We’re going to hit rock bottom, and some painful regulation is coming. However, stability will emerge as an unlikely hero, the real world is going to get in on the action, and it’s going to be better than CEX.
Thus can be summarized the Big Themes for the blockchain sector in 2023. There is, to be sure, a whole hell of a lot of stuff going on in DeFi Land, and tracking the trends can be a bewildering task. But, while we may have closed the door on 2022 with much relief, the fair winds of crypto are still tainted with the noxious vapors emanating from the rotting carcasses of last year’s indiscretions. Thanks to that, forecasting the direction—or directions—of travel for the immediate future doesn’t exactly require a crystal ball.
So grab yourself a coffee, or a beer, settle back and let us unpack what the coming months most likely hold for us all.
1. We’re Going To Hit Rock Bottom
If 2021 gave us the most spectacular bull run in crypto history, 2022 was the year the chickens came home to roost. Unfortunately, they’re not quite done pecking at us yet.
In terms of both retail confidence and risk-addicted organizations being flushed out of the space, we haven’t hit rock bottom.
A lot of damage has already been done, with Terra and FTX/Alameda shouldering a large portion of the blame. But we know for sure that there’s more where that came from. Crypto broker Genesis, sister company to the Grayscale Bitcoin Trust, took huge losses from their exposure to Alameda and are now in dire straits. Gemini, the Winkelvoss-twins-owned crypto exchange, is clamoring for $900 million in customer funds lent to Genesis from its Earn product, which offered users 8% returns. At the time of writing, the Winklevii have just fired shots by publicly accusing Genesis founder Barry Silbert of engaging in “bad faith stall tactics” as they seek to find a resolution. Gemini has a problem, Genesis has a problem, and as yet it’s unclear how these giants will resolve their differences—or what further destruction they will cause if they fall.
What that means for the market is unclear. There are lots of moving parts, including the macro outlook, and well-reasoned opinions on both sides of the coin. (ProTip: Jim Cramer is predicting a bleak year for crypto.)
But Rock Bottom—in terms of sentiment, bankruptcies and, if it hasn’t already happened, the market—is surely approaching. There are only so many organizations left to collapse, only so many users left to leave the space. When the sector is once again dominated by True Believers, the pendulum will begin to swing the other way. Adoption and markets are nothing if not cyclical. At some point in the not-too-distant future the Fed will stop hiking rates, deeming either that inflation is under control or that the risk of breaking something is too great.
And all the while, smart money managers are making their plays, institutions are creating new crypto offerings, and the Faithful continue to BUIDL.
2. Lawmakers Are Waking Up
After the debacle-laden year we’ve just seen, a regulatory backlash is inevitable. 2022 saw US regulators (in particular) plucking and crushing low-hanging fruit in the form of small DAOs and influencers while ignoring the most truly egregious offences, including FTX’s litany of failings. There are around 8 billion reasons why SBF is set to become one target of regulators’ need to be seen to do the right thing after sleeping at the wheel for so long. The precise path that case takes will depend on many things, including plea bargains and the number of former employees and allies who flip on him (the list is considerable), but there are no likely scenarios in which he walks away unscathed.
The industry as a whole can expect much closer scrutiny of centralized exchanges, which will probably have to toe the same line that banks are required to walk, viz. don’t steal your customers’ money and gamble it away, especially not on a series of jaw-droppingly naive directional bets involving endlessly rehypothecated loans ultimately collateralized by an artificially inflated and illiquid altcoin.
While the broad implications for centralized organizations that deal with crypto are clear, the prospects for regulation around crypto itself are not. What happened at FTX was not a failure of crypto per se, but simply a good old-fashioned fraud that just happened to use crypto as a convenient means to its dirty ends. In the US, the attitude of lawmakers towards crypto spans the full spectrum from “This is clearly the future and we should embrace it” to “Kill them. Kill them all.”
Because crypto speaks to core policy issues like individual freedom vs control of the state, and because crypto wealth has poured into the pockets of political campaigns, as well as into Ukraine, partisan divides around how it should be regulated could be messy, and the debate protracted.
3. Stability Is Going To Be The Hero
Stablecoins sat squarely in the limelight in 2022, for all the right and all the wrong reasons.
On the side of darkness and evil stood the Terra ecosystem, which blew a $60 billion bubble backed by nothing but financial alchemy and enthusiastic marketing. The implosion of LUNA and UST supercharged the bear market and sent the evangelists for algorithmic stablecoins scurrying back to square one.
On the side of goodness and truth stood (embarrassingly) fiat-backed stablecoins including USDT, USDC, and USDP. Despite their centralization and single points of failure, they not only held their value but increased their market share.
Regulators, businesses, NGOs, and users quickly cottoned on, realizing that stablecoins are an incredibly useful tool for storing and moving value swiftly and reliably anywhere with an internet connection, while avoiding crypto’s signature volatility (assuming they’re not prone to imploding overnight, coof coof UST). The utility of (reliable) stablecoins was underscored in a multitude of applications, including UNHCR sending cash to Ukrainian refugees using USDC on Stellar, and Latin America’s adoption of dollar-backed stablecoins to avoid stubbornly high inflation.
