DeFi will enter a new era of innovation. Stablecoin is the killer application.

Key Insights

Crypto markets are poised for transformative growth in 2025, continuing their momentum of maturity and adoption.

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 across sectors are expanding. In the past year alone, the U.S. approved spot ETFs, tokenization of financial products increased dramatically, and stablecoins saw tremendous growth and further integration into global payment frameworks.

These achievements were not easy. However, while these gains appear to be the culmination of years of hard work, there are growing signs that they may be just the beginning of a larger transformation.

As we look back over the past year, crypto markets have shown amazing resilience in emerging from the plight of rising interest rates, regulatory crackdowns, and an uncertain future. Despite these challenges, cryptocurrencies have established themselves as a reliable alternative asset class and have shown lasting vitality.

From a market perspective, the upward trend in 2024 is significantly different from previous bull cycles. Some differences are superficial: for example, the term "web3" has been replaced by the more appropriate "onchain". Others are more profound: fundamental demand has gradually replaced narrative-driven investment strategies, partly due to the deepening of institutional participation.

In addition, not only has Bitcoin's dominance risen, but innovations in decentralized finance have also pushed the boundaries of what is possible with blockchain, laying the foundation for a new financial ecosystem. Major central banks and financial institutions around the world are discussing how to use cryptocurrencies to improve the efficiency of asset issuance, trading, and record keeping.

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

Although cryptocurrencies are widely known, the innovative nature of their technical structure still makes them complex and difficult to understand for many people. However, technological innovation is also changing this situation, and more and more projects are committed to improving user experience by simplifying blockchain complexity and enhancing smart contract functionality. This success may open the door to the crypto world for a new class of users.

At the same time, earlier in 2024, the United States laid the foundation for regulatory clarity, and this progress will accelerate further in 2025, which may consolidate the position of digital assets in mainstream finance.

As the regulatory and technological environments evolve, we expect the crypto ecosystem to see significant growth, with wider adoption driving the industry closer to its full potential. 2025 will be a defining year, with breakthroughs and advances that will shape the long-term trajectory of the crypto industry for decades to come.

Theme 1: Macro Roadmap for 2025

Needs and Goals of the Federal Reserve

Donald Trump's victory in the 2024 U.S. presidential election became the most important catalyst for the crypto market in the fourth quarter of 2024, pushing Bitcoin prices 4-5 standard deviations above the three-month average. However, looking ahead, we believe the short-term fiscal policy response will be less influential than the longer-term direction of monetary policy, especially as the Fed approaches a critical juncture. Still, it is not easy to distinguish the two. We expect the Fed to continue easing policy through 2025, but the exact pace may depend on the strength of the next round of expansionary fiscal policy. This is because tax cuts and tariffs are likely to push inflation higher, and while the headline CPI has fallen to 2.7% year-on-year, the core CPI is still hovering around 3.3%, above the Fed's target.

What the Fed wants to achieve is disinflation from current levels, meaning prices need to continue to rise, but at a slower pace to help achieve its other mandate, maximum employment. In other words, they want to control the pace of price increases. Households, on the other hand, would like to see deflation, meaning falling prices, after two years of high spending. However, while falling prices may be more politically popular, they could set off a vicious cycle that ultimately leads to a recession.

Nevertheless, the current baseline scenario remains a soft landing, supported by lower long-term interest rates and "American Exceptionalism 2.0". The Fed's rate cuts have largely become a matter of form as credit conditions are already easing, creating a favorable environment for crypto performance over the next 1-2 quarters. At the same time, if the new administration's projected deficit spending is realized, it could lead to greater risk appetite (including purchases of crypto assets) as more dollars circulate in the economy.

The Most Crypto-Proactive Congress in U.S. History

The U.S. has faced political ambiguity in the crypto space for many years, but we believe the next legislative session could be an opportunity for the U.S. to establish regulatory clarity for the crypto industry. The election sent a strong signal to Washington that the public is dissatisfied with the current financial system and is eager for change. From a market perspective, a bipartisan pro-crypto majority in the House and Senate could shift the U.S. regulatory stance from crypto-unfavorable to crypto-supportive, providing a boost to crypto market performance in 2025.

