VeradiVerdict - Issue #280
2023 marks 10 years since Pantera became the first institutional asset manager in the US to invest in Bitcoin, recognizing then its tremendous resilience and potential for disruption. This past year in particular has been a testament to the blockchain space’s ability to recover from even the harshest external conditions. From the depths of the “crypto winter” at the beginning of the year, the overall market cap of the crypto space has grown by 90% to $1.69 Trillion, with Bitcoin more than doubling from its yearly low of $16k in Jan 2023 to over $40k in December.
In 2023, we’ve continued to feel some of the aftershocks of the wave of major collapses in 2022, most notably the FTX trial and verdict and the Binance plea deal in November, as well as the momentary depegging of the USDC stablecoin in March amidst the banking crisis (which triggered memories of the Terra UST collapse in May 2022). At the same time, we’ve continued to see breakthroughs in the space, from technological innovations to regulatory wins, to increased institutional adoption to novel social and consumer experiences.
Some of the highlights over the past year include the Ethereum’s Shapella upgrade to a full Proof of Stake network in March, the ruling that XRP was not a security in July, the launch of Paypal’s PYUSD stablecoin and Grayscale’s win over the SEC for the Bitcoin spot ETF in August, and the pioneering of novel tokenized social experiences such as the rise of friend.tech. We thus enter 2024 with a great optimism on the road ahead.
Here are my top predictions for crypto industry in 2024:
1. The resurgence of the Bitcoin ecosystem and “DeFi Summer 2.0”
In 2023, Bitcoin has staged a comeback, with Bitcoin dominance (Bitcoin’s proportion of crypto market cap) rising from 38% in January to around 50% in December, making it one of the top ecosystems to look out for in 2024. There are at least three major catalysts driving its renaissance in the next year: (1) the fourth Bitcoin halving due for April 2024, (2) the expected approval of several Bitcoin spot ETFs from institutional investors, and (3) a rise in programmability features, both on the base protocol (such as Ordinals), as well as Layer 2s and other scalability layers such as Stacks and Rootstock.
On the infrastructure level, we expect to see a proliferation of Bitcoin L2s and other scalability layer to support smart contracts. The Bitcoin ecosystem will likely coalesce around one or two Turing-complete smart contract languages, with top contenders including Rust, Solidity, or the extension of a Bitcoin-native language such as Clarity. This language will become the “standard” for Bitcoin development, similar to how Solidity is considered to be the “standard” for Ethereum development.
We also see the fundamentals for a possible “DeFi summer 2.0” on Bitcoin. With Wrapped BTC (WBTC) today having a market cap and Total Value Locked (TVL) of around $6B, there is clearly an enormous demand for Bitcoin in DeFi. Today, Ethereum has about 10% of its $273B market cap in TVL ($28B). As Bitcoin DeFi infrastructure matures, we could potentially see Bitcoin DeFi Total Value Locked (TVL) rise from the current $300M (<0.05% of market cap) to ~1-2% of Bitcoin market cap (~$10-15B at current prices). In this process, many Ethereum DeFi practices are likely to be transferred and “naturalized” on Bitcoin, such as the recent rise of BRC-20 inscriptions and ideas such as staking such as in Babylon’s L2.
Bitcoin NFTs, such as those inscribed on Ordinals, may also see increased popularity in 2024. As Bitcoin has much higher cultural recognition and memetic value, it is possible that web2 brands (such as luxury retailers) will choose to release NFTs on Bitcoin, similar to how Tiffanys partnered with Cryptopunks to release the “NFTiff” pendants collection in 2022.
2. Tokenized social experiences for new consumer use cases.
Whereas Web2 has moved from social to finance, Web3 is moving from finance to social. In August 2023, friend.tech pioneered a new form of tokenized social experiences on the Base L2, with users able to buy and sell fractionalized “shares” of others’ X (fka. Twitter) accounts, reaching a peak of 30k ETH TVL (~$50M USD at the time) in October, and inspiring several “copycat projects” such as post.tech on Arbitrum. It seems that friend.tech, through financializing Twitter profiles, has successfully pioneered a new tokenomics model for the SocialFi space.
In the upcoming year, we expect more experiments in the social space, with tokenization (both as fungible and non-fungible tokens) playing a key role in reinventing the social experience. Fungible tokens are more likely to be novel forms of points and loyalty systems, whereas non-fungible tokens (NFTs) are more likely to serve as profiles and social resources (such as trading cards). Both would be able to be traded on-chain and participate in DeFi ecosystems.
