As one of the most active crypto VCs, HashKey Capital regularly analyzes every Web3 sector internally. In the 1H 2024, we “open source” our internal sector analysis and insights as our contribution to the industry. 

The authors of this article include (in alphabetical order): Arnav Pagidyala, Harper Li, Jack Ratkovich, Jeffrey Hu, Junbo Yang, Jin Ming Neo, Stanley Wu, Sunny He, Xiao Xiao, Yerui Zhang, Zeqing Guo.

Ethereum

Zero Knowledge

ZKVM & ZKEVM

In the 1H 2024, we saw an increasing number of ZKEVM projects shifting to a ZKVM architecture with the PSE team under Ethereum Foundation leading the way. Taiko is already working with Risc0’s ZKVM, and Scroll is also preparing in this area. 

A catalyst for this transition is Plonky3 which offers better performance than Halo2 (though less stable) and enhanced user experience. 

Available VMs in this space now include: ZKWASM, Succinct’s SP1, a16z’s JOLT, and Risc0. Additionally, Polyhedra’s ZK Prover performs well and will also develop a VM in future. Aztec and Mina are working on their own VMs but have yet to release their performance benchmarks. 

The catalyst for greater adoption will rely on several factors such as cost of proving, proving efficiency and development time. Currently, there is a consensus that using zkVM is apt for building and deploying verifiable applications so developments in this area is something that we continue to focus on. 

ZK Middleware 

In terms of middleware, we have proof verification systems and the space remains highly active with Brevis, Alignlayer and Nebra collaborating with Eigenlayer to enhance security while lowering proof generation costs. As zk proof is relatively costly, there is a shift towards a hybrid approach that utilizes both OP and ZK to enhance verification efficiency. As demand for verifiable offchain computation and verifiable AI applications grow, we will continue to track innovations in this field.

MEV, Chain Abstraction/Account Abstraction, Intents

MEV Developments

• At Flashbots, the team has been experimenting and building products utilizing Intel Software Guard Extensions and most recently attempted running confidential compute using Trusted Execution Environments (TEEs) on the Ethereum Virtual Machine. Some of these use cases include storing and processing of sensitive data, keeping the bidding auction safe from tampering and data leaks. 

• FHE has also taken the spotlight as a potential solution to combat MEV as it keeps data encrypted at all times removing the possibility of selectively reordering. 

  
  

Block builder

As we’ve seen via relayscan, the builder market has centralized around only a few builders, some of which are notorious HFT firms that first serve their own trading needs.

The top 3 most dominant block builders currently are beaverbuild, titan builder and rsync builder, which are also the most profitable ones in the market. This presents a centralization issue that guides future research in the design of block auction to preserve Ethereum’s censorship resistance. 

Relay

Relays continue to play a quintessential role in block supply as more than 90% of blocks pass through them. Titan builder also launched their Titan Relay this year which has seen increasing growth since inception. 

Generally when evaluating Relays, there are several factors:

• Performance and reliability which can be analyzed from metrics such as uptime, latency and bid faults. 

• Relay scalability refers to the ability of a relay in catering to a large number of validators. 

In the MEV sector, we have previously invested in several successful projects, including Primev, the inventor of preconfirmation; Titan, a leader in the block building market; and FastLane, one of the few successful MEV systems apart from Flashbots. In the next phase of growth, key questions include how MEV-related projects will achieve value capture and how they can successfully design their tokens.

Chain Abstraction and Account Abstraction (AA)

Chain abstraction, an enduring yet essential concept to onboard masses,  refers to an elevation of user experience such that users are unaware that they are on a blockchain or which blockchain they are on. NEAR, one of the earliest pioneers in this space, has introduced multichain signatures that allow one account to be used across different chains. Supported chains include: Bitcoin, Ethereum, Cosmos Chains, DogeCoin, XRP Ledger, TON Network, Polkadot among others. 

Analysis of the chain abstraction landscape can be segmented into 4 different layers: Application layer, permission layer, solver layer and settlement layer as defined by Frontier Tech. The AA track is mainly divided into two categories: smart contract wallets and modular services. As previously mentioned in our 2023 sector review, smart contract wallets play a vital role in providing a seamless user experience through an increasing focus on being intent-centric. 

Notable observations in this space:

• The number of AA accounts has exceeded more than 12 million with more than 49 million UserOps called. 

• Weekly active smart wallet accounts have also been on an uptrend with Polygon retaining the top position as the network with the highest number of smart accounts. Another popular platform for smart accounts is Base. A contributing factor to this could be due to the launch of Coinbase Smart Wallet equipped with account abstraction functionalities. 

