Disruption or bubble? Cryptocurrency leads the new wave of gold mining

One of the highlights of ETHDenver 2024 is watching attendees from different camps engage in heated debates on a single topic.

In the debate, one camp holds an aggressive and risk-taking mentality, predicting that the entire industry is about to enter a super cycle, while the other camp struggles to find fundamental support to understand the current frenzy of market sentiment.

In the short term, I think both sides may have a point. Although the current public/private market sentiment may have deviated from fundamentals, the crypto market still has the potential for significant and sustained gains.

But upon closer inspection, this cryptocurrency bull run may be different from previous ones.

Although previous bull markets have stimulated user growth, this growth is more like the market volatility effect amplified by leverage rather than real market acceptance.

Today, the wave of liquidity that has driven market volatility is about to give way to a permanent structural shift that benefits three major sectors:

1. Dramatic changes in the macro environment drive the correlation between global markets and crypto markets

2. Decentralized infrastructure & middleware are gradually approaching Web2 level

3. Open source artificial intelligence based on blockchain

Macro Environment and Cryptocurrency Mainnet

The recent boom in public and private equity markets, driven by the AI ​​craze and economic optimism, masks several ongoing long-term structural changes. In fact, the current global landscape is evolving in a very different direction from before the pandemic, with features of fragmentation and cross-border competition.

These new dynamics will pose a major challenge to the existing mainstream forces, while also providing a golden opportunity for cryptocurrencies to achieve global application. The first decade of cryptocurrency can be seen as an extraordinary test network phase, marked by grassroots community development, enthusiastic peaks, and difficult valleys. After more than a decade of development, cryptocurrency is now ready to become the main network of a global interoperable network. In an era of urgent need for economic exchange and technological innovation, it will become a neutral platform that accommodates various economic activities and technological innovations.

Why?

These long-term structural changes come at an opportune time for cryptocurrencies, acting like a strong tailwind for the market.

The underlying architecture that has supported global trade for the past two decades is undergoing a real structural shift, a process accelerated by the breakdown of international relations. In 2023, the pace of restructuring global supply chains and trade channels has clearly accelerated and has become a core issue of concern to both businesses and governments.

The trend of enterprise repatriation and the differentiation of trade pattern

Meanwhile, elections are approaching in countries and regions that are home to more than half of the world’s population and nearly 60% of global gross domestic product (GDP). And with several major military conflicts playing out in real time, trade protectionism is a major focus.

Also closely related to the crypto industry is the evolution of international competition. Competition between countries is no longer limited to traditional military means, but extends to finance, technology and other fields.

For example, the United States imposed international financial sanctions on Russia in response to its military intervention in Ukraine, while OPEC and Russia responded by using energy resources.

In addition, with the rise of technological nationalism, countries have adopted subsidies and sanctions to promote the development of their own semiconductors and other key industries.

These factors have led to the fragmentation of global trade channels and intensified the formation of trade barriers. The profit margins of developed countries are under pressure, while low- and middle-income countries, where nearly 40% of the world's population lives, face even more severe survival challenges.

For individuals in low- and middle-income countries, cryptocurrency has become a tool for solving daily economic problems, and the importance of this tool has become increasingly prominent as these countries face systemic challenges. The relevant data also supports this point: when geopolitical tensions increase, the adoption rate of cryptocurrency at the grassroots level has not only not declined, but has accelerated.

Likewise, for private companies, the confluence of these factors has significantly increased operating costs and limited their access to new consumer markets, all at a time when capital is no longer free.

The trade wars and tariff barriers of the past few years have already had negative impacts on businesses and the domestic economy, and these negative impacts are likely to intensify as businesses adjust to new trade realities.

Therefore, companies and individuals need to make decisions urgently:

Will we struggle in an increasingly fragmented economy and market, or embrace a decentralized future based on modern technology and built on permissionless markets?

This intersection reminds me of an interesting historical analogy:

In the 15th century, Constantinople fell to the Ottoman Empire, and the new rulers took over the geographical hub that connected the East and West trade of the "Silk Road". However, the Ottoman Empire then took measures to restrict the land trade routes that had flourished for centuries. This move forced European countries to turn to the sea to seek new trade routes, thus ushering in the "Age of Exploration" that shaped the modern world.

This time, blockchain will become a gathering place for wealth and risks in the new world, waiting for those explorers who dare to set sail.

Cryptocurrency moves towards enterprise-level applications

In addition to the above arguments, we also need to pay attention to another important aspect: cryptocurrencies have always been a testing ground for large companies to explore new technologies.

However, given the various factors described in this article, traditional companies' exploration of cryptocurrencies is shifting from the research and development stage to the production application stage.