Lens and Farcaster are two of the leading web3-native applications integrating DeFi with social networks. Projects like Blackbird will also popularize tokenized points systems for loyalty programs in specific verticals (such as restaurants), using a combination of stablecoin payments and tokenized rebates to reinvent the consumer experience, functionally providing an on-chain alternative to credit cards.
3. An increase in TradFi-DeFi “bridges” such as stablecoins and mirrored assets.
2023 has seen a lot of legal action in crypto, including several high profile wins for the industry such as the XRP ruling and the Grayscale ETF litigation win, and justice being served for financial fraud in Binance and FTX. Alongside this is a large increase in institutional interest and potential ETF approvals for Bitcoin and Ethereum.
In 2024, we expect to see a dramatic increase in institutional adoption, who not only seek for ETFs, but also tokenized real-world assets (RWA) and TradFi financial products. In other words, TradFi assets will be “mirrored” in DeFi, while crypto assets will have increased exposure in TradFi markets, thus creating TradFi-DeFi “bridges” that bring these two worlds closer together for increased liquidity and diversification for investors. Ondo Finance has done well tokenizing treasuries while MZERO provides decentralized infrastructure for RWAs.
Stablecoins will serve as one of the most important links between the TradFi and DeFi worlds, with stablecoins such as USDC and PYUSD being more widely accepted as both portfolio options and payment tools. With Circle said to consider a 2024 IPO, we also may see an increase in the issuance and usage of non-USD stablecoins, most notably Euro-backed stablecoins such as Circle’s EURC, as well as British Pound, Singaporean Dollar, and Japanese Yen stablecoins. Some of these stablecoins may be launched by state-backed actors. This may also lead to the growth of an on-chain fiat foreign exchange market.
4. The cross-pollination of modular blockchains and Zero Knowledge Proofs.
Both the idea of modular blockchains and ZKPs have greatly matured over this past year, such as the recent Celestia mainnet launch, Espresso’s Arbitrum integration, RiscZero’s open-source Zeth prover, and Succinct’s launch of a ZK marketplace. One interesting trend is how these two narratives have merged together, with companies in the ZK space “modularizing” by focusing on specific verticals, such as co-processors, privacy layers, proof marketplaces, and zkDevOps.
In the upcoming year, I expect this trend to continue, with Zero Knowledge Proofs emerging as an interface between different components of the modular blockchain stack. For example, Axiom’s ZK co-processor leverages ZKPs to provide historical state proofs, which can then be used by developers to perform computations in DApps. With ZKPs being the common interface between these different providers, we will see a new era of smart contract composability. This provides developers building DApps with a far greater flexibility for providers and reduces the barrier to entry for the blockchain stack. On the consumer side, ZKPs may see increased use cases as a way to preserve identity and privacy, such as in the form of ZK-based decentralized IDs.
5. More computationally intensive applications moving on-chain, such as AI and DePIN.
There has been a lot of time, energy, and capital poured into the scalability problem for decentralized applications. Today, much of the scalability problem has been solved – gas fees on Ethereum L2s are less than 0.02 USD (compared to 11.5 USD for Ethereum mainnet), and on Solana the fees are 3-4 orders of magnitude even lower.
As this trend continues in the next year, we believe computationally expensive applications (applications can use up gigabytes of RAM) will become much more economically feasible on-chain in the near future. This includes vertical applications such as on-chain AI systems, Decentralized Physical Infrastructure Networks (DePIN), on-chain knowledge graphs, and fully on-chain games and social networks. All this may radically reshape the on-chain data economy, greatly improve both user and developer experience, as they are freed from onerous gas fees and stringent constraints on compute power.
Examples of computationally expensive projects that can take advantage of this much cheaper on-chain “compute” include Hivemapper’s efforts to create a decentralized Google Maps on Solana, Bittensor’s creation of a decentralized machine learning platform, Modulus Labs’ efforts in ZKML and AI-generated NFT art, The Graph’s plans for on-chain knowledge graphs, and the Realmsverse creating an on-chain game world and lore on Starknet.
6. Consolidation of public blockchain ecosystems and a “Hub-and-Spoke” model for appchains.
There has been a proliferation in infrastructure projects over the past few years. Despite the commonplace technical categorization of Layer 1 (L1) and Layer 2 (L2), from a user experience perspective there is not much of a difference. This is especially true for a general-purpose public blockchains; today an L1 such as Solana or Avalanche is a direct competitor to an L2 such as Arbitrum or Starkware for users, projects, and volume.
