Twenty crypto investment institutions in Asia: Talking about current opportunities and confusions

summary

It has become a consensus among all investors and practitioners that the crypto market has entered a bear market. Winter is the time to prepare for spring sowing. What fruits will be produced in the future, of course, depends on the sowers. Huobi Research interviewed more than 20 representative global investment institutions, hoping to use their development status, investment philosophy and layout direction as samples to understand the investment institutions' judgment on the current status and trends of the industry and discover potential tracks.

During the interview, we learned that most investment institutions tend to watch more and do less. They pay more attention to infrastructure projects, among which ZK, new public chains and middleware are the most popular. In terms of application projects, DeFi, Games and Social Networking rank in the top three. Among them, DeFi is the direction that institutions are most optimistic about, and there are great controversies about Games and Social Networking.

The key areas and logic of the institutions’ attention are as follows:

• ZK is one of the potential core drivers of the next cycle and has long-term value. It occupies the two core narratives of Ethereum expansion and privacy computing. ZK accelerated network and mining are the focus of institutional layout because it has a stable game structure.

• Institutions are more concerned about new public chains from a strategic perspective, rather than seeing definite opportunities. They are very concerned about two innovations that have emerged in the recent batch of new public chains, the Move programming language and parallel processing technology, and believe that their value may exceed that of a public chain itself.

• The attention paid to middleware is second only to zk and new public chains. The more popular ones are decentralized identity, data protocols and wallets.

• Institutions tend to continue to pay attention to DeFi, but generally maintain a wait-and-see attitude. For existing DeFi protocols, only those with stable cash flow and not relying on subsidies are likely to explode again. For emerging DeFi protocols, institutions are currently more concerned about protocols with relatively mature businesses in traditional fields but fewer on-chain competitors. From the perspective of categories, most of them belong to the direction of derivatives.

• The controversy over social networking is mainly that everyone agrees that social networking is a necessary need and has a very high upper limit. However, many institutions believe that the existing SocialFi project is still in its early stages of development, the model is not clear yet, and no sustainable paradigm has been formed. If it only relies on the token economy and the packaging and transformation of Web2 social networking, it will be difficult to acquire users from traditional giants.

• The controversy surrounding the game lies mainly in the following aspects: on the one hand, many organizations agree that games are the most effective in attracting incremental users; on the other hand, some organizations believe that the current blockchain game model is unsustainable.

We believe that the industries with more potential in the future are infrastructure, including ZK, new public chains, and middleware. The application side has greater uncertainty, and DeFi has a relatively higher chance of winning, and the potential direction is in the field of derivatives. Social networking is still a while away from an explosion because the necessary preconditions are not yet complete. Games have growth opportunities, and games with better economic models have greater opportunities.

1. Current status of investment business

First, let's look at the current status of investment business in the global crypto market. According to public information statistics reported by Odaily and PANews, there were 511 investment and financing events in the global crypto market in the second quarter of 2022 (excluding fund raising and mergers and acquisitions), with a total disclosed amount of US$12.71 billion. Among all financing events, the number of transactions with a financing scale of more than US$100 million reached 28.

Compared with the first quarter of this year, there were 461 investment and financing events in the global crypto market in Q1 this year, with a total disclosed amount of US$9.2 billion. Although the secondary crypto market environment deteriorated further in Q2, investment and financing activities showed signs of recovery. The number of investment and financing activities increased by 11% month-on-month, and the amount increased by 38% month-on-month.

However, if we look at it on a monthly basis, we feel a chill. From April to July, the number and amount of investment and financing activities have been declining monotonically. The total amount of investment and financing has dropped by nearly 70% and the number has dropped by 16% in four months. The cold state of the investment and financing market is basically consistent with the psychological state of the investors we interviewed.

The reason for the divergence between quarterly and monthly figures may be that the secondary market rebounded from January to March, driving the investment and financing market, and most financing news was disclosed in April. The collapse of Terra and 3AC severely hit market confidence, causing investors to be more cautious, so the number and amount of investment and financing declined from May to July.

Let's review what areas investment institutions have focused on before. As shown in the figure below, in Q2, the areas that global crypto investment institutions are most concerned about are GameFi and NFT. Games, game-related infrastructure and technical solutions received a total of 82 financings, ranking first in quantity, accounting for 16% of the total financing. The amount of financing in the GameFi field is also far ahead, as high as US$2.996 billion, accounting for 23.5% of the total financing in the industry. The NFT field received a total of 67 financings, ranking second in quantity. DeFi ranked fourth with 50 financings. Infrastructure fields represented by L1, L2, mining, privacy, identity, etc. have become "long-tail fields", and the number of investments they have received is about 10.

As the crypto industry changes, the focus of crypto investment institutions has changed significantly after two months. Let's see what the interviewed institutions say.

Huobi Research interviewed more than 20 investment institutions in this investment institution survey, including crypto native head investment institutions, crypto departments of traditional investment institutions, investment departments of crypto group companies (such as exchanges, wallets, asset management, etc.), investment incubation companies, and investment institutions focusing on specific tracks. We hope to obtain a more comprehensive and real understanding through a diverse interview sample. In this interview, we mainly exchanged with various investment institutions on everyone's analysis of the current situation and prospects of each track, investment logic and investment strategy, etc. We hope to provide some guidance for readers to deeply understand the cryptocurrency industry.

