AI detonates Crypto’s third major leap, and four major tracks are laying out the next trillion-dollar opportunity

Author: Karthik Senthil

Compiled by: Deep Wave TechFlow

Introduction

When the narrative of smart contracts gradually lost its appeal, the strong addition of AI brought a breakthrough and promoted a wave of enthusiasm and innovation that exceeded expectations. From the consensus layer of Bitcoin to the execution layer of smart contracts, and now to the AI-driven application layer, has the encryption industry ushered in a third technological leap?

KOL @karsenthil has published his opinion articles on Crypto X AI at different times, believing that we are on the eve of the next "take-off" in the encryption industry.

The original text is divided into two articles, and the structure is relatively fragmented.

In the first article, the author expressed the view that AI will drive blockchain into the next technological leap. In the second article, he elaborated on the specific implementation paths of AI at the application and infrastructure layers, and what potential opportunities there are for investors and builders.

Shenchao TechFlow has integrated and compiled it, and the following is the complete content.

Crypto

AI is driving blockchain’s next big leap.

Each stage of blockchain development typically follows a similar trajectory:

• A “leapfrog” technological advance triggers a new wave of innovation;

• As a large number of imitators join in, technological progress gradually stagnates;

• Then, the next technological leap occurs, pushing the industry forward.

The original picture comes from @karsenthil , compiled by Shenchao TechFlow

The first major leap forward in cryptocurrencies occurred at the consensus layer, with the invention of Bitcoin and Proof of Work (PoW) marking the beginning of this phase. From 2009 to 2014, this wave increased the cryptocurrency’s market capitalization more than 10,000 times (from approximately $750,000 to approximately $7.5 billion ).

The second leap occurs at the execution layer. The emergence of smart contracts makes the blockchain programmable. Today, the vast majority of blockchain infrastructure (such as L1, L2) and applications (such as tokens, stablecoins, DeFi) rely on this core innovation. From 2014 to the present, this wave has driven the cryptocurrency market value to increase approximately 500 times to approximately US$3.5 trillion, of which projects born in this stage account for approximately 43% (approximately US$1.5 trillion) of the total market value.

However, current technological progress has once again stalled. Why is this happening? Here's my (probably controversial) opinion:

• The potential of smart contracts has been basically exhausted. Even the recently popular memecoins are just a recombination of existing technologies (such as tokens, binding curves, and NFT community craze) rather than a completely new invention.

• Smart contracts become a major bottleneck in user experience (UX). Current cryptographic applications need to interact directly with smart contracts, which means users must understand where the contract runs, what its functions mean, and how to interact with it. They also need to sign transactions and pay gas fees.

Fortunately, the next technological leap is already here—bringing new innovations at the application layer by improving usability.

AI will become crypto’s user experience layer

The proliferation of every new technology requires a powerful "front end" to simplify complexity and consolidate functionality. Personal computers have graphical user interfaces (GUIs) and operating systems, the Internet has web browsers and FAANG, and mobile devices have native apps and app stores.

AI will become the user experience layer of blockchain technology, providing users with an order of magnitude better experience, thereby driving wider adoption. AI can solve three major user experience challenges in crypto: user onboarding, execution of complex operations (which often require multiple steps, and large language models (LLMs) are very good at handling these steps), and discovery of functionality. I predict that by 2030, 40% of the world's population will have experienced on-chain transactions, and more than 95% of these on-chain transactions will be completed through AI. By then, people will unconsciously use applications powered by blockchain technology.

The original picture comes from @karsenthil , compiled by Shenchao TechFlow

To achieve this, AI will work both up and down the technology stack as a link between the application layer and the blockchain infrastructure. In the future, applications will interact directly with AI agents, and these agents will aggregate and perform on-chain operations on behalf of users. In addition, smart contracts will evolve into "intelligent tokens" that are deeply integrated with AI, thereby providing users with a generative and customized experience, rather than the current one-size-fits-all model.

From an AI perspective, the future of blockchain applications becomes clearer. For example, the next generation of financial super applications may use AI to proactively recommend and execute on-chain DeFi operations based on user intentions and preferences (such as security, yield, etc.), combined with real-time information from the prediction market. Users do not need to know the difference between L1 and L2, or the names of protocols and assets, or even how cross-chain bridges work. The rudiments of this trend are already beginning to emerge.

Crypto X AI Thesis (Part 2) – Opportunities for Builders and Investors

So, who will be the biggest winner?

As AI innovation continues to accelerate at the application level, the answer is obvious: application is still the focus (of course, infrastructure support is also indispensable, after all, this is still the field of encryption). As David mentions below, we are already starting to see a shift from the infrastructure cycle to the application cycle , and the addition of AI will further drive this trend.

@divine_economu: “2024 marks two important milestones in the cryptocurrency space:

1. Hot projects are app-led for the first time

2. Popular protocols are those that support application development in innovative ways

This is the first time in the history of crypto that it has moved from an infrastructure-led cycle to an application-focused cycle. "

( Tweet details )

I am particularly bullish on the following four categories of crypto products, all of which are in the early stages of development and therefore have significant growth potential:

1. Aggregators, also known as SuperApps

I predict that in the future the “FAANGs of crypto” will be born: super apps that will integrate functionality from agents that simplify the user experience (UX) on the chain and connect directly with users. At the same time, these applications will also vertically integrate the technology stack, not only improving their own application capabilities, but also attracting the attention of developers by providing infrastructure (similar to Amazon or Google). In their respective fields (such as search and advertising, finance, commerce, social networking, etc.), such applications will exhibit monopolistic characteristics. Just as FAANG companies contribute approximately 20% of the S&P today, I expect applications in this category to account for a similar proportion of the crypto market share by 2030. Conservative estimates place the size of this market opportunity at hundreds of billions of dollars, while optimistic estimates range into trillions of dollars.