A new focus of discussion is the possibility of creating a strategic Bitcoin reserve. In July 2024, Senator Cynthia Lummis (Wyoming) introduced the Bitcoin Act following the Bitcoin Nashville conference, while the Pennsylvania State Assembly also introduced the Pennsylvania Bitcoin Strategic Reserve Act. If passed, the bill would allow the state treasurer to invest 10% of Pennsylvania's 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 following closely. However, there may be some challenges in creating a strategic Bitcoin reserve, such as legal restrictions on holding assets on the Federal Reserve's balance sheet.

Meanwhile, the United States is not the only jurisdiction making progress on regulation. The growth of global demand for crypto is also driving more careful regulatory competition internationally. Looking overseas, the European Union's Markets in Crypto-Assets Act (MiCA) is being implemented in stages, providing a clear framework for the industry. Many G20 countries 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, thereby creating a more favorable environment for innovation and growth.

Crypto ETF 2.0

The approval of spot Bitcoin and Ethereum (ETH) exchange-traded products (ETPs and ETFs) in the United States is an important milestone for the crypto economy, with net inflows of $30.7 billion since their launch (about 11 months). This figure far exceeds the inflation-adjusted $4.8 billion attracted by the SPDR Gold Shares ETF (GLD) in its first year after its launch in October 2004. The performance of these ETFs puts them in the top 0.1% of the best performers of about 5,500 ETF listings over the past 30 years, according to Bloomberg data.

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

Looking forward, the market’s attention will be on whether issuers will expand the scope of exchange-traded products to cover other tokens such as XRP, SOL, LTC and HBAR. While potential approval may only benefit a limited portfolio of assets in the short term, what is more noteworthy is the impact that could occur if the SEC allows staking to be included in ETFs, or removes its requirement for cash rather than physical ETF share creation and redemption.

Introducing physical creation and redemption mechanisms would not only improve price consistency between ETF share prices and actual net asset value (NAV), but also help narrow the spread of ETF shares. This means that authorized participants (APs) do not need to quote cash prices above the Bitcoin trading price, thereby reducing costs and improving efficiency. The current cash-based model also raises some issues, such as increased price volatility caused by the continuous buying and selling of BTC and ETH, and triggering taxable consequences that would not apply in physical transactions.

Stablecoins: The "Killer App" in Crypto

Stablecoins have seen significant growth in 2024, with total market capitalization up 48% to $193 billion as of December 1. Some market analysts predict that the industry could grow to nearly $3 trillion over the next five years based on current trends. While this valuation may seem large, being the size of the entire current crypto market, it only represents about 14% of the U.S.’s $21 trillion M2 broad money supply.

We believe that the next wave of real adoption in crypto may come from the stablecoin and payment space, which explains the surge in interest in this space over the past 18 months. Stablecoins enable faster and cheaper transactions than traditional methods, which has led to their increasing use in digital payments and cross-border remittances, and more payment companies are also expanding their stablecoin infrastructure. In fact, we may be getting closer to a day when the primary application scenario for stablecoins will no longer be transactions, but global capital flows and commercial activities. In addition, the potential political significance of stablecoins cannot be ignored, especially in solving the problem of the US debt burden.

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 of 2023. This includes a large number of peer-to-peer (P2P) transfers and cross-border business-to-business (B2B) payments. Businesses and individuals are increasingly using stablecoins such as USDC because they have good regulatory compliance and are widely integrated with payment platforms such as Visa and Stripe. For example, Stripe acquired stablecoin infrastructure company Bridge for $1.1 billion in October 2024, the largest deal in the crypto industry to date.

Tokenization Revolution.

