Cover Image: Adam Ho
Working in crypto has always garnered a lot of intrigue (and sometimes skepticism) from the people around me, but in the aftermath of some of the most disastrous crypto headlines in history, I’ve been fielding more questions than ever before.
My answer is always some variation of the same: “It’s an incredible time to be in crypto.”
The most resilient companies are born in this type of environment: Chainalysis (2014), MetaMask (2016), OpenSea (2017), Bison Trails (2018), and Uniswap (2018) just to name a few.
As investors focused on nascent technologies, it’s fascinating and gratifying to be able to learn from and support these brilliant founders. I wanted to share a few themes I’m especially eager to see evolve over the next year.
One of the biggest challenges within blockchain design is cryptoeconomic security, and more specifically scaling/aggregating network security. More nascent chains are being built with this in mind, ie: Cosmos + Interchain Security. However, innovation in Ethereum remains stifled at this level. Any middleware application built on top of Ethereum is responsible for bootstrapping its own security/trust network, a process that is extremely costly and resource-intensive. As investors in Obol*, which is bringing distributed validator technology (DVT) to Ethereum, we’re well aware of the necessity and challenges of building Ethereum middleware. Not only is building middleware expensive and time-consuming, but it also fragments trust/security within the ecosystem. And the issue of fragmented security only continues to persist/worsen as more applications are built.
Restaking addresses the issue of fragmented trust networks within Ethereum by introducing a generalized marketplace for decentralized trust. Restaking is a twist on the idea of merged mining whereby a PoW miner mines two blockchains at the same time and commits a block hash that works for both chains. This allows miners on the chain with a higher difficulty level to mine blocks on lower-difficulty chains at little cost. However, merged mining failed because there was no disincentive to merged miners. Restaking is powerful because it is built on top of PoS and introduces disincentives for bad restakers (slashing conditions), addressing the original issues of merged mining.
The pioneering team of restaking is EigenLayer, which offers a service that allows users to repurpose their staked $ETH that is already being used to secure Ethereum to secure other protocols. EigenLayer essentially enables a market for pooled security for Ethereum, allowing validators to adjust their risk/reward parameters across services.
The implications of restaking as a primitive are boundless, but just to start, restaking will fuel experimentation and innovation in Ethereum middleware, as developers can more freely focus resources on building products rather than bootstrapping security. A few of our favorite ideas that could leverage restaking: lightclient bridges, more secure oracles, and decentralized sequencers.
Despite Mark’s sincerest efforts, I think it is clear that we will not all be living within the confines of our Meta Quests any time soon. I do, however, think we are steadily moving towards a world in which the physical and digital are inextricably linked.
But as the initial hype around Fortnite concerts and “Baby Birkin”-type schemes cools down, brands/creators will have to think long and hard about the actual utility of their digital offerings beyond novelty. I’m particularly interested in the use of hardware combined with NFTs,
ie: NFC chip-embedded products → wallet creation/onboarding → NFT mint → exclusive rewards/user analytics
We’re already seeing parts of the infrastructure stack like Endstate* and IYK emerge and web3-native success stories like 9dcc, but this is only the beginning phase of exploring the design space for these new hybrid forms of commerce and engagement.
A few other digiphysical case studies I’m watching:
Real World NFT Governance/Fandom: The go-to case study for the power of fans is K-pop, which is now a $5B industry. Modhaus is creating tripleS, the “first decentralized Kpop idol group.” Voting K-pop artists into stardom is not a new mechanism à la audition shows and music charts, but tripleS members are voted into the performance group through NFT governance with Polygon NFTs.
Tokenized Asset Marketplaces: Seamlessly giving physical goods the powers of digital objects (liquidity, fractionalization, borrow/lend power, etc.) goes beyond tokenization, but also requires custody, supply chain logistics, etc. Marketplaces like Americana and 4K are working to make this as easy as using existing web2 marketplaces.
Nike x RTFKT: Nike’s acquisition of RTFKT in 2021 was one of the first major signals that web2 brands’ commitment to entering web3 is here to stay. The collaboration dropped its AR Genesis Hoodie in July 2022, and has shown no signs of slowing down shipping. Many brands are looking to giants like Nike to see just how they leverage blockchain technology. Nike continues to make new moves in crypto, recently announcing the launch of .SWOOSH, its own hub for its digiphysical efforts moving forward.
