Hashed 2024 Outlook: Bitcoin Ecosystem Infrastructure Explosion, Continued Advancement of AI and Blockchain Integration

Author: Hashed

Compiled by: Deep Tide TechFlow

Abstract

2023 has been a year full of resilience. Hashed has been closely collaborating with developers to drive the mass adoption of blockchain. This year, Hashed has invested in 26 early-stage industry teams globally.

As a team, Hashed has built relationships with global industry leaders and reflected on the specific Web3 areas they are excited about for the upcoming 2024.

Hashed's 2024 investment themes focus on the industries they believe will have the greatest impact. In this article, Hashed will look ahead to nine key areas of blockchain.

They believe that blockchain will play a crucial role in reshaping the creator economy and intellectual property. It will also expand significantly into Ordinals and BRC-20 tokens, marking the potential for Bitcoin network expansion. Additionally, Hashed will explore the intersection of economic activity and capital markets in blockchain gaming, followed by a deep dive into the next generation of finance, including Real World Assets (RWA) and Security Token Offerings (STO). They also anticipate that the industry will mature through permissioned DeFi, which serves as an important bridge for regulatory adoption.

Hashed states that the synergy between artificial intelligence and blockchain is expected to bring new advancements. They see the development of L2 as an exciting part when observing some ecosystems adopting application-specific Rollups to enhance scalability. The article concludes with the potential of crypto euros provided for global financial markets and the untapped potential of advertising as a tradable asset.

Blockchain Will Reshape the Creator Economy and Intellectual Property

Like traditional media giants, friction in the rich creative process still exists, including but not limited to creating IP derivatives such as web comics, games, and films, as well as content with or without AI-generated content (AIGC). These issues have persisted because traditional media and entertainment giants have taken a defensive stance toward open IP infrastructure.

Open, on-chain, and traceable/verifiable intellectual property infrastructure and studios will serve as a foundation for content creators and any stakeholders in the content creation and consumption process to immerse themselves in intellectual property and content, owning rights to them, which was possible before the broadcasting era, a time that expanded and weakened the direct connection and relationship between content creators and consumers.

As a technology, blockchain will create a paradigm shift in the media and entertainment industry to achieve more transparent and equitable IP and royalty/revenue sharing management for any stakeholders in the content creation and consumption process. This aims to create a multiplier effect on creativity for producers and consumers across different fields, from comic artists, celebrities, athletes, and film directors to animation, film studios, and talent agencies, growing into more influential IP (the next Pokémon or Hello Kitty).

To accelerate the shift in the above model, infrastructure for IP attribution/proof or open standards for intellectual property needs to be established to flexibly implement licensing and royalty schemes that incorporate AIGC complexities. Furthering the foundation of IP attribution and proof, fan-driven, blacklist-like IP crowdfunding platforms, fan-generated ETF-like intellectual property (such as web comic ETFs), and bets on the next developments in anime series can all serve as examples of creating capital markets on interconnected on-chain intellectual property. Of course, individuals or companies with high brand-identifying IP can drive this initiative faster.

Reference examples: Knowledge sharing, token-bound NFT licenses, Pudgy Penguins, Yuga Labs

Ordinals and BRC-20: A New Look at the Bitcoin Ecosystem

While most crypto participants are discussing the upcoming Bitcoin spot ETF, a wave of innovation is occurring on the Bitcoin network, largely overlooked by institutions and retail investors. We believe that Ordinals and BRC-20 technology represent a paradigm shift in the Bitcoin ecosystem, showcasing the long-term sustainable potential of what many consider the most dominant, widely accepted, and secure blockchain.

Ordinals allow various types of data to be inscribed on the smallest unit of Bitcoin, the satoshi (sats), transforming them into NFTs on the Bitcoin network. Shortly thereafter, the BRC-20 standard was launched, a set of instructions that, when used with Ordinals, allows people to deploy, mint, and transfer these inscriptions as fungible digital tokens on the Bitcoin network. This became very popular in the second half of 2023, increasing Bitcoin's block size and doubling the average transaction volume per block. Consequently, the average transaction fee for Bitcoin surged about 20 times compared to the average fee in early October, reaching $37 per transaction.

