, but after Web3auth and Magic.link made it available as an SDK, many apps started using the solution to allow users to manage their wallets directly from their email accounts. But neither is the end game. Smart contract wallet gas is high and the threshold is higher, requiring users to have both an EOA wallet and manage smart contracts. The MPC+TSS solution is a compromise to Web2, and users don't have full control over the wallet. In the end, the development of wallet may still rely on the account abstraction scheme proposed by Vitalik. After the deployment of IP-4337 along with other functions such as Gas payment and social recovery, the user threshold will be reduced by a leapfrog.

Although the EOA wallet trend towards AA wallet is irreversible, other wallets cannot wait, the MPC wallet development is in full swing, the pattern may be formed before the EIP4337 land, now is the prime time to seize the market. For wallet, there are two approaches. One is to start from application, develop users in reverse, form an application-oriented ecology, and let users stay in the ecology. The other is to start from the B-side service, provide SDK, let more applications access the wallet system, rapidly develop their own customer base, and form network effects after the number of users is large enough to extract the value of the cluster. In the case of similar technology implementation, how to expand the user boundary through strong operation is the core competitiveness of the new wallet team.

The first path means that any user entrance can create its own wallet, so that users can deposit their data and funds in their own social network. Trading platform, games and social media can all become the entrance of users' "first wallet", provided that the product experience should be good enough, smooth and not become a burden to users. The second path requires the project team to have a strong BD ability, rapidly expand the influence and territory of the product, let more applications access, in order to build the ecology of wallet. This is similar to the ecological development of the public chain. Perhaps, the development of the wallet will eventually integrate with the public chain, because it can carry a larger narrative and further deposit users in their own ecology.

The essence of wallet is "private key management tool". As long as we agree that the difference between Web3 and Web2 is that users manage their own data and assets, then personal accounts relying on the public-private key system are the carrier of these data, and the wallet is the entrance to manage this carrier. The wallet is the application that everyone will use, but not everyone's original intention is to use the wallet, the wallet is an entry, but any entry will also access the wallet. Even if the user does not have access to the management of public and private keys, access to complex mnemonics, but as long as all this is built on the blockchain network, the core role of the wallet will never be replaced.

Data tool

With the rapid development of decentralized applications, the value of on-chain data is further reflected. Nansen and Dune Analyst have become daily tools used by many analysts, and over the past year we have seen the creation of a plethora of data products on the market, from on-chain data indexing to integrated Airdrop pickup and Mint calendars.

The essence of the tool is the exchange rate flow, which is divided into two steps. The first step is to occupy the market in the segmented field, and the second step is to rapidly expand to other fields and become the traffic gathering place. Bytedance's core competitive advantage is not Tiktok, but its recommendation algorithms and user traffic metrics, which allow them to replicate hundreds of similar products in niche markets. The same is true for data tools, and development teams need to think about what the core advantage is behind it, whether it's the power of data mining, or the breadth of collection of tags on the chain.

Footprint Network, which we invested in, focused on building DeFi's data analytics in the early days, but after dissecting market needs and strengths, they switched to GameFi and became the world's largest Web3 game data analytics tool. You can see real-time, comprehensive data on the game chain and monitor what you want to focus on in real time with one click, depending on your needs.

But the business model of data analytics tools has always been a more difficult problem to solve, as evidenced by the short-lived lifelines of a large number of data analytics tools. ToB or ToC, That "s a question. Once on-chain protocols are deployed, there is little room for change, but analysis tools do not need to iterate and pay a lot of server costs compared to the objects they analyze. Nansen fired the first shot at C-side charging with their high pricing model, which depended on their ability to help users make money from bad information. But when the bull market ended and the bear market came, everyone was losing money, and the "billing" losses were far greater than the user membership fees, and user activity dropped off a cliff. For products like Massari and Theblock, they integrate media and data analysis. Through data analysis ability, they have a say in the industry and create media influence.

They are more like the products of ToB. While constantly exporting industry reports, they seek more partners and resources for resource realization. Advertising is also a good business model, but it requires a large user base and a high frequency of visits. CoinMarketCap and Coingecko are good examples in this regard. In the data analysis tool circuit, we prefer to start small and beautiful products that may only solve a single need, but once that gap is filled, we can expand into other areas. DeFiLlama has been working hard on TVL for a year now, and it wouldn't be surprising if one of them saw the news that they're doing a public chain.

socialize

Social is a huge topic, and to discuss it, we need to first define what Web3 social is. Today's social network covers all aspects of life. Instant messaging for communicating with people, social media for expressing opinions, and video websites for showing everything in life are all social content. You can imagine all of this happening on the chain, but the current infrastructure obviously doesn't accommodate this, so if we just change the distribution of benefits and let existing Web2 social platforms issue tokens, will they be Web3 social?

We do not presuppose the product form of Web3 social, but only discuss from several aspects: data ownership, the volume of data on the chain, and the value generated by data. The progressive progression of these aspects means that social networking is moving from Web2 to Web3.

