2023 Blockchain Themes and Bold Predictions

If you’re reading this piece, you’re likely a true believer, a very smart trader (who’s been through multiple crypto cycles), a personal friend, or genuinely think crypto is here to stay. 2022 has been down only from nearly every angle except for technological innovation. The protocol and application level innovations are what get me so excited for 2023 and beyond.

I cover some relevant themes about blockchains, applications, and mainstream adoption after a very brief discussion about price. I hope you enjoy the thought provoking points and hope you disagree enough to provide some feedback. You can reach me on Twitter or shoot me and email if you are open to a discussion.

Here’s what I believe will happen in 2023, enjoy!

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Price Action

The latest narrative is cryptocurrency capitulation has occurred and only true crypto believers remain. I’ve also read about ‘time based capitulation,’ which essentially boils down to investors getting bored or finding a more productive place to move their capital. For example, if $ETH price doesn’t move over 6 months and you can get 2.5% in your savings account, you may decide to move money around.

Bitcoin is a difficult asset to hold for several reasons:

1. It is highly correlated to the Nasdaq as TradFi trading algorithms have been incorporated

2. Mt Gox distributions are expected some time in 2023. That’s 150,000 $BTC supply distributed to those impacted by the hack ($2,500,000,000).

3. Digital Currency Group has suffered immense losses from the Genesis loans to FTX and Grayscale’s GBTC product which is trading at a 47.5% discount. Investors fear Grayscale may need to liquidate some of their $BTC to raise enough money to keep DCG solvent.

I continue to subscribe to the idea crypto goes where TradFi goes, however, crypto native money will continue to flow out of BTC and into good Layers 1 tokens + DApp tokens. This also implies Bitcoin dominance should continue to fall. The best I am hoping for is a sideways equity market as a recession and potential stagflation sets in, earnings are adjusted downwards, and rate hikes continue to a terminal rate >5%.

Layer 1s

Solidity has won the smart contract language race (yes, I know there are new versions like Vyper…) so the “EVM on <fill in the blank chain>” narrative will be strong next year. Once a chain has incorporated a trustworthy oracle, like Chainlink, battle tested protocols can very easily launch and go multichain. This occurred numerous times in 2022 and will continue on more efficient (faster/cheaper/composable) blockchains. Cosmos is slated to finally get Chainlink in 2023, which should keep the app chains relevant. What should we be watching?

• Neon and Nitro on Solana

• Canto, Monad, and Berachain on Cosmos. Canto has the first mover advantage, but there is serious hype around Berachain’s innovative liquid staking with a delta neutral perps machine.

After the two consecutive years of VC gluttony at the peak of cheap money, retail has gotten slaughtered by predatory practices that allowed early token allocation multiples to be locked in and hedged via perps.

Therefore, I am very bullish organic, authentic builder-focused communities that have nothing to do with VCs. Specifically:

• Ethereum and L2s (Arbitrum and Optimism mainly)

• Fantom

• Canto

On the contrary, until better token practices emerge, I am bearish:

• Aptos

• Sui

• Solana

• Avalanche

• Near

I am also bearish Bitcoin, but shouldn’t even call it a L1 due to its complete lack of utility and failed inflation hedge/store of value narratives. The only way $BTC outperforms $ETH in 2023 is if the following happens:

• Regulations are passed that hurt smart contract platforms or proof of stake

• Major currencies fail or are devalued (EURO, YEN, USD)

Here are the blockchain ecosystems I am warming up to and have potential:

• Binance Smart Chain because of the Wombat ecosystem (incentivized stablecoin swaps), Thena (Solidly style DEX), and Level (Perps). OpenSea also recently added support for BSC, which may lead to more NFT activity. CZ will support BSC’s ecosystem at all costs, but centralization is dangerous so I’ll always limit my funds on chain.

• Osmosis has new applications recently added, namely stableswaps, and liquid staking (Stride with Quicksilver coming). Mars Protocol is also on the way which should dramatically increase capital efficiency and become an $OSMO token sink.