Especially in the field of DeFi (or DeFAI ), I think this is a killer application scenario: imagine a next-generation one-stop financial super application, where users can seamlessly access all financial assets on the chain and get investment advice or ideas , analyze market sentiment in real time and quickly execute investment decisions. Another exciting direction is the "encrypted version of Google", which solves the discovery problem of encrypted applications and assets by designing an algorithm similar to "PageRank", while achieving profitability through advertising or innovative value streams.

The winners in this category will achieve unimaginable results because they will have a key advantage that Web2 super applications do not have: tokens. Token is the only tool in the crypto space that has proven to have strong product market fit (PMF), able to attract users, unite believers and investors, and capture the market mind.

2. Agents as SaaS

I'm excited about AI agents that can do extremely well in one area. These agents can be used through aggregators or other combinations of agents, just like today's SaaS products or financial products. For example, imagine a fully autonomous agent that accepts funds from Liquidity Providers (LPs) and makes top investments in the crypto market (being both a top 1% highly liquid trader and participating in the best performing investments opportunity) while charging lower management fees than ETFs or funds. Or, an agent capable of achieving high returns in prediction markets or sports betting. As another example, tools like @aix_bt can provide high-quality market and investment research data. These agents will enable users to gain access to previously inaccessible markets (such as USD or real-world assets RWAs that are now on-chain) and provide advanced investment strategies (such as quantitative trading or venture capital).

@Loopifyyy: “The first AI agent that can do on-chain transactions for me and actually work, I won’t hesitate to invest my entire net worth. It solves the user experience (UX) problem and now I just You can use the blockchain with simple prompts, and it doesn’t matter whether it’s cross-chain or not.”

This is not limited to finance. I can imagine a future with an AI doctor that is specifically trained on a specific patient profile, able to bill insurance companies through encrypted payment channels, and write low-risk prescriptions. Or, an AI insurance agent can find the cheapest home insurance for your house. Of course, to be frank, we are still some way away from realizing these scenarios (most agents currently cannot even complete basic on-chain interactions).

However, as these agents continue to innovate in customer acquisition, value realization and pricing mechanisms through their native tokens (for example, users need to hold 100 AIXBT to obtain advanced services), the opportunities in this area are almost unlimited. As this trend develops, I believe that platforms dedicated to trading and managing AI agents (agent markets similar to Ebay or OpenSea) will also usher in huge development opportunities.

3. AI-Native Infra

The most important infrastructure opportunities in the future (such as the new generation of L1) will no longer focus solely on optimizing speed or cost, but on attracting users by significantly improving the user experience (UX). This improvement will be achieved by building a core architecture around AI agents and AI-driven smart contracts, and natively support the following functions: efficient on-chain reasoning capabilities (see Section 4 for details), providing reliable execution through Trusted Execution Environments (TEEs) Proven off-chain reasoning capabilities, smart accounts that support semi-autonomous AI agent operations (with built-in protection mechanisms that can perform tasks on behalf of users), access to computing resources and model training capabilities, and functions that support two-way value flow between agents, thereby Promote the innovation of intelligent agent collaboration and economic models.

Similar to the current era of decentralized applications (dApps), many agents in the aforementioned category 2 (especially long-tail agents) will choose to deploy on these new L1s rather than manage the infrastructure themselves while enjoying Network effects from proximity and composability. I'm also excited about the potential of these new generations of L1, which may redefine value capture mechanisms, Maximum Extractable Value (MEV), and consensus mechanisms (eg, can agents be validators?).

This doesn't mean I'm pessimistic about Ethereum, Solana, or other mainstream L1/L2 ecosystems. In fact, these ecosystems will gradually introduce similar features in the coming years. But I believe that the new L1s born in this era will be more in line with the needs of contemporary developers and therefore gain huge development potential. Projects like ai16z and Virtuals are already showing the beginnings of this trend and the huge opportunities to be winners in this space.

L1 innovation continues and remains strong.

Intelligent Assets

Currently, some of the popular applications in crypto (such as stablecoins, NFTs, ERC-20/SPL governance tokens) are deterministic and static assets. They work great at accomplishing their stated goals, but what if users could have smart assets that operated dynamically, automatically optimizing to achieve a specific goal, such as increasing holders or increasing value?

Imagine that smart contracts can dynamically call models during on-chain execution, enabling assets to do the following: adjust token supply, release schedules, destruction or staking mechanisms, or even modify other parameters that currently require hard coding or relying on social consensus to change . Each token can even be personalized based on the holder’s preferences, providing users with a new level of personalized experience.

I predict that early exploration of this type of smart assets will focus on the fields of NFT and DAO. For example, NFTs can be fully generative in all aspects, not just media content. Alternatively, a governance token could automatically write proposals or vote on behalf of users based on protocol history and user preferences.

As the technology continues to mature, the main application scenarios of this category may shift to the financial field. For example, imagine that Ethena’s USDE stablecoin could dynamically adjust its synthetic USD strategy based on macroeconomic conditions. This will be an exciting future!