Written by Danny Sursock

The best part of ETHDenver 2024 was watching two opposing groups collide in a classic left-curve / right-curve debate.

One arrived with a risk-on, full send mentality in anticipation of a coming mega cycle.

The other came in struggling to find the fundamentals to make sense of today’s market euphoria.

In the short term, I think both are probably right. The setup for a massive, prolonged run up in crypto looks pretty good, even if the current momentum in public and private markets has almost certainly lost sight of fundamentals.

But a closer look suggests something different might be going on this time.

Where previous bull markets drove users, those cycles tended to look less like true adoption and more like a levered macro beta.

Today, those fluctuating waves of liquidity are set to give way to a permanent shift in the tides thanks to three major tailwinds:

Macro x Crypto’s Mainnet

The explosion in public and private markets—thanks to a mix of AI hype and economic optimism—masks several secular changes playing out.

In fact, rather than reverting to pre-pandemic norms, a very different geopolitical paradigm is emerging: one centered on fragmentation and cross-border competition.

While these new dynamics will materially challenge incumbents, they present a generational opportunity for crypto to make the jump to global adoption.

Crypto’s first decade was an extraordinary testnet marked by grassroots development, exuberant highs and difficult lows. Now in its second decade, crypto is ready for mainnet as the world’s interoperability layer: a neutral home for economic exchange and technological innovation in an age that desperately needs it.

Why?

For crypto, secular changes are positive tailwinds arriving at the perfect time.

Real structural shifts in the pipes that have underpinned global trade for the last two decades are being accelerated by very serious fractures in international relations. A restructuring of global supply chains and trade rails accelerated in 2023 and has become a core focus for companies and governments alike.

Growing Focus on Reshoring by Corporates:

Meanwhile, over 54% of the world’s population and close to 60% of global GDP are undergoing an election cycle where protectionism is already a major focus as several major military conflicts play out in real time.

Equally relevant to crypto is an evolution in the art of international competition. Countries no longer rely solely on rockets and bullets.

America weaponized international finance in response to Russia’s invasion of Ukraine, while OPEC and Russia have shown they are happy to respond in kind by manipulating energy supplies.

In parallel, techno-nationalism around semi-conductors and other critical inputs has seen rhetoric replaced with action in the form of sanctions and subsidies.

This fragmentation of global commerce is damaging to margins in the developed world, while for the 40% of the world living in Lower-Middle Income (LMI) countries, the impacts are even more existential.

For individuals in LMI countries in particular, crypto provides vital solutions to everyday problems, and its importance only grows alongside systemic challenges. The data confirms this story: grassroots crypto adoption is not only reinforced but accelerated when geopolitical strains rise.

Likewise, for private enterprises this confluence of factors introduces significantly greater costs and restricts access to new consumer markets, all of this in a world where the cost of capital is no longer zero.

The trade wars & tariffs of the last few years have already proven damaging to businesses and domestic economies, and those negative impacts risk compounding as companies adapt to a new reality.

As a result, enterprises and individuals increasingly need to make a choice:

This crossroads reminds me of an intriguing historical parallel:

When Constantinople fell to the Ottomans in the 1400s, its new conquerors inherited control over a geographic nexus connecting global commerce across the ‘Silk Road’.

Famously, the Ottomans would soon move to restrict the overland trade routes that had thrived for centuries. The result pushed European powers to take to the seas in search of new trade routes, thereby igniting the ‘Age of Exploration’ that shaped the modern world.

This time around, it will be blockchains where the riches and perils of the New World will be found by those brave enough to set sail.

Reaching Enterprise Scale

There’s another important point worth hitting on: crypto has historically been a staging ground for large companies looking to experiment with a new technology.

Because of the factors covered here, the traditional enterprise’s exploration of crypto is now transitioning from R&D to production grade.

• Companies will accelerate efforts to explore digital assets and onchain ecosystems as a key source of greenfield markets. What was once a vanity project will increasingly become an existential mission.

• Capital allocators will scale up crypto-native deployment and participation to insulate against ‘beta’ exposure to global risk and uncertainty. There won’t be many places to hide in the old world.

