*Forward the Original Title：HashKey Capital 2024 Web3 Investment Track Comprehensive Analysis

ZK (Zero Knowledge) Tracks

The ZK track expanded further into more application scenarios in 2023 beyond its previous focus on scalability and cross-chain contexts, further diversifying into different tracks.

zkEVM (Zero Knowledge Ethereum Virtual Machine)

In the zkEVM sector, there have been some developments in type0, type1, and type2 aspects. Type0 is fully equivalent to Ethereum but still faces technical challenges due to its strong emphasis on equivalence, such as block generation speed, deployment, and verification status. Type1, which improves upon and compromises with the EVM, is currently the most prominent in terms of overall application experience and opcode compatibility. Type2 has launched its mainnet earlier and is developing its application ecosystem accordingly.

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

zkVM (Zero Knowledge Virtual Machine)

The main technical route in the zkVM domain is currently zkWASM, which has stronger scalability. Therefore, it focuses on collaboration with exchanges to develop high-performance DEXs. Major projects in the zkWASM field include Delphinus Labs, ICME, wasm0, etc.

In the direction of RISC V architecture, RISC0 is a notable project exploring this area. Compared to WASM, it is more friendly to frontend languages and backend hardware, but potential issues include efficiency and proof time. Current applications are also expanding, such as Reth for simulating the Ethereum execution environment, FHE runtime environments, Bitcoin Rollup, etc.

Another area is zkLLVM. =nil; recently launched a Type-1 zkEVM based on this technology, enabling fast compilation of high-level languages into zkSNARK circuits.

ZK Mining

In the ZK Mining field, the efficiency of GPUs and FPGAs is currently similar, but GPUs are more expensive, and FPGAs are more like prototype verification. ASIC scenarios may gradually differentiate, such as special-purpose ASIC chips, new FHE demands, etc.

Additionally, the number of Prover DAOs has significantly increased, with computing power being a core competitive advantage. Therefore, miner teams creating Prover DAOs tend to have a distinct competitive edge.

ZK Middleware

ZK middleware can include scenarios like zkBridge, zkPoS, ZK Coprocessor, zkML, zk trusted computing, etc., involving verifiable computations. ZK Coprocessor scenarios are quite clear, with most projects reaching the testnet phase; the zkML track remains hot, with projects showing some degree of progress and competitive differentiation. Moreover, a new track has emerged for ZK proof sharing (sending proofs to a network collectively, then sharing revenue after batch processing).

MEV

• The main focus can be on the early stages of the transaction supply chain, namely the intention stage.
• There will be more and more next-generation DEX designs and infrastructure solutions for LVR and improving LP, attracting more capital.
• If private auctions/trading pools can operate effectively, they will greatly improve the transaction supply chain. The development of FHE, MPC, and ZKPs is worth paying attention to.
• Currently, most systems use centralized relays, permissioned solvers, and trusted builders, etc. However, we believe that the end game of the race will be permissionless, to achieve the most competitive market.
• The MEV supply chain will change in areas such as APS, order execution, PEPC, etc.

OFA

Order Flow Auctions (OFA) started to gain popularity in 2023. High-value transactions will no longer flow to public trading pools but to OFA, giving users back the value they create themselves. From RFQ auctions to block space aggregators, there are various OFA implementation schemes to meet different needs in price discovery and execution quality. Looking forward, it is estimated that more and more ETH transactions will be conducted through OFA.

Blockbuilder

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

Relay

The relay market faces two fundamental problems: (1) The market is concentrated in a few companies, namely BloXroute and Flashbots; (2) There are no incentive mechanisms for relays.

In the future, we look forward to seeing the rapid development and implementation of optimistic relays, as well as proposals for relay incentives.

AA

AA (Account Abstraction) tracks can mainly be divided into two major categories: smart contract wallets and modular services.

In the realm of smart contract wallets, companies within the AA wallet track have essentially mirrored the overall wallet track’s landscape. Relying solely on functionality to gain traffic has become increasingly difficult. Instead, attention is shifting towards the wallet factory aspect.

In terms of modular services, Bundler and Paymaster are functionalities that all these foundational providers must offer. In fact, these services have already become standard offerings.

Current trends in some tracks include:

• Most of the infrastructure has been built, with development now being relatively stable. According to data from the entire track, it has entered a rapid growth trajectory. The number of user wallets has been increasing since June, reaching over 6 million Userops by November, with about 200K MAUs.
• The development of AA on L2 is better than on L1, with EF considering native support for L2.
• The issue of DApps not supporting AA remains severe, including problems with implementing cross-chain and cross-Rollup accounts. New solutions need to be proposed.
• Private mempools will converge with MEV and intents to optimize user experience.