2. Track potential ranking and investment logic

We have summarized the areas of concern of the investment institutions participating in the interviews and sorted them by the frequency of mention, as shown in the figure below. Some of the areas in the figure are included in each other. We will analyze them according to the specific content of each area in the following text. Here we will give you an intuitive impression.

The areas that institutions focus on can be divided into two categories, infrastructure and application. Overall, people pay more attention to infrastructure projects. Infra is mentioned most frequently, and the two main lines are ZK and new public chains. Fields such as middleware, data, oracles, DID, etc. also have obvious infrastructure elements. In terms of application projects, DeFi, GameFi, and social rank in the top three. Although DeFi has been deserted for some time, it is still the direction that institutions are most optimistic about. In contrast, Game and social are very controversial. Some institutions support them, while others are obviously not optimistic. Let's analyze them one by one to see why institutions pay attention to these areas.

2.1 Infrastructure

The survey results show that institutions pay more attention to infrastructure than applications. Some institutions did not explicitly mention the word "Infra", but their focus still fell on areas such as ZK and new public chains. For the convenience of discussion, this article classifies zero-knowledge proof, new public chains, middleware, DID, data, modularization and other fields into infrastructure.

Why infrastructure matters

There are two main reasons for paying more attention to infrastructure: the first is to adapt to the industry development cycle, and the second is to prepare for the new narrative of Web3.

First, follow the cycle of industry development. The cycle here is not the general bull-bear cycle, but the sector rotation cycle of infrastructure and applications.

IOSG Ventures summarizes this phenomenon with the law of "Newton's cradle". They believe that in order to spread applications in emerging technology fields, the underlying infrastructure is first needed for technical support. When the infrastructure development reaches a certain level, its performance can support the germination of some early applications (for example, there would be no earliest DeFi applications without Ethereum smart contracts). The growth and prosperity of applications require stronger infrastructure and more complex technical middleware or application infrastructure in subdivided fields. It reversely impacts and promotes the further iteration of infrastructure (for example: more complex DeFi second-layer protocols require stronger performance support to reversely promote the development of Rollup. The current crypto GameFi and SocialFi are also in the early stages and require dedicated infrastructure in their respective subdivided fields). This repeated and cyclical completely elastic collision is like a Newton's cradle. According to this law, there will be a phenomenon of fat protocols and thin applications first, that is, the protocol will first capture the value of tokens on a large scale. In investment practice, IOSG has been investing in the protocol layer and Infra infrastructure for five years. It has invested in platforms such as Cosmos/DoT Near Avalabs in Layer1, Starkware and Arbitrum in Layer2, and a large number of native developer protocols in middleware. When Infra became stable and mature, IOSG turned to the investment strategy of fat applications and began to capture unicorns in DeFi and game social networking (including metamask and 1inch/Project Galaxy and/Cyberconnect/Bigtime Studio and illuvium, etc.).

Bixin Ventures believes that there are not many innovative products coming out of the application layer at present, and some hot concepts have not yet been implemented, so it is not the right time to invest. Now is the right time to invest in infrastructure, hoping that they will be the first to start in the next bull market. Compared with betting on application projects, this is a layout method with a higher winning rate[1]. Moreover, the odds of infrastructure projects are also high, and they can also accommodate larger funds. Matrix Partners proposed the "8020 rule" as a practical work guide. In a bear market, 80% of the energy is used to study infrastructure and 20% of the energy is used to study application projects, while in a bull market, this ratio is reversed.

Second, prepare for the new narrative of Web3. The most ambitious narrative in the current Internet field is Web3. Many traditional Internet giants such as Amazon, Google, Meta, ByteDance, Baidu, etc. are actively exploring and planning. One view is that Web3 is a new generation of Internet ecosystem based on blockchain technology. Of course, the number of users served by this Internet system cannot be just a few million, but at the billion level. The current blockchain infrastructure is far from sufficient to serve such a large number of users, so it must be continuously upgraded and transformed.

In terms of how to judge the value of Infra, Cobo Ventures and Foresight Ventures proposed that infrastructure is a technology-oriented field that requires attention to the advancement and maturity of technology and low-cost, efficient, and secure solutions. It is also necessary to pay attention to the activity of the developer ecosystem and the degree of user recognition in order to create actual value.

The following discusses each institution’s views and judgment logic on several key areas of infrastructure.

2.1.1 Zero-knowledge proof

Zero-knowledge proof (ZK) is the area that various institutions pay the most attention to in technical facilities. It mainly includes ZK Rollup and its acceleration network.

ZK's Status

Let’s first make two horizontal comparisons to see the status of ZK in the minds of institutions.

First, within the Layer 2 field, ZK has become synonymous with Layer 2, and is significantly more favored than OP. Currently, the mainstream technology of Layer 2 is Rollup, which includes two technical routes, namely Optimistic Rollup and ZK Rollup. In the interview, almost all institutions that mentioned ZK and Layer 2 were only optimistic about the ZK Rollup technical route, and were not optimistic about OP Rollup, which was clearly ahead in all aspects of data. More than one institution believes that OP can be viewed from the logic of short-term and medium-term applications, and does not have strong value in the long run. ZK is to cryptography what machine learning is to AI. It occupies a core position and is one of the top narratives in the industry.

