Key Points

The crypto market will experience transformative growth in 2025, continuing its trend of maturity and popularity momentum.

Key themes for 2025 include the macro environment, blockchain metagame, transformative innovation and changes in user experience.

Executive Summary

Looking ahead to 2025, the cryptocurrency market is on the verge of transformative growth. As the asset class matures, institutional adoption continues to increase and use cases expand across various sectors. In the past year alone, the U.S. has approved spot ETFs, the tokenization of financial products has increased dramatically, stablecoins have seen tremendous growth, and become further integrated into the global payments framework.

Achieving these achievements is not easy. Yet while these results appear to be the culmination of years of effort, there are growing signs that they may be just the starting point for larger changes.

When we look back on the past year, the crypto market has shown amazing resilience as it emerged from the predicament of interest rate hikes, regulatory crackdowns, and uncertain prospects. Despite these challenges, cryptocurrencies have established themselves as a reliable alternative asset class and have shown staying power.

From a market perspective, the uptrend in 2024 is significantly different from previous bull cycles. Some of the differences are superficial: for example, the word "web3" is replaced by the more apt "onchain." Others are more profound: Fundamental demands are gradually replacing narrative-driven investment strategies, in part due to deepening institutional involvement.

In addition, not only Bitcoin’s dominance has increased, but the innovation of decentralized finance has also pushed the boundaries of possibility of blockchain, creating a new financial ecosystem. laid the foundation. Major central banks and financial institutions around the world are discussing how to use cryptocurrencies to improve the efficiency of asset issuance, transactions and record-keeping.

Looking to the future, the current encryption market shows many exciting developments. At the forefront of change are the rise of decentralized peer-to-peer exchanges, decentralized prediction markets, and AI-powered agents equipped with crypto wallets. And in the institutional space, stablecoins and payments (bringing crypto more closely to fiat banking solutions), unsecured on-chain lending supported by on-chain credit scores, and compliant on-chain capital formation all show huge potential.

Although cryptocurrencies are well known, the innovative nature of their technical structures makes them complex and difficult to understand for many people. However, technological innovation is also changing this situation, and more and more projects are dedicated to improving user experience by simplifying blockchain complexity and enhancing smart contract functions. Such success could open the door to the crypto world to a new class of users.

Meanwhile, the U.S. laid the groundwork for regulatory clarity earlier in 2024, and this progress will accelerate further in 2025, potentially consolidating the numbers The place of assets in mainstream finance.

As the regulatory and technology environment evolves, we expect significant growth in the crypto ecosystem, and broader adoption will push the industry closer to its full potential . 2025 will be a decisive year, with breakthroughs and advances that may shape the long-term trajectory of the crypto industry for decades to come.

Topic 1: Macro Roadmap to 2025

The Fed’s needs and goals

The victory of Donald Trump in the 2024 US presidential election became the most important catalyst for the crypto market in the fourth quarter of 2024, sending the Bitcoin price 4% higher than the three-month average -5 standard deviations. However, looking forward, we believe that the short-term fiscal response will be less important than the longer-term direction of currency, especially as the Fed is about to enter a critical moment. Still, distinguishing the two is not easy. We expect the Fed to continue easing in 2025, but the exact pace may depend on the strength of the next round of expansionary fiscal policy. That's because tax cuts and tariffs could push up inflation levels, while core CPI is still hovering around 3.3%, above the Fed's target, even as headline CPI has fallen to 2.7% year-over-year.

What the Fed hopes to achieve is de-inflation from current levels, that is, prices need to continue to rise , but at a slower pace to assist with its other mandate - maximum employment. In other words, they want to control the pace of price increases. Households, on the other hand, want to see deflation, a fall in prices, after experiencing high spending over the past two years. However, while falling prices may be more welcome in the economy, they can trigger a vicious cycle that ultimately leads to a recession.

Still, the current baseline scenario remains a soft landing, underpinned by lower long-term interest rates and "American Exceptionalism 2.0." The Fed's rate cuts have essentially become a formality issue, as Credit conditions are already easing, which creates a favorable environment for cryptocurrency performance in the next 1-2 quarters. At the same time, if the new term. If projected deficit spending materializes, that could lead to greater risk appetite (including purchases of crypto assets) as more dollars circulate through the economy.

