Original title: "Pantera Capital's Open Letter to Investors: A Turbulent 2022, 2023 About to Bottom"

Original compilation: Frank, Foresight News

Original compilation: Frank, Foresight News

Dear Investor:

Let's say it's January 1st, 2022, and let me tell you, by January 17th, 2023, Tesla stock will be down 63%, Meta down 60%, Amazon down 42%, PayPal down 57%, Square down 54%.

According to an analysis by Edward McQuarrie, a professor emeritus at Santa Clara University who studies historical investment returns, it was the worst year ever for U.S. bond investors:

"Even if you go back 250 years, you can't find a worse year than 2022."

Now, I ask you to guess how much Bitcoin will fall, and I think most people will say more than 54% (Bitcoin, as a proxy for our industry, has fallen by 54% since January 1, 2022).

And that's not even taking into account the shocking crimes committed by SBF/FTX/Alameda against 5 million people, and the detonation of companies in the circle like Three Arrows Capital, Terra/LUNA, Genesis, BlockFi, Celsius, etc.

Blockchain has been impressively resilient in the face of dire risk asset macro markets and historic idiosyncratic catastrophes.

However, this is not surprising. Pantera has managed blockchain funds in three previous “crypto winters,” each of which had catastrophic events such as the fall of Mt. Gox, which had 85% of the market at the time — Much bigger than FTX today.

Blockchain will change the world, and it will surely survive these problems.

I believe it has bottomed out and we will soon see blockchain assets continue their 13-year trend of 2.3x annual appreciation.

Table of contents

1. 2022 YEAR IN REVIEW, CAT FOLEY & JESUS ​​ROBLES, III, CONTENT ASSOCIATES

2. Our 2023 Outlook

• Crypto Market Outlook, Co-CIO Joey Krug

• The State of Blockchain Venture Capital, General Partner Paul Veradittakit

• Blockchain infrastructure and Ethereum merge, investment analyst Will Reid

• Structurally Safe DeFi, Investment Assistant Jeng Yang

3. Announcing Pantera Blockchain Summit 2023: April 3-4, 2023, San Francisco, CA

2022 Year in Review

2022 is going to be a crazy year for the blockchain industry, some of the things we are witnessing include:

Ethereum Merge, an upgrade that reduces Ethereum’s energy usage by ~99.9% and mitigates ETH’s inflation — a huge achievement for blockchain coordination;

The stunning collapse of Three Arrows Capital, Terra/LUNA, Celsius, Voyager, and FTX, once the second largest exchange by trading volume;

Institutions increase investment in research and development of DeFi protocols and products, such as JPMorgan Chase and the Monetary Authority of Singapore to conduct DeFi transactions on public blockchains for the first time. Public sector adoption is also happening, with many major countries experimenting with blockchain-based central bank digital currencies (CBDC);

Here is a recap of some key highlights for 2022:

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Crypto Market Outlook, Co-CIO Joey Krug

look back at past,2022 could be the biggest turbulent year in crypto history.Many times throughout the year, I found myself saying, "This feels bigger than Mt. Gox." Back when Mt.Gox was hacked, it started the next phase of major developments in the crypto space:Transition to a more global trust-minimized architecture and eliminate intermediaries outside of payments.

In practice, self-custody solutions like Ledger and Trezor gained popularity early on, allowing individual holders of cryptocurrencies to store their funds somewhere more secure than their computers without having to trust a central Exchanges to hold their assets.

On the institutional side, companies like BitGo make it possible for institutions to also store funds using secure multi-signature solutions, again removing the need for any "trusted" exchanges. These changes may seem small in hindsight, but they were significant — enabling people to hold their cryptocurrencies more safely.

A more significant shift has taken place in the construction of Ethereum and smart contracts, a technology that will make it possible to conduct a wide range of value transfer transactions (whether financial or otherwise) around the world without trusting any individual or entity. A vision also includes making the financial system more efficient, more accessible, and reducing the cost of financial intermediation.

However, many of these benefits still depend on further builds and integrations of scalability improvements, and at the time there was little talk of the idea of ​​being able to trade cryptocurrencies without using an exchange, whether through atomic swaps (a glorified off-exchange transactions, to some extent do not need to trust the counterparty), or through a mature DEX based on Ethereum smart contracts.

