Abstract

Cycles and narratives have always been the core topics of the global crypto market. In the past, the industry used Bitcoin halving as a reference to perceive cycles and explore the direction of large narratives. However, after the approval of Bitcoin and Ethereum spot ETFs, the crypto market is highly coupled with the trend of the global financial market, and the variables affecting the trend of the crypto market are increasing.

Against the background of soaring chaos values, how to perceive the cycle more clearly and discover the future narrative trend is very important. As innovative narrative catchers, investment institutions have always been relatively cutting-edge. In view of this, OKX specially planned the "Crypto Evolution" column, inviting the world's mainstream crypto investment institutions to systematically output topics such as the cyclicality of the current market, the direction of the new round of narratives, and the subdivision of hot tracks, so as to inspire others.

The following is the first issue of content, which was jointly launched by OKX Ventures, Hashed and Animoca Digital Research around topics such as "Challenges and Opportunities in the Current Cycle". I hope their insights and thoughts will inspire you.

About OKX Ventures

OKX Ventures is the investment arm of OKX, a leading crypto asset trading platform and Web3 technology company, with an initial capital commitment of $100 million. It focuses on exploring the best blockchain projects globally, supporting cutting-edge blockchain technology innovation, promoting the healthy development of the global blockchain industry, and investing in long-term structural value. Through its commitment to entrepreneurs who support the development of the blockchain industry, OKX Ventures helps build innovative companies and brings global resources and historical experience to blockchain projects.

About Hashed

Hashed is a team of blockchain experts and developers from around the world, focusing on investing in and promoting the development of decentralization and blockchain technology. As a core technology contributor, Hashed actively participates in and accelerates the widespread application of blockchain and drives the transformation of the global economy and Internet structure.

About Animoca Digital Research

After years of investment, Animoca Brands has formed a diversified portfolio of more than 500 blockchain projects, focusing on GameFi and infrastructure. As a dedicated team of Animoca Brands Digital Asset Team, Animoca Digital Research is composed of a group of experts from various fields who are passionate about Web3 and decentralization. Through alpha tracking and practical experience accumulation, Animoca Digital Research's mission is to bring deep insights and unique insights to the industry while stimulating innovation and vitality in the community. Keep exploring and move forward humbly. WAGMI!

I. Cycle and Market Structure

1. What cycle is the current market in? Compared with the past, what changes have occurred in the structure of this cycle?

OKX Ventures:We believe that the industry cycle needs to be understood from the following three perspectives:

The first is the degree to which the industry begins to enter the mainstream of society. At present, the growth of the market size of Crypto remains at a scale of 2 trillion US dollars. Bitcoin and Ethereum ETFs have entered the trading range of the global mainstream financial market, and the scale of Bitcoin ETF exceeds 60 billion US dollars. The rise of RWA assets and the scale of government bond assets exceeding 1.8 billion US dollars also represent that the traditional world is being integrated into the Crypto industry.

The second is the improvement of the entrepreneurial environment. The inflow of VC funds is on the rise. According to statistics, the total amount of investment and financing in Q2 2024 exceeded 3 billion US dollars, a month-on-month increase of 28%. Overall, investment institutions are more active. At the same time, the continuous influx of outstanding entrepreneurs, entrepreneurs with leading industry backgrounds and top education backgrounds continue to enter the industry, and continue to contribute fresh blood to the industry.

Finally, there is the large-scale entry of users. In the past few years, the blockchain infrastructure has improved. Ethereum, Layer2 and high-performance public chains provide a friendly development environment and rich block space. User-side applications such as games, social networking and Telegram ecology are allowing more users to enter the Crypto world without perception. AI applications, Intent and account abstraction are lowering the learning threshold for users. We are on the eve of a large-scale application outbreak and remain optimistic about it in the long term.

Hashed:The cycle of the crypto market is affected by many factors, including macroeconomic conditions, policy changes and technological progress. The difference between this round of market cycles and previous ones is that institutions have begun to actively enter the market, which shows that the industry has begun to be constrained by the regulatory framework, and it will be difficult to continue the high market volatility as before.

