Foreword: As 2021 draws to a close, the cryptocurrency market has had a rough start to 2022. Compared with the total retracement of ATH in November 2021 of about 52%, the total market capitalization of the encryption market has retraced about 50% from 3T (November 10) to 1.49T (January 24), and now rebounds to 1.826T . In addition to the price drop, the performance of the primary market is not satisfactory, and IDO breakout projects appear frequently. Although in such a market environment, it is not easy to directly define a bear market in the encryption market. The application forms behind blockchain technology and cryptocurrency are surging, constantly attracting institutions to enter the market. The main theme of the story is already different from the previous cycles. Will the performance be different this time?

For beginners who want to participate in investing in the blockchain, the obscure and difficult terms are daunting. In fact, we can learn from the investment methods of traditional industries and choose what is good. The traditional investment system is generally divided into two types: top-down and bottom-up: top-down starts from macroeconomic factors, studies the overall trend of the market, and then selects the sector that conforms to the trend, and finally selects the most worthwhile investment in the sector target. Bottom-up strategies downplay the importance of macroeconomic and market cycles, focusing most on the performance and management of individual projects.

In an environment where the market is sluggish and there are no hot spots, the top-down investment method is worth exploring and learning for everyone. The top-down learning method can be divided into five steps. The so-called five styles of the mean practice one move, which is still timeless in this industry.

Knowledgeable: There is a relatively clear framework for the blockchain industry, development paths and track opportunities.

Interrogation: Have a general perception of the overall macro environment, understand the current stage of the industry, predict hot spots in the market, and interrogate whether the track has an opportunity to intervene.

Think carefully: be cautious about development risks such as industry policies and market environment.

Discernment: Do a lot of research in the track where you are, find out the most valuable products, and settle on specific targets.

Do it: make informed decisions.

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Blockchain 1.0

"Privacy in an open society requires a variety of anonymous transaction systems. So far, the premier system in society has been cash. Anonymous systems enable individuals to reveal their identity when they want to, and only when they want to; this is The core meaning of privacy."

----- Cypherpunk Manifesto

The emergence of Bitcoin in 2008 was not born out of nowhere, and its origin needs to be traced back to the geeks of the Cypherpunk organization. The hash algorithm came from 1997, the father of hash, AdamBack; the distributed anonymous cash system first appeared in 1998, and WEIDAI proposed the b-money encryption currency system; peer-to-peer technology became popular in 1999; Finney proposed in 2005 The multiplexing proof of work (RPOW) is the origin of Bitcoin PoW mining. These terms are all too familiar to people working in the blockchain world. Satoshi Nakamoto injected the spirit and accumulation of cypherpunk into Bitcoin, just like the creator who came out of the matrix, intending to defend the rights of citizens in the digital world.

The 1.0 era of the blockchain launched by Bitcoin depicts a currency transaction network that is not controlled by governments and banking institutions. People participating in the network can be divided into miners, investors, and currency holders.

The tracks derived from this include: electronic currency, exchanges, wallets, and mining machines.

Among them, various electronic currencies use different encryption algorithms to adjust the mining difficulty (LTC, DOGE, etc.) on the basis of the data layer of Bitcoin, or change the block size (BSV, BCH) on the basis of the protocol layer, or improve the area Block confirmation speed (LTC), or increased anonymity (XMR/ZEC/DASH, etc.). However, in essence, other altcoins with electronic payment functions do not have the properties that make Bitcoin a digital cash and hard currency, and cannot compete with Bitcoin. Instead, altcoins that improve the Bitcoin network secure Bitcoin's unassailable status, making it a perfect example of what Taleb calls "anti-fragility."

Due to the increasing volatility and transaction activity of Bitcoin year by year, the total carrying capacity of the network cannot meet the needs of daily transactions on the technical level, and the attribute has changed from an alternative asset against inflation to a value storage tool for allocation, coupled with controversy. Constantly digging into energy consumption issues. The difficulty of Bitcoin becoming a trustless digital cash vision is increasing year by year, and the core meaning has shifted to value storage, risk allocation and individual sovereignty.