With EIP-7702 included in Ethereum’s Pectra Upgrade, this will usher in a more seamless and user/developer friendly experience as it aims to improve upon previous AA designs like ERC-4337 which is costly and does not have native support to convert EOAs into smart accounts. With a protocol-level enhancement to user experience, we look forward to how that translates into new/better quality applications in the future.  

Beyond account abstraction, other areas within this field include policies-based engine, intent frameworks, and preconfirmations. Projects related to intent are still under active development, and their specific performance and product-market fit (PMF) remain to be observed. 

Bitcoin

Bitcoin rollups have garnered significant interest earlier in the year. However, towards the later part, interest seems to be dwindling as we observed during the Bitcoin Asia event. Fewer projects are emerging and fundraising seems challenging in this current climate. Despite that, we have seen several notable technological breakthroughs such as BitVM. Some rollup projects are exploring the integration of BitVM which has seen rapid innovations such as the creation of the BitVM bridge. The bridge can be used for large cross chain transactions while smaller transactions are expected to continue relying on multisig or HTLC swaps for economic efficiency. For more details, please refer to prior research on this topic. 

Overall, despite the challenges faced by rollups, technological advancement such as BitVM could bring back vitality to the Rollup ecosystem by having better cross-chain interoperability. 

Yield Focused Bitcoin Strategies

Yield focused strategies are also gaining traction with more projects offering wrapped BTC for holders to earn yields while also bootstrapping liquidity. For instance, projects like Mezo integrate various products, where rollup is just one component alongside others like tBTC and Acre’s stBTC (liquid staking). 

In this field, we continue to exercise prudence and invest in teams with defined technical advantages, well-defined GTM strategies, or proven successful experience. 

BRC20, Runes, Atomicals, RGB, Taproot Assets

Performance of BRC-20 tokens remained weak, with ORDI, down significantly compared to the start of the year. While Runes recorded strong interest following Bitcoin halving, this interest has waned as well. This is in line with the trend of declining network activity and fees. Taproot assets integration with Lightning network could potentially spark renewed interest and momentum. 

In general, on the premise of a sustainable adoption of Bitcoin assets, infrastructure providers servicing this growing asset class could prove to be a compelling investment opportunity. 

Bitcoin Staking

Bitcoin staking generated considerable interest in 1H 2024, with heavyweight Babylon raising $70M led by Paradigm. The emergence of Bitcoin staking (restaking) addresses two key needs: (1) providing yields for Bitcoin holders, (2) creating utility for Bitcoin. 

Staking approach can generally be categorized into 3 types: 

1. Principal slashing: Babylon is an example where this approach is used.

2. Interest slashing: CoreDAO focuses on slashing potential earnings rather than the principal itself. 

3. No slashing: This category includes self custodial L2s (e.g., Rollups aiming to boost TVL while promising returns) and financial products like BounceBit, where users’ bitcoin is managed by an asset management team to generate yield. 

Babylon, a leading player in the Bitcoin staking, has developed a broad ecosystem, with many Bitcoin-related applications planning to use Babylon to leverage on Bitcoin underlying security. In Babylon's ecosystem, staking-related projects will mainly focus on implementing auxiliary features. For more details, please refer to the Babylon Ecosystem section.

Bitcoin staking (restaking) bears resemblance to Eigenlayer with applications and infrastructure development following a similar path. For example, Babylon mainnet has seen early success with its TVL ceiling quickly achieved following launch. We remain optimistic on the future development of Babylon. 

Bitcoin DeFi, MEV

BTCFi: We observed many BTCFi applications in 1H 2024 with most applications still focused on lending and stablecoin applications. Several approaches such as locking assets on Bitcoin while handling logic on the L2 for asset issuance or choosing different asset issuance methods can lead to different trade-offs. 

Wrapped BTC sector: WBTC, tBTC, FBTC, and SolvBTC have been gaining significant interest recently. Solv Protocol for example, has witnessed huge demand derived from extensive partnerships, DeFi integrations, and cross chain composability, that allowed the protocol to receive more than 13.5K BTC staked. We anticipate greater competition in this area moving forward as more projects look to utilize Bitcoin in DeFi applications. 

Bitcoin DEX and related applications: Onchain DEXes are still primarily using PSBT, while some projects like Satflow uses pre-confirmation strategies within the mempool. However, this approach comes with the risks of transactions being replaced. 

MEV: The activation of RBF and introduction of new types of assets have led to a more active MEV scene on Bitcoin. Projects like Rebar aim to  build MEV infrastructure similar to what Flashbot is doing with Ethereum, while others like Alkimiya, focus on the fee/blockspace market. Current MEV related activities are mainly from transaction acceleration services. We will continue to monitor the ongoing developments in this space as new projects introduce various services to mitigate the negative effects of MEV on users. For more insights on MEV, refer to our previous report on Bitcoin MEV.

