Annual Report 2022: Capture investment trends from evolutions of 5 major crypto verticals

Cipholio Ventures
26 min readDec 15, 2022

Author: @0x_Jonas from Cipholio Ventures
Remarked by: @BlockchainFF

Background

The whole crypto market seems to lack endogenous growth momentum after the core DeFi and NFT narrative cycle faded away. Especially after the double whammy of Terra in DeFi and FTX in CEX, the whole industry is suffering from a backlash: practitioners’ confidence is shaken internally, and more stringent regulation is faced externally. From investors’ perspective, is the crypto market really “sick”?

This article conducts dismantling research on the five major verticals L1/L2, DeFi, Gaming, NFT, and Social, along with analysis of the competitive landscape of different verticals, trying to abstract the core structure of the sector and the potential future development direction, so as to sort out the investment logic of the track. At the end of the article, it also explains Cipholio Ventures understanding of the market cycle and core investment thesis.

1. L1/L2

The first thing to mention is the core infrastructure of blockchain: the public chain. As the source of innovation and the foundation of the superstructure of the whole industry, the public chain has never lacked the pursuit and favor of capital since its birth. With the continuous evolution and development of the public chain ecology, we can vaguely outline the existing competition pattern as “one superpower and four powers”.

No wonder the superpower is “The King” Ethereum. With its current technical maturity and ecological prosperity, no other chains can shake its status as the king. However, the development process of Ethereum is not smooth due to the explosive growth of Dapp, resulting in Layer1 network congestion and thus pushing up transaction costs. High transaction costs will prevent the mass adoption of Ethereum, thus leading to the core issue around which the development of the entire public chain revolves: scaling.

The history of public chain development is a history of solving the problem of the Ethereum scaling plan. Regarding “how to adopt blockchain technology on a large scale”, different public chains have formed different ideas and solutions in different divisions, and gradually evolved into the current “four strong” competition pattern. Roughly speaking, we can divide the existing mainstream public chains into four quadrants based on whether they support EVM and decomposable and roughly divide them into four major categories.

First is the monolithic EVM chain, represented by BSC/Polygon/Avalanche in the upper left corner, commonly called the Ethereum Forks. At the beginning of their establishment, there were, more or less, improvements in the technical aspects of the core structure of Ethereum, such as the number of validators, consensus mechanism, etc., so there were some improvements in the performance level.

On the other hand, similar remodelers did not break the monolithic architecture, while still retaining the EVM environment. Such changes make it possible for developers to seamlessly migrate both at the development level and in the user experience, making it possible for them to greatly carry overflow users who want to experience Dapp but cannot afford the high gas fees of Ethereum, providing a low-cost portal for blockchain users to experience Dapp as well.

This change has allowed the “DeFi Summer” to continue to some extent on public chains other than Ethereum. However, due to the market cycle, the gas of Ethereum itself is relatively lower, which has lowered the user experience threshold to a certain extent. Meanwhile, most of the innovation of native applications still happens on Ethereum, so the Ethereum Forks are currently facing a serious TVL exodus, insufficient innovation, and user loss.

The second one is the modular chain that also supports EVM, which is often referred to as the Layer2 scaling solution. Layer 2 serving as a horizontal extension of Ethereum, enhances the overall operational efficiency of Ethereum through the architecture of a separated execution layer.

The development of Layer2 has gone through the technical iterations of Channel, Plasma, and Rollups to the proposed hybrid solutions such as Validium and Volition, and currently, the most market-focused solutions are mainly on Rollups, with the two mainstream segmentation solutions ZK and OP leading the market. However, the development process of the ZK system is slow due to the difficulty of the circuit algorithm and the development of EVM equivalent compatibility issues, so the OP system solutions represented by Arbitrum and Optimism have the upper hand in terms of technical maturity and ecological applications.

The third one follows the exact opposite path of Layer2, so-called “Ethereum Killers”. they abandoned the existing development path of Ethereum and started a new one, the most intuitive improvement being its optimization of the parallel execution of Ethereum itself. the legacy problem of EVM at the beginning of its design is that it cannot fully unleash the performance potential of multi-node and multi-threaded, resulting in the network itself not being very capable of solving high concurrency scenarios.