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History won't repeat itself, but it always rhymes with the same rhyme: DeFi is the foundation of the next crypto cycle

2022 feels very similar to the crypto era of late 2014. Many projects and companies that embody the opposite of the fundamental principles of encryption have failed. People are starting to say "crypto is dead", but I believe this is one of the best times to get into the space and start building serious products, deploying capital into crypto.

The darkest time is just before dawn.

While it's tempting to say "this time is different because...", things are rarely that different. While the exact reasons for the breach vary, the theme of centralized entities failing is as old a story as financial markets: either get hacked, or get greedy and start doing sketchy/illegal things.

And actual crypto products like on-chain solutions, smart contracts, protocol-based cryptocurrencies, etc. do alleviate these problems, because you don't need to hand over all your money to an entity that claims to "trust us".

One exception/warning is that smart contracts are just code - code is dumb, and computers usually do exactly what you tell them to do (ignoring the possibility of solar flares). therefore,Writing smart contracts that create risky financial products is still risky, even if we no longer need to trust some centralized exchange, legal system, or whatever tool to enforce that product. For example, I made a smart contract that allows you to take out an unsecured loan, but if your loan is not repaid, it is not the fault of the computer program.

With that disclaimer, the short version of the "difference" about the 2022 CeFi explosion is the booming crypto credit market, Three Arrows Capital, Terra/LUNA, BlockFi, Celsius, Voyager, FTX, and Genesis have a common thread :They are effectively lending large amounts of funds to relatively risky counterparties that either do not have sufficient collateral or have insufficient collateral risk limits (if there is collateral)。

On the other hand, it is interesting that DeFi lending to unknown counterparties did not collapse. The reasons behind the success of DeFi protocols are twofold, with ostensibly these protocols (such as Compound, Aave, and Maker) forcing people to submit collateral and implement aggressive risk controls. Ironically, these risk controls are the same controls that centralized entities have been criticized for being “too tight and ineffective”, yet they say “these protocols cannot monitor risk the way we do”.

After one of my closest friends told me about one of the companies offering him great borrowing terms and thus taking on ridiculous bankruptcy risks, I told him that “the next crypto cycle could blow up because of these centralized lending entities , because they pick up coins in front of the steamroller".

There is a common phrase in the software world: "worse is better", meaning that a simpler system that "just works" is better than a highly complex design that increases the risk of failure. In my opinion, DeFi's risk control is a good example of the "the worse the better" philosophy, but for finance. The centralized lending entities we interviewed certainly had "elegant" systems, but none of their systems worked. Many of the hottest, "best" growth rounds from the previous cycle were zeros. Some because their businesses aren't real businesses, they're just akin to betting on downside volatility, and others because they're outright scams.

The second level of why DeFi protocols work well in 2022 is the more critical, higher level reason. Decentralized protocols can't just say "trust me, I went to MIT and want to give everything to charity", but more of a "you don't have to trust us" nature, or as Google once said Abandon what I said before: the DeFi protocol "can't be evil".The only option at the protocol layer is to build something efficient from first principles in an open environment, like an anonymous playing field against rational economic actors, where your code is public and can be scrutinized by anyone and read it.

Nick Szabo, the father of smart contracts, said it best:secondary title。

2023 Outlook

Looking ahead, I think it's clear that the historical arc of the world's financial trajectory will eventually end with blockchain-based systems using smart contracts. The real question is how do we get there, and what needs to be done.

Despite the lower prices, I think the field is clearly in a better position than ever. We finally have a scalability solution that enables transactions with transaction fees of less than 10 cents. With more upgrades to Ethereum and Layer 2 (protocol extensions), it's hard not to see transaction fees drop to around a penny. This is important because decentralized exchanges cannot compete with centralized exchanges if fees are too high.

Another important paradigm shift compared to 2017 is when developer infrastructure was virtually non-existent, and writing smart contract-based systems is much easier now than it was in the previous cycle. In 2017, I was the first major user of Alchemy, and everyone was fiddling with those patchy node infrastructures on AWS or DigitalOcean.

For new developers, this and other issues have been addressed as they enter the field, not just nodes, all other areas of the stack have been improved, whether it's the test suite or for catching common bugs in smart contracts All automation tools have gained IDE support for Solidity.

If we look ahead, I believe there are two interesting questions:

What does the end state look like?

What innovations and companies/protocols need to be built to make this happen?

Of course, I believe that both areas are worth investing in.

in my opinion,The end state is that decentralized finance protocols and apps basically solve many of the problems discussed above, and ordinary people will have apps on their phones that can access DeFi, where they will be able to do finance without a bank/broker Trade with lower fees, global liquidity and markets running 24/7.