The existing infrastructure is still in its infancy, lacking accessibility, developer tools, and complex tracking systems. Current token protocols lack support for third-party extensions and smart contract compatibility, and the BRC-20 module always requires detailed onboarding tutorials. 2024 will be a crucial year for the industry to overcome these barriers and widely adopt the Ordinals and BRC-20 standards.

We are excited about projects that expand the Bitcoin ecosystem. We foresee this space unfolding similarly to Ethereum's decentralized finance in 2020. The ecosystem infrastructure includes lending markets, decentralized exchanges, bridges, aggregators, portfolio management, development tools, tracking infrastructure, and more. Combining these ecosystems with one of the most powerful, oldest, and focused communities in the cryptocurrency space, along with on-chain participants who have become smarter and more active over the past few years, will be key. Startups or protocols that help build tools for secure and flexible programming on Bitcoin, develop independent indexing infrastructure or wallets, aggregation systems, or even create native Bitcoin metaverses or NFT marketplaces could have a significant impact in 2024.

Reference examples: Bounce Auction, Darewise, Multibit, Ordinals, Ordiswap, Tap Protocol, Trac, UniSat, Xverse.

The Flourishing of Economic Activity and Capital Markets in Blockchain Gaming

Gaming has always been one of the most engaging fields, with over 3 billion users globally participating in economic activities across all media. As blockchain gaming strives to meet the standards of traditional gaming and AAA studios like Nexon and CCP, it has attracted a large user base. Moreover, user experience has seen meaningful improvements from smart contract wallets to MPC, allowing for programmable accounts and security, thus providing a more seamless experience for users, gamers, and studios.

As the blockchain industry moves into a growth and maturation phase toward mainstream adoption through the infrastructure and user onboarding channels of blockchain gaming, we foresee economic activities occurring in real-time in both physical and virtual worlds through fungible and non-fungible tokens, digital identities and social graphs, UGC, and adaptations.

More specifically, since DotA originated from a mod built on Warcraft 3, ultimately inspiring the creation of League of Legends with over 150 million active players, FOCG (Fully On-Chain Games)/AW (Autonomous Worlds) will create an unprecedentedly growing virtual economy through their front-end and back-end composability, community governance, and security. We will elaborate on this below:

Front-end composability: Modifying the game client to have new user interfaces, game art, sounds, or music, or reimagining the game experience from scratch by creating an entirely new client. Rewarding such contributions (i.e., fees paid to client developers) can be transparently and automatically executed through smart contracts, enabling an automated and transparent revenue-sharing model.

Back-end composability: Every object in a game or world, including players, can be individually addressed by any smart contract on-chain, meaning players can truly realize the original promise of smart contracts as a way to form automatically executable agreements with complete Turing-complete logic, sometimes referred to as user-generated logic. The ability to form complex and powerful protocols will bring unprecedented political and economic complexity to virtual societies.

Community governance: When the entire game or world is on-chain, value can be captured automatically and transparently without relying on third-party market royalties for enforcement. The community has a say in how value is captured, either choosing to exit (i.e., switching to or launching a fork) or voting within a predefined on-chain governance system. The ability to capture value and accumulate it into a community-controlled on-chain treasury can serve as a powerful economic flywheel for the virtual economy. Capturing value from economic activities within the world can provide stable reserve support for assets and fund community development and contributions, further promoting greater economic activity.

Security: As FOCG allocates substantial computational resources to validate each transaction, on-chain games and worlds will be secure. This will enhance confidence in the flow of the virtual economy.

Reference examples: Nexon MapleStory Universe, CCP Project Awakening, The Citadel, Dark Forest, MUD/Lattice, Halliday, ERC-6551, dfns

Next Generation Finance: RWA and Equity Tokens

The financial landscape is undergoing a transformation that promises to bridge the gap between traditional finance and the world of blockchain technology. This shift centers around Real World Assets (RWA) and equity tokens (whose products are referred to as STO), including traditionally existing off-chain assets that are now being tokenized and integrated into the blockchain ecosystem. It encompasses a wide range of real-world assets, including real estate, stocks, bonds, and other valuable assets, all made compatible through blockchain technology.

