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Where is crypto going: predictions from Jan 2023
The first draft of this was written in October 2022 - my goal was to re-orient myself in the face of the “black swan” events of the summer. However nearly as soon as I had finished, another black swan emerged which gave me some pause: the collapse of FTX. After processing that event have made some updates and hit publish.
After going through a few of the crypto boom and bust cycles, one gets accustomed to rapid sea changes in a short period of time within the industry. As such, I typically work to re-orient myself to the rapid shifting landscape, or “touch grass” of the industry.
2022 Was Painful - But inspiring
The beginning of 2022 was still riding on the irrational exuberance of the bull market, however that quickly came to a halt as the massive Luna + 3AC + Celsius collapse caused an industry wide credit collapse. Just as a bit of hope was seen at the end of the tunnel, the credit contagion revealed the massive fraud of FTX, pulling down the likes of DCG/Genesis, Silvergate, and many others with it.
The allegations of fraud within some of these companies has the industry again facing strong regulatory headwinds, withdrawal of institutional capital, and as well shrinking user volumes, and for the main stream, a sense of uncertainty and dismay around product market fit and the future of blockchains and cryptocurrencies.
The shocks and aftershocks of that collapse has certainly shaken everyone up, myself included, and for a time, cast a damper on the industry.
However, all the issues have highlighted a variety of key failure points that were weaknesses for the crypto industry: centralization of key use cases.
For those building the decentralized brokers, settlement networks, exchanges, stablecoins, and other critical infrastructure, this was a rallying cry, a reminder why their work is important, and an eye opener for those who previously did not understand the value of fully decentralized infrastructure.
In fact, this pattern has repeated itself throughout crypto history - as hacks, theft, and centralized failures teach more people about the value of full decentralization, the market size for fully decentralized products increases. Bullish!
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Crypto is a Seasonal Industry
This is not my first rodeo enduring a market collapse in crypto, and I remain confident that the boom bust cycle of crypto will continue, as new technologies and the halving cycle historically have converged into a bull market rather predictably.
Generally I see crypto as a seasonal industry, with each cycle expanding the user base, and not as an “up only” line of user growth that web2 businesses are looking for. As such I’m not very concerned with the current (bear market) state of usage and traction, however the winter tends to be a rallying force for builders to level up the state of decentralized technologies so that we have an evolution in every cycle.
To better inform my predictions for the next cycle of blockchain technologies, I wanted to get on the ground with builders within many ecosystems, I spent much of last quarter traveling and meeting with builders all over the world from many ecosystems. This has included places like Ethereum Devcon, Cosmoverse, Urbit Assembly, various meetups and hacker houses for Bitcoin builders, Solana, Aptos, Sui, Avalanche, Near, anon MEV & privacy gatherings, and as well hosting a series of Network State themed events around the world (next one in Singapore!).
At the same time global geopolitics and economics have been shifting rapidly, and have informed my predictions for the space in the coming years as well. Some concepts referenced from readings include “political economy” and re-shoring.
Macro Economic Drivers and Use Cases
To make these productions, I assume that the following somewhat broad macro predictions will be true:
We are already in non-kinetic WW3 and global conflicts will continue to increase
The world economy is on the ropes, and USD deflationary measures are holding everything up, increasing the power of the US government and desire for USD, for now.
Global trust between nation states has completely broke down, leading to concerted efforts to become less dependent on other countries (see re-shoring and “political economy”)
Trust between citizens and nation states + institutions is breaking down as they getting economically screwed while also not getting the whole story from the somewhat secretive global conflict
Trust between “tribes” within countries is breaking down as the global non-kinetic world war has resulted in digital campaigns to cause divisiveness. Culture wars are raging between citizens while the non-kinetic WW3 rages between nation states.
Nation states will more tightly control strategic resources, such as commodities, energy, food, and technology in order to maintain their independence from other countries and fight in the trade wars. International trade becomes tightly controlled.
