Hashed’s Request for Startups 2024
Disclosure: Hashed has established, maintained, and enforced strict internal policies and procedures designed to identify and effectively manage conflicts of interest related to its investment activities. This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Furthermore, references to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services.
Authors: Edward Tan, Dan Park, Timmy Han, Jun Park, Gary Rhee, Baek Kim, Simon Kim, Ryan Kim, Wooster Han, Edward Hong
Introduction
2023 was a year of resilience. Hashed is continuously working closely with builders to bring mass adoption of blockchain. This year, Hashed has made 26 early-stage investments in industry pioneering teams globally.
As a team, we built relationships with global industry leaders and reflected on specific verticals we are excited about as we approach 2024.
Our 2024 investment thesis focuses on sectors that we think will capture the biggest impact. We write about blockchain’s pivotal role in reshaping the creator economy and intellectual property, highlighting a use case not many have talked about. Our focus extends to Ordinals & BRC-20 tokens, marking the potential for scaling the Bitcoin network. We explore the intersection of economic activities and capital markets in blockchain-enabled games, followed by a dive into next-generation finance with Real World Assets (RWA) and Security Token Offerings (STO). Similarly, we expect the industry to mature with permissioned DeFi, a crucial bridge to regulated institutional adoption.
The synergy between Artificial Intelligence and blockchain promises new advancements, as we have seen with some protocols towards the tailend of 2023. Navigating the evolution of Layer 2s as we see some ecosystems embracing Application-Specific Rollups for enhanced scalability is also an exciting segment. The thesis concludes with the introduction of catered crypto eurodollars for global financial markets and the untapped potential of advertisements as tradable assets.
Overall, this encapsulates our enthusiasm for crypto’s trajectory in 2024. If you’re a builder working on a product in one of these sectors, please reach out!
Blockchain will redesign creator economy and intellectual property
Frictions to the abundance of creative process including, but not limited to, creating derivatives of IP such as webtoon, games and movies and remixing contents with or without the usage of AIGC (AI-generated content) still exist as traditional giants in the media & entertainment space take a defensive stance to the open IP infrastructure.
Open, on-chain and trackable/attestable IP infrastructure and studios will act as a foundation to allow for content creators and any stakeholder in the process of content creation and consumption to be immersed into and have a sense of ownership of the IP and contents, which were possible before the broadcast era widening and weakening the direct kinship and relationship between content creators and consumers.
Blockchain as a technology will generate a paradigm shift in the media & entertainment industry to enable more transparent and fairer lifetime IP & royalty/revenue sharing management for any stakeholder during the process of content creation and consumption envisioning to create a multiplier effect to creativity of prosumers ranging from vTubers, mangakas, celebrities, sports athletes, film directors to animation, films studios and talent agencies to be cultivated into the next Pokemon or Hello Kitty.
To accelerate the aforementioned paradigm shift, IP attribution/attestation-enabling infrastructure or open standards of IP rights to allow for flexibility of licensing and royalty schemes which incorporate AIGC complexities would be required. To move one step further beyond IP attribution and attestation, a fan-driven crowdfunding platform of IPs similar to The Black List, fan-generated ETFs of similar IPs such as webtoon ETF, wagering of what will happen next for anime series could be examples of capital markets created on top of interconnected-IPs on-chain. Of course, individuals or corporations which hold high brand-identity IPs could drive the initiative in a more accelerated manner.
Reference examples: Creative Commons, Token-bound NFT license, Story Protocol, Yuga Labs, Pudgy Penguins, Modhaus
Ordinals & BRC-20: Revisiting the Bitcoin ecosystem
While most crypto participants are talking about the impending Spot Bitcoin ETF listing, a wave of innovation and activity is taking place on the Bitcoin network, largely unnoticed by institutional and retail players. We think that Ordinals and BRC-20 technology is a paradigm shift for the Bitcoin ecosystem, demonstrating long-term sustainable potential of what many recognise as the most dominant, widely-accepted and safest blockchain.
Ordinals allows for the inscription of various types of data onto Bitcoin’s smallest unit, the satoshi (sats), turning them into NFTs on the Bitcoin network. The BRC-20 standard was shortly introduced after, which is 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 wildly popular in the later-half of 2023, increasing Bitcoin’s block size and doubling average transactions per block. Consequently, Bitcoin’s average transaction fee spiked ~20x to $37 per transaction, from its average in early-Oct.