Bitcoin Technical Developments

OP_CAT

Despite being an easy opcode to implement, the activation of OP_CAT ushers in more advanced features such as Merkle Tree verification and more complex operations such as leveraging Schnorr signatures to verify transactions. However, there are concerns about its flexibility, which could introduce unforeseen risks. In May 2024, OP_CAT was activated as a soft fork in the Bitcoin Inquisition client (a client on the signet network). However, the soft fork approach itself remains a topic of debate, especially since the Taproot upgrade, which involved significant discussions about both the content and the process of soft fork upgrades. Therefore, it’s uncertain whether OP_CAT will be activated soon, and if it is, it will likely spark further controversy. The same considerations can be applied to other soft fork upgrades such as OP_CTV (which sparked heated debates in 2022) and APO. 

BitVM

BitVM made significant breakthroughs by increasing the expressiveness of Bitcoin, with BitVM2 improving upon prior BitVM design, enhancing complex computation verification and minimizing trust assumptions. Recent advancement primarily on the development of the BitVM bridge has reached a certain level of maturity and security, potentially achieving testnet/mainnet readiness by the end of 2024. BitVM2 is more ideal to handle large value assets leaving opportunities for other cross-chain bridges to exist. Alternative cross chain solutions via multisig bridges or atomic swaps remain relevant for retail users as they are faster and more cost effective. Additionally, we might also see new verifier networks being built on BitVM2 in future. 

Recent developments in Channel and Joinpool solutions

Channel and joinpool-related solutions have gained meaningful progress. These solutions allow two or more users to share a UTXO on the main chain, while off-chain logic determines the allocation (vTXO). When users want to exit, they can perform a unilateral exit back to the main chain for settlement.

Aside from Hedgehog, recent attention has primarily been focused on Ark.

Burak introduced Ark v2, which offers higher capital efficiency and also proposed a related concept known as Brollups.

Statechain is another interesting approach, functioning similarly to Joinpool-based UTXOs. Mercury Layer has made significant strides in developing this area, and new projects like Mach are working on the underlying infrastructure.

Bitcoin, being the largest asset, has historically been regarded as a digital gold. However, with more innovations like BitVM2, OP_CAT, Bitcoin Staking, we are witnessing greater utilities of Bitcoin. Although relatively nascent compared to the DeFi ecosystem on Ethereum, we think these catalysts will allow the Bitcoin DeFi ecosystem to see similar success in future. 

Solana

Institutional Interest

During Consensus, Paypal announced the launch of PYUSD on Solana. Since then, the market cap of PYUSD has accelerated due to integrations with large DeFi protocols in Solana such as Kamino Finance, Jupiter and Orca among others. Another sign of institutional interest in the space, Stripe, has announced its re-entry into Solana by allowing users to accept and make payments in USDC. 

The firm behind Solana, Solana Labs, has announced the launch of Bond, a blockchain-based platform that could potentially accelerate institutional adoption as it seeks to enhance brands’ customer engagement.

Apart from the growing interest in Solana from institutions, we noted high interests around themes like Blinks and memecoins, with the core focus being retail consumers. 

Solana Action and Blockchain Links (Blinks)

In late June, Solana introduced Solana Actions and Blockchain Links (Blinks) that created a more seamless experience for retail users to join web3. Through Solana Action API, users are able to convert any transaction into a blockchain link which can be shared on any interface. 

The impact of Blink is that application developers (especially Web2 developers) can more easily embed on-chain actions across devices and platforms. In turn, specialized browsers (or components) can intuitively display these elements, which may include links, QR codes, push notifications, buttons, and more. 

This approach aligns with Solana’s goal of promoting mass adoption. Currently, there are about 155 projects listed in the Blink ecosystem, all of which require official review before adoption. Among these, 25 projects are specifically registered with Blink domains, while the rest have registered for Blink compatibility. The community has shown considerable interest in blnk.fun and BlinkEditor (though BlinkEditor’s official Twitter account is currently suspended). The process resembles that of Pump.fun, where users can simply set parameters like quantity, price, and description to issue a token. Once shared on platforms like Twitter, the token can be purchased directly by users without having to leave the platform. Additionally, other notable projects like Jupiter Exchange and Pump.fun are also integrating Blinks. 

Meme Culture

On Solana, memecoin continues to be a dominant part of the ecosystem and the launch of pump.fun has only further validated this observation. Pump.fun enables anyone to launch a memecoin at zero cost which has led to a plethora of memecoins generated into the ecosystem. Since its launch in January, the protocol has generated almost $50M in revenue. However, despite the barrier to launch a token has decreased, leading to more projects and trading volume, we noted that the probability of success of these tokens remains low.  