Public chains such as Solana/Aptos/Fuel are high-performance public chains designed to solve this problem. But it is not perfect as well, the impossible triangle of blockchain is not broken, and they sacrifice stability while performance and efficiency are improved. For example, Solana’s extremely low redundancy design has been greatly questioned by the market for system stability issues arising from large-scale usage.

The last one is to highly abstract and modularize the blockchain as a whole. The modular public chains represented by Cosmos/Polkadot/Celestia further split the single blockchain according to different functional modules, which has the benefit of lowering the threshold of public chains development and operation, greatly reducing the technical and time requirements for public chains cold start, and bringing independent sovereignty to Dapp, and the concept of L3/L4/App-chain was born.

In addition, the public chains are divided into separate functions, and the blockchain as a whole has significantly improved operational efficiency compared to a monolithic chain. However, the disadvantage is also obvious. After the partitioning of functions, the transmission of information within the original unified system requires additional inter-chain communication tools to complete, which poses certain challenges to inter-chain mobility, security, and atomicity.

Combining with the above analysis, we believe that public chains are developing along two major directions in solving the core problem of scalability: “general-purpose chains” to meet the needs of “broad users” and “dedicated chains” to meet the needs of “vertical users”.

The core player in the stage is still the Ethereum + Layer 2 empire. To the breadth, high-performance chains are providing supercomputing platforms to meet the needs of Web2 mass adoption, and to the depth, there are modular public chains serving top Web3 applications to meet more on-chain native needs and innovations. We believe that in the future there will be a long-term single-chain and multi-chain hybrid development trend.

Of course, outside the technical level, whether the public chain itself has the ability to provide continuous improvements for ecological development is also crucial. There is no doubt that the public chain is still the investment vertical with the strongest narrative and highest odds at this stage, and the investment in the public chain is generally longer in the cycle, with bigger bets, and the technology development also faces huge uncertainties. Even though the situation that liquidity premium caused by capital-intensive investments will not improve significantly shortly, we still see the evolution of the public chain ecosystem in the following areas.

Ethereum Forks: With the development of Layer2, the traffic bonus of the current bull market, which is the result of the explosive growth of Ethereum spillover traffic, may not exist in the next cycle, and public chains should focus on the endogenous growth logic of the business itself. For example, Polygon has been actively exploring ZK and modularity-related areas and has proposed solutions such as Hermez, Miden, zkEVM, etc. Exchange-based public chains like BSC can rely on the strong empowerment provided by the exchange ecosystem to gain more traffics.

In addition, the rise of Meme coins and NFT made us realize the importance of cultural attributes in the crypto space. We are looking forward to seeing more public chains which focus less on the tech stack and more on the culture side in the next cycle.

Rollups: There are many discussions in the market about the advantages and disadvantages of OP and ZK solutions. Most developers and investors believe that betting on ZK which is underlying security guaranteed by cryptography is the ultimate scaling solution for Ethereum in the future. However, when we look back at the history, not only ZK, but also Plasma was considered the best scaling solution for a long time before Rollups was considered the mainstream solution for Layer2.

So rather than analyzing and comparing the pros and cons of betting on different technology square solutions, we tend to go after middleware with more deterministic trends in technology change, such as bridging between L2s, decentralized sequencers, ZK mining, zkEVM, etc. In terms of technology we also clearly see the proposal and development of convergent solutions such as Optimism Bedrock, StarkWare Volition, Celestia Celestium, etc. The ultimate means of scaling Ethereum can only be verified by the market and users.

Ethereum challengers: although the narrative of a high-performance chain is that of an Ethereum killer, we believe that it is inconceivable that any one ecosystem could challenge the dominance of Ethereum today. If Ethereum is likened to a super crypto lab where new ideas can be birthed all the time, the high-performance chain is a commercialization platform where ideas and practices can be brought to life.

By carrying the value exchange behavior generated on Ethereum with lower cost and higher efficiency, the high-performance public chain is responsible for inheriting the proven business model of Ethereum and extending it to more users. For example, Aptos/Sui, represented by the Move language, defines data assetization in such a way that it can better serve financial applications. In addition, we see that Web2 high-frequency interaction scenarios such as social games are also expected to be better experienced on high-performance chains.