With this homogeneity in place, liquidity serves as a concentrating force for general-purpose public blockchains, benefiting larger incumbent players such as Arbitrum, Optimism and Solana, with the top 4 ecosystems today accounting for ~90% of Total Value Locked (TVL). Smaller ecosystems must concentrate their efforts on specific verticals (such as social, gaming, DeFi) to retain an edge, effectively becoming “appchains” or “sector-chains.” Already, three of the Top 10 L2s by TVL (dydx, Loopring, Ronin) are effectively appchains that specialize in a single vertical. The TVL “break-in” of smaller, newer L2 chains such as Base and Blast also rely heavily on single “killer-apps” (eg. friend.tech and Blur respectively) to establish beachheads in volume.
Moreover, most leading general-purpose public blockchains have released appchain toolkits (OP Stack, Arbitrum Nitro, StarkEx, etc.) to allow appchains to tap into the liquidity on these public networks and place them within their ecosystem orbits. Thus, we’re beginning to see a “hub and spoke” model where there a few general-purpose public blockchains acting as central “hubs,” around which there are numerous “spokes” of specific appchains. In 2024, it may be worth paying attention to major rollup-as-a-service vendors such as Caldera, Conduit, and Eclipse and decentralized sequencers like Espresso that take advantage of this “hub-and-spoke” move.
How were my predictions for 2023?
At the end of 2022, I made predictions about the growth of six sectors listed below. Here’s how I score myself on accuracy, with 1 being the least accurate and 5 being the most accurate.
DeFi will continue to grow while CeFi consolidates
Total Value Locked in DeFi has risen about 40% in 2023, growing from $38B in January to $50B in December, a pace that lags behind the 90% increase in market cap of the crypto space. Nonetheless, there has been an explosion in liquid staking, with Lido’s TVL rising 400% from $5B at the beginning of the year to over $20B by December. Currently, there is over $26B in liquid staking tokens. Restaking has been another major trend in DeFi. Eigenlayer, which announced its Stage 1 launch in June and Stage 2 launch in November, has seen its TVL grow 20x from $13M to over $260M.
Major DeFi protocols, such as Uniswap and Synthetix, have also focused on building better front ends to improve the user experience of using decentralized exchanges. Uniswap launched several major products in 2023, including Uniswap v4 in June which introduced the idea of “custom hooks” to support extended customizability and flexibility in user-defined pools, the open-source UniswapX engine, which processed over $1B in volume in just 4 months, and mobile apps on iOS and Android. Synthetix also launched its v3 in March, featuring multi-collateral staking, cross-chain functionality, and increased developer tooling to improve the user experience for both traders and developers.
CeFi, however, has become more fragmented. Due to its regulatory troubles in the US, Binance’s market share in centralized exchanges has dropped from over 60% in January to less than 50% by September. With the market leader faltering, this has led to a fight between other major centralized exchanges (such as Bybit, Coinbase, and HTX) fighting over this vacuum, leading to a plurality of exchanges in the CeFi market.
We will see tremendous zero-knowledge adoption and use cases
2023 has undoubtedly been a year of zero-knowledge adoption, with Zero Knowledge Proofs (ZKPs) rapidly developing on multiple fronts. On the theoretical front, there has been new innovation in recursive folding schemes, such as Hypernova and Protostar, while on the applications front, there has been an explosion in the application of ZKPs in rollups and beyond.
This past year has seen mainnet launches of several high-profile zkEVM mainnet launches, including the zkSync Era and Polygon zkEVM launches in March, Linea’s launch in July, and Scroll’s mainnet launch in October. Today, 5 of the Top 10 Layer 2s by volume are zkRollups.
ZKP companies have become much more specialized, with ZKP applications in coprocessing, marketplaces, DevOps, and privacy. RiscZero has released its Zeth prover, Axiom has pioneered ZK coprocessors, Succinct Labs released the Succinct ZKP marketplace, and Modulus Labs has released a series of ZKML products. In addition, Worldcoin launched its World ID “digital passport” to use ZKPs to secure biometric data.
Institutions will increasingly tokenize financial assets
Tokenized financial assets have gained great momentum in 2023, as 10-year US Treasury Bill rates have hit a 15 year high. Taking advantage of these macro conditions, Franklin Templeton has tokenized over $300 million US Treasury Bonds, and the tokenized US treasury bonds has increased from $100M in January 2023 to over $700M in December. Other emerging forms of tokenized financial assets include on-chain credit loans, which have also exceeded $600M this year.
In the US, there also seems to be more regulatory clarity over this past year, with several landmark court victories for the industry, such as Grayscale’s win over the SEC over ETF approval, which seems to be poised for approval in 2024. There has also been several moves in the stablecoin space, including Paypal’s launch of PYUSD in August, which currently has a market cap of over $200M, and Circle’s expansion of its EURC Euro-backed stablecoin to multiple networks such as Stellar and Avalanche.