Stablecoins continue to drive crypto adoption, providing utility in their own right but also offering access to DeFi and other blockchain services. They’ve been through a period of tremendous innovation, and the wheat has been separated from the chaff.
The hero we need, not the one we thought we wanted, is a stablecoin that is not only decentralized but backed by hard assets. MakerDAO has made strides in that direction (Ruby already lists Maker’s DAI alongside fiat-backed stablecoins USDT, USDC, and USDP). But we can expect to see the stablecoin sector mature, and for a wider variety of forms of stablecoin to come onto the market. While the concept of an algo stable now risks spending eternity in the dumpster of crypto history, other ideas will gain traction.
One platform we’re keeping a particular eye on in this regard is Reserve, which has recently launched its portal for creating stable, asset-backed, decentralized currencies. More “interesting” forms of stablecoin—tokens that show stability over different timeframes, that subsidize transaction costs, that actually pay a yield or gain in value over time, and so on—are on the way.
4. Real Solutions To Real Problems
Ever since it was old enough to be noticed, crypto has been slammed by its detractors as a solution without a problem, a tool for facilitating illegal activity, a bubble, a Ponzi, and more. And given what SBF and the goons of TradFi just pulled, can you blame them?
But those guys who really did take the “blockchain, not crypto” thing to heart? They’re still building hard, creating applications that actually make a difference to people in the real world.
We’ve already mentioned the use cases for stablecoins when it comes to moving money across borders and storing value, and you don’t have to live in Venezuela to appreciate a stable currency. Just about anyone who has savings needs to consider inflation, because the US dollar is, itself, a failed stablecoin. And it’s still the global reserve currency (for now). Just sayin’.
New DeFi services are going to be enabled as real-world assets (RWA) are brought onto the blockchain. As yet, it’s not possible to trade the S&P 500, T-Bills, real estate and other mainstream assets on DEXs, or use them as collateral for DeFi services, though the first steps in this direction have been made. Paxos already offer tokenized gold, for example, and major financial institutions have launched the first tokenized bonds. The Tokenization Of Everything (TOE) will gain pace as new assets are brought on-chain, laying the foundations for the next wave of DeFi growth. This time, it will be intrinsically linked to the real economy.
Meanwhile, blockchain will continue to carve its own path with Web3-native solutions. Despite the bear market, corporations have been pouring cash into Metaverse products. As we’ve said before, we believe NFTs are going to be one of the foundational technologies of Web3, and we’ve barely scratched the surface in terms of applications.
5. It’s Going To Be Better Than CEX
It should now be abundantly clear that blockchain is here to stay. It’s also obvious that there need to be some changes.
The last market cycle was defined by centralized entities—including exchanges, lending apps, VCs, and hedge funds—on-ramping vast amounts of capital, but inevitably introducing single points of failure of many and varied different kinds in the process. Unfortunately, Joe Public didn’t always know, understand, or care about the difference between the decentralized blockchain-based assets he was buying and the highly centralized, fallible, and sometimes downright untrustworthy entities that would handle his transactions for him.
The coming cycle will, necessarily, see clearer distinctions between CeFi and DeFi. (The term “CeDeFi” is an oxymoron; centralized decentralized finance is centralized finance, in the same way that a chain with just one broken link is a broken chain.) The bear market gives project developers a chance to build more user-friendly interfaces and next cycle’s users, having become intimately acquainted with the shortcomings of centralized organizations, will want to make the switch.
While there will always be a place for trustworthy centralized exchanges, DEXs will take more market share. They will also integrate more features commonly found on CEXs. Instead of TradFi bolting blockchain onto its centralized models, DeFi will become more, well, CEXy. Ruby has a few of our own ideas in that direction.
Providing decentralized services that compete favorably against their centralized counterparts will be a multi-stranded endeavor. Partly this is about technology, partly about functionality, and partly about education (or to put it another way, “Is it possible?”, “Have we built it?”, and “Why should we use it?”).
On the tech front, layer-2 platforms that provide both high throughput and strong security are already available, but there’s room to do better; ZK rollups have provided a good deal of hype, and the first comprehensive solutions are coming online, with many more in the pipeline. Cross-chain transfers are another area that requires significant improvement, following bridge exploits that saw hundreds of millions of dollars stolen in 2022. Until fast, secure, private, user-friendly access to trading and transfers to other platforms are available on-chain, people will naturally default to the convenience of CEXs.
In terms of functionality, we’re getting to a point where almost everything you can find on a centralized apps—charts, advanced analytics, derivatives, leverage, borrowing and lending, yield farming, affiliate programs, copy trading, social interactions, and much more—will soon be available in a user-friendly form in dApps. Real-world assets will bring with them a flood of liquidity that will dwarf anything we’ve seen to date. Along the way, we expect to see an evolution in liquidity mining and GameFi models, which will not rely on a secular bull market to offset the impact of their vastly inflationary tokenomics.
And education? We’ll be doing our bit, and we know other DeFi organizations will be too.
Here’s to 2023. We’re looking forward to what comes next.