Financial Technology (Fintech) is just lipstick on the existing financial system and solves very limited problems. To realize the true vision of cryptocurrency, we need to build new economic infrastructure from scratch. The good news is that many new ones already exist today. Primitives of the financial system.

For example, we already have various cryptocurrencies (pegged and free floating), exchanges, lending markets, etc. In this universe, the world should look like this:

When you want to trade an asset, you can use a decentralized exchange, where you can access a global liquidity pool to trade without depositing the asset on the exchange. Even services like OTC trading that are typically used by high net worth individuals or institutions can be done in DeFi.

When you want to lend or borrow an asset, I think the most logical place is on a DeFi lending protocol. DeFi lending protocols are currently one of the few places where you can borrow or lend cryptocurrencies, especially considering that many of the large centralized lending operations in the space have gone bankrupt.

There is also an exciting innovation in the financial market, which originated in cryptocurrencies, called "perpetual contracts". This enables a trader to gain leveraged exposure (much like one can get with futures contracts) but with no maturity date, instead interest is paid on an ongoing basis to the party with less demand (i.e. if the demand to go long increases, the to shorts and vice versa).

There are some perpetual trading DEXs that are attractive, and while the failure of FTX was undoubtedly the catalyst for the massive takeoff of "perpetual contract exchanges", I think we need to build some innovations first. In the long run, this will happen in easy-to-use applications where end users may not even know they are using DeFi. At the same time, very long-term, real-world assets will exist and be tokenized on-chain, so the stable end state looks like a new parallel financial system that can achieve all the functions in the traditional system and more services, something like Because of how the Internet handles content creation, encryption technology can create an infinite set of customized financial markets on anything.

In order to achieve all of this, I think some issues have to be solved for further adoption. These questions fall into two categories:

• Increase liquidity within the DeFi ecosystem;

• Make DeFi as easy to use as possible;

In terms of liquidity, in order for DeFi to obtain more institutional capital, more asset custodians need to support the direct use of Ethereum. While there are excellent solutions like Fireblocks, the main problem is that most, if not all, of these solutions are not regulated custodians from the SEC perspective. Some custodians that have obtained charters from federal or state agencies to operate as regulated custodians in the crypto space, such as BitGo, support the use of DeFi protocols through a partnership with the MetaMask Institutional, but other regulated custodians must also add support for the use of DeFi protocol support, which should bring more liquidity and capital to DeFi.

Another way to increase liquidity is to aggregate liquidity across multiple chains, Layer 2 and liquidity pools on those chains. These aggregators will enable users to submit trades, while applications will provide liquidity across multiple venues, multiple chains, providing users with the best price and best path for trade execution.

In order to build it, we need fast and secure cross-chain bridges, and many of the cross-chain bridges built so far strike me as clumsy — not in a cool "hack the PlayStation" way, but "put something Cobbled together, it only really works if you trust it (insert trusted third party here)", and as we'll see, this trust is a "security hole".

In my opinion, the bridging problem has always been a software problem and should be solved in software, not using oracles, trusted multi-signatures, etc. The most ideal solution is to use zero-knowledge proofs. Once Ethereum supports "single slot finality", it can be bridged to other chains very quickly. At that time, aggregated liquidity will be easier to achieve.

The second question - the usability of DeFi, is as important as the liquidity part. Although usability has improved a lot over the years, a common rebuttal is, "the network is very difficult to use in the early days, and usability should not be an obstacle" . However, since the inception of the web, user expectations for usability have risen by several orders of magnitude. People want things to be easy to use. I think there are three usability problems that need to be solved. If they are solved, DeFi adoption may grow faster:

The first is the user experience (UX) issue around wallets, I love MetaMask and what it has done for the industry, like the next guy, but it's just a simple browser add-on that users download rather than having a well-designed UX powerful application. It has a confusing layout that can be overwhelming if you don't know much about cryptocurrencies, and there's just too much going on in the UI (user interface). This reminds me of those old Palm or Windows handhelds that existed before the iPhone (i.e. they might work, but they're clunky and confusing, even if you know what you're doing), and maybe the long answer here looks like a MPC based retail wallet.