Notable developments on Solana include the launch of token extensions which enable tokens to have more customizable features tailored to the needs of different projects. With Firedancer client expected to be ready soon, this not only brings a diversity of validator clients but also substantially increases the throughput and lowering the cost on the network, cementing its appeal to developers and users. 

TON

Ton has been one of the best performers in 1H 2024, recording gains north of 200%, attributed to the slew of mini apps developing on TON that are vying for the huge user base on Telegram. Our reasoning for focusing on TON can be dissected as follow: 

1. Vibrant ecosystem on Telegram. With approximately 900M monthly active users, Telegram’s large user base makes it appealing to developers who are looking to capture a slice of the pie. Coupled with an in-app wallet as well as built-in fiat on-ramps, we are optimistic that Telegram can bring a significant number of web2 users to web3. 

2. As we compare it against other popular messaging apps such as WeChat, we see the potential for TON to mirror the success of WeChat in achieving large scale monetization. WeChat currently has 1.3B monthly active users, with about 400 million active in gaming. Gaming is the most popular category among mini-programs, followed by e-commerce and daily services. The top 100 mini-games generate $1.3 million in revenue per quarter, while hit titles can reach $15 million in monthly revenue.

Notcoin, a tap-to-earn game on TON, has gained widespread fame in 1H 2024. With more than 40M in total users, Notcoin has established a positive example and created incentives for developers, investors, retail users to join the TON ecosystem. However, it also led to inflated traffic and a certain degree of overhype. 

In terms of ecosystem development, TON introduced an ad revenue-sharing mechanism in February this year, allowing channel owners to receive 50% of ad revenue, settled in TON. Currently, TON has established a $90 million ecosystem fund and a $220 million community incentive plan, specifically for investments and grants. Regarding compliance, TON launched the TON Star Coin model, directly linked to the Apple Store, where users can purchase in-game virtual items via Apple Pay, while Telegram will still settle payments to project teams using TON. For on-chain top-ups, most applications have a bot that supports third-party payments rather than adopting a one-size-fits-all approach.

However, the recent arrest of Telegram’s CEO for cyber and financial crimes charges as well network outages attributed to TON-native memecoin, DOGS, serve as key headwinds for adoption. While this warrants caution, the team behind TON has reiterated that the project will continue to remain operational. Given our exposure to the TON ecosystem, the team will await further infrastructural developments on TON that enhance the ecosystem maturity. 

Restaking 

Eigenlayer

Restaking has been one of the hottest narratives in 1H 2024, with Eigenlayer being the primary catalyst behind it. 

The success of Eigenlayer is evident in many ways:

1. Total Value Locked (TVL) peaked at $20 billion.

2. Eigenlayer's restaking feature led to the emergence of at least 5 Liquid Restaking Tokens (LRTs) and over 20 Active Validator Services (AVSs). This revitalized Ethereum DeFi landscape with the likes of Pendle and AAVE being beneficiaries. 

3. Eigenlayer successfully transitioned its narrative from simply providing shared security (offering additional rewards to Ethereum nodes) to becoming a supplement to Ethereum's governance system.

The core of Eigenlayer is its AVS. Currently, there are 16 active AVS (Active Validator Services), with only EigenDA supporting Eigen token restaking, involving 3.7 million ETH. Other AVS, such as Omni and Eoracle, have between 0.8 to 2 million ETH each, amounting to a minimum of $2 billion in assets ensuring security. ZK (Zero-Knowledge) projects align well with AVS by offloading some ZK verification tasks off-chain, which can be handled by stakers, thereby reducing costs and improving efficiency. Further adoption and expansion of the Eigenlayer ecosystem would bode well for its native governance token, EIGEN.

The concept of restaking has also introduced different liquid restaking (LRT) projects offering liquidity on top of restaked assets. Through various design mechanisms and strategies, these LRT projects differed in performance. Overall, the success of these projects hinges on the success of Eigenlayer and future macro developments. Despite its initial success, we should be cognizant of the potential challenges ahead for LRTs. Overfinancialization of LRTs could potentially affect the stability of Ethereum’s on-chain ecosystem. We anticipate competition to intensify between different notable LRT projects, leaving smaller and new projects with less growth potential. 

Cross-Chain Shared Security 

Babylon

Babylon is a platform that allows Bitcoin holders to trustlessly stake their Bitcoin to secure Proof of Stake (PoS) chains. 

