Pantera Capital Partner: 6 predictions about the encryption industry in 2023
Written by: Paul Veradittakit, Partner, Pantera Capital
Compilation: aididiaojp.eth, Foresight News
2022 will undoubtedly be a year of frequent ups and downs in the crypto industry. After a bull run in 2021, we kicked off 2022 with expectations of a market correction, with Bitcoin and Ethereum down roughly 20% and 31%, respectively, in January alone. Macro factors such as Fed rate hikes, high inflation, layoffs, and a general slowdown in economic growth have brought great uncertainty. Difficult market conditions have largely been a source of panic for much of the year, but that hasn't stopped the crypto industry from making many incredible technological advances. Improvements in DeFi such as Compound v3 and the development of the ZK ecosystem continue. Institutional adoption of cryptocurrencies is also advancing rapidly, with Disney, Starbucks, Adidas and many other brands quietly embracing Web3. Big banks are also showing growing interest in the sector: Fidelity has launched an encrypted service for investors, BlackRock is partnering with Coinbase to provide its institutional clients with encrypted access, and Goldman Sachs is creating a new encrypted data service.
An industry highlight this year was the ethereum merger in September, when the blockchain transitioned from proof-of-work to proof-of-stake, reducing ethereum's energy usage by around 99.9%. Second, many amazing engineers continued to build in the bear market, with some strong projects emerging from it. The industry, too, is learning from every disaster in 2022, albeit tough for now. In light of these events, many projects and even the cryptocurrency market as a whole have shown their resilience. The development of the encryption industry so far has come through crisis after crisis, and this time I believe it will not be an exception. The industry will enter 2023 with the strength and durability demonstrated in 2022.
Here are my top six predictions for the crypto industry in 2023:
DeFi will continue to grow amid CeFi consolidation
The past year has exposed many problems of centralized finance CeFi, while DeFi has generally performed well. Given the multiple crashes of CeFi in 2022, I expect CeFi companies in the industry to gradually consolidate into highly regulated players like Coinbase and Bitstamp.
In the period following the FTX crash, DeFi trading volumes have skyrocketed, rising 68% from October to November to $97 billion in volume, illustrating how managing assets through secure smart contracts empowers users to better better understand liquidity and gain better control over their investments.
By 2023, I believe we will see the growth of more complex and interesting applications of DeFi. Some exciting examples are GMX, a decentralized perpetual exchange, and 1inch Pro, a compliant platform that connects TradFi (traditional finance) to DeFi. Use cases such as self-custodial wallets, synthetic assets, and prediction markets will attract more attention in the next year.
The industry's real strength lies in its infrastructure, which powers transactions in a trustless and efficient manner. These characteristics will greatly accelerate the adoption and growth of DeFi in 2023, especially considering the difficulties of CeFi this year.
We will see a lot of zero-knowledge adoption and use cases
With privacy concerns at the forefront of the crypto industry, zero-knowledge technology has been particularly prominent this year. Zero-knowledge techniques are essentially using provers, verifiers, and mathematical algorithms to prove something without revealing the underlying information about the proof. Since the blockchain is inherently transparent, the application is significant for the industry, and it also allows for more interactions on-chain in a private manner. Zero-knowledge proofs are also very lightweight, making on-chain interactions more scalable and efficient.
With projects like Succinct Labs, Risczero, and Espresso Systems, we've seen a proliferation of use cases for zero-knowledge proofs, EVMs, and Rollups. Zero-knowledge technology has a particularly beneficial role in cryptographic vertical identities. With zkps, users can prove their identity on-chain without revealing sensitive data. Vitalik Buterin, the co-founder of Ethereum, also pointed out in a recent article that zero-knowledge technology plays a very important role in solving information problems on the chain, and this category is "a problem that actually needs to be solved."
ZK technology is also valuable for cross-chain bridges, which can transfer messages and token assets, while ensuring security and correctness through concise proof mechanisms. It also has exciting use cases in the TradFi system, such as credit scoring and taxation.
Institutions will increasingly put financial assets on the chain
A real world asset (RWA) is a claim that represents a claim on an underlying asset and usually has a claim on the asset that generates income. The emergence of this category has unlocked a lot of liquidity and utility so far, and 2023 may bring more assets represented on-chain in an accessible way.