Multi-chain/Modularity: The development of multi-chain and modularity is inevitably the trend, and we need to make specific optimizations in depth according to different usage scenarios at the stage when the ecosystem application development has taken shape. However, not all applications are suitable for modular components. We hope to find applications that find their PMF to reach a certain scale of operation and finally leverage computing performance improvement, making the product experience significantly better.

On-chain gaming, high-performance DeFi is a good fit for this scenario. We are also looking for a development framework that allows developers to deploy to different modules with one click, giving them the possibility to freely choose the consensus layer, data availability layer, settlement layer, and execution layer. We are pleased to find that OP Stack is also moving in this direction of change and look forward to its further progress in the future.

2. DeFi

As the crown jewel of blockchain, DeFi is naturally the fastest-growing and most mature segment in the crypto world. If we dismantle the core structure of DeFi, we can find that DeFi has been formed around three significant pilla

rs: asset issuance, asset trading, and asset management.

The asset issuance enriches asset types, the trading platform activates liquidity, the capital management platform provides financial gains, excluding the native DeFi module such as AMM, POS Staking, etc., the rest basically replicate the functions and business modules of traditional financial markets locally, and we can say that a relatively complete financial market system has been realized on chain already: money market (USDx), capital market (trading and lending), foreign exchange market (Token), and gold market (BTC).

DeFi may lose its charm if it only reproduces all elements of the traditional financial market on chain. Traditional financial markets (US/Hong Kong/A-share) increase asset liquidity by continuously issuing new financial assets (IPO) and reaching out to global investors, and complete the positive cycle of economic growth (dividends) by increasing the intrinsic value of assets (share price) through good operations and then providing real income (dividends) to investors.

But this combination is not new, and soon everyone will realize that all the ways and means of traditional finance will be reenacted in DeFi, what will DeFi do to disrupt the traditional financial market system besides transparency and fairness? It is important to mention the core engines of DeFi that have created rapid economic growth: “liquidity mining” and “vampire attacks”.

Unlike traditional finance, most DeFi projects lack professional market makers to provide liquidity. And one of the manifestations of the prosperity of the financial market is whether the liquidity of the market is abundant enough. Therefore, the essence of all on-chain wars is the competition for liquidity, and the application with the ability to dominate liquidity has the biggest say in the market.

Compound’s “lending to mining” concept made people realize that the project itself can obtain incremental users through credit enhancement, as for subsequent governance token pools, second pools, and revenue aggregators all launched with a single purpose: to create a boom in isolated economies by minimizing the actual circulation of tokens.

The vampire attack, on the other hand, takes the fight for liquidity to a fever pitch based on liquidity mining: a price war that spreads subsidies to get TVL at all costs. From Sushi to Uniswap, from Ethereum to BSC, from Looksrare to Opensea, all of them are using similar methods to build up another tower in a parallel universe.

Neither “liquidity mining” nor “vampire attack” is a mere on-farm game. Liquidity mining locks in user funds by issuing tokens with high inflation, thus reducing selling pressure and stabilizing high yields, and sinking a large number of users and funds in the upside of the market.

Vampire attack, on the other hand, expands DeFi’s parallel universe by replicating the same financial foundation in different public chains, creating a financial market in the blockchain world with very different styles but similar functions. The development of a multi-chain ecosystem has simultaneously created a boom in infrastructure such as cross-chain bridges, oracles, etc.

If the traditional financial market growth is only capital expansion along one main line of economic growth, DeFi can match the excess number of users and user funds in both depth and breadth, thus demonstrating unprecedented economic growth on an exponential level.

Following the above analytical framework, we can abstract the five major factors of financial market development at the macro level: asset type, liquidity, real return, capital multiplier, and inflation level, which correspond to the five core segments of asset issuance, asset trading, asset management, multi-chain, and yield farming respectively.

The capital multiplier increase brought by the multi-chain development and the high inflation provided by yield farming is a double-edged sword, providing a continuous capital injection when the market is up, and hired capital will flee at any cost when the market is down leading to the collapse of the economic system.

Combined with the Merrill Lynch clock theory, we can obviously find that the crypto market is currently in a stagflationary phase, where asset issuance, market liquidity, and real yield have all declined significantly, yet the inflation level and multi-chain development are still in a high-speed expansion with occasional moderating trends, ultimately leading to a slightly declining on the overall market.