What makes this era particularly special is the active involvement of major traditional financial players like JPMorgan, Goldman Sachs, KKR, and Hamilton Lane. These financial institutions are paving the way for bringing physical assets onto the blockchain, signaling a significant change in the industry. Meanwhile, blockchain protocols like MakerDAO, Securitize, Chainlink, Maple Finance, Goldfinch, Ondo Finance, and Backed Finance are at the forefront, leading the digital transformation with crypto-native currencies, seamlessly adapting to RWA and STO.

In this context, two major categories have emerged: infrastructure-centric and asset-centric. Infrastructure-centric projects are laying the groundwork for this new financial ecosystem, creating protocols, safeguards, and platforms that will support the future of RWA and STO. On the other hand, asset-centric projects aim to deeply verticalize specific assets.

We are committed to exploring both categories in a balanced manner. While we recognize the immense potential of asset-centric efforts, our relative focus leans toward infrastructure development. We believe that building robust and secure infrastructure for tokenization and trading is the cornerstone of this financial revolution.

In the early stages of the RWA and STO revolution, we see significant growth potential in projects that seamlessly integrate with existing Web2 services while skillfully navigating the complexities of the global regulatory environment and establishing partnerships with major Web2 entities. Currently, the market is primarily focused on products related to U.S. Treasury securities and the tokenization of underlying assets. However, we recognize considerable opportunities in projects exploring areas such as derivatives tokenization and securitization, adopting a more inclusive strategy to embrace a broader range of asset classes and financial products. Our assessment will also include regulatory factors such as compliance, risk management, and due diligence, as well as operational factors like efficient onboarding processes, market accessibility, and scalability. These aspects are crucial for bridging the gap between decentralized finance and traditional finance, laying the foundation for a more integrated and resilient financial ecosystem.

Reference examples: MakerDAO, Securitize, Chainlink, Maple Finance, Goldfinch, Ondo Finance, Backed Finance

Permissioned DeFi Facilitates Regulated Institutional Adoption

During the 2020-2021 period, centralized finance protocols emerged, enabling the masses to access cryptocurrencies as an investable asset class. However, a series of events in 2022, marked by the misconduct of several centralized players, quickly tarnished the entire industry, leading to widespread sell-offs and leveraged liquidations, which saw 2023 witness the emergence of robust DeFi innovations such as shared pool perpetual DEXs and peer-to-peer money markets.

We anticipate transformative developments in the DeFi space for institutions in 2024. Unlike fully decentralized products (e.g., GMX, Lido, Morpho), we see permissioned DeFi projects introducing controlled access models in their protocol designs, prioritizing issues related to regulatory compliance, privacy, and security.

The primary driving force behind the rise of permissioned DeFi protocols is the increasing emphasis on regulatory compliance. Governments worldwide are seeking to bring cryptocurrency and blockchain operations under regulatory frameworks, so permissioned DeFi platforms that prioritize compliance and structured onboarding for institutions are expected to benefit. One approach is to implement KYC or KYB verification processes, supplemented by zero-knowledge technology to protect customer privacy. Through these access controls, protocols can mitigate the risks of unauthorized transactions and potential vulnerabilities, thereby increasing the likelihood of welcoming institutional capital.

Institutional capital drives the development of traditional financial markets, and we expect that, with the right infrastructure and protocols, these capital flows will be better suited for on-chain interactions.

In the lending space, if institutions must sacrifice the capital efficiency of over-collateralized assets, they are less likely to consider leveraging. However, for the development of mortgages, appropriate credit rating infrastructure is needed to capture on-chain footprints, manage risks, and accurately predict asset prices. Institutions also emphasize downside protection and hedging capabilities, making insurance markets for pricing on-chain risks critical. Institutions with existing crypto assets may seek ways to earn yields. If so, we anticipate that enterprise-grade platforms with permissioning features (e.g., verified validator sets or security-focused infrastructure providers) will be particularly attractive.

