Ten years of ups and downs, review of the changes in the crypto industry and future prospects

The innovation and development of anything cannot be separated from iterating on the foundations and problems of predecessors.

The term "blockchain" has been around for 13 years since the Bitcoin white paper was born in 2009. From an obscure noun to a well-known industry, it has spawned countless flourishing ecosystems and tracks. After several rounds of bull and bear changes, the industry has grown from nothing, allowing many early players who focus on various tracks in the industry to take advantage of the trend and reap huge wealth. Looking back at the changes in various tracks in the industry in recent years, it is not difficult for us to find the rules hidden in them.

First of all, it is well known that the blockchain industry has always been an industry with particularly significant cyclical behavior. In the bull market cycle, the industry is extremely prosperous and constantly generates bubbles. In the bear market cycle, the industry is very deserted and bleak, and the market is quickly cleared. In terms of time, the Bitcoin halving has always been the time node, accompanied by a large amount of funds rushing in and leaving the market at a loss, forming an industry law of a four-year bull-bear cycle.

In each cycle, in addition to the unchanging narrative of Bitcoin halving, we can also find that each cycle has unique industry changes as the main line of industry development.

For example, we have experienced three times before:

The first is the value discovery of decentralized commodity currencies, led by Bitcoin;

The second time is the value discovery from pure decentralized currency to decentralized smart contract platform;

The third time is when users began to turn to on-chain behaviors and value discovery of decentralized basic applications.

1. The first three cycles experienced by the blockchain industry

1.1 The Enlightenment Stage of Decentralized Commodity Currency (2010-2013)

Looking back at history, in the first crypto cycle, Bitcoin, as the pioneer of the entire industry, began to gradually enter people's field of vision due to its anonymity, decentralization and scarcity of a fixed total amount. Its narrative value of cross-border transfers and digital gold was gradually recognized by more and more people. "Bitcoin Gold and Litecoin Silver" was the best interpretation of the enlightenment stage of decentralized commodity currency at that time.

It was also due to the 2008 financial crisis that people’s trust in traditional finance was broken. Participants in the early cryptocurrency market tended to be hardcore geeks. Compared with the current situation where capital has been widely involved in the cryptocurrency market, early market participants had extremely high requirements and beliefs for the degree of decentralization.

This stage is more of an enlightenment stage of decentralized thought.

1.2 The embryonic stage of smart contract platform (2014-2017)

In the second crypto cycle, the value discovery of blockchain smart contract platforms represented by Ethereum in the era of initial token issuance was the main focus. From the birth of Ethereum to the first discovery of its financing value, followed by a group of Ethereum killers, such as well-known projects EOS, Tron, ADA, etc., this stage was a wild period dominated by the term "blockchain". Only the native coins of a few blockchain smart contract platforms had consensus value, and there were only a few applications on the platform, and the value of the application tokens was basically unrecognizable. Users quickly exchanged the application tokens they got back to the platform's native coin. In addition, the activities on each chain were extremely cold, and most users still focused on "coin trading" on centralized exchanges. Finding killer Dapps was the most mentioned topic by many blockchain practitioners in various industry conferences at the time.

This stage is the embryonic stage when the concept of blockchain truly begins to enter the historical stage.

1.3 Basic stage of DApp application (2018-2021)

The third crypto cycle is also the one closest to us. The most obvious change in the market in this round is that the on-chain ecology and user activities have obviously prospered. The most intuitive feeling is that many trading users, when mentioning a token they are not familiar with, no longer ask which centralized exchange can be traded, but ask the contract address on the token chain. It sounds commonplace now, but it was unimaginable in the previous cycle.

Thanks to this cycle, some decentralized basic applications on the chain began to improve. Starting from the well-known DeFi Summer, the two killer weapons of AMM automated market maker mechanism and liquidity mining have completely opened the era of prosperity on the DeFi chain. Everyone must still remember the subsequent story. Throughout 21 years, on-chain applications such as DeFi, NFT, and GameFi have become hot spots in the bull market. In addition, the short-lived meme craze started by Doge, Shiba, etc. and the wealth effect brought by airdrops such as Dydx and ENS are also important drivers of the prosperity of on-chain activities in this cycle.