The most pro-encryption Congress in U.S. history

For many years, the United States has The field is always facing ambiguity, but we believe that the next legislative session may be an opportunity for the United States to establish regulatory clarity for the crypto industry. This election sends a strong signal to Washington: the public is dissatisfied with the current financial system and desires change from the market. From a perspective, a bipartisan pro-encryption majority in the House of Representatives and the Senate may shift the U.S. regulatory stance from being unfavorable to encryption to supporting encryption, thus providing a boost to the performance of the encryption market in 2025.

A new focus of discussion is the possibility of creating strategic Bitcoin reserves. In July 2024, Senator Cynthia Lummis (Wyo.) introduced the Bitcoin Act after the Bitcoin Nashville conference, while the Pennsylvania Assembly also introduced The Pennsylvania Bitcoin Strategic Reserve Act, if passed, would allow the state Treasurer to invest 10% of the Pennsylvania General Fund in Bitcoin. Or other crypto-based instruments. Currently, pension funds in Michigan and Wisconsin already hold crypto assets or crypto ETFs, and Florida is not far behind. However, there may be some challenges in creating strategic Bitcoin reserves, such as Legal limits on assets held on the Federal Reserve's balance sheet

Meanwhile, the U.S. is not the only jurisdiction making progress on regulation. Growing global demand for crypto is also driving competition internationally for more sophisticated regulation. Looking overseas, the European Union’s Crypto-Asset Markets Act (MiCA) is being implemented in phases, providing a clear framework for the industry. Many G20 and major financial centers such as the UK, UAE, Hong Kong and Singapore are also actively developing rules to accommodate the development of digital assets to create a more favorable environment for innovation and growth. environment.

Crypto ETF 2.0

US approves spot Bitcoin and Ethereum Ethereum (ETH) exchange-traded products (ETPs and ETFs) are an important milestone for the crypto economy, with net inflows of $30.7 billion since launch (approximately 11 months), a figure that far exceeds that of the SPDR Gold Shares ETF (GLD). ) in 2004 The ETFs' performance, which attracted an inflation-adjusted $4.8 billion in their first year after launching in October, puts them in the top 0.1% of about 5,500 ETF listings over the past 30 years.

These ETFs have changed the market dynamics of BTC and ETH, pushing Bitcoin's market share from 52% at the beginning of the year to 62% in November 2024. Nearly all types of institutional investors already hold these products, including endowments, pension funds, hedge funds, investment advisors and family offices, according to the latest 13-F filing. The launch of U.S.-regulated related options in November may further enhance risk management capabilities and provide more cost-effective asset exposure.

Looking ahead, the market’s focus will be on whether issuers will expand the scope of exchange-traded products to cover other tokens such as The asset mix is ​​favorable, but of greater concern is the possible impact if the U.S. Securities and Exchange Commission (SEC) allows staking to be included in ETFs, or removes its requirement for the creation and redemption of ETF shares in cash rather than in kind.

Introducing a physical creation and redemption mechanism will not only improve the price consistency between ETF share prices and actual net asset values ​​(NAV), but also help narrow the spread of ETF shares. This means Authorized Participants (APs) There is no need to quote a cash price higher than Bitcoin's trading price, thus reducing costs and improving efficiency. The current cash-based model also causes problems such as the continuous buying and selling of BTC and ETH. This results in increased price volatility and triggers taxable consequences that would not apply in a physical transaction.

Stablecoins: The “killer app” in crypto

2024 , stablecoins have achieved significant growth, with total market capitalization increasing by 48% to $193 billion as of December 1. Some market analysts predict that based on current trends, the industry may grow to nearly 3% in the next five years. Trillion dollars. Although this valuation seems huge, equivalent to the current size of the entire crypto market, it only accounts for about 14% of the US$21 trillion M2 broad money supply.