In 2024, the tokenization field continued to make significant progress. According to rwa.xyz data, tokenized real-world assets (RWA, excluding stablecoins) increased by more than 60% from $8.4 billion at the end of 2023 to $13.5 billion as of December 1, 2024. Analysts predict that the industry could grow to at least $2 trillion and even as high as $30 trillion in the next five years, a potential increase of nearly 50 times. Asset managers and traditional financial institutions, such as BlackRock and Franklin Templeton, are increasingly looking to tokenize government securities and other traditional assets on permissioned and public blockchains to enable near-instant cross-border settlement and around-the-clock trading.

Firms are experimenting with using such tokenized assets as collateral for other financial transactions, such as derivatives trading, which could optimize operations (e.g., margin calls) and reduce risk. In addition, the trend toward RWAs is expanding beyond U.S. Treasuries and money market funds to private credit, commodities, corporate bonds, real estate, and insurance. Ultimately, we believe tokenization has the potential to optimize processes by bringing the portfolio construction and investment process fully on-chain, but this vision may still be years away.

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

The Renaissance of Decentralized Finance (DeFi)

DeFi is dead. Long live DeFi. Decentralized finance suffered a major blow in the last cycle as certain applications proved to offer unsustainably high returns by bootstrapping liquidity through token incentives. However, since then, 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 could 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 as we see increasing synergies between off-chain and on-chain capital markets. In fact, decentralized exchanges (DEX) now account for about 14% of centralized exchange (CEX) trading volume, a significant increase from 8% in January 2023. More importantly, in a more friendly regulatory environment, the possibility of decentralized applications (dApps) sharing protocol revenue with token holders is also increasing.

In addition, the role of crypto in disrupting financial services has also been recognized by key figures. In October 2024, Federal Reserve Governor Christopher Waller pointed out in his speech that DeFi can largely complement centralized finance (CeFi). 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 measures are needed to reduce risks such as bank runs and illegal financing.

All these signs suggest that DeFi’s influence may soon extend beyond its predominantly crypto user base and begin to more deeply integrate and interact with traditional finance (TradFi).

Theme 2: Disruptive Paradigms

Telegram Trading Bots: Hidden Profit Center

After stablecoins and native L1 transaction fees, Telegram trading bots become one of the most profitable industries in the crypto space in 2024, with net protocol revenues even surpassing 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 became the best performing cryptocurrency sector in 2024 as measured by total market capitalization growth. Meanwhile, memecoin trading activity on the Solana decentralized exchange (DEX) continued to surge in the fourth quarter of 2024.

Telegram trading bots are chat-based token trading interfaces that allow users to create custodial wallets directly in their chat windows, fund their wallets with buttons and text commands, and manage their funds. As of December 1, 2024, bot users are primarily concentrated in Solana tokens (87%), followed by Ethereum (8%) and Base (4%).

Like most trading interfaces, Telegram trading bots charge a percentage of each trade, up to 1% of the trade value. However, due to the extremely volatile assets that users trade, we believe these high fees have little impact on user appeal. As of December 1, Photon bots have accumulated $210 million in year-to-date fee revenue, close to the $227 million collected by Solana's largest memecoin launch platform, Pump. Other major bots such as Trojan and BONKbot also have impressive revenues, reaching $105 million and $99 million respectively. In comparison, Aave's protocol revenue after expenses in 2024 is $74 million.

The appeal of these applications mainly stems from their convenience in DEX trading, especially for tokens that are not yet listed on exchanges. Many bots also provide additional features, such as a "snatch" function when a token is listed and integrated price alerts. Telegram's trading experience is attractive to users, with nearly 50% of Trojan users returning for four days or more (only 29% of users stop using it after one day), which also contributes to its high average revenue per user of $188. Although increasing competition among Telegram trading bots may eventually reduce trading fees, we believe that Telegram bots (and other core interfaces discussed below) will continue to be leading profit centers in 2025.