There is no doubt that the overall market of DeFi is in the process of returning from the false prosperity caused by the over-credit expansion when the market was overheated to the rational development, and DeFi has been regarded as the front-runner of the public chain ecosystem development, and the number one investment project of the new public chain development is DeFi, and the financial first idea has brought the initial users and funds for the development of the new public chain.

But when the tide ebbs, today’s hits that created countless wealth will gradually be forgotten. Our investment philosophy for DeFi vertical has also shifted from looking for innovative applications with endogenous leverage to applications with solid track logic and endogenous demand, and a direct indicator is to pay more attention to the cash flow of the agreement and whether the real revenue grows organically. Finally, we hope to see more diversified asset classes and businesses that are relatively mature in traditional business but not yet adopted by the chain on a large scale, and we are optimistic about the future development of the chain’s order book, derivative agreements, and synthetic assets.

Blockchain Founders Fund: If decentralized finance is to reach mass adoption, the current infrastructure needs to mature with increased utilization of risk management, underwriting, and insurance products and services that can protect against uncertainties of exploits and malfunctions of smart contracts and wallets.

3. Gaming

Gaming is the most popular yet controversial vertical of 2022. Believers are convinced that game + blockchain is the future paradigm shift of the game industry and is the next important Web2 entrance portal after DeFi. Skeptics believe that the current P2E games are all Ponzi schemes, which are completely incomparable to traditional games in terms of playability and sustainability.

How to create a Web3 game with high playability and sustainable revenue for players is the biggest challenge facing the whole industry. Can there be a game with a perfect combination of playability, financialization, and sustainability?

Unfortunately, our answer is NO. The dichotomy of financialization and playability has not found a suitable solution. Let’s start with the traditional games represented by RTS, MMORPG, MOBA, and intuitively find that the game is facing the problem of going left or right: the game management team has to choose between playability and financialization at the beginning of the venture.

The choice of financialization is currently the most well-known and criticized P2E/X2E model. One of the predominant features of this system is ordinary quality and the gaming scheme is relatively flat. The core is to use financial numerical design and gameplay operation to make the public participate in the game spontaneously.

Although not sustainable, one game after another has become a testing ground for the numerical design and operational ideas of DeFi products. How to properly distribute rewards? How to make a soft landing for the economic system developed through hyperinflation? How to attract and retain users to the pool through the token economy and operational design is the key answer.

The exact opposite direction is explored along the field of playability. This part is the key area of traditional game manufacturers, which is generally operated by professional game development and operation teams, combining the characteristics of blockchain and NFT to put game assets and gameplay on chain, and the purpose of players playing games is still to have fun rather than simply to generate revenue.

Unfortunately, due to the long development cycle of traditional games and slow landing, we have not seen much actual output of games on the ground, but combined with the entertainment habits of users in the Gen-Z, we believe that games have the potential to act as the entrance to the next generation of social platforms. Not only does the capital injection of AAA/Metaverse takes responsibility as the educator of the Web3 market, but also accumulates Web3 users’ traffic in a subtle way, and the game-based social business model is also applicable in the crypto world.

Therefore, we can see that blockchain games are standing at the crossroads of choosing to embrace financialization to become a platform providing pure mathematical gaming or focusing on game content to become the entrance to the next generation social platform. Both AAA/Metaverse and P2E/X2E are only the intermediate products of the current paradigm shift, they are only the process and means rather than the result. Along the line of thinking that blockchain games will eventually land along the two scenarios of social and DeFi, we think there will be some noteworthy opportunities in this vertical.

We believe that sudo on-chain games without distinctive features will hardly survive in the future, and game teams must choose between playability and financialization. Secondly, in the current situation where the overall industry model is not fixed, we are not optimistic about the macro middleware of the game industry, such as the data service platform and gaming guilds, etc. The integrated game studio is more worthy of favor.

Finally, along the direction of the DeFiization of games, which is the P2E/X2E vertical, we are still optimistic about teams that have made innovations in token design and application scenarios and have outstanding operational and narrative capabilities. In the direction of AAA/Metaverse, we will pay more attention to the development of infrastructure to bring more assets and even play mechanisms on chain, such as cloud games, AIGC, game wallets, vertical NFT trading platforms for game assets, and so on.