More companies will emerge to leverage blockchain data
With the rise of Large Language Model (LLM) applications such as ChatGPT over the past year, there has been a push to use AI to make sense of on-chain data. This includes new AI block explorers, such as Solana’s Aperture block explorer, as well as portfolio visualizers such as DeBank and Cymbal. Dune, a major on-chain analytics platform, has also introduced its magic AI wand in August to aid in the writing of on-chain queries in its custom DuneSQL engine. There has also been the trend of “Intent-centric” design in the blockchain space, focusing on a higher-level understanding of what a user seeks to accomplish in a given transaction, and automating the process based on AI and other advanced algorithms based on on-chain data.
However, partly due to market conditions, many social and consumer-facing applications based on blockchain data have not yet reached a critical mass. Many on-chain social networks, for example, have struggled to onboard new users, with even some of the more notable social protocols such as Lens only having 100k profiles, very modest numbers compared to web2 social networks. For example, Threads, was able to onboard 100 million user signups in a week. Even after its initial hype ended, Zuckerburg claimed in October that Threads has almost 100 million monthly active users. One of the few successful blockchain social networks of the year was friend.tech, which heavily relied on the distribution and social graph of X, a quintessentially web2 social network, rather than bootstrapping from blockchain data.
The developer tooling stack will continue to grow as blockchain engineers increasingly seek easy and efficient ways to deploy Web3 projects
This year saw several exciting advances on the developer tooling stack, from composability solutions to cross-chain interoperability, to customizable application hooks. One of the major developments in the composability space is Arbitrum’s Stylus VM, which augments the Ethereum Virtual Machine (EVM) with a WebAssembly (WASM) runtime in order to support smart contracts written in Rust, C, and C++. All of these smart contracts are completely interoperable with those written in Solidity, and for memory-intensive applications, Arbitrum estimates that Stylus VM contracts may be orders of magnitude faster, with access to memory that is 100-500x cheaper than using the EVM.
On the interoperability front, Chainlink unveiled its Cross-Chain Interoperability Protocol (CCIP) in July, featuring a novel design using three decentralized oracle networks (DON), and announced partnerships with the Swift international banking system. LayerZero has just launched its v2 a few days ago, featuring Decentralized Verification Networks to replace its V1 Oracle, introducing a modular verification approach for cross-chain packets and increased programmability features.
There has also been a flurry of activity in the modularity space, such as Celestia’s mainnet launch and Espresso System’s Arbitrum integration, which all promise increased composability for developers. Decentralized applications such as Uniswap have focused on increasing composability and customizability, such as releasing “custom hooks” integrations in Uniswap v4 and the open-source UniswapX engine.
However, despite these advancements, monthly active developers in the blockchain space has dropped by about 25% from 26k to less than 20k in October this year, despite the rise in prices since the start of the year. One reason for this may be because developers oftentimes have sunk costs (such as completing current projects), and therefore developer count acts as a lagging indicator in the bear market. One bright spot of this is that the overall decline in developers, ~30% from its peak in mid-2022, is far less than ~70% drawdown in prices during this “crypto winter”.
Non-fungible tokens that provide some kind of value to their holder, such as gaming NFTs and identity NFTs, will expand
This past year has been brutal to the NFT scene. Ethereum NFT trading volume hit a two year low in August 2023, and the average selling price dropping over 90% between 2022 and 2023. OpenSea laid off around 50% of its marketplace staff and lost its market leader position to become a mere fifth, with less than half of Blur’s volume. Even prominent gaming NFTs, such as Sorare’s trading cards, have seen a “deflationary spiral” where card values are declining rapidly.
Despite all this, there have been some bright spots and innovations in the NFT space. The Blur marketplace had a highly successful launch that featured a sophisticated tokenomics strategy in February 2023 to overtake OpenSea, and is currently launching its own L2, Blast, with native yield. There has also been a growth of Bitcoin Ordinal NFTs, reaching over $1B in transaction volume, with trading supported by major exchanges such as MagicEden and OKX’s NFT marketplace. Arcade has also been pioneering NFT financialization with NFT-backed loans for both digital and real-world assets.
As we reach the end of 2023, we have perhaps made it through the worst of the bear market, turning over the page on the series of brutal collapses that we have seen over the past year and a half, and ready to begin exploring novel use cases. Today, we’re at an inflection point, where crypto is no longer solely about financialization, but rather a broader idea of how we redefine consumer, social, and developer experiences using blockchains. I’m very excited to see what 2024 holds for the future of our still nascent industry, as we use decentralized technologies to reimagine our digital culture.
- Paul Veradittakit
Hi, I’m Paul Veradittakit, a Managing 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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