By Niklas Polk
Translation: Airis, TechFlow
“It’s like an Ouroboros: the value of crypto tokens is that you can earn a yield on them, and those yields are paid by the same people who are trading them. […] I’d love to see a story that explains where those yields are coming from or could be coming from, and that’s rooted in something external. I’ve heard some plausible possibilities! For example, there are some fundamental structural reasons why cryptocurrencies are durable and more efficient for international currency transactions. But I’d like to hear more of that story.”
——Vitalik
introduction
The cryptocurrency market is moving beyond its initial focus on ERC20 tokens and DeFi. While these areas dominate current user activity (the most popular contracts on the chain are usually stablecoin ERC20 and decentralized exchanges) and portfolio allocation (currently, seven of the top ten token holdings of Nansen "Smart Money" are DeFi project tokens or tokens primarily used for DeFi), and have evolved to the point of offering a variety of reliable working products, their growth may flatten as their money market attributes, yields and profit opportunities decrease. At the same time, interest in non-monetary capital markets is increasing.
This has three possible implications - first, the next big use case for cryptocurrencies may exist in verticals and assets beyond ERC20 tokens. Second, to be sustainable, these new assets or products must provide sufficient returns by either bringing new value on-chain or creating off-chain value. Third, these new use cases should be suitable for cryptocurrencies and interoperable with the new DeFi that serves non-ERC20 tokens to take advantage of this large liquidity market (over $8.2 billion in total DeFi locked), and can leverage existing mature products while avoiding loopholes such as price oracles. We call this other side of DeFi Object-Oriented Finance (OOF). As Vitalik wrote, this new era of DeFi requires underlying objects derived from more fundamental value, perhaps from off-chain, and can be valued by cash flow rather than data. This report explores several such verticals and identifies those that have the potential to go beyond simple tokenization and raw DeFi, and believes that among many possibilities, the following use cases will attract a wider audience.
Emerging verticals
The following section analyzes five of the most promising emerging cryptocurrency verticals. A brief introduction is given in each segment, followed by its key market indicators and a critical assessment of future growth prospects. The table below provides a concise overview of each vertical, highlighting its revenue potential, possible DeFi intersections and notable project examples, which will serve as a guide for in-depth discussions later.
NFTs
NFTfi has most notably driven the integration of non-ERC20 tokens (especially non-fungible tokens) into the DeFi ecosystem in the lending space. At the peak of the NFT market, various NFTfi products emerged, most of which were mainly lending-oriented. However, because many NFT collectibles lack an intrinsic way to generate income, they often struggle to prove their value outside of social "hype". When the sentiment or narrative of the project changes, these assets are prone to significant depreciation, making them unsuitable as collateral. This problem is further amplified by the extreme illiquidity of many NFTs, resulting in the failure of most NFTfi and lending protocols to gain and maintain widespread adoption.
Although the NFT market as a whole, and NFTfi as an extension market, did not return to its former glory in 2024, NFTfi still attracted some attention due to the recovery of airdrop vitality this year.
Frequent airdrops of NFTs
As airdrops become more professional, protocols are starting to look for “real” market participants. A common practice is to allocate a portion of their airdrop tokens to designated blue-chip NFT collectibles holders. For some similar NFTs (such as Pudgy Penguins and Miladys), this solves the problem of “intrinsic” returns (i.e., a non-zero probability of future cash flows associated with holding an asset), making them more attractive assets to borrow and lending, and adding some elasticity to their floor prices.
Even so, the number of such NFT collections is limited, so the growth potential of this market is also very limited. In addition, the frequency, value and sustainability of airdrops are difficult to predict, making the entire vertical a high-risk market.
NFTs with infrequent airdrops
Since the end of the last NFT cycle, the value of most NFT collections has been falling. Due to the lack of actual factors to support their value, these collections are largely non-productive assets and are highly sensitive to changes in narratives and "panic selling" (FUD), making them unsuitable as collateral. It is worth noting that art NFTs seem to be more resilient because collectors mainly buy them for their aesthetic value, but from a financial perspective, they are still non-productive assets.
While a new NFT hype cycle could drive demand in the lending markets associated with these collectibles, this demand is likely to be short-lived as demand will eventually fade again without additional cash flow.
Games/Metaverse
Similar to the NFT market, the gaming and metaverse markets have also experienced peaks and valleys. This is not to say that there aren’t exciting developments in the space right now, but valuations and asset prices in the space are generally trending downwards.
However, unlike NFTs, these assets often have built-in revenue-generating mechanisms. Users who participate in a game or metaverse experience are often willing to pay for that participation. For early-stage projects, the model can even be flipped, with projects giving out tokens directly to get users involved. Either way, game and metaverse assets are often productive assets that channel competitive lending yields and use cases, such as Axie’s scholarship program, where Axie owners “rent” their Axies to other players and share the loot (tokens) generated.