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Blockchain 2.0

In the Bitcoin system of blockchain 1.0, the technical architecture includes data layer, network layer, consensus layer, incentive layer, and application layer; the function of each module can be referred to in the figure, and will not be elaborated. The functions that can be realized are limited to the storage, distribution, exchange and distribution of value. Ethereum adds Turing's complete smart contract layer to the underlying system of the Bitcoin network. In addition to transaction functions, Ethereum allows developers to create various complex business logics according to their own wishes, making tokens more widely used. The story of blockchain 2.0 is rapidly transforming from digital currency application to value Internet application.

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base layer

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Source: Messari

Logically speaking, the expansion direction of Ethereum can be divided into two types:

• Layer 1 expansion: change the underlying architecture of Ethereum, adopt different logic, create a brand new public chain, and stand on its own.

It can be divided into: the public chain compatible with the Ethereum EVM virtual machine, the high-speed single chain and multi-chain of the non-EVM virtual machine. For example: Cardano, Solana, Avalanche and other public chains.

The idea of ​​expansion starts from the underlying architecture of the blockchain:

Improve the data layer (the basic idea is to improve the chain-related data structure),

Optimize the network layer (optimize the information exchange process, increase the block size, speed up the block confirmation speed, etc.),

Innovative consensus layer (saving time for network nodes to achieve data synchronization and consistency).

From the perspective of the final form of the public chain, the innovative high-speed public chain that changes the underlying structure of the blockchain is mostly built with scalability as the first element, which weakens security and decentralization to a certain extent.

2. Layer 2 expansion: Without changing the underlying protocol of Ethereum, part of the calculations are transferred off-chain based on the decentralization and security of Ethereum, and the workload of the underlying Ethereum network is shared.

The basic idea of ​​Layer2 expansion is: according to the different technical routes, the calculation or state change result process of the main chain is transferred to the second-layer network, because only the results need to be fed back to the main chain at the end, so it can be effectively expanded and reduced. transaction fee. One more link also means more risk. Layer2 expansion weakens security to a certain extent, but retains the absolute decentralization of the main chain and significantly improves scalability.

Under the framework of the blockchain impossible triangle, the development of the public chain has certain trade-offs among the three. The choice of public chain can refer to the application form and target audience. For example, native Internet users outside the blockchain require a smooth experience for the product, which means that the scalability is the highest, and they may not have absolute belief in decentralization. , which creates a development space for the high-speed public chain. Blockchain users with on-chain assets participate in more financial products, so security and decentralization are the most important factors, and finally scalability.

application layer

application layer

Smart contracts bring infinite possibilities to the application layer of the blockchain, and any logic that can be described by code can be deployed on the blockchain. Decentralization, security, and scalability are the characteristics of the underlying blockchain and the cornerstone of building applications. The logic of the blockchain application narrative is based on Permissionless and Trustless, bringing real changes to the developer and user experience.

Permissionless is understood as access without permission. Simply understood, the software and services of Internet companies are run by servers purchased, operated and maintained by themselves, and companies have the right to make their own decisions. Every step of the user's operation is called from the server, which requires the server's permission. The data generated by users using the software is also stored in the server, and the enterprise enjoys data ownership based on the commercial value generated by the data. Since the development of the Internet, people's perception of the value of data has become stronger and stronger. The blockchain without permission has brought the most core changes to the confirmation of data rights.

Take Ethereum as an example. Ethereum is like a large computer. The data generated is stored on this large computer. Data such as developers’ development codes and users’ transaction behaviors are publicly accessible. For users, every step of our operation on the software is no longer retrieved from the server in the enterprise, and anything built and stored on the chain can be retrieved at any time. For developers, companies no longer have a monopoly on data.

Data is the core factor of production in the transformation of the digital age, and interconnection can maximize the value of data. Although the application development of the blockchain is in its infancy, the openness provided by the blockchain for development can predict that the application will be developed on the basis of Internet products, and the innovation diffusion curve will be steeper and penetrate faster than any industry.

