In which scenarios will on-chain applications for one billion users explode?

In July 2018, Dr. Xiao Feng, Vice Chairman of Wanxiang Holdings, predicted that the blockchain industry could see companies worth $5 trillion. At that time, the total market capitalization of the entire cryptocurrency market was only over $200 billion, which then fell to $100 billion within a year. From the peak of $830 billion in January 2018 to the lowest point of $100 billion in December, the market dropped by 88%, leaving a gap of 50 times to the $5 trillion market cap. Most people felt confused about the industry's prospects at that time, even though DApps on Ethereum were beginning to take shape.

In July 2020, the DeFi craze ignited the crypto world, shifting the industry narrative from underlying infrastructure to applications that generate real value. During this cycle we are experiencing, the application layer and protocol layer began to explode at scale. The discussion of "fat protocols" versus "fat applications" came into view; public chains prioritized ecosystem development; blue-chip NFTs like CryptoPunk and BAYC successfully broke into the mainstream. In November 2021, the total market cap of the crypto market reached $3 trillion, less than a full gap to $5 trillion. The number of global crypto users reached 100 million.

Although there was a decline after November 2021, with the industry's cleansing, the bottom of the bear market has already emerged. The year 2023 is an important moment for transition. Rather than timing the market, we should think: when the global crypto user base reaches 1 billion and 15% of humanity enters Web3, which sectors will give birth to trillion-level applications? How will these applications develop in the next cycle?

Application or Infrastructure?

We believe that the next cycle is very likely to witness an explosion in the application layer. This is similar to the development path of the internet, where developers focused on building when the infrastructure was lacking, and as a large number of users became capable of using it, industry giants turned into monopolistic application developers. The Web3 path is the same; the "application" discourse power is gradually increasing, and after capturing users, building a public chain suitable for themselves has become a feasible path. Developers realize that infrastructure serves applications, and mastering users means mastering the discourse power of Web3. Although the infrastructure has not yet supported a billion users in the next cycle, for application developers, this is the dawn of seizing the "high ground."

DeFi

The exploration of the future of DeFi may focus on two aspects: one is attracting clients from centralized financial institutions within the industry, and the other is attracting unbanked users from outside the industry. The collapse of Luna in 2022 triggered a series of crises that made many users question Crypto. However, DEX trading volume doubled within days after the FTX crash, demonstrating people's trust in decentralized financial protocols.

One of the next narratives in DeFi is to replace existing centralized financial institutions. In 2020, DEX trading volume once accounted for 15% of CEX, and after two rounds of declines, it has risen again to around 15%, in line with the development curve of emerging technologies. CEX still occupies the vast majority of market share, and DEX still has significant room for growth. Especially in derivatives trading, DEX accounts for less than 2%, but derivatives are a major profit source for many centralized exchanges. To achieve a derivatives trading experience comparable to CEX, current DEXs are still far behind CEX in terms of response speed, concurrent processing, depth, and convenience. This requires exploration in various aspects such as L2 scalability, cross-chain, privacy protection, and liquidity.

Another direction for DeFi development is to grow in low-financialized third-world countries, acquiring users with low barriers to entry. DeFi may help these countries bypass traditional financial systems and use digital currencies for everyday payments directly. Currently, some countries in Africa and South America have begun accepting BTC payments. To achieve this vision, it is necessary to iterate on technology to lower barriers, such as the development of AA wallets and smart contract wallets, establishing on-chain credit mechanisms, and also considering localized promotion and user education.

For DeFi to achieve explosive growth in the next cycle, the collaborative development of multiple underlying infrastructures is needed. Investors and developers should pay attention not only to the protocol itself but also to the construction of underlying facilities.

X to Earn

In 2021, Axie Infinity brought Play to Earn into the spotlight, becoming a national game in several Southeast Asian countries. In early 2022, StepN expanded the boundaries of Earn to "X". Subsequently, various X to Earn projects surged, but most did not break away from the StepN framework. The collapse of StepN sparked discussions about token economics: the pros and cons of Ponzi designs, the impact of NFT pools, and the trade-offs of multi-chain outputs.

The Ponzi scheme has accompanied the crypto world for many years. Looking back at history, the essence of many token economies is Ponzi, but it is difficult to define before the collapse. After the collapse, it should not be completely denied, but rather reviewed and reflected upon its exploration in the development of token economies. For example, the failure of Fcoin has become history, but its "trade to mine" laid the foundation for the later DeFi "liquidity mining" craze.

The discussion of X to Earn should not define a Ponzi scheme, but rather explore how token economics and user behavior are intertwined. Currently, there are mainly three token schemes:

1. Governance tokens: primarily focused on voting rights, holders can monetize ecological resources or anticipate future dividends.
2. Dividend-type tokens: Use project revenue for dividends or buybacks.
3. Staking Tokens: Holding can increase future yields or earn yields based on shares. X to earn belongs to this type of variant.

In this cycle, most projects began to integrate various types of tokens. Staking tokens emphasize future output and require refined supply and demand design. If governance rights and profit distribution rights cannot stimulate sufficient demand in the short term, and native demand fails to meet expectations, then a more Ponzi-like design becomes a choice. This is the reason why many X to earn projects choose the Ponzi model and is also a problem to be solved in the next cycle. The key to the Ponzi lies in whether pseudo-demand can stimulate true demand, and whether it can soft-land under prolonged payback periods and reduced returns.