Second, in the competition landscape of public chains, institutions are slightly more optimistic about ZK than new public chains. The reason is that ZK, or the Layer 2 it represents, represents the expansion direction of Ethereum, and at this stage, institutions are relatively more optimistic about Ethereum. JDAC Capital believes that Ethereum will become a settlement protocol in the future, and the objects using this protocol may expand, and even the traditional Internet can use public chains for settlement. Ethereum has high asset attributes and high network value consensus, so settlement on Ethereum will be more trusted and the value of assets will be more recognized.

Layout ZK logic

The reason for being optimistic about ZK, in addition to its comparative advantages, is to look deeper into its own value. Zonff Partners clearly stated that ZK is one of the four potential core driving forces in the next cycle and has long-term value. It occupies two core narratives, namely Ethereum expansion and privacy computing. Maybe ZK Proof will be to cryptography and blockchain what machine learning is to artificial intelligence. Especially in the field of Ethereum expansion, it already has the structural characteristics of the upstream and downstream of the track, such as developers, computing equipment providers, node services, application needs, user needs, etc. On the one hand, a track with a stable structure is more suitable for institutional capital layout; on the other hand, the development expectations are stable, not completely dependent on macro or a hot event, and it is easier for projects or entrepreneurs to generate positive feedback during the entry process.

First, ZK Rollup will play a greater role in Ethereum's expansion, and its capabilities have not yet been fully utilized. Needless to say, ZK can improve performance and solve the problem of blockchain lightweighting. Because all nodes need to store a large amount of data, it is difficult for general operators to carry it, which increases the degree of centralization. ZK Rollup needs to upload less data to the chain, which helps to alleviate the storage pressure of nodes. The more prosperous the on-chain ecology, the greater the demand for lightweight, and ZK Rollup will have greater room for development. Of course, the original transaction data still needs to be stored, which is where the data availability layer in the modular public chain comes in handy.

Second, ZK has the potential to solve more problems related to privacy protection. Before DeFi and NFT became popular, there was not so much on-chain data, and the importance of privacy was not yet apparent. There was nothing to protect, and no one knew how to protect it. It was more about concepts. After the emergence of DeFi, privacy became more important. There is no reason to require everyone to disclose on-chain data, especially for large investors and institutions, whose on-chain operations may contain huge economic benefits. However, the current data analysis tools magnify the open and transparent characteristics of the blockchain, causing some troubles for them. Therefore, the demand for privacy is real and deterministic. And as more and more data is on the chain, the demand for privacy is also increasing. However, there is no better way to protect privacy now. In addition to ZK, homomorphic encryption and MPC also have opportunities.

Based on the above logic, many institutions believe that ZK Rollup is the best solution in Layer 2. And because the Ethereum Foundation itself also has its eyes on ZK technology, and currently has not seen an equally advanced solution, it is necessary to lay out its bottom layer.

ZK's key layout direction

Zonff Partners, JDAC Capital, and Hashkey Capital have all explicitly mentioned that they are paying attention to the ZK acceleration network and mining. ZK Rollup requires a large amount of computing when generating proofs, so it needs to be accelerated by hardware, which is a real demand. Considering the position of ZK in the entire ecosystem mentioned above, ZK mining is still a long-term demand.

Institutions are more concerned about ZK Mining's position in the entire industrial structure.

ZK's industrial chain is similar to Bitcoin mining. The upstream of the industrial chain includes chip manufacturers, mining machine manufacturers, nodes, and mining pools, and the downstream includes developers and various applications. Overall, there is a stable game structure. At present, the upstream technical routes of ZK mining, such as Scroll, zkSync, Starknet, Aztec, Polygon, etc., are relatively scattered, which is not conducive to institutional heavy positions, because it is very difficult to choose cost-effective targets. Investing in these infrastructures has risk components, and even gambling components. After the summer of DeFi and the outbreak of games, the downstream has no obvious direction for the application end at the current time, and the competition within the application track is extremely fierce. Institutions also face the difficulty of choice. First, they must bet on the right track, and then bet on the right players in the track. This is not a very high probability thing. ZK mining is in the middle of the two, and there are structural opportunities. When the upstream (various technical routes) are very scattered and the downstream (various applications) are also very scattered, there will be structural opportunities in the middle to obtain stable returns. This is the logic of accelerating the development of the network and mining industry, just like selling mineral water and jeans to gold diggers.

However, it is difficult for the ZK hardware industry to achieve the same market scale as Bitcoin mining. The first is to see whether the ZK underlying protocol is open to decentralized proof, i.e. mining. It is also possible to do it in a centralized way. The second and more important point is that ZK mining is limited by the scale of the ZK project, that is, how much capital can be carried on ZK in the future. If there is a major breakthrough in this regard in the future, the ceiling of ZK mining can also be very high.

The impact of ZK's rise on other tracks

Finally, let’s take a look at the interaction between the rise of ZK and other tracks.

First of all, ZK will enhance the competitiveness of Ethereum. JDAC believes that the technical solutions and community building level of Ethereum are unmatched by other L1s, and it is difficult for others to break its dominance using EVM. Once ZK matures, it will further consolidate the position of Ethereum. We will not jump to conclusions here, but we can make such a guess that the development of ZK will greatly enhance the competitiveness of Ethereum, and the iron throne of the public chain will not change hands so easily. When the market was good last year, Ethereum's Layer 2 was not widely adopted, the handling fees of other new public chains were negligible, and Ethereum could still occupy more than 60% of TVL. So if Ethereum narrows the performance gap with other public chains and maintains a high degree of decentralization, we have reason to believe that its position will be further enhanced.

