Pantera Partners' 6 Predictions for the Crypto Industry in 2023

Original Title: 《2023 Predictions》

Source: Paul Veradittakit, Partner at Pantera Capital

Compiled by: aididiaojp.eth, Foresight News

2022 was undoubtedly a year of highs and lows for the crypto industry. Following the bull market of 2021, we opened 2022 with expectations of market adjustments, with Bitcoin and Ethereum dropping approximately 20% and 31% respectively in January alone. Macroeconomic factors such as the Federal Reserve's interest rate hikes, high inflation, layoffs, and a general slowdown in economic growth brought significant uncertainty. The tough market conditions largely became a source of panic for most of the year, but this did not prevent the crypto industry from achieving many incredible technological advancements. Improvements in DeFi, such as Compound v3, and the development of the ZK ecosystem continued. Institutional adoption of cryptocurrencies also accelerated, with numerous brands like Disney, Starbucks, and Adidas quietly embracing Web3. Major banks have also shown increasing interest in the industry: Fidelity launched crypto services for investors, BlackRock partnered with Coinbase to provide crypto access for its institutional clients, and Goldman Sachs is creating new crypto data services.

One highlight of the year was the Ethereum merge in September, which transitioned the blockchain from proof-of-work to proof-of-stake, reducing Ethereum's energy consumption by approximately 99.9%. Additionally, many remarkable engineers continued to build during the bear market, with some strong projects emerging. The industry is also learning from every disaster in 2022, although it remains challenging. In light of these events, many projects and even the entire cryptocurrency market have shown their resilience. The crypto industry has developed through numerous crises, and this time will likely be no exception, as it enters 2023 with the strength and durability demonstrated in 2022.

Here are my six predictions for the crypto industry in 2023:

DeFi will continue to grow during CeFi consolidation

The past year has exposed many issues within centralized finance (CeFi), while DeFi has generally performed well. Given the multiple collapses of CeFi in 2022, I expect CeFi companies in the industry to gradually consolidate into highly regulated participants like Coinbase and Bitstamp.

During the period following the FTX collapse, DeFi trading volume surged, increasing by 68% from October to November, reaching $97 billion. This indicates that managing assets through secure smart contracts allows users to better understand liquidity and have greater control over their investments.

By 2023, I believe we will see more complex and interesting DeFi applications emerge. Exciting examples include GMX, a decentralized perpetual exchange, and 1inch Pro, a compliant platform connecting TradFi (traditional finance) to DeFi. Next year, use cases such as self-custody wallets, synthetic assets, and prediction markets will attract more market attention.

The true advantage of the industry lies in its infrastructure, which supports transactions in a trustless and efficient manner. These characteristics will greatly accelerate the adoption and growth of DeFi in 2023, especially considering the challenges faced by CeFi this year.

We will see a surge in zero-knowledge adoption and use cases

As privacy issues become a focal point in the crypto industry, zero-knowledge technology has gained particular attention this year. Zero-knowledge technology essentially allows a prover to demonstrate something without revealing underlying information about the proof, using provers, verifiers, and mathematical algorithms. Given that blockchains are inherently transparent, this application is significant for the industry, as it also enables more private interactions on-chain. Zero-knowledge proofs are also very lightweight, making on-chain interactions more scalable and efficient.

With the emergence of projects like Succinct Labs, Risczero, and Espresso Systems, we are witnessing a surge in use cases for zero-knowledge proofs, EVM, and Rollups. Zero-knowledge technology plays a particularly beneficial role in identity within the crypto vertical. With zkps, users can prove their identity on-chain without disclosing sensitive data. Ethereum co-founder Vitalik Buterin also pointed out in a recent article that zero-knowledge technology is crucial for addressing on-chain information issues, a category that represents "real problems that need to be solved."

ZK technology is also valuable for cross-chain bridges, enabling the transfer of messages and token assets while ensuring security and correctness through concise proof mechanisms. It also has exciting use cases in TradFi systems, such as credit scoring and taxation.

Institutions will increasingly put financial assets on-chain

Real-world assets (RWA) represent claims on underlying assets and typically generate returns on those assets. So far, the emergence of this category has unlocked significant liquidity and utility, and 2023 may bring more assets represented on-chain in an accessible manner.

Stablecoins can be considered the most popular application of real-world assets in today's market, with three of the top seven tokens by market capitalization belonging to this category. Circle's USDC and Maker's DAI have been recognized as stablecoins by the market and have shown little volatility throughout the bear market.