• Enterprises will accelerate their exploration of digital assets and on-chain ecosystems, viewing them as a key means of opening up new markets. Blockchain application projects that were once seen as ostentatious are now increasingly becoming important missions for the survival and development of enterprises.

• Capital allocators will increase crypto-native deployment and participation to protect against the "beta" exposure to global risk and uncertainty. In the old world, there will be few safe havens left to avoid risk.

• Systemic challenges in different regions (inflation, capital controls, cold/hot wars, etc.) will further increase the relevance and demand for digital assets. Permissionless blockchain infrastructure will emerge from grassroots communities and eventually go global.

To be sure, economic and geopolitical challenges have been important factors driving user adoption of cryptocurrencies, especially in developing markets.

However, the scale and scope of the challenges that the world will need to address in the coming years also provide a once-in-a-lifetime opportunity for cryptocurrencies to become the “de facto standard” in the field of free trade and culture.

Institutional capital inflows

The key to realizing the above vision is to introduce institutions to participate in on-chain funding activities.

The approval of a spot Bitcoin ETF marked an important turning point for the space, and Ethereum looks set to usher in a similar situation.

To date, Bitcoin ETFs have attracted more than US$7.5 billion in net inflows, with the first-month fundraising of related products launched by BlackRock and Fidelity setting a record for all ETFs in the past 30 years.

This incredibly strong momentum will eventually enable large institutions to join the on-chain economy, alongside over 52 million Americans and 500 million other users around the world.

Major shifts at the macro level are like the spark that ignites the golden age of cryptocurrency, and the inflow of institutional funds will serve as fuel.

Middleware and infrastructure upgrades drive growth

The external environment is favorable. Are we ready to embrace the opportunities?

I believe the answer is yes.

Following the 2022 crash that caused a large number of speculators to flee in panic, the crypto-native community conducted deep reflection, examining the excesses and shortcomings that led to the formation of the bubble.

As capital and talent coalesce around the concept of a “total system upgrade,” tremendous progress is being made at all levels of the stack, laying the foundation for the coming large-scale adoption cycle.

The flow of private funds throughout the year also reflects this trend. At the beginning of the year, financial infrastructure accounted for the largest share of financing, followed by wallets, and at the end of the year, the former dominated again, with L2/interoperability projects ranking second.

What’s particularly striking in all of this is that the flywheel effect between infrastructure and applications has begun to take effect, with more focus than ever before.

The growing demand from crypto natives is driving targeted and focused improvements to the technology stack, which in turn are giving rise to new use cases and application scenarios.

Excellent UI/UX promotes the popularization of encryption

In the first quarter of 2023, the ERC-4337 standard was released, aiming to transform external ownership accounts (EOAs) into smart contract wallets to achieve customizability, better private key recovery mechanisms, and a more simplified user experience.

Even more impactful, teams like Privy * are streamlining the user onboarding process with embedded wallets, both minimizing user friction and enabling developers to design more contextual experiences.

Privy helped Friend.Tech quickly acquire 100,000 addresses in just a few weeks, achieving explosive early user growth. Since then, Privy has continued to support user registration for platforms such as OpenSea , Zora , and Blackbird , and its services have covered more than 2 million users in more than 150 countries around the world in the past 13 months.

Meanwhile, the launch of Frames by Farcaster * – a new primitive that allows users to embed interactive experiences directly into Casts – is having a transformative impact and has already significantly stimulated platform activity.

Farcaster has over 4 million Casts and over 8 million interactions, which may indicate that crypto-native consumer applications are approaching a critical mass and are ready to take off.

The emerging design space under the modular wave is getting bigger and better

Ethereum was originally designed to break through the limitations of Bitcoin. Now, a new generation of projects are targeting Ethereum’s own architectural flaws, setting off a wave of modularization.

Alternative L1s and sidechains have emerged in previous cycles, but none have been able to shake the Ethereum mainnet’s dominance in terms of users, total locked value (TVL), developers, and activity.

This situation has changed with the rise of Roll- ups such as Arbitrum and Optimism . These projects have achieved higher throughput and lower fees by moving computing tasks off the Ethereum chain.

While these emerging L2s are already comparable in scale to Ethereum itself, and in some cases surpassing it, blockchain application developers are still looking to further optimize the L1 stack, with even greater ambitions.

The reason is that, although the number of daily active users on L2 has increased 8 times in the past year, most of the operations actually performed by users are not much different from historical L1 activities. Therefore, the industry has gradually reached a consensus: simply moving transactions to a cheaper execution environment is not enough to achieve a truly novel on-chain experience.