Second, ZK will increase the demand for the DA layer. As mentioned above, although ZK Rollup needs to upload less data to the chain, the original data still needs to be uploaded. The DA layer is responsible for storing these original transaction data and ensuring their availability. From this perspective, it can be said that it is an upstream industry of ZK, and the prosperity of ZK will also drive the prosperity of the DA layer. In my previous article "How the Data Availability Layer can shape the future of blockchain", I made a simple calculation. If Rollup achieves greater development and a "Rolluop-centric" situation emerges, and the price of ETH rises again, the annual income of the DA layer is expected to reach 2 billion US dollars.

Third, the rise of ZK may not have much impact on data analysis tools. At present, it seems that ZK Rollup is still focused on capacity expansion. There are also projects that focus on privacy, but they are not mainstream. Privacy is a long-standing field that has not received much attention, and the same is true in the traditional Internet. Protecting privacy requires costs. If the cost is not low enough, it will discourage some small and medium-sized users and reduce the utility of the network. More people still care more about convenience and cheapness, so the author believes that the development of ZK is not enough to shake the survival foundation of data analysis tools in a short period of time, and both can continue to develop.

Fourth, the development of ZK may give rise to new application projects. ZK Rollup requires a small amount of data to be uploaded, which means that applications can design more complex business logic. Perhaps some application projects that are different from the current ones will appear, such as DeFi projects with more complex business logic. Layer 2 killer applications are also likely to appear in ZK Rollup. However, this requires a prerequisite, which is the maturity of the general ZKEVM.

2.1.2 New public chain

New public chains are also receiving a lot of attention, but investment institutions discuss them much less than zero-knowledge proofs. Many of them are paying attention to them from a strategic perspective, rather than seeing definite opportunities.

The logic of laying out a new public chain

Public chain is the mainstream track that has been thriving in blockchain investment, and the ceiling is very high. In each wave of the rise of a new batch of public chains, there is a certain degree of paradigm shift in development, such as the shift of consensus mechanism from POW to POS, which has promoted the long-term development of the industry. There are huge opportunities in this. If the impossible triangle is broken, it can even subvert the current logic and the status of Ethereum. However, there will not be many subversive opportunities. Because it is difficult for a large paradigm shift to occur, it requires high innovation and requires a solution that is 10 times better than the current one. More than one institution has stated that no project has reached this level yet. However, the future public chain pattern is likely to maintain a multi-chain coexistence pattern, and new public chains do not necessarily have to occupy a large market share to be considered successful. As long as there are a certain number of users and capital, there is also an opportunity for market value growth in the bull market, which is a good choice from an investment perspective.

When judging and selecting projects, several venture capital institutions have proposed to look at performance correctly. First of all, performance itself is not important, but performance comparison is important. Every new generation of public chains mentions performance improvement, and their comparison object is Ethereum. However, Ethereum itself is also improving performance. When Layer2 gains more adoption, users may find it difficult to perceive the performance gap between public chains, or this gap may not be enough to attract users. Secondly, actual performance is more important than laboratory performance. The 160,000 TPS claimed by Aptos is laboratory data, and it is necessary to detect the correlation between transactions in order to better exert the concurrency capability. The actual performance remains to be seen. Solana claims 65,000 TPS, but it has experienced large-scale downtime 4 times and its performance is not stable enough.

Highlights of the new public chain

Although there are no projects that are particularly exciting, HashKey and NGC Ventures are very concerned about two innovations that have emerged in the recent batch of new public chains. The first is the Move programming language used by popular public chain projects Aptos and Sui. The second is parallel processing technology. Their value may not be limited to a certain public chain itself, but will have a greater impact on the industry.

Move language is a bright spot, and its value may be greater than that of several new star public chains. Move proposed the concept of resource-oriented programming and abstracted something called "resources". Users can easily define any type of resource (for example, our common crypto assets are a kind of non-copyable and indestructible resource), and can also define how this resource can be operated. This gives it the following features. First, the Move programming language is more secure. It makes the smart contract language more suitable for its asset-oriented scenarios through the separation of resource definition and control authority, static types, generics, module system, formal verification and other features, and ensures the security of digital assets from the smart contract level. Second, Move can help developers shift their attention to other areas that should be paid more attention, such as writing correct business logic and implementing correct access control strategies. Third, the smart contracts of the Move language are more composable. This can save the block space occupied by the contract and make optimization and upgrading easier. Fourth, the threshold of Move is lower than that of Solidity. And there will be an underlying compiler to further lower the development threshold. If the new public chains based on Move do not develop as expected, they can be regarded as another round of popular science for future developers. If successful, it will bring about a completely new way of programming. So from this perspective, the value of Move is greater than the value of the public chain based on it.

Parallel processing is another big highlight, and it may be a trend of underlying improvements. Currently, Ethereum transactions are processed serially, and all transactions need to be processed by the single-core CPU of EVM. The idea of ​​parallel transactions is to no longer use linear processing, but to use a more parallel approach. For example, Aptos uses a 16-core CPU to open multiple threads to process unrelated transactions at the same time to improve TPS. Sharding technology is actually a typical parallel processing, but it is more of a parallel design at the architectural level. The parallel processing mentioned here refers to the parallelization of processes or threads during program processing, which is closer to the bottom layer of the system. In the future, parallelization may become the standard configuration of public chains, and all public chains have this feature to a greater or lesser extent. This transition is similar to the fact that public chains after 18-19 all adopted the POS consensus mechanism, and generally abandoned the POW mechanism.