The disastrous collapse of FTX was a wakeup call for the crypto industry, and a reminder that there are no shortcuts when it comes to security. After all, “not your keys, not your crypto.” However, onboarding the next million users into crypto, while also keeping those users’ funds secure is a daunting task. Today, users have to make a zero-sum choice: ease of use or sovereign control.
There are two ways to improve on the current UX of self-custody: smart contract wallets and MPC wallets. For sake of brevity, I’ll focus on smart contract wallets (more specifically, account abstraction) here.
Smart Contract Wallets
There are currently two types of accounts in Ethereum:
Externally Owned Account (EOA): accounts that are controlled by private keys to a corresponding public address (these are most accounts used by wallets today)
Smart Contract Wallet: accounts that are controlled by code, allowing for deployment of arbitrary logic
Account Abstraction is the process of abstracting away the differences between these accounts. More granularly, account abstraction brings programmability to transaction validity rules. A single contract account type for all the Ethereum accounts will empower developers to provide orders of magnitude better UX for users, enabling the following features:
Custom Access Control: multisigs, sub-accounts, spending limits, allow/blocklists
Session Keys (major for on-chain gaming)
Gas Sponsored Transactions
The road to account abstraction has been a long one including multiple EIPs–EIP-86 (2017), EIP-2938 (2020), and most recently ERC-4337 (2021) which seeks to give standard EOA functionality to smart contract wallets without any consensus-level changes.
We’re still a ways away from a usable ERC-4337 native client wallet, but several teams have answered the call to build: Soul Wallet, StackUp, Candide, etc.
In the meantime, it’s worth noting that 1) zkSync and StarkWare are among the first L2s to have native account abstraction support in their protocols. For example, Argent supports StarkWare and zkSync. 2) Hybrid solutions (AA wallet + MPC key management) are also entirely viable.
More resources on account abstraction (and perhaps a spicy counter-take on its limitations)
To quote Chris Dixon quoting Clay Christensen (quote-ception?), “the next big thing will start out looking like a toy.” 2021/2022 was NFTs’ toy moment. We had our fun with 10K PFP collections and their copypastas (still $7B+ market cap, btw), and now the real work begins–finding real-world, scalable use cases for NFTs.
My bet is that NFTfi, hybrid NFT + DeFi mechanisms, will be the next major unlock for NFTs to tap into deeper liquidity and extend composability. 2022 saw $500M+ in cumulative NFT loan volume, laying the groundwork for an imminent explosion in NFTfi. Though NFT trading volume overall has plummeted, the economy is resilient–NFT borrow volume still persists significantly beyond levels during the 2021 bull market. And this is just the tip of the iceberg.
While I’m excited to see experimentation in marketplace token incentives and new financial instruments like NFT derivatives, the current NFTfi market still remains relatively small, mostly serving the long-tail. NFT liquidity is still rather low, driving lenders to give unfavorable loan terms, deterring people from entering these protocols all-together.
In order for NFTs to become their own established asset class, core pieces of infrastructure that unlock deeper liquidity will need to be refined including NFT AMMs like Sudoswap and liquidity aggregators like Reservoir*––not dissimilar from early innovations in DeFi. Demand for NFTfi will also surge as NFT utility expands beyond PFPs to other use cases such as in-game assets, real-world assets, brand loyalty passes, etc. I’m especially eager to see the NFT pricing issue get solved. NFT pricing historically has been incredibly obscure, relying largely on floor price (lowest buy price). Floor price is a poor metric, as it reduces the value of rarity/desirability within a collection, and is also susceptible to manipulation. Upshot, Abacus, and Waterfall are just a few of the laser-sharp teams working on this.
These are just a few examples of the countless number of innovations being built in crypto excluding some other heavy-hitter topics the Archetype team is also thinking about such as zero-knowledge roll-ups, next-generation DAOs, cross-chain interoperability, and more.
I’m expecting to be extremely validated and equally humbled this year, but I’m excited to be strapped in along for the ride.
Whether you’re noodling on an early idea or actively building with a team, I'd love to meet you––online or in NYC where Archetype is headquartered. You can reach me at firstname.lastname@example.org or on Twitter @katiewav.
Thank you to Nick, Ash, Benji, Edgar, and Sean for thoughtful comments and feedback.
*denotes Archetype portfolio company