The permissioned DeFi model will be the first step toward regulatory adoption. In the long run, this enables the industry to benefit from scaling in a controlled and structured manner.

Reference examples: Alluvial Finance, Blueprint Finance, Centrifuge, Fortunafi, Fractal Protocol, Maple Finance.

The Convergence of AI and Blockchain

Outside the crypto industry, artificial intelligence has dominated in 2023. This poses a challenge for technologists and pioneers: how to maintain neutral and composable network infrastructure while achieving democratic progress.

Blockchain offers a promising avenue for addressing control and governance-related challenges within powerful technological and economic systems. Through decentralized governance, enhanced transparency, and improved data privacy, blockchain can contribute to creating a more equitable, accountable, and inclusive AI ecosystem.

The convergence of AI and blockchain technology represents a synergy with immense potential to reshape various industries. AI, with its ability to analyze vast datasets and make intelligent predictions, can enhance efficiency and decision-making processes within blockchain networks. On the other hand, blockchain provides a decentralized and secure platform for storing and managing data, which can address some challenges associated with AI, such as data privacy and security issues. Together, these technologies create a powerful framework that can revolutionize industries ranging from finance to healthcare.

Substantial advancements in AI on blockchain services are reflected in the enhancement of smart contracts. Smart contracts are self-executing agreements with contract terms directly written into code. AI can be integrated to analyze the conditions and outcomes of smart contracts, making them more adaptable to changing environments. This dynamic combination not only ensures the accuracy of contract execution but also allows for the automation of complex decision-making processes within the blockchain ecosystem.

Deep learning models like Midjourney and Stable Diffusion may become protocols similar to media versions of ChatGPT, where original content and IP holders can stake their assets (NFTs, game items, photos, papers, iconic designs, etc.) to prove ownership and originality, with a portion of the revenue generated from products distributed as loyalty compensation. This will alleviate IP ownership issues for content generated by AI engines and open new markets for content creators.

By 2024, more builders will leverage these technologies to empower decentralized open-source networks with good governance, fundamentally changing how we produce and consume digital experiences. The seamless integration of blockchain and AI is not merely the sum of their respective advantages but a multiplicative synergy with prominent features in each product. Incentive-compatible AI-supported products and sustainable protocol designs will surpass existing web2 applications.

Reference examples: Worldcoin, Lovo AI, Zettablock, Gensyn, Modulus labs, Ritual.net

Leading the Development of L2 by Embracing Application-Specific Rollups (L3)

2023 has been a period of L2 availability expansion. With Arbitrum experiencing explosive growth and numerous companies using the OP stack to create their own Rollup solutions, many L2 solutions have begun to emerge. The viral release of services like GMX and Friend.Tech signals the broader adoption potential of L2.

Application-specific Rollups (L3) utilizing their own high-performance CPUs for computation will have a greater impact in 2024 to build on this momentum. Vitalik Buterin emphasized in his 2020 Rollup-centric roadmap that Ethereum needs to address scalability issues related to data and computational scalability. Data scalability is expected to be gradually addressed through the implementation of EIP-4844 and sharding. However, computational scalability is primarily solved by Rollups. Layer 3 proposes a practical solution for computational scalability by continuing to provide settlement and composability within Rollups, relying on the general layer for dispute resolution while maintaining the same level of security as the base layer.

However, this comes with trade-offs. While it effectively runs applications at lower costs and high performance, it sacrifices composability with applications on other Rollups. Nevertheless, applications that benefit more from having their own ecosystems (e.g., dYdX, Ronin, etc.) are better suited for application-specific Rollups in a more controlled environment. As we anticipate the launch of several well-funded, mass adoption-focused gaming and social applications in 2024, L3 will play a larger role in providing high-quality services to a large number of users simultaneously, hosting substantial amounts of text, images, and videos in social services, and handling significant traffic from traders in order-book exchanges.

Which part of the infrastructure layer will benefit the most? It could be the ordering layer projects that manage validator computation and sorting, as well as layers that enhance composability between different application-specific Rollups. Additionally, products aimed at minimizing miner extractable value (MEV) in application-specific convolutions, privacy solutions to curb centralized validation nodes, and high-performance validation node solutions for quickly building application-specific Rollups are expected to witness significant progress.