Stablecoins are arguably the most popular real-world asset application in the market today, with the category accounting for three of the top seven coins by market capitalization. Circle’s USDC and Maker’s DAI have been market-recognized stablecoins and have seen little volatility throughout the bear market.
The on-chain community has already demonstrated demand for RWA: MakerDAO, for example, decided to invest $500 million worth of DAI in U.S. Treasuries and corporate bonds by mid-2022. Goldfinch, a company that provides off-chain mortgage loans, currently has around $100 million in active loan value. Jia allows business owners to obtain blockchain-based loans and generate lucrative yields for liquidity providers backed by real-world businesses and assets. I expect interesting applications of RWA to grow in 2023, such as quick loans and real estate etc. In line with real-world asset trends, I also expect to see a slew of startups focused on bringing TradFi institutions into the crypto space in a regulatory-compliant manner.
More companies enter the blockchain data space
Arguably, the abundance of open-source data is one of blockchain’s best features, as it allows for in-depth analysis of on-chain activity. Harnessing this data in an efficient and responsible manner is an integral part of scaling blockchain dapps and their use cases. The data reveals a wealth of information about how blockchain is being used, emerging trends, user behavior, and on-chain money flows.
Blockchain analytics platforms like Nansen will continue to play a key role for services that analyze on-chain behavior through wallet activity. Companies like nxyz are also solving the blockchain indexing problem by providing data APIs without rate limits. Launching in 2022, Definitive aims to provide user-accessible tools and analytics for on-chain and off-chain activity. Even as these companies grow, blockchain data remains largely untapped, and I expect the industry to see significant growth in 2023. To understand where cryptocurrencies are headed next, we need to refine our level of state data analysis.
The developer tools stack will continue to grow
The developer tool stack will continue to grow as blockchain engineers increasingly seek simple and efficient ways to deploy Web3 projects.
Developer tools remove many repetitive and tedious parts of the job and encourage more engineers to experiment with creating on-chain protocols. Companies like Alchemy and Tenderly have been particularly important players in the industry over the past year.
Despite the bear market, developers are experimenting with on-chain applications more than ever. Alchemy recently said that since the beginning of the year, the number of engineers using its platform has tripled. In September 2022, monthly verified smart contracts increased by 2.6 times year-on-year. Impressively, 36% of smart contracts will be deployed and verified in 2022 as well.
As more and more web3 developers participate in the ecosystem, it's critical to provide them with solid tools as they start building. Cross-chain tools are especially important as they provide composable software that makes it easy to launch projects on multiple chains. A mainstay of many crypto projects, developer tools will continue to grow in 2023 as more crypto use cases emerge and more engineers seek to enter the industry.
NFTs that provide value to holders, such as game NFTs and identity NFTs, will continue to grow
Utility NFTs such as in-game NFTs, identity tokens and token membership communities, software and events will grow in 2023. This year, we've seen the industry start to develop in terms of technology and creativity, but it's still a long way from becoming mainstream. While the digital arts industry is undoubtedly a huge vertical, the use of NFTs to allow specific perks has the potential to disrupt many existing industries.
So far, we have seen some exciting applications and developments of these ideas. PROOF Collective allows its NFT holders access to future PROOF airdrops (one of which is the popular Moonbirds NFT project) and access to PROOF community programs such as live events and private Discords. Vitalik also published an integrity document on soulbound tokens (NFTs that hold on-chain identity information), and several projects have already adopted it. Gaming transactions also skyrocketed in 2022, accounting for more than half of all blockchain activity at one point. In addition, NFT has begun to explore in the field of entertainment, especially in the fan economy.
Traditional companies have been exploring the adoption of NFTs at an increasing pace. Some highlights: Tiffany released a line of pendants for CryptoPunk holders; Instagram announced that it would incorporate NFTs into its platform; Nike acquired metaverse fashion company RTFKT. Additionally, Royal redefines music revenue streams and ownership by allowing fans to invest directly in songs. Sports players like Cristiano Ronaldo have released related NFT collections to increase fan engagement and potentially other future perks.
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