• Synapse (Synchain) is a trusted bridge that has gone very broad and introduced $nUSD to transfer value across chain. Synchain is an optimistic rollup expected to launch very soon with numerous partner protocols. Berachain has also been interested in using Synapse as its canonical bridge, which could lead to additional volume. Synapse has a lot of questions to answer around specific progress of Synchain, the tokenomics, and deliver in order for me to be make a significant investment.

• Cosmos Hub if they can figure out the ATOM 2.0 tokenomics and clean up the governance/infighting. Gud tech bad token and the unfortunately seems to be profitable only for early insiders, while retail investors have been hurt.

I am also watching two other Cosmos chains very closely that could be monsters if they deliver.

• Sei has the shortest block times (0.6sec finality) in Cosmos and has figured out how to parallelize transactions to prevent MEV.

• Celestia is all the rage due to modularity as it separates the transaction and data availability layers. Celestia raised a ton of VC money, which is a concern for retail investors.

Ethereum

The next and final hard fork for Ethereum 2.0 is the Shanghai upgrade. This will enable $ETH unlocks from the Beacon, Proof of Stake, chain. This is scheduled for March and should lead to a big increase in the staked supply as it gives investors assurance they can get their ETH back.

In the mean time, we’ve seen liquid staking derivatives (LSDs) grow rapidly in 2022, and I predict they will grow faster than new $ETH inflationary supply in 2023.

However, the lack of on-chain activity will lead to an inflationary ETH supply next year. Below, the graphic demonstrates $ETH has not been deflationary since the successful Merge, however, 1.16 million fewer $ETH (~$1.4 billion) have been created.

Source ultrasound.money

DApps

Derivatives

On chain perps blew up in 2022 thanks to GMX (The bear market darling - just imagine the volume and fees in a bull market), Perpetual Protocol, and Gains Network. Arbitrum is becoming the liquidity hub as every protocol deploys or moves there. I expect on-chain options to really improve in 2023. Dopex, Buffer, and Premia are live on Arbitrum and Aevo is built on top of Ribbon. These will all double their TVL in 2023 despite the decreased liquidity.

Structured products and vaults will grow exponentially in 2023 with the combination of perps and options.

Delta neutral vaults like Rage Trade and Umami are likely to continue to onboard crypto native capital and eventually institutional capital due to superior risk adjusted yields.

DEXes

In 2023, Solidly DEXes like Velodrome ($VELO), Equalizer ($EQUAL), Thena ($THE), and Camelot ($GRAIL) will outperform Uni v2 style ($SUSHI, $QUICK, $BOO e.g.) and $UNI. Tokens with real yield, sustainable emissions, and a built in bribe mechanism should be less volatile and generate income in a sideways market.

Lending

Undercollateralized loans took a big step back after FTX fallout, but I believe are still going to grow in 2023. DeFi behaved very well due to the overcollateralized nature of loans, and capital efficiency will be front and center for large capital pools.

crvUSD is just the beginning of DEX focused stablecoins. Univ3 LP (NFTs) have been severely underutilized and it’s likely other liquidity positions (e.g. Balancer BPTs) will lead to additional stablecoin liquidity and leverage.

Real World Assets are the holy grail for leverage in DeFi, but I don’t expect any progress to be made in 2023. Regulatory clarity is a big requirement for this to happen.

NFT

I’m admittedly not a NFT expert, but NFTFi was a part of my 2022 themes, and I anticipate this to continue in 2023.

I recently have participated in a protocol bootstrapping that used NFTs as fundraising mechanism, and really enjoyed the experience. This was different from any other mint where I was buying a lottery ticket for a profile picture because it had value backing the received NFT. I hope to see additional protocols duplicate this mechanism.

NFT lending has been a slow start and stuck to higher floor blue chip assets, but the addition of Llama Lend is very intriguing for getting liquidity on the long tail assets. JPEGd has the highest TVL and has stuck to a slower growth process. One of the bigger risks of NFT lending is the liquidation engine. Reducing collateralization ratios is one way to deal with lower risk for protocols, but finding buyers for liquidated loans is not always immediate and easy.

