Investment Opportunities Emerge at the Intersection of AI and Crypto

In recent years, the rapid development of artificial intelligence (AI) and blockchain technology has made the AI + crypto sector an investment magnet. Blockchain’s characteristics of decentralization, high transparency, low energy consumption, and anti-monopoly complement the centralized and opaque nature of AI systems. The fusion of these technologies brings unprecedented opportunities.

According to Vitalik Buterin, Ethereum's co-founder, the applications of combining AI and blockchain can be categorized into four types: AI as a player, AI as an interface, AI as the rules, and AI as the objective. He suggests that AI's role in crypto should be considered more from an 'application' perspective, including optimizing computing power, algorithms, and data.

HTX Research distinguishes crypto technology participation based on AI’s application levels, which can be divided into foundational, execution, and application layers. Each layer presents opportunities worth exploring. For example, zero-knowledge machine learning (zkML) technology, which combines zero-knowledge proofs and blockchain technology, offers a secure, verifiable, and transparent solution for AI agent behavior. Additionally, AI shows great potential in data processing, automated decentralized application (dApp) development, and on-chain transaction security within the execution layer. In the application layer, AI-driven trading bots, predictive analytics tools, and automated market maker (AMM) liquidity management are playing crucial roles in the decentralized finance (DeFi) sector.

Blockchain and AI differ fundamentally in centralization, transparency, energy consumption, and monopolization. Based on this principle and his analysis, Vitalik has classified applications that combine AI and blockchain into four categories: AI as a player in a game, AI as an interface to the game, AI as the rules of the game, and AI as the objective of the game. Vitalik approaches AI's role in the crypto world from an 'application' perspective. Additionally, we can consider crypto as a means of facilitating technologies and resources, including three perspectives: optimizing computing power, optimizing algorithms, and optimizing data.

HTX Research suggests that AI's development can be categorized into the foundational layer, execution layer, and application layer based on a general architecture. Correspondingly, we can also explore AI + Web3 projects from these dimensions. The foundational layer includes model training, data, decentralized computing power, and hardware, where particular attention should be given to combining zk (zero-knowledge) with AI/ML (machine learning) technologies. The execution layer involves data processing and transmission, AI agents, zkML, and FHE (fully homomorphic encryption). The application layer features AI + DeFi, AI + GameFi, the metaverse, AIGC (AI-generated content), memes, and blockchain-related technologies like RAAS (Robotics as a Service), oracles, coprocessors, and UBI (universal basic income).

Rapid progress has been made in foundational and application projects. These include Io.net, a computing power project; Flock, a foundational model; ZeroGravity, a blockchain infrastructure; Myshell as an AI agent; and 0xScope in the application layer.

We suggest exploring these opportunities:

I. zkML

zkML technology combines zero-knowledge proofs with blockchain to provide a secure, verifiable, and transparent solution for monitoring and constraining AI agent behavior. For example, the Modulus Labs project uses zkML to prove to stakeholders that their AI has performed specific tasks while protecting personal privacy and commercial secrets. As an intermediary between AI and blockchain, zkML offers a solution to address privacy protection for AI models and inputs and ensures the verifiability of the inference process. It has pioneered a method that allows using public models to verify private data or using public data to verify private models. Integrating machine learning capabilities enhances the autonomy and dynamism of smart contracts, enabling operation based on real-time on-chain data rather than merely static rules. This innovation makes smart contracts more flexible, allowing them to adapt to a wider range of applications, even those unforeseen at the contract's inception.

II. Data Processing

This area includes breakthroughs in the execution layer of AI, particularly in blockchain data transmission and development layers.

a. AI and On-chain Data Analysis

This area involves using AI technology to deeply mine blockchain data and leveraging large language models (LLMs) and deep learning algorithms to gain more insights. The Web3 Analytics project, for example, uses AI for on-chain data analysis to discover market trends and user behavior. It helps users understand on-chain transactions and market dynamics more effectively.

b. AI and Automated dApp Development

This area focuses on infrastructure projects related to DevOps. AI projects using automated development can attract more developers, thereby making the ecosystem more prosperous. Some AI-powered development tools can help developers quickly write smart contracts and automatically correct errors. Others even offer drag-and-drop dApp programming capabilities.

