Navigating the Crypto World in the Global Economic Landscape: DePIN, Intents & Abstraction May Rise Prominently — by Pentos Ventures
— — Cookie at Pentos Ventures
Global Economic Landscape
As the summer of 2024 progresses, the arrival of July signifies that we are now in the second half of the year. The market fluctuations last September brought long-awaited hopes to the crypto industry. Since January 2024, Bitcoin prices have steadily climbed, leading most industry practitioners to assert that a bull market has arrived. During this time, many high-valued startups emerged in the venture capital investment world, with valuations of 30 million USD even considered on the lower end. The primary reason for these valuations was the market’s belief that BTC prices would surpass $100,000 in this cycle. However, this assumption contains a fatal logical error: the change in BTC market capitalization does not equate to changes in altcoin market capitalization, as there is no absolute relationship between them. Project valuations should be determined based on their own merits.
Despite this, investors, driven by market sentiment, continued to invest heavily in these startups despite unreasonable valuations. This led to widely-spread observations where high-valued projects listed on Binance found insufficient buyers, sparking continuous skepticism in the market. The key question being asked: with the market constantly going downward, who are those making profits?
To answer this, we must return to the earlier point: “The change in BTC market capitalization does not equate to changes in altcoin market capitalization.” Here, we need to step out of the Mobius strip and take a more macro view of the market. The global economy is essentially a macro financial game, and crypto is just one part of it. So, where does the capital in cryptocurrencies come from? TradFi.
How did the COVID-19 pandemic, which began at the end of 2019, impact the global economy and subsequently the crypto world? What is the global economic situation in 2024?
According to the latest data from the International Monetary Fund (IMF) for Q1 2024, the US dollar remains the dominant global reserve currency. Therefore, any discussion of global economic issues inevitably revolves around the US political and economic landscape.
Since the outbreak of COVID-19 at the end of 2019, inflation in the US began to surge in 2021, primarily due to shocks in commodity prices. The unexpected rise in commodity prices and distortions in key product markets, such as new and used car markets, drove this inflation (1). During the pandemic, strong overall demand combined with supply constraints in certain industries led to shortages and sector-specific price increases. Additionally, the US “printed” over $3 trillion in 2020 to stimulate economic activity and provide relief to those affected by the pandemic, further exacerbating inflation. Consequently, the price of BTC, as a commodity with a relatively small total market size compared to gold, saw a noticeable increase.
When the economy overheats, or inflation rises, the Federal Reserve typically raises interest rates to cool economic growth and control inflation. Inflation is closely related to changes in the Consumer Price Index (CPI). In 2021, the CPI increased significantly, with an annual growth rate of about 7.0%; in 2022, it continued to rise, with an annual growth rate of about 6.5%. In 2023, the CPI growth slowed but remained at a high level, with an annual growth rate of about 4.0%. According to the latest data from the US Bureau of Labor Statistics, the CPI in May 2024 was unchanged from the previous month, with a seasonally adjusted monthly rate of 0%, but the CPI for all urban consumers (CPI-U) increased by 4.0% from May 2023 to May 2024 (2).
Typically, an annual inflation rate exceeding 3% can be considered high inflation. Despite the control of monthly CPI data, annual data shows that the US is still experiencing high inflation. This indicates that inflation has not been effectively mitigated despite annual interest rate hikes. Meanwhile, the US faces other severe issues due to interest rate hikes.
Firstly, raising interest rates has increased the interest on US national debt. Although the US has adopted the FIMA Repo mechanism, it still faces the problem of national debt interest being the third-largest expenditure after social security and healthcare. The source of expenditure is fiscal revenue, but what issues does US fiscal revenue face? During the US election period, there was a continuous push to stimulate manufacturing, not only to create domestic jobs and increase research and innovation but also to continue the trade war with China. However, due to interest rate hikes, manufacturing cannot afford high loans. As a result, the manufacturing sector cannot be stimulated for development.
The latest US non-farm employment data shows that in June 2024, non-farm employment increased by 272,000 people, higher than the expected 182,000 and the previous month’s 165,000. Non-farm employment data is widely considered an important barometer of the US economy’s health. Data exceeding expectations (higher than expected) represents a strong economy, which is bullish for the US dollar. (3) Data below expectations represents a weak economy, which is bearish for the US dollar.
