Nansen shares 'high-conviction bets' for crypto in 2024

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On December 17, blockchain analytics platform Nansen published a report containing insights about four ‘High-Conviction Bets’ its analysts are hyped for in 2024. The insights range from artificial intelligence (AI) to projects creating infrastructure using the Bitcoin blockchain as their base layer.

AI and blockchain intertwined

The integration of AI and blockchain is the first bet from Nansen analysts for 2024, representing a significant advancement for both technologies. Initially designed for deterministic tasks, AI agents have evolved to function with increased autonomy, and are now capable of processing transactions and managing value exchanges on blockchain networks, the report points out. 

That said, the bet is that AI might become a dominant user category in the blockchain ecosystem. However, blockchain could also present enhancement cases for the AI industry, and the Nansen report mentions the distinction between human and AI interactions. 

A few examples are the usage of cryptographic proof for digital signatures; IPFS & Merkle Trees to ensure the integrity of data sets and AI models; and Zero-Knowledge Machine Learning (zkML), which is the concept of allowing verification of AI models without exposing their details.

Moreover, the application of token rewards for AI agents and a shift towards consumer-oriented applications are also part of Nansen analysts’ bet about AI and blockchain integration.

Improvements in user experience

User experience (UX) is a known point of pain for crypto users and a major threshold for mainstream adoption. Nonetheless, the second Nansen bet for 2024 is an overall improvement in UX for decentralized applications (dApps).

One of the catalysts motivating this outlook is the efforts applied to UX advancements throughout 2023, which include simplifying navigation and making the apps more intuitive.

Another catalyst is the popularization of intent-centric applications in decentralized finance (DeFi). Intent is a way for users to specify their desired outcomes and rely on third parties to efficiently execute these tasks. This process abstracts the complexity of operations from the user, enhancing capital efficiency. 

Teams like Anoma and Flashbots are mentioned in Nansen’s report as players working on creating general-purpose solutions within the permissionless nature of blockchains, aiming for a system where deploying new applications doesn’t require setting up new parameters like mempools.

The upcoming ERC-4337, the standard for account abstraction, is also seen as a huge improvement in user experience by Nansen analysts. This concept allows users to delegate actions on-chain to smart contracts without losing custody of their wallets. It is expected to significantly improve the UX in interacting with blockchains. The ERC-4337 standard is expected to be implemented in Ethereum’s Dencun upgrade.

A year for DEXs

The cryptocurrency market, particularly in the realm of perpetual swaps and decentralized exchanges (DEXs), is undergoing significant evolution and growth. Nansen’s reasons to justify this overview are:

• Perpetual swaps have shown a strong product-market fit in the crypto market, leading to innovative designs in LP-based AMMs (like GMX), CLOBs (like dYdX), and hybrids (like Vertex);
• The perpetual contracts DEX (perp DEX) segment has a lucrative business model, generating substantial revenues for various stakeholders.

The arguments listed above are used by analysts to point out that the addressable market for DEXs is expanding, with the ability to offer markets for a wide range of assets, including niche and less liquid ones, and potential expansion into other asset classes like equity derivatives and commodities.

Furthermore, the design space is evolving with unique features to combat issues like maximal extractable value (MEV) and incorporating innovations like frequent batch auctions and threshold encryption.

Those catalysts could result in a few improvements, per Nansen’s analysts:

• Increased market activity correlating with higher trading volumes;
• Liquidity is attracted to where incentives are offered;
• Continued growth in protocols’ monetary incentives through trading rewards and points systems;
• Improvements in scalability, fees, and user experience (UX) across DEXs;
• Scaling solutions like app-chains and specific rollups enhance DEX performance.

With that in mind, Nansen bets that perp DEXs’ derivative volume market share could rise from the current 2 to 10% to potentially 20% by the end of 2024. 

Bitcoin as a data layer

The crypto market is currently witnessing Bitcoin (BTC) leading the charge in prices, with Ethereum (ETH) taking a secondary role. The ETH/BTC chart has shown a consistent decline since the start of the year, unaffected by the news of a potential ETH spot ETF.

Bitcoin’s resilience and reliability, shown by its unbroken operational history and resistance to attacks, have solidified its position as a leader in the crypto industry. Its robust network, significant market capitalization, and strong community contribute to its perception as one of the safest crypto assets. 

All of that could be used to apply more use cases on top of Bitcoin, which could evolve beyond just being a store of value and medium for transactions, according to Nansen. The trust and security associated with the Bitcoin network position it as a prime candidate for a more integral role in the future financial infrastructure.

While there have been attempts to expand Bitcoin’s utility through layers for increased throughput, like Lightning or Liquid, and even smart contract capabilities (e.g., Rootstock or Stacks), these have yet to gain substantial momentum. Challenges include user experience issues, scalability limitations, and concerns within the Bitcoin community about potential centralization and network risks.

Despite these hurdles, recent developments like the Ordinals protocol have sparked significant interest. Ordinals, which involves inscribing unique identities on Satoshis, the smallest Bitcoin unit, has opened the door to NFT creation on the Bitcoin blockchain. 

Similarly, the BRC-20 standard, leveraging Ordinals, enables the creation of fungible tokens on Bitcoin, though they currently lack the functionality and usability of their Ethereum counterparts.

The market’s positive response to these innovations, as seen in the substantial trading volume of BRC-20s, indicates a readiness for Bitcoin to serve as infrastructure. This future could involve the emergence of Layer 2 solutions and possibly a modular architecture, powered by platforms like Celestia or the OP Stack, the developer’s kit used by the Optimism network.

Given Bitcoin’s stature as the most prominent and trusted cryptocurrency, its expansion into areas beyond basic transactions appears inevitable to Nansen’s analysts. As a result, they bet that keeping an eye on developments that utilize Bitcoin for various applications could be beneficial in 2024 and beyond.

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