According to the Babylon website, there are 91 ecosystem projects listed across seven categories: Layer 2, DeFi, Liquid Staking, Wallet and Custodians, Cosmos, Finality Providers, and Rollup Infrastructure. Among these:

• Wallet and Custodians: Mostly established wallets and custodial solutions.

• Finality Providers: Mainly staking services.

• Cosmos: Primarily older projects within the Cosmos ecosystem.

These three categories have fewer new projects. The primary sources of new projects are within the Layer 2, Liquid Staking, and DeFi tracks:

• Layer 2: Bison Labs, BSquared Network (our portfolio company), Lorenzo, Map Protocol among others. 

• DeFi: Kinza Finance, LayerBank, Levana, Mars Protocol, Stroom and Yala Finance (portfolio company). 

• Liquid Staking: Bedrock, Chakra, Lombard, pSTAKE, Solv Protocol, Nomic, PumpBTC

Additionally, we also see other protocols such as Satlayer which is building a restaking platform on Babylon and Nubit uses  Babylon to enhance its Bitcoin-native data availability layer. 

With many DeFi yield projects surrounding BTC, the demand to generate yield from idle Bitcoin is evident. We anticipate more projects offering liquid staking services on Bitcoin and we will likely see an inflow into Bitcoin from other ecosystems as the Bitcoin yield / Bitcoin DeFi narrative continues. 

Modularity 

Data Availability (DA)

The DA track has limited participants, including Ethereum, Celestia, EigenDA, and Avail, NearDA  with varied project progress. DA projects mainly focus on security (including data integrity, network consensus), customizability and interoperability, and costs. A look at the DA landscape in 1H 2024 paints a mixed picture with DA tokens such as Celestia off their all time highs while competitor, Avail, raised $75M in total for their latest Series A round led by Founders Fund, Dragonfly and Cyber Fund. 

Competition in the DA field is mainly dominated by a few key players such as Ethereum and Celestia. Here, we see a comparison between Celestia and Ethereum, with Ethereum continuing to remain the top choice for rollups. 

Source: HashKey Capital

Top users of Ethereum DA include Taiko, Base, Scroll, Arbitrum and OP Mainnet. Comparatively, top users on Celestia include Orderly, LightLink, Manta Network, Lyra and Hokum. Although Ethereum DA is costlier, demand and usage of Ethereum DA has outpaced that of Celestia, leading to significant revenue gains for Ethereum. 

As the DA sector matures and becomes increasingly saturated, the key to a project’s success lies in customer acquisition and ecosystem vibrancy. Projects should also focus on diversifying the client base such as DEXes, games, bridges and payments to scale. Having different services aside from being a pure data availability play will also serve to more easily bootstrap and retain clients. 

In general, we see the data availability landscape being increasingly competitive as players compete more aggressively in terms of pricing, which could be a headwind to their long term profitability. 

Rollup Frameworks & RaaS

In the rollup sector, Arbitrum, Base and OP Mainnet are leading by a significant margin with Arbitrum taking the helm. Base continues to close the gap with the strong support from Coinbase and branding itself as a consumer application hub with applications such as Farcaster and Friend.tech. 

OP Rollups and ZK Rollups have seen varying levels of success, with OP rollups built on OP Stack taking up the top spots. Generally, RaaS is provided by 4 main solutions: Arbitrum Orbit, OP Stack, ZK Stack and Polygon CDK, each with its own strengths and weaknesses. However, a common outcome of these different RaaS providers is an increasing number of rollups. 

Leveraging on OP Stack, there exist opportunities to unify the OP Stack chains via the concept of OP Superchain such as through shared sequencing. With a shared goal of scaling Ethereum through high throughput performance, these rollups can differentiate themselves by implementing AA features and onboarding enduring and  popular consumer applications. These will maintain their competitiveness as they continue to face challenges from L1s such as Solana and Sui. 

On the sequencer front, we did not see many new emerging projects, with existing projects implementing features that enhance user experience, mitigates MEV and promotes decentralization. 

With greater ease in deploying rollups, we expect Rollup-as-a-Service to become more competitive as service providers compete on various factors such as size of ecosystem, cross-chain interoperability, and having a modular toolkit that is equipped with comprehensive integrations. 

DePIN

As one of the most enduring use cases of blockchain technology, DePIN has gained significant traction in 1H 2024, which can be attributed to increasing appeal of Solana as a hub for DePIN applications and the surge in interest in Artificial Intelligence The intersection of AI x Crypto highlights the growing synergies shared between these two sectors. Node sales, a very popular monetization strategy seen in 2024, have proven effective in bootstrapping communities and raising additional revenue for projects. However, despite gathering significant interest, returns in DePIN have been suboptimal across various verticals over the past 3 months. 