At this stage, the DeFi infrastructure in the chain has been basically built, and relevant leading companies have been born in trading circulation, lending and other products. DAO is still in the embryonic stage of a trend of thought, and the product is still immature. NFT is between DeFi and DAO. It has explored a relatively mature success path of PFP avatar, but needs to expand more successful scenarios for further development. This is the current status of what was once called the three carriages of blockchain applications.

At present, the on-chain applications in this cycle have reached a bottleneck period. Most of the related applications are based on the previous ones, and the homogeneity is serious. In addition, in the later period of this encryption cycle, the hot spots of market funds began to tend to some more grand narrative concepts, such as the metaverse and Web 3.0. This is a typical manifestation of the lack of innovation on the product side. Of course, we are still in the early stages of the blockchain industry. If we use the analogy of a person's growth, it is more like a teenager. Everything is still laying the foundation, but there are various subdivided paths.

This stage has laid a solid foundation for more diversified DApp applications in the future. It is also in this cycle that the concept of "track" begins to have substantive meaning.

2. The initial stage of the full outbreak of blockchain applications

The next cycle will be the initial value discovery of the comprehensive application of blockchain.

The comprehensive development of applications will make the blockchain industry more mainstream, and only continuous mainstreaming can bring exponential user growth to the industry. In the current context of macroeconomic downturn and the disappearance of the demographic dividend in the Internet industry, with the popularity of Web3.0, the new synonym for the blockchain industry, the industry has also received unprecedented attention from new and old capital. In addition, some public chain platforms that have settled in this cycle, new capital-intensive new public chains, Rollup and Danksharding after the Ethereum Merge, etc., with the birth of capital and the accumulation of technology, have all allowed us to see the dawn of large-scale application of blockchain in the future.

For the industry to move further towards mainstreamization, it also needs to strengthen in these three aspects:

a. More scalable blockchain underlying technology and platform to handle and run more complex blockchain applications

b. Regulatory and compliance policies that are more compatible with the crypto industry will bring more mainstream capital and funds

c. Further lower the threshold for newcomers to enter the crypto industry and optimize the experience of entry products to facilitate the introduction of more mainstream users

Of course, Rome was not built in a day. Looking back at the outbreak of several cyclical industry narratives, they also evolved in a spiral manner around several dimensions.

2.1 Products and Concepts

Excellent hit products are the prerequisite for the corresponding track to explode, and the data showing rapid growth of the product itself is the best story. For example, Uniswap and Compound for DeFi quickly increased the on-chain TVL by an order of magnitude; Axie Infinity for GameFi, its revenue exceeded the top Web 2 mobile game "Honor of Kings" in a short period of time; Sandbox and Decentraland for Metaverse; CryptoPunk and Bored Ape Yacht Club for NFT, etc. On the other hand, many tracks have not exploded, mainly because there are no hits or market-proven products on the track. Of course, in a bull market, liquidity is rampant, and many immature product concepts will also be hyped in turn, and the hype of concepts can actually help attract more people to participate in product development, and eventually the waves will wash away the sand and leave better products.

And there is only one product that can be called a paradigm-changing product in each cycle. Bitcoin in the first cycle, Ethereum in the second cycle, and Uniswap in this cycle.

2.2 Applications and Infrastructure

The development of applications and the development of underlying infrastructure must be compatible and mutually beneficial. The development of applications is inseparable from the continuous optimization of middleware built on the underlying infrastructure technology and providing certain service guarantees. The development of infrastructure depends on the prosperity of applications built on it or serving it. For example, the rapid development of DeFi and the demand for DeFi fund security have not only allowed Ethereum to maintain its position as the No. 1 public chain, but also brought explosive growth to middleware and tools such as ChainLink and The Graph. Applications such as GameFi are more suitable for building on new public chains such as BSC, Avalanche, and Solana, which have lower handling fees and faster transaction processing speeds. Most of the current applications are still in the application of relatively simple logic. I believe that in the new cycle, more applications that can handle more complex logic and matching infrastructure will be born.