Still, this type of collateral suffers from many of the same drawbacks as NFTs, including volatility and market dependence, and the majority of returns still come in the form of (equally volatile) tokens.
Real World Assets (RWAs)
Real-world assets are often productive assets, and unlike the asset types discussed previously, these assets themselves and their primary returns come from outside the crypto space and are denominated in fiat currency. This reduces many of the sustainability issues faced by NFTs, games, and metaverse returns, and makes these real-world assets less volatile and more suitable as collateral. However, bringing off-chain assets on-chain weakens the trust of the blockchain. People must trust the entity that brings the real-world asset on-chain to ensure that its valuation is accurate and to safeguard the rights of users (often involving multiple jurisdictions) when problems arise.
While this is generally true for all RWAs, distinguishing between fungible/crypto-related RWAs (e.g., Treasuries, Funding Rates) and non-fungible/less crypto-related RWAs (e.g., Real Estate, Intellectual Property) helps assess the opportunities and challenges in this large and diverse asset class.
Alternative to RWAs
Fungible and crypto-related RWAs, such as tokenized treasuries (e.g., Ondo, BUIDL, Maple) or other traditional financial products (e.g., Ethena tokenizes funding rates), are conceptually close to DeFi and therefore relatively easy to implement, although they may still face regulatory hurdles.
These products usually come in the form of pools where users can deposit their yield-accumulating tokens and process them through DeFi like any other token. They can also be easily integrated into most DeFi applications.
The underlying assets are usually pegged to the US dollar or stablecoins, making them ideal collateral. However, despite their sustainability and reliability, the on-chain growth potential of such assets is questionable, as off-chain alternatives are already easily accessible, making it difficult to attract retail users. In addition, since the returns are usually in the single-digit range, these pools are often not the first choice for crypto natives seeking high returns unless combined with returns from other DeFi applications or leveraged.
No replacement for RWAs
Non-fungible RWAs are conceptually more complex, more difficult to implement on-chain, and generally face greater regulatory challenges. The underlying assets are often illiquid (such as real estate) and their value is difficult to verify or estimate (such as intellectual property).
On the other hand, non-fungible RWAs tend to offer higher returns, depending on the specific asset, because their returns often come from outside the crypto market. This helps diversify income sources, and if it can be successfully combined with other DeFi applications, on-chain investors also have the opportunity to earn substantial returns.
In addition, for retail investors, such returns are usually difficult to obtain due to high barriers (such as access restrictions on intellectual property) or too high initial investment requirements (such as real estate). This is also an incentive for these assets to be put on the chain.
However, to date, the existing non-fungible RWAs market has not yet achieved large-scale adoption or attracted a large amount of liquidity due to its immaturity, cumbersome operations, and regulatory issues.
NodeFi
NodeFi is an emerging narrative and project funding method. The operating license of a blockchain node is tokenized (usually as an NFT) and sold, and the rewards for node operators are usually considerable. And, at least for the project parties, this model seems to be very effective; the sales of the three major nodes alone (XAI in November 2023, Aethir in March 2024, and Sophon in May 2024) have collectively raised nearly $250 million.
This license is a productive asset and allows the purchaser to earn income by running a node or delegating operations.
Currently, depending on the price of a node license (usually due to most sales being a tiered system, the later you buy, the higher the price), the yield can be very competitive. Crypto markets tend to latch onto successful models quickly, and with the success of past node sales, there will likely be more sales in the future to further expand this emerging space.
However, node sales also have their disadvantages. First, their proceeds are closely tied to the crypto market, usually denominated in project tokens and dependent on valuation and network usage. This in turn affects the value of node licenses, making them highly volatile. Second, the full use and integration of node licenses may in turn pose a centralization risk to the network itself. Because of this, many project network designs make node licenses non-transferable and limit the number of nodes that a single user can purchase. Nonetheless, a thriving ecosystem around node licenses is conceivable, and new NodeFi products in this category, such as XAI and MetaStreet, have begun to unlock these restrictions.
Overall, the NodeFi vertical is growing and likely to continue to exist, albeit highly dependent on crypto market conditions. While it is difficult to identify a clear winner building on this foundation at this point in time, one will likely emerge as these productive assets continue to gain popularity.