4. NFT

Although everyone has long been familiar with the various PFPs in our wallets, we think it is still too early to attribute NFT to an independent vertical today. When sorting out the NFT-related industrial structure, we found that the so-called NFT industry is actually a vertical financial market with PFP as the core. Its industrial framework is very similar to the core framework of DeFi, but it focuses more on asset issuers and trading platforms.

The scarcity and non-homogeneity of the total circulation make the pricing and valuation of NFT extremely complicated, which leads to the low liquidity of the NFT market. Therefore, compared with the large and comprehensive development of DeFi, the mainstream narrative of the NFT financial market will be more complex. Focus on the liquidity service module, resulting in a series of innovative applications of NFT-Fi-related transactions, mortgages, loans, and fragmentation platforms.

But is NFT-Fi really the only development path for the NFT vertical in the future?

Before answering this question, let’s take a look at the proposal and implementation of the EIP standard related to NFT. It is not difficult to find that NFT is also developing in two major directions: financialization and commercialization. In addition to the well-known NFT asset issuance standards such as ERC-721/ERC-1155/ERC-875, we can also see some other standards that deepen financial composability, such as ERC-490 leasing standards and ERC-3525 semi-homogeneous tokens on the route of financialization and ERC-2981 royalty income. This is also a key area for the development of the NFT-Fi market.

Another major trend is the exploration of commercial attributes. Since Vitalik proposed the concept of SBT, various related EIPs have emerged in an endless stream. The establishment of ERC-5192 also allows us to see the possibility of large-scale application of SBT applications. Further exploring the field of Web2 integration, we also found some subscription agreements such as EIP-5643, which also provided room for imagination for the development of membership services, the traditional Web2 vertical. Judging from the total number of proposals and the number of proposals passed, another observable trend is that the community is currently paying more attention to the development of NFT financial direction, and the practical NFT that is more closely integrated with Web2 still has a long way to go at the landing level.

Back to the topic of NFT-Fi, although the current evaluation, lending, and liquidation systems for NFT are more or less flawed, we believe that the current liquidity problem of NFT does not lie in the imperfect infrastructure, but rather It is more trapped in the dilemma of double scarcity on the supply side and the demand side.

Compared with FT, NFT has almost only one main narrative vertical: PFP, and the top ten PFP projects by market value almost occupy all the liquidity in the market. The single type of asset and the homogeneity of the narrative has led to the lack of asset supply. Also from the perspective of the demand side, if NFT is regarded as an alternative investment market in the encrypted world, there will be fewer asset allocations focusing on the NFT field when the market goes down. In addition, affected by the total market value of NFT, the Matthew effect generated by capital accumulation will be more obvious than FT, the prudence of the demand side on the market cannot generate new investment and consumption demands.

The lack of fresh narratives on the supply side, and the tightening of investment on the demand side are not only problems with NFT, but limited by the types of NFT assets and inseparable characteristics, the problem of liquidity will be infinitely magnified, which has led to the current extreme illiquid NFT market.

So back to the question above, is NFT-Fi the only path forward for the NFT circuit? We believe that until the NFT asset class is enriched, any project claiming to solve the problem of NFT liquidity is taking a hammer to the nail. But at the same time, the cultural narrative-driven NFT represented by PFP will continue to dominate for a long time, which seems to be an insurmountable paradox, but we believe that the shift in the narrative style of PFP will be more frequent and diverse in the future, which can increase the richness of assets within PFP.

Secondly, regarding the NFT infrastructure direction, we will continue to focus on the parts that are integrated with Web2, looking for a generic “bridge” from Web2 to Web3: for example, providing a membership-type service SDK and a crypto wallet that is more accessible to the average user. Finally, we envision that NFT will no longer appear as a separate vertical in the future, but will be more like FT, which is integrated into all aspects of the crypto ecosystem as a foundation.

Blockchain Founders Fund: So far, a significant portion of NFT buyer and seller volume over the years came from users trying to flip PFPs and NFT projects with little to no utility with a focus mainly on digital art and collectibles. Volume across NFT marketplaces sunk steeply towards the end of 2022. This merely represents the PFP bonanza and not the true value behind the NFT technology. There are NFT use cases beyond images that are more subtle, and less colorful but have a high utility such as identity verification that will act as a data layer composed of unique, verifiable digital identities and attributes upon which decentralized social tools can be built.