Intents

After gaining attention this year, Intents have developed rapidly, despite facing issues such as malicious solvers and trust in order flow. However, feasible solutions are available.

For Intents to develop better, considerations such as order flow and user acquisition are crucial. Therefore, from an architectural and business perspective, Intents are well-suited to integrate with MEV and AA architectures. Builders and Searchers are the most suitable roles for matching and solving.

Telegram Bots are likely to evolve towards Intents. Their advantage in order flow grants them significant bargaining power over builders and SUAVE, potentially exceeding that of larger wallets.

DA

The DA (Data Availability) track has fewer overall participants, mainly including projects like Celestia, Eigenlayer, and Avail, with varying progress. The head effect is significant, leaving little opportunity for the middle and tail segments. Projects in the DA track mainly focus on security (including data integrity and network consensus), customizability, interoperability, and costs. With the launch and price increase of Celestia, the overall valuation level of the DA track has been elevated. However, DA is essentially a B2B business, with the income of DA project parties closely related to the quantity and quality of ecosystem projects.

From a customer’s perspective, launching DA on Ethereum is the safest but most expensive solution. After protodanksharding, Ethereum’s fees have significantly decreased, so large Rollup projects still opt for Ethereum as their DA layer. Currently, customers of DA projects other than EigenDA are mainly from the Cosmos ecosystem and RaaS projects; EigenDA’s positioning is somewhat special, related to but not directly connected to Ethereum, which may attract customers from a middle ground. Additionally, some early-stage DA projects and DA targeting specific scenarios, like Bitcoin DA, may achieve notable market shares in niche areas.

Rollup Frameworks & RaaS

The rollup market is essentially saturated, awaiting new developments. Currently, at least 30 venture capital (VC)-supported Rollup-as-a-Service (RaaS) projects and infrastructure providers are entering the market. It’s important to understand which use cases have been successful on RaaS, as well as which interoperability solutions can be effective.

Some Layer 2/Layer 3 frameworks, such as OP Stacks, have received significant funding for public goods and developer adoption.

Specific applications, like DePIN, may potentially utilize Ethereum rollups through custom execution environments.

Additionally, there are many recent developments in rollup technology, such as Risc0 Zeth and other projects that can change the way rollup verification states are managed, without relying on validators or sync committees. When used with primitives like Zero-Knowledge Proofs (ZKP) and Multi-Party Computation (MPC), Fully Homomorphic Encryption (FHE) rollups can offer completely generic privacy for DeFi, among other possibilities.

Cosmos

The Cosmos Hub aims to continue strengthening its position in the ecosystem in various ways. For example, Partial Security Signalling (PSS) allows a subset of validators to provide shared cross-chain security (Inter-Blockchain Communication or IBC) without forcing all Cosmos Hub validators to join, reducing the pressure on validators and facilitating broader adoption. Additionally, the Cosmos Hub plans to enable multi-hop IBC to enhance user experience and add features like Megablocks and Atomic IBC to support atomic cross-chain transactions, potentially creating a unified Miner Extractable Value (MEV) market similar to the Ethereum ecosystem’s shared sequencer and SUAVE.

In terms of the Cosmos ecosystem, the development trajectory of application chains has recently been influenced by Layer 2 and other development frameworks, leading to a decline in the number of new projects. However, due to its highly customizable underlying framework and resilience, it can continue to evolve with the mainstream narrative, seeking public chains that have undergone customized modifications.

Security

Projects in the security track are making progress on various levels, offering tools and protocols for on-chain detection and interception, on-chain tracking tools, manual audit and bounty services, development environment tools, and applications of various technical methodologies (e.g., fuzz testing).

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

Beyond these different focuses, projects can also be evaluated on maintenance and update speeds, the size of the vulnerability database, mediums, and the actual needs of partners.

AI

The current integration of crypto with AI mainly focuses on areas such as underlying computational infrastructure, training based on specific data sources, chat tools, and data labeling platforms. In the realm of computational power infrastructure and power networks, projects are innovating at different points but are generally in the early stages and need to consider sustainable commercial expansion paths beyond creating different types of agents. Data labeling platforms are transforming traditional manual labeling services into Web3 formats, where the ability to obtain orders is crucial. However, as low-barrier data labeling may easily be replaced by AI in the future, it’s important to focus on securing more orders around high-value and high-barrier data.

Moreover, many new projects combining AI are developing To C chat tools, among other things. As a crypto fund, we are more interested in projects that focus on ZKML, have a data advantage in crypto-specific verticals, or are closely integrated with AI in To C products, rather than areas we are less proficient in, such as large language models and other basic infrastructures.