The existing infrastructure is still nascent, lacking accessibility, developer tooling, and complex tracking systems. Existing token protocols lack the support for third-party extensions, smart contract compatibility and detailed educational material is consistently required for BRC-20 modules. 2024 will be a critical year for the industry to overcome these deterrences in widespread adoption of Ordinals and the BRC-20 standard.
We are excited about projects scaling the Bitcoin ecosystem. We envision these efforts to play out as Ethereum DeFi did in 2020. The ecosystem primitives — lending markets, decentralised exchanges, bridges, aggregators, yield farms, portfolio managers, developer tooling & tracking infrastructure, and more. Couple this vision with one of the strongest, oldest and dedicated communities in crypto, alongside on-chain participants that have grown smarter and more active over the last few years. Startups or protocols that help build tools to enable secure and flexible programming on Bitcoin, developing independent indexing infrastructure or wallets, aggregating systems, or even creating a native Bitcoin metaverse or NFT marketplace could have a huge impact in 2024.
Reference examples: Bounce Auction, Darewise, Multibit, Ordinals, Ordiswap, Tap Protocol, Trac, UniSat, Xverse.
Proliferation of economic activities & capital markets on blockchain-enabled games
Traditionally, games have been one of the most immersive realms in which people of over 3 billion users globally conduct economic activities across all media. In the blockchain industry, gaming dominates the industry in terms of unique active wallets, fueled with the massive influx of users as blockchain games are striving to match the standards of traditional games and traditional AAA game studios like Nexon and CCP delving deeper into blockchain-enabled gaming. In addition, UX has been meaningful improvements ranging from smart contract wallets to MPC, allowing for programmable account and security and hence generating a more seamless experience for users, gamers and studios.
With the infrastructure and user onboarding funnels for mainstream adoption of blockchain industry through blockchain-enabled games is heading towards its growth and maturity stages, we foresee economic activities sprouting 24/7 live on physical and virtual worlds connected in forms of fungible and non-fungible tokens, digital identity and social graph, UGC and modding.
To be more specific, as DotA was derived from a mod built on top of Warcraft 3, which eventually inspired the creation of League of Legends boasting over 150M active players, FOCG (fully on-chain games) / AW (autonomous worlds) will, through its front & back end composability, community governance and security, generate an ever-growing virtual economy unprecedented of what has been seen until today. We will explain more in details below:
Front-end composability: Modding a game client to have a new user interface, game art, sound or music, or re-envisioning the game experience from ground up by creating an entirely new client. Rewarding these kinds of contributions (i.e. fees awarded to client developers) can be transparently and automatically enforced with smart contracts, allowing for automatic and transparent revenue sharing models.
Back-end composability: Every object in the game or world, including players, can be individually addressed on-chain by any smart contract, meaning that players can actually realize the initial promise of smart contracts as a way to form automatically enforceable agreements between themselves with full turing-complete logic, which some people call it a user-generated logic. The ability to form complex and robust agreements with confidence will enable virtual society to reach levels of political and economic sophistication that were not possible in off-chain worlds.
Community governance: When the entire game or world is on-chain, value can be captured both automatically and transparently without needing to depend on enforcing third party marketplace royalties. The community is assured a voice in all decisions about how value is captured by either having the option to exit (i.e. switch to or launch a fork), or vote in a predefined on-chain governance system. The ability to capture and accrue value to a community-controlled on-chain treasury can act as a powerful economic flywheel for virtual economies. Capturing value from the economic activity within the world can provide a stabilizing reserve backing for assets as well as fund community development and contribution that can in turn spur on greater economic activity.
Security: Since FOCG devotes a significant portion of compute resources to validating each transaction, on-chain games and worlds will be secure. This will lend greater confidence to non-trivial value to flow through virtual economies at scales we’ve never seen before.