2.3 Issuance and circulation

The biggest difference between Web 3 and Web 2 is actually Token (i.e. the essential difference between assets and information). The issuance, circulation and economic model of Token are issues that every Web 3 entrepreneur cannot avoid. In the development of the industry over the years, the issuance and circulation methods of Tokens have also been changing. In terms of issuance, from the earliest consensus mechanism mining such as POW/POS, to the later financing issuance such as ICO and IEO, to this round of DeFi liquidity mining and GameFi gold farming, as well as the popularity of various public offering platforms IDO and airdrop issuance of tokens. During this period, more and more venture capital has entered, which has also made the issuance of Tokens for current projects and the issuance of multiple rounds of financing and IPOs by companies almost certain, and the issuance methods of Tokens have become diversified.

At the circulation level, from the earliest decentralized OTC trading model, to the centralized exchange matching transaction circulation, and then to the current decentralized exchange, the trading model has also settled into two mainstreams: centralized order book trading and decentralized AMM.

It is still unknown whether the final form of the industry token issuance and circulation model will be like this. However, issuance and circulation are the two most basic demand attributes of assets. Every change in the token issuance and circulation model can cause huge changes in the industry and produce huge wealth effects. We also hope that in the next cycle, we can continue to see innovation in this dimension of the industry.

The initial value discovery of the full application of blockchain also indicates some possible trends: in the next cycle, first, the degree and rules of industry changes will be more complicated, and many things that were once regarded as rules in this industry are likely to be broken. I believe that in the secondary market, many investors who "carve the boat to seek the sword" through the on-chain data have already experienced it; secondly, the precipitation time required for the innovation and maturity of products and technologies may be longer than before. Therefore, it is also recommended that industry colleagues be fully prepared for long-term building and have sufficient financial reserves.

3. Prediction and analysis of hot sectors in the industry

3.1 Rollup and other expansion solutions

In terms of blockchain expansion, there are many technical solutions and teams that have been building. From the previous improvement of the consensus algorithm alone, to the L1 sharding solution, to the current layered design of L1, L2, and L3, the most mainstream layered solution is Rollup. At the end of 2020, V God published the article "Ethereum Roadmap Centered on Rollup". In 2022, at the ETH Shanghai Summit, he once again affirmed the development status of the Rollup route. Technologies such as Danksharding are also specially prepared for Rollup. Among them, Rollup is currently divided into Optimistic Rollup and ZK Rollup.

Optimistic Rollup is more compatible with EVM and supports general contracts, but it takes a long time to exit the network. As we can see, the representative projects of Optimistic Rollup, Arbitrum and Optimism, have done a good job in their ecosystems and have many projects on them. At the same time, due to its exit feature, many third-party cross-chain bridges have a good market.

In the primary market, Zero-Knowledge Proof technology is a track that capital is competing to invest in. From a technical point of view, ZK is a verification technology. Under the premise that the prover does not reveal any information other than the proof itself, the verifier can confirm that a proof is valid. ZK technology was first used for privacy, and in recent years it has begun to be used for capacity expansion.

ZK Rollup exits the network much faster than Optimistic Rollup, but is relatively poor in terms of EVM compatibility and support for general contracts, so current representative projects such as ZkSync and StarkWare are still in the preparation stage.

In terms of performance, ZK Rollup is slightly better than Optimistic Rollup, and in terms of the difficulty of ecological migration, Optimistic Rollup is easier than ZK Rollup. This also made Vitalik publicly express that he is optimistic about Optimistic Rollup in the short term, and pays more attention to the performance of ZK Rollup in the long term.

In fact, no matter which expansion method is used, the ultimate goal is to provide users and developers with a better experience, thereby building a prosperous ecosystem on top of it. The expansion battle is far from over, which is why I define the next cycle as only the initial stage of the full outbreak of blockchain applications. We believe that the next generation of expansion solutions led by Rollup will continue to present a diversified pattern, and diversified infrastructure will also be more conducive to the flourishing of applications and ecology.

It is worth noting what kind of different native applications will grow based on the new expansion plan or architecture, especially in the field of derivatives and games. For example, dedicated chains such as Arbitrum Nova. 3.2 DID

DID, or decentralized digital identity, has been around for a long time. This year, Vitalik Buterin proposed the concept of SBT soul-bound tokens, and Binance also launched the "soul-bound token" BAB. These two events have once again pushed the concept of DID to the climax of market attention.