The latest data seems to show a relatively good US economic situation. However, whether this is the actual situation requires further comparison of more data. For example, data on full-time and part-time employment nationwide shows that part-time employment has been on an upward trend since the onset of the COVID-19 pandemic, suggesting that non-farm data may still include overlapping data. Additionally, comparing M2 data reveals that there has been no increase in funds in recent years.
Another major issue facing the US is that European countries have recently chosen to cut interest rates. The Euro, as the second-largest global payment currency, has always competed with the dollar. European interest rate cuts have led to a significant inflow of capital into the US, increasing the cost of funds for American banks. The rate cut in Europe will further intensify competition for American manufacturing by strong European companies. Europe’s decision to cut interest rates is mainly based on internal economic problems, choosing to address economic issues in the face of inflation and economic challenges. Additionally, a large part of this decision may be influenced by the tightening of the US dollar and the Russia-Ukraine conflict, which is part of the US dollar’s acquisition of euros. Lowering interest rates can also be seen as a form of combating the US dollar. Moreover, after the Russia-Ukraine conflict, many countries have taken measures to avoid being acquired by the US dollar, such as Saudi Arabia and Iran settling oil in Renminbi and the 10 ASEAN countries settling in their own currencies.
Given the current situation, if the US does not cut interest rates and faces economic threats from various countries, the US economy may collapse first. However, if interest rates are cut, the US dollar economy will also face serious problems due to high inflation rebound. From the current situation, the US economy may face more precarious problems than inflation. This year is also an election year, and according to analysis by the International Monetary Fund (IMF), economic policies in election years are usually influenced by political and economic factors. The government may take measures before the election to maintain economic stability and increase voter support. However, post-election policies may be adjusted based on the new government’s economic strategies. Therefore, significant changes are likely to occur around November.
In today’s economic landscape, making an accurate judgment at this stage is challenging. Overall, we believe that the likelihood of a rate cut is higher. It is important to consider the macro-level aspects that the cryptocurrency market is currently confronting and should be mindful of. Ultimately, we need to consider and prioritize whether there is an influx of capital into the market.
Can technological revolution contribute to economic recovery?
In addition to monetary policy to regulate the market economy, the development of technological innovation is also crucial. Typically, innovation at the technical level changes the way productivity is achieved, thus creating significant economic effects. For example, the emergence of the Internet changed all aspects of human communication, entertainment, and travel. The US dollar hegemony economy is mainly supported by a strong military presence and oil settlements as cornerstones, both of which are currently being shaken. To sustain the US dollar hegemony, the dollar will need to find new support.
The breakthrough in AI technology is highly anticipated at present, and most practitioners are already or are in the process of changing the way they learn, produce, and think because of AI. Technological development always progresses exponentially, and while it replaces some job categories and opportunities, it creates more opportunities and room for imagination. From a macro perspective, AI technology may become the next support point for US dollar hegemony. For the sake of the dollar and global economic stability, as the world’s largest economy, the US will have the comprehensive motivation to promote the development of AI technology. Of course, technical innovation is a disorderly development with a high degree of uncertainty, but AI will have great potential with the support of the world’s largest economy.
According to PwC’s research report on global artificial intelligence, it is estimated that by 2030, AI is expected to contribute as much as $15.7 trillion to the global economy. This growth mainly comes from productivity improvement and increased consumer demand.
Productivity improvement: The application of AI technology can significantly increase productivity through automation and process optimization, contributing approximately $6.6 trillion to economic growth.
Increase in consumer demand: AI can stimulate consumer demand through personalized products and services, enhancing user experience, and is expected to bring about $9.1 trillion in economic growth.
Regional Impact:
China: China is expected to benefit the most from AI, potentially increasing GDP by $7 trillion. North America: The North American region is expected to increase GDP by $3.7 trillion. Europe: European countries are expected to increase GDP by about $2 trillion.
The global gross domestic product (GDP) is projected to reach approximately $45.72 trillion by 2024. Despite the current lack of optimism in the global economy, there is a positive outlook for future economic trends.
The advancement of AI technology will undoubtedly impact the development of blockchain technology, leading to significant changes in the cryptocurrency landscape and fostering innovation. While the second big wave of impactful AI technologies have yet to emerge in the venture capital investment world, the potential for new capital to enter the market and transform the technological landscape is evident. Based on our analysis of the current Web3 startups we have got in touch with recently, we anticipate unexpected growth in the DePIN and Intent & Abstraction tracks, introducing new possibilities to the world of cryptocurrencies.