NFT Marketplace Volume — 2022

5. Social

In Web2, social = traffic, and traffic = attention. In this era where attention is king, grasping users’ attention gives you control over them. Therefore, social is also a hot area for capital chasing in 2022, and no one wants to miss the opportunity of the next Tencent or Meta.

When it comes to the drawbacks of existing Web2 products, everyone will invariably envision the problems of data ownership, privacy, and revenue hijacking. Social, as the most prominent and intuitive vertical to solve such problems, occupies the double main narrative of traffic + sovereignty, and also attracts countless startup teams trying to rebuild the mature business models of Web2 in Web3. Today, these models are often proven to be unsustainable and unsuitable for Web3 development.

Based on the dismantling of the vertical we can also clearly find that the social field is built around the data combinable line “infrastructure — middleware — application” classic three-layer framework. The bottom layer is mainly about data transmission and storage and protocols of the specification class, the middleware is more around the core social graph of data availability, and the upper layer application is not much different from the Web2 social scene of daily experience.

We always believe that Web3 social and Web2 social are not always in a state of opposition and separation, and the soul of Web3 social should be to return the data’s ownership to users. Based on this, we believe that the path of Web3 development should start from middleware attached to existing Web2 giants, and provide Web3 native services to platform users by drawing traffic from Web2 to complete the accumulation of seed users.

At the same time, privacy will be an essential requirement in Web3 social. We are optimistic about the development of ZK authentication and access control solutions in the infrastructure and middleware areas. The common business model of Web2 application + coin issuance at the beginning of the application layer explosion has been falsified by the market, and as a social product, ease of use is much more important than decentralisation and financialisation. Finally, we believe that as the richness of on-chain assets increases, crypto-native social applications will see explosive growth, so we are looking forward to the day when SBT and AAA games will be implemented on a large scale.

Blockchain Founders Fund: We always believe that Web3 social and Web2 social are not always in a state of opposition and separation, and the soul of Web3 social should be to return the data’s ownership to users. Based on this, we believe that the path of Web3 development should start from middleware attached to existing Web2 giants, and provide Web3 native services to platform users by drawing traffic from Web2 to complete the accumulation of seed users.

Core Investment Thesis

The above is our interpretation of the current competitive landscape and investment logic of the five core verticals, and sorting out the core structure of different verticals can help us understand the pulse and direction of the market development more clearly. However, when we go beyond the segmentations and try to re-examine the changes in the crypto market with a macro-cycle perspective, we seem to have some surprising new findings.

First of all, we follow the Merrill Lynch clock to divide the crypto market into four quadrants according to the degree of economic growth and inflation and carve out a four-year bull and bear cycle corresponding to the crypto market. It should be noted that the intersection of the axes should not be 0, but at a neutral position, i.e. the third quadrant should not be expressed as “negative growth, negative inflation”, but rather “low growth, low inflation”. Therefore, the sequence from the first year of the bull market to the last year of the bear market corresponds to the recovery period, the overheating period, the stagflation period, and the reflation period, respectively.

  1. Recovery period: low inflation → medium inflation, medium growth → high growth. The accumulation of underlying technology and middleware iterations in the long bear market has prepared the application layer for the explosion. In addition, inflation has bottomed out, the economy is expected to improve will also attract more funds and users to enter, making it easier to get started and understand the application class logically becoming the most outstanding performance of this phase of the asset class.
  2. Overheating period: medium inflation → high inflation, high growth → medium growth. As inflation continues to increase market heat gradually reached its peak, the market has overdrawn technology accumulation + application explosion brought about by high growth expectations, and a lack of sufficient reserves of innovation to drive the market forward in the short term. Capital has reached a bottleneck under the narrative of fundamental analysis, and Meme class assets have been able to shine because of their unique cultural narrative attributes to take up the emotion of capital revelry.
  3. Stagflationary period: high inflation → medium inflation, medium growth → low growth. The orgy of the bull market often ends after the top of inflation, the impact of overdrawn growth is also fully released at this stage, the capital market will slowly return to rationality, bubble asset prices to a significant retracement, while the market is also looking for new growth points brewing the next narrative cycle. This moment should be combed after the tide has receded leaving the core technology, standing on the shoulders of the previous breeding the infrastructure needed for the next cycle to explode.
  4. Recessionary period: mid-inflation → low inflation, low growth → medium growth. This will be the most difficult phase of the bear market when the infrastructure as the next bull market growth engine is maturing, but due to the inactivity of the capital market is still unable to reflect the economic growth on paper. Therefore, at this stage, we should pay more attention to the middleware that connects applications and protocols, and the sign of maturity and large-scale application of middleware should be used as one of the signals for the opening of the bull market.

