For the crypto community, 2023 arrived not a minute too soon. Last year brought us an endless ticker tape of bad news, starting with the collapse of the algorithmic stablecoin TerraUST and continuing all the way through the cascading bankruptcies, with crypto’s market cap dropping by almost $2T by the year’s end.
While the media has spared no ink in covering all these crypto dramas, it’s time to look forward to 2023 and what developments it may bring. To be sure, the growing pains of this industry are guaranteed to continue, and yet so is the adoption of this technology that has the potential to transform the world. With the high drama of 2022 behind us, it’s now possible to take stock of the new narratives lining up for their chance in the spotlight.
Here are a few trends that could dominate the year.
(Please note that this article is to be used for educational purposes only and shouldn’t be construed as financial advice of any kind)
New global crypto regulation is coming
It’s no surprise that the FTX collapse has likely expedited the introduction of more cohesive new federal regulation in the US, as the US Securities and Exchange Commission (SEC) and Commodities and Futures Trading Commission (CFTC) figure out which respective crypto assets fall under their purview (or not). And for the first time in crypto’s existence, they might be enjoying a fair amount of support from crypto investors jaded by the carnage of 2022.
So far one of the biggest obstacles to the institutional adoption of crypto has been a lack of regulatory clarity. That may be about to change in 2023, as regulatory expansions like the EU’s Markets in Crypto Assets (MiCA) framework are rolled out.
While we are unlikely to see a Bitcoin ETF, by all accounts 2023 is set to see the establishment of some clear rules in the space, even if enforcement lags behind by a year or two. This could create the conditions for more institutional entrants into the market, particularly towards Q3 and Q4.
There have already been recent reports of Goldman Sachs looking to pick up distressed crypto entities on the cheap, and this builds on JP Morgan and BlackRock’s 2022 warming to crypto. It’s not hard to imagine institutional adoption accelerating in tandem with regulation, as regulatory clarity makes investment easier.
MiCA to overhaul EU crypto regulations
Although an agreement over MiCA was reached last June, the final vote on the legislation has been repeatedly pushed back, with the latest news that it is set for February. MiCA had been expected to be implemented over a period of multiple years; however, in the wake of last year’s crypto calamities, some EU officials are now calling for parts of it to be implemented as early as this year.
While not a regulatory package per se, many of the reports commissioned through President Biden’s Crypto Executive Order are coming due soon too, and these have the potential to turn into comprehensive legislation. The stablecoin market, centralized exchange reserves, and privacy-focused blockchain tech are all contenders for heavy-handed US regulatory treatment.
In Asia, where many crypto companies have at times found hospitality only to have the winds shift later, regulation is likely to proceed in patchwork and with an eye toward the dynamics of the region. Singapore, the domicile of many of foreign-run crypto companies, is reportedly giving its embrace of crypto a second look. Meanwhile, Japan, which had stiffened its crypto stance in recent years, now appears headed towards a period of relative loosening.
Slow and steady wins the race for Ethereum
The catastrophic crypto events seen in 2022 were, by and large, unrelated to the technology. Blockchain technology – the engine driving the industry – has steadily continued its pace of refinement despite the negative headlines. This seems set to keep up in 2023.
Last year’s Ethereum Merge saw the world’s second-largest blockchain migrate from a proof-of-work (PoW) consensus mechanism to the more environmentally friendly proof-of-stake (PoS), reducing Ethereum’s energy usage by 99.5%. More improvements for Ethereum, such as the Shanghai Upgrade, sharding, and increased use of rollups will only see that chain’s appeal continue to grow.
Ethereum has also become a fairly widespread unit of account in Web3, especially in the non-fungible token (NFT) and GameFi spaces. Top that off with the relative price stability of ETH compared to altcoins, and you have an emerging cryptocurrency that is very much starting to seem like a medium of exchange to millions of people.
ETH Layer-2 networks will continue to outshine L1s
With many layer-1s down up to 95% from their all time highs, attention has turned to chains with newer tech like Aptos and Sui, which are still unproven late arrivals. Cosmos, Cardano, and a host of other layer-1s are still very relevant players with stories that have not yet played out, but with Ethereum’s increasing adoption and widespread integrations, it may become more and more difficult for new entrants in this crowded field.
https://twitter.com/DefiDegenL2/status/1605195251865776129
One of the biggest narratives of 2022 was the rise in Ethereum layer-2 solutions, which is not expected to subside any time soon.
The growth in popularity and usage of Ethereum layer-2 blockchains can be attributed to the scalability issues faced by the Ethereum network, most notably during the 2021 bull run when gas fees occasionally went into 3 digits. As Ethereum gained popularity and usage, it struggled to keep up with the demand, resulting in high transaction fees and slow processing times. Layer-2 protocols offer a solution to these problems and have therefore seen increased adoption.
