The world of Web3 and crypto is rapidly evolving, with new technologies, trends and narratives emerging every day. In this article, we explore the potential breakout trends of 2023 and what you should watch as an investor.
Cross-Chain / Multi-Chain
“Current cross chain bridging technology still has too many security difficulties, not to include blockchains sovereignty, which is developed independently of one another and come with their own set of protocols and restrictions.” -Vitalik Buterin, Ethereum Founder
The ability to move or transact across chains is now essential, but frustrating at times with slow transactions or bridges getting hacked. Bridges are vulnerable in their current state, accounting for nearly 15% of crypto hacks over the past year. The existing solutions are challenging even for veteran traders, requiring bridging solutions, wallet configurations, understanding of how different chains and protocols operate. And on the protocol side, splitting liquidity across multiple chains can lead to supply constraints and higher slippage for traders.
Technology that solves these challenges, and makes cross-chain activities simpler, will be essential for future growth of the space. Examples of strong candidates in cross-chain solutions include Cosmos’ bridge-hub model, Polkadot’s parachains, Symbiosis, t3rn, Chainlink with it’s Cross Chain Interoperability Protocol, and others.
Decentralized Finance (DeFi)
The market today is very different from “DeFi Summer” a couple years ago, when simple yield farming apps were coming of age. But as the DeFi ecosystem grew, we saw more venture capitalists (VC) enter the picture, leading to another trend worth keeping tabs on – investing in new and rising layer-1 (L1) chains with VC backing. Projects like APTOS are easy to dismiss based on technical shortcomings, but reference Solana – VCs may not always be ethical, but they find creative ways to pump their bags, and are well connected.
Decentralized exchanges (DEX) and decentralized derivative services (ie. margin trading) will grow in popularity due to distrust of centralized exchanges (CEX) on the back of numerous bankruptcies and meltdowns such as FTX, Celsius and BlockFi. Examples include Uniswap, Pancakeswap, GMX, and dYdX.
Past market leaders are strong candidates in the next cycle. Although established projects are lower risk, they may be outperformed by newer entrants. Example of strong past performers include Curve, Convex, Pancake Swap and Uniswap. Monitor established protocols pursuing Traditional Finance (TradFi) integration, such as AAVE and it’s AAVE’s ARC platform and their partnership with Fireblocks. Deep integration between DeFi and TradFi will eventually lead to very profitable ecosystems and holding utility or governance tokens in those will be rewarded.
Oracles are how information is transmitted across DeFi, such as price data. This is a critical function as the value of a coin or token on one chain needs to align with the price on other chains. There is a clear market leader here – Chainlink.
Chainlink underperformed in the past market cycle after a strong performance in the last bear market. Many believe that its overdue a rally. It is widely utilized in thousands of projects, but the utility of it’s token (LINK) is less clear, and with staking recently launched it remains to be seen if that will boost the perceived value of the token or dilute the value as we typically see with other staking tokens.
Yield farming remains a core part of DeFi, but the concept of sustainable yield is evolving – from veToken model at Curve, to integration with TradFi, to revenue positive services like borrow/loan, trades, margin trades, etc. Projects that build healthy sustainable yield engines will thrive. We discussed some of these above, but monitor market leaders like Uniswap, GMX, Pancake Swap, AAVE, Curve. If you want to monitor protocol fees and revenue, thanks to the transparency of the blockchain and data aggregators like DeFi Llama you can: https://defillama.com/fees .
Hedge Against Regulations
Given uncertain United States (U.S.) and international regulatory climate, you may want to consider portfolio allocation focused on either embracing regulation or anti-regulation.
- Pro-regulator “maybe commodity” projects like Bitcoin, Litecoin and possibly Ethereum. These are the three, in my opinion, most likely to be registered as commodities versus securities. Bitcoin is clearly the favorite in this list, but that isn’t a guarantee. While you can continue to trade crypto as securities, being classified as a commodity makes it much easier to trade.
- Anti-regulator with privacy tokens like Monero (XMR) Litecoin with MimbleWimble, zCash, Dash, and other privacy-focused tokens and coins. Monero is likely the top performer in this category. Note that this is better suited to those who live under oppressive governments or life circumstances and have an essential need to protect capital on-chain. In places like the U.S., you may have a harder time cashing out privacy tokens due to future regulatory restrictions.
Crypto casinos and gambling remain a very popular subset of web3. Studies of historical recessionary periods show that while casino revenue remained steady (but flat), lottery tickets rose in popularity. This translates well into certain segments of web3.
While the space continues maturing, most trading volume continues to come from traders “gambling,” FOMO’ing into low-cap and meme coins, or in the case of NFTs – mint and hope for a high rarity NFT to immediately sell. Many new traders are fed dreams of quick riches and are happy to chase high risk investments that are borderline gambling, and at times very similar to buying lottery tickets.
The demand for “lottery tickets” will remain strong in crypto and as casinos gain trust and adoption, we may see the digital gambling space outpace real-life casinos. You can invest in gambling projects without actually gambling, such as investing into liquidity pools at gambling sites, or into native tokens of the gambling projects that offer some utility.
Other things on my mind- meme coins will continue to perform well – DOGE and it’s link to the richest man in the world (now owner of Twitter) has a lot of upside potential long term. Rumors of Twitter integration, or integration with Tesla or other products and services can lift the floor on DOGE. Also DOGECHAIN may emerge as a meaningful and cheeky L1 chain next cycle. Keep in mind that Vitalik, the founder of Ethereum, is also on the advisory council for DOGE.
Ethereum L2 battles are a growing narrative into next cycle. As L2 chains improve their efficiency, they will offer strong competition to each other and other L1 chains. Reviewing the “total value locked” on each chain, Polygon and Optimism are winning the current Ethereum L2 battle, and actually represent the 4th and 5th biggest DeFi ecosystem in all of crypto. Polygon already had a strong performance over the past cycle, so it remains to be seen how far it can grow in the next, but they rate as a lower risk / moderate reward investment.
Artificial Intelligence (AI) is a very popular narrative going into 2023. It seems we reached a new generation of AI capable of communicating in plain language with humans, and also demonstrates greater proficiency than in the past. Web3 has a long history of exploring crypto and AI integration, so it may be worth allocating a portion of your portfolio in AI-centric projects.
General observations, although Aptos doesn’t appear to bring anything new to crypto at this stage, it does have significant VC backing, and in some ways appears to be chasing a similar trajectory to Solana last cycle. VC backed projects are risky due to VC inclination to dump their holdings with no loyalty to the project, you can make quite a bit of money by following them into projects.
If you enjoyed this, you can follow Papi on Twitter: https://twitter.com/1MrPapi and on CryptoQuant: https://cryptoquant.com/profile/u/MrPapi?tab=quicktake. If you want to read more thoughts on 2023, check out part 2 here: https://crownanalysis.com/cryptocurrency/web3-and-crypto-trends-for-2023-part-2/