• Systemic challenges in different regions (inflation, capital controls, cold / hot conflicts) will drive even greater relevance and need for digital assets. Permissionless blockchain infrastructure will start grassroots before going global.

To be sure, economic and geopolitical challenges have always driven users to crypto, particularly in developing markets.

But the scale and scope of challenges the world must navigate in the coming years presents a unique window for crypto to become the de facto system for free commerce and culture.

Institutional Flows

Of course, all of this is contingent on the final piece of the puzzle: bringing institutional capital onchain.

The approval of spot BTC ETFs marked a major turning point on this front, and it would seem a similar outcome is on the horizon for ETH.

Already, BTC ETFs have seen more than $7.5B in net inflows, and those launched by BlackRock and Fidelity marked the largest debut months of any ETF in the last 30 years.

This incredible momentum is what will finally allow the biggest institutions to join over 52M Americans and another 500M around the world in the onchain economy.

If the tectonic shifts in macro are providing the spark, the flow of institutional capital represents the gas that will light the fire underpinning crypto’s prime-time moment.

Middleware & Infrastructure Upgrades Drive Growth

The exogenous setup is outstanding. Are we ready to seize the moment?

I believe the answer is yes.

Following the crashes of 2022 that sent tourists scattering, crypto natives worked through self-reflection of the excesses and shortcomings that enabled the bubble in the first place.

As capital and talent consolidated around what felt like a full systems upgrade, colossal progress was made across all layers of the stack, setting the stage for a major coming cycle of adoption at scale.

The flow of private funding throughout the year reflected that story. The year started with financial infrastructure commanding the largest share of funding, followed by wallets, and ended with the former dominant once again and L2/interoperability projects in second place.

Amidst all of this, what is particularly fascinating is the infrastructure-application flywheel is starting to catch fire with more concentrated purpose than ever before.

The needs of a growing class of crypto-native consumers are driving directional and focused improvements in the tech stack, which in turn is yielding new use cases and applications.

Superior UI/UX is Fueling Adoption

Q1 2023 saw the release of the ERC-4337 standard, designed to transform externally owned accounts (EOAs) into smart contract wallets to enable customizability, better private key recovery mechanisms, and a materially more streamlined user experience.

Even more impactfully, teams like Privy* made massive progress by simplifying onboarding with embedded wallets to minimize user friction while letting developers design more contextual experiences.

Privy’s efforts helped streamline Friend.Tech’s explosive early capture of 100K addresses in a matter of weeks, and they’ve gone on to power onboarding for OpenSea, Zora, Blackbird and others to the tune of 2M+ users across 150+ countries in the last 13 months.

Meanwhile, Farcaster’s* launch of Frames—a new primitive allowing people to embed interactive experiences directly within Casts—is a transformative move that is already supercharging activity on the platform.

Farcaster has over 8M+ reactions across 4M+ casts and may well represent early signs of a crypto-native consumer app hitting escape velocity.

New Design Spaces Are Getting Bigger and Better

Just as Ethereum sought to go beyond Bitcoin’s functional limitations, a new generation of projects are now targeting Ethereum’s own structural shortcomings in a wave of modularity.

Alternative L1s & side chains have been a feature of previous cycles, but none have succeeded in disrupting Ethereum’s (mainnet) dominance of users, TVL, developers and activity.

This changed with the launch of rollups like Arbitrum and Optimism—projects designed to enable better throughput and lower fees by offloading computation from Ethereum.

While these new layers have reached scale that rivals, or in some cases surpasses, Ethereum itself, builders are dreaming bigger as they seek to further optimize the L1 stack.

That’s because even though the number of daily active users on L2s has risen 8x in the last year, much of what users are actually doing looks largely similar to historical L1 activity. As a result, the emerging consensus is that offloading transactions to cheaper execution environments isn’t enough to enable truly novel onchain experiences.

We need to actually rearchitect the components underpinning blockchains, from Data Availability (DA) to state access bottlenecks and parallel execution.

Standalone data availability (DA) layers built to scale to web2 performance parity (i.e., EigenDA, Celestia, Avail) are coming to market alongside upgraded virtual machines, some based on the EVM and others using alternate engines like Move’s (Movement Labs*) or the Solana VM (Eclipse). Some of these are building L2s to optimize execution only (MegaETH), while others are launching net new L1s from the ground up (Monad).

