Where is the smart money flowing? Trends in 2023 to Watch by a Major Crypto VC

Venture capital firms can be a great source of information regarding the current trends in crypto. Their business is to identify and capitalize on the latest narratives by supporting newly emerging startups. In this article, we will have a look at which trends has a16zcrypto identified in 2023. By following venture capital investments, you can benefit easily from their experienced analytics team, the newest information, and vast data sources.

New Layer 1s

During the last year, many new Layer 1 solutions have emerged, bringing innovative ideas and enhanced capabilities to the table. These next-generation Layer 1 protocols aim to tackle the limitations of existing blockchains (typically Ethereum), such as scalability, energy efficiency, and transaction throughput. 

Sui and Aptos

Both Sui and Aptos are projects that emerged out of Meta's former blockchain initiative Diem. The developer team has split and some continued with Aptos, while others worked on SUI.

These projects bring fresh wind into the economy filled with EVM chains and scaling solutions. Sui and Aptos are based on a whole new programming language called Move, which aims to succeed where solidity has failed. They both offer innovative consensus mechanisms enabling parallel transaction execution, which could in theory surpass even the fastest blockchains out right now (like Solana).

Near

Created with mass user adoption in mind, NEAR is a scalable and intuitive Layer 1 blockchain that caters to beginners. The platform is designed to support non-EVM native dApps, further expanding its accessibility and potential for widespread adoption.

NEAR Protocol sets itself apart from other blockchain platforms through its unique sharded consensus mechanism. This innovative approach allows the network to achieve greater scalability by processing transactions in parallel, without compromising security.

Application-Specific Chains

Another way to tackle the scalability problem is to use many chains for specific applications, that way congestion is less likely to happen. Several big projects are working on this kind of chain network, which could also provide some interesting opportunities in the future.

Cosmos Zones

Cosmos Zones pioneer the innovative Hub & Spoke blockchain architecture, creating a permissionless ecosystem where Hubs act as routers for interconnected application-specific blockchains called Zones. Hubs have multiple connections to Zones and even other hubs, while Zone can have just one connection to its Hub.

The Cosmos Hub (ATOM) is one of the first Hubs launched in the Cosmos Network, enabling interoperability between various Zones in a beginner-friendly environment. 

ZkSync Hyperchains

ZkSync Hyperchains, built on the zkEVM engine, are fractal-like instances running in parallel with the transaction settlement on Ethereum. Hyperchains are built on top of the ZkSync L2 and inherit all the underlying security of L1 (Ethereum). You can think of them as L3s, enabling theoretically unlimited scalability.

Hyperchains will be deployed in a permissionless and trustless manner, serving an application-specific purpose. To ensure a smooth experience and value transfer, all Hyperchains will be connected both to the underlying zkEVM and to each other.

Polkadot Parachains

Polkadot Parachains are advanced, next-generation layer-1 blockchains that form a diverse ecosystem of specialized, interconnected platforms, communities, and economies.

These Parachains transcend the limitations of legacy networks, enabling seamless communication and value transfer within the Polkadot ecosystem and paving the way for an improved online connectivity experience for beginners and experts alike.

Zero-Knowledge Rollups

I think this will surprise no one. Zero-knowledge proofs and their application for scaling solutions have been around since the beginning of 2023. The following projects are still in their early stages but are expected to grow rapidly.

ZkSync

ZkSync has recently launched its mainnet called ZkSync Era. Many of the well-known projects are working hard to port their platform on the ZkSync Era - for example Uniswap or Balancer.

Check out the most interesting projects that you can try out ZkSync Era right now. For more information on the application of Zk-proofs follow here.

Aztec

Aztec is building a privacy-oriented rollup to help scale Ethereum and make it more secure. For this cause, Aztec has developed its own programming language called Noir. 

Aztec also incentivizes developers to build encrypted applications on Ethereum by providing the Aztec Connect toolkit. While still in the early stage, it may be a good idea to keep an eye on Aztec, as it could become the go-to privacy-centric solution.

StarkNet

StarkNet is a decentralized, permissionless, and highly scalable Layer 2 network built on StarkWare's zk-STARK technology. Offering an energy-efficient scaling solution, StarkNet provides fast and secure transactions with lower costs, making it accessible to a wider audience.

Find out about booming projects on StarkNet here.

The Bottom Line

Observing VC investments has proven to be a valuable indicator of where the big money is flowing. It is to be expected that in the following months, we could see a surge in usage of Zk scaling solutions and/or application-specific interoperable chains.

Once Sui releases its mainnet for the general public, if everything goes smoothly we could be looking at a renewed L1 narrative. The important distinguishing feature is the programming language Move, which could also play a big role in this narrative. With some certainty, we could say that the future will probably contain many interoperable and modular blockchains/ecosystems. Secured by zero-knowledge cryptography, these chains will provide scalable platforms for building adoption-ready applications.

Of course, none of this is financial advice and you should always do your own research. This article was created based on the State of Crypto 2023 report by a16zcrypto.