Reference examples: Nexon MapleStory Universe, CCP Project Awakening, The Citadel, Dark Forest, MUD/Lattice, Halliday, ERC-6551, dfns
Next Generation Finance: Real World Assets (RWA) and Security Tokens
A transformative shift is underway in the financial landscape, one that promises to bridge the gap between traditional finance and the world of blockchain technology. This shift centers around Real World Assets (RWA) and Security Tokens (the offering of which is called STO), encompassing assets traditionally existing off-chain that are now being tokenized and integrated into the blockchain ecosystem. It encompasses a wide array of real-world assets, including real estate, equities, bonds, and other valuable holdings, all made compatible via blockchain technology.
What makes this era truly exceptional is the active participation of major TradFi players such as JP Morgan, Goldman Sachs, KKR, Hamilton Lane, and many others. These financial institutions are paving the way to bringing real-world assets onto the blockchain, signaling an upcoming seismic shift in the industry. Simultaneously, blockchain protocols like MakerDAO, Securitize, Chainlink, Maple Finance, Goldfinch, Ondo Finance, and Backed Finance are at the forefront, leading the digital transformation as crypto-natives to seamlessly accommodate RWAs and STOs.
In this dynamic landscape, two broad categories are emerging: infrastructure-focused and asset-focused. The infrastructure-focused projects are building the foundations of this new financial ecosystem, creating the protocols, security measures, and platforms that will underpin the future of RWAs and STOs. On the other hand, asset-focused projects aim for deep vertical targeting of specialized assets.
We are committed to exploring both of these categories in a balanced approach. While we recognize the immense potential in asset-focused endeavors, our relative focus leans toward infrastructure development. We believe that building the robust and secure infrastructure required for the tokenization and trading is the cornerstone of this financial revolution.
In this early phase of the RWA and STO revolution, we see initial significant growth potential in projects adept at navigating the intricate global regulatory landscape, while also integrating seamlessly with established Web2 services and forging partnerships with major Web2 entities. Currently, the market primarily concentrates on US Treasury Bill-related products and basic asset tokenization. Yet, we recognize considerable opportunities in projects that delve into areas like tokenization of derivatives and securitization, employing a more inclusive strategy to embrace a wider variety of asset classes and financial products. Our assessment will also include regulatory elements such as compliance, risk management, and due diligence, alongside operational elements like efficient on-ramp and off-ramp processes, market accessibility, and scalability. These aspects are crucial in bridging the gap between decentralized finance (DeFi) and traditional finance (TradFi), laying the groundwork for a more integrated and resilient financial ecosystem.
Reference examples: MakerDAO, Securitize, Chainlink, Maple Finance, Goldfinch, Ondo Finance, Backed Finance
Permissioned DeFi enabling regulated institutional adoption
The period of 2020–21 saw the rise of centralized finance protocols that enabled the masses to get exposure to crypto as an investable asset class. However, 2022 saw a string of events in which several centralized actors quickly tainted the entire industry with a few bad acts, leading to widespread sell-offs and leveraged liquidation cascades. This allowed 2023 to witness the emergence of strong DeFi innovations, such as shared-pool perpetual DEXs and peer-to-peer money markets.
We expect the DeFi landscape to see transformative developments on the institutional front in 2024. Distinguished from their fully-decentralized counterparts (e.g. GMX, Lido, Morpho, etc.), we see permissioned DeFi projects introducing a controlled access model in their protocol design, prioritizing concerns related to regulatory compliance, privacy, and security.
A primary driver behind the rise of permissioned DeFi protocols is the growing emphasis on regulatory compliance. Governments seek to bring cryptocurrencies and blockchain operations under a regulatory framework, so permissioned DeFi platforms that prioritize compliance and structured onboarding of institutions are poised to benefit. One way could be from implementing KYC or KYB verification procedures, complemented with zero-knowledge technology to protect client privacy. With these access controls, protocols can mitigate the risk of unauthorized transactions and potential exploits, providing a higher likelihood of welcoming institutional capital.
This leads us to elaborating on our streamlined thesis for permissioned DeFi in 2024. Institutional capital drives the traditional financial markets, and we expect these flows to be more amenable to on-chain interactions when the right infrastructure and protocols are available.