Data ownership is what defines whether social occurs on Web3. If Twitter issues digital currency (or uses DOGE) for tips, or lets advertisers pay for ads with digital currency. We can think of Twitter as a digital transformation, but it's not Web3 social. Because all content on Twitter is still stored on a centralized server, censors also have the power to block users' accounts without their permission.

So, if we have to define what Web3 is, we believe that social data should exist on the blockchain, and that users have absolute control over their account data. This is the part of the social infrastructure that the top teams in the industry are building, Nostr based on the Bitcoin Lightning network, Farcaster based on Ethereum, Lens Protocol based on Polygon, all of which are trying to reinvent the rules of data, Decentralize and resist censorship by building social protocols on mature blockchains. The content generated by these social protocols is blockchain based, while the ownership of the data and accounts belongs to the users themselves. On top of these protocols, the community has developed front ends to help users make better use of the protocols. We think this is the beginning of Web3 social.

After data ownership is established, the next step for Web3 social requires a large data building moat. We can look back on the development of bitcoin, "consensus" has been an important factor in its standing over the years, and is the biggest advantage of BTC over other forked coins of the same code.

After having the technical foundation, rapidly expand users, expand consensus, is the key of Web3 social. In this case, tokens may play an important role, either as a way to motivate users or to help apps build better business models. The front-end setup is also the key to gaining users. If you test product frontends built on Nostr or Lens Protocol, you'll find that they're pretty immature compared to the full-fledged Web2 products. This is a matter of time, because it is still in the stage of infrastructure construction. After the initial competitive pattern is revealed, the competition point to grab users will shift to the entry point. At that time, games, trading platforms and wallets will all become the entry point for social networking. App portals that are not compatible with other social protocols will be abandoned by users.

After having a large amount of data, how to mine the value generated by the data will be the most worth discussing topic in the post-Web3 era. The data value of Web2 is mainly reflected in accurate advertising push. It is difficult to predict what kind of value Web3 data will produce at present, but there is no doubt that it will bring several trillion level products.

Back to the original question, what is Web3 social? Today, we can only describe what Web3 social will bring us and what kind of characteristics, it is difficult to give a precise definition. But we do know that Web3 social is still in the infrastructure phase, and the success rate of investing in infrastructure is much higher than finding a needle in a haystack for a client product.

AI

ChatGPT's explosion brought the combination of AI and Crypto back into the conversation for a while. Most AI+Blockchain projects in the industry are focused on using AI to solve blockchain data privacy and security issues, rather than application-level products.

It is difficult to predict how AI and Crypto will combine in the future, but there are a number of potential use cases and applications currently being developed or discussed.

One area where AI and Crypto may combine is DeFi and financial trading. AI algorithms can be used to analyze market trends and make trades based on this information, potentially leading to more efficient and profitable trades. In addition, AI can be used to detect fraud in DeFi systems and help maintain the security of these decentralized networks.

Another potential use case for AI and Crypto is the creation of decentralized autonomous organizations (DAOs). Daos are organizations managed by computer programs encoded on a blockchain. AI can be used to optimize and manage these organizations, making decision-making and governance more efficient.

There have also been some interesting developments in the area of privacy and data security. AI algorithms are often trained on large amounts of data, which can include sensitive personal information. By using blockchain technology, this data can be secured to ensure that it is only used for its intended purpose. This is especially important in areas such as healthcare and finance, where privacy is crucial.

There are already several projects exploring the integration of AI and Crypto. Ocean Protocol, for example, is a blockchain-driven data exchange platform designed to provide a secure and trusted environment for the exchange of valuable data and to support the development and deployment of AI algorithms.

The growth of AI technology and the popularity of Crypto are also driving the growth of smart contracts. AI algorithms can be used to develop and enforce these smart contracts to ensure they operate safely and reliably.

In conclusion, the integration of AI and Crypto could lead to a range of new applications, as well as more efficient, secure and trusted financial systems. As these technologies continue to develop and evolve, there will be more interesting applications and developments.

If AI are trading with each other, will they be trading in fiat or digital currency? I asked ChatGPT this question and he replied that quantifying the price of access to data using tokens is a better solution than traditional currencies.

This means that the combination of digital currency and AI may be more pure, simply serving as a unit of account for future AI interactions to help AIGC products gain users.

conclusion

Looking across the tracks, we look at scenarios where the next cycle could produce a massive user explosion. Going back to the original discussion, in the next bull market, apps may no longer be part of the public ecosystem, but rather the big apps will form their own niche. Unlike Web2, Web3's emphasis on interoperability and composibility will really come into play. We are looking forward to a world where users have their own data, can switch between apps at very low cost, can freely socialize and play without having to worry about prohibitive barriers and fees, and don't have to worry about the security of their assets. Such Web3 is bound to be able to carry more good wishes of people, and people will also spend more time on the Internet, in the meta-universe, to realize more of their ideas in this unreal world. This is when Web3 explodes its incomparable value.

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