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VeradiVerdict - Issue #227
Earlier this week, Coindesk published my annual predictions piece and you can read my thoughts on last year and predictions for 2023 below
2022 has certainly been a series of highs and lows for the crypto industry. After the 2021 bull run, we kicked off 2022 with a correction as Bitcoin and Ethereum dropped ~20% and ~31% respectively in January alone. Macro factors, such as the Fed’s interest rate hikes, high inflation, layoffs, and generally slowing economic growth have led to much uncertainty. Rough market conditions largely became the standard for much of the year, but that didn’t stop crypto from many incredible technological achievements. Improvements in DeFi like Compound v3 and the march of the ZK ecosystem continued regardless. Institutional adoption of crypto has also occurred at a rapid pace, with Disney, Starbucks, Adidas, and many other household brands quietly embracing blockchain. Large banks have also shown increasing interest in the sector: Fidelity launched a crypto service for investors, BlackRock partnered with Coinbase to bring its institutional clients crypto access, and Goldman Sachs is creating a new crypto data service.
One industry highlight this year was the Ethereum Merge in September, where the blockchain transitioned from proof-of-work to proof-of-stake, reducing Ethereum’s energy usage by an incredible ~99.9%. Secondly, many amazing engineers continued to build through this bear market, and some of the strongest projects came out of it. Another benefit for the industry, though rough in the moment, was the lessons learned from each of the disasters that 2022 brought. Many projects – and even entire categories in crypto – have shown their resiliency in light of these events. If crypto has proven anything through its existence, though, it has proven that it can survive unfavorable times. Because of this, the industry will enter 2023 with a level of strength and durability that 2022 has given it.
Here are my 6 predictions for the crypto industry in 2023:
DeFi will continue to grow while CeFi consolidates:
This past year exposed many of CeFi’s (centralized finance) problems, while DeFi at large functioned flawlessly. In light of 2022’s many CeFi collapses, I expect the industry to consolidate into highly regulated players like Coinbase and Bitstamp.
In the period following the FTX collapse, DeFi transactions have already spiked, with volumes up 68% (to ~$97B) from October to November. Events like these prove the case for DeFi: governing assets via secure smart contracts enables users to better understand liquidity flows and have more control over their investments.
Come 2023, I believe we’ll see more complex and interesting applications of DeFi grow. A few exciting examples are GMX, a decentralized perpetual exchange, and 1inch Pro, a regulatory-compliant platform that connects TradFi (traditional finance) to DeFi. Next year will also likely bring more traction for use cases like self-custody wallets, synthetic assets, and prediction markets.
Despite market conditions, the sector’s true strengths lie in its foundational infrastructure that powers transactions in a trustless and efficient way. These properties will greatly accelerate DeFi’s adoption and growth in 2023, especially in light of CeFi’s struggles this year.
We will see tremendous zero-knowledge adoption and use cases:
As the question of privacy comes to the forefront of the crypto industry, zero-knowledge technology has been particularly notable this year. Zero-knowledge technology essentially uses a prover, a verifier, and mathematical algorithms to prove something without revealing underlying information about the proof. Since blockchains are inherently transparent, this application is huge for the industry and allows many more interactions to take place on-chain in a private way. Zero-knowledge proofs are also extremely lightweight, making on-chain interactions much more scalable and efficient.
With projects such as Succinct Labs, Risczero, and Espresso Systems emerging, we’ve seen use cases for zero-knowledge proofs, VMs, and rollups explode. Zero-knowledge technology has particularly beneficial applications for identity as a crypto vertical. With zkps, users are able to prove their identity on-chain without having to reveal sensitive data. Ethereum co-founder Vitalik Buterin also noted in a recent piece how huge zero-knowledge technology is for solving the on-chain information problem – but that the category is “something that will actually need to be worked on.”
ZK technology is also valuable for bridges, which are able to transmit messages and tokens while guaranteeing security and correctness via succinct proofs. There are also exciting applications for TradFi systems like credit scores and taxes.
Institutions will increasingly tokenize financial assets:
Real-world assets (RWAs) are financial primitives that represent a claim on an underlying asset and often produce yield for that asset. The emergence of the category has unlocked huge amounts of liquidity and utility so far, and 2023 will likely bring more assets represented on-chain in an accessible manner.
Stablecoins are arguably the most popular application of a real-world asset in today’s market, with the category constituting three of the top seven tokens by market capitalization. Circle’s USDC and Maker’s DAI have been top-tier stablecoins and have both seen almost no volatility throughout the bear market.
On-chain communities have demonstrated demand for RWAs: for example, MakerDAO decided in mid-2022 to invest $500M worth of DAI into US Treasurys and corporate bonds. Goldfinch, a company that provides loans that are collateralized off-chain, currently has an active loan value of ~$100M. Jia allows business owners to take out blockchain-based loans and generates substantial yields for liquidity providers backed by real-world businesses and assets. I expect 2023 to bring the growth of interesting applications of RWAs, such as flash loans and real estate. In-line with the real world asset trend, I also expect to see a surge of startups focused on bringing TradFi institutions into crypto in a regulatory-compliant way.
More companies will emerge to leverage blockchain data:
Arguably, rich and open-source data is one of the blockchain’s best features, as it allows for deep analysis of on-chain activity. Leveraging this data in an efficient and responsible way is integral to the expansion of blockchain dapps and their use cases. Data reveals a massive amount about how blockchains are used, emerging trends, user behavior, and on-chain money flows.
