Cycles and narratives have always been central topics in the global crypto market. In the past, the industry often looked to the Bitcoin halving to track cycles, and explored major narrative directions. However, following the approval of Bitcoin and Ethereum spot ETFs, the crypto market has become highly coupled with the global financial market, and the variables affecting the crypto market's movements are increasing.
In the context of increased uncertainty, it’s important to better understand cycles and discover future narrative trends. Investment institutions have always led the way for this discovery, being eager to capitalize on new narratives. As a result, OKX has launched the Crypto Evolution column, inviting leading global crypto investment institutions to discuss the current market's cyclicality, the direction of the new round of narratives, and popular sub-tracks, to draw out fresh insights.
The following is the content of the fourth issue, jointly produced by OKX Ventures and Fundamental Labs to explore topics such as "how should infrastructure evolve in the next stage?".
About OKX Ventures
OKX Ventures is the investment arm of leading crypto exchange and Web3 technology company OKX, with an initial capital commitment of USD 100 million. We focus on exploring the best blockchain projects on a global scale, supporting cutting-edge blockchain technology innovation. OKX Ventures also works to promote the healthy development of the global blockchain industry, and invest in long-term structural value.
Through our commitment to supporting entrepreneurs who contribute to the development of the blockchain industry, we’re helping to build innovative companies while bringing global resources and deep experience to blockchain projects.
About Fundamental Labs
Fundamental Labs is an investment company specializing in the blockchain sector. So far, we've invested in over 300 blockchain projects across our portfolio, including leading names responsible for driving our industry forward.
I. Analyzing the Current State of the Sector
OKX Ventures: According to L2Beat data, there are now numerous rollups, but only a few have activity levels exceeding that of Ethereum (ETH).
Through our observations over the past two years, we’ve seen that infrastructure has been the most sought-after area in the primary market, especially during the challenging fundraising environment of 2022 to 2023. However, this trend reversed toward the end of 2023, with application-based Web3 becoming the sector most favored by venture capitalists.
At this stage, we remain committed to supporting infrastructure development while reminding ourselves to avoid the inertia of ‘reinventing the wheel’ in our investments. This is to prevent a resource imbalance between infrastructure and applications, which could lead to a situation where Layer-2 solutions (L2s) become more abundant than RAAS (Rollups as a Service) and Daily Active Users (DAUs).
One of the reasons for this phenomenon is related to the modular narrative. Independent architectures like data availability (DA), execution, and interoperability can achieve performance optimization through internal concept adjustments or recombinations, which are then touted as innovations or upgrades without the concern of market education costs. The eventual outcome is the widely criticized "ghost town" phenomenon in infrastructure and the increasingly severe ecological fragmentation.
On a positive note, Ethereum has shed its "noble chain" label, with single-digit gwei becoming the norm. The DeFi trifecta — DEXs (decentralized exchanges), perpetual contracts, and lending — as well as pump-and-fun asset issuance platforms — have become standard configurations for all public chains, integrating them into their tech stacks. The basic solutions for financial onchain interactions are now in place. Meanwhile, popular applications with high concurrency, high costs, and complex logic, such as AI, social platforms, and games, have new infrastructure solutions. This includes high-performance public chains like parallel EVM or Move, and zk coprocessors.
If our current path is correct, a super app capable of large-scale applications could emerge within the next two to three years.
Fundamental Labs: The current Web3 infrastructure sector is highly active, with significant progress and innovation across various fields. Bitcoin and Ethereum remain the most mainstream blockchains, with Ethereum widely used as the earliest and most mature smart contract platform. Meanwhile, we’re also witnessing substantial advancements in Layer-1 blockchains like Solana, Aptos, and Cosmos due to their high performance and cross-chain compatibility. NEAR has stood out in the AI and onchain abstraction narratives, significantly increasing the number of active onchain addresses. This has made NEAR one of the top-performing Layer-1s in 2024 alongside Solana.
DEXs, lending platforms, and liquidity mining platforms within the DeFi sector continue to be the main application tracks in the current industry. Fees generated by DeFi applications have become a major source of income for top public chains. Scaling technologies are also maturing, with Rollup-based L2 solutions greatly expanding blockchain transaction processing capabilities and reducing transaction fees by optimizing offchain computation.
Overall, the current state of Web3 infrastructure is characterized by diversity and innovation, with different fields interwoven and collectively driving the development of decentralized networks.
II. How Will Infrastructure Evolve?
OKX Ventures: The fundamental issues that infrastructure aims to solve won’t change. We still need faster and more effective infrastructure to serve as the state machine and asset settlement layer for the entire real world. In the short term, as current upstream infrastructure trends towards homogenization, we see two significant changes that need attention.
On one hand, there are the opportunities and challenges following the approval of ETFs. In terms of challenges, the main concern lies in the impact of institutional holdings and the professionalization of node operations on the decentralization of PoS (Proof of Stake) networks. For example, with Ethereum, after the approval of ETFs, centralized exchanges (CEXs) like Coinbase might become custodians for most institutions. Staking through CEXs is highly centralized, and the cost of controlling 33% of the nodes could be much lower than anticipated.
As Solana founder Toly mentioned, "economic security is a meme." With the marginal utility of increased staking having a diminishing impact on decentralization, Ethereum needs to leverage engineering designs such as liquid staking tokens (LST) protocol governance, and distributed validator technology (DVT) to prevent a decline in economic security. Otherwise, criticisms similar to the recent internal debates within the Ethereum team over PeerDAS upgrades may continue.