2.1.3 Middleware

The level of attention paid to middleware is second only to ZK and the new public chain. Middleware generally refers to software that provides common services and functions for applications. Data management, application services, messaging, authentication, and API management are usually handled by middleware. Its role is to connect infrastructure and applications. For the convenience of discussion, this article will first classify it as infrastructure.

Since middleware has the attributes of infrastructure, if more applications adopt it, it will attract other applications to follow suit, thus forming an unwritten standard. Therefore, its network effect is very strong, and it is easy to have a winner-takes-all situation. Investment institutions will naturally not let go of such a field. They pay more attention to decentralized identity, data protocols and wallets.

Decentralized identity (DID) is an Internet address that users can own and control, and is an infrastructure for many Web3 applications. Users in current blockchain networks already have ownership of assets, but their identities in virtual life have not yet been established. Just as assets in the decentralized world can flow freely across the margins of applications, users themselves should also have this ability, which requires a user-owned, user-identified identity. With an identity, social applications, other Web3 non-financial applications, and some new DeFi businesses can be developed. For example, when users use social applications, they can prove who they are by using a certain DeFi protocol, participating in the governance of a DAO, or playing a certain game, so as to find more like-minded friends. However, investment institutions are also concerned about whether the protocol can generate sustainable income. This has not yet been seen. Most DID protocols generate income through staking and liquidity mining, which is unhealthy. In the long run, if there is a certain user base, it can be profitable through service fees. There will be a long construction period in the middle, and the project team must adhere to long-termism.

In terms of data protocols, accurate privacy definition and fast response are the features that investment institutions value most. EVG said that currently they have hardly seen any protocol that can clearly define which types of data should be privately owned and which types of data should be open to the public. For example, identity information should generally be classified as confidential, but for certain specific data, should they be owned by the protocol and allowed to be retrieved and reviewed by others? There is a delicate balance to be struck in the middle, and the data protocol that solves this problem is likely to be the winner. Another direction is fast and high-frequency response, because many hedge funds need fast data support to react. For protocols like Dune and Graph, they are already great, but they also need to be more timely.

For middleware like wallets, expanding the audience is a key issue. Most non-circle users have never used crypto wallets, and wallets are even a barrier for them to enter the crypto world. StepN has made a good demonstration by integrating Web3 wallets into the product itself, guiding non-circle users to create wallets when registering an account, giving users a seamless first wallet experience. This is also a new idea for the wallet itself, which can achieve seamless acquisition of incremental users through deep integration with consumer-oriented dapps.

2.2 DeFi

As a rising star in the application layer, DeFi has naturally caused quite a lot of discussion. However, apart from the AMM algorithm, DeFi does not have more innovations in mechanism, and the nesting doll-style innovation cannot stir up much splash in the market. Therefore, like the public chain, institutions tend to continue to pay attention to DeFi, but generally maintain a wait-and-see attitude.

The logic of DeFi layout

Since its birth, blockchain has been closely linked to finance. With the introduction of smart contracts, DeFi has gradually demonstrated strong financial innovation vitality and attracted a large amount of funds. At the same time, DeFi, with its own composability and no need for access, has well solved the user pain points of high entry barriers, centralized risks and high capital volume in traditional finance. All parties conduct transactions openly and transparently on the blockchain, and there is no misappropriation of assets. Anyone can also perform corresponding operations based on on-chain liquidity and positions. Smart contracts provide automated rules for how specific financial instruments and protocols should act, which are executed and managed by code and will not favor any investor. After the frequent collapse of CeFi institutions, the advantages of DeFi are particularly prominent.

Development Path

Since the emergence of AMM, the current DeFi market has developed to a relatively mature stage. Not only are the tracks diverse, but the ecological projects are also relatively complete. Some large and comprehensive infrastructures have formed an obvious head effect, such as DEX, lending, etc. Institutions such as Nothing Research and Matrix have some basic judgments on the overall trend of DeFi in the future:

1. For existing DeFi protocols, more consideration is needed on how to smoothly survive this round of bear market. Looking back at the rise of DeFi, project subsidies are an important means to stimulate ecological expansion, relying on good narratives to earn market dividends. But this is by no means a long-term way to survive. In a bear market, only projects with stable cash flow and gradually getting rid of subsidies can welcome another outbreak in the future. On the other hand, many protocols are easy to use, but the tokens fail to capture the value of the ecosystem. This has caused the token price to weaken, which in turn has affected the further development of the protocol. Therefore, existing protocols that can optimize token economics are expected to achieve secondary growth.

2. For the newly emerged DeFi protocols, all tracks of DeFi are relatively saturated. Before disruptive innovation appears in the overall environment, it is difficult to find new developments. Therefore, institutions are currently focusing on DeFi protocols with relatively mature businesses in traditional fields but fewer on-chain competitors. From the perspective of categories, most of them belong to the direction of derivatives. At present, the models of some derivatives protocols are quite good, but the market has not been fully educated. In addition to allowing users to learn by themselves in a large rising market, it is also necessary to rely on the protocol's own operational capabilities to acquire incremental users.

