Over the past few weeks, we’ve seen a slew of institutional reports looking back at the crypto winter of the past year and offering an outlook for 2023. We collected these reports and compiled the views of various agencies.
The Disruptive Potential of Web3
Web3 represents the decentralization of business models, moving away from the control of centralized powers, where user data is captured, aggregated and resold, applications are developed, delivered and monetized in a proprietary manner, and decisions are centralized in a few Income is also distributed to management and shareholders. In contrast, Web3 is a shift towards open standards and decentralized protocols, where governance is delegated to the community, rather than being “closed doors” within the company.
However, the Web3 community has recently faced some challenges, including market decline and centralized company bankruptcy.
But there is still potential for transformative applications of digital assets and blockchain technology across industries. The financial sector is leading the way in adopting these technologies, and they have also been implemented in real estate, gaming, carbon markets and the arts. Still, Web3 has ongoing challenges, including poor user experience, frequent fraud, and a still unclear regulatory environment.
This year has been tough for the cryptocurrency market, with the overall market cap down 66.4%. Markets are affected by external factors such as tightening international monetary policy, COVID-19, supply chain issues. The cryptocurrency ecosystem also faces significant challenges, including protocol breakdowns, poor risk management, and losses from fraud. As a result, protocol token prices fell, companies went out of business, and DEX and NFT marketplace trading and development activity decreased. However, the Web3 industry will continue to make progress as the technology develops further and institutional adoption increases.
Currently, many users access the blockchain primarily through their smartphones, relying on a potentially risky centralized infrastructure. To decentralize access for all users, including those who cannot run their own nodes, some blockchains have introduced “light” clients that allow users to verify blockchain data directly in their phones. We expect to see more of this in 2023.
Zero-knowledge proofs have become more practical in recent years, and the proliferation of educational materials and the development of high-level programming languages have made it easier for engineers to start writing ZK applications, which will hopefully lead to an influx of application developers and the development of potential new use cases.
Zero-knowledge proof technology is a method for the prover and verifier to use mathematical algorithms to prove something without revealing specific information about the proof. It is useful for increasing privacy on the blockchain and allowing users to interact more on-chain in a private manner.
ZK Rollups are not expected to gain significant traction in 2023 due to their lack of production readiness and insufficient decentralization. Instead, zero-knowledge proofs are expected to be widely used, especially non-interactive zero-knowledge proofs. Many cross-chain bridges are also expected to start using zero-knowledge proofs for interoperability.
There is growing interest in zero-knowledge proof techniques and privacy coins in the blockchain and cryptocurrency space, especially how they interact with traditional systems and emerging technologies such as SBT. One question is how protocols using zero-knowledge techniques can provide transparency and traceability without compromising the advantages of anonymity.
The advent of the blockchain has made it possible for developers for the first time to create game worlds that cannot be deleted or censored, do not require servers, and can exist outside of the developer’s “lifecycle”. These “self-governing worlds” are made possible by developers’ ability to place the entire state and operating logic of a game on a publicly verifiable, censorship-resistant, and decentralized blockchain, as well as advances in on-chain procedural generation .
First bullish then bearish, the Web3 gaming space may be overhyped. We’ve seen players ask several questions about the development of P2E games, including:
Make sure the game is playable, not fleeting due to earning tokens.
Game development is expensive and time-consuming, especially when complex token mechanics and NFT game items are involved.
While Axie has been successful with $1.35 billion in revenue, overall revenue in the P2E gaming space is trending down.
Decentralized finance (DeFi) may struggle to survive the regulatory challenges of 2023, as it is considered the riskiest subsector of the cryptocurrency industry by U.S. lawmakers. Some DeFi teams are preparing for future regulation, including temporary compromises in certain jurisdictions to protect the underlying protocol from crackdowns. Some DeFi protocols have implemented controls and restrictions, such as token delisting and geo-location restrictions, to comply with laws and regulations.
The problems with centralized finance (CeFi) and the success of decentralized finance (DeFi) over the past year are expected to lead to a highly regulated DeFi industry. The significant increase in DeFi transaction volume makes DeFi expected to have more complex and interesting applications in 2023, including decentralized perpetual exchanges and platforms connecting traditional finance and DeFi. DeFi’s trustless and efficient transactions will drive its wider adoption, especially given CeFi’s woes (e.g. FTX, Celsius bankruptcy time).
The recent bankruptcies of centralized companies like FTX, Celsius, Voyager, etc. were not caused by decentralized protocols, but by their own greed and excessive risk taking. Going forward, DeFi developers can focus more on building economically sustainable and secure decentralized applications. DeFi will continue to provide safe and instant cross-border payments, improving the efficiency of financial transactions through blockchain.