We believe that the next real wave of adoption in crypto may come from stablecoins and payments, which explains the past 18 Stablecoins have seen a surge in interest in the space over the past month as their ability to enable faster and cheaper transactions compared to traditional methods has led to an increase in their use in digital payments and cross-border remittances, as well as by more payment companies. In fact, we may be getting closer to the day when the primary application scenario of stablecoins will no longer be transactions, but global capital flows and commercial activities. In addition, the potential of stablecoins. The implications cannot be ignored, especially the potential for solving the U.S. debt burden problem.

As of November 30, 2024, the stablecoin market has completed nearly $27.1 trillion in transactions, nearly three times the $9.3 trillion in the same period in 2023. This includes a large number of peer-to-peer (P2P) transfers and cross-border Business-to-Business (B2B) payments. Stablecoins such as USDC are increasingly used by businesses and individuals because of their good compliance and widespread integration with payment platforms such as Visa and Stripe. The acquisition of stablecoin infrastructure company Bridge in October 2024 for $1.1 billion is the largest tokenization transaction in the crypto industry to date.

Tokenization. Revolution.

In 2024, the tokenization field continues to make significant progress, according to rwa.xyz data, tokenized real-world assets (RWA, excluding stable. currency) from the end of 2023 $8.4 billion, up more than 60% to $13.5 billion as of December 1, 2024. Analysts predict the industry could grow to at least $2 trillion over the next five years, if not more.to $30 trillion, a potential growth of nearly 50 times. Asset managers and traditional financial institutions, such as BlackRock and Franklin Templeton, are increasingly focusing on tokenizing securities and other traditional assets on permissioned chains and public blockchains, enabling near-instantaneous cross-border settlement and round-the-clock trading.

Businesses are experimenting with using such tokenized assets as collateral for other financial transactions, such as derivatives transactions, which may optimize operations such as margin calls ) and reduce risk. Additionally, the RWA trend is expanding beyond U.S. Treasuries and money market funds into private credit, commodities, corporate bonds, real estate and insurance. Ultimately, we believe tokenization has the potential to enable process optimization by taking the portfolio construction and investment process fully on-chain, but this vision is likely still years away.

Of course, these efforts also face unique challenges, including fragmented liquidity across multiple chains and ongoing regulatory hurdles. However, there has been significant progress on both fronts. Ultimately, we expect tokenization to be a gradual and ongoing process; however, its advantages are already widely recognized. This is a golden time for experimentation and exploration, ensuring companies stay at the forefront of technological advancement.

The resurgence of decentralized finance (DeFi)

DeFi is dead. Long live DeFi. Decentralized finance took a major hit during the last cycle as some applications proved to offer unsustainably high yields through token incentives channeling liquidity. Since then, however, a more sustainable financial system has gradually emerged, incorporating real-world use cases and transparent governance structures.

We believe that changes in the US regulatory environment may inject new vitality into the prospects of DeFi. This may include establishing a regulatory framework for stablecoins and providing a path for traditional institutional investors to participate in DeFi, especially in the context of the increasing synergies we see between off-chain and on-chain capital markets. In fact, decentralized exchange (DEX) trading volume currently accounts for approximately 14% of centralized exchange (CEX) trading volume, a significant increase from 8% in January 2023. What’s more, in a friendlier regulatory environment, there is also an increasing possibility for decentralized applications (dApps) to share protocol revenue with token holders.

In addition, encryption technologyRoles in disrupting financial services are also recognized by key players. In October 2024, Federal Reserve Governor Christopher Waller pointed out in his speech that DeFi can complement centralized finance (CeFi) to a large extent. He believes that distributed ledger technology (DLT) can speed up CeFi’s record keeping and improve its efficiency, while smart contracts can enhance CeFi’s capabilities. He also mentioned that stablecoins may have potential benefits in payments and as "safe assets" on trading platforms, but that measures are needed to reduce risks such as runs and illegal financing.

All these signs indicate that DeFi’s influence may soon transcend its crypto-user-dominated base and begin to compete more deeply with traditional finance (TradFi). Integration and interaction.