Meanwhile, EigenLayer’s mission of providing a shared security layer via restaking is making it possible for a new generation of projects to launch in a way that minimizes the need to bootstrap native liquidity and therefore deviate from the core security model of Ethereum itself.

All of this means the underlying infrastructure, tooling, and design optionality on offer to web3 builders is approaching unprecedented levels of maturity and performance.

As crypto’s ethos increasingly resonates alongside upgrades in infrastructure, tooling, and middleware, we’re seeing a promising story in the data underpinning crypto’s paramount leading indicator: developer flows.

Building on blockchains should not just be a more meaningful exercise, but a more technically performant one that effectively empowers developers to design the future of the open internet.

Significantly better retention of existing developers and onboarding of new ones amidst difficult market conditions speaks volumes to the work that’s been done on this front.

Open-Source AI & Crypto Rails

And finally, our belief is that the intersection of crypto and AI—two paradigm shifts in their own right—represents one of the most transformative moments in modern history.

Blockchain rails have successfully undergone a multi-year pressure test in the design of a permissionless system fit for a digital age, and especially an age shaped by generative AI.

Crypto’s toolkit of solutions tackles pertinent problems ranging from resource and liquidity coordination, asset ownership, data provenance, attestations, and much more. Crucially, the maturity of the ecosystem and technology stack are arriving just in time to meet the demands of the AI revolution.

While there is ample room for blockchains to streamline existing machine learning (ML) flows, the most exciting opportunities will emerge where crypto and AI converge to enable completely novel outcomes.

The most exciting new design spaces will span areas like:

• Decentralized storage underpinning shared, permissionless repositories for data to enable better training or more performant models via Retrieval-Augmented Generation (RAG)

• Zero Knowledge Proofs for model or content verification, training or user data privacy, or enabling edge and local (client side) inference

• Novel information markets and better mechanisms for collecting higher quality data as foundation models require more specialized data inputs to continue evolving

• Autonomous agents transacting on smart contracts that uniquely enable them to accumulate resources, knowledge and assets using machine-operated private keys

As crypto rails impact everything from the supply of compute to markets for data to the collective creation and monetization of powerful foundation models, open-source AI/ML will be supercharged by crypto, fueling a renaissance in human productivity and open collaboration in the coming years.

Crypto will be the best way to get exposure to the rise of AI, as a proxy via blue chip assets like ETH or directly through ownership or speculation across agents, models, networks, and datasets.

What’s Next?

We’re at an inflection point for this industry. After years of grinding in spite of market, incumbent, and regulatory resistance, the tides are finally shifting.

Crypto’s moment has arrived thanks to the convergence of a few significant tailwinds that are finally ushering in the decentralized future. Amidst this renaissance of infrastructure and middleware, which is already enabling a step function evolution in the onchain experience, there’s an important point we should keep in mind.

In a perfect world, modularity enables not just specialization but also a dissemination of control and points of failure across multiple contributors. However, each of these new puzzle pieces involve different technical and security assumptions, incentive mechanisms, token dissemination roadmaps, VCs, foundation setups, and internal politics.

I don’t want to detract from the inspiring efforts of builders across the space last year, especially in the face of a brutal economic downturn. But as activity and excitement pick back up, it’s imperative we escape the echo chambers and false signals of token grants masquerading as logical integration partnerships, effective PR as community approval, or incentivized behavior as a proxy for organic adoption.

In the coming years, we have a shared responsibility to keep this growing number of projects accountable across technical design choices, token concentration, value dissemination, ideology, and governance.

That’s how crypto wins the endgame.

*denotes an Archetype portfolio company

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Thank you to my Archetype colleagues Katie Chiou, Benjamin Funk, Aadharsh Pannirselvam, Ash Egan, Tyler Gehringer, and Dmitriy Berenzon for thoughtful review and feedback.

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Disclaimer:

This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment or legal matters. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by Archetype. This post reflects the current opinions of the authors and is not made on behalf of Archetype or its affiliates and does not necessarily reflect the opinions of Archetype, its affiliates or individuals associated with Archetype. The opinions reflected herein are subject to change without being updated.