IoT sensors / wearables

This sector encompasses a wide range of IoT sensors and consumer wearables such as watches, wristbands, rings and many more. A core fundamental proposition of this sector is in collection of data, utilizing web3 technologies to make data more accessible and monetizable. A key issue for this segment is incentivizing users to participate in mining and earning rewards through data distribution which hasn’t seen widespread success in comparison to web2 solutions. For wearables, consumers’ top 3 motivations for purchasing them are (1) health and wellness, (2) fitness tracking, (3) enhanced accessibility to smartphones and other smart devices. Curating a desirable user experience is critical in the bootstrapping of communities alongside sustainable tokenomics and value accrual mechanisms. 

Data Market

The key challenge in this field is scalability and adoption of data marketplace. Creating a siloed data marketplace can prove to be challenging especially in a data-rich environment. 

Wireless Networks 

In wireless networking, numerous projects have been trying to improve penetration rates using Web3 concepts but struggle with the exception of a few successful ones (e.g., Helium Network). Key issues encountered include poor user experience, compatibility issues, lack of service reliability among others. However, there are still opportunities in this space. Cost, geographical limitations and economic developments are factors that can hinder the adoption of wireless networks. With a global internet penetration rate at 67% as of April 2024, opportunities exist for web3 players to fill the gap.  

AI x Crypto

This remains the sector that we are mainly focused on, primarily because AI and machine learning model training indeed require a significant amount of computing power and storage. This demand has exacerbated in recent times since the launch of OpenAI’s ChatGPT model, which kicked off a generative AI race for the best model. Against this backdrop, blockchain technology has emerged as a viable solution. 

Blockchain-based AI projects, through leveraging distributed networks and incentive mechanisms to encourage users to share their idle computing resources, can generate substantial real revenue. This model is also significantly more cost-effective compared to centralized services. Some existing projects in the market have already demonstrated their value in real-world applications, with use cases including AI model training and inference services, as well as providing rendering capabilities for games, all of which indicate that demand in this field is genuinely present.

In the computation infrastructure field, privacy can be added to the computing network, such as data privacy and model privacy. A core tenet of blockchain technology is secure, privacy-preserving verification. In this aspect, several approaches such as ZKML, OPML, TEEML are adopted although with varying trade offs. 

Data has become more valuable as the AI ecosystem rapidly develops and we observed distinct verticals like data sources, data-related infrastructure and data-privacy solutions (FHE, TEE, etc) emerging to cater to growing demand for better AI models. 

These developments underscore the growing focus on data-driven AI ecosystems and the importance of both data privacy and decentralized infrastructures in the future of AI applications. Below we dissect some of the key players fostering a vibrant AI x crypto ecosystem.

Data source, labelling, marketplaces: Grass, Vana, Dria, DIMO, Hivemapper, Sahara Labs, Ocean Protocol, Singularity Net

Computing networks: Aethir, io.net, Akash network, Bittensor, Filecoin, Render, Nosana, Ritual AI, Gensyn AI, Together.ai

Verification networks: Modulus Labs, Giza, Ora, Vana Labs, Aztec

Agent network: ChainML, MyShell AI, Spectral Labs, Autonolas, Fetch.ai, Delysium

AI-driven applications: Kaito.ai, 0xScope, Ringfence AI, Kai-Ching

Notable trends in AI x Crypto

• With demand for AI and ML training increasing exponentially, computing power becomes a highly valuable resource. Many projects have sprung up to collectively gather compute resources globally to meet this need. 

• With the proliferation in foundational models, there is also an increasing focus towards model fine tuning and optimization, able to meet the specific needs of enterprises. 

• More innovations in no-code/low code platforms that allow the deployment of personalized AI agents. In web3 AI, some notable projects include MyShell AI, Hyperbolic Labs, Prime Colony and Wayfinder. 

Moving forward, areas that we are interested in within the realm of DePIN are Artificial Intelligence, Internet of Things, DeWi (Decentralized Wireless) and Decentralized Energy. 

RWA

The real world assets sector remains a cornerstone of crypto, enabling Web3 technology to be closely intertwined with traditional asset classes. Real world assets bring numerous benefits to crypto such as diversified real yields, and easier access to illiquid or private asset classes. The sector continues to make significant headways in this area from the formation of Tokenized Coalition Charter, Mantra’s $500M real estate tokenization, Blackrock’s BUIDL fund surpassing $500M in asset under management,  to notable investments in Securitize and Ironlight to bolster adoption of tokenized assets. 

