From Loneliness to Liquidity: Virtuals Protocol and the Wealth of Connection
Executive Summary
- Market trading color: Despite struggling to rise above $100k, BTC options screen bullish, alt season is at the party but hasn't started dancing, and ETH has finally begun to see the light
- Theme of the week – Virtuals Protocol driving innovation in AI-driven gaming, companionship, and innovation on Ethereum’s Base blockchain
- Sector commentary: Crypto markets face volatility, altcoin declines, DeFi growth, and Web3 challenges amid Bitcoin, ETF, and AI trends
Market Trading Color (Nolan Aibel)
Digital assets took a breather from last weekly note as the $100,000 level proved too daunting to surpass given the asks surrounding it. As BTC fell nearly 10% and headed toward $90,000, the market saw over $1.8B of BTC longs get liquidated. This has brought Bitcoin annualized funding rates down to the 14% range, much healthier than where they were prior, above 40%. The temporary risk off approach was expected as Trump tariff plans and cabinet appointments have made headway and the market braces for a wave of data on the U.S. economy this week. Bitcoin stabilized just below $91,000 and has begun to climb its way back. Despite the near-term noise, many continue to bet big on Bitcoin to breach $100,000 by year end. The century strike still significantly dominates open interest on Deribit with the 11/29 and 12/27 expiries seeing the majority of volume. In looking at IBIT options, the Jan 2025 calls dominate volume with the 17Jan25 C55 seeing double the volume of any other listed contract. Downside protection is still lacking as the volume from yesterday alone screened 2.27/1 calls over and open interest 2.36/1 calls over.
Source: Deribit
As BTC ranges in the 90 thousands, alts have begun to find their stride with retailing piling back into the space. This is noticeable, not only with Coinbase flying up the app chart, but also by the tokens that have seen the largest rise of late. Darlings from the 2021 cycle have been top performers over the past week with $XLM +102%, $SAND +77%, $TIA +58%, $MANA +46%, $DOT +40 and $UNI +38% leading the way. To update a graphic, we posted two weeks ago, this alt season metric was at 35, so yes, alts have begun to find their legs but there is more room to run. We see this happening to its fullest extent once Bitcoin breaks $100,000 and finds firm footing above.
Source: blockchaincenter.net
Lastly, it has been refreshing to see the price action of Ethereum of late. On the week, the ETHBTC ratio has increased over 10% and rose back above 0.037. This week we saw ETH briefly rise above $3,500 for the first time since early July. This has led our desk to see an increased activity from directional traders rotate into ETH as well as stat arb funds becoming more active as volume on ETFs / CME increases and dislocation presents itself.
Virtuals on Ethereum’s L2
With Ethereum outperforming Bitcoin over the past week, renewed interest in Ethereum and its ecosystem is driving conversations around price action and new avenues for exposure. While traditional methods remain a focus, Virtuals Protocol offers a unique opportunity to engage with the Base ecosystem beyond equities. Positioned as one of the most innovative developments on the blockchain today, Virtuals Protocol is a repeated name in conversations our team has.
In terms of market performance, Virtuals Protocol's token, $VIRTUAL, has surged 40% this week, outpacing many peers. Meanwhile, GOAT has seen a 30% decline, one of the leaders in the AI/LLM models in the space.
Operating on Coinbase's Base blockchain—a rapidly growing ecosystem with over 1.5 million monthly active users—Virtuals Protocol is redefining AI-driven gaming and entertainment. At the core of Virtuals Protocol’s vision is intelligence modularity: fostering composability that drives innovation while maintaining a seamless and synchronized end-user experience. This approach positions Virtuals as a leader in the evolution of blockchain-based AI ecosystems.
The Vision: Intelligence Modularity at Scale
The Virtuals Protocol aims to create modular AI agents designed for gaming and entertainment. These agents are composed of distinct modules:
- Cognitive Core for strategic decision-making.