Prediction Markets: Foundational Capabilities

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

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

Games: Bringing Entertainment into Focus

Games have been one of the core themes in the crypto space due to the potentially transformative impact of on-chain assets and markets. However, cultivating a loyal user base for crypto games has been a challenge. Compared to the player base of traditional successful games, many crypto game users are more motivated by profit rather than pure entertainment. In addition, many crypto games are distributed through web browsers and require self-hosted wallet setup, which limits the audience to crypto enthusiasts rather than a wider player base.

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

Off the Grid is a prime example of this trend. This first-person shooter battle royale game launched while its core blockchain component (the Avalanche subnet) was still in testnet, yet it became the number one free-to-play game on the Epic Games platform. Its appeal came primarily from its unique gameplay, rather than its blockchain tokens or item trading marketplace. Notably, the game is paving the way for an expanded distribution channel for crypto-integrated games, with distribution spanning Xbox, PlayStation, and PC (via the Epic Games Store).

Mobile has also become an important distribution channel for crypto-integrated games, both as native apps and embedded apps (such as Telegram mini-games). Many mobile games also selectively integrate blockchain components, with the majority of activity actually running on centralized servers. These games are often playable without the need to set up an external wallet, lowering the barrier to entry and making it easy for players who are not familiar with crypto to get started.

We believe that the line between crypto and traditional games is likely to continue to blur. The main "crypto games" of the future are likely to be crypto-integrated rather than crypto-centric, focusing more on refined game experiences and distribution channels rather than mechanics for earning tokens. However, while this may drive wider adoption of crypto technology, it is unclear how this will directly translate into demand for liquidity tokens. In-game currencies may continue to remain isolated between games, and non-crypto players may not welcome external investors' intervention in in-game economies.

Decentralized Real World

Decentralized Physical Infrastructure Networks (DePINs) have the potential to revolutionize real-world distribution problems by guiding the creation of resource networks. In theory, DePINs can overcome the initial economies of scale challenges that such projects typically face. DePIN projects range from computing power to cellular towers to energy, offering a more resilient and less expensive way to aggregate resources.

The most notable example is Helium, which operates by distributing tokens to individuals who provide local cellular hotspots. By distributing tokens to hotspot providers, Helium is able to build coverage in most metropolitan areas in the United States, Europe, and Asia without incurring the large upfront capital costs of building and distributing towers. Instead, early adopters are incentivized by receiving early stakes in the network through tokens.

Nevertheless, we believe that the long-term revenue and sustainability of these networks requires a case-by-case analysis. DePIN is not a panacea for resource allocation problems, as pain points vary greatly across industries. Decentralization strategies may not be applicable to certain industries, or may only solve certain specific problems within 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 depend on the target industry itself rather than the underlying technology network used.

Artificial Intelligence: Creating Real Value

Artificial Intelligence (AI) continues to be a focus for investors in both traditional and crypto markets. However, we believe that the impact of AI in crypto is multifaceted, and the narrative direction changes frequently. In the early stages, blockchain technology was seen as a solution to the problem of trusted data for AI-generated content and users (e.g., verifying the authenticity of data). AI-driven intent-directed architectures were seen as a potential tool for improving user experience. Subsequently, the focus shifted to decentralized AI model training and computing networks, as well as crypto-based data generation and collection. More recently, the focus has shifted to autonomous AI agents that can control crypto wallets and communicate through social media.

We believe that the full impact of AI on crypto is not yet clear, as can be seen from the frequent changes in the narrative. However, this uncertainty does not diminish AI’s potential to transform the crypto space, as AI technology continues to make breakthroughs. AI applications are also becoming more accessible to non-technical users, which may further accelerate the development of creative use cases.

We believe that the biggest suspense is how these changes can create lasting value for liquidity tokens rather than company equity. For example, many AI agents run on traditional technology tracks, and short-term "value manifestation" (such as market attention) flows more to memecoins rather than 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 that this divergence between price and network indicators, coupled with the market's rotational attention to AI memecoins, reflects that investors have not yet reached a strong consensus on how to capture the growth of AI in the crypto space.

