Bankless: Five Strong Crypto Narratives of 2023

Original Title: 《5 Crypto Sectors Flashing Bullish Signs》

Author: Ben Giove

Compiled by: Deep Tide TechFlow

The start of 2023 has been quite dramatic. Bank crises, crackdowns on centralized exchanges, and seemingly endless regulatory panic—every day brings a new piece of bad news.

However, the cryptocurrency market has shaken off these concerns. Bitcoin and Ethereum surged 69.1% and 57.8% respectively in the first few months of this year, outperforming all other major asset classes globally. Additionally, several sectors within cryptocurrency continue to show strong signs of growth.

Historically, sustained cryptocurrency bull markets have not only been driven by the appreciation of Bitcoin and Ethereum but also by application catalysts, such as the rise of smart contracts and ICOs in 2016-2017, and the use cases triggering block space demand like DeFi/NFT in 2020-2021.

Which verticals are flashing bullish signals today and showing strong signs of entering the mainstream market? Let’s dive deeper:

Liquid Staking

Liquid Staking Derivatives (LSD) have recently gained immense popularity as we approach the "Shanghai" upgrade, a highly anticipated Ethereum upgrade set to launch on April 12, allowing for ETH staking withdrawals. Although "Shanghai" has not yet been implemented, LSD deposits have surged 21.3% so far this year, increasing from 4.9 million to 6 million.

In the short term, the impact of the "Shanghai" upgrade on ETH prices remains unclear. However, it is more certain that by eliminating technical implementation risks, the "Shanghai" upgrade is likely to trigger a "staking supercycle," where the ETH staking rate could rise from the current 15% to close to the PoS network average of about 60% over the next few years.

Expectations for this staking supercycle have led to significant increases in the governance tokens of LSD issuers such as Lido (LDO), Rocket Pool (RPL), StakeWise (SWISE), Frax (FXS), and Stader (SD), as the market anticipates they will capture these inflows.

Moreover, assets providing staking infrastructure have also benefited from the growth of LSD, such as SSV Network, a distributed validation technology (DVT) protocol, and a liquidity bribing market operator RedactedCartel (BTRFLY), which is rumored to be entering the LSD space as well.

As the number of deposits increases, LSD should see a significant rise in its revenue, as the increase in ETH prices will lead to a higher value of its income measured in ETH.

NFT-Fi

NFT-Fi (DeFi for NFTs) is another area that has seen significant growth in 2023, beginning to shake up the competitive dynamics in the space.

With the rise of Blur, the NFT market landscape has changed dramatically in 2023. Blur has surpassed OpenSea to become the leading marketplace and aggregator in the space, thanks to its innovative incentive programs and token issuance. While some question its sustainability, Blur has injected considerable liquidity into the NFT ecosystem, with total auction values for popular collectibles like BAYC exceeding $61.9 million.

Other markets, such as AMMs like SudoSwap and Caviar, also offer innovative solutions for deep liquidity in the asset class, although they have yet to make a significant impact in the market.

Lending is another sub-industry of NFT-Fi that has experienced notable growth.

In Q1 2023, lending volumes surged from $95.4 million to $436.5 million (a quarter-over-quarter increase of 357.5%), largely due to the growth of platforms like NFTfi, Arcade, and BendDAO, which provide NFT traders with ways to gain liquidity or borrow at high leverage.

Although NFT prices measured in ETH have only slightly increased since the beginning of the year—the Nansen blue-chip 10 index rose just 8.5%—the liquidity and leverage increase driven by NFT-Fi should yield returns in the long term, as it will lead to a maturation of the market structure for the asset class. With increasing interest in alternative use cases like JPEGs and gaming, NFT-Fi should continue to grow.

Perpetual DEX

Perpetual DEX (where users can trade perpetual futures contracts, which are futures contracts without an expiration date) are seen by many as the big winners following the collapse of FTX, with hopes that trading activity for the most popular type of cryptocurrency derivatives will shift on-chain.

While centralized exchanges still dominate, perpetual contract DEX have already seen significant growth during the market rebound. According to Token Terminal data, trading volumes for perpetual contract DEX increased by 77.3% year-over-year in Q1 2023, rising from $926 billion to $1.643 trillion compared to Q4 2022.

This growth has led to many excellent perpetual contract protocol governance tokens outperforming ETH, such as dYdX (DYDX), GMX (GMX), Gains Network (GNS), and Kwenta (KWENTA).

If prices continue to stabilize and liquidity returns to the market, these DEX look poised for continued growth in the coming months. Additionally, especially GMX, GNS, and KWENTA should benefit from increased Layer 2 adoption and the proliferation of ARB and OP incentives. If utilized correctly, these tokens should deepen liquidity and stimulate trading activity on these platforms.

Gaming

Gaming is one of the use cases in cryptocurrency most likely to attract new users and capital.

Although it has not received the attention of other verticals on this list, the industry has shown strong potential so far in 2023, with gaming tokens like MAGIC, IMX, RON, and GALA performing well this year, outpacing ETH.

There are many positive catalysts within the gaming industry that may have contributed to this performance, such as the Arbitrum token issuance in the case of Treasure, Immutable's announcement of zkEVM, and the launch of RON staking.

Other events, such as the Game Developers Conference (GDC) and Epic Games announcing support for 20 games with crypto elements, may also have contributed to the growth enthusiasm in the industry.

With highly anticipated games launching, such as the card game Parallel, auto-battler RPG Illuvium, first-person shooter Deaddrop, and Shrapnel, as well as fully on-chain MMO games Realm and Influence continuing to roll out their releases in 2023, future competitions and UX improvements (like account abstraction) are expected to help the gaming industry continue to grow slowly and steadily in the coming months.

On-Chain Treasuries

On-Chain Treasuries is another emerging DeFi sector, similar to the previous DeFi summer, which began in a zero-interest-rate environment. At that time, double, triple, quadruple, or even quintuple-digit returns became an oasis in a capital-starved world. While these returns were an illusion and ultimately proved unsustainable, they attracted a massive influx of capital into DeFi seeking those returns.

Today, DeFi faces the opposite problem, as the interest rates on U.S. Treasuries in the Meatspace have surpassed the farm yields of the safest protocols (on a risk-adjusted basis). Additionally, large stablecoins like USDT, USDC, and DAI do not pay any interest to holders, increasing the opportunity cost of holding cash on-chain.

Several solutions have emerged to address this issue, such as Ondo Finance (and recently Open Eden), which provides a way to access tokenized U.S. Treasuries from within DeFi.

Although accessing these products requires overcoming KYC/AML barriers and is limited to high-net-worth investors, they have still found product-market fit. Ondo's OUSG has already attracted $65.2 million in TVL.

If interest rates remain above 0% and stablecoins continue to offer no yield, the tokenized treasury market may continue its rapid growth trajectory and penetrate one of the largest financial markets globally.

Conclusion

There are many cryptocurrency sectors worth keeping a close eye on. Liquid staking, crypto gaming, NFT-Fi, perpetual DEX, and on-chain treasuries are just a few promising sub-industries showing signs of growth at the beginning of 2023.

The year has just begun, and the market's trajectory remains uncertain—many things can change. However, now is the time to start paying attention to these areas, as cryptocurrency is about to become interesting again.