The second problem is that transaction fees must be paid in ETH. This makes you need ETH in addition to any assets you send/trade/trade. Economic abstraction solves this problem. It will be a protocol-level native upgrade to Ethereum. Users will be able to use tokens other than ETH to pay transaction fees. One can easily imagine how this is done—— If you want to exchange USDC for ETH, you can send USDC to your wallet and then trade for ETH without getting ETH first. It sounds simple, but this is a huge UX advantage of CEXs over DEXs right now. Also useful for a large number of other applications with more mainstream users who are not familiar with ETH or why they need it to transact.

The third problem is the tougher one — getting better on-ramps of fiat currencies that allow native integration in decentralized applications (DApps). Like Stripe's integration service, apps can add fiat currency on-ramps, allowing users to buy cryptocurrencies with just a few clicks and without exorbitant fees, but this does not currently exist in the DApp market. It needs to be embedded as a widget in the UI, and no one controls the UI (ie DApps), which is cool, but Stripe's new cryptocurrency on-ramp product doesn't solve this problem.

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Key indicators

• Key indicators

Despite the decline in cryptocurrency prices that began last January, private market trading activity continues, at least through the first half of 2022.

Valuations in private markets tend to lag public market pricing, and in contrast to previous bear markets, the recent bull market has seen the rise of consumer cryptocurrencies and other industries such as DAOs, crypto games, NFTs, and the Web3 creator economy.

Judging from the above pie chart, among the industry segments of Pantera's 2022 transactions, DeFi occupies the leading position, and the gaming/consumer industry ranks second.

DeFi investments are mainly concentrated in the following areas:

• Infrastructure (Braavos, Waterfall);

• Derivatives (Maverick, Cega);

• Institutional-grade DeFi products that began to adopt structured products (Ondo, Rift);

On the gaming side, we focus on experienced teams (Metatheory, Revolving Games) to build fun, engaging games using cryptoeconomics. Consumer DeFi companies focus on areas such as identity (Unstoppable Domains) and fashion metaverse (Spacerunners). During the bull market until the second quarter of 2022, Pantera adopted a barbell strategy in terms of capital deployment, mainly investing in seed rounds of startups.

In the second half of 2022, we have been waiting for a private market valuation re-evaluation. While the absolute number of startup funding rounds has declined over this period, we’ve seen a rise in the percentage of startups with strong teams entering the private market—mostly from big tech companies like Coinbase, Facebook, Uber, and Square, as well as JPMorgan Entrepreneurs at traditional financial institutions such as Chase and Goldman Sachs.

For VCs, the most important thing is the quality and quantity of talent entering the ecosystem. According to Alchemy, the number of developers building on its platform has tripled during this bear market:

As I mentioned in a recent blog post on my 2023 predictions, there has been consolidation in the areas that entrepreneurs focus on, which usually happens in every bear market, and I've seen a shift toward infrastructure and things like DeFi, real-world asset Shifts in areas such as tokenization, developer tools, and data infrastructure.

After FTX, trading volume has moved to highly regulated exchanges such as Coinbase and Bitstamp as well as DeFi-based decentralized exchanges. The figure below shows the trading volume of decentralized exchanges in the past 12 months, of which November 2022 (The month of the FTX crash) trading volume rose significantly.

With increased scrutiny around trust and security, we believe there are more opportunities for startups in areas such as self-custody, security, insurance, and identity. We expect a higher percentage of deals to be initiated by domestic founders (note: US) rather than international founders compared to past bear markets, as the focus is on infrastructure rather than applications. As we start to emerge from the bear market, we expect a larger share of NFTs, games and decentralized social applications in Asia due to labor costs, influential brands and strong social mobile penetration, Asia is in the application layer. better location.

Now is the time.

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Valuations for private equity deals in the second half of 2022 have fallen significantly, with growth-stage valuations falling more sharply than early-stage deals. Most deals we see involve equity and tokens in the same round. We believe entrepreneurs should prioritize making sure they have enough runway and buffer to get through the bear market and the next bull market, optimizing the right investment partners, not valuation. More established companies are expected to drive earnings, during which secondary deals and acquisitions may be more common to provide liquidity to employees and investors.

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Blockchain infrastructure and Ethereum merge, investment analyst Will Reid

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• The Ethereum Merger, and the Rise of the "Urge"

The Ethereum merger is one of the most technically impressive software updates ever, roughly likened to switching the engines of a rocket ship on the fly, September 2022 Ethereum's transition from PoW to PoS makes the network economically More sustainable, user friendly and environmentally friendly.