DePIN
Decentralized Physical Infrastructure Networks (DePIN) is a category that has received a lot of attention recently. Current major sub-industries include computing/AI related networks (such as Render), wireless networks (such as Helium), sensor networks (such as Hivemapper) and energy networks (such as Arkreen). Although the concept of DePIN has been around for a while (Helium’s blockchain went live in 2019), the rise of AI has significantly driven a lot of hype for computing-related projects since the release of ChatGPT-3 in November 2022. Following this trend, distinguishing computing/AI-related DePIN from other types of DePIN can help to discuss this field more accurately.
Computing/AI related DePIN
Although these projects have yet to capture a significant share of the GPU rental market (the size of the GPU-as-a-service market is approximately $3.2 billion in 2023, while Aethir’s annual revenue is approximately $36 million, Akash Network’s rental revenue since 2021 totaling less than $800,000), but the space is quickly attracting the attention of investors and users.
As AI increasingly becomes the core of technological innovation and training proprietary models becomes a key differentiator for many companies, GPU rental, as a sub-sector of DePIN, is likely to experience significant growth. Realistic demand and willingness to pay for GPUs continue to rise (a topic that will be explored in detail in a future report), and these benefits are highly competitive with other on-chain opportunities. Additionally, because these types of earnings come from outside the crypto ecosystem, they are typically denominated in U.S. dollars, which also opens the door to interesting opportunities like Pendle’s earnings speculation as a bet on the GPU market.
Additionally, the price of GPU as an underlying asset is relatively easy to evaluate and predict compared to other verticals such as NFTs, real estate, and project-related licenses, which also makes it very attractive as a lending use case.
However, it is worth noting that this space also faces some of the same trust and regulatory issues discussed in the RWA section, albeit to a lesser extent. In addition, DePINs are often vulnerable to challenges from off-chain competitors because these markets and use cases benefit from economies of scale and centralized efficiencies. However, the unique opportunities presented by integration with the crypto market - such as token incentives and additional benefits through DeFi integration - mean that the AI-related computing space has a great opportunity to capture a significant market share in the future.
Non-computational DePIN
Non-computational DePIN networks include wireless networks (such as Helium), sensor networks (such as Hivemapper), and energy networks (such as Arkreen). The benefits of these networks usually depend heavily on the utilization of the "nodes", and the benefits vary greatly (for example, frequently used Helium hotspots can generate higher benefits, while Hivemapper can also get more benefits by mapping "important" streets).
This sub-sector faces many of the same challenges as AI-related computational DePIN, and even has less obvious advantages in some areas. The demand side of many products can often be well served by off-chain solutions, and industries such as wireless and sensor networks do not face the same increasing demand as the AI computation field. In addition, the setup, quality, and maintenance of these services are more difficult to ensure standardization and maintain than running GPUs in data centers. GPUs are generally more diverse in application, while many non-computational DePIN industries are overly dependent on project-specific devices and have limited scope of use.
Nonetheless, the potential of DePIN is huge, and an innovative non-computing application with strong product-market fit could capture the world’s attention at any time.
in conclusion
The table below shows how each of the emerging verticals discussed performs on the following dimensions:
• Growth potential: Assess the growth potential of existing markets and the ability to capture market share in corresponding off-chain markets.
• Earnings Potential: Assess the earnings potential of the vertical, excluding additional token incentives.
• Asset volatility: measures the volatility of a productive asset and its correlation with the success of individual projects, and also implies its suitability as collateral.
• Complexity: Consider the complexity of implementation, including off-chain components and regulatory issues.
Overall, AI-related computational DePINs appear to be well-positioned to become the next major vertical, with a sizable and rapidly growing market, high yield potential, predictable asset prices, and relatively low implementation complexity. It now appears that given time, the synergies and potential interoperability between these projects and existing crypto-native use cases (such as innovative fundraising, lending, yield speculation/fixed income products, or self-repaying loans) will lead to breakthroughs and the development of successful products.
It is worth mentioning that NodeFi and non-fungible RWAs are also strong competitors. NodeFi looks promising with huge growth and revenue potential and simple implementation. But it relies heavily on the success of the underlying project and tokens, and node licenses are generally non-transferable and have restrictions. It has not yet proved its long-term sustainability, nor has it created a market for these node licenses that can easily interoperate with DeFi.
Non-fungible RWAs offer relatively high returns and have the potential to bring real advantages to the chain that are currently unavailable in the off-chain market. However, implementation and regulatory barriers are complex, and no product has yet achieved deep retail penetration.
It is worth noting that the above three verticals face similar challenges in creating markets for their assets and successfully (and sustainably) integrating them into DeFi. This may mean that breakthroughs in one vertical may trigger innovations in other areas. As Vitalik said, the current major DeFi lending protocols have not yet provided markets for low-liquidity, high-value assets, which are exactly the assets that "ordinary people" own and are familiar with.