On the opportunity side, the ETF provides a prime moment for market education, offering infrastructure for new product-market fit (PMF) opportunities, including but not limited to payment systems, AI infrastructure, social platforms, and real-world assets (RWA).
On the other hand, the iteration of mid-to-downstream infrastructure such as DA, coprocessors, solver networks, shared sequencers, and chain abstraction could enhance infrastructure performance across various dimensions in a plug-in-like manner. This includes 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 Web3 user base grows, demand for infrastructure performance, reliability, and security will continue to rise. More efficient, lower-fee, user-friendly interfaces, alongside identity management, will always be the direction of infrastructure evolution. Integration and collaboration across platforms and applications are also worth paying attention to. During this process, privacy protection, data sovereignty control, and decentralized governance mechanisms need to evolve in a way that supports effective community participation.
Currently, new public chains and Layer 2 networks are constantly emerging, providing users with more choices but also leading to increased ecosystem fragmentation. Interoperability between different blockchains also needs to be enhanced. At the same time, as regulatory frameworks gradually take shape, infrastructure must ensure compliance while providing services and protecting user rights.
In the long term, infrastructure will iterate towards improvements in performance, parallelization of computation, modularization, technology integration, management abstraction, ease of use, cost efficiency, and regulatory compliance. From an investment logic perspective, we always start from industry pain points and actual needs, driven by research, to support projects that can positively contribute to industry development.
Specifically, in the public chain sector, we’re optimistic about Bitcoin’s infrastructure. The approval of a spot Bitcoin ETF is bringing in more funds and liquidity, enhancing public trust, and driving broader adoption. Bitcoin scalability solutions like the Lightning Network, Taproot Assets, RGB, and BitVM will also see new opportunities. NEAR, representing chain abstraction and AI narratives, with its security aggregation and account aggregation solutions, can help to simplify cross-chain operations and enhance user experience, making it worth watching.
In the application domain, as regulatory frameworks become clearer, DeFi platforms may need to strengthen AML (anti-money laundering) and KYC (know your customer) measures to comply with new regulations. Compliance technology infrastructure and stablecoins will become increasingly important.
Additionally, attention should be given to new opportunities brought about by technology integration. Decentralized AI computing infrastructure, tokenized training data, MachineFi, and compliant RWA platforms are all areas of our focus.
III. Industry Observations and Investment Insights
OKX Ventures: Compared to the previous cycle, the landscape of public chain infrastructure has undergone significant changes with the introduction of the modular concept, which the market has taken some time to digest and accept.
Currently, when evaluating projects, we generally categorize them into execution layers, DA layers, settlement layers, and middleware facilities that address interoperability issues. Our investments in the entire technology stack have mostly been concentrated in the past one to two years. For instance, in the execution layer scaling track focused on rollups, besides having invested in all the leading L2 projects in the previous cycle, we also last year paid close attention to the popular parallel EVM concept. Representative investments include Sei, Monad, and MegaETH.
Other public chains like Solana and Move still have relatively immature L2 concepts. We’ve invested in execution layer projects based on non-EVM public chains, such as SonicSVM and Lumio, but it remains uncertain whether cross-VM execution layer solutions will be accepted by the market. However, based on the principle of blockchain openness, we believe that closed, monopolistic L2 and Layer-3 solutions will not be a long-term solution.
The DA layer, on the other hand, has seen relatively little technological innovation, with a more pronounced Matthew effect. Currently, we’ve only invested in Celestia and Avail, which were spun off from Polygon. However, within this track, it’s worth mentioning the BTC ecosystem. Late last year, we had intensive discussions with hundreds of BTC L2 projects. Since BTC’s Layer-1 doesn’t support complex smart contracts, it can’t serve as a settlement layer. Existing projects like Merlin, B2, and Bitlayer use BTC as a DA layer, with the only exception being the UTXO-based L2 RGB++ protocol. Regardless of the technical differences, we believe the core task of BTC L2 is to embed the concepts of non-custodial native BTC yield generation and on-chain asset issuance into the minds of users. In particular, we see a need for more Bitcoin supporters to embrace the idea of building DeFi ecosystems on BTC. This is also why we invested in Babylon and BTC LSDfi projects like Lombard.
However, there have also been some innovations in the settlement layer this year, although competing with ETH isn’t encouraged by some, and most projects are still in the early stages. We’ve also invested in coprocessors like FHE (fully homomorphic encryption) and proof aggregation, because these plug-in facilities help drive the mass adoption of blockchain.
Fundamental Labs: Our investment logic has always been to strategically position ourselves across different layers of the infrastructure from the perspective of the technology stack.
In the underlying public chain sector, we’ve invested in BTC computing power and supported a range of L1 chains such as NEAR, Avalanche, Polkadot, Nervos, and Platon. In the emerging DePIN (decentralized physical infrastructure networks) sector, we led the 2022 investment in Peaq Network.
In the middleware sector, we’ve invested in Filecoin, Chainlink, and Stratos. At the decentralized application layer, we invested in marketplaces and development frameworks like Metaplex and Mintbase.
Meanwhile, at the user access layer, we’ve also invested in Math Wallet, Mask Network, and RSS3. Centralized exchanges that comply with regulations are crucial infrastructure for the entire industry, so we also invested in Coinbase. Overall, compared to traditional Web2, the significance of Web3 lies in achieving greater decentralization and user autonomy, which is also the core driving force behind the development of the infrastructure sector.
OKX Ventures Disclaimer: www.okx.com/learn/okx-disclaimer.
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