The network has slashed its inflation from around 3.6% per year to almost parity with mints and burns, improved transaction times to a point where it can compete with credit card sales systems, and lowered its electricity usage from roughly Austrian levels to something closer to that of San Marino or the Vatican s level.

However, the upgrade of Ethereum is far from complete, and the merger is just the beginning of an inflection point in Ethereum's comprehensive expansion roadmap. Ethereum founder Vitalik Buterin outlined this inflection point in his EthCC speech in July last year:

Looking ahead, Vitalik divided Ethereum's "most rapidly changing period" into 6 distinct segments: The Merge, The Surge, The Scourge, The Verge, The Purge, and The Splurge.

The time required to develop and deploy these "urges" will take well beyond 2023, but since each part is critical to understanding the vision of the base layer of the largest crypto ecosystem, we will briefly outline each of them here :

The Merge：While the main event and most technically complex event of merging the Ethereum mainnet with the beacon chain to migrate from PoW to PoS has been completed, there are still several meaningful upgrades to be performed in the "merge", which will be the next few Roadmap section for months and years. Including the Shanghai upgrade expected in March 2023, which will allow Ethereum stakers to withdraw their staked assets, while single slot finality will reduce transaction confirmation time from about 15 minutes to about 12 seconds, which is a For a longer-term goal, decentralized verification node technology will provide key risk management functions for Ethereum stakeholders;

The Surge：It’s about scaling Ethereum’s transaction throughput, with the goal of reaching 100,000 transactions per second (currently around 30). To achieve such a significant scaling improvement, Ethereum will introduce a new transaction type that allows "blocks" attached to transactions to contain large amounts of transaction data that do not need to be accessed when the transaction is executed. The first instance of these new transactions will be "Proto-Danksharding", which will be delivered as part of the EIP-4844 upgrade (expected in May or June 2023);

The Scourge：The Scourge aims to address the risks posed by Maximum Extractable Value (MEV). According to Vitalik, Acts should "ensure the inclusion of reliable, fair, and credible neutral transactions, and address the MEV issue." The first phase is to embed a "proposer-builder separation" (PBS) in the core of the Ethereum network. The current earliest estimate of the PBS within the protocol is sometime on 2H23, with Flashbots leading the development of the PBS;

The Verge："Fully SNARKed Ethereum" aims to reduce the cost of verifying blocks by introducing Verkle trees (so that users can even install verification nodes on mobile phones), which is a more efficient version of Merkle trees, which have been used since the birth of Ethereum. Powering Ethereum, the Verkle tree is also the first step towards a stateless client for Ethereum, these upgrades will ensure further decentralization and resilience of the Ethereum network;

The Purge：Designed to simplify Ethereum and achieve performance improvements, starting with EIP-4444, which will significantly reduce the overhead of storing historical data for Ethereum clients, The Purge will perform a series of upgrades designed to facilitate other parts of the Ethereum roadmap, such as Remove the well-known "SELF-DESTRUCT" opcode from Solidity to enable Verkle trees and eventually build state expiration into the network (a system that reduces the amount of data clients need to store to about 20-50 GB);

Splurge："Fix everything else" section, including account abstraction (a significant UX improvement to the network) and verifiable latency features (another efficiency booster);

So what can we expect from all these upgrades? Ultimately, Ethereum is moving towards a faster, cheaper, fairer, more decentralized, secure, and user-friendly network than Ethereum is today. As blockchains mature, applications built on top of them will be able to more effectively leverage core features of blockchain technology (such as removing trusted intermediaries) without being constrained by the underlying protocols.

Just as higher bandwidth internet connections allowed for the building of increasingly diverse content and applications in the early days of the internet, higher bandwidth, more secure and more user-friendly blockchains should allow similar applications and applications to emerge in Web3 The Cambrian Explosion of Use Cases.

• The Rise of Layer 2

While The Merge has had many positive impacts on the Ethereum ecosystem, lowering gas fees is not one of them, so Layer 2 scaling solutions remain a critical part of the Ethereum ecosystem infrastructure. Protocol layers beyond the base blockchain (e.g. Layer 2) are developed to either extend the feature set or solve problems (usually scalability issues) inherent to its relative underlying blockchain.

So far, Layer 2 has performed relatively well in the bear market, with many important upgrades such as Arbitrum's Nitro upgrade and StarkWare introducing recursive proofs (and upgrading to Cairo v1.0), around zk-EVM and alt-L1 (replacement Layer 1) hotspot rotation has given the industry a boost.

