“That’s Our Two Satoshis” - The Long-Term Effects of AI and Crypto

Jeff Dorman, CFA
Jun 5, 2023
Thats Our 2 Satoshis Logo

What happened this week in the Crypto markets?

Screen Shot 2023-06-05 at 9.28.03 AM

Source: TradingView, CNBC, Bloomberg, Messari

A Little Dispersion in An Otherwise Sideways Market
“Just landed back in town, and it looks like prices are exactly the same as when I left 5 days ago!”
- Senior Analyst at Arca

That’s been the story of the 2nd quarter. Low volatility, range-bound markets have taken a toll on anyone in a hurry.  That said, last week there were some small pockets of dispersion.  For example, Solana (SOL) woke up from its slumber, rising +6% week-over-week and outperforming ETH for the first time since the first few weeks of 2023, perhaps due to a successful first rollout of its Solana phone.  Meanwhile, Optimism (OP) continued its slide, falling another -7% week-over-week, and is now down -23% in the past 30 days and -41% in the past 90 days as investors front-ran the unlocking of tokens (386M OP tokens were unlocked for early investors and core contributors last week, which more than doubled the circulating supply of OP). 
Source: Coinbase
Elsewhere, AI-related tokens are starting to separate from each other, no longer just an “all or none” sector investment.  Render (RNDR) has outperformed most peers. 
Source: Arca estimates / CoinGecko
AI is of course not “new” per se, but it could be argued that it is one of the most important technologies invented, at least in terms of estimates of productivity enhancements (rivaling the invention of the internet). As Grit Capital pointed out, the S&P 500 would be meaningfully down YTD if not for the AI-related stocks. And while AI tokens are not yet a meaningfully enough part of the digital assets economy for these moves to have an impact on the overall market, it is quite certain that they will be a much bigger sector in the near future.  Arca’s own Venture Portfolio Manager, David Nage, shows what that future might look like:
If You Build It, They Will Fund
Written by Arca Portfolio Manager, David Nage
Venture capitalists invested $2.4B into crypto-focused startups and protocols in the first quarter of 2023—the lowest sum in over two years (since Q4 2020).  Some metrics include: 
  • Median deal size continues to decline ($2.5M) from the all-time highs seen in Q3 2022 ($4.5M)
  • Median pre-money valuation was $18.8M—its lowest point since Q1 2022 
  • 42% of the crypto VC deals completed in Q1 2023 were for companies headquartered in the United States (185 deals), Startups headquartered in the United Kingdom were 2nd, with 37 deals done in Q1 2023
  • About $2.2B was raised by 14 new crypto VC funds in Q1 2023, with the average fund size increasing to $211M and the median fund size decreasing to $62.5M. 
In May 2023, based on our early-stage fund's observations coupled with the data from Messari/Dove Metrics, curbed asset allocation into early-stage companies in digital assets continued, with only 66 deals announced at a total of $630M compared to the same time last year, with 223 deals funded totaling over $4.7B.  
Approximately 50% of the Series A through C deals funded in May 2023 were later stage compared to deals 29% of deals in May 2022.  This included the massive $115M round for Worldcoin, which is working to create decentralized identities through the use of retinal biometrics and digital asset infrastructure. This continues a trend where infrastructure companies and those building the pipes of Web3 are getting funded. One of the more recent fundings in infrastructure, LayerZero, recently raised $120M to continue the work on building its omnichannel interoperability protocol designed for lightweight message passing across chains (think sending email from Gmail to Hotmail in more of a Web1/2 approach). 
AI Rules Everything Around Us
Or does it? 
The AP reported: “Experts say the viral image had telltale signs of an AI-generated forgery, and its popularity underscores the everyday chaos these now increasingly sophisticated and easy-to-access programs can inflict.”
Content verification is potentially one of the biggest areas for blockchains to play a role in society. Beyond the recent AI Pentagon fiasco, another issue occurred when someone on TikTok with the handle GhostWriter997, initially claimed to produce a song with the famous hip-hop artists Drake and The Weekend—without actually working with the artists. 
James Murtagh-Hopkins, Senior Vice President of Communications at Universal Music Group, said:
“UMG’s success has been, in part, due to embracing new technology and putting it to work for our artists—as we have been doing with our own innovation around AI for some time already. With that said, however, the training of generative AI using our artists’ music (which represents both a breach of our agreements and a violation of copyright law) as well as the availability of infringing content created with generative AI on DSPs, begs the question as to which side of history all stakeholders in the music ecosystem want to be on: the side of artists, fans and human creative expression, or on the side of deep fakes, fraud and denying artists their due compensation.”
Blockchains and decentralized storage can play a role in creating a verified timestamp of human-generated content. A recent example of what this could look like, provided by Starling Labs in addition to IPFS, shows how a photo captured during a time of war could be verified and authenticated using blockchains:
With the ease of use and proliferation of AI/ChatGPT, society will soon be flooded with AI-generated content, becoming similar to the corollary of generic versus brand-name pharmaceuticals. Purchasers/users will want to verify if the content is AI or human generated, similar to wanting to know if they are getting a generic or name-brand. It’s feasible through this example that on-chain verified human content would be priced at a premium, while AI-generated content would be at a discount. What better way to verify content than to mint an NFT immediately upon creating content to verify authenticity and provenance with an immutable record. 

Just Do It 
As Blockworks reported this past week: “Nike NFT marketplace .Swoosh will be incorporated into future EA Sports video games.  Nike stated that it will give more specifics on how its NFTs — which it currently refers to as “virtual creations” — will be included in EA’s games “in the coming months”. EA is Nike’s latest partner in its bid to incorporate Web3 into its business. Ron Faris, a vice president of Nike Virtual Studios, said in a statement that the partnership would unlock “new experiences for our .SWOOSH community and the massive EA SPORTS fan base.”
Source: NBA2k23
What does the future of commerce look like? With this announcement, it’s quite possible that one of the most iconic consumer brands, Nike, sees a future where the 3 billion gamers worldwide engage in the pre-existing storefronts in a video game, such as NBA2k23. When they purchase digital items within the game, in the form of an NFT, it will marry with a real-world purchase of the same item. Those items will most likely have sophisticated NFC chips that further bridge the gap between the digital and real worlds. 
So while the dollars may be less in the aggregate, the builders continue to build, and the world's largest corporation continues to find ways to leverage the technology that has been developing over the last few years. Those focused on solving real-world issues, such as identity and IP verification, to name a few, are finding their groove.


And That’s Our Two Satoshis!
Thanks for reading everyone! Questions or comments, just let us know.

The Arca Portfolio Management Team
Jeff Dorman, CFA - Chief Investment Officer
Michael Dershewitz - Chief Operating Officer
Katie Talati - Director of Research
Sasha Fleyshman - Portfolio Manager
David Nage - Portfolio Manager
Wes Hansen - Director of Trading and Operations
Michal Benedykcinski - Senior Vice President, Research
Nick Hotz, CFA - Vice President, Research
Kyle Doane - Vice President, Trading
Robert Valdes-Rodriguez, CFA- Vice President, Research
Alex Woodard - Associate, Research
Christopher Macpherson - Research Analyst
Andrew Masotti - Associate, Trading and Operations
To learn more or talk to us about investing in digital assets and cryptocurrency
call us now at (424) 289-8068.

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