As a result of tightly controlling the supply chain, inflation will become more rampant, and capital controls within countries will become tighter, even in places where they previously were nearly non-existent
USD remains a flight to safety, but treasury bonds give the US government a line of credit which will be used for the “political economy” against certain adversarial countries, thus those countries will not be able to use that lifeline within their own economies
With all that in mind, human ingenuity will prevail, no one sits idly by when they can put out a fire
With the above in mind, human ingenuity will prevail. No one wants to remain under war, starvation, etc, and they will fight to fix these problems. New peace equilibriums will be found, uses for different commodities will be found, new technologies will solve growing problems.
As usual - no one actually knows. Take this with a grain of salt and understand this is not financial advice. This is my current mental model for price drivers in the next few years.
Fed rates remain high because the international economy depends on it, and inflation drivers remain active. Any new credit will go towards strategic national security needs. Little excess risk capital available to go into non-productive assets like Bitcoin, at least for the next year. Things to watch out for to reverse this trend: other currencies gaining independent strength, inflation drivers (commodity/energy volatility) receding.
Bitcoin halving in Q1 2024 still very likely triggers a price trend reversal a reflexive upwards swing in the crypto markets, with the macro environment dictating the magnitude and duration of the bull trend.
For now, USD is the flight to safety for the world, not BTC. This could potentially shift if USD turns highly inflationary and US dominance falls greatly, but at the moment its difficult to imagine a scenario where that happens and the electricity/internet is still operational.
If more countries secure energy independence and then USD becomes inflationary, BTC as a flight to safety asset would make sense.
Regardless of the flight to safety asset, BTC and thus crypto assets will likely benefit from any USD inflationary pressures or even reversals on deflationary measures.
BTC has historically been pretty good at reacting to money printing at the time of printing, I think this will continue if money printer goes brrrr, but I think thats unlikely in the short term (1-2 years).
ETH will continue tracking BTC on the downside and over performing on the upside.
The rest of the cryptocurrency market will continue its pattern of acting like leveraged BTC, with rebalancing lags.
Based on the above understanding, the are my thoughts on some emerging or strengthening use cases for the coming 1-2 years.
While USD is combatting inflation, it is worsening elsewhere, thus citizens of other countries are and will be looking for a flight to safety from their home currency. USD and thus stable coins are currently the preferred means for people around the world to escape local inflation.
This means the potential demand for USD stablecoins will likely increase greatly in coming years. Low risk yield bearing USD even better!
Regulations will interfere with the potential demand for stablecoins on a per country basis. Within the US, tight controls around bank backed stablecoins are likely, while under collateralized algo stables will be likely banned due to the UST collapse.
Outside the US, stablecoins regulation will likely focus more around capital controls as tightening of FX markets will cause flows to shift over into the unregulated realm.
Decentralized over-collateralized stablecoins have an opportunity to prosper in that environment as they are not prone to collapse and also difficult to regulate or enforce regulation on. However better UX and education is required to grow that market by orders of magnitude.
Bank banked stablecoins like USDC will drive a move into “permissioned defi”, which will be fully regulatory compliant and ready for institutions to use, however in the era of “political markets” over “free markets” and increasing political friction around to international trade its hard to imagine any benefits of a walled garden chain. Perhaps it can somehow solve the problems of decreasing trust globally?
Due to increased regulatory headwinds, the DeFi technologies will have to become decentralization maximized or get pulled into the world of permissioned DeFi.
The breakdown of trust on all levels gives an opportunity for credibly neutral money, payments, and finance to rise.
As culture wars rage on increasing de-platforming and censorship by both companies and governments, users will more and more seek credibly neutral censorship resistant alternatives, which creates more demand for full stack decentralized web products. Both the infrastructure to build these products and the end products themselves (eg. social media) have lot of work ahead to become viable to users however.
The politicization of Twitter for instance has driven users to try alternatives like Mastodon, where at the whims of server owners, they discovered the value of owning their own identity and content.
Canada and PayPal have opened the flood gates to financial censorship of internal political or cultural opponents. As more incidents occur, users will seek censorship resistance financial services to ensure they can have opinions without being financially ruined. Again, these users fundamentally are not serviceable via permissioned finance.