c. AI and On-chain Transaction Security

This area involves AI agents. It entails deploying AI agents on the blockchain to enhance the security and reliability of AI applications. These AI agents can automatically perform tasks such as trading, data analysis, and automated decision-making. Deploying them on the blockchain ensures their operations are transparent, traceable, and tamper-resistant, thereby increasing the system's overall security. Through real-time monitoring and smart analysis, AI technology can identify and defend against malicious attacks and data breaches, ensuring transaction security and data integrity. Project Example: SeQure is a security platform that uses AI for real-time monitoring and analysis. It detects and defends against malicious attacks and data breaches, ensuring the stability and security of on-chain transactions.

III. AI + DeFi

The most significant aspect of integrating AI with the application layer is AI + DeFi. Here are some key areas to focus on:

1. AI-driven Trading Bots

These bots can execute trades swiftly and accurately by analyzing market data, news sentiment, and price trends to make instant decisions. They often outperform human traders.

2. Predictive Analytics

While predicting the volatility of the crypto market has always been challenging, AI-driven analysis tools are becoming increasingly important. They can provide reliable forecasts of market trends and potential price movements.

3. AMM Liquidity Management

For instance, when adjusting the liquidity range for Uniswap V3, integrating AI allows the protocol to more intelligently set the liquidity range. This optimizes the efficiency and profitability of AMMs.

4. Liquidation Protection and Debt Position Management

Through a combination of on-chain and off-chain data, smarter liquidation protection strategies can be implemented. This ensures that debt positions are safeguarded during market volatility.

5. Design of Complex DeFi Structured Products

In designing vault mechanisms, financial AI models can be used instead of fixed strategies. These models may include AI-managed trading, lending, or options, enhancing product intelligence and flexibility.

IV. AI + GameFi

AI in GameFi projects enhances the gaming experience and fosters innovation. Here are some primary focuses:

1. Game Strategy Optimization

AI can learn players' habits and strategies to adjust game difficulty and tactics in real time, providing a more personalized and challenging experience. Through deep learning and reinforcement learning, AI can evolve to better suit players' needs and preferences.

2. Game Asset Management

AI can help players manage and trade in-game virtual assets more effectively. Leveraging smart contracts and automated trading strategies, players can maximize the use of their assets, such as automatic buying, selling, renting, and lending game assets, thus optimizing investment returns.

3. Enhanced Game Interaction

AI can create smarter and more responsive non-player characters (NPCs). Through natural language processing (NLP) and machine learning (ML) technologies, AI enables more natural and seamless interactions with players, enhancing immersion and satisfaction.

Investment Strategies in Different Timeframes

In the short term, we should focus on areas where AI is first applied in crypto, such as conceptual AI applications and memes. Mainstream AI communities will continue to generate new hot topics, and major upgrades by companies like Nvidia and OpenAI will spark attention in the AI sector, attracting capital inflows. These can create excitement and drive momentum. In the mid-term, the combination of AI agents with Intents and with smart contracts will garner traction. If successful, AI could extend smart contracts to create a new type of blockchain that integrates ledgers, contracts, and AI, moving beyond Ethereum's 'ledger + contract'. Vitalik has highlighted AI agents as a promising area. AI agents are intelligent entities capable of autonomously acquiring and processing information, making decisions, executing actions, and altering the environment. This is a cutting-edge field within AI, closest to mass adoption at the application layer. Metaphorically speaking, AI agents are like attractive and dynamic individuals, GPU cloud computing is a stable and mature entrepreneur, and AI models in the DA layer are disheveled scientists. In the long term, the combination of AI and zkML technology, despite skepticism from ML experts in Web2 AI companies, will ultimately exert a significant impact on the crypto world.

HTX Ventures, the global investment division of HTX, integrates investment, incubation, and research to identify the best and brightest teams worldwide. With a decade-long history as an industry pioneer, HTX Ventures excels at identifying cutting-edge technologies and emerging business models within the sector. To foster growth within the blockchain ecosystem, we provide comprehensive support to projects, including financing, resources, and strategic advice. HTX Ventures presently backs over 200 projects spanning multiple blockchain sectors, with select high-quality initiatives already trading on the HTX exchange.

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