2.3 Social

The social track has always been a hot topic worthy of attention, but the views and judgments of various institutions on this track are very different.

Layout of social logic

On the one hand, various institutions can basically reach a consensus on the discussion of the significance of social existence, that is, social interaction is a basic human need and a necessary behavior for people to communicate and exchange values ​​in production and other social activities. Web3 social interaction is the future trend and has a very high development ceiling. Cobo Ventures believes that in the social platform of the Web 3.0 era, people will have absolute control over their social data. SocialFi products are based on the underlying infrastructure of Web 3.0, starting from people's needs for decentralized social interaction and finance, and are a product category that combines the two needs. It can break the platform monopoly, eliminate single-point risks, and create new business models and product categories in the wave of the global digital economic system.

On the other hand, the main point of disagreement among institutions is the mid- to short-term expectations. Huobi Incubator believes that the existing SocialFi project is still in the early stages of development, has not formed a sustainable paradigm, and the future model is not clear. More importantly, if SocialFi only relies on the token economy and the packaging and transformation of Web2 social networking, it is destined to be difficult to open up the user gap of traditional social giants. It needs to explore more of the user characteristics and user needs of Web3 native. From these perspectives, SocialFi is not yet ready to become the next wave of bull market outbreak.

Development Path

After interviewing many people, we summarized the development path of the social track. The protocols that use blockchain technology and tokenomics to empower social networking have the following directions:

First, blockchain + social networking, improving the drawbacks of Web2 social networking

The core idea of ​​some social projects is to subvert the monopoly of traditional social giants and use the characteristics of blockchain to make changes, which are mainly reflected in the following aspects:

1. Data autonomy. In traditional social platforms, users are only data participants or users. Blockchain can put data on the chain, allowing users to control their own data;

2. Data sharing. There are information islands in the Web2 world, and data between platforms is not interoperable;

3. Data privacy. Unlike traditional Web2 where users passively bear the risk of privacy leakage, although the information in the blockchain is publicly accessible, users can also use encryption technology to protect the privacy of data such as on-chain addresses and control the degree of disclosure according to their needs.

In terms of the economic system, it is natural for blockchain social projects to reward users by issuing platform tokens. After the introduction of the token economy, the interest relationship between users and the platform will change accordingly, and the binding relationship with the platform will be deeper. If users participate and contribute more in the platform, they will not only be rewarded in terms of the number of tokens, but the value of a single token will also increase. At the same time, in order to provide more economic incentives, some "X2Earn" or content creation mining models have also brought new ideas to social networking, leading to the short-lived SocialFi boom.

The token economy can provide certain support to blockchain social projects during their early cold start, but how to get more users to generate real social needs and create products on the platform cannot be solved by simply relying on the token economy.

The bigger difficulties faced by SocialFi are:

1. Small user base. Given that the Web3 social user base is relatively small, the effect of converting Web2 traffic using tokens alone is not ideal;

2. Token economy backlash. The interest relationship represented by the token itself is of a time nature. The rewards distributed in cash are timely, but the value of the token will continue to change over time. When the value of the token falls, the incentives that users can obtain are also shrinking, exacerbating the deterioration of the project's fundamentals;

3. The portrait of the on-chain users is blurred. Since most SocialFi projects focus more on "Fi", that is, the financial attributes of the project, it has attracted a large number of trading speculators, which will quickly leave once there is no profit, resulting in the platform's lack of understanding of on-chain social users and unable to capture real needs;

4. Insufficient infrastructure. At present, the underlying infrastructure cannot support complex SocialFi applications that require a large amount of data.

Second, the exploration of Web3 social networking

The focus of each project has gradually changed, and we have begun to pay more attention to the Web3 users themselves, and improve the underlying information transmission and relationship establishment based on their respective Web3 identities.

Web3 Identity

The premise of steady progress is a solid infrastructure. More and more projects are exploring the creation of Web3 identities and portraying the user group of real social needs. The establishment of the identity map includes two aspects:

1. Data analysis. Traditional social products need to establish user habits from scratch; but the data on the Web3 chain is a public resource, and anyone can use existing data (such as transaction data, identity recognition or personal taste) to portray user image and establish an identifiable identity;

2. Identity aggregation. Data analysis is no threshold, and any project can use identity data to develop products on this basis. However, if users can actively aggregate information from multiple chains, multiple addresses and even off-chain, thereby conducting more accurate and three-dimensional image portrayal, it is the driving force for the sustainable development of the project.

· Information transfer

There are two situations for information transmission:

1. Non-targeted information transmission. It mainly relies on the form of social media to attract attention and communication from others by posting content (text, pictures, videos);

2. Directed information transmission. For example, sending messages with a specified address or a type of address, the main scenarios are: NFT over-the-counter transactions, hacker negotiations, and project airdrops.

· Relationship establishment

When it reaches an individual, it is necessary to establish a social relationship with the other party, including strong relationships, weak relationships and temporary relationships. Web2 applications contact users through the platform, weak contacts are difficult to monetize; while Web3 introduces tokens, strengthening the economic attributes behind social behaviors, and weak contacts achieve stronger binding through transactions.