Topic 2: Disruptive Paradigm

Telegram Trading Bot: Hidden Profit Center

In Stablecoins and native L1 transaction fees, Telegram trading robots have become one of the most profitable industries in the crypto field in 2024, and their net protocol revenue has even surpassed major DeFi protocols such as Aave and MakerDAO (now renamed Sky). This profitability is largely due to a surge in trading and memecoin activity. In fact, meme tokens will be the top-performing cryptocurrency space in 2024 as measured by total market capitalization growth. Memecoin trading activity on the Solana decentralized exchange (DEX) continued to surge in the fourth quarter of 2024.

Telegram trading bot is a chat-based token trading interface. Users can create a managed wallet directly in the chat window and fund the wallet through buttons and text commands. and manage funds. As of December 1, 2024, bot users are primarily focused on the Solana token (87%), followed by Ethereum (8%) and Base (4%).

Similar to most trading interfaces, Telegram trading bots charge a percentage of each transaction, up to 1% of the transaction value. However, since the assets users trade are inherently highly volatile, we believe these high fees will have little impact on user appeal. As of December 1, Photon bots’ cumulative year-to-date fee revenue reached $210 million, close to Solana’s$227 million collected by Pump, the largest memecoin launch platform. Other major bots such as Trojan and BONKbot also generated significant revenue, amounting to $105 million and $99 million respectively. By comparison, Aave will have $74 million in agreement revenue before expenses in 2024.

The appeal of these applications mainly stems from their convenience in DEX trading, especially for tokens that have not yet been listed on exchanges. Many bots also offer additional features, such as a “snatch” feature when a coin becomes available and integrated price alerts. Telegram’s transaction experience is attractive to users, with nearly 50% of Trojan users repeating it within four days or more (only 29% stopped using it after one day), which also contributed to its $188 Average revenue per user. While increasing competition among Telegram trading bots may ultimately drive down transaction fees, we believe Telegram bots (along with the other core interfaces discussed below) will continue to be the leading profit center in 2025.

Forecasting the market: basic capabilities

In the 2024 US election cycle, the prediction market has become one of the biggest winners. Platforms like Polymarket outperformed traditional polling data, which had predicted a closer election. This is a win for the crypto industry, as prediction markets leveraging blockchain technology demonstrate significant advantages over traditional polls while demonstrating unique use cases for the technology. Prediction markets not only demonstrate the transparency, speed and global access provided by blockchain, but their blockchain foundation also enables decentralized dispute resolution and automated outcome-based payment settlement, unlike non-blockchain versions.

While many believe the relevance of such dApps may decline after the election, we have already seen their adoption expand into other areas such as sports and entertainment. In the financial sector, these markets are more accurate than traditional surveys at reflecting economic data releases such as inflation and non-farm payrolls, potentially making them relevant and useful even after the election.

Games: Let entertainment take center stage

Games have always been one of the core themes in the crypto space , because the assets and market on the chainpotential transformative impact of the field. However, cultivating a loyal user base for crypto games has been a challenge. Compared with the player base of traditional successful games, many crypto game users are more motivated by profit than pure entertainment. Additionally, many crypto games are distributed via web browsers and require self-hosted wallet setup, which limits the audience to crypto enthusiasts rather than the wider player base.

However, games integrating cryptography have made significant progress compared to the previous cycle. The core trend is to gradually move away from the early cypherpunk concept of "completely owning games on the chain" and turn to selectively on-chain assets to unlock new features without affecting the gaming experience. In fact, we believe that many high-profile game developers now view blockchain more as a support tool than a core marketing feature.

"Off the Grid" is a typical representative of this trend. The first-person shooter battle royale game launched while its core blockchain component (the Avalanche subnet) was still in the testnet stage, but it became the number one free-to-play game on the Epic Games platform. Its appeal mainly comes from the unique gameplay, not the blockchain token or item trading market. Notably, the game is paving the way for expanded distribution channels for crypto-integrated games, with a release reaching Xbox, PlayStation, and PC (via the Epic Games Store).

The mobile terminal has also become an important distribution channel for crypto-integrated games, whether they are native applications or embedded applications (such as Telegram mini-games). Many mobile games similarly selectively integrate blockchain components, with much of the activity actually running on centralized servers. These games can often be played without setting up an external wallet, lowering the barrier to entry and making it easy for players unfamiliar with crypto to get started.

