2024 promises to be one of the biggest years for crypto ever. Following the long-awaited approval of 11 spot Bitcoin ETFs in January, crypto holders also have the once-every-4-years Bitcoin halving to look forward to. Beyond Bitcoin, however, specific sectors of the crypto token ecosystem look set for success.
The dynamic intersection of AI and blockchain, the strategic evolution of Layer-2 solutions, and the innovative concept of liquid staking tokens – these sectors emerged in 2023 and look set to become breakout narratives in 2024.
Artificial Intelligence Tokens
Artificial Intelligence and Blockchain are two of the biggest buzzwords in the modern tech space. Combine them and you get an industry sector with incredible market buzz. The two represent powerful technology paradigms that have already revolutionized our views on big-picture concepts like money and automation. Crypto tokens that have an AI connection exploded in value in 2023. Tools like ChatGPT and MidJourney evidenced the powerful capabilities of AI to the mainstream market, while blockchain assets like Bitcoin have shown strong resilience in a volatile market.
While cynics expound that there is no real connection between Blockchain and Artificial Intelligence, there is an argument that AI needs to be more decentralized. With the current model for AI, there are concerns surrounding privacy and security. Currently, AI tools use large caches of data to train models. For example, the Chat-GPT3.5 model was trained using text databases from the internet. There was 570 GB worth of data from books, web texts, Wikipedia, articles, and other pieces of writing on the internet. 300 billion words are believed to have been fed into the system. All are stored on OpenAI and stored internally.
Technology giants like Google and Microsoft are the builders and owners of the largest AI solutions. They are managing the data being fed to build the models, a situation that many observers see as unfair and imbalanced.
There are several decentralized data storage and access solutions being built to support AI’s large data requirements, in a decentralized manner. This includes the two largest AI token projects, Bittensor, and Render. While these projects may not be able to wrestle market share away from the tech giants, they do have a growing market and speculators adore them.
AI tokens to look out for:
Bittensor – is a decentralized network of subnets that operate under a unified single token system. The subnets represent machine learning models that work together to process information and provide relevant responses. Bittensor aims to be a decentralized machine learning web and a digital neural network.
The TAO token is designed to drive incentives to Bittensor network participants. It is paid out to miners who contribute financial resources to complete machine learning tasks. TAO stakers who lock into the ecosystem receive rewards and TAO tokens determine governance rights.
- Enormous hype – Speculation and expectation will likely boost the token during market-wide bull runs. Look out for AI tokens to have a strong bullish upside
- There is a problem with AI that blockchain can potentially solve
- A bandwagon investment for many, AI tokens may rise rapidly but will likely sell off just as quickly. Traders speculating this sector will likely leave when market conditions turn
- Some will argue that it’s too early for AI to be disrupted. While the most popular AI tools like ChatGPT and Bard are owned by mega-corporations the market is happy with them
Coin performance since the beginning of 2023
Bittensor (TAO) – (Newer token since March 3rd, 2023) $100.93 – $274.53
Render (RNDR) – $0.40 – $4.32
Fetch.ai (FET) – $0.09 – $0.68
Akash Network (AKT) – $0.18 – $2.81
SingularityNET (AGIX) – $0.04 – $0.28
Layer-2 refers to any secondary framework or protocol built on top of an existing blockchain that adds features that improve the scaling capabilities of the base chain. Base layer blockchains like Bitcoin and Ethereum can slow down and become expensive when they are congested because of events such as popular NFT drops.
Layer-2 tokens have exploded as the need for secondary solutions for large blockchains struggling to scale has become more relevant. Layer-2 Projects like Optimism, Aribtirum, and Stacks had bumper 2023s, and this momentum looks set to continue in the new year.
Summary of Layer-2 TVL across major Ethereum providers including Aribtrum and Optimism. Source: L2Beat
The TVL of major Bitcoin Layer-2 solution Stacks. Source: DeFiLlama
During 2022, the TVL locked into Layer-2 platforms began to stagnate alongside a price bear, but in 2023 as the prices of assets like Ethereum and Bitcoin began to soar again, so did the TVL flowing into layer-2s. Layer-2s have emerged as a cornerstone of retail viable Cryptocurrency and Blockchain solutions.
The Blockchain trilemma is the inevitable trade-off a blockchain has to make between crypto network scalability, decentralization, and security. The term was coined by Ethereum founder Vitalik Buterin and remains hyper-relevant to the current state of play. As networks like Bitcoin and Ethereum have become larger and accumulated more network participants in the form of miners and validators, the nature of the blockchain means that as the network becomes larger, more information needs to be processed by more participants.
Layer-2s have emerged as one of the most dependable and preferred solutions because they operate on the periphery of the main chain. Bitcoin and Ethereum can maintain their consensus and base security standards as the layer-2 solution operates as a separate network off-chain. This is a relationship that has worked for the market, users, and builders.
Layer-2s will continue to grow in popularity as the ecosystem becomes larger because of factors like the US approval of Bitcoin ETFs and the likely approval of an ETH one, as well as the Bitcoin halving. There are strong views that transaction demand for both chains will grow this year, boosting the appeal of layer-2s.