Overall, after exploring early exploration and social craze, social networking has slowly explored the path of sustainable development. In the future, with the continuous improvement of infrastructure such as social data and network relationships, the real needs of social networking are slowly being explored, and Web3 social networking is just around the corner.

2.4 Game

From the perspective of demand, games are very similar to social networking, and they are both common application tracks in life; the difference is that the wave of games led by Axie in 2021 has proved that games can get out of their own alpha, while also being able to reap sufficient premiums in the secondary level by relying on tokens and money-making effects. However, the good times did not last long. As the top projects gradually cool down, there are more and more arguments about short-selling GameFi, and GameFi is often at the forefront. Judging from this survey, GameFi is also full of controversy.

The logic of layout game

Most institutions can find consensus on the discussion on why games need to be put on the chain. Animoca Brands and Huobi Ventures have made a detailed discussion on this, and we summarize it as follows:

1. Blockchain+games can achieve the return of player ownership, allowing the game to better establish a decentralized trust mechanism and asset transferability, making the game more sustainable.

2. Games are prone to derivatives of various trading scenarios. The gold-making and free markets in traditional online games and PC games have long existed. Both on-site and off-site markets have developed mature adjustment mechanisms and design logic, and there is also a demand for props and gold coins to flow in the game. However, the secondary trading market is not very common in traditional games, mainly because the company prohibits it. The user experience in this regard is actually not good. Blockchain technology has changed this point, and it will benefit both game companies and users. Now the company mainly makes money selling skins, and the secondary market of games also has huge space. Game companies can obtain continuous income by collecting transaction taxes. Players have greater freedom and can create and experience more gameplay, which will enhance their stickiness to the game, enhance the value of the game, and are more willing to pay for the game.

3. The diverse purpose of unique assets in the game (trading, speculation, collection) is relatively high in harmony with NFT. Some props in the game are unique, and these props also have differences in rarity and function. NFT is a natural thing.

4. Games can be used as the traffic entrance for L1 and the test field for L2. GameFi is regarded as the most active transaction and is so far close to physical applications. In 2021, GameFi's role in public chains begins to attract attention, and Ethereum's TPS cannot meet the computing requirements in game scenarios. Some high-performance public chains are beginning to seek new opportunities; for L2, there are currently lacks some cash bulls that focus on fast delivery and high activity, and games happen to fit in with it, and the two may achieve each other in the future.

From the above perspectives, games are of great long-term investment value. However, the existing GameFi development model has also attracted some doubts, and the biggest problem is the sustainability of games. Most of the current GameFi is a wave of flows. The short, flat and fast Play to Earn model can quickly attract a large number of funds, and the promotion of fomo sentiment GameFi often shows explosive growth in the early stage. But in the long run, the economic game structure of most GameFi is unhealthy, and it can even be said to be a Ponzi scheme. When the freshness of the game slowly dissipates, GameFi often manifests itself as insufficient succession and difficult to attract incremental users. The imbalance in the economic structure drives people who have previously gained dividends slowly out of the game system, triggering the decline in the economic value of game assets and accelerating the death of GameFi. If the game dies, the assets based on it will die, whether the assets are on the blockchain or on the centralized server.

There are two ways to solve this problem. The first is to make the game more fun and keep it very fun. The second is to make the economic structure healthier, so that players can have relatively stable game relationships due to the victory or defeat of the game or the division of labor in the game. It cannot be based on growth to solve all problems and let new players take over. These two methods require at least one of them to work. Only when the game-based assets have a foundation of long-term value, and its value consensus and trading logic are also possible.

GameFi development path

In terms of Maslow's hierarchy of demand theory, humans generally first meet basic physiological and security needs, and then pursue higher-level needs, such as social relations, respect, self-realization, etc. From this point of view, games are of higher-level needs and are in a very early stage of development in the blockchain world. Specifically, Ethereum's history is only 10 years, and the explosion of applications started with DeFi Summer in 2020, and GameFi represented by Axie was closely followed one year later. The booming bull market has made the development of GameFi a bit ahead of its pace. The primary market needs new narratives, the secondary market needs new gameplay, and the market has forced the rapid rise of GameFi. With the gradual cooling of the market, we have been able to re-examine the game track. Although there are shortcomings, from the perspective of long-term value, games are still regarded as a tool for killer applications built on infrastructure, and there are still many opportunities to nurture them.

1. See opportunities from the game team

First, the traditional game manufacturer of Web2. It is common for traditional Web2 companies to seek transformation and actively embrace Web3, and the game field is naturally no exception. Generally speaking, this type of game manufacturer that has been deeply engaged in many years has rich game development experience and resources. It has its own system in various channels such as game distribution, online operation, project revenue, advertising placement, etc., and it is not a problem to develop and operate multiple game products at the same time. Therefore, this type of game manufacturer may develop more than one game into the GameFi track, but a series of game matrices, using the existing user base to gradually realize user conversion, and inject more incremental users into the ecosystem. It is certain that although the user increment brought by this conversion is the most effective, the development and operation process is relatively slow, which requires game manufacturers to make long-term layout.

Second, crypto native game manufacturers. Relatively, some teams in the native crypto industry will choose to develop chain games. However, there are a considerable threshold for game development. Even if the talents of Web2 game manufacturers can be introduced into the team, after losing the operation and channels of the original large manufacturers, it is difficult for them to replicate their past success in gameplay. Therefore, some game teams began to change their thinking and try to find a way to break the deadlock from the token economic model. A good economic model must be full of games, allowing players to gain benefits from others while paying, rather than blindly pulling away the project side. Foresight Ventures proposed that for GameFi, the economic model is 1 and the gameplay is 0. Native manufacturers cannot compete with traditional games, and having a good economic model is the first priority.