DEX user experience will outperform CEX. In order to compete with CEXs, DEXs must overcome several challenges and hurdles. These include:
User Experience: A big hurdle with DEXs is that using them is generally more challenging than CEXs for most users. Most DEXs require users to self-custody, users must have their own wallets and must manage their own private keys. This is often daunting and puts most market participants off.
Liquidity: Another major challenge for DEXs is that they are generally less liquid than CEXs. This could make it harder for users to execute trades on the exchange. This can also lead to higher volatility and wider spreads in different markets. To compete with CEXs, DEXs must find ways to increase liquidity and make it easier for users to transact on their platforms.
Regulation: CEXs are generally more strictly regulated than DEXs. This gives users more confidence in the legitimacy, security and reliability of the exchange. Which is ironic since the fallout from the FTX debacle is still playing out. On the other hand, DEXs may not be subject to the same level of regulation, which may be a concern for some users. To compete with CEXs, DEXs need to address user concerns.
Tokenization of Real World Assets
By 2023, more real-world assets are expected to be mapped onto the blockchain. The crypto community has already demonstrated demand for real-world assets, and there may be more interesting applications for these assets, such as real estate. There may also be an increase in startups focused on bringing traditional financial institutions into the crypto space in a regulatory-compliant manner.
In 2021, DeFi lending protocols such as MakerDAO and Aave will increasingly use real-world assets such as U.S. Treasury bonds as collateral. These protocols are more transparent than centralized lending platforms, have better collateral, and demonstrate a deep understanding of risk management. Aave plans to launch its GHO stablecoin, which will allow users to earn yield on collateral and will receive 100% interest income, compared to 10% for other assets. The official deployment of GHO and Aave V3 on Ethereumis expected to come soon.
The NFT market faces a drop in transaction volume in 2022, leading to fears that NFTs will no longer be successful. However, despite the 2021 boom, NFTs are actually thriving in many fields. There have been successes with Layer-2 solutions, music NFTs, and Web3 social platforms using NFTs. Web2 giants and top brands are also using NFTs in marketing and enhancing user experience. Even as market volatility continues, NFT adoption and innovation are laying the groundwork for strong future growth. Overall, 2022 is also a successful year for NFTs.
As far as prospects are concerned, game companies will find more advanced use cases through NFT. These include new NFT standards, new economic models, and blockchain games. The intersection of NFTs and AI, as well as the evolution of wallets and marketplaces to better serve users, is also of interest. The Web2 social media platform is also exploring the use of NFT, and the new NFT market is challenging OpenSea’s dominance and trying to reshape the NFT market landscape.
NFTs will become increasingly popular in 2023, especially in gaming NFTs, identity tokens, token-gated communities, and more. Traditional companies are increasingly exploring use cases for NFTs, using them in a variety of contexts, including engaging fans who hold NFTs to participate in exclusive events.
It is expected that by 2023, users will no longer pay attention to digital art and collectibles, but will pay more attention to the commercial use cases of NFT. For example, in the ticketing industry, NFT can be used as tickets and souvenirs.
The NFT trading market will see significant growth in 2022, with a market capitalization of $35 billion in March. However, transaction volumes have declined since April. The adoption of NFTs by major consumer brands including Starbucks, Instagram, Disney, Nike may lead to increased interest in NFTs by traditional users in 2023.
Despite the poor performance of Web3 games this year, VCs are still interested in Web3 games because they believe that it will eventually attract the masses into the world of cryptocurrency and Web3, and lead to the adoption of DeFi, NFT and other fields. Some games cater to both Web2 and Web3 audiences and could be considered “Web2.5”.
They are also paying attention to Web3 social media, some platforms are actively building and gaining attention. As the crypto user experience improves, it is expected that more and more users will use cryptocurrency and NFT-based applications on a daily basis.
In 2022, Web3 accounts for the majority of blockchain investments, with investors particularly interested in early-stage projects related to NFTs, Web3 games, privacy-preserving technologies, and other areas.
Investors are divided on their focus in 2023. Some investors are interested in Web3 game infrastructure and entertainment experience, while others are concerned about the sustainable development of Web3 through decentralized infrastructure and innovative DeFi solutions. Some are prioritizing projects that offer extended Web3 capabilities, such as privacy solutions and no-code development tools.