DeFi

A change in 2023 might be that many investors are looking for real yield products, such as those ideally coming from LSDfi or RWAs, rather than yield based on emissions. Additionally, with centralized exchanges facing significant regulatory pressure and assets needing liquidity, DEXs have a great opportunity, especially with the launch of L2s bringing the possibility of high-performance applications. Therefore, focusing on DEX opportunities on L2 could be beneficial.

On the other hand, projects enabling non-crypto-native users (including institutions) to access Web3 yields also have enormous potential. Those capable of abstracting blockchain elements and providing a secure environment for non-crypto-native users could attract significant funds. Specifically, according to a report by Messari, renowned projects including dYdX, GMX, Drift, and Jupiter, among others in the perpetual DEX sector, generate the highest fee revenue in their respective sub-sectors.

Liquidity staking continued to grow in 2023. Nearly 22% of all ETH is staked, with Lido accounting for about 32% of the ETH staking market share (as of writing). Liquid staking tokens actually remain the largest DeFi sector, with a TVL of 20 billion USD.

Gaming & Entertainment

Studio

Studio-type projects differ in characteristics and focus areas depending on their category, as summarized in the table:

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Overall, the quality and professional level of game development teams have significantly improved compared to the previous cycle. We continue to look forward to studios entering Web3 with a background in mature product development and operations, as well as seeking founders who are keen learners, sensitive to crypto and community, and willing to voice out, combining game producers with KOLs.

In terms of Web3, given the short history and lack of mature experiences in blockchain gaming, we value teams whose ideas and approaches align with Web3 principles, emphasizing rapid learning over extensive Web3 experience.

We will continue to pay attention to UGC, as centralized Web2 UGC faces issues that cannot be resolved. Besides providing tools for users to create content, UGC should also offer a fully transparent reward mechanism and freedom of asset trade, which decentralization can address effectively. We see great potential in teams with Web2 creator resources, aiming for transparency and higher earnings to attract these creators to Web3 UGC platforms.

Game UA

Projects in the Game UA category focus primarily on creating user profiles, incorporating three dimensions: on-chain, off-chain, and social interaction. These are divided into customer acquisition (Carv) and operational strategy (Helika). However, all customer acquisition platforms face the challenge of retaining users. Nonetheless, it is undeniable that player data holds value, which increases with the user base. If one is optimistic about the application’s potential for widespread adoption, game data analysis can capture a portion of this value.

Moving to game distribution platforms, the last cycle saw platforms centered on infrastructure and tools gradually lose competitiveness. Currently, the success of distribution services relies on core game products that can attract a large user base.

User/Fan Engagement

The project mainly involves the entertainment, sports events, and film and television industries. Based on the cooperation with IP owners, it can be roughly divided into two types: direct operation by IP owners and IP licensing cooperation. The latter places less operational pressure on platforms, but its effectiveness depends on the resources provided by the IP owners. Direct operation by IP owners usually results in better integration of IP events/content with end products and grants users more ancillary rights through NFTs, potentially leading to better fan incentives and feedback. Additionally, tracking several projects has shown that platforms with a solid community foundation (e.g., Karate combat) find it easier to convert existing users into IP fans than starting from scratch and building a fan base entirely based on IP for fan engagement. Future focus will be on entities with high IP value, audiences/fans overlapping with game/betting profiles, and direct IP collaboration targets.

Institutional Service

The institutional service track can be divided into the following sub-tracks:

• Trading/Brokerage Services: Including exchanges, liquidity providers, brokers/traders, clearing/settlement, etc.
• Asset Management: Including fund management, high-frequency trading, arbitrage, custody, etc.
• Banking/Payment: Including payment processors/in-out funds, issuing cards, banking-related services, etc.
• Other Services: Including trading technology providers, etc.
• The overall trend in this track includes:
• The institutional services track is expected to continue steady growth in the coming years.
• Compliance is a significant trend in the institutional services track, with companies actively building compliance infrastructure.
• The roles of various service providers are becoming more distinct, with each participant focusing on their core duties. This mutual checks and balances and supervision within sub-sectors promote a more honest and efficient market operation.
• The market share of PB (Prime Brokerage) services companies is expected to gradually increase. Attention should continue for areas currently vacant in crypto but mature in traditional fields (ECNs, Fully regulated clearing house, Cross Margin capabilities).
• During the window period for ETF applications, crypto-native service companies will face competition from traditional financial firms, further increasing the demand for compliant products and reshaping the market landscape.
• Europe is a hot spot for the development of the institutional services track, with emerging markets like South America also holding potential.

Bitcoin

Although Bitcoin has recently attracted attention due to inscriptions and similar features, the Bitcoin blockchain does not have a global shared state, which differs significantly from Ethereum’s entire approach (state, accounts, computation model). Therefore, in the medium to long term, the construction of Bitcoin infrastructure and applications needs to adopt a different approach.