Blockchain analytics platforms like Nansen will continue to be critical for understanding on-chain analytics through wallet activity. Companies like nxyz are also tackling blockchain indexing by providing data APIs with no rate limits. Definitive emerged in 2022 to provide user acquisition tooling and insights for both on-chain and off-chain activity. Even with the growth of these companies, blockchain data is still largely untapped and I expect to see significant developments in the sector during 2023. To understand where crypto is going next, we need to get granular with our level of data analysis of the state of the industry as it is right now.
The developer tooling stack will continue to grow as blockchain engineers increasingly seek easy and efficient ways to deploy Web3 projects:
Developer tooling eliminates many repetitive and tedious parts of the job and encourages more engineers to experiment with creating on-chain protocols. Companies like Alchemy and Tenderly have been particularly critical players in the sector this past year.
Despite the bear market, developers have experimented with on-chain applications more than ever. Alchemy recently stated that it saw the number of engineers using its platform soar 3x since the start of the year. In September 2022, monthly verified smart contracts were up 2.6x year over year. Impressively, 2022 also saw 36% of total smart contracts ever deployed and verified.
As a greater number of web3 developers get involved in the ecosystem, it is critical to provide them with sturdy tooling as they begin to build. Cross-chain tooling is particularly relevant, as it provides composable software that makes launching projects on multiple chains easy. By serving as the backbone for many crypto projects, developer tooling will continue to grow in 2023 as more crypto use cases arise and an increasing number of engineers seek to enter the industry.
NFTs that provide some kind of value to their holder, such as gaming NFTs and identity NFTs, will expand:
Utility NFTs, such as in-game NFTs, identity tokens, and token-gated communities, software, and events will grow in 2023. This year, we’ve seen the sector start to develop technologically and creatively, but the space is nowhere near mainstream adoption. While the digital (pure) art industry is undoubtedly a massive vertical, using NFTs to permit specific privileges has the potential to disrupt many incumbent sectors.
We’ve seen some exciting applications and developments of these ideas so far. PROOF Collective allows its NFT holders to access future PROOF drops (one of which was the popular Moonbirds NFT project) and access to PROOF community initiatives, such as in-person events and a private Discord. Vitalik also released a formative paper on soulbound tokens (NFTs that hold on-chain identity information) which some projects have already adopted. Gaming transactions also skyrocketed in 2022, at one point composing over half of all blockchain activity. Further, NFTs are starting to be explored in the context of entertainment, specifically for fan engagement.
Traditional companies have been exploring adoption of NFTs at an increasingly rapid pace. A few highlights: Tiffany’s released a collection of pendants for CryptoPunk holders, Instagram announced that it will incorporate NFTs into its platform, and Nike acquired metaverse fashion company RTFKT. Royal has redefined music revenue streams and ownership by allowing fans to invest directly into songs. In addition, sports players like Cristiano Ronaldo have dropped NFT collections to drive up fan engagement and potentially give access to other future perks.
In 2023, I’m excited to see industry disruption and ideas for utility NFTs fleshed out even further. Cryptonative applications, as well as traditional companies, will likely start to experiment more with using NFTs to bring something valuable to their owners.
How Were My Predictions About 2022?
My final takeaway from 2022
Despite some painful hacks and CeFi crashes, the crypto industry as a whole made huge technological strides in 2022. Even through the harsh crypto winter, web3 has reached an incredible amount of individuals – and the technology is clearly here to stay. Our job as an industry is to make that technology accessible, reliable, and safe for users around the world in order to usher in an era of financial transparency, dependability, and autonomy. Web3 continues to redefine how we think about money, ownership (of both physical and digital assets), identity, and community. I’m very excited to see what 2023 brings as we continue to accelerate the adoption of an economic layer to the internet.
Pantera Capital Puerto Rico Management, LP and its affiliates (“Pantera”) makes investments in crypto assets and in blockchain-related companies. Pantera and/or its affiliates or personnel may be an investor in, or have relationships or other business arrangements related to, certain instruments, companies and/or projects discussed herein. This document does not contain any advertisement for Pantera’s investment advisory services, or any other services or products, whether provided by Pantera or otherwise. The information and opinions presented in this document are solely those of Paul Veradittakit; they do not represent, and should not be interpreted as representative of, the views of Pantera or any other individual working for Pantera, and do not represent investment, legal, tax, financial, or any other form of, advice or recommendations. Neither Pantera nor Mr. Veradittakit is acting, or purports to act, as an investment adviser or in a fiduciary capacity with respect to any recipient of this paper. Information contained in this document is believed to be reliable, but no representation is made regarding such information’s fairness, correctness, accuracy, reasonableness or completeness. There is no obligation to update this document or to otherwise notify a reader if any matter stated statement or information contained here changes or subsequently is shown to be inaccurate. Nothing contained herein constitutes any representation or warranty as to future performance of any financial instrument or company. Forward-looking statements should not be relied upon, and performance or outcomes may differ materially from what is contemplated herein. Opinions included here incorporate subjective judgments or may be based on incomplete information. This document does not constitute or contain an offer to sell or a solicitation to buy any securities or a recommendation to enter into any transaction, and no reliance should be placed on this document in making investment decisions.
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Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. I’ve been in the industry since 2014, and the firm invests in equity, early stage token projects, and liquid cryptocurrencies on exchanges. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.
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