In summary, the crypto market will continue to cycle through the four cycles mentioned above, and the core segments in the cycle will repeat the rotation of Application-Meme-Protocol-Middleware. The leading application of the previous cycle will gradually expand the ecosystem to become the infrastructure of the next cycle, and the infrastructure of the next cycle will breed a new leading application, and so on and so forth.

It is worth noting that outside of the inflation and growth threads we can find a third thread that we believe is a unique dimension to measure in the crypto space: Culture. There is no doubt that Meme has the most cultural attributes, while at the other end of the axis the middleware of the tool type is the most lacking in cultural attributes. Both the public chain itself and the protocols on the public chain can more or less feel the difference in development and user experience brought by different cultural attributes. We, therefore, venture a conjecture that the invisible hand of culture, like inflation and growth, is also subtly influencing the crypto cycle.

Where exactly are we? We believe we are currently at the intersection of overheating and stagflation. With growth slowing and inflation nearly peaking at the moment, if we could only choose one sector to focus on in 2023, we would not hesitate to focus on the protocol layer. This is one of the key reasons why capital is now piling into infrastructure investments, whether it is Danksharding, zk Layer2, the Move duo, or Cosmos 2.0, and we are instead looking forward to the protocol layer of the crypto world in 2023 more than any previous year.

However, as a primary market investment institution, what we should do is always look ahead of the market. Based on this judgment of the cycle, we believe that the profit/loss ratio for 2023 is no longer high for groveling in the general-purpose protocol layer investment, and the best strategy at the moment is to focus on the development of middleware and even application layer in systems with high growth potential. The crown of our predecessors has been repaired, we just need to select the right pearl.

Finally, let’s talk about the way Cipholio Ventures’ investment philosophy is formed. We believe there are only two models for all native crypto innovation: technology innovation-driven and business model innovation-driven. These correspond to innovation at the protocol and application layers respectively. According to this logic, we can sort out the competitive landscape of industry structure in different verticals, and this process from idea to model to the component is the framework for doing industry research and the core framework for our analysis of different verticals above. However, investment is exactly the opposite process, that is, we need to abstract what is the corresponding model according to the possible future basic components, and then speculate upward to see what technological innovation or business model innovation can bring such changes, and finally form the core investment concept to guide future investment.

Beyond the straightforward industry research and investment philosophy, we find that the most innovative and exciting directions are not in the traditional analytical framework, but rather in the intersection of the emerging application layer that drives technology development and the emerging protocol layer that drives business model advancement.

Curve is now the next-generation infrastructure for DeFi stablecoin trading, and the flourishing of a series of bribery platforms built around the Curve voting mechanism is a testament to its ability to derive innovative business models at the application level. DYDX, as the leading derivatives protocol, has higher requirements for on-chain execution speed than other derivatives protocols and has since chosen to stand on its own due to the efficiency of Ethereum, which proves that excellent applications often have the ability to force technological breakthroughs in the protocol layer. So if we can summarize a guideline for investment across cycles and tracks, what exactly are Cipholio Ventures looking for? There are only two answers.

  1. Protocols require technical breakthroughs to satisfy the actual demands of booming applications.
  2. Applications that possess protocol-specific business model innovations on top of universal protocols.

Ending

Finally, there are some popular segments that cannot be effectively categorised, such as abstract account wallet, KYC/KYT, MEV, etc., which cannot be discussed due to space limitations. We hope that this combing and analysis from the industry structure can provide some general guidance for the future macro investment direction. Standing at the moment of the unprecedented great crunch and crypto credit crisis, the future seems to be certain and uncertain. As participants and witnesses of history, all we can do is firmly believe, keep a child’s heart, and keep exploring.

(The End)

Disclaimer: This research article is opinion/insights only, it should not be viewed as financial or investment advice in any form. Readers are advised to do their own research and analyze the market on their own.

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