Since January 2022, Arbitrum's active development team has grown by 516%, and cumulative trading volume across all StarkEx platforms has more than doubled from over $300 billion in early 2022 to $795 billion.

However, the industry is not entirely immune to the bear market. The TVL of Layer 2 on Ethereum has dropped by more than 40%, from about US$7 billion in January 2022 to about US$4 billion at the end of December, but indicators such as DAU (daily active users) and TVL may be misleading because They can be manipulated and often don't reflect organic growth.

At this stage of Layer 2 development, the more important focus is technological progress, and key developments to monitor include fraud proofs supporting optimistic Rollup, zkEVM working in production, decentralization of sequencers and provers, and compatibility with Layer 1. Compared with the gas cost reduction.

Looking ahead, Layer 2 will need to deal with the implementation of EIP-4844. It is expected that EIP-4844 will reduce the Rollup fee to one-tenth or even one-hundredth of the original. In addition, the Layer 2 ecosystem can also benefit from the expensive alt-L1 incentive plan , as funds for these schemes designed to lure users away from the Ethereum ecosystem are running out.

A key KPI to track for the Layer 2 ecosystem will be inflows from non-DeFi verticals, with transaction fees falling, funding from gaming and NFT use cases is expected to be a particularly strong growth vector and will be a layer 2 attraction for crypto-natives Key metrics for audiences beyond DeFi users.

Finally, the topic of Layer 3 is getting a lot of attention in 2022, and while the term suggests "scaling solutions on scaling solutions" or "scaling squared," it actually encompasses many possible visions, including custom Features (such as privacy), custom extensions (such as data compression optimized for specific use cases), and weak-trust scaling solutions (which will use Validiums for cheaper, less secure Rollups) can serve particularly well Enterprise Blockchain"). However, an application-specific Layer 3 will have to deal with the costs associated with setting up a fully independent blockchain, so the barrier to entry may be higher than the Layer 3 hype suggests. For example, a DeFi chain needs to pay for sequencers, RPC nodes, price feed oracles, indexers and bridges. In short, there is a considerable overhead for the chain to start.

Overall, we believe that Layer 3 is probably the most interesting area of ​​all crypto ecosystems, and as a measure of overall crypto adoption and performance in 2023, we will be watching it closely.

• Cross-chain interoperability

Cross-chain interoperability remains a major pain point in the cryptocurrency space, with bridge hacks costing over $2 billion in 2022, accounting for more than 70% of all cryptocurrency hacks that year. High-level bridges can be classified as untrusted (also known as local authentication) or trusted (also known as external authentication). So far, most bridges are trusted, or externally verified, but the rise of trustless or locally verified bridges like IBC may prove to be a solution to the cross-chain bridge hacking problem.

IBC has achieved great success in 2022, becoming the de facto cross-chain bridge of Cosmos and one of the top three encrypted cross-chain bridges in transaction volume. Mergers and recent advances in ZK technology also create a possible path for IBC to launch on Ethereum.

Finally, zero-knowledge-based bridges developed by the teams at Succinct Labs and zkBridge offer another solution for building trustless bridges and are gaining traction in the last quarter of 2022, with both teams set to launch in 2023 Launch a mainnet version of its product sometime.

• Ethereum middleware

Flashbots, Eigenlayer, and Obol Network are laying the groundwork for a new field of "Ethereum middleware".

For Flashbots, the rollout of the proposer-builder split, and the development of the developer marketplace will be key areas of focus in 2023.

For Eigenlayer, we will be monitoring the launch of its restaking product, which allows ETH to be restaked and extends Ethereum’s base layer security to provide additional services and products on the network.

For Obol Network, the launch of Distributed Validator Technology (DVT) on mainnet should boost the adoption of institutional staking, as the slashing risk of ETH staking has been greatly reduced. We are very excited about DVT as a core part of the infrastructure that we believe "needs to exist" in the Ethereum ecosystem, and we can't wait to see what the Obol team has in store for 2023.

• Alt-L1 s

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Structurally Safe DeFi, Investment Assistant Jeng Yang

Cryptocurrencies also have greedy criminals. We can never eliminate greedy criminals, especially in finance, but what we can do is reduce their chances of success. In my opinion, there are three pillars to achieving a safer decentralized finance (DeFi):

• programs and codes as "executors";

• Traditional legal structures and regulations as "guarantors";

• Market expectations as a "filter";

Traditional legal structures and regulations should be seen as a good but incomplete means of security, a partial means to a structurally safer financial end. As a decentralized technology, no single centralized institution can limit DeFi that operates outside of regulations. In order to succeed, DeFi must be able to secure user funds with just code — and in an increasingly confrontational, open global environment. Fortunately, there is no more structural enforcement mechanism than code.