- Visual and Voice Cores for immersive interactions.
- Memory and Domain Expertise Cores for contextual continuity.
Contributors build these modules collaboratively, co-owning the agents and sharing in their financial upside. This system not only encourages innovation but ensures contributors are rewarded equitably for their efforts.
October Highlights: A Strong Start
Over the past two months, Virtuals Protocol has demonstrated great traction, as evidenced by their published metrics:
- 17,500 unique agent token holders—a clear indicator of user adoption.
- Over $250 million in trading volume across all agent tokens, with $VIRTUAL as the base asset.
- 15 million $VIRTUAL tokens locked in Agent Liquidity Pools (LPs).
- More than 1,000 unique AI agents created, showcasing the protocol's modular and creative potential.
Tapping into Explosive Market Growth
From 2018 to 2023, the number of monthly active users on AI companionship platforms grew 30x, reaching 15 million users. This adoption rate is 150% faster than early-stage social media and online gaming, showing the untapped demand for AI-powered interactions and potential growth.
Source: ARK Investment Management
Virtual companionship directly addresses one of humanity’s most persistent challenges: loneliness. According to Google Trends, search interest in terms related to loneliness has steadily increased year over year, reflecting a growing societal concern and a growing market. Virtuals Protocol leverages AI agents to provide empathy and companionship without the complexities of human interaction, offering a scalable and innovative solution to this pressing issue. By bridging emotional needs with technological advancements, Virtuals aligns its growth trajectory with this rising demand.
Building on this foundation, Virtuals Protocol’s Generative Autonomous Multimodal Entities (G.A.M.E) enable developers to create versatile AI agents that transcend individual applications. Through APIs and SDKs, these agents seamlessly integrate cognitive and multimodal functionalities, paving the way for universal digital companions.
Ecosystem Highlights
The three largest applications and a summary for each is below:
- AI Koi
- A multimodal comic-generation app powered by Virtuals Protocol.
- 4.8 million messages exchanged, 4,800 mangas created, and an average session time of 12 minutes.
- Market cap: $9 million.
- Sanctum
- An open-world Mafia game on TON blockchain, blending AI agents with collaborative gameplay.
- First iteration is now live, powered by Virtuals.
Source: Sanctum AI
- AI-dol
- The first AI-powered virtual girl band on TikTok, integrating cutting-edge features like Audio-to-Dance and Text-to-Music.
- TikTok account boasts 571,000 followers and a market cap of $45 million.
Initial Agent Offerings (IAO): Democratizing AI Creation
The Virtuals Protocol allows anyone to create AI agents in a fair and accessible manner:
- Create an agent: Enter details like name, ticker, and description for a small $VIRTUAL fee.
- Market validation: Once the agent’s market cap hits $420k, it’s listed on the Virtuals app, paired with $VIRTUAL in a liquidity pool.
- Growth unlocks: Higher market caps unlock advanced features like autonomous social media posting and on-chain wallets.
Source: Virtuals Protocol
The IAO process on Virtuals offers a democratized approach to creating AI agents, similar to the graduation mechanism seen in Pump.fun (reach out for our write up on pump.fun). However, Virtuals distinguishes itself with a focus on modular innovation and AI intelligence scaling, aligning financial incentives with agent growth.
V2: A Smarter Protocol
Virtuals Protocol prioritizes incentivizing contributors by quantifying their input and rewarding them with $agent tokens, creating a fast track to network growth. Contributors are provided with the flexibility to either cash out for immediate gains or hold tokens for potential value appreciation, driven by speculative interest or revenue sharing from AI agents. The idea that technical contributors are motivated solely by passion is a misconception; financial incentives are equally important, especially in an engaging, innovative ecosystem. To support this, the protocol ensures liquidity options for contributors while fostering co-ownership for long-term rewards.
Applications are encouraged to integrate AI agents through a "paid-to-pay" mechanism, where usage fees are offset by retrospective discounts paid in $VIRTUAL tokens. These tokens can even be redistributed to end users as a tool for user acquisition.