We believe that the lines between crypto games and traditional games may continue to blur. The major “crypto games” of the future are likely to be crypto-integrated rather than crypto-centric, focusing more on refined gaming experiences and distribution channels rather than mechanisms for earning tokens. However, while this may drive wider adoption of crypto, how this directly translates into demand for liquidity tokens remains unclear. In-game currencies may continue to remain segregated across games, and non-crypto players may not welcome the interference of outside investors in the in-game economy.

Decentralized real world

Decentralized Physical Infrastructure Network (DePIN) has the potential to revolutionize real-world distribution problems by guiding the creation of resource networks. In theory, DePIN could overcome the initial economies of scale challenges that such projects typically face. The scope of the DePIN project spans computing power, cellular towers, and energy, providing a more resilient and lower-cost way to aggregate resources.

The most typical example is Helium, which operates by distributing tokens to individuals who provide local cellular hotspots. By issuing tokens to hotspot providers, Helium will be able to build coverage networks across most metropolitan areas in the United States, Europe and Asia without incurring the large upfront capital costs of building and distributing communications towers. Instead, early adopters are incentivized by receiving an early stake in the network via tokens.

Nevertheless, we believe the long-term revenue and sustainability of these networks requires a case-by-case analysis. DePIN is not a panacea for resourcing problems, as pain points vary widely across industries. Decentralization strategies may not be suitable for some industries, or may only solve certain problems in that industry. We believe that the space is likely to see significant differences in network adoption, token utility, and revenue generation, and that these differences are more likely to be determined by the target industry itself rather than the underlying technology network used.

Artificial intelligence: creating real value

Artificial intelligence (AI) continues to be the focus of investor attention in both traditional and crypto markets. However, we believe that the impact of AI in crypto is multi-faceted and the direction of its narrative often changes. In its early stages, blockchain technology was thought to solve the problem of trustworthy data for AI-generated content and users (e.g., verifying the authenticity of data). AI-driven intent-driven architecture is viewed as a potential user experience improvement tool. The focus then turned to decentralized AI model training and computing networks, as well as encryption-based data generation and collection. Recently, attention has turned to autonomous AI agents capable of controlling crypto wallets and communicating via social media.

We believe that the full impact of AI on the crypto space is not yet clear, and this is reflected in the frequent changes in the narrative. However, this uncertainty does not diminish the potential of AI to revolutionize the crypto space, as AI technology continues to make breakthroughs. AI applications are also becoming increasingly accessible to non-technicaluser usage, which may further accelerate the development of creative use cases.

We believe that the biggest suspense is how these changes will create lasting value for liquid tokens rather than company equity. For example, many AI agents run on traditional technology tracks, with short-term “value reflection” (such as market attention) flowing more to memecoins than to the underlying infrastructure. While liquidity tokens associated with the infrastructure layer have also experienced price increases, their usage growth has generally lagged behind price increases. We believe this divergence in price and network metrics, combined with the market’s rotating focus on AI memecoins, reflects that investors have not yet reached a strong consensus on how to capture the growth of AI in crypto.

Topic 3: Blockchain metagame

Is the future of multi-chain still a zero-sum game?

After the last bull market cycle, the popularity of alternative Layer-1 (L1) networks has once again become an important theme. Emerging networks compete on lower transaction costs, redesigned execution environments, and minimized latency. However, we believe that the expansion of L1 space has reached the point where there is a surplus of general block space, even though high-value block space remains scarce.

In other words, the extra block space itself is not inherently valuable. However, a vibrant protocol ecosystem, active communities, and dynamic crypto assets can still give certain blockchains the ability to charge premium fees. For example, Ethereum remains at the core of high-value DeFi activity even though mainnet execution capabilities have not improved since 2021.

Nonetheless, we believe investors are still attracted by the differentiated ecosystems that these new networks may foster, although the threshold for such differentiation is constantly rising. High-performance chains such as Sui, Aptos, and Sei are competing with Solana for market recognition, and the upcoming release of Monad is also seen as a strong contender for developer attention.