There has not been a significant increase in new money from retail investors in this cycle, but with the approval of the Bitcoin ETF, institutional interest in Bitcoin has become more active, making the market look like it is on an upward trend. But with the exception of a few top-cap tokens such as ETH, SOL, and TON, many other top-cap players are going through difficult times. The legitimacy of each token, especially the role of application tokens, is facing unprecedented challenges.

Many coins that are not on the institutional shortlist face major challenges, which is why many altcoins have not achieved multiple growth in the past. Under current market conditions, the continued issuance of tokens without fundamentals or valuation logic remains a barrier to new capital inflows, as these tokens are viewed negatively in the minds of retail investors, especially on issues such as low circulation and high FDV.

In addition, one of the main reasons for the limited flow of funds into the crypto market is the macro-level attention and asset allocation. Retail investors have a greater impact in the public market than expected. While they poured into the crypto market in late 2020 and early 2022, they are now pouring into the generative AI space. Although most AI startups are not yet significantly profitable, they are still raising a lot of money, creating valuations that are difficult to justify. This trend is similar to the price phenomenon of major tokens from 2020 to 2022. From the perspective of the attention economy, these reasons can explain to some extent why this crypto cycle does not have the same impact as previous ones.

Animoca Digital Research:We believe that the cryptocurrency market is still in a bull cycle as of August 2024. Despite some recent volatility in global asset markets, the medium-term outlook remains positive. Compared with previous cycles, the current cycle has not yet reached its peak. The recent correction of about 30% is well within the historical range and is in line with the normal pattern of bull market adjustments.

Despite the recent volatility in the TradFi market, we observe that there are still several positive drivers in the crypto market in the medium term:

German government liquidations:The large-scale liquidations in July forced the sale of leveraged longs in the system, leaving only strong spot holders. A new round of liquidations in August further cleared out leveraged positions.

Exchange traded fund purchases:The majority of cryptocurrency purchases came from BTC and ETH ETFs, showing:

· TradFi buyers have a deep understanding of asset volatility and are not easily affected by market fluctuations. During the recent round of market volatility, the trading volume of both types of ETFs has only increased slightly and is still far from their historical peaks

· TradFi buyers are price sensitive and their purchase decisions are influenced by price levels.

FTX liquidation:FTX's bankruptcy liquidation will unlock $10 billion in funds before the end of the year. Although the time is not determined, it has a positive impact on the market.

Fed rate cut:Rising unemployment and cooling inflation increase the possibility of a rate cut in September. Specific indicators include Q2 US GDP growth of 2.8%, unemployment rate rising to 4.3%, and inflation stabilizing between 3.1% and 3.5%.

2. In view of the global environment, what core issues in the crypto industry need to be addressed?

OKX Ventures:In view of the current macro environment, we think the industry needs to focus on two core issues:

First, the sustainability of technological innovation is crucial. Although significant progress has been made in infrastructure, how to further enhance network security while improving transaction efficiency and reducing costs remains a key issue that needs to be addressed. This requires not only the continuous iteration of technology, but also close cooperation and collaborative innovation among all parties in the industry.

Second, the integration of popular science education and culture cannot be ignored. Although the user base of cryptocurrency is rapidly expanding, the public's understanding of cryptocurrency technology and its applications is still relatively limited. Therefore, we believe that it is particularly important to enhance the public's knowledge of encryption, which will help more ordinary users understand and participate in this industry, thereby promoting the healthy development of the industry.

Hashed:In the current environment, we believe that the crypto industry should focus on solving two core issues.

