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 major narrative trends. However, after the approval of Bitcoin and Ethereum spot ETFs, the crypto market is highly coupled with the global financial market trends, and the variables affecting the crypto market trends are increasing.
In the context of soaring chaos values, it is very important to perceive the periodicity more clearly and discover the future narrative trends. As innovative narrative catchers, investment institutions have always been relatively cutting-edge. In view of this, OKX specially planned the "Crypto Evolution" column, inviting mainstream crypto investment institutions around the world to systematically output topics such as the periodicity of the current market, the direction of the new round of narratives, and the subdivision of popular tracks, in order to stimulate discussion.
The following is the fourth issue, jointly discussed by OKX Ventures and Fundamental Labs around topics such as "How should the next stage of infrastructure develop?" We hope their insights and opinions will inspire you.
1. Brief analysis of the current situation of the track
OKX Ventures : According to L2Beat data, we already have too many rollups, but few of them are more active than ETH.
In our observation, infra has been the most popular field in the primary market in the past two years, especially in 2022-2023 when financing was the most difficult. However, this trend reversed at the end of last year, and application-based Web3 became the sector with the most VC bets.
At this stage, we still firmly support the development of infra, but always remind ourselves not to fall into the inertial thinking of reinventing the wheel when investing, so as to avoid resource imbalance between infra and applications, leading to the embarrassing situation of L2s > Raas > DAU.
One of the reasons for this phenomenon is also related to the modular narrative. Independent architectures such as DA, execution, and interoperability can achieve performance optimization through internal concept fine-tuning or recombination, and claim to be innovation or upgrade without worrying about market education costs. The ultimate consequence is the ghost town phenomenon that is currently widely criticized by infra and the increasingly serious ecological fragmentation.
On the positive side, ETH has gotten rid of the name of "noble chain", and single-digit gwei has become the norm. The DeFi trio - DEX, Perp, lending, and pump-and-fun asset issuance platforms have become standard for all public chains, integrated into the public chain's technology stack, and financial on-chain interactions already have basic solutions. Popular applications with high concurrency, high cost, and complex logic such as AI, social networking, and games also have new infra solutions:
1. Parallel high-performance public chains such as EVM or Move;
2. zk coprocessor.
If we are on the right path, super apps that enable mass adoption may emerge rapidly in the next 2-3 years.
Fundamental Labs: The current Web3 infrastructure track is very active, with significant progress and innovation in all areas. Bitcoin and Ethereum are still the most mainstream blockchains, of which Ethereum is widely used because it is the earliest and most mature smart contract platform. At the same time, we have also seen that Layer 1 public chains such as Solana, Aptos, and Cosmos have made great progress due to features such as high performance and cross-chain compatibility. NEAR has performed outstandingly in focusing on AI and on-chain abstract narratives, and the number of active addresses on the chain has increased significantly, becoming one of the best performing Layer 1s this year besides Solana.
DeFi platforms such as decentralized exchanges, lending, and liquidity mining are still the main application tracks in the current industry. The fees generated by DeFi applications have become the main source of income for the leading public chains. Chain scaling technology has also gradually matured. Layer 2 using Rollup technology has greatly expanded the transaction processing capabilities of the blockchain, and by optimizing off-chain computing, it has improved performance while reducing transaction fees.
Overall, the current state of Web3 infrastructure is diverse and innovation-driven, with various fields intertwined and jointly promoting the development of decentralized networks.
2. How will the infrastructure form evolve?
OKX Ventures: In fact, the problems that infrastructure solves will not change fundamentally. We still need faster and better-performing infrastructure to become the state machine and asset settlement layer for the entire real world. In the short term, as upstream infrastructure tends to be homogenized, we believe there are two major changes that need to be noted:
On the one hand, there are opportunities and challenges after the ETF is approved:
At the challenge level, it mainly comes from the impact of institutional holdings and node operation specialization on the decentralization of the PoS network. Taking Ethereum as an example, after the ETF is passed, CEXs like Coinbase may become the custodians of most institutions, and the staking of CEX is extremely centralized. The cost of holding 33% of the nodes may be much lower than expected. As Solana founder Toly said, [Economic security is a meme]. As the marginal utility of the increase in the staking ratio on the degree of decentralized governance becomes lower and lower, Ethereum needs to prevent the deterioration of economic security through engineering designs such as LST protocol governance and DVT technology, otherwise it is inevitable that the recent criticism of the upgrade of PeerDAS within the Ethereum team will continue.
In terms of opportunities, we must seize the best opportunity for ETF market education and provide infrastructure for new PMFs, including but not limited to payment, AI infrastructure, social and RWA.
On the other hand, there is the iteration of mid- and downstream infrastructure such as DA/coprocessor/Solver network/shared sorter/chain abstraction. This field will improve the performance of various dimensions of the infrastructure in a plug-in-like form, including more seamless cross-chain operations, cheaper financial interactions, and new application scenarios unlocked by proof aggregation.