Trustless is understood as no need to trust. The development of the credit system started with point-to-point oral promises, developed to the rule of dynasties, and now the credit system of the main body of the country and the endorsement of institutional intermediaries. In the past, the trust system relied on an authoritative third party, and the blockchain delivered credit to the code, using the underlying cryptography, mathematics, and Internet technology to achieve a trust system without an intermediary. Therefore, no trust is the strongest trust.

Once the code of the blockchain application is uploaded, it cannot be upgraded or updated. Each iteration is equivalent to creating a new DAPP, that is to say, the fault tolerance of the project is very poor. Unless the user's code level generally reaches a certain level and can distinguish the logic of the project, the audit track is an indispensable part of the blockchain.

The core of blockchain applications is based on permissionless access and no trust. The Permissionless blockchain environment is very friendly to developers. The open source nature of the project and the convenience of invoking data on the chain provide developers with more There are many logical ideas for reference to create richer applications. However, users do not have a strong perception of data, and the concepts of privacy and data advocated by Web3.0 are more reflected in Trustless. The biggest feature of the application created by combining Permissionless and Trustless is composability and natural API entrance. Formed a bottom-up creation mode, the underlying public chain is a building block, providing a start. Developers optimize and improve based on the existing application codes on the chain, locate target groups and develop new functions based on the data on the chain, make full use of interactivity, and put all stories that can be described in code into products based on building blocks.

However, in essence, the DAPP of the blockchain is a solution to disintermediation. For third-party entities that are themselves trusted, the blockchain still has many shortcomings and may not be suitable for transformation.

I think the narrative logic of blockchain composability is not only in the application, but also the information exchange between public chains can create more exciting stories. In this context, the demand for multi-chain and cross-chain technologies will develop with the enrichment of the ecology.

Blockchain application layer DAPP can be divided into two main lines:

1. A digital native world based on digital currency

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digital native world

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• DeFi

Source: Multicoin Capital/The DeFi Stack

The ICO gold rush mania was the earliest application of the financial industry route, which ended in a bubble. And DeFi is the most successful application of the financial industry route. Regardless of whether the traditional financial industry is a financial building of the blockchain, trading and lending are the most basic and important financial services. Mainly for Bitcoin, Ethereum and other on-chain asset users, blockchain DeFi applications naturally derive the core tracks: decentralized exchanges, decentralized lending and stablecoins.

The core of DeFi's success is also the perfect adoption of the underlying logic of the blockchain, which is composed of Permissionless and Trustless, interoperability and composability to build the financial building of DeFi. After liquidity mining and economic incentives were integrated into DeFi products, a blowout broke out. The layer-by-layer combination of nestable DeFi products has led to the rapid rise of tracks such as aggregators, derivatives, synthetic assets, and asset management.

At present, the target groups of DeFi products are mostly on-chain asset users. The design logic of financial products is based on digital currency, and the value circle is fixed in the field of encrypted assets, forming a natural digital native world. The financial services associated with physical assets have not yet opened up space, such as the lending services of physical assets, insurance, synthetic assets and other tracks have not ushered in a real explosion. On the one hand, it is because the financial services associated with physical assets require authentic and credible off-chain behavior data, and on the other hand, the processing efficiency of the bottom layer of the blockchain has not reached the standard.

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• NFT

Source: The Block Research

The core change of NFT application is firstly the basic protocol standard of Token, adding the function of writing unique identification and metadata to the standard of ERC-20 basic protocol, so that the assets that can be described and depicted can form tokens; the second is to make the target group It has become more widespread, attracting a large number of non-financial users outside the blockchain, such as artists, traditional brands, enterprises and merchants, outside the digital native world.

The protocol standard of NFT can be used to map on-chain/off-chain assets, so NFT can be expanded as the lowest production factor, and built from the bottom up according to the different attributes of assets. Just like Ethereum only provides a building block, it only builds a beginning. It is equivalent to the bricks used to build a house. The shape of the subsequent building depends on the design ability of the architect. "Almost anything anyone creates has an existence, what matters is how much other people create on top of it."