In the lending/borrowing vertical, institutions are unlikely to consider leveraging if they have to sacrifice the capital efficiency of over collateralized assets. But for under collateralized lending to develop, a proper credit rating infrastructure is required to capture on-chain footprints, risk management, and accurate asset price forecasting. Institutions also emphasize on downside protection and hedging capabilities, so an insurance marketplace that prices on-chain risk is key. Institutions with existing crypto assets on their balance sheet may look for avenues to attain yield. If so, we expect enterprise-grade platforms with permissioned features (such as verified validator sets or security-focused infrastructure providers) to be particularly attractive.
The permissioned DeFi model will be the first step to regulated institutional adoption. In the long term, this enables the industry to benefit from scaling in a contained and structured manner.
Reference examples: Alluvial Finance, Blueprint Finance, Centrifuge, Fortunafi, Fractal Protocol, Maple Finance.
Convergence of AI x Blockchain
Outside of the crypto industry, AI dominated the show in 2023. A realization of how powerful such systems can be, in the hands of a few, challenges technologists and pioneers on how to maintain neutral and composable web infrastructure while we make democratized progress.
Blockchain provides a promising avenue for mitigating challenges related to control and governance in powerful technological and economic systems. Through decentralized governance, enhanced transparency, and improved data privacy, blockchain can contribute to creating more equitable, accountable, and inclusive AI ecosystems.
The convergence of AI and blockchain technology represents a synergy that holds immense potential for reshaping various industries. AI, with its ability to analyze vast datasets and make intelligent predictions, can enhance the efficiency and decision-making processes within blockchain networks. Blockchain, on the other hand, provides a decentralized and secure platform for storing and managing data, which can address some of the challenges associated with AI, such as data privacy and security concerns. Together, these two technologies create a powerful framework that can revolutionize industries ranging from finance to healthcare.
Tangible advancement in the blockchain services via AI lies in the enhancement of smart contracts. Smart contracts, which are self-executing contracts with the terms of the agreement directly written into code. AI can be integrated to analyze the conditions and outcomes of smart contracts, making them more adaptive and responsive to changing circumstances. 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 could become a protocol resembling media versions of ChatGPT, where original content & IP holders can stake their asset (NFT,game items, photos, thesis papers, iconic designs, etc.) for proving ownership and originality, and a portion of revenue generated from the product could be distributed as loyalty compensation. This will mitigate the IP ownership issue for the contents generated by AI engines, and open up a new market for content creators.
In 2024, more builders will tap into these technologies empowering decentralized open-source networks with sound governance, revolutionizing the way we produce and consume digital experiences. The seamless integration of blockchain and AI will not just be the sum of their strengths, but rather a multiplied synergy with edged features in each product. Incentive aligned AI-backed products and sustainable protocol designs will outperform existing web2 applications.
Reference examples: Worldcoin, Lovo AI, Zettablock, Gensyn, Modulus labs, Ritual.net
Navigating the evolution of Layer 2 by embracing Application-Specific Rollups (Layer 3)
2023 marked a period of expanding usability for Layer 2s. With Arbitrum experiencing explosive growth, attracting users, and numerous companies creating their own Rollup solutions using the OP stack, a multitude of Layer 2 solutions began emerging. Viral launches from services like GMX and Friend.Tech signaled potential of wider adoption on Layer 2s.
Application-Specific Rollups (Layer 3) utilizing their own set of high-performance CPU for computation will have greater impact in 2024 to build on this momentum. Vitalik Buterin, in the Rollups-centric roadmap of 2020, emphasized the necessity for Ethereum to address scalability problems in terms of both data and computation scalability. Data scalability is expected to be gradually resolved with the implementation of EIP-4844 and Sharding. However, computation scalability has been mainly delegated to be solved via Rollups. Layer 3 suggests a practical solution to computation scalability by continuing to provide settlement and composability within the Rollup while relying on the General Purpose Layer for dispute resolution to keep the same level of security of the base layer.
However, there is a trade-off. Although it efficiently operates applications at a lower cost and with high performance, it sacrifices composability with applications on other Rollups. Nevertheless, applications that benefit more from having their own ecosystem (e.g. dYdX, Ronin, etc.), providing services in a more controllable environment, are more suitable for Application-specific Rollups. As we expect several heavily-funded, mass-adoption-targeting games, and social apps to launch in 2024, Layer 3 will play a greater role in enabling games requiring high-quality services for numerous users simultaneously, social services hosting a vast amount of text, images, and videos, and order-based exchanges handling substantial traffic from traders.
