This Autumn I want to start work on a new project and this is an exploration in to some of the niches within decentralized finance and web3 where it might be possible to create value.
If anyone is working on these I would love to hear from you.
Cross-Chain Communications
LayerZero has a market leader and first move advantage here. However they may have left a door open for a community focused network of interchain operator nodes. LayerZero is heavily funded by VC’s with no way to invest for individuals. If someone came along and created a simple communications bridge between chains and put a fair launch governance token on it, I would use it and be interested in investing in it.
Building cross-chain anything is challenging from a security perspective and a decentralization perspective. You would need a network of nodes that are secure but can also read and write to the various blockchains. This is a weekend job to create in a centralized manner but to do it well as part of a decentralized permissionless system would be difficult.
Decentralized Social Media
I think it’s fair to say that Twitter has had some ups and downs this year and Meta is launching a text based competitor on Thursday. There are already a few decentralized social media platforms however most of them lack any real decentralization. If the founder tweets that you need to dm him for an invite to the network it feels like the benefits of decentralization have already been lost.
The most interesting step forwards here was the work that I done on Soul-Bound-Tokens which eventually ended up becoming just a NFT with a blocked transfer function. The original code that I wrote was more interesting and perhaps a starting point for user owned data.
A decentralized application could be 10x better than existing social media but we aren’t there yet from a UX perspective. Account abstraction, scaling solutions and many other updates are going to make on-chain data fast, affordable and easy to use which will create a unique opportunity to disrupt a massive industry that impacts our day to day lives.
Algorithmic Stablecoin
Tether fud get’s blown out of proportion but do we really want our biggest stablecoin to be backed by a centralized corporate entity?
Algorithmic stablecoins have had a rough few years too with the collapse of UST which depegged and then death spiralled as the Luna ecosystem fell apart.
There is an opportunity to create something massive in DeFi. USDT and USDC have a combined market cap of over $100B, more than 10x larger than the current largest algorithmic stablecoin.
The team that gets the risk management and peg incentives right to create a long-term sustainable algo stablecoin might go on to become a trillion dollar project by TVL.
Bitcoin ETF’s aren’t suitable as a treasury asset for most institutions however stablecoins that attract yield could be a perfect fit. The potential of some of the new stablecoin is really big, for settlement as well as for attracting yield. Could be the next big institutional adoption story once the Bitcoin ETF’s gets approved - @Gl3nnHODL
Decentralized Futures Trading
FTX was great until it wasn’t. Centralization, fraud and human incompetency destroyed what should have been a highly profitable business.
There is demand to trade cryptocurrencies on leverage and perpetual futures are the instrument of choice. We have seen a few DeFi derivatives products pop up and start to gain traction, notably with DyDx and GMX. But no one has reached the tipping point yet where UX and liquidity make it the default venue for degenerate traders.
I just want sub-accounts, the way that FTX managed isolated margin sub-accounts made risk management incredibly easy as you could put pockets of funds into different strategies.
P2P Gambling Client
Imagine playing poker on a P2P decentralized censorship resistant network from anywhere in the world. You connect your dApp to the network, load on some cryptocurrency and go gambling (with the bots and grinders).
The legalities of this are highly questionable and in many jurisdictions online gambling is either regulated or outright banned. While it’s probably not something I would want to work on, it’s something I wish existed.
Uniswap v4 Hooks
Uniswap v4 will likely be launched towards the later part of 2024 or early 2025 which will introduce hooks. These add additional functionality and the ability for 3rd party devs to add logic before and after a swap takes place.
Here is an example hook for Uniswap v4 that I wrote to get up to speed with the protocol changes.
There is probably a lot of really sensible use cases where this can be helpful but I think the biggest opportunity early on is probably a memecoin. You could potentially add a test within a swap to see if a user has held a position for x days otherwise the transaction is reverted. You might also be able to make the router the owner of the token contract to create a permissionless token owned by the liquidity pool.
There are a lot of options to do new things with ERC20 tokens on Uniswap and no doubt there will be opportunities for innovative devs at launch.
Leveraged Staking Position
Imagine a smart contract which manages market cycles and earns yield from Ethereum proof of stake on a leveraged position.
So when ETH is making new all time highs it risks off and reduces leverage then after big market sell offs and long-term downtrends it starts to lever up taking on more leverage.
It might be possible to use a soft liquidation system similar to crvUSD to reduce risk of ruin. The general value proposition is you have a token that buys the multiyear dip and outperforms a staked ETH position.
I expect very few products will outperform staked ETH over the next decade but this could potentially be something that could, all be it with additional risk and reward.