Layer-2 protocols work to ease the burden on the main Ethereum network by taking transactions off the chain and improving speed and lowering costs. These transactions are eventually settled back on the main Ethereum network once they have been processed.
The competition among various Layer-2 protocols to become established as the top choice for Ethereum scalability has also contributed to their growth. Protocols such as Arbitrum, Optimism, zkSync, and StarkNet have all gained recognition in this space. Polygon, specifically, has gained traction as a Layer-2 choice for traditional brands and platforms looking to enter the web3 and non-fungible token (NFT) space.
According to data on the total value bridged by each protocol, Arbitrum is currently leading the pack with more than double the amount of its nearest competitor, Optimism.
However, both these optimistic rollup chains can expect intense competition from zero-knowledge (ZK) rollup solutions like zkSync and StarkNet this year, as the two technologies battle over ETH scaling supremacy.
Polygon (MATIC) has made enormous traction in 2022 as a Layer 2 choice for traditional brands and platforms looking to enter the web3 and non-fungible token (NFT) space. Companies such as Starbucks, Meta, and Reddit have all turned to Polygon for their expansion into these areas.
Polygon is also active in the realm of blockchain gaming. Immutable X is another Layer 2 protocol that is focused on gaming and NFTs, positioning itself as a specialized solution in this niche.
Metis is a scaling solution that aims to improve upon the concept of decentralized autonomous organizations (DAOs) by creating decentralized autonomous companies (DACs). While DAOs can be somewhat vague in their functions, DACs are decentralized entities that can perform the functions of traditional companies, combining the best of both worlds. Loopring is another well-known Layer 2 protocol that provides the infrastructure for an eponymous DEX.
DeFi is hiding its strength and biding its time
Last year, lots of attention was paid to the extraordinary trend of DeFi hacks and exploits that continue to siphon off billions in funds. Nevertheless, as the regulators clamp down on centralized exchanges and crypto entities of all sorts, it could be a major catalyst for DeFi adoption, which means crypto may be about to get a lot more decentralized.
For builders, the plausible deniability offered by creating a DeFi protocol governed by a decentralized autonomous organization (DAO) offers a possible respite from crushing liabilities. For users, the prospect of only taking one’s crypto in self-custody to perform trades on a decentralized exchange (DEX) offers a measure of safety from the exchange failures that plagued 2022.
The key to getting DeFi on the right path will be a combination of technological solutions to secure the currently vulnerable codebases combined with regulatory obligations surrounding audits and disclosures. Further innovations, particularly in user-interface design, could see widespread DEX usage really begin to take off in 2023.
Marquee brands (and Big Tech) get in big on crypto
In the bull market, all the speculative cash flowing into crypto meant that projects could be somewhat indifferent to all the corporate behemoths that populate the modern business landscape. Now, with that speculative capital all but dried up, it will make a lot more sense for projects to pursue integrations with marquee brands that can inject funds as needed.
A lot of this will take the form of NFTs, as is already happening with Nike, Starbucks, and others. Some of these NFTs will be digital collectibles, while others will lean in hard to the utility aspects. Expect loyalty rewards NFTs and platforms for trading them to be breakout use cases in 2023.
Another trend to watch is the embrace of NFTs by Big Tech heavyweights like Twitter and Meta, which are both developing more integrations for their platforms. It’s unclear how the general public, which has yet to completely warm to NFTs, will take to these developments. However, we can be sure the new features are coming.
Conclusion
Make no mistake, the change over to 2023 does not a market reversal maketh. Macro-economic data remains bleak for 2023 and points to “intensifying pain”, as central banks wrestle with rampant inflation and the effects of their interest rate hikes last year start to show this year and destroy wealth globally.
For crypto: Everyone knows that crypto prices are down at the moment. Let’s look beyond that. What fewer know is that crypto-adoption rates are forecast to continuously climb over the coming years, especially in emerging economies, where access to financial services can be spotty.
As people often forget, the world has a tendency to move on from bad press. Last year is already starting to seem like a fever dream. A handful of bad apples (albeit very bad) are unlikely to ruin a (once-and-future) multi-trillion dollar industry, much less one based around a technology with deep philosophical resonance for people around the globe.
With only around 4.2% of the world owning crypto at this early date, there are still tremendous opportunities for growth in the space, and the technology is maturing alongside the culture and regulation that will nourish it. With so much happening under the radar as central custodians took center stage last year, it’s possible we haven’t even heard of the use cases that will drive the next bull run, which could happen as soon as 2024. Strap yourselves in for an incredible 2023 in the most exciting space on the planet.