Despite the many catastrophic events in the blockchain industry in 2022, including hacks and the bankruptcy of centralized companies, investors remain confident in the potential of Web3 and hope to continue the current funding trend in 2023. However, they are also more cautious in their investment approach, conducting due diligence and checking the viability, sustainability of potential investment opportunities.
Overall, investors remain optimistic about the prospects of Web3 in 2023.
Throughout 2021 and the first half of 2022, there will be 247 and 183 investment rounds for centralized infrastructure startups, 500 and 596 for decentralized infrastructure and NFT startups, and 218 and 186 for CeFi startups. Rounds totaled $28.5 billion for all of 2021 and $27.4 billion in the first half of 2022 alone, so it looks like 2022 is really picking up the pace. However, in the second half of 2022, the investment amount of venture capital companies in the encryption market will decrease, and the pace of transactions will slow down significantly. Therefore, in 2023, if crypto startups want to obtain investment, they may face more brutal conditions and need to prove the robustness of their business.
Following the recent bankruptcy of FTX, there have been calls for greater regulation of the cryptocurrency industry. However, many of the closures and insolvency events in the crypto industry in 2022 are due to common problems such as excessive leverage, insufficient risk control, and in some cases unethical business practices, which are also common in traditional finance. While regulatory clarity is important for a market to mature, there is a risk that overly draconian regulation will push cryptocurrency players outside of the United States. Instead, we need to create an appropriate regulatory framework for the cryptocurrency economy that can effectively manage risks while promoting the development and adoption of crypto innovations for the further benefit of society.
The Australian government clarified in its 22-23 federal budget that Australians holding cryptocurrencies will be subject to capital gains tax. The government is also working on a framework, known as “token mapping,” a process that involves classifying digital assets to determine how they should be regulated. The government also plans to introduce a digital asset custody regime and licenses for cryptocurrency trading platforms.
Web3 friendly regulations are being introduced to the crypto market with a focus on protecting investors. Several US states have passed their own legislation to become Web3 friendly zones, offering preferential treatment and special tax considerations for Web3 businesses. Dubai is also billing itself as the home of Web3 innovation, and other countries are expected to follow suit in the coming years. It is important that these regulations do not stifle Web3 innovation, while also protecting investors.
The United States and the European Union have accelerated the pace of improving the regulatory framework for cryptocurrencies. The United States has released a draft industry regulatory framework, and the European Union has passed a proposal for an encrypted asset market, which will establish a unified regulatory framework in the EU. The regulatory frameworks of the US and EU will have a major impact on the global cryptocurrency market and serve as a reference model for other countries.
Stablecoins and CBDCs
Stablecoins will continue to be a major part of the crypto market, currently, they account for about 17-18% of the total cryptocurrency market capitalization, more than five times higher than the 3.4% in early 2021. The market share growth of stablecoins, and the roughly 78% combined market capitalization of bitcoin, ethereum, and stablecoins suggest that cryptocurrency investors have shifted their focus to higher-quality assets. The growing use of stablecoins, especially the top four stablecoins by market capitalization (USDT, USDC, BUSD, and DAI), represents the willingness of cryptocurrency investors to hold stablecoins during market downturns, rather than exiting the market.
Central bank digital currencies (CBDCs) pose a greater threat to society than the collapse of UST, the $60 billion algorithmic stablecoin, according to Circle’s head of policy, Dante Disparte. Disparte suggested that policy and rules-based competition should be used instead of CBDC to solve problems in the banking system.
Web3 enables users to have a digital wallet as their unique identity and have greater control over the information they disclose on the Web3 platform. Decentralized identity, including the use of avatars and biometrics, is expected to become mainstream in the Web3 ecosystem in the future.
Vitalik Buterin published a blog post about Soulbound Token (SBT), a digital asset tied to a single wallet (“soul”). These tokens are non-transferable under certain conditions and can be used to represent personal identities or store identity-related value such as qualifications or reputation. In a later paper, Buterin also discussed the potential of SBT to encode social trust and reputation on the blockchain. The technology is still relatively new, and many industry experts have proposed various methods for verification, transferability, and governance based on SBT.
The storage industry is always upgrading and innovating, including adding computing power to storage solutions. Known as storage-based computing, these solutions are required for Web2 applications, including local development environment rendering and insertion and extraction of data streams. The crypto industry also has several “global computers”, but they are not the same as storage-based computing.
Decentralized domain names
The three main reasons behind the popularity of domain names are their inherent scarcity, the decentralization and security of blockchain domain name innovations, and the ongoing narrative and hype surrounding them. These factors make domain names the “best sellers” in the NFT market in 2022.