Source: Virtuals Protocol
The Proof of Intelligence (PoI) framework ensures sustainable tokenomics by inflating $agent token supply only when an agent's intelligence improves. Validators review and approve contributions that enhance agent intelligence, with the growth measured via an Elo rating. This system balances innovation with controlled inflation, as both agent intelligence and token supply are designed to plateau over time.
- Real-time value streaming: Automates the flow of value from applications to contributors.
- Enhanced revenue sharing: 90% of agent revenue is distributed to liquidity providers, while the protocol retains 10%.
- Contributor incentives: Intellectual property holders receive 10% of all future $agent tokens, ensuring ongoing rewards.
- Proof of Intelligence (PoI): Links intelligence growth to token inflation, maintaining equilibrium between innovation and token value.
How the Tech Stack Works
Virtuals' website features great graphics that illustrate each component and its functionality. I’ve summarized some of their content below, but for a full explanation, please visit their website here.
- Agent Prompting Interface
- APIs and SDKs enable seamless integration with AI agents for dynamic computational tasks.
- Agentic Behavior
- Framework includes sensory processing, action execution, strategic planning, and on-chain wallet operations.
- Long-Term Memory
- Persistent storage for knowledge graphs and embeddings ensures contextual continuity.
- Parallel Processing
- Enables real-time interactions via multi-threading and distributed computing.
- Stateful AI Runner (SAR)
- Hosts multimodal AI agents, linking tools like Text-to-Speech and Image Generation.
- Coordinator
- Synchronizes updates based on on-chain and off-chain changes in real-time.
- Initial Agent Offering (IAO)
- Launches and trades AI agents using ERC-6551 wallets and liquidity pools.
- Immutable Contribution Vault (ICV)
- Stores and enriches custom models and data securely on the blockchain.
Sector Commentary
- Layer One / Altcoins
- Bitcoin ($BTC): Bitcoin's Tumble to $91K Evokes Thanksgiving 'Massacre' of 2020 (link)
- Bitcoin ($BTC): Bitcoin Price Will Sink Lower Before Hitting $100,000: Standard Chartered (link)
- Bitcoin ($BTC): Bitcoin Long-Term Holders Have 163K More BTC to Sell, History Indicates: Van Straten (link)
- Bitcoin ($BTC): This Hedge Fund Now Has a 1,000x Profit on Bitcoin (link)
- Ethereum ($ETH): Make Ethereum feel like Ethereum again: Based rollups explained (link)
- Dogecoin ($DOGE): Dogecoin Jumps on Fresh X Payments Speculations After Elon Musk Tweet (link)
- Altcoins: CoinDesk 20 Performance Update: XLM Falls 14.6% as All Index Constituents Decline (link)
- DeFi / Stablecoins
- Web3 / AI / NFTs
- RWA / Tokenization / Metaverse / Gaming
- Zodia Custody partners with Securitize to bolster institutional access to tokenized assets (link)
- Digital Infrastructure: Capital Markets / Exchanges / DAOs / Mining
- Trump admin eyes CFTC to lead digital asset regulation (link)
- Bitcoin on corporate balance sheets: What’s the risk and reward? (link)
- Op-Ed: Why Memecoins Matter (link)
- Arthur Hayes on memecoins, monetary policy and the US election (link)
- Visionary or 'financial comedy'? Market participants weigh MicroStrategy's stock premium amid bitcoin buying spree (link)
- Bitcoin Buying Plans Are Supercharging Stocks. Is This a Michael Saylor Redux — or Another 'Long Island Iced Tea' Fad? link)
- Spot Bitcoin ETFs see $438M outflows — biggest since US election (link)
- Bitwise files S-1 registration for ETF tied to Bitcoin and Ether (link)
- Justin Sun Joins Donald Trump's World Liberty Financial as Adviser (link)