There are many asset classes within real world assets, however the areas that have seen the most interest are in private credit and U.S Treasurys. The top 3 issuers in US Treasuries are Blackrock BUIDL fund, Franklin Templeton US Government Money Market Fund, and Ondo Finance’s USDY. In private credit, competition is dominated by a few key players such as Maple Finance, Centrifuge, and Goldfinch Finance. In TradFi, private credit is estimated to be at $1.5T and this is expected to grow to $2.8T by 2028. Comparatively, web3 private credit remains small, although future growth seems promising. 

In terms of tokenized commodity, gold is still the dominant asset with the top two commodities being Paxos Gold and Tether Gold. 

In terms of tokenized collectible, the field remains quite niche and siloed hence generating an enduring demand and having asset composability for tokenized collectible would be critical for projects. 

Institutional appetite for tokenization

There is increasing appetite among institutional investors to leverage blockchain to tokenize financial products. However, regulatory risks remain at the top of mind for most executives and hence exposure to public blockchain remains limited. Navigating this space requires attention to market structure development, default risk management and liquidity management. By focusing on compliance and infrastructural security can RWA players capture retail and institutional adoption. A notable blockchain player that has made significant progress is Avalanche. Through Avalanche Evergreens, the network has partnered with various institutions such as Citi, JP Morgan and ANZ, showcasing its appeal to institutions by offering a secure, customizable and efficient platform for onchain RWA. RWA narratives that we are excited about are RWA index tokens, RWA-backed stablecoins, RWA-backed DeFi use cases etc. 

RWA adoption is likely to be driven by institutions rather than retail users, however, as regulations crystallize, we expect to see more projects emerging offering different tokenized securities beyond Treasuries, catering to the risk profiles of different investors who are warming up to the idea of RWA. 

Gaming & Entertainment

In the 1H 2024, sentiment towards gaming remains weak with the exception of TON mini games which have taken a hit such as Notcoin, Catizen, Hamster Kombat, among others. 

Ecosystem

Aside from the aforementioned growing mini games ecosystem on TON, IMX, Polygon, and Ronin remained popular gaming chains by daily average unique active wallets (UAW). Ronin continued to lead in the Tier 1 gaming ecosystem boosted by games that have strong gaming communities like Pixels with a 7D UAW of 600,000. On its network, it boasts ~3.8M MAU. Ronin remains popular for small to mid-sized games; the ecosystem is able to provide user traffic to game developers. To date, it has boarded more than 12 gaming studios. Additionally, Ronin has also collaborated with Polygon’s CDK to enable zkEVM, allowing developers to launch their own L2 chains on top of Ronin. This could serve as a positive catalyst for RON. 

IMX, on the other hand, holds more mid to large scale games and continues to attract web2 gaming studios, offering them a comprehensive deployment solution. Immutable and Marblex, subsidiary of Netmarble, have launched a $20M ecosystem boost program to further foster the gaming ecosystem on Immutable zkEVM. 

We continue to welcome studios entering the web3 space, game producers and KOL founders who are keen learners, sensitive to crypto culture and user-centric. 

Gaming x AI

Traction within Gaming x AI remains to be seen. Gameplay continues to be heavily centralized with consumer-driven, AI-generated content in web3 in its early stages. There’s interest in deploying AI for NPCs, companions and scripting, primarily targeting B2B game developers. 

Overall, the gaming ecosystem remains highly competitive and it is critical to strike a balance between incentives and community building. Strategies focused on cultivating loyal users with good gameplay, positive user experience and strategic partnerships can be effective in achieving long term success. 

SocialFi 

SocialFi has been a hot topic, no less contributed by the popularity of crypto consumer applications like Friend.tech, Farcaster and TON mini applications. 

Friend.tech

Since its launch in 2023, Friendtech has sparked ongoing debate regarding the longevity and sustainability of its model. Despite a very successful initial launch, user activity has declined throughout this year. The release of the V2 version in May sparked renewed interest, thanks to the introduction of features like paid group clubs, an innovative fee structure, and high APYs, which led to a temporary surge in users. However, criticisms from the community regarding token liquidity and airdrop distribution, along with intense competition from other social platforms, have since caused engagement to plateau. Despite doubts over its long term viability, the launch of friend.tech has opened the sector to a new SocialFi model with 3 key takeaways: (1) Possibility of tokenizing social influence, (2) Paid group clubs in web3, (3) Social assets with cross platform interoperability. 

Farcaster

This year, Farcaster has gained significant traction, becoming the dominant player in the space. In contrast, other social protocols have largely faded from the spotlight, with some even appearing to be on the verge of decline. The launch of Frames by Farcaster, met with positive sentiment, has also introduced a new way of social, onchain interaction using familiar web2 interfaces which has enhanced user experience and led to a surge in interest in the protocol. Additionally, the integration of Farcaster with meme tokens, especially the success of tokens such as Degen, has significantly driven user growth and engagement on the platform. Airdrop campaigns have effectively boosted user participation and fostered a vibrant community. 