The first is the need to leverage blockchain technology to decentralize and distribute increasingly centralized technologies, such as closed-source AI. This is not just about AI, but also about the social problem of too much power accumulated by a few entities. The rise of blockchain technology was born out of dissatisfaction with centralized government agencies, censorship, and financial control, as well as a desire to freely exchange and store value. This topic is resurfacing, this time including concerns about corporate and government centralization and censorship. AI (especially AGI) is a technology with huge potential and impact on human history. Due to its nature, it is seen as a national security issue, leading to higher fortress building. If the development of AI is concentrated in a few centralized companies and institutions, large-scale surveillance problems may arise. If AI is inherently centralized, then solving these problems through the spirit of blockchain - which is in stark contrast to it - is a real problem that the industry should strive to solve.

The second is that the incentive mechanism of the crypto market needs to evolve. Tokens, as a tool for incentives and ownership, have not yet played the role they should. Insufficient precise engineering of token dynamics and market price discovery has led to network tokens not being fully utilized as a tool for incentive alignment. Until this fundamental problem is solved, the growth of token-based decentralized networks will face significant limitations.

While various mechanisms have been designed and many protocols have experimented with incentive alignment, effective and capital-efficient incentive allocation and alignment has not yet been achieved. Therefore, it is not difficult to understand why there are not more projects that utilize tokens to replace traditional companies. We look forward to seeing solutions to these long-standing industry challenges. We support industry participants who understand the essence of the economic value of blockchain protocols and promote the replacement of traditional corporate structures with broader decentralized protocols.

Animoca Digital Research: The expansion of business scenarios and user acquisition remain the core challenges of the industry. This includes direct users, such as converting gamers into Web3 users, or getting ordinary chat users on TON to start using on-chain payments, as well as enterprise-oriented scenarios, such as the penetration of RWA into traditional finance. These are issues that the industry needs to continue to address. The high valuations of many existing projects, especially infrastructure projects, are based on expectations of a significant increase in future usage. Only the continued growth of real users and usage can support the high valuations of a large number of infrastructure projects, and ultimately transform tokens from speculative funds in the hands of users into payment media that support decentralized collaborative networks, thereby truly realizing the value of the project.

II. Future Challenges and Opportunities

On Challenges:

OKX Ventures:At present, one of the challenges facing the industry is that although a lot of money and resources have been invested in infrastructure construction, there are not many applications that are truly effective and can attract a large number of real users. Although many infrastructures have made significant technological progress, their end-user acceptance and practicality have not improved significantly. In addition, for blockchain infrastructure, there is a problem of how to serve end users more efficiently rather than just being a technology showcase. For example, despite the existence of advanced technologies such as FHE (fully homomorphic encryption) and ZK (zero-knowledge proof), these technologies still face many difficulties that need to be overcome in the real large-scale application and popularization. We need to find a more effective balance between technology promotion and application development.

In addition, at the practical application level, the relatively mature DeFi (decentralized finance) field has grown in market size in the past few years, but it is still eager for products that can solve specific needs and are more innovative. At present, many DeFi projects are trying to include multi-chain operations, increased decentralization, the introduction of more physical assets and derivatives, but to make these products serve a wider range of scenarios and truly achieve the perfect combination of liquidity and functionality, continued efforts and innovation are still needed.

Hashed: We believe that the crypto industry faces two core challenges: regulatory review and infrastructure scalability.

First, regulatory uncertainty is the main obstacle. Although crypto technology is universally used, to become a legal asset class, it must comply with the regulations of major economies (such as the United States, China, South Korea, Singapore, etc.). Local regulations vary greatly and change rapidly, making compliance more difficult.

To address this challenge, Hashed actively engages with global regulators to promote clear, fair, and consistent regulatory frameworks. In 2022, Hashed established the Hashed Open Research (HOR) and Hashed Open Dialogue for Law (HODL) initiatives to promote dialogue between the blockchain community and governments, help our portfolio understand the latest regulatory best practices, and work with academia and industry experts to drive company development.