Floating Floor NFTs
The idea I had was to store a token like rETH or wstETH in a NFT contract. The NFT is a profile picture or digital art by a local artist and it costs 0.22 ETH to mint but once minted the NFT can be redeemed for 0.2 ETH by burning the NFT. Over time this will grow due to the staking rewards accruued by the liquid staking token.
It is a NFT which also represents a staked Ethereum position. The benefit is that it sets a hard floor for the NFT valuation and guaranteed liquidity. In adverse market conditions if there are no buyers or bids for the individual NFT it always has an emergency liquidation function where it can release the underlying collateral.
The accrual of staking rewards and expected (optimist) appreciation of ETH relative to the USD over the long term also creates an appreciating floor price for the collection.
DeFi Hedge Fund
Analysing DeFi investments and looking for opportunities in emerging technologies is interesting and financially rewarding. A DeFi hedge fund could turn this into a financial product or service.
There are two routes here
A centralized active fund where the fund manager has the ability to allocate capital but not run off with it. This option is difficult to do well because the fund manager could potentially create a token themselves and buy it with depositors funds or have some other interest in the funds investments. You can prevent a hard rug pull via a smart contract but it is impossible to give the fund manager control and still prevent a soft rug pull.
A fully decentralized fund or strategy which is deployed in immutable code. This would have less value as it would need to be open sourced and could be forked. You could have something like a 60/40 portfolio of crypto/stables which rebalances at set intervals. This would automate the process of selling as markets go up and buying as they go down.
This is the kind of project that could start small and grow over time depending on past performance.
Zero Knowledge Privacy
Tornado cash proved there was demand for private transactions on the Ethereum network. I think there are genuine use cases where this makes sense and is almost a necessity in the future. The issue is that through immutable code there is no KYC/AML and privacy apps are targeted by hackers trying to obfuscate source of funds.
Aside from legal issues, the technical difficulty of creating custom zk circuits makes this very challenging. There is a shortage of engineers currently that have the ability to really innovate with zero knowledge tech. Circom provide premade circuits but unless your use case fits a defined model its going to be a steep learning curve to build out.
Web3 Frontend Analytics
There isn’t a great deal of optimisation and performance focus on DeFi frontends. It’s very rare to see AB or multivariate testing or even conversion goals setup to track and improve decentralized applications.
This is partly because of privacy concerns around embedding analytics code. Perhaps there is a opportunity for anonymous data collection on frontends which enables modern conversion rate optimisation without compromising users privacy concerns.
Could data be anonymised and provably stored on a public blockchain where it is transparent to everyone. Most users don’t mind a hit counter that counts the number of users to a site anonymously but don’t want to be tracked or followed around the net.
Metaverse Content Studio
The metaverse is going to become big business and I believe in the future we will spend money on social signals for our digital identities. Perhaps we’ve already seen the start of that with profile picture NFT’s.
It’s not clear currently if a leading metaverse will emerge out of a social network like Meta, a game like fortnite or a blockchain sector project. Whoever achieves product market fit first will open up a marketplace for 3rd parties to sell their wares. Creating content or ML algorithms to create content seems like a business opportunity worth exploring when the time comes.
Decentralized Philanthropy
The effective altruism movement prides itself on openness and transparency. What better way to achieve those goals than on an open, transparent financial innovation.
Blockchains are a good fit for philanthropy for a number of reasons
Financial transactions are fully traceable from source to final destination
Large community of potential high net worth donors (in a bull market)
Efficient, fast cross border payments system
Programmable distribution logic
In the future it might be possible to create something like givedirectly where transactions are sent out from yield on a DeFi vault or proof of stake position. Contributors funds go into a perpetual yield vault and every year/month some funds are released to good causes that are voted on via a DAO.
I wrote something similar to this for a web3 tutorial here: https://github.com/jamesbachini/GiveForever
In-Game Economies
There are many games that already run on freemium models where you get to buy more tokens in the app store. Axie Infinity took this a step further by creating a massive internal in-game economy. The game peaked and declined but it proved the demand for both a game with the potential to make money and an investment product that provides exposure to GameFi.
Digital assets such as crypto tokens and NFTs are the obvious best fit for emerging in-game economies. However the barrier to entry is that mobile app stores require a 30% commission on all sales. Apps have been banned and removed from the app store for using crypto settlements.
Something needs to change around the app store centralization issue to allow a free market for digital assets.
Did I miss a promising niche or are you working on something related to this? If so I’d love to hear from you, hit the reply button.
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