The Farcaster ecosystem can be broadly divided into these categories:

1. Clients: Warpcast, Recaster, Supercast, ampcast, Farcord, Firefly, far.quest etc. 

2. dApps: Jam.so, DeBox, Paragraph, CasterBites, Unlonely, Bountycaster, Wildcard, AlfaFrens etc.

3. Tooling: sharecaster, Alertcaster, Searchcaster, Farcaster storage, farcaster.vote etc. 

4. API services: Neynae, Pinata, Airstack etc. 

Overall, the SocialFi landscape has seen mixed success and network effects remain a critical factor that determines a project’s success. In this area, we are looking for projects that are able to overcome the cold start problem and bootstrap diverse profiles of users, have a web2-like user experience, and strike a delicate balance in rewarding creators and growth of the platform. 

DeFi

Much of the growth in DeFi in 1H 2024 can be attributed to tremendous interest in Eigenlayer which introduced the concept of restaking to Ethereum and Ethena, a delta neutral stablecoin that now amassed more than $3B in TVL. 

Stablecoins have received renewed interest from developers with more RWA-backed, fully collateralized stablecoin projects trying to mirror the success seen by Maker and Tether. Despite growing interest, finding enduring onchain use cases for stablecoin remain challenging, with usage predominantly on centralized exchanges. This could pose a challenge for decentralized stablecoin projects that are looking to deliver value through native governance tokens. 

Eigenlayer dominated most of the attention in 1H 2024 with ecosystem projects such as Ether.Fi, Pendle and Renzo capitalizing on the surging interest in restaking to capture a significant market share. Despite the hype it has gotten, Eigenlayer has fallen short of users’ expectations partially contributed by a weakening macro environment. 

From the perspective of blockchain, Ethereum continues to take the helm in terms of TVL. Blast and Base have seen notable performance in 1H 2024. With various incentive campaigns, TVL on Scroll has risen past $1B. Among non-EVM chains, Solana biggest TVL contributor comes from Jito’s JitoSOL with other catalysts coming from a thriving meme culture and lending ecosystem. BTC-related chains have generated interest as well, however sustaining interests remains challenging as TVL declined after incentive programs ended. 

Recent CeDeFi trend echoes the need for sustainable, secure returns for on-chain assets. Whether through ENA fee-mining or RCH’s structured options, the ultimate payers are centralized exchange users. 

DeFi has demonstrated its capability in capturing capital through lucrative yields. Currently, AAVE remains the primary destination for capital across many Layer 2s and public blockchains, while Uniswap still serves as the main liquidity pool. However, the key to long term success lies in protocols’ abilities to accrue value for its holders and meet long term expectations. With an increasing number of chains, there is also the issue of liquidity fragmentation, which is an area we see opportunity in. Diverse DeFi solutions catering to different needs provide an underlying demand and opportunity for intent-focused platforms. 

Institutional Service

Since last year, the crypto market has been on the rise, driven by strong institutional interests in spot BTC and ETH ETFs. Promising areas of investment include trading infrastructure, institutional-grade staking, CeFi lending, yield generating stablecoins and derivatives platforms. From a primary market perspective, investors are indeed still betting on these areas, with notable deals completed this year, such as Securitize ($47M raised), Bitstamp (acquired for $200M), Flowdesk ($50M raised), Sygnum ($40M raised), Kiln ($17M raised), and Agora ($12M raised). Looking at the public market, Coinbase has been the main beneficiary of crypto ETFs launch while crypto mining companies are promising candidates for exchange listing. 

From our perspective, we view this sector as part of the fintech field. Looking at the global financing trends for fintech companies (which include crypto-related institutional service firms), the amount of funding has been continuously declining. In the first quarter of 2024, fintech financing reached its lowest level since 2017, with investors showing a preference for later-stage companies that are closer to profitability and already generating revenue. On the positive side, crypto-related fintech companies are relatively active within this broad sector, though their activity is mainly concentrated in early-stage and Series A rounds. 

In summary, some of the key focus areas we observed in this space include trading infrastructure, institutional-grade staking, CeFi lending, yield-generating stablecoins, and derivatives platforms. From an investment lens, we are particularly interested in companies that have already demonstrated growth potential and stability.

Conclusion

While this summary does not encompass all our findings, it highlights some of the key insights we have gathered in the first half of 2024. As a leading player in the crypto venture capital space, HashKey Capital is dedicated to supporting innovative projects across various sectors. If you are developing a groundbreaking project, we welcome you to connect with us!