Original article: "2023 Predictions" by Paul Veradittakit, Partner at Pantera Capital

Compiled by: aididiaojp.eth, Foresight News

2022 has undoubtedly been a year of highs and lows for the crypto industry. After the bull run in 2021, we kicked off 2022 with expectations of a market correction, with Bitcoin and Ethereum falling by about 20% and 31% respectively in January alone. Macro factors such as the Fed's rate hikes, high inflation, layoffs, and a general slowdown in economic growth have created a lot of uncertainty. Difficult market conditions have largely been a source of panic for most of the year, but this has not stopped the crypto industry from making many incredible technical progress. DeFi improvements such as Compound v3 and the development of the ZK ecosystem continue. Institutional adoption of cryptocurrencies has also advanced rapidly, with many brands such as Disney, Starbucks, and Adidas quietly embracing Web3. Major banks have also shown a growing interest in the industry: Fidelity has launched a crypto service for investors, BlackRock has partnered with Coinbase to provide crypto access to its institutional clients, and Goldman Sachs is creating a new crypto data service.

An industry highlight this year was the Ethereum merger in September, where the blockchain transitioned from proof-of-work to proof-of-stake, reducing Ethereum's energy usage by about 99.9%. Secondly, many amazing engineers continued to build during the bear market, and some strong projects emerged from it. The industry is also learning lessons from each disaster in 2022, although it is still difficult. In light of these events, many projects and even the entire cryptocurrency market have shown their resilience. The crypto industry has developed to this day, and it has come through crisis after crisis, and this time will be no exception. The industry will enter 2023 with the strength and durability it showed in 2022.

Here are my top six predictions for the crypto industry in 2023:

DeFi will continue to grow during CeFi integration

The past year has exposed many problems with centralized finance CeFi, while DeFi has generally performed well. Given the multiple CeFi crashes in 2022, I expect CeFi companies in the industry to gradually consolidate into highly regulated players similar to Coinbase and Bitstamp.

In the period since the FTX crash, DeFi trading volume has surged, with trading volume increasing 68% from October to November to $97 billion, demonstrating that managing assets through secure smart contracts gives users better visibility into liquidity and more control over their investments.

By 2023, I believe we will see the growth of more complex and interesting applications of DeFi. Some exciting examples are GMX, a decentralized perpetual exchange, and 1inch Pro, a compliant platform that connects TradFi (traditional finance) to DeFi. Use cases such as self-custodial wallets, synthetic assets, and prediction markets will attract more attention in the market next year.

The real strength of the industry lies in its infrastructure, which supports transactions in a trustless and efficient manner. These features will greatly accelerate the adoption and growth of DeFi in 2023, especially considering CeFi’s struggles this year.

We will see a lot of zero-knowledge adoption and use cases

As privacy issues become the forefront of the crypto industry, zero-knowledge technology has been particularly prominent this year. Zero-knowledge technology essentially uses provers, verifiers, and mathematical algorithms to prove something without revealing the underlying information about the proof. Since blockchain is transparent in nature, this application is significant for the industry and it also allows for more interactions on the chain in a private manner. Zero-knowledge proofs are also very lightweight, making on-chain interactions more scalable and efficient.

With the emergence of projects such as Succinct Labs, Risczero, and Espresso Systems, we have seen a surge in use cases for zero-knowledge proofs, EVM, and Rollups. Zero-knowledge technology has a particularly beneficial role in identity in the crypto vertical. With zkps, users can prove their identity on-chain without revealing sensitive data. Ethereum co-founder Vitalik Buterin also pointed out in a recent article that zero-knowledge technology plays a very important role in solving on-chain information problems, and this category is a "real problem that needs to be solved."

ZK technology is also valuable for cross-chain bridges, which can transfer messages and token assets while ensuring security and correctness through a concise proof mechanism. It also has exciting use cases in TradFi systems, such as credit scoring and taxation.

Institutions will increasingly put financial assets on the blockchain

Real World Assets (RWAs) are bonds that represent a claim on an underlying asset and typically have a claim on the yield that that asset generates. The emergence of this category has unlocked a lot of liquidity and utility so far, and 2023 will likely bring even more assets represented on-chain in an accessible way.

Stablecoins are arguably the most popular real-world asset application in the market today, with the category accounting for three of the top seven tokens by market cap. Circle’s USDC and Maker’s DAI have been the most popular stablecoins in the market and have seen little volatility throughout the bear market.