Secondly, infrastructure scalability is also a major challenge. Bitcoin and Ethereum are inefficient when processing a large number of transactions, with high fees and slow processing. Although the Ethereum Foundation has improved the scalability of the mainnet through network upgrades, the research and development of Layer 2 protocols and non-EVM L1 chains are equally important. Hashed has invested in Layer 2 projects Taiko and zkSync, and supports Solana's efforts to increase transaction throughput and reduce costs, and has also invested in ecological projects such as Backpack. Hashed will continue to identify and invest in projects that can drive growth and scalability in the crypto industry.

Animoca Digital Research:In our view, the current challenge facing the industry is that it is difficult to attract and maintain retail investors to continue to participate in new projects. After this year's TGE, the fully diluted value (FDV) of the project declined rapidly, and the transparency of token airdrops also caused controversy. These factors have led to a decrease in retail investors' interest. However, retail investors are an important source of market liquidity, and their absence poses a certain threat to the healthy development of the crypto ecosystem.

To meet this challenge, venture capital firms and exchanges should take active measures, such as jointly improving the price discovery mechanism of projects. This may include developing more complex valuation models and introducing transparent data-driven pricing processes. By improving the accuracy and reliability of project valuations, the market can build more trust and confidence in the minds of users. Project teams should also focus on coordinating the interests of projects and communities, and establish mechanisms for the community to better participate in network effects and share network value.

Talk about opportunities:

OKX Ventures:We believe that a major opportunity in the new cycle is to use cryptographic technology innovation to introduce Web2 users to the Web3 field and achieve effective retention. In addition, the integration of AI technology and Web3 is also a very important sector, which is important for improving transaction efficiency, promoting personalized user services and building new products. For example, using AI to analyze and predict market trends, or automating more financial services through AI-enhanced smart contracts.

Combining the challenges mentioned above and the opportunities in the new cycle just mentioned, the overall idea of OKX Ventures at present is to optimize resource allocation, improve the rigor of project review and investment decision-making, and ensure that funds flow to projects that can bring real technological breakthroughs and user growth. At the same time, look for innovative projects that can bridge existing technologies with market demand, such as Web3 applications with highly assimilated Web2 advantages, so as to drive the entire industry forward.

In addition, we will maintain cooperation and exchanges with other participants in the same industry, and constantly adjust and optimize investment strategies to ensure that we can provide support for industry construction in the new cycle. For investment institutions, wanting to stay at the forefront of innovation requires not only courage and foresight, but also meticulous strategic planning and execution. We remain optimistic about the development of the industry in the new cycle.

Hashed:We believe that there are two particularly meaningful opportunities in the next five years: the tokenization of real-world assets (RWA) and the use of encryption technology to achieve innovation from 0 to 1.

First, the tokenization of RWAs can unlock the accessibility and capital efficiency of illiquid assets. For example, in areas such as real estate, commodities, art, and even intellectual property. Tokenized assets can provide fractional ownership, increase liquidity, and make hard assets or intangible assets that were previously limited to specific individuals or institutions more widely accessible. To promote the development of this field, we are looking for teams with expertise in handling traditional assets and are committed to tokenizing them. For example, Story Protocol, an open source infrastructure that tokenizes intellectual property and gives it programmable provenance, attribution, and monetization functions.

Another opportunity is to discover entrepreneurs who can use blockchain technology to achieve "from 0 to 1" innovation. They have the opportunity to redefine existing paradigms and create new market opportunities. On the one hand, we believe that there are certain opportunities in the payment field, such as realizing open finance through mobile devices and blockchain-driven payment systems to provide financial services to people without bank accounts. After all, blockchain technology is suitable for fast settlement and low transaction costs, but there is no clear winner in the payment field yet.

On the other hand, capital efficiency within the Bitcoin network has not been fully utilized. Although Bitcoin has a market cap of $1 trillion, less than 0.1% of the market cap is captured on-chain. There is a huge opportunity in this area of helping users earn returns and develop on-chain strategies. Ethena is the latest example in this field. They tokenized the funding rate to form a "synthetic dollar" tool, creating the first native crypto Internet bond. Ethena captures funding payments from CEX traders, tokenizes them into a neutral on-chain tool, and can be used across multi-chain DeFi, such as DEX, collateralized lending markets, derivatives trading, etc.

