Hi, as we ease into another year, we’ve decided to collate some predictions about the year ahead, culled by our favourite authors and a few from ourselves.
The usual disclaimer: This newsletter collates the main themes and headlines of the week in DeFi/crypto/metaverse/web3/NFT land and tries to provide unbiased context. It’s aimed at anyone who wants to keep an eye on the space. It’s put together by a team at YAP and doesn’t contain any promotion of our clients (if one is mentioned, we’ll flag that).
The team: founder Samantha Yap and Jeremy Wagstaff, formerly of the journalism parish, with Sam O’Donohoe, Becky Corbel, Delon Chan, Ewan Brewster and Tiffany Mac Sherry. Your feedback is as always welcome. Ping us at thecontext@yapglobal.com. Old newsletters can be found here.
[tl;dr]
Investigations and prosecutions will predominate, at least until most of the bodies have been located and dug up. Regulators may or may not follow in their wake, but more interesting will be how attention shifts to more insightful and thoughtful investing within DeFi, making use of tools both old and new, albeit on a smaller scale than in 2021 or 2020;
A lot will hinge on how effectively Ethereum can tackle its growing pains, but as more of CeFi’s weaknesses come to light there will be more serious momentum towards making non-custodial investing more user-friendly and safe;
Smaller, more niche use cases will gain attention as the less flashy, risky stuff matures. Think music NFTs, decentralized social networks and web3 games find a broader audience (and investor base).
[Big stuff]
Regulators must get their heads around DeFi. There are two ways of looking at this: FTX demonstrated how opaque and weak existing mechanisms for self-regulation are, and so external regulation is needed to protect the gullible. As JP Koning points out, Canada and Japan have already made these moves. The other way to look at it is that even in the midst of this winter, the crypto-asset market is worth more than $800 billion. That’s not huge, but it’s not small either: it’s about the value of the combined Belgian and Danish stock markets. At its peak in November 2021, the market was worth 3.7 times that, making it bigger than the UK stock market. (Of course, the numbers are misleading.) So for the banks, the question is: When do we consider crypto assets to be critical financial infrastructure? In a recent blog post, the Bank of England asked just that question: If a blockchain became more critical to the financial system, how should it be governed? (Story by Vildana Hajric of Bloomberg)
Retail investors will get smarter about what they’re buying. Yes, a lot won’t come back. But a lot will — and a lot are still investing. Instead of the breathless Discord and Telegram steam rooms, we’ll see growing interest in those who spend time crunching numbers before investing. Such as Tascha, whose most recent blog post and podcast episode explore setting up an empirical model for pricing blockchain native tokens. (And of course, some institutional investors will decide it’s not worth it.)
Prosecutors will get smarter, leaving fewer loopholes for aggressive DeFi open market actions that skirt the law. We’ll see more cases like Avraham Eisenberg, who was arrested in Puerto Rico in late December and charged with fraud by the US Attorney’s Office in Manhattan in connection with an exploit targeting Mango Markets. The debate around this issue may not settle quickly, but the direction is clear. Bloomberg's Crypto Trader’s Fraud Charges in Mango Exploit Show DeFi Not Above Law, partner at digital-asset venture capital firm Dragonfly, as putting it this way: “Fraud is fraud,” Schmidt said. “I think people mistake ‘Code is law’ for ‘Code is above the law.
Impacting investing: Effective Altruism may have earned a black eye from the SBF affair, but expect to see growing interest in using the best bits of web3 to fund public goods. Rachel Shu explores some of the ideas in her notes from Bogotá, using NFTs for intellectual property, patents and impact certificates, and smart contracts for automating transfers based on impact milestones etc. Regenerative Finance is another term used.