X to Earn emphasizes X rather than Earn. Earn can assist with cold starts and early user expansion, but it cannot be the sole goal. The project should quickly soft land the Ponzi model after the cold start, weakening the benefits for early users. "X" is the key to the project's continued operation, and user retention should rely on behaviors within the application rather than obtaining tokens. "Positive externalities" emphasize how the project attracts external incremental guarantees for internal returns, ensuring that external demand exceeds internal supply. Lowering user thresholds and attracting traffic from outside the circle is the consensus for the next cycle.

The Ponzi scheme will still exist in the next cycle and may shine brightly, causing a huge market impact when it collapses. Remember:

1. There is never a "too big to fail".
2. What can achieve you often can easily lead to your downfall.

Games and the Metaverse

In 2022, GameFi financing reached $5.189 billion, accounting for the largest share. The number of gaming projects makes up about 20% of our project database, second only to DeFi. This is attributed to the investment boom in the "metaverse" and the combination of Axie Infinity's NFT games.

However, "games" and "metaverse" are not the same concept. Games emphasize competition or growth, while the "metaverse" emphasizes the "mapping" of the real world into the virtual world. Most projects that claim to be "metaverse" are actually MMORPG games, and many "Web3 games" are just old-fashioned games with NFTs.

Neither of these two solutions is the endgame for games. Games can make money because they can bring joy to people. Web3 can improve some issues such as data ownership, token cold start, and NFT rarity verification, but the fundamental problem of games always lies in how to make them enjoyable, and then add Web3 elements.

In the next cycle, most games that claim to be 3A but are not fun will disappear. Explosive Web3 games should be fun, attract players, and have a positive cash flow, supplemented by a lightweight token model, using tokens as dividends rather than being strongly tied to user behavior. It should divert players and investors, allowing players who enjoy the virtual world to pursue their "hero dreams" and letting investors who hope to earn returns make decisions to achieve those returns.

We also focus on building gaming infrastructure, such as Fragcolor, which provides a native blockchain game engine, Anima, which creates on-chain AR interactions, Matrix World and ChapterX, which offer multi-chain metaverse solutions, and SecondLive, a metaverse project that has accumulated hundreds of thousands of users. What can truly change the world are those products that bring novel experiences and are full of imagination.

NFTFi

The liquidity shortage in the NFT market urgently needs to be addressed. The biggest difference between NFTfi and DeFi is that mainstream NFT works like PFP have both consistency and inconsistency. Currently, there are mainly three types of liquidity solutions:

1. Marketplace: The listings are divided into art and comprehensive NFT Marketplace. The comprehensive market is led by Opensea and faces competition from challengers like Blur.

2. Aggregator: Platforms like Gem and Genie( have been acquired by Opensea and Uniswap). Blur is more like a way to drive traffic to its own Marketplace.

3. AMM Protocol: Like Sudoswap, it uses a multi-pool approach to address the issue of inconsistent liquidity through market pricing.

The NFT lending market mainly has the P2P model ( NFTfi, Arcade, x2y2) and the P2Pool model ( BendDAO ). We believe that P2P lending will continue to be squeezed by the Marketplace.

The NFT pricing models include peer pricing ( such as Abacus ) and AI pricing ( such as NFTbank and Upshot ). Peer pricing has inherent flaws, while AI pricing faces value capture issues.

Fragmentation was once highly anticipated, but with Fractional rebranding to Tessera and the decline of NFTX, NFT20, and Unicly, it is no longer receiving attention. Most fragmentation solutions have not addressed why fragmentation is necessary and its impact on liquidity.

The entire NFTfi market is still in its early stages, and liquidity solutions are a current priority. We believe that Marketplace, AMM Protocol, and Lending Protocol are the sub-sectors that investors need to pay the most attention to. In the short term, Marketplace remains the primary solution, but order flow processing will become more specialized and convenient.

Wallet

Wallets play an important role as the largest user entry point in lowering barriers. In recent years, wallet development has been divided into two branches: smart contract wallets and MPC wallets. The smart contract wallet is led by Gnosis Safe, while the MPC+TSS solution is applied by Fireblock in custodial wallets. However, neither of these is the final solution, as wallet development may still rely on the account abstraction proposal put forward by Vitalik.

Although the trend of EOA wallets evolving towards AA wallets is irreversible, other wallets won't wait. The development of MPC wallets is in full swing, and now is the golden period to seize the market. There are two paths for wallets:

1. Start from the application, develop users in reverse, and form an application-centric ecosystem.
2. Starting from B-end services, providing SDKs to allow more applications to connect and rapidly develop the customer base.

In situations where the technical implementations are similar, how to expand user boundaries through strong operations is the core competitiveness of the new wallet team. The first path means that any user entry can create their own wallet; the second path requires strong business development capabilities to quickly expand influence. The development of the wallet may align with on-chain tracks, carrying larger narratives and further solidifying user retention.

A wallet is essentially a "private key management tool". Even if the end user does not directly manage public and private keys, as long as it is built on an on-chain network, money