Animoca Digital Research:In our view, the main goal of Web3 at this stage is to attract and retain users who migrate from Web2 by providing real value. Here are three main directions.

The first is the TON ecosystem. TON on Telegram and its Mini Apps framework provide the infrastructure to seamlessly integrate Web3 functions into daily use. TON has more than 900 million monthly active users and has successful experience in mini programs and payments. We believe that TON has the potential to create breakthrough applications similar to WeChat Pay's "Red Packet Moments" through the promotion of mini programs, quickly introducing and retaining a large number of users. In addition, the application of TONcoin on the Telegram platform also provides opportunities to improve advertising channels and user value sharing mechanisms.

The second is GameFi. Animoca Brands' Mocaverse has built a network of 700 million users and provides multiple powerful platforms. Projects that can effectively integrate and utilize the Mocaverse ecosystem are expected to achieve accelerated growth and increase the value of related digital assets, becoming more attractive targets.

Finally, there are consumer hardware products such as smartphones and smartwatches. These devices can be pre-installed with Web3 products and applications to simplify the user's entry experience, while embedding some airdrop mechanisms to stimulate new users to use. In fact, this is especially important for emerging markets where infrastructure is not yet perfect, because Web3 infrastructure can help these countries enter the digital economy that does not rely on traditional institutions.

Three, narratives that OKX Ventures, Hashed and Animoca Digital Research are paying attention to

OKX Ventures:OKX Ventures is currently continuing to make extensive layouts in multiple tracks such as AI, GameFi, DeFi, Web3, NFT and Metaverse, as well as blockchain underlying infrastructure, currently covering a total of more than 300 projects. The core basis of investment is the current market demand and expectations for the future. The main directions currently focused on include infrastructure construction, promoting DeFi product innovation, and shortening the distance between Web2 users and the Web3 world.

From our portfolio, although infrastructure and DeFi are still the core of the layout, we have also witnessed the rise of Web3 and gamification applications, which to a certain extent reflects that the cryptocurrency market is gradually evolving from a pure financial tool to a platform that includes a broader user experience. With the maturity of technology and the development of the market, the cryptocurrency industry may further integrate more daily application scenarios in the future.

In the next development cycle, OKX Ventures firmly believes that by funding innovations in these key areas, we can drive the industry forward and further promote the maturity and widespread application of the entire cryptocurrency ecosystem. Our goal is to bring users a richer Web3 experience by leading technology and business model innovation.

About infrastructure construction:We will continue to invest a high proportion in high-performance and cost-effective technical solutions. This includes parallel processing technologies such as MegaETH and Monad and public chains built for specific needs, such as AI-specific chains and FHE (fully homomorphic encryption) and ZK (zero-knowledge proof) technologies for enhanced privacy protection. These efficient technical infrastructures can not only drive new user growth, but also generate revenue, which can further promote the sustainable development of the industry to a certain extent.

About the innovative DeFi track:Considering that the DeFi field already has a very mature market and user base, the focus is mainly on multi-chain, higher degree of decentralization, introduction of RWA technology, and development of more complex financial derivatives.

About the large-scale introduction of Web2 user layers:In the process of driving the migration of Web2 users to Web3, we pay special attention to opportunities that can be integrated through existing large-traffic platforms. For example, by leveraging AI technology and platforms (such as ChatGPT) and leveraging the power of social media (such as Telegram), Web3 projects have the opportunity to reach hundreds of millions of ordinary users who have never been exposed to cryptocurrencies, which will bring a huge growth opportunity to the entire industry.

Hashed:The narrative we focus on has not changed, the only thing that has changed is that the industry is maturing, which allows us to see the actual effects of these applications and infrastructure. We focus on applications and infrastructure that inspire positive and meaningful behavioral and lifestyle changes, while cultivating a thriving ecosystem of real builders, users, and producers.