Reference examples: Radius, Cartesi, Espresso, Astria, Automata, AltLayer

Providing Crypto Euros and Dollars for Global Financial Markets

The stablecoin ecosystem has evolved into a massive market, valued at approximately $130 billion by the end of 2023, with Tether's USDT issuance around $90 billion. One key reason for USDT's success is that it was the first stablecoin targeting the financial markets of the blockchain space, but we believe that, especially in 2024, stablecoins will undergo a significant transformation as they shift towards customized solutions designed for specific user groups and use cases. This transformation will include considerations of factors such as onshore vs. offshore targets, compliance levels, and base currency choices. While it remains unlikely to see federal-level stablecoin legislation in the U.S. next year, we expect to continue witnessing attempts to disrupt existing dominant products.

Currently, the stablecoin market is primarily dominated by dollar-based options (such as USDT, USDC, and DAI). The dollar nearly monopolizes the currency denomination of the financial markets formed in cryptocurrency, while people in countries needing strong monetary support are turning to the most proven reserve currency—the dollar—rather than using secondary or tertiary reserve currencies. Meanwhile, Tether is now one of the largest buyers of U.S. Treasuries, ranking among the top 15 in holdings compared to all countries holding U.S. Treasuries, indicating the immense demand for using the dollar as a medium for transactions online or outside the U.S. without full U.S. regulatory oversight.

In 2024, we will continue to see various ways to realize the disruptive potential of dollar-denominated stablecoins (also known as crypto euro dollars), and in a market dominated by USDT and USD C, new competitors will continually enter this space. In this process, we will see the emergence of stablecoin issuers providing specialized services for financial markets, B2B payments, C2C remittances, and more, which have so far been handled by a single stablecoin. Meanwhile, innovations in user experience will emerge in the end-user space, leading to more stablecoin-based services, including new banks, bank cards, and API tools that compete with or collaborate with existing fintech applications.

While the use cases for stablecoins are diversifying, the future applications of crypto euros/dollars will be characterized by disrupting the major players that dominate these traditional financial markets. Builders dedicated to constructing stable currency Legos in the current fintech landscape will have immense potential, ultimately creating a stablecoin-based financial market that includes primary and secondary markets, derivatives, and foreign exchange markets.

Reference examples: Circle, First Digital, StraitsX, Mountain Protocol, REAP, BasedApp, Bleap

The Impact of Blockchain on the Digital Advertising Market

Blockchain technology is poised to revolutionize the advertising industry by addressing long-standing privacy and efficiency issues that have plagued traditional online advertising models. As a pillar of internet business, advertising has been criticized for monopolizing user data. However, the emergence of Web3—emphasizing autonomy and privacy—presents a new paradigm.

In Web3 applications, relying on server-side data storage or client-side cookies to obtain user information becomes redundant. The transparency of blockchain, where all transaction data is stored and accessible, provides a powerful database for analyzing and identifying potential customers, significantly enhancing advertising efficiency. For advertisers, this means a more direct targeting process, as shared wallet information across various media platforms can be used to serve relevant ads to users, even as they browse on different platforms. Given the previous privacy laws that limited advertising effectiveness, this approach is particularly advantageous.

This shift toward a Web3-based advertising model is expected to break the monopoly of large companies in the advertising market, paving the way for a more competitive and diverse media landscape. By minimizing intermediary costs, both media agencies and advertisers will reap significant benefits. Additionally, the potential for advertising slots and keyword futures markets, leveraging their value fluctuations over time, could introduce new dynamics to capital markets, providing opportunities to hedge against market volatility.

Moreover, user privacy remains a paramount concern. Advanced encryption technologies being developed can offer users the option to hide their transaction data, thereby maintaining their privacy while using these services. This balance between efficient advertising and privacy protection is the cornerstone of the blockchain-driven advertising future, creating a vibrant and fairer market for all stakeholders in the industry.

Reference examples: Brave Browser, Hypelab, Persona, Slise