Y Combinator: Stablecoins, Metaverse, and AI Show the Most Promise
Compared to well-known investment institutions in the cryptocurrency industry such as a16z, Paradigm, and Binance Labs, Y Combinator, although not focused on the cryptocurrency industry, is undoubtedly the most low-key player in the industry. Companies like Coinbase, OpenSea, TRM Labs, Quantstamp, and even WorldCoin have Y Combinator behind them.
Last week, Y Combinator released its annual “Requests for Startups” report, and this year, in contrast to previous years, Y Combinator explicitly stated that stablecoins, the metaverse, and artificial intelligence (AI) are the most promising innovation areas in the future.
Stablecoins have enormous potential as an economically efficient cross-border payment option. At the same time, Y Combinator sees potential in the fields of augmented reality (AR) and virtual reality (VR), as metaverse applications are already expanding beyond gaming. Additionally, AI has the capability to customize enterprise software and simplify “back-end processes.”
Why does Y Combinator believe in the stability of stablecoin economics?
According to Y Combinator partner Brad Flora, “Stablecoins will become an important part of the future of currency.” In fact, Y Combinator has effectively incorporated stablecoins into its operations for many years, including cross-border payments, reducing transaction costs and fraud, and helping users protect their savings from malignant inflation.
In the past, many people believed that blockchain technology lacked practicality, but stablecoins are the simplest and most efficient blockchain application. Traditional finance is inevitably going to “emulate” stablecoins.
First: Stablecoin market is at a breakthrough stage
Firstly, the historical trajectory suggests that the stablecoin market is at a breakthrough stage. Y Combinator has seen rapid development in the stablecoin market, with a notable example being PayPal’s recent launch of its in-house stablecoin, PYUSD. Major banks have also started offering custody services and ramped up their promotion efforts. All these changes are similar to the transformation of the digital music industry in the early 21st century when “illegal” downloads seemed to be everywhere, but with the entry of “legitimate” players like Apple and Spotify, the industry began to thrive.
Second: There is still significant room for growth in stablecoin users
Secondly, there is still significant room for growth in stablecoin users. In terms of data, the global stablecoin market currently has a total supply of approximately $136 billion, with immense development potential because only about 7 million people have traded/used stablecoins so far, while there are over 500 million people living in countries and regions with inflation rates exceeding 30%. This means that there is a large depth and growth space for stablecoin users.
Third: Insufficient number of BUIDLers
Furthermore, stablecoin technology has clear advantages, but there is an insufficient number of BUIDLers. Y Combinator hopes to find and invest in promising teams in the stablecoin, tool, and platform space.
Stablecoins are digital currencies pegged to a value anchor (usually the US dollar but could be other fiat currencies or assets). Stablecoin transactions are recorded on a blockchain digital ledger, allowing wallets on the same network to transact and complete transactions within seconds, with much lower transaction fees compared to traditional financial transfers. The technological advantages of stablecoins are evident, but currently, there are only a few stablecoin issuers like Tether and Circle, and even fewer major market liquidity providers.
Therefore, Y Combinator aims to find excellent teams that build B2B and consumer products on top of stablecoins, tools, and platforms because these tools and platforms can enable stablecoin financial services and more stablecoin protocols. Currently, Y Combinator’s alternative investment portfolio in stablecoins includes:
– Stablecoin payment service provider Apollo First
– Stablecoin cross-border payment service provider Kapstar
– Stablecoin payment Web3 application Paymobil
– Stablecoin protocol Algofi based on the Algorand blockchain
– Meson, a low-cost stablecoin cross-chain trading platform based on L2 Rollup.
Why does Y Combinator believe in the metaverse and AI?
Metaverse applications have begun to surpass gaming applications
With the recent releases of Apple Vision Pro and Meta Quest 3, the metaverse market is gaining momentum. Y Combinator partner Diana Hu pointed out that although augmented reality (AR) and virtual reality (VR) are continuously evolving, there are still many challenges to address in terms of best use cases, user experience/interface practices, and more.
Diana Hu added, “The user experience is improving, rendering capabilities are constantly enhancing, and hand/eye tracking has also significantly improved—but there is still work to be done.”
Therefore, if a startup explores metaverse device-based applications in fields like “super games,” it is highly likely to be considered for investment by Y Combinator.
AI can simplify “back-end processes”
Additionally, Y Combinator’s “Requests for Startups” report includes enterprise software built with artificial intelligence, large language models (LLMs), and “intelligent AI.”
Harj Taggar, General Manager of Y Combinator, believes that compared to traditional “one-size-fits-all” enterprise software, AI can help businesses create their own customized customer relationship management, human resources, and planning systems. Large language models can significantly simplify many historically labor-intensive “back-end processes” performed manually by large teams, including application evaluation, document submission, transaction monitoring, and compliance reviews.
The following image shows Y Combinator’s AI-related investments since 2015, and it is evident that the number of investment projects in the AI field has increased significantly since the introduction of ChatGPT:
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Data shows that during the 2023 winter and summer batches (January to March and June to August), the number of AI-related projects reached 88 and 99, respectively. In addition to the increase in the number of investments, compared to the winter batch of 2023, Y Combinator is more focused on applied landing projects such as enterprise services and software development, and AI applications have become more diverse, with a noticeable increase in AI investments related to medical services and finance. Currently, Y Combinator seems to focus more on projects that use AI technology to improve development efficiency, such as:
– CodeStory, which supports automatic code writing
– Tempo Labs, which can generate 60%-80% of the front-end code required for any feature
– Autotab, which provides the Autotab tool that can automatically generate corresponding programs through natural language description commands
– Ten.dev, which generates annotated documentation for code and supports developers’ queries through chat
– Kapa.ai, which provides AI-supported bots for the programming community
– Magic Loops, which supports programming using natural language.
In conclusion
In the venture capital industry, there are not many institutions that have had a greater positive impact than Y Combinator. This well-established and low-key incubator and accelerator has quietly made significant moves in the cryptocurrency industry. For anyone with innovation and entrepreneurial spirit, the significance of Y Combinator is evident, and analyzing the areas they focus on may be helpful for Web3 entrepreneurs.
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Proofread by: Gao Jingyuan