Moving into 2023, we should see TradFi (traditional finance) best practices extended to DeFi, where a better legal framework would help. The Cega founders understand how to make up for losses with structure and contract backing, which illustrates how their TradFi background gives them an edge in the DeFi world. Cega is the market leader in establishing counterparty risk management because of its strong internal practices, such as requiring every market maker to use ISDA, code can try to become law, but law and code are not mutually exclusive.

As an industry, we've been so focused on pillar 1, forgetting that traditional finance has a long history of leveraging pillars 2 and 3. Increased regulation will help bring greater legal certainty, but we also know that regulatory reliance is not the point of DeFi. If we want to create a balance and achieve a world with minimum viable regulatory scrutiny, our industry must be able to manage itself through market expectations of minimum safe behaviour.

I mean avoid behaviors that don't happen in TradFi. Mortgage loans, for example, failed because of some esoteric aspect of the blockchain. It failed because lenders were willing to use WhatsApp messages as proof of AUM. Likewise TradFi financial managers have always had to consider counterparty risk for custodial services in a way that some CFOs have failed to. We will also continue to see an increased emphasis on providing market-standard information to users of various DeFi protocols. Clearer communication of the risks that liquidity providers take on for certain liquidity pools would go a long way toward creating a fairer system and reducing regulatory scrutiny.

The current debate over centralized exchanges using blockchain-based proof-of-reserves and proof-of-liability is a good example. As market players, we need to set expectations for the minimum safe behavior of the counterparties we deal with, and the market may expect a fully audited exchange as the base case for doing business with others.

In our view, CeFi (centralized finance) backend obfuscation capabilities are only a short-term advantage, while infrastructure weaknesses and shortcuts lead to long-term vulnerabilities. Part of the reason FTX failed was because Alameda had special accounts that were allowed to trade without an automatic liquidation mechanism when they were over-leveraged, and there are no backdoors or special treatment in DeFi, avoiding backdoors and private transactions is what we The core advantages of DeFi that have been pointed out repeatedly.

This gives us key insights into how to think about the future of DeFi. DeFi is a much more adversarial environment than CeFi and TradFi, a feature that means that despite the many headlines of hacks and exploits, the industry as a whole has learned from these mistakes and permanently hardened its infrastructure to move forward. Whereas the best practices of traditional finance are passed down through rulebooks or, more likely, executives’ memories, DeFi passes on knowledge through code.

TradFi best practices need to be integrated into DeFi, and DeFi infrastructure needs to be integrated into CeFi/TradFi. Embracing this symbiotic relationship is the key to entering the next stage.

• The big fork of DeFi

We believe 2023 will see divergence in regulated and censorship-resistant infrastructure.

It’s important to remember that blockchain promises to create new financial rails (of interest to TradFi institutions) and new financial systems (of interest to censorship-resistant players).

There has always been skepticism about enterprise-level DeFi, and I think a lot of it is unfounded. A non-decentralized, permissioned blockchain facilitates existing relationships between financial participants rather than creating new ones, in contrast to a censorship-resistant financial ecosystem that can withstand overbearing governments and intermediaries.

At the same time, this reflects the great promise of blockchain technology - by creating a horizontal technology that facilitates (at least) two distinct camps of builders, it is important to remember why we are here: a trusted neutral foundation Facilities are good for everyone, badly designed biased infrastructure benefits no one.

First, a reminder of how far we have come in enterprise-grade DeFi. As Coinbase noted in its 2023 report, JPMorgan's intraday repo app on Onyx Digital Assets has processed more than $430 billion in repo transactions since its launch in November 2020. In addition, JPMorgan Chase, DBS Bank and SBI Digital Asset Holdings conducted tokenized transactions by issuing currencies and sovereign bonds on Polygon in November 2022.

These developments mean blockchain will have a place in the enterprise tech stack regardless of how other markets play out, and despite what the current market downturn may mean, institutions are still investing in and researching DeFi.

At the same time, events like OFAC, FTX, MakerDAO, etc. support the skepticism of allowing the compromise of centralization within the DeFi infrastructure. At the same time, we will see more and more regulatory crackdowns and challenges to many DeFi DApps and infrastructure, making the need to build a trusted neutral infrastructure change from a long-term stability problem to a survival condition.

