If you’re reading this, you’re probably a true believer, a very smart trader (who has been through multiple crypto cycles), or someone who really thinks crypto is here to stay. 2022 is a down year for the crypto market from almost every angle except for technological innovation. Even so, innovation at the protocol and application level has me very excited about 2023 and beyond for the crypto industry.
In this article, after a very brief discussion of price, I will cover some relevant topics about blockchain, applications, and mainstream adoption. I hope you enjoy these thought-provoking perspectives and that you disagree enough to provide some feedback.
This is what I believe will happen in 2023, enjoy!
Price Trends
The latest buzz is that crypto capitulation has already happened and only true crypto believers still believe in the industry. I've also read about "time-based market capitulation" which basically boils down to investors getting bored or finding a more productive place to move their capital. For example, if the $ETH price hasn't moved in 6 months and you're earning 2.5% in your savings account, you might decide to move your money.
Bitcoin is a difficult asset to hold onto for the following reasons:
- It is highly correlated with Nasdaq as the TradFi trading algorithm has been incorporated into the crypto industry
- Mt. Gox compensation is expected to be distributed sometime in 2023. The 150,000 BTC supply (worth $25 billion) is expected to be distributed to those affected by the hack.
- Digital Currency Group has suffered huge losses from providing Genesis loans to FTX and Grayscale's GBTC product, which is now trading at a negative premium of 47.5%. Investors are concerned that Grayscale may need to liquidate some of their BTC to raise enough funds to keep DCG solvent.
I still subscribe to the idea that crypto will follow in TradFi's footsteps, however, crypto native money will continue to flow out of BTC and into good layer 1 tokens + DApp tokens. This also means that Bitcoin's dominance should continue to decline. My best hope is that as recession and potential stagflation begin to drive stock markets sideways, earnings adjust downward, and interest rate hikes continue until they reach a terminal rate of 5%+.
Layer 1
Solidity has won the race between smart contract languages (yes, I know there are new versions like Vyper...) so the narrative of "EVM on <XX chain>" will be strong next year. Once a chain includes a trusted oracle like Chainlink, the battle-tested protocol can easily be launched and enter multi-chain. This happened multiple times in 2022 and will continue on more efficient (faster/cheaper/composable) blockchains. Cosmos plans to finally connect to Chainlink in 2023, which should keep Lisk relevant. What should we focus on?
- Neon and Nitro on Solana
- Canto, Monad, and Berachain on Cosmos. Canto has the first-mover advantage, but the hype around Berachain’s innovative liquidity staking and delta-neutral perps machine is intense.
After two years of VC predatory tactics at the height of cheap money, the retail sector has been slaughtered by predatory practices that allow for locking and hedging of early token allocation multiples via perps.
Therefore, I am very bullish on organic, true builder-centric communities that are not VC-related. Specifically:
- Ethereum and L2s (mainly Arbitrum and Optimism)
- Fantom
- Canto
Conversely, until better token practices emerge, I am pessimistic about the following projects:
- Aptos
- Sui
- Solana
- Avalance
- Near
I am also bearish on Bitcoin, but it shouldn’t even be called L1 due to its complete lack of utility and failed inflation hedge/store of value narrative. The only way $BTC can outperform $ETH in 2023 is if the following happens:
- Some regulations were passed that harmed smart contract platforms or PoS
- Major currencies fail or depreciate (Euro, Yen, Dollar)
Here are some blockchain ecosystems that I am preparing to try and think have potential:
- Binance Smart Chain, because of the Wombat ecosystem (incentivized stablecoin swaps), Thena (Solidly-style DEX), and Level (Perpetual Protocol). OpenSea also recently added support for BSC, which may drive more NFT activity. CZ will support BSC's ecosystem at all costs, but centralization is dangerous, so I will always limit the funds I put on the chain.
- Osmosis recently added new applications, namely stablecoin swaps and liquidity staking (Stride, Quicksilver). Mars protocol is also on the way, which should significantly improve capital efficiency and become part of the $OSMO token pool.
- Synapse (Synchain) is a trusted bridge that has gone very broad and introduced $nUSD to transfer value across chains. Synchain is an optimistic rollup that is expected to launch soon with numerous partner protocols. Berachain is also interested in using Synapse as its canonical bridge, which could bring in additional transaction volume. Synapse has a lot of questions to answer around the specific progress, token economics, and delivery of Synchain in order for me to make a significant investment.
- If only the Cosmos Hub could figure out ATOM 2.0 token economics and clean up the governance/infighting. Unfortunately, “good tech, bad tokenomics” only seems to benefit early insiders, while retail investors are hurt.
I’m also keeping a close eye on two other Cosmos chains that could be monsters if they deliver.
- Sei has the shortest block time in Cosmos (0.6 second finality) and has figured out how to parallelize transactions to prevent MEV.
- Celestia became all the rage due to its modularity that separated the transaction and data availability layers. Celestia raised a lot of venture capital funding, which is a concern for retail investors.
Ethereum
The next and final hard fork for Ethereum 2.0 is the Shanghai upgrade. This will unlock $ETH from the Beacon Chain, the PoS, chain. This upgrade is scheduled for March of next year and should result in a significant increase in the staked supply as it gives investors confidence that they can get their ETH back.
Meanwhile, we’ve seen Liquid Staking Derivatives (LSD) grow rapidly in 2022, and I predict they will grow faster than new ETH inflation supply in 2023.
However, the lack of on-chain activity will lead to ETH supply inflation next year. The chart below shows that $ETH has not experienced deflation since the merger was successful, however, 1.16 million fewer ETH (about $1.4 billion) have been created.