The on-chain community has already shown demand for RWAs: for example, MakerDAO decided to invest $500 million worth of DAI in US Treasuries and corporate bonds in mid-2022. Goldfinch is a company that provides off-chain mortgages, with active loans currently valued at around $100 million. Jia allows business owners to obtain blockchain-based loans and generate significant returns for liquidity providers backed by real-world businesses and assets. I expect to see growth in interesting applications of RWAs in 2023, such as flash loans and real estate. In line with the trend towards real-world assets, I also expect to see a large number of startups focused on bringing TradFi institutions into the crypto space in a regulatory-compliant manner.

More companies entering the blockchain data space

Arguably, the abundance of open-source data is one of the best features of blockchain, as it allows for in-depth analysis of on-chain activity. Leveraging this data in an efficient and responsible manner is integral to scaling blockchain dapps and their use cases. The data reveals a wealth of information about how blockchains are being used, emerging trends, user behavior, and on-chain money flows.

Blockchain analytics platforms like Nansen will continue to be critical for services that analyze on-chain behavior through wallet activity. Companies like nxyz are also addressing the blockchain indexing problem by providing a data API with no rate limits. Definitive was launched in 2022 with the goal of providing user-accessible tools and related analysis for both on-chain and off-chain activity. Even with the growth of these companies, blockchain data remains largely untapped, and I expect the industry to see significant developments in 2023. To understand where crypto is headed next, we need to get granular with our state data analysis level.

The developer tool stack will continue to grow

As blockchain engineers increasingly seek simple and effective ways to deploy Web3 projects, the developer tool stack will continue to grow.

Developer tooling removes many of the repetitive and tedious parts of the job and encourages more engineers to try their hand at creating on-chain protocols. Companies like Alchemy and Tenderly have been particularly important players in the industry over the past year.

Despite the bear market, developers are experimenting with on-chain applications more than ever before. Alchemy recently said that the number of engineers using its platform has soared 3x since the beginning of the year. In September 2022, monthly verified smart contracts increased 2.6x year-on-year. Impressively, 36% of smart contracts were deployed and verified in 2022 as well.

As more web3 developers participate in the ecosystem, it is critical to provide them with reliable tools as they begin to build. Cross-chain tooling is particularly important because it provides composable software that makes it easy to launch projects on multiple chains. As the backbone of many crypto projects, developer tooling will continue to grow in 2023 as more crypto use cases emerge and more engineers seek to enter the industry.

NFTs that provide value to holders, such as gaming NFTs and identity NFTs, will continue to grow

Utility NFTs such as in-game NFTs, identity tokens and token membership communities, software and events will grow in 2023. This year, we have seen the industry begin to develop on both the technical and creative sides, but it is still a long way from becoming mainstream. While the digital art industry is undoubtedly a huge vertical, using NFTs to allow specific privileges has the potential to disrupt many existing industries.

So far, we’ve seen some exciting applications and developments of these ideas. PROOF Collective allows its NFT holders to access future PROOF airdrops (one of which is the popular Moonbirds NFT project) and access PROOF community initiatives such as live events and private Discord. Vitalik also released an integrity document on soul-bound tokens (NFTs that hold on-chain identity information), and some projects have already adopted it. Game transactions also soared in 2022, at one point accounting for more than half of all blockchain activity. In addition, NFTs are beginning to be explored in the entertainment sector, especially in the fan economy.

Traditional companies have been exploring the adoption of NFTs at an increasing pace. Some highlights: Tiffany released a series of pendants for CryptoPunk holders; Instagram announced the inclusion of NFTs on its platform; Nike acquired metaverse fashion company RTFKT. In addition, Royal has redefined music revenue streams and ownership by allowing fans to invest directly in songs. Sports athletes like Cristiano Ronaldo have released related NFT series to increase fan engagement and potentially obtain other future benefits.

I’m excited to see the idea of ​​industry disruption and utility NFTs fleshed out further in 2023. Crypto applications as well as traditional companies will likely start experimenting more with using NFTs to bring something valuable to their owners.

Summary

While 2022 saw some painful hacks and CeFi crashes, the crypto industry as a whole made tremendous technological progress in 2022. Even in the harsh crypto winter, Web3's impact emerged around the world, and this technology is clearly here to stay. As an industry, it is our job to make this technology accessible, reliable, and secure to users around the world to usher in an era of financial transparency, accountability, and autonomy. Web3 continues to redefine the way we think about money, ownership (physical and digital assets), identity, and community. I'm excited to see what 2023 brings as we continue to accelerate Web3 adoption on the Internet.