Historically, DEX transactions have been the largest driver of on-chain fees, requiring strong user guidance, wallets, interfaces and capital support to form an activity and flow The ever-increasing cycle of sex. This concentration of activity often leads to a “winner-takes-all” pattern on different chains. However, we believe that the future may still be multi-chain, as different blockchain architectures provide unique advantages to meet diverse needs. While appchains and Layer-2 solutions can be customized for specific use casesOptimized and lower-cost, multi-chain ecosystems allow for specialization while benefiting from broader network effects and innovation across the blockchain space.

Improve Layer-2 capabilities

Despite the exponential scaling capabilities of Layer-2 (L2), the debate surrounding Ethereum's rollup-centric roadmap continues. Criticisms include L2’s “predatory” influence on L1 activity, fragmentation of liquidity and user experience, with L2 in particular being blamed for the decline in Ethereum network fees and the collapse of the “ultrasonic currency” narrative. New controversies surrounding L2 also include decentralization trade-offs, the fragmentation of different virtual machine environments (such as the potential fragmentation of EVM), and the choice of "based" vs. "native" rollup.

Nevertheless, L2 has been a huge success from the perspective of increasing block space and reducing costs. Binary large object (blob) transactions introduced in the Ethereum Dencun (Deneb + ​​Cancun) upgrade in March 2024 reduced the average cost of L2 by more than 90% and drove a 10x increase in Ethereum L2 activity. Additionally, we believe that allowing multiple execution environments and architectures to be experimented with in the Ethereum environment is a long-term advantage of the rollup-centric approach.

This roadmap also comes with short-term trade-offs. Interoperability across rollups and the overall user experience becomes more complex, especially for new users who don't fully understand the differences between different L2s or how to bridge across L2s. Despite improvements in bridge speed and cost, we believe the need for users to interact with the bridge still degrades the overall on-chain experience.

Although this is a current real problem, the community is solving this user experience problem through a variety of methods, such as: (1) Optimism ecosystem Superchain interoperability, (2) real-time proofs and super transactions for zkRollups, (3) based ordering, (4) resource locking, (5) sequencer network, etc. However, most of these improvements are focused on the infrastructure and network levels and may take time to show up at the user interface level.

At the same time, Bitcoin’s L2 ecosystem is more difficult to navigate due to the lack of unified rollup security and roadmap standards. In contrast, Solana's "network extensions" are generally more application-specific and likely to be less disruptive to current user workflows. Overall, L2 is taking shape in most major crypto ecosystems, but in varying forms.

Everyone can have a chain

The increased ease of customizing network deployments is prompting more and more applications and companies to build chains that they can better control. Major DeFi protocols such as Aave and Sky (formerly MakerDAO) have explicitly included building chains in their long-term plans, while the Uniswap team has also announced plans to launch a DeFi-focused L2 chain. Even some traditional companies are getting involved, such as Sony announcing plans to launch a new chain called Soneium.

As the blockchain infrastructure stack matures and becomes increasingly commoditized, we believe the appeal of owning block space is increasing, especially for regulated Required entities or applications with specific use cases. The technology stack supporting this trend is also changing. In previous cycles, application-focused chains have primarily used Cosmos or Polkadot’s Substrate SDK. Now, the growth of the rollup-as-a-service (RaaS) industry is driving the launch of more project-owned L2 chains. Service platforms represented by companies such as Caldera and Conduit simplify the integration with other services through their markets. integrated. Likewise, Avalanche's subnets may also see an adoption boom due to the development of its managed blockchain service, AvaCloud, which significantly simplifies the process of launching custom subnets.

The growth of modular chains may have a corresponding impact on the demand for the Ethereum blob space and other data availability solutions such as Celestia, EigenDA or Avail. Ethereum has reached saturation (3 blobs per block) blob usage since early November, up more than 50% from mid-September. As existing L2s like Base continue to scale throughput, and new L2s come online on mainnet, demand doesn’t appear to be slowing down. However, the Pectra upgrade expected in the first quarter of 2025 mayRelieving some pressure by increasing the number of target blobs from 3 to 6.