Layer-2 tokens to look out for Optimistic Rollups (Arbitrum and Optimism) –
This is the technology that supports the two most popular ‘True’ Roll-up solutions, Arbtitrum and Optimism. Like other layer 2 solutions, Optimistic Rollups reduce computation on the Ethereum chain by processing transactions and state-storage off-chain.
Optimistic rollup operators bundle multiple off-chain transactions together in large batches before submitting them to the Ethereum main chain. This method enables the spread of fixed costs across multiple transactions. Rolling them up into batches reduces fees and the compression techniques used also reduce the amount of data posted on Ethereum.
The Roll-up process is set to become more efficient soon. The upcoming Cancun-Deneb upgrade, scheduled for January 17th is set to introduce Proto-Danksharding as part of EIP-4844.
Protodanksharding introduces data blobs that can be attached to roll-up transactions when they communicate with the main chain. Blobs are transactions carrying a 125kb ‘blob’ data payload that is stored on the Ethereum consensus layer. This is much more efficient than the current roll-up solution where data is stored on the mainchain via the special CALLDATA location, which is in the Ethereum Virtual Machine (EVM) which is more expensive than storing it in the consensus layer. Blobs also disappear after a few months, whereas the current solution leaves data on the blockchain forever. Roll-ups are set to become an even larger, core component of Ethereum.
- A popular, validated solution that has grown in the last year and is likely to continue to grow in the coming year
- The potential for both Bitcoin and Ethereum layer-2 scaling technology is yet to be fully tapped
- Layer-2s are periphery solutions tied to larger blockchains. There is an argument that they are not necessary or don’t have long-term legs
- As the market becomes more crowded with more Layer-2s value becomes diluted Particularly on Ethereum, layer-2 solutions like Metis, ZK-rollup are trying to eat into the Arbirtrum and Optimism market share
Coin performance in 2024:
- Polygon (MATIC) – $0.78 – $0.81
- Optimism (OP) – $0.92 – $3.46
- Arbitrum (ARB) – (Newer token since March 23rd, 2023) $1.35 – $2.03
- Metis (METIS) – $16.05 – $120.07
- Stacks (STX) – $0.27 – $1.56
Liquid Staking tokens
Staking is the process of securing Proof-of-Stake (PoS) blockchains. Participants run validator nodes and earn rewards for providing computer power to validate transactions. In exchange, they need to put up a stake, which is slashed (lost) if they behave poorly or don’t do their job.
While many nodes operate solo, they generally function as a collective where any user can add to a validator’s stake. The power of the node within the consensus is boosted with the extra stake, and individuals can earn some staking rewards without needing to set up a node.
For users, however, a frustrating limitation remains. Once tokens are staked they become locked. They are not easily unstaked and generally come with some type of time contract. This is because the tokens are needed for consensus tasks.
Liquid staking service providers, like Lido Finance and RocketPool, have found a workaround for this issue through token minting. When users stake with Liquid Staking platform they deposit a network token like Ether or SOL they receive LSTs. These tokens like stETH and rETH, are certificates of staking and indicate a version of ETH that is staked. Users earn staking rewards by holding LSTs.
LST holders do not have to worry about locking up their ETH and sacrificing potential DeFi profit generation. Instead of dealing with a deposit and withdrawal process, they manage an asset like stETH, which is very similar structurally to ETH but grows in value based on how long a staker has held them.
Liquid staking has been a godsend for DeFi users on the fence about whether they should stake their ETH.
The appeal of Liquid Staking is set to be boosted further by the ongoing hype surrounding Liquid restaking.
Liquid Staking tokens
Lido Finance: Is undoubtedly the liquid staking platform of choice, and it dominates the Ethereum and Polygon staking markets. 32% of all staked ETH originates from Lido, and it has an 85% market share of the Ethereum liquid staking ecosystem.
ETH staked by entity, Lido in light blue. Source: DuneAnalytics user: Hildobby
Lido’s success is believed to have been driven by excellent, early-entry market timing.
- Excellent product market fit, everyday users want to be able to stake their ETH but also want to participate in DeFi with it
- Bitcoin and Ethereum look set to grow in 2024, this tailwind should boost the appeal of liquid stakin projects
- A pro can be a con, liquid staking is a cyclical solution. If Ethereum grows then so does the liquid staking ecosystem. If macro factors like the spot ETF being rejected cause the price to drop, then the value of liquid staking tokens will drop
- Ethereum development is not completely laid out and can be unpredictable. The scope for Liquid staking solutions may shift if the Ethereum roadmap shifts
Coin performance in 2024:
- Lido DAO (LDO) – $1.08 – $3.16 –
- Rocket Pool (RPL) – $20.63 – $33.67
- Marinade (MDE) – $0.06 – 0.26
AI tokens, Layer-2 solutions, and liquid staking tokens are emerging sectors that represent the relentless pursuit of advancement and efficiency in the blockchain world.
These narratives, however, come with much promise and with elements of caution. While each of these sectors has some built-in uncertainty, they are undeniably rich with technological possibilities and speculative potential.
The complex interplay of technology and market dynamics defines the cryptocurrency asset class. Picking winners is as much about technological innovation as it is about speculative fervor and strategic foresight. It should be a productive year.