Theme 3: Blockchain Metagame

Multi-chain future or zero-sum game?

Following the last bull cycle, the popularity of alternative Layer-1 (L1) networks has once again become a major 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 a point where general purpose blockspace is oversupplied, even as high-value blockspace remains scarce.

In other words, additional blockspace itself is not inherently high value. However, a vibrant protocol ecosystem, active community, and dynamic crypto assets can still enable certain blockchains to charge premium fees. For example, Ethereum remains at the core of high-value DeFi activity even though mainnet execution has not improved since 2021.

Nevertheless, we believe investors are still attracted to the differentiated ecosystems that these new networks may foster, even though the bar for such differentiation is constantly rising. High-performance chains like Sui, Aptos, and Sei are competing with Solana for market awareness, while Monad’s upcoming release is also seen as a strong contender for developer attention.

Historically, DEX trading has been the largest driver of on-chain fees, requiring strong user onboarding, wallets, interfaces, and capital support to form a cycle of growing activity and liquidity. This concentration of activity often leads to a “winner-takes-all” situation on different chains. However, we believe the future may still be multi-chain, as different blockchain architectures provide unique advantages that meet diverse needs. While appchains and Layer-2 solutions can provide customized optimizations and lower costs for specific use cases, a multi-chain ecosystem allows for specialization while benefiting from broader network effects and innovation across the blockchain space.

Improving the Capabilities of Layer-2

Debate continues around Ethereum’s rollup-centric roadmap despite Layer-2 (L2)’s exponential scaling capabilities. Criticisms include L2’s “predatory” impact on L1 activities, fragmentation of liquidity and user experience, and L2 in particular has been cited as the cause of Ethereum’s falling network fees and the collapse of the “ultrasonic currency” narrative. New controversies around L2 also include decentralization tradeoffs, the split of different virtual machine environments (e.g., the potential fragmentation of EVM), and the choice of “based” versus “native” rollups.

Nevertheless, L2 has been a huge success from the perspective of increasing block space and reducing costs. The introduction of binary large object (blob) transactions in the Ethereum Dencun (Deneb + ​​Cancun) upgrade in March 2024 has reduced the average cost of L2 by more than 90% and driven a 10x increase in Ethereum L2 activity. In addition, we believe that allowing multiple execution environments and architectures to experiment 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 become more complex, especially for new users who do not fully understand the differences between different L2s or how to bridge across L2s. Despite improvements in bridging speed and cost, we believe the need for users to interact with the bridge still detracts from the overall on-chain experience.

While this is a real problem today, the community is addressing this user experience issue through a variety of approaches, such as: (1) Superchain interoperability in the Optimism ecosystem, (2) real-time proofs and super transactions for zkRollups, (3) based ordering, (4) resource locking, (5) sorter networks, etc. However, most of these improvements are focused on the infrastructure and network levels and may take time to be reflected at the user interface level.

Meanwhile, 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 may be less disruptive to current user workflows. Overall, L2 is taking shape in most major crypto ecosystems, but in different forms.

Everyone can own a chain

The increased ease of custom network deployment is driving 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, and the Uniswap team has also announced plans to launch a DeFi-focused L2 chain. Even some traditional companies are getting in on the action, such as Sony announcing plans to launch a new chain called Soneium.

As the blockchain infrastructure stack matures and becomes increasingly commoditized, we believe that the appeal of owning block space is increasing, especially for entities with regulatory requirements or applications with specific use cases. The technology stack that supports 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 more project-owned L2 chains to launch, with service platforms such as Caldera and Conduit simplifying integration with other services through their marketplaces. Similarly, Avalanche’s subnets may also see a surge in adoption due to the growth of its managed blockchain service AvaCloud, which greatly simplifies the process of launching custom subnets.