2. See opportunities from game mode

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In general, from an investment perspective, GameFi's first-level investment is more risky. In the traditional Web2 game field, before any game is developed and launched, manufacturers will do a lot of market research and testing. The cost of manpower, material resources, financial resources and other costs are unbearable for the crypto industry, especially in time. Because this industry is too cyclical, the opportunity to make money is often linked to the overall market. If GameFi wants to take into account the playability of the game, it must be a strong and professional team, and the development cycle will naturally be extended. Therefore, this contradiction often means an increase in investment risks and bargaining chips.

Conversely, investment institutions in the crypto market usually seek relatively fast monetization capabilities, which will force GameFi teams to do things that are conducive to short-term value. Therefore, some GameFi that currently claims to develop for 1-2 years is not in good condition in the crypto industry.

In addition, from the perspective of the game itself, any game has a lifespan. The type of a game has been determined from the beginning. The difficulty of updating and iteration is relatively high, and investing in GameFi is more like a one-time transaction. Therefore, before the game solves the above problems, institutions are more cautious in taking action on game projects and tend to watch more and move less.

3. Where are the opportunities in the future

After analyzing so many fields, we can't help but think about what kind of projects will explode in the next bull market and which field will be born. What strategies should we adopt to seize these opportunities? We make some predictions, which does not constitute investment advice.

Prediction and strategy of infrastructure

Judging from the cycle rules of sector rotation, the next protagonist of the crypto market is likely to be (actually now) infrastructure.

ZK Mining is a good opportunity for both high win rate and odds. Similar to Bitcoin Mining, ZK Mining's concentration will not be very high and the returns will be relatively stable. Its market imagination space is very large. Although the current technical route (GPU/FGPA/ASIC) is uncertain, the residual value of the first two is high and the fault tolerance rate is high. The ZK Rollup platform has two relatively top projects, StarkNet and zkSync, but the competitive landscape of the industry has not been completely determined. This also contains huge opportunities. Judging from the technical strength and financing situation, the two top projects are still the most optimistic about. However, StarkWare is currently at a high valuation and may be risky.

The new public chain is in a state of rising power, which is a track with low winning rate but very high odds. They are still in the early stages, and the market is generally sluggish, so it is not yet time to explode. Investors have a relatively long time to study their innovations, go deep into the community, and witness the process of ecological construction together. Most of the value of public chains comes from ecology. When they see several high-quality projects or even special projects on a public chain, they will bet on their winning rate.

Middleware is similar to the new public chain, and is also an industry with low winning rate and high odds. It needs to pay more attention to upstream and downstream cooperation. For middleware, the advantages of leading projects will be more sustainable and you need to keep a close eye on it. Before the industry's competitive landscape is clear, it can be configured in an index manner, and it is not advisable to bet on a project alone.

Prediction and strategies of application

DeFi still has huge growth opportunities in the next bull market. DeFi is also an area with high odds but low winning rates. Currently, due to the sluggish market, DeFi will temporarily enter a dormant period. Some blue-chip projects may cross bull and bear, and their second growth curve needs to be superimposed on the performance improvement of public chains or expand their business scope. The focus of DeFi innovation may be on the derivatives field on Layer 2 or on the new public chain. In the derivatives field, the proportion of perpetual contract transaction volume is still far lower than that of CEX, and there is still room for development here. As the market continues to recover and rise, the demand and narrative of unsecured/under-collateralized lending and algorithmic stablecoins are long-term, and they may have growth opportunities. However, after the collapse of UST and 3AC, these two areas need to evolve. DeFi has great growth potential and high industry concentration, so the focus should be on leading projects.

The odds of social networking are extremely high, but the winning rate is very low. Its development requires the improvement of on-chain identity and public chain performance, and more application scenarios are needed. So it may be a field that was launched later. It is difficult to have breakthrough advantages when copying the existing model and cannot compete with traditional social giants. Blockchain-based social networking is not useless, and there may be opportunities in these aspects. First, meet the native needs of the chain, such as precise information transmission and community construction. Second, use the token economy to solve the real needs of actual social networking, such as trust issues in social networking.

The odds of the game are very high, and the winning rate is higher than that of social networking. It is a track that can accommodate many small and medium-sized projects. As more large companies enter, more incremental users will enter the market, bringing overall growth of the track. Therefore, games are the area where the next bull market is likely to explode. Fun is not necessarily the most important attribute of chain games. P2E narratives will definitely make a comeback, especially in the rising stage of the market. Games with better economic models may achieve greater success. To have relatively long-term development, an economic model with a stable game structure is essential.

Thanks to the more than 20 investment institutions that cooperated with the survey for their suggestions and inspiration for this article. The following is a list of institutions (sorted alphabetical order, institutions that do not want to disclose their names are not listed):

[1] The two words "win rate" and "odds" are used in the article to measure the cost-effectiveness of an investment. The winning rate refers to the probability of a positive return in the investment, that is, how likely it is to make money. Odds refer to how rich the investment will be if a certain investment produces positive returns.