Source: ultrasound.money
Decentralized Applications
Derivatives
The on-chain perpetual market exploded in 2022 thanks to GMX (bear market darling — imagine the volumes and fees in a bull market), Perpetual Protocol, and Gains Network. Arbitrum is becoming a liquidity hub as each protocol deploys or migrates. I expect on-chain options to really improve in 2023. Dopex, Buffer, and Premia run on Arbitrum, while Aevo is built on Ribbon. These will all double their TVL in 2023 despite declining liquidity.
Structured products and vaults will grow exponentially in 2023 as perpetual products and options are combined.
Delta-neutral vaults like Rage Trade and Umami are likely to continue to attract crypto-native and eventually institutional capital due to their higher risk-adjusted yields.
Decentralized Exchanges
DEXs such as Velodrome ($VELO), Equalizer ($EQUAL), Thena ($THE), and Camelot ($GRAIL) will outperform Uni v2-type products (e.g., $SUSHI, $QUICK, $BOO) and $UNI by 2023. Tokens with real yield, sustainable token emission, and built-in bribery mechanisms should be less volatile and generate revenue in sideways markets.
Borrowing
The undercollateralized lending space took a big step back after the FTX incident, but I believe it will still grow through 2023. DeFi is performing extremely well due to the overcollateralized nature of lending, and capital efficiency will be front and center for large capital pools.
crvUSD is just the beginning for DEX-centric stablecoins. Univ3 LPs (NFTs) are severely underutilized, and other liquidity positions (such as Balancer BPTs) could lead to additional stablecoin liquidity and leverage.
Real World Assets (RWAs) are the holy grail of DeFi leverage, but I don’t expect any progress in 2023. Regulatory clarity is an important requirement for this to happen.
Non-fungible tokens (NFTs)
Granted, I’m not an NFT expert, but NFTFi is part of my 2022 theme and I expect this to continue in 2023.
I recently participated in a protocol funding round that used NFTs as a fundraising mechanism and thoroughly enjoyed the experience. This was different from any other minting event where I bought lottery tickets for my profile picture because it had the value backing the NFTs received. I hope to see other protocols replicate this mechanism.
NFT lending has been slow to start and has been around higher value blue chip assets, but the addition of Llama Lend is very attractive for gaining liquidity on long tail assets. JPEG'd has the highest TVL and has been a slower growth process. One of the bigger risks of NFT lending is the liquidation engine. Reducing the collateralization ratio is one way to reduce the risk of the protocol, but finding buyers for liquidated loans is not always immediate and easy.
I’m excited about the new NFT AMM Sudoswap, which is being used as a price oracle and for instant liquidity. The Sudoswap LP token may also help with leverage through lending or minting stablecoins. $SUDO The token should be one of the larger launches in 2023.
I expect most mainstream crypto adoption to occur in the NFT space by 2023 (more on this below).
GameFi
Gaming is the most hyped vertical for the disruptive power of blockchain and cryptocurrencies in the near future. Billions of dollars have been invested in gaming studios and companies with the expectation that once crypto incentives are added to gaming, the masses will flock to it.
Realistically, I have yet to see a game good enough or with enough mainstream adoption (except by crypto speculators) for me to believe this claim. In a world where money isn’t cheap and liquidity is thin, I’d need real results to make any large-scale liquidity investments in GameFi. Maybe by 2024-25, but not in 2023.
Social Finance (SocialFi)
The first exciting protocol in SocialFi is STFX. I have been a beta tester, experiencing its UX, and eager to get more involved when it fully launches in 2023. STFX will allow anyone to transparently demonstrate their trading acumen, raise funds for funds (directional trading), and leverage the power of community capital. STFX will also make GMX a larger perpetual swap powerhouse and attract more CEX traders to join DeFi.
Lens and Farcaster are decentralized social media with some crypto-native hype, but they need better UX and parity with Twitter. Otherwise, they will never be used by crypto-natives.
Mass adoption
Credit card companies like Visa see how blockchain can simplify the payment process. That’s why Visa has been deeply exploring how to incorporate stablecoin payments.
Visa is at the front line, but other payment processors will be in line, with Fortune 100 companies like Amazon, Apple, and PayPal all set to benefit from crypto payment rails.
I expect big banks like JPMorgan, Goldman Sachs, BNY Melon, etc. to acquire crypto exchage and assets of distressed companies, enter market making and custody businesses, and integrate web3 wallets. Digitally native, purely online banks like SeriesFi will cater to crypto-native companies.
Adoption of Polygon NFTs (Starbucks loyalty program, Nike, etc.) will continue. Their focus has been on business development, and their strategy is to convince companies that it is a win-win when companies issue unique NFTs as part of their customer loyalty programs. Whether the incorporation of NFTs will lead to behavioral changes or increased revenue remains to be seen, but it is definitely an interesting development that has the potential to help expand mass adoption.
Another much-needed development is helping crypto investors add fiat on-ramps directly to decentralized exchanges (DEXs) and bypass the risks of holding assets on custodial platforms. Moonpay has already seen some success, and others will surely be eager to share in the fees.
There has been and will continue to be a massive exodus of CEX → DEX usage and trading. For CEXs to stay relevant, they must adjust their regulatory and transparency strategies. Coinbase and Binance are the biggest survivors. They both need a DeFi strategy, perhaps multi-signature authentication for asset transfers from customer wallets, or some other technical improvement, otherwise they will not be able to develop due to public distrust.
Regulation
With Congress so split, I don’t think 2023 will bring any sweeping regulatory changes. However, the impact of FTX and the general negative crypto sentiment will require us to be very active with organizations like Coincenter and support open-minded and well-informed members of Congress like Tom Emmer.