From this perspective, NFT has rich imagination and wide application space. The core value lies in the assetization of content. The current asset attributes in the market mainly include: artworks, collectibles, original assets on the chain, real assets off the chain, domain names, identities, game assets, etc. Since it is an asset, the underlying facilities that perform the functions of asset casting, storage and circulation are the most basic and core track: public chain, protocol standard, storage wallet, NFT trading platform, etc.

The perfect underlying facilities guarantee the imagination space at the application level and support developers to make full use of it. At present, the evolution of NFT at the application level is divided into three categories: NFT financialization, digital IP, and asset digitization.

• The digital native world of NFT financialization

Similar to the design of DeFi, financial products built with NFTToken as the underlying asset, the digital native world, including pledge lending, fragmentation, insurance, etc., aim to provide a liquidity mechanism for NFT assets.

It is worth mentioning that GameFi, although the core logic of Game is Fi, which is finance. Then convert the assets in the game into NFT format, and release liquidity while confirming the rights. Generally speaking, users first need to buy NFT to play games. NFT is already providing liquidity for the project as an entry cost. The exit mechanism of players is to place an order to sell NFT assets. The principle is similar to the liquidity mining of DeFi. Since the core of GameFi is finance, the essence is investment. Because various market environments are bound to be cyclical, the bubble will burst one day, and the liquidity will quickly escape one day. However, the game guild track spawned by GameFi purchases assets in various GameFi projects to form a certain liquidity pool, forming a stable and active liquidity fund in the GameFi field, linking project parties and players, and helping projects complete cold starts. This has prompted the continuous injection of institutional funds into the market, and a large number of game developers have entered this track. Even if there is a bubble, GameFi still exists after returning to calm. To be clear, just like the blockchain impossible triangle, it is currently difficult to develop a game with both playability and a continuous P2E model, but the P2E revenue-driven model has proven its place. Since the core is Fi, the audience is different, so there is not much need to trace the playability.

The explosion of GameFi has attracted more types of game development. Sandbox, MOBA, RTS, MMORPG, SLG, FPS, etc. will all increase the fun of the game, but the picture quality cannot be compared with the traditional game experience, and the financial attributes are reduced. developed into an awkward position.

The other direction at the application level is products and services based on technologies such as underlying distributed ledgers, decentralization, and encryption algorithms. The initial intention of chain game development is to separate the ownership of game assets. NFT provides the key technology for the game. The ownership of props, skins or decorations that consumers spend energy and financial resources in the game belongs to the player and can be transplanted to the game in the end. out and sell. Financial GameFi is not strictly a game, but a financial game. How to change the chain of traditional games? It may be the direction of game development to retain its own gameplay and only upload game assets (skins, avatars, equipment, etc.) without hard embedding token models and having a business model.

• digital native IP

Collectible assets can be used as digital native IP. One is to explain why avatar NFTs can be sold at sky-high prices. It is important to understand that IP in the digital native world is just like the Disney, Harry Potter, and Marvel series in the real world. Unlimited business value. Based on IP, a business empire can be built in the future. Of course, the sky-high price is not only caused by IP. In the case that there is no obvious difference in the underlying technology, community activity is the most critical factor, and the business value forms a consensus and reflects its own social capital. In addition, the derivative application of IP is also the core element for the gradual growth of digital IP. Finally, it is the uniqueness and scarcity of the blockchain technology itself. Collectible NFTs such as CryptoPunks, BoardApe Yhat Club, CoolCats, and Doodles leverage the digital scarcity of limited supply to create their own social circles.