Theme 4: User experience

Improvement of user experience (UX)

We believe that simple The user experience is one of the most important factors driving mass adoption. While the crypto industry has historically focused on deep technical bootstrapping due to its cypherpunk origins, today the focus is rapidly shifting toward streamlining the user experience.

In particular, the industry is working to abstract the complexity of cryptography into the context of applications. Several recent technological breakthroughs are making this shift possible, such as employing account abstraction to simplify user onboarding and using session keys to reduce signing friction.

Adoption of these technologies will make the security components of crypto wallets, such as mnemonic phrases and recovery keys, invisible to most end users — — Similar to today’s seamless security experience on the Internet (such as https, OAuth, and passkeys). We expect that 2025 will see more passkey bootstrapping and in-app wallet integration trends. For example, Coinbase Smart Wallet’s passkey onboarding and Tiplink and Sui Wallet’s integrated logins with Google are early signs of this trend.

Nonetheless, we believe that the abstraction of cross-chain architecture may still be the biggest challenge facing crypto user experience in the short term. Cross-chain abstraction is still a focus of the network and infrastructure layer (such as ERC-7683) research communities, but in our opinion, this is still quite far away from front-end applications. To make progress in this area, both the improvement of the smart contract application layer and the improvement of the wallet layer are required. Protocol upgrades are necessary to unify liquidity, while wallet improvements are needed to provide a simpler experience for users. We believe that the latter has a greater impact on expanding the user base, although current research and industry debate mainly focus on the former.

Take control of the interface

In our opinion, improving the user interface to "take control" of the user relationship It is one of the most important changes in the encryption user experience. This change will be achieved in two ways: The first is to improve the experience of independent wallets, as mentioned above. The user onboarding process is becoming increasingly streamlined to adapt to user needs. For example, application features such as exchange and lending that are directly integrated into the wallet allow users to stay in a familiar ecosystem.

At the same time, applications are also competing to abstract blockchain technology components into the backend by integrating wallets to control user relationships. This includes trading tools, games, on-chain social and membership apps that automatically provision wallets for registered users via methods familiar to users, such as Google or Apple’s OAuth. After users complete onboarding, on-chain transactions are funded by paymasters, the costs of which are ultimately borne by the application owner.

This model brings a unique dynamic, where the revenue per user needs to match the cost of its on-chain operations. Although these costs continue to decrease as blockchains scale, they also force crypto applications to rethink what data needs to be submitted to the chain.

Overall, the crypto industry will face fierce competition to attract and retain users. As evidenced by the aforementioned average revenue per user (ARPU) of Telegram trading bots, many retail crypto traders are relatively less price sensitive than traditional financial (TradFi) entities. In the coming year, we expect efforts to “take ownership” of user relationships to expand beyond transactions and become a greater focus for protocols.

Decentralized identity

As regulatory clarity continues to improve and more assets are tokenized off-chain, streamlining know-your-customer (KYC) and anti-money laundering (AML) processes will become increasingly important. For example, certain assets are restricted to accredited investors in specific regions, making identification and qualification core pillars of the long-term on-chain experience.

In our view, this involves two key components. The first is creating the on-chain identity itself. The Ethereum Name Service (ENS) provides a standard for resolving human-readable ".eth" names to one or more wallets across the chain. Variations of this technology are already appearing in networks such as Basenames and Solana Name Service. Adoption of these core on-chain identity services is accelerating, with major traditional payment providers such as PayPal and Venmo now supporting ENS address resolution.

The second core component is the upper body of the chaincopy build properties. This includes confirming KYC verification and jurisdiction data, which can then be viewed by other protocols to ensure compliance. At the heart of this technology is the Ethereum Attestation Service, which provides a flexible service for entities to provide authentication attributes to other wallets.

These authentication attributes are not limited to KYC and can be freely extended to meet the needs of the authenticator. For example, Coinbase’s on-chain verification utilizes the service to confirm that a wallet is associated with a user of a Coinbase exchange account and is located in a specific jurisdiction. Some new real-life asset permissioned lending markets will use these verifications to limit usage rights on Base.