Future Horizons: DePIN, Intents and Abstraction
Numerous Web3 narratives have caught new attentions for in-depth study and analysis in the venture capital investment world. Despite the saturation of DeFi, GameFi, SocialFi, etc., where it is challenging to identify groundbreaking technologies, the DePIN, Intent and Abstraction solutions have piqued the interest of investors and founders alike. Here, we aim to share our insights and knowledge with the market based on what we have observed and learned.
DePIN
The definition and classification of DePIN have been widely circulated in the crypto market, so we will not delve into them here. We believe that most investors or users who have not yet come into contact with DePIN projects still harbor certain biases towards DePIN. In a rapidly developing industry, biases will always pose obstacles to raising awareness and seizing opportunities to capture the early alpha. It is conceivable that without a deep look, some might still think that the current DePIN trajectory is similar to the old era of let-us-put-all-businesses-on-the-blockchain in the previous years. However, the current situation is nothing like that. Presently, several leading DePIN startups have already emerged on the market, such as the project peaq (Layer 1 built for DePIN & RWA), Hivemapper (decentralized mapping), DIMO (automotive IoT), and IoTeX (modular infrastructure for DePIN), among others. Here, we will not elaborate on the introduction of each of these startups, as many have already produced good write-ups for that purpose. What we want to share is a high-level summary through our learning and research of the DePIN category, after speaking with dozens of DePIN project founders:
- Projects in the DePIN categories that focus on traditional businesses that are widely adopted and have a clear business and revenue model, are effectively attracting new users to the cryptocurrency space. These projects have the highest potential to convert users from Web2 to Web2.5/Web3.
- Companies in the DePIN categories that address genuine demand-side needs and have a technological advantage in specific sectors are making significant strides.
- Many project teams demonstrate relatively strong adoption potential, as compared to non-DePIN crypto projects
In our extensive communication with DePIN projects, we have encountered roles and designs tightly connected to Helium. For instance, Hotspotty, as the first European hot spot of Helium, manages nearly 40% of Helium’s devices, bringing in almost 300k users. Most of these users were previously unfamiliar with Web3 but have since become active participants in many other DePIN projects due to their exposure to Helium. Maxime Goossens and Daniel Andrade, Co-Founders of Hotspotty, are recently actively expanding DePIN Hub (a platform in which users can find the best stories and alpha in DePIN) with innovative social features to strengthen the DePIN community.
While Helium stands out as one of the top leaders with an undeniably significant impact, other projects like Natix and Teneo are also making a mark. These startups attract initial users from the Web2 world and gradually convert them into Web2.5/Web3 users as the projects develop. This pattern is common among many high quality DePIN projects, demonstrating their abilities to bring incremental users into the Web3 world.
Regarding DePIN companies that meet genuine demand needs, we have recently engaged in conversations with two notable projects. One of them is Staex, led by Dr. Alexandra K. Mikityuk. Staex is a zero-trust network for IoT devices founded by the blockchain research institute under Telekom Germany. The company is already providing paid services to devices such as drones and EV charging stations, and has a quality list of paying clients and prospectus.
Another startup that closes the demand-supply loop, is ROVR, a decentralized 3D data collection, processing, and storage platform primarily used in autonomous vehicles. Led by Guang Ling, the team members have extensive industry expertise, such as guiding the technical development of Baidu Maps and NavInfo. ROVR is actively engaging with leading players in the traditional automotive and autonomous driving fields and is set to release hardware to provide more extensive opportunities in the future.
Despite the promising aspects of many DePIN startups, one of the biggest obstacles we currently see comes from the lack of sufficient awareness and first-handed experience in building a Web3 company. But at the same time, this is also the parts where Web3 industry can play the role. Web3 investors and industry players should support DePIN teams who have extensive vertical industry experience and have been deeply involved in market-tested technologies within specific sectors, as that is the DNA/ moat of successful DePIN innovations.
Intents & Abstraction
After Vitalik Buterin introduced the concepts of Intents and Abstraction, they gained significant attention in the market, attracting developers to explore product development and research in this area. Prior to Taobao’s emergence, many investors overlooked the growth potential of the e-commerce giant, and before Uniswap’s inception, many investors doubted the value and scalability of DEXes. Despite widespread skepticism about mass adoption, the development of Intents and Abstraction is crucial for creating a more user-friendly and immersive crypto user journey.