In this context, it’s worth paying attention to Taproot Assets, Rollups, Lightning Network, and also tracking new technological directions such as Statechains.

Sidechains

Technological approaches like Stacks, which are part of sidechain technology, have long dominated the narrative of Bitcoin’s layer 2 network. This is because they have a relatively small technical burden (can be implemented off-chain) and allow for high programmability, facilitating a strong ecosystem effect. However, they primarily rely on cross-chain technology and anchoring to the main chain, which may be overshadowed by other new technological directions attracting more traffic and attention.

Layer 2

Many of the so-called Bitcoin Layer 2 technologies, from a core technical principle perspective, still resemble a sidechain form but have built a complete framework of execution, settlement, verification/challenge, and Data Availability (DA) following the Ethereum technology model. The differences in current Bitcoin Layer 2 projects mainly lie in the selection of technology stacks at various levels, for example, the execution layer adopting Cosmos SDK, OP Stack, Polygon zkEVM, Taiko, etc.; some third-party projects are implementing the DA layer, and some are self-implemented; additionally, an “account abstraction” layer or multi-chain wallet integration is generally included to support both Ethereum and Bitcoin address formats, facilitating user operations.

Client-side Validation

Technologies including RGB and Taproot Assets, which enable the issuance and trading of assets with minimal on-chain footprint, are worth continued attention.

Lightning Network

Lightning Labs plans to launch stablecoins and other assets on Taproot Assets next year. Additionally, the promotion of native asset yield products by Liquidity Service Providers (LSP) and others is also promising.

BRC20-like Assets

Assets similar to BRC20, due to their heavy reliance on certain infrastructures like indexers, merit attention towards these infrastructures and new asset types like ARC20. However, the technical implementation risks involved should be considered.

DLC

Discreet Log Contracts (DLCs), although proposed earlier, faced challenges in promotion due to limited demand. With the subsequent large-scale expansion of ecosystem construction, the application of DLC technology may become more widespread, especially in collaboration with some oracles. However, attention should be paid to the centralization risks introduced in the DLC implementation process.

DePIN

DePIN is a sector that can easily scale up during bull markets. Similar to gaming, DePIN also represents a pathway that can effectively convert traditional users, thus receiving considerable attention within the industry. DePIN centers around several key elements:

1) Decentralization, Gameplay, and Mechanisms**: These are the lifeline of DePIN. The investment in DePIN projects should start with an evaluation of their mechanisms.

2) Timing**: A good mechanism needs to align with the right timing. Projects launched in the early stages of a bull market will definitely acquire customers more easily, which requires the team to have a keen sensitivity to the web3 market.

3) Industry Fundamentals**: The choice of hardware type and the characteristics of the targeted users may determine the success or failure of a project. Below is a classification based on hardware types:

• Focus on ToC scenarios and markets where similar hardware is not yet popular could lead to revolutionary changes**: For hardware frequently used in ToC scenarios (e.g., wearable devices), web3 gameplay and mechanisms actually provide project teams with a better and more efficient product crowdfunding channel, lowering barriers for both users and merchants. In the world of DePIN, because of clear token incentives, users are more motivated to purchase hardware (quick return on investment), and merchants can even pre-sell before production. With flexible cash flow, merchants can then focus on fundamentals, such as enriching the software ecosystem, linking with other hardware, and empowering tokens within the ecosystem. This is especially true for underdeveloped regions where certain hardware might never be purchased without DePIN, but speculative participation in early mining might lead to widespread actual hardware adoption.

• Be cautious with improvement-type hardware**: For ToC placed or low-frequency but essential hardware (e.g., routers), where the user base and ownership are large, DePIN could be an opportunity to improve the experience. Theoretically, DePIN can redistribute resources and demands between suppliers and users, reallocating costs and revenues to create more reasonable unit economics, making services more affordable for users. However, challenges exist:

  1) Technologically, whether decentralization can surpass centralized solutions, as many decentralized computing or storage solutions may even be more expensive and less efficient;

  2) Commercially, whether it infringes upon the interests of centralized giants. Essential and large ownership implies numerous big players with years of user, brand, and financial accumulation. If DePIN solutions cannot achieve revolutionary breakthroughs on the fundamentals or unite forces beyond the influence of big brands, competing with web2 counterparts becomes challenging.

• Observe the specific direction of mining machines**: For other low-frequency, non-essential hardware in daily life, or even hardware purchased specifically for mining, DePIN might bring short-term returns but may not necessarily foster user loyalty. It’s not excluded that DePIN might cultivate new user habits, but this involves a certain degree of chance and is difficult to predict, requiring specific analysis for specific projects.

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