The on-chain community has already demonstrated demand for RWAs: for example, MakerDAO decided to invest $500 million worth of DAI in U.S. Treasuries and corporate bonds in mid-2022.

Goldfinch is a company providing off-chain loans, with current active loan values around $100 million. Jia allows business owners to obtain blockchain-based loans and generates substantial returns for liquidity providers backed by real-world businesses and assets. I expect interesting applications of RWAs to grow in 2023, such as fast loans and real estate. In line with the trend of real-world assets, I also hope to see many startups focusing on bringing TradFi institutions into the crypto space in a compliant manner.

More companies will enter the blockchain data space

Rich open-source data can be considered one of the best features of blockchain, as it allows for in-depth analysis of on-chain activities. Utilizing this data efficiently and responsibly is an essential part of scaling blockchain dapps and their use cases. Data reveals a wealth of information about how blockchains are used, emerging trends, user behavior, and the flow of funds on-chain.

Blockchain analytics platforms like Nansen will continue to play a key role in analyzing on-chain behavior through wallet activity. Companies like nxyz are also addressing blockchain indexing issues by providing data APIs without rate limits. Definitive emerged in 2022, aiming to provide accessible tools and related analytics for on-chain and off-chain activities. Even as these companies develop, there remains significant untapped potential in blockchain data, and I expect the industry to achieve substantial growth in 2023. To understand the next steps for cryptocurrency, we need to refine our level of state data analysis.

Developer tool stacks will continue to grow

As blockchain engineers increasingly seek simple and effective ways to deploy Web3 projects, developer tool stacks will continue to expand.

Developer tools eliminate many repetitive and tedious parts of the work, encouraging more engineers to experiment with creating on-chain protocols. Over the past year, companies like Alchemy and Tenderly have been particularly important players in the industry.

Despite the bear market, developers are trying on-chain applications more than ever. Alchemy recently reported that the number of engineers using its platform has surged threefold since the beginning of the year. In September 2022, the number of verified smart contracts deployed monthly increased 2.6 times year-over-year. Impressively, 36% of smart contracts were deployed and verified in 2022.

As more web3 developers engage with the ecosystem, it is crucial to provide them with reliable tools as they begin to build. Cross-chain tools are particularly important as they offer composable software that can easily launch projects across multiple chains. As a cornerstone of many crypto projects, developer tools will continue to grow in 2023 as more crypto use cases emerge and more engineers seek to enter the industry.

NFTs providing value to holders, such as gaming NFTs and identity NFTs, will continue to grow

In-game NFTs, identity tokens, and utility NFTs for membership communities, software, and events will grow in 2023. This year, we have seen the industry begin to evolve in terms of technology and creativity, but there is still a long way to go before it becomes mainstream. While the digital art sector is undoubtedly a massive vertical, using NFTs to allow for specific privileges has the potential to disrupt many existing industries.

So far, we have seen some exciting applications and developments of these ideas. PROOF Collective allows its NFT holders access to future PROOF airdrops (one of which is the popular Moonbirds NFT project) and access to PROOF community programs, such as live events and private Discord. Vitalik has also released a paper on the integrity of soulbound tokens (NFTs holding on-chain identity information), and some projects have adopted this paper. Gaming transactions surged in 2022, once accounting for more than half of all blockchain activity. Additionally, NFTs are beginning to explore the entertainment sector, particularly in the fan economy.

Traditional companies have been exploring NFT adoption at an increasingly rapid pace. Some highlights include: Tiffany & Co. releasing a series of pendants for CryptoPunk holders; Instagram announcing the incorporation of NFTs into its platform; and Nike acquiring the metaverse fashion company RTFKT. Furthermore, Royal is redefining music revenue streams and ownership by allowing fans to invest directly in songs. Athletes like Cristiano Ronaldo have released related NFT collections to enhance fan engagement and potentially gain other future benefits.

By 2023, I am excited to see the ideas of industry disruption and utility NFTs further materialize. Crypto applications and traditional companies may begin to experiment more with using NFTs to provide valuable offerings to their holders.

Conclusion

Although 2022 saw some painful hacks and CeFi collapses, the entire crypto industry made significant technological advancements. Even in the harsh crypto winter, the influence of Web3 has emerged globally, and this technology is clearly here to stay. As an industry, our job is to make this technology accessible, reliable, and secure for users around the world, paving the way for a financially transparent, reliable, and autonomous era. Web3 continues to redefine our perceptions of money, ownership (both physical and digital assets), identity, and community. As we continue to accelerate the adoption of Web3 on the internet, I am eager to see what 2023 will bring.