Its features will not be elaborated here. From the perspective of narrative and practicality alone, a mature and widely used DID product in the future may be the necessary infrastructure for the entire industry to become more mainstream.

Building decentralized social networks, on-chain KYC, on-chain credit systems, unsecured lending, and compliance with regulatory requirements may all create some wonderful sparks with DID.

In DID products, it is absolutely not feasible to directly move the KYC solution and experience of Web 2 to Web 3. Project owners need to pay more attention to the organic integration of data such as user interaction behaviors on the chain. Capture users through a specific demand.

3.3 GameFi

GameFi was an extremely hot track in the second half of last year. But the good times did not last long. With the madness of retail investors, blockchain games became the last stick in this bull market. Today, investment in the game track has also become the most controversial track in institutional investment. Looking back at blockchain games, now everyone knows that GameFi 1.0 is actually DeFi mining, or even Ponzi, in the form of a game. Because of the game coat of GameFi, many people participate in the form of guilds (which can be understood as mining pools), resulting in many people who are not proficient in Web 3. The participation threshold of GameFi is actually lower than that of DeFi. They only need to entrust their funds to their guilds. But in fact, the conflict of interests between the custodian and the investor has hurt many GameFi users.

For the gaming industry, the essence of a game is that it must be fun. In addition to beautiful graphics, the fun is more importantly to gradually make gamers addicted or indulge in it through the design of complex gameplay, interesting game modes, or intriguing game background stories, etc. This involves many game or psychological methods.

All the blockchain games last year were definitely not fun. They attracted players purely by offering high returns for gold farming, especially in the later stages of the blockchain game craze, where participants were competing to see who could get the shortest return cycle. When the price of the currency began to fail and the returns began to decline until the income was meager, blockchain game participants were no longer likely to "indulge" in it.

This is not just a problem with certain projects, but a problem of the separation of needs and experiences between Web2 and Web3 users. Web3 users pursue high returns on funds, while Web2 users pursue entertainment needs. These two groups of people are not completely unrelated. There are a large number of people who love to play games in Web3, and Web2 users also have the need to make money. These needs cannot be met by a beautifully made game and a token. In essence, different strategies need to be formulated for users of different natures, and breakthroughs need to be made at a certain point to achieve an organic combination.

Back to the original intention, our recognition of the value of blockchain games is that it can solve the problem of game asset ownership and keep the assets of users in their own hands. Secondly, tokens can be used to participate in governance, so that the game officials are not the only ones who have the final say. These are the values ​​that blockchain can provide to a game after it has been recognized by players. In terms of the current level of blockchain usage by Web 2 users, it is still a bit premature to make such a chain change. Then, when making Web 3 native games, incentives are particularly important. Therefore, the situation last year was also a necessary stage for early incentives to go to the first extreme.

The next stage may be a stage of shaping game assets, namely NFT. Because NFT itself is the most suitable for game attributes and has the most consumer characteristics, rather than "mining machines" like GameFi 1.0 that only use NFT as an entry threshold. With the improvement of blockchain game play and the development of many NFT protocols, the liquidity of NFT has been improved. Games with NFT as the value orientation may be the direction of the next round of chain games.

Of course, token incentives will still exist, but the economic model and values ​​will tend to be more stable and will not be the main means.

Conclusion

The crypto industry has experienced ups and downs for ten years, from the ideological foundation to the underlying technical foundation, and then to the improvement and construction of the application foundation. I believe we are on the eve of the explosion of comprehensive blockchain applications. In addition to the popular tracks mentioned above, such as Rollup, DID, GameFi, etc., which have been discussed more recently, there will be some excellent projects standing out in tracks such as DeFi derivatives, NFT liquidity, decentralized middleware, cross-chain basic protocols, blockchain security, mobile blockchain application products, DAO, etc. Token, as an industry-unique incentive mechanism, is also a special business model in itself. No matter how the economic model is designed, it has its own cyclical financial attributes. When the resonance of Token business model innovation, product maturity, and application narrative innovation comes, we will usher in the next big cycle opportunity again in the future.