Which part of the infrastructure layer will benefit the most? These may be projects managing computation and sequencing for validators in a Sequencer layer, and layers enhancing composability among different Application-Specific Rollups. Additionally, products minimizing Miner Extractable Value (MEV) in Application-Specific Rollups, privacy solutions curbing centralized validator nodes, and solutions for rapidly setting up high-performance validator nodes for Application-Specific Rollups are anticipated to witness significant advancements.
Reference examples: Radius, Cartesi, Espresso, Astria, Automata, AltLayer
Catered crypto eurodollars for the global financial market
The stablecoin ecosystem has grown into a huge market, worth around $130 billion by the end of 2023, with Tether’s USDT issuance at around $90 billion. A big reason for USDT’s success is that it was the first stablecoin to target the financial markets in the blockchain space, but we believe that going forward, especially in 2024, stablecoins will undergo a major shift as they move towards customized solutions designed for specific user segments and uses. This shift will include considerations such as onshore vs. offshore target, levels of compliance, and choice of base currency. While it’s still unlikely that we’ll see a federal level of stablecoin law in the US next year, we think we’ll continue to see attempts to topple the existing dominant players.
Currently, the stablecoin market is dominated by dollar-based options like USDT, USDC, and DAI. The dollar is almost monopolizing the currency denomination of the financial markets formed in crypto, and at the same time, people in countries that need strong currency support are turning to the most proven of all reserve currencies, the dollar, rather than using secondary or tertiary reserve currencies. Meanwhile, Tether is now one of the largest purchasers of U.S. Treasuries, and even when compared to all countries holding U.S. Treasuries, it ranks in the top 15 in terms of holdings, which shows how great the appetite is for using the dollar as a medium of exchange online or outside of the U.S. without full U.S. oversight and authorization.
In 2024, we will continue to see different ways to implement the disruptive potential of dollar-denominated stablecoins (aka crypto eurodollars) emerge, and there will be constant competition to enter a market that has been dominated by USDT and USDC. In this process, we will see the emergence of stablecoin issuers that offer specialized services for financial markets, B2B payments, C2C remittance, etc. that have been handled by a single stablecoin till now. At the same time, UX innovation will occur in the end-user-facing segment, leading to more catered stablecoin-based services including neobanks, cards, and API toolings that compete or collaborate with existing fintech apps.
While the use cases for stablecoins diverge, the future of crypto eurodollar adoption will be characterized by disruption to the major players that have dominated these traditional financial markets. Builders working on stable money lego that could work within the current fintech landscape will have immense potential to ultimately create a stablecoin-based financial market including primary & secondary, derivatives, and forex market.
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, addressing key issues of privacy and efficiency that have long plagued traditional online advertising models. As the backbone of internet-based businesses, advertising has faced criticism for monopolizing user data. However, the advent of Web3 — with its emphasis on self-sovereignty and privacy — presents a new paradigm.
In Web3 applications, the reliance on server-side data storage or client-side cookies for user information becomes redundant. Blockchain’s transparent nature, where all transaction data is stored and accessible, offers a robust database for analyzing and identifying potential customers, vastly improving ad efficiency. For advertisers, this means a more straightforward targeting process, as wallet information shared across various media platforms can be used to serve relevant ads to users, even as they navigate different platforms. This approach is particularly advantageous in light of privacy laws that have otherwise hindered ad effectiveness.
This shift towards a Web3-based advertising model promises to break the monopoly of large corporations in the ad market, paving the way for a more competitive and diverse media landscape. By minimizing intermediary fees, both media outlets and advertisers stand to gain significantly. Moreover, the possibility of a futures market for advertising slots and keywords, leveraging their fluctuating value over time, could introduce new dynamics into capital markets, offering hedging opportunities against market volatility.
Additionally, user privacy remains a paramount concern. Advanced cryptographic technologies in development could offer users the option to obscure their transaction data, thereby maintaining their privacy while using these services. This balance between efficient advertising and privacy protection is a cornerstone of the blockchain-driven future of advertising, promising a dynamic and more equitable marketplace for all stakeholders in the industry.
Reference examples: Brave Browser, Hypelab, Persona, Slise