I am excited about the new NFT AMM, Sudoswap, to be used as a price oracle and for accessing immediate liquidity. Sudoswap LP tokens will also likely be useful for leverage through loans or minting stablecoins. The $SUDO token should be one of the bigger launches in 2023.

I expect most of mainstream crypto adoption will be in NFT space in 2023 (more below).

GameFi

Gaming is the most obviously hyped vertical for blockchain and crypto disruption in the near future. Billions have been invested in gaming studios and companies and expectations are sky high that once crypto incentives are added to games, the masses will flock in.

In reality, I have yet to see a game good enough or with enough mainstream adoption (outside of crypto speculators) to convince me of this narrative. In a world where money is not cheap and liquidity is thin, it will require real results for me to make any sizable liquid investments in GameFi. Perhaps by 2024-25, but not in 2023.

SocialFi

The first exciting protocol in SocialFi is STFX. I have been a beta tester, enjoyed the UX, and am eager to get more involved when the full launch occurs in 2023. STFX will allow anyone to transparently demonstrate their trading acumen, raise money for a fund (directional trade), and leverage the power of community capital. STFX will also make GMX an even bigger perpetual swaps powerhouse and attract more CEX traders to DeFi.

Lens and Farcaster are decentralized social media with some crypto native hype, but they will need better UX and experience parity with Twitter. Otherwise, they will never usurp it for crypto natives.

Mass Adoption

Credit card companies like Visa see how blockchains simplify the payment process. This is why Visa has been deeply exploring how to incorporate stablecoin payments.

Visa is on the front lines, but other payment processors will comes before Fortune 100 Companies like Amazon, Apple, and PayPal who will all benefit from crypto payment rails.

I anticipate Big Banks like JP Morgan, Goldman Sachs, BNY Melon, and others will acquire crypto exchanges and assets from distressed companies, enter the market making and custody business, and incorporate web3 wallets. Digital native, online only banks, like SeriesFi, will cater to crypto native companies.

Polygon NFTs (Starbucks loyalty, Nike, e.g.) adoption will continue. Their emphasis has been on business development and their strategy is to convince companies it’s a win-win when companies issue unique NFTs as part of customer loyalty programs. It’s to be seen whether the incorporation of NFTs brings about a behavioral change or increase in revenue, but it’s definitely an interesting development that has the potential to help scale mass adoption.

Another much needed development is helping crypto investors onboard fiat directly to decentralized exchanges, and bypassing the risk of holding assets on custodial platforms. Moonpay has seen some success and others will most certainly be eager to grab a share of the fees.

There is and will continue to be a mass exodus from CEX → DEX usage and trading. In order for CEXs to remain relevant, they must adjust their strategy for custody and transparency. Coinbase and Binance are the largest survivors. They will both need a DeFi strategy, maybe multisignature authentication for assets to move out of customer wallets, or some other technological improvement or they won’t be able to grow due to public mistrust.

Regulation

I don’t see 2023 bringing any sweeping regulatory changes due to a divided Congress. However, the fallout from FTX and general negative crypto sentiment will require us to be very active with organizations like Coincenter, and to support open minded, well informed congresspeople like Tom Emmer.

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A Personal Note

In 2023, I will continue in my role as portfolio manager and yield strategist for the hedge fund Four Moons advises, and I am legitimately excited about the deals that can be found on secondary markets here in the bear market.

Four Moons is actively in discussions with multiple crypto startups for advisory opportunities, and we will strive to be instrumental in moving new decentralized applications and blockchains forward.

We are still running validators for the two Cosmos app chains we’re most excited about (Osmosis and Canto), and will actively research any new validator opportunities in the IBC ecosystem.

Finally, Ethropy will be focused on writing unique content twice per month, sharing new protocols, and putting out weekly industry updates with “The Last 168 Hours in DeFi.”

Thanks for reading and try to have fun in 2023!