The growth of modular chains may have a corresponding impact on the demand for Ethereum blob space and other data availability solutions such as Celestia, EigenDA or Avail. Since the beginning of November, Ethereum’s blob usage has reached saturation (3 blobs per block), an increase of more than 50% from mid-September. With existing L2s such as Base continuing to expand throughput and new L2s coming online on mainnet, demand does not seem to be slowing down. However, the Pectra upgrade expected in Q1 2025 could ease some of the pressure by increasing the number of target blobs from 3 to 6.

Theme 4: User Experience

Improvements in User Experience (UX)

We believe that a simple user experience is one of the most important factors driving mass adoption. While the crypto industry has historically focused on deep technical onboarding due to its cypherpunk origins, the focus is now rapidly shifting to simplifying the user experience.

In particular, the industry is working to abstract the complexity of crypto into the background of applications. Several recent technical breakthroughs are enabling this shift, such as account abstraction to simplify user onboarding and session keys to reduce signing friction.

The adoption of these technologies will make the security components of crypto wallets (such as mnemonics and recovery keys) invisible to most end users - similar to the seamless security experience of the Internet today (such as https, OAuth, and passkeys). We expect to see a trend towards more passkey onboarding and in-app wallet integration in 2025. For example, Coinbase Smart Wallet's passkey onboarding and Tiplink and Sui Wallet's integrated login with Google are early signs of this trend.

Nevertheless, we believe that the abstraction of cross-chain architectures may still be the biggest challenge facing the crypto user experience in the short term. Cross-chain abstraction remains a focus of the research community at the network and infrastructure layers (such as ERC-7683), but in our opinion, it is still a long way from front-end applications. Progress in this area requires improvements at both the smart contract application layer and the wallet layer. Protocol upgrades are necessary to unify liquidity, while wallet improvements are needed to provide users with a more streamlined experience. We believe the latter will have a greater impact on expanding the user base, although current research and industry debate focuses on the former.

Control of the Interface

In our view, improving the user interface to "control" the user relationship is one of the most important changes in the crypto user experience. This change will be achieved in two ways: First, improving the experience of independent wallets, as described above. The user onboarding process is becoming increasingly streamlined to adapt to the needs of users. For example, application functions directly integrated into the wallet (such as exchange and lending) can allow users to stay in a familiar ecosystem.

At the same time, applications are also competing to abstract blockchain technology components to the background through integrated wallets to control the user relationship. This includes trading tools, games, on-chain social and membership applications, which automatically configure wallets for registered users through familiar methods such as Google or Apple's OAuth. After the user completes the onboarding, the on-chain transactions are funded by payment service providers (paymasters), and their costs are ultimately borne by the application owner.

This model creates a unique dynamic where the revenue per user needs to match the cost of their on-chain operations. While these costs are decreasing as blockchains scale, it is also forcing crypto applications to rethink what data needs to be submitted on-chain.

Overall, the crypto industry will face fierce competition to attract and retain users. As demonstrated by the average revenue per user (ARPU) of the aforementioned Telegram trading bot, many retail crypto traders are relatively less price sensitive than traditional financial (TradFi) entities. In the coming year, we expect efforts to "own" user relationships to go beyond the trading space and become a larger 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 becomes increasingly important. For example, certain assets are limited to qualified investors in specific regions, making identification and qualification a core pillar 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 chains. Variations of this technology are now available in networks like Basenames and the Solana Name Service. Adoption of these core on-chain identity services is accelerating, with major traditional payment providers like PayPal and Venmo now supporting ENS address resolution.

The second core component is building attributes for on-chain identities. This includes confirming KYC verification and jurisdiction data, which other protocols can then look at to ensure compliance. At the heart of this technology is the Ethereum Attestation Service, which provides a flexible service for entities to provide attestation attributes to other wallets.

These attestation attributes are not limited to KYC and can be freely extended to meet the needs of authenticators. For example, Coinbase's on-chain verification uses the service to confirm that a wallet is associated with a user of a Coinbase trading account and is located in a specific jurisdiction. Some new real-world asset permissioned lending markets will restrict access through these verifications on Base.