As certain Nation States become weaker, they become more susceptible to the emergence of Network States within their borders, which can better coordinate and provide better services to their citizens. The tooling and example models for this are quite nascent and may not be ready for the first countries that could utilize them, but a collapse of a digitally connected nation could spur huge interest in the Network State concept.
The collapse of trust also provides opportunity for the peaceful rise of a credibly neutral Network State.
Infrastructure and Ecosystem
As the web3 hotness wanes, great UX focused product builders have retreated back to the safety of web2. These rare product skills are much needed in crypto in order to expand beyond a highly technical user base. Unfortunately, they not only seem to have left web3, but they also tend to be much weaker on understanding emerging market user bases, which have the strongest economic motivations to use crypto and blockchains. Super strong consumer product teams that at least partially base themselves outside of the US and developed markets will likely do extremely well. Without them, expanding the user base will be slow moving.
As use cases in crypto have become clearer over the last cycle, teams are starting to optimize the products to be more efficient in various ways. Different use cases benefit from different types of chain configurations and different levels of chain security. Some use cases even benefit greatly from direct L1 optimizations. As such, I expect that as adoption increases, it will happen across multiple chains and app chains.
Bridges are currently used with various types security configurations to move assets between chains, however I view most of these as temporary solutions. After speaking with many teams working on the forefront of cross-chain technologies, I expect that the combination Cosmos and zk-proof technologies will become the most secure and trustless way to communicate or transfer between chains. I expect that these will be mature and dominate within 2-3 years, making current bridges obsolete.
Similarly, I expect that scaling will happen via either optimized dedicated chains (side chains or app chains), or by L2+ via zk-rollups. While optimistic rollups are dominant right now, I expect that within 1-2 years generalized zk-EVM chains will make them obsolete.
Longer term, new generalized zk-VMs or frameworks will start to dominate zk-EVM, and we will eventually see EVM dominance fade from both the L2 and L1. (5+ years)
While zk-rollup dapps get built out at a slower rate, I think they will eat all other non-zk dapps eventually.
Further to generalized zk-scaling, offchain computation via specialized zk-circuits is starting to mature, which enables far more complex computation in a fast and trustless manner. I think in about 1 year we’ll start to see the first specialized zk-circuit applications start to become available.
The idea space for zk-dapps seems highly underexplored and we probably have about a decade+ of innovation coming in the zk-dapp space.
A privacy smart contract chain will likely appear in the next year, but the regulatory action against tornado cash is limiting the willingness of teams to deploy such a thing. However if done correctly, I think it will gain a lot of traction as privacy is in high demand within crypto.
Decentralized trading infrastructure is finally moving forward with the collapse of FTX, but in my opinion still very underdeveloped. The good news is that the hidden problems of centralized infrastructure have been exposed. High competition and high cost of building makes it difficult for anyone to breakout, which makes it difficult to justify building the full product suite that FTX had. I’d still like to see a proper decentralized risk engine and decentralized order book, (see article) which in my opinion must also be off-chain. I am seeing some early attempts at this but not yet the full vision of it. I think either of a decentralized offchain orderbook or risk engine alone would unlock new financial use cases that are not economically useful with current technologies.
Decentralized web, or dweb, has a lot of work to be done but there seems to be a lot of progress. Am optimistic we can see a fully decentralized dapp with decently good UX within a year (mirror.xyz seems mostly there).
DeSci starts to become a thing, but is still nascent. Something in this space captures people’s imagination in 1-2 years.
And of course, AI is reaching a point where people are seriously thinking about how to apply them to various use cases. I expect that we will likely see something useful at the intersection of AI and blockchain, after many attempts that were probably too early.
Looking forward to 2023!
I get the sense that a lot of teams have been quietly building and sitting on their good news and announcements while they wait for the FUD to clear the market - thus quite excited for the year ahead!
The above is by no means comprehensive and I’ll probably revisit certain parts, provide updates with new predictions, and expand on some of these areas in future posts.
PS. What would you like to see us cover next? Leave a comment if its not in the poll.
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