In the original digital world, a series of avatars are regarded as a brand and IP. The growth of the brand is no longer managed and operated by centralized personnel, but is closely related to each owner, and together they continue to empower digital collections. Value and utility, which is also the concept of DAO, complement each other with the deep integration of NFT. As a distributed collaboration, the most suitable feature is that the owner has the right to vote autonomously. In subsequent activities and operations, the community can design unique subdivision and participation strategies based on the data held on the chain, and allocate subsequent rights and interests according to the rarity, quantity or holding time of collectibles, and will hold every NFT Connect people with business brands. It is not that an IP is born an IP, it is necessary to establish community activity and manage member relationships. The value of IP will also increase with the efforts of the community, enriching the world on the chain, and even linking the world off the chain.

Traditional film and television, music, sports, animation, enterprise and other fields of IP gradually intervene in the digital world, and the vigorous development of digital native IP provides sufficient "underlying building blocks" in the supply of production factors. Such as NBA, Gucci, eBay, McDonald's, Coca-Cola and other brands; animation IPs such as Under One Man, Marvel and Ahri. The role of digital collections released by traditional IP in the digital world is more to maintain the user ecology and take advantage of the fan economy. The specific utility needs to continue to evolve.

• Asset Digitization

The digitalization of assets involves the most extensive user groups. Any asset we own in the physical world or the digital world on the chain can generate NFT tokens and upload them to the blockchain to ensure security, confirm rights and protect them while releasing abundant liquidity. Application scenarios. Simply understand, various certificates such as ID cards, real estate certificates, marriage certificates, and driver's licenses; financial documents such as invoices, bills, and insurance; copyrighted goods such as music and artwork, and other assets that can be fed back to the real world. In addition, the metaverse itself is a form of social digital transformation, and the asset logic in the future metaverse is also asset digitization.

By linking with the real world and digitizing the assets we own, NFT has the potential to become the entrance for users to enter blockchain products.

Summary: In the original digital world created by the financial industry with digital currency as an economic incentive, scarcity and confirmation of rights are the most obvious characteristics, while interoperability and composability are the development directions. It is a wrong idea to regard NFT as a designed work. NFT needs to evolve and explore more possibilities under the premise that the building blocks are rich enough. It is unclear what their future utility will be, and all possible uses of the technology cannot be predicted.

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DAO

DAO is called Decentralized Autonomous Organization. In layman's terms, the rules and governance within the organization are handled by distributed programs, reflecting the characteristics of openness, transparency, and efficient trust. So DAO has two characteristics:

• All participants can make proposals, vote, and make decisions, and all have the same goals and interests. (Generally, token holders have rights, weaken identity boundaries, and geographical influence. The deep combination of DAO and NFT is gradually being explored)

• The open source feature of the blockchain project is automatically executed by the contract.

(The guarantee of the rules is not attached to the law, but depends on the code, open and transparent, and efficient trust)

DAO has a long history in the digital world, dating back to the Bitcoin network. Anyone can purchase computing power equipment to run nodes for mining and jointly maintain the normal operation of the network. The development process of the Bitcoin community has also gone through countless proposals, voting and other governance links. In an open source network environment, the community is constantly looking for upgrade opportunities to optimize the network, improve scalability, and expand the application layer. This part of the DAO eventually leads to a soft/hard fork of the Bitcoin network.

The prosperous period of DAO is in the blockchain 2.0 Ethereum network. Similar to the Bitcoin network, anyone can participate in maintaining the operation of the Ethereum network as a node. The Ethereum community is currently the largest force in the blockchain world, submitting proposals and voting decisions for soft/hard forks to improve the scalability of the Ethereum network; developing complex smart contract applications based on the Ethereum ecosystem. As mentioned earlier in the text, Ethereum is like a "building block". Some people are maintaining this building block, and some are building an ecology based on the building block. This series of organizational activities does not have centralized management for distribution and operation and maintenance, but community members conduct autonomous activities for common interests and goals based on open source code and data.

The Turing-complete smart contract platform implemented by Ethereum has created a wide range of opportunities for efficient and trusted DAO organizations. The DeFi protocol is the most successful validator. The DeFi protocol is usually led by team developers in the early stage to write program logic. The user's interaction is completely delivered to the community after the automatic execution of the smart contract. In this way, it is easy to understand the design of the incentive mechanism. In the early stage of team leadership, users are encouraged to participate and experience through airdrops and other methods to form a community. In the later stage, all participants will be motivated through the incentives built into the program.