Fundamental Labs: The evolution of infrastructure will fundamentally be driven by user needs. As the user base of Web3 grows, the requirements for infrastructure performance, reliability, and security will continue to increase. More efficient, lower fees, more user-friendly interfaces, and identity management will always be the direction of infrastructure evolution. Cross-platform and cross-application integration and collaboration are also areas worth paying attention to. In this process, privacy protection, data sovereignty control, and decentralized governance mechanisms also need to evolve in a direction that facilitates effective participation by community members.
At present, new public chains and second-layer networks are constantly emerging, which bring new choices to users, but also lead to increasing fragmentation of the ecosystem, and the interoperability between different blockchains needs to be enhanced. At the same time, as the regulatory framework is gradually established, the infrastructure needs to follow new regulations while providing services to users, ensure operational compliance, and protect the rights and interests of users.
In the long run, infrastructure will be iterated in the direction of performance improvement, computing parallelization, modularization, technology integration, management abstraction, ease of use, cost-effectiveness, and compliance with regulations. In terms of investment logic, we always start from the pain points and actual needs of the industry, driven by research, and support projects that can bring positive impetus to the development of the industry.
Specifically, in the field of public chains, we are optimistic about the infrastructure of the Bitcoin ecosystem. The approval of the Bitcoin ETF will bring more funds and liquidity, enhance public trust, and promote wider adoption. Bitcoin scalability solutions such as the Lightning Network, Taproot Assets, RGB, and BitVMB will also usher in new opportunities. As a representative of chain abstraction and AI narrative, NEAR's solutions such as security aggregation and account aggregation will simplify users' cross-chain operations and improve the experience, which is worthy of attention.
In the application field, as the regulatory framework gradually becomes clearer, DeFi platforms may need to strengthen AML and KYC measures to comply with new regulations. Compliance technology infrastructure and stablecoins will become more important.
In addition, we are focusing on new opportunities brought by technology integration, such as decentralized AI computing infrastructure, tokenized training data and MachineFi, as well as compliant RWA platforms.
3. Industry observations and investment experience
OKX Ventures: Compared with the previous cycle, the public chain infrastructure landscape has undergone significant changes after the concept of modularization was proposed. It actually took the entire market some time to digest and accept it.
At present, when we examine projects, we roughly divide them into the execution layer, DA, settlement layer, and middleware facilities to solve interoperability problems. Most of our investment layout in the entire technology stack has been concentrated in the past 1-2 years. For example, in the execution layer expansion track with rollup as the direction, in addition to investing in all the top L2 projects on the market in the last cycle, we also paid close attention to the hottest parallel EVM concept last year, and representative investment portfolios include Sei, Monad and MegaETH.
The L2 concept of other public chains such as Solana and Move is not yet mature. We have invested in execution layer projects based on non-EVM public chains such as SonicSVM and Lumio, but it is still unknown whether the cross-VM execution layer solution will be recognized by the market. However, based on the principle of blockchain openness, we believe that closed-door, one-man-dominated L2/L3 will not be a long-term solution.
The DA layer has relatively less technological innovation, and the Matthew effect is more significant. We have currently only invested in Celestia and Avail, which is independent from Polygon. But within this track, we can talk about the BTC ecosystem. We talked intensively about hundreds of BTC second-layer projects at the end of last year. Since the first layer of BTC does not support smart contracts, it cannot be used as a settlement layer. The existing Merlin, B2, Bitlayer, etc. all use BTC as the DA layer. The only exception is the UTXO-based L2 RGB++ protocol. But regardless of the technical differences, we believe that the core task of the BTC second layer is to implant concepts such as non-custodial native BTC interest and on-chain asset issuance into people's hearts, especially to enable Bitcoin supporters to accept the construction of DeFi and other ecosystems based on BTC. This is also the reason why we invested in Babylon and some BTC LSDfi projects such as Lombard.
However, there have been some innovations in the settlement layer this year, but competing with ETH does not seem to be a "politically correct" choice, and most projects are still in the early stages. We have also invested in co-processors such as FHE/proof aggregation, mainly because these plug-in facilities help promote large-scale applications of blockchain.
Fundamental Labs: Our investment logic has always been to lay out infrastructure at different levels from the perspective of the technology stack.
In terms of the underlying public chain, we have deployed BTC computing power and supported a series of Layer 1s, such as NEAR, Avalanche, Polkadot, Nervos, Platon, etc. For the emerging DePIN track, we led the investment in Peaq Network in 2022.
In the middleware track, we have invested in Filecoin, Chainlink and Stratos. In the DApp application layer, we have invested in marketplaces and development frameworks such as Metaplex and Mintbase.
At the user access layer, we have also invested in Math Wallet, Mask Network and RSS3. Compliant centralized exchanges are important infrastructure for the entire industry, so we invested in Coinbase. In general, compared with traditional Web2.0, the significance of Web3 lies in achieving greater decentralization and user autonomy, which is also the core of the development of the infrastructure track.
