1confirmation Partners: Three Undervalued Product Trends in 2023

Original Title: 《Three underrated product trends: 2022 recap and 2023 predictions》

Written by: Richard Chen, Partner at 1confirmation

Translated by: Yangz, The Way of DeFi

As a tradition, I make three underrated predictions for product trends each year. Let's first look back and see how my predictions from last year fared, and then make three predictions for 2023.

Review of Last Year's Predictions

1. Vertical-specific NFT Markets

Conclusion: It depends

OpenSea's trading volume has dropped by 94% from its historical peak, and most other vertical NFT markets have seen similar declines; SuperRare and Foundation dropped by 92% and 90%, respectively.

The only exception seems to be music NFTs. Last year, I predicted that 2022 would be the breakthrough year for music NFTs. Although the trading volume of music NFTs has also significantly decreased from historical highs, there has still been healthy year-over-year growth on a monthly basis throughout the bear market.

2. Trust-minimized Cross-chain Bridging

Conclusion: Correct

Last year I wrote, "Bridging is a huge honeypot, and I predict that cross-chain hackers will become the new CEX and DeFi hackers." It turns out that five of the seven largest hacks in history were cross-chain bridges, resulting in a total loss of $2.3 billion.

All of these hacked cross-chain bridges took shortcuts in their design, introducing trust assumptions. For example, there was a centralized multi-signature composed of several validators, all controlled by the same entity, or a management key that could unilaterally upgrade critical parameters in the smart contract. These single points of failure became huge targets for sophisticated hackers. Meanwhile, trust-minimized bridges like Hop have not experienced any security incidents so far and have gained significant market share.

These hacks illustrate why designing a trust-minimized bridge is difficult and why projects should not glue a solution together at the expense of security for the sake of prioritizing execution speed. As an old saying in cybersecurity goes, being right 99% of the time doesn't matter. You only need to be wrong once to be taken down.

3. Investing in DAOs

Conclusion: Incorrect

Aside from a few OG investment DAOs like Flamingo DAO, the newly emerging DAOs are mostly media hype. They initially received a lot of media coverage and some early usage, but ultimately lacked sustained traction and product-market fit. The number of new DAOs is also a vanity metric, as the power law of venture capital applies here—only a small fraction of DAOs will capture nearly all the investment returns.

Last year, I likened investing in DAOs to collecting collectibles rather than art, with the big use case being group purchases of expensive grail NFTs. But the result was that collectors preferred to buy cheaper versions rather than seek exposure to blue-chip artists.

Predictions for 2023

After reviewing last year's predictions for 2022, here are my thoughts on three underrated product trends for 2023.

1. ENS

ENS is the elephant in the NFT space. In terms of unique holders, it is the most widely distributed among all NFT projects to date and is the tenth most called smart contract on Ethereum over the past year.

However, ENS is still not being talked about much on Twitter, as it isn't as sexy as JPEGs; the hype around names rather than images seems less compelling. Additionally, there is a misunderstanding that ENS is only about capturing popular domain names, rather than aiming to build a passionate holder community like other NFT projects. However, it turns out that ENS also has its own versions of PFPs in the form of 3-digit and 4-digit ENS names. I predict that ENS projects like 999 Club and 10k Club will be some of the most ideal forms of on-chain identity next year.

On top of all this, ENS.Vision has quickly grown to become the leading vertical market for ENS domain names and is the preferred place to purchase ENS domain names, rather than OpenSea. When a vertical market captures more trading volume than a general secondary market, it is always beneficial for the vertical market.

2. MEV Business Models for Applications and Wallets

In the past few years, MEV has evolved from a side hustle for crypto-native enthusiasts (myself included!) into a specialized industry requiring dedicated infrastructure to optimize millisecond-level execution speed.

Note that this is just a lower bound estimate—the true total of MEV profits could be several times higher. It would be great if there were ways for projects and users, rather than searchers and validators, to capture this profit.

Application chains and rollups. There have been many articles on the theory of application chains for 2022. Unlike claims of faster/cheaper/better scalability, I believe MEV will be the biggest reason dApps migrate to their own chains or rollups. This is because when dApps are deployed on their own customized chains, they can control the sequencer, which is the order of transactions. Controlling the sequencer is a new business model for dApps, as MEV searchers pay dApps for the right to order transactions in some way for their front-running or back-running operations. This money can serve as revenue for the dApp or be returned to users to compensate for their impermanent loss.

Additionally, MEV can provide a new business model for wallets. Wallets can create their own private mempool for user transactions (or collaborate with projects to establish one) and allow MEV searchers to bid for the rights to bundle transactions. Wallets earn revenue from the bids and can return a portion of it to users. This is similar to payment for order flow (PFOF), which is also how Robinhood makes money, as Citadel pays Robinhood for retail flow.

A common misconception is that all MEV is bad. But in reality, only a subset of MEV is harmful, such as front-running and sandwich trading. Arbitrage and liquidation are crucial for maintaining the health of the on-chain DeFi ecosystem. Without a robust MEV ecosystem, protocols will ultimately face bad debts when market turmoil occurs, as seen with MakerDAO on Black Thursday.

In short, whenever a new business model is created, it is a sign of 0 to 1 innovation.

3. Generative Art

Generative art is a safe escape from PFPs. Generative art not only shares similar attributes with collectibles in creating a passionate community of NFT holders, but it is also seen as higher-quality art created by artists who believe in the long-term value of NFTs, rather than random contractors on Fiverr who may not know what NFTs are.

When NFT prices drop, critics argue that NFTs have no intrinsic value unless there is real-world utility associated with owning them. Therefore, existing projects are under pressure to create physical goods, build metaverse games, license their brand IP, etc., to create value for their NFT holders.

But in my view, this is often the wrong approach taken by projects. NFT projects need to become more execution-oriented, while most projects have proven they are primarily good at marketing rather than building products. When external dependencies are introduced and expectations are tied to the project's development, projects continuously need to reward NFT owners to make them productive assets; otherwise, NFTs become worthless.

This is different from value storage. It is counterintuitive, but value storage is a feature, not a bug. As a store of value, there is greater upside potential and TAM than as a company. NFT projects should strive to become places where ETH whales and ultra-high-net-worth individuals can diversify and park their funds.

Art is one of the oldest forms of value storage. On-chain generative art represents a paradigm shift in the traditional art world, as it is a new form of art that cannot be created without blockchain. And with the total market cap of crypto art being only $1.7 billion (0.2% of the total cryptocurrency market cap), there is still enormous upside potential. Decades from now, art historians will look back and define this era just as they have done with the Renaissance, Neoclassicism, Romanticism, Modern Art, Contemporary Art, and various other art movements.