In addition to well-known projects like Biconomy and XION, our analysis of leading Intent and Abstraction projects has led to the following conclusions:
- Account abstraction serves as the starting point of Abstraction, inspiring the birth of other Abstraction infrastructure, at the foundational level.
- At the infrastructure level, it significantly enhances user experience, streamlines different types of crypto usage operations, aligns with the Web2 user behaviors, and facilitates new user onboarding.
- Intents and Abstraction are often integrated with AI, and the implementation of on-chain contract reading, calling, and operation will unlock greater development potential for cryptocurrency trading and applications.
- Enabling multi-chain, multi-application interoperability based on Intents and Abstraction will open up new crypto user experiences.
- The founders of Intent and Abstraction startups are noticeably young in age. They possess diverse capabilities, and demonstrate in-depth understanding of Web3.
One notable Intent solution is Axal, led by the 20-year-old Harvard graduate, Ash Ahmed. Axal’s “Intent Coordination Layer” aims to provide a comprehensive solution for monitoring, calling, and executing multi-chain data and task automation to automate DeFi Protocol user transaction requests.
Another noteworthy project is Abstract, led by the multi-talented, versatile founder, Adair Kelley. Abstract offers developers a technical solution for full-chain development, paving the way for users to discover, register, and use applications on any blockchain without requiring an understanding of the underlying technology.
Whether it’s Axal, Abstract, or other Intent and Abstraction innovations, their goal is to create more user-friendly and operationally efficient everyday use case scenarios. Just as Internet products have evolved to the point where user experience optimization is a pre-requisite for building anything new, Web3 solutions should strive for the same.
We believe that DePIN, Intents and Abstraction have the potential to stand out among various Web3 categories due to their strong correlation with crypto value utilization, user and market growth, and their ability to bring innovation and new users to the crypto market.
What will the future hold?
Cryptocurrency stakeholders have been pondering a fundamental question: what has blockchain changed? To what extend has it brought forward decentralization, distributed ledger tech, or provided a more fair game for everyone? Everyone would have their own answer to this.
From a financial perspective, the emergence of smart contracts has provided entrepreneurs with a new way of financing, primarily through the use of crypto tokens to replace traditional equity. This transition offers the benefit of effectively controlling the issuance and over-issuance situations. However, it also comes with the downside of high-cost, structure-level adjustments as the project develops and scales, making implementation extremely challenging. In terms of rewarding methods, token design tends to favor early contributors, while equity tends to reward continuous contributors. Therefore, tokens are more suitable for business models that must rely on a meticulously clear participation and revenue distribution rules. In this sense, the characteristics and advantages of an well-designed crypto tokenomics, is something a DePIN project has to have from day 1.
From a technical perspective, blockchain’s main technologies are decentralized and smart contracts. The “impossible triangle” theory suggests that every technology has its limitations at the application level. Despite many years of technological development, blockchain’s scale has not yet achieved true exponential growth. In order to unleash its full potential, blockchain needs to focus on creating more user-friendly, intuitive, and practical products and technologies. This is why Abstraction and Intents should be the core focuses in this market cycle.
As digital gold, BTC’s intrinsic value range and scale will continue to expand, but this does not necessarily mean blockchain will grow proportionally. The innovative DeFi category in the financial arena has shown some early potential. Blockchain needs to seek breakthroughs in real-world industry sectors by applying its technology to provide technical services for businesses and solve specific problems. This approach should be combined with existing DeFi foundation to create more sustainable wealth-distributing effects. Additionally, looking toward to the future of AI, blockchain should seek to combine with real-world business systems to solve account and settlement needs.
In July, the market appears gloomy. Faced with this overall market environment, even crypto believers may feel frustrated at times. However, whether in the traditional world or the cryptocurrency industry, real technologies and products always bring hope. Markets may stagnate, but once a technology is adopted, it will never cease unless eliminated. The only thing to do now, is believe and follow in the footsteps of technology, continue to learn and improve, step into every necessary field, patiently change the world one block at a time, and have faith that technologies that truly enhance human life will shine in their market value in the long run.
Sources
(1) Ben Bernanke and Olivier Blanchard (2023). What Caused the U.S. Pandemic-Era Inflation?
(2) US Bureau of Labor Statistics. Consumer Price Index. 2024.
(3) US Bureau of Labor Statistics. Non-farm employment data. 2024
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