[Specifics]
2023 is likely to see continued adoption of self-custody, where investors park their assets in a hardware wallet or something similar, rather than entrust it to an exchange. But this is an area that needs work, especially in ease of use, and in reducing the possibility that passwords (seed phrases) are not lost, and that the hardware doesn’t fail. (Story by Zeynep Geylan of CryptoSlate)
Similarly, those using CeFi exchanges to organise and trade their portfolio will likely go elsewhere. One likely area is “on-chain asset management” [companies like Enzyme](https://messari.io/report/enzyme-on-chain-asset-management?__s=pi90vu9wnnewb289x2a4&utm_source=drip&utm_medium=email&utm_campaign=We need a DAM solution for custody!), where investors park their funds in non-custodial ‘vaults’ and set their investment parameters.
With so many other big names losing their sheen in 2022, Ethereum and Vitalik Buterin are both carrying much more of the industry’s expectations. The next thing to look out for after The Merge is when validators will be able to unstake (those who have committed funds to Ethereum’s new Proof of Stake blockchain to earn a yield cannot, as yet, withdraw, or unstake, the ETH until a further upgrade to Ethereum is done. When is the $60,000 question.) (Story by Samuel Haig of The Defiant)
Expect fewer crypto companies trying to go public through SPACs, or special purpose acquisition companies. It’s not just a winter thing — it’s both a regulatory black hole and a funding one, too, according to analyst/Insight Provider subSPAC who publishes on Smartkarma. Sceptics would argue that DeFi and listings don't really mix anyway.
[Other people’s dreams]
Ryan Selkis’ Crypto Theses for 2023 run to 157 pages, and are well worth the read. Lou Kerner has collected his 10 Highlights. One really interesting one is the collateralisation of Real World Assets on chain. MakerDAO, for example, invests in real estate, invoices, trade receivables and commercial loans, accounting for 57% of its total protocol revenue, up from less than 10% in July. Lou Kerner also mentioned examples like END-Labs, which tokenizes pools of gig-work compensation from the likes of Uber, providing gig workers earlier access to monies they're owed while providing stable returns to investors.
Fixing stuff: DeFi may be in the dumps, but the rest of the world isn't all that groovy right now either. Might web3 help? One area might be social media. Decentralised Social is another top investment theme for Ryan Selkis, with DeSo’s layer 1 blockchain boasting 2 million accounts. It's hard to see a massive influx of Twitter refugees, but the exodus to (non-web3) Mastodon has shown it's not implausible, especially if third-party services can ease the transition (Movetodon, for example, trawls for your Twitter followers on Mastodon). A deeper dive into the space here: The Status of Web3 Social - by Donovan Choy.
The Milk Road has collated a few predictions, alongside their own. Its most interesting one: The first mainstream web3 application will be a video game, as more big names enter the space. Half of the top 10 Dapps by wallet activity are games. “There's more talent, more money, and more traction than ever in web3 games," he says.
Bankless has hopes that music NFTs may continue to attract support since musicians can earn far more than they would on streaming platforms. More on the space by 101 Blockchain’s Georgia Weston.
[Events]
World Crypto Conference | January 13th - 15th 2023 | Zurich, Switzerland
Blockchain Economy 2023: London Summit | February 27th - 28th 2023 | London, England
[DeFi Definitions]
An occasional segment exploring one particular aspect of DeFi.
This week: “Memecoins” by Ewan Brewster
Memecoins started off as a cheaper and light-hearted alternative to Bitcoin. They take their names from the memes that inspire them and possess absolutely no utility. Despite their inherent ridiculousness, they have become immensely popular amongst the crypto community with Dogecoin having a total market cap of $8 billion. But why?
The value of a memecoin depends entirely on their popularity within the community. As they are created, their founders will attempt to hype up their new currency on social media but their lifespan totally depends on the strength of their community base. Memecoins can also boom when high-profile players endorse them, for example, Dogecoin surged in value after Elon Musk showed his support for the cryptocurrency.
As Memecoins are yet to have any real utility, they are, for now, merely a way to make money and despite their humorous reputation, there are dangers involved in investing. Memecoins are more volatile than other cryptocurrencies due to their unlimited supply and they are much more vulnerable to mainstream factors such as social media trends. Furthermore, a substantial amount of the supply is in a select few wallets, for example, 48% of all Dogecoins are held by seven wallets. This means large investors can manipulate the market or cause the coin’s value to collapse should they cash out their holdings.