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Credit: @Cooopahtroopa

According to the goals of the organization, the ecology of DAO is all-encompassing: there is an investment DAO similar to an investment company, which gathers investors to concentrate funds to make investment decisions; there is a collection DAO that focuses on investing in NFT; the most extensive agreement DAO, members jointly build and execute agreements ;A service DAO that acts as a talent agency in the digital native world; a social DAO that temporarily avoids interests and shares common ideas and beliefs; a media DAO that produces content in a collaborative manner.

If you want to set up a DAO. As the infrastructure in the DAO ecosystem, the operating system can provide a set of applications to enable anyone to easily start a DAO.

Development status: In fact, limited to the technical level of community members, most DAO members are not motivated enough to make proposals and vote for decisions. In a speculative environment, large currency holders have absolute voting rights, and community governance is semi-centralized.

Metaverse

Metaverse

According to the understanding of the lowest production factor of NFT mentioned above, NFT will provide the core carrier for the economic system of the Metaverse. Assets in the metaverse can be digitally generated into NFT, and blockchain technology provides value confirmation, storage, distribution, exchange and consumption, etc.

The combination of NFT and the metaverse is equally extensive, only lacking in imagination. Collectible NFTs can be used as an identification system in the metaverse, reflecting personal social capital while building a strong social community, and can also compile personal identity information and related backgrounds into NFTs.

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Web3.0

Markets have different interpretations of the concept of Web3.0. I think that Web 3.0 is not defined as blockchain 3.0 for the time being, and the blockchain has not yet reached the 3.0 stage, and Web 3.0 projects are still within the existing framework of the blockchain. Trustless and Permissionless are also the main concepts of Web3.0, and the ownership of data and the composability of open source are the main narrative logic. Data is no longer monopolized, and users enjoy ownership of the data. Developers can achieve data interoperability based on user data and open source code. Whether it is the alpha version started by cypherpunks before 1.0, or the advanced application started by Bitcoin to 2.0 Ethereum, this is the core theme. So the world of Web3.0 will be evolved rather than designed. That is to say, Web3.0 is not moving towards the Internet revolution that replaces Web2.0.

Web 3.0 is a complement to, not a replacement for, existing versions. Under the environment of open source collaboration, the development of Web3.0 products will be very rapid. The digital native world is a part of Web 3.0, and any existing Internet product may also be a part of Web 3.0. The coverage of the Internet is not limited to a certain value circle, but for all users.

In the track of Web3.0, the data economy is narrative logic, and the related tracks of data: privacy, storage, indexing, price feed, analysis, and identity data. It can be divided into data value discovery in the digital native world on the chain, and another alternative way to the real world off the chain. In other words, on the basis of data, the integration of current Internet products is the second route taken by the application layer.

The rise of Web3.0 is not a temporary idea. Just like the rise of Bitcoin, it is surrounded by the accumulation of predecessors and the advancement of technology. Just like the snippet of the password friend declaration put forward in the beginning, the concept of Web3.0 is set off by privacy and autonomy, and a new era of composability and interoperability is opened.

This article only takes the development of blockchain as the main line, and describes the main track of development so far. Remind everyone what kind of industry they are in and have a sense of the things behind it. Any one of these sectors can be singled out to describe a complete industrial chain, their meaning of existence, narrative logic, business opportunities, and value capture. The investment logic of each track and different projects is different. Some need to find misplaced pricing, some need to focus on growth inflection points, some focus on intrinsic value and growth, and some are suitable for short-term trends.

The purpose of this article is to guide everyone to explore the track in line with the future development trend based on the current situation: the perfection of the current underlying facilities and the progress of application development. Pursue industry Beta during the rapid growth period of the track, and capture value depressions. If you are interested in the investment logic of a certain track, you can leave a message or join the community to communicate and explore each other.

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