The divergence and development of these two distinct ideologies will play out dramatically in the markets, especially for many investors who don't need to face these underlying tensions in a bull market.

• Areas of concern in 2023: Macro impact portfolio construction

Over the past few years, on-chain financial infrastructure for “risk appetite” has developed. As the macro environment favors risk-off, we will see the development of a “safe-off” financial ecosystem. As real-world portfolio allocations remain risk-averse and seek safer instruments, especially in the fixed income space, we should expect to see more real-world yield and fixed-income assets grow on-chain.

When bonds and real-world fixed income assets become more attractive, the right response is to get excited about it - a clear problem statement. I'm particularly excited to take this one step further on the promise of cryptocurrencies to unlock global liquidity: to provide real-world assets to clients around the world in a way that traditional fintech institutions have been limited by, focusing on "0-1" access to financial instruments instead of Companies that are not incremental channels will do especially well.

Just as the last bull market was the catalyst for alternative investment platforms, this bear market will be the catalyst for a new wave of safer investment vehicles.

• Application Weaknesses Lead to Infrastructure Opportunities

Why is it so easy to spot weaknesses in DeFi infrastructure and DApps? Because when we build a financial system from the ground up, we also build the business and its infrastructure from the ground up. It's hard to say the least, and fraught with challenges. Given the lack of external infrastructure providers available, existing businesses are bound to have sub-optimal infrastructure components or rely on shortcuts. As markets and regulations demand better practices, infrastructure providers will simultaneously need to better support safer practices.

Going back to the counterparty deposit risk example, traditional finance faces similar issues and is solved by companies like IntraFi, which helps break down vaults into separate accounts to take advantage of $250,000 of FDIC insurance. As companies realize they need to manage counterparty risk in an equally rigorous manner, we will see an increased need for infrastructure players of all types to address previous issues.

In other words, infrastructure boom leads to application boom, as Union Square Ventures points out in a different way. As they point out, we can build great applications before the infrastructure arrives, but sometimes those applications crash and cause losses. We learned from these experiences to demand better outsourced infrastructure and build safer applications, and we continue to invest in better infrastructure and safer applications in DeFi and other fields.

• Lessons from Traditional Fintech Investing

Before joining Pantera, I invested in emerging market fintechs and have always believed that many aspects of crypto investing are similar to investing in fintechs in relatively weak emerging markets. These markets exhibit profitability difficulties, the need to build core infrastructure in-house, distribution and user education challenges, and large public and private incumbents gaining monopoly market share.

The ecosystem around India's Unified Payments Interface (UPI) is a good example of some of these challenges, particularly around the ability of companies building on UPI to monetize what is essentially the public domain. To the traditional finance folks in the room, I always joke that collateral and MEV (Maximum Extractable Value) are the new lending.

Success means a strong ability to build a product roadmap that is focused on capturing mindshare of highly valuable customers in existing markets, and has the incremental ability to monetize through broader revenue streams than traditional startups , so India has seen some of the most innovative fintech startup strategies.

As founders double down on finding product-market fit in the crypto space, many traditional finance courses will expand into the crypto space.

Pantera Blockchain Summit 2023

The 2023 Pantera Blockchain Summit will be held in San Francisco on April 3-4, 2023, the ninth summit in a series of meetups we've hosted since 2013.

This year also marks the 10th anniversary of the U.S. blockchain fund industry, and starting with the launch of the Pantera Bitcoin Fund, our team is especially honored to bring together our family of portfolio companies, partners, and investors for a day of learning, inspiration, and connection.

The 2023 Pantera Blockchain Summit is an invitation-only event curated by Pantera's investment team that focuses on the most important topics in the blockchain industry.

Confirmed speakers for 2023 include:

Former CFTC Chairman Chris Giancarlo

BitGo Co-Founder and CEO Mike Belshe

0x Labs co-founder Amir Bandeali

Audius CEO Roneil Rumburg

Ola Doudin, Co-Founder and CEO, BitOasis

Bradley Kam, Co-Founder, Unstoppable Domains

Sumit Gupta, Co-Founder and CEO, CoinDCX

Injective co-founder and CEO Eric Chen

Nathan Allman, Co-Founder and CEO, Ondo Finance

Cega Co-Founder and CEO Arisa Toyosaki

Don Ho, Managing Director, Quantstamp