For example, Axie Infinity, which we invested in, has attracted a large number of players in Southeast Asia and Asia Pacific by pioneering a new business model and providing them with considerable income. By building infrastructure like Katana DEX and Ronin Bridge, Axie Infinity’s Ronin ecosystem has now grown to over 1.5 million daily active users and 3.8 million monthly active users, supporting high-quality games like Pixels and Apeiron.

Against the backdrop of the gradual development of RWA and the large-scale migration of Web2 users to the Web3 market, we have also incubated the blockchain-driven entertainment studio Modhaus, which manages the new generation K-pop girl idol group TripleS and plans to launch more sub-groups. In the past, fans could only passively participate in idol activities by attending concerts, watching shows, or purchasing peripheral products, and had almost no say in community governance. Modhaus uses blockchain technology to change this situation through on-chain governance and DAO. For example, fans can vote through purchased photo cards (Objekts) to select TripleS's debut title song, and each vote is called Como. All activities are transparently recorded on the chain.

In addition, Story Protocol, which we invested in, pioneered and commercialized programmable intellectual property (IP), attracting the attention of builders in the media, entertainment, and blockchain industries. The gap between the Hollywood writers' strike in the West and the Eastern animation industry shows that IP giants dominate most IP-derived revenues, but fail to provide clear and transparent monetization methods to original creators and stakeholders. To address this centralization issue, Story Protocol's IP graph allows any stakeholder, including original content creators, to easily track, prove and manage the flow of IP and its derivatives. Its three core modules - on-chain IP registration, licensing and royalty management - are currently in the testnet, inspiring stakeholders in the media and entertainment industry to use blockchain to solve the black box centralization problem, leading to exponential growth in users and builders before its mainnet launch.

Animoca Digital Research:The Web3 ecosystem has evolved from an initial isolated model to modularization and is now beginning to form a collaborative network. This allows projects to focus on their core value and be able to leverage the capabilities of other projects to expand. Coprocessors and intent-centric design are two innovations that can significantly enhance the large-scale development of Web3 and are worthy of our attention.

About Coprocessors

Coprocessors offload a large number of on-chain query and transaction tasks to off-chain processing and return the results to smart contracts in a trustless manner. It provides a powerful framework for managing and verifying the state of digital assets in a scalable manner while maintaining trustlessness, thereby enhancing the security and auditability of asset ownership, transfers, and other critical activities.

In GameFi, applications often need to handle complex game mechanics, player interactions, and economic transactions. For example, an on-chain jigsaw puzzle game may require cumbersome user signatures or verifications at each step. With the use of a coprocessor, computationally intensive game logic can be moved off-chain, allowing the main blockchain to handle only the confirmation and verification of the final state. These innovations enable games to develop more complex game modes and in-game economies, such as loyalty programs that are fully on-chain.

Intent-centric design

Intent-centric design is a philosophy that prioritizes user outcomes over process complexity. It aims to achieve the desired outcome without burdening the user with unnecessary technical details.

In GameFi, intent-centric design lowers the barrier for mainstream users to enter and utilize Web3 capabilities. Users can join Web3 games directly without downloading crypto wallets or managing gas fees; the online identities created and the digital assets earned can be used seamlessly in other games; and the rewards earned can also be used directly to pay for other services without conversion or transfer.

For OKX Ventures’ disclaimer, please read here.

For Animoca Digital Research's disclaimer, please read here.

Risk Warning and Disclaimer

This article is for reference only. This article only represents the author's views and does not represent the position of OKX. This article is not intended to provide (i) investment advice or investment recommendations; (ii) an offer or solicitation to buy, sell or hold digital assets; (iii) financial, accounting, legal or tax advice. We do not guarantee the accuracy, completeness or usefulness of such information. Holding digital assets (including stablecoins and NFTs) involves high risks and may fluctuate significantly. You should carefully consider whether trading or holding digital assets is suitable for you based on your financial situation. Please consult your legal/tax/investment professionals for your specific situation. Please be responsible for understanding and complying with local applicable laws and regulations.

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