In fact, we need to rebuild the architecture of the underlying components of the blockchain from various aspects, from data availability (DA) to state access bottlenecks and parallel execution.

Independent data availability (DA) layers are being brought to market with the goal of scaling to levels comparable to Web2 performance (e.g. EigenDA, Celestia , Avail ). These DA layers will be used in conjunction with upgraded virtual machines, some of which are based on the EVM, while others use alternative engines such as Move (Move Labs*) or the Solana virtual machine ( Eclipse ). Some of these projects are building L2s (MegaETH) that are only used for optimized execution, while others are starting a new L1 from scratch ( Monad ).

At the same time, EigenLayer provides a shared security layer through re-staking, enabling a new generation of projects to launch in a way that minimizes the need to launch native liquidity, thereby reducing the need to deviate from the core security model of Ethereum itself.

All of this means that the maturity and performance of the underlying infrastructure, tooling, and design options available to Web3 builders are approaching peak speed at an unprecedented rate.

The values ​​of cryptocurrency and the upgrades of infrastructure, tools, and middleware reinforce each other, and also lead us to pay attention to a positive signal: developers are flowing into the encryption field.

Developing on the blockchain should not only be a more meaningful endeavor, but also a more technically superior endeavor, empowering developers to design the future of the open Internet.

Even in a difficult market environment, the high retention rate of existing developers and the influx of new developers are strong evidence that the efforts made by the blockchain field to attract and cultivate developers have been effective.

Open Source Artificial Intelligence and Crypto Track

Finally, we firmly believe that the convergence of cryptocurrency and artificial intelligence—two technologies that represent paradigm shifts in their own right—will be one of the most transformative moments in modern history.

After years of stress testing, the blockchain track has successfully designed a permissionless system suitable for the digital age, especially the era of generative artificial intelligence. The toolkit of cryptocurrency can solve a series of related problems, such as resource and liquidity coordination, asset ownership, data provenance, proof, etc. Crucially, the maturity of the blockchain ecosystem and technology stack is just in time to meet the needs of the artificial intelligence revolution.

While blockchain has great potential to streamline existing machine learning (ML) processes, the most exciting opportunities will emerge where cryptocurrency and AI converge to achieve entirely new outcomes.

The most exciting new design spaces will cover areas such as:

• Decentralized storage that supports shared, permissionless data repositories, enabling better training or higher-performing models through retrieval-augmented generation (RAG) technology.

• Zero-knowledge proofs are used for model or content verification, training or user data privacy protection, or to support edge computing and local (client-side) reasoning.

• New information markets and better mechanisms to collect higher quality data – The underlying models need more professional data inputs to continue to evolve.

• Autonomous agents conduct transactions through smart contracts, enabling them to accumulate resources, knowledge, and assets using machine-operated private keys.

As the crypto track influences everything from computing supply to data markets to the collective creation and monetization of powerful basic models, open source AI/machine learning performance will be greatly improved by cryptocurrencies, thereby promoting the development of human productivity and the creation of an open collaborative ecosystem in the coming years.

Cryptocurrency will become the best way for people to get exposure to the rise of AI. Investors can invest indirectly through blue chip assets like ETH, or they can hold it directly or speculate through proxies, models, networks and data sets.

What's next?

We are at an inflection point in the industry. After years of fighting against market, incumbent, and regulatory resistance, the tide has finally turned.

A series of important trends have come together to lead us towards a decentralized future - it can be said that the era of encryption has arrived. Infrastructure and middleware have reached a peak of development, making the on-chain experience a step-by-step development, but we still need to pay attention to one thing.

Ideally, modularity would enable not only specialization, but also the distribution of control and points of failure across multiple actors. However, each of these new frameworks involves different technical and security assumptions, incentive mechanisms, token distribution roadmaps, venture capital firms, foundation structures, and internal politics.

During the brutal economic recession of the past year, the efforts made by crypto builders are admirable, and we should not ignore their contributions. However, as the industry picks up, some tokens will package themselves as "partnerships" with other projects in order to attract attention, but in fact there is no real technical or business integration. In addition, some projects will create false prosperity through public relations means, such as paying water armies to post promotional posts, or encouraging users to participate through incentives, but these behaviors do not mean that the project has truly gained user recognition. Therefore, we need to be wary of industry information cocoons and false signal activities, do not be confused by appearances, and rationally judge the value of the project.

In the coming years, we all have a shared responsibility for the emerging projects to be responsible in terms of technical design choices, token concentration, value distribution, philosophy, and governance.

This is the way for cryptocurrency to overcome all obstacles and move towards glory.