I originally wrote this article for a guest piece in an upcoming publication, but thought you might enjoy some riveting speculation over the weekend now that Perseverance is live. There’s a discussion thread about 2023 in the discord, so come join in the fun!
Get your crystal balls and tea leaves out, and let’s get into it.
This year was hell. What about next year?
2022 really had it all: war, disease, shortages, crashes, collapses, inflation, contagion, and turmoil - and yet here we are. I look back on when we were building during the 2018/19 crypto winter, and remember how fragile the entire industry seemed even without any of these headwinds - let alone one of the most turbulent years in decades. I think that this year has proven something that few can deny: despite the devastating collapse of FTX, the Web3 industry isn’t going away. But that begs the question - where is it going in 2023? I can only offer my predictions.
Centralised Exchanges Will Be Challenged
Until FTX went under, a trend few others have not have paid much attention to is the cross-chain space and its implications for the shape of the industry’s spot markets.
In 2020, Uniswap exploded (in a good way) and took billions in daily volume away from centralised exchanges, to the point where much of the price discovery for ERC-20 tokens now occurs almost exclusively on-chain.
I think the same is likely to happen in 2023 to other markets. With dozens of new L1s on the block, and cross-chain technology getting better and more refined over time, it is slowly becoming possible to swap assets cross-chain in a comparable experience to Uniswap.
The industry knows that we have to move away from centralised exchanges, which will become more tightly regulated in both good and bad ways. When it comes to transparency and user control of their own funds, however, nothing beats on-chain trading.
There are still many problems plaguing cross-chain experiences, namely low liquidity, poor UX, lack of aggregation, market fragmentation and lack of support for non-EVM chains. Luckily, cross-chain aggregators are helping to pull together the patchwork of cross-chain messaging, bridging, and native swapping protocols out there. There is still plenty of work to do to make this competitive with centralised exchanges.
Chainflip’s native cross-chain AMM should help bring accurate pricing and low slippage to the industry’s most traded assets, while cross-chain messaging protocols will help users move their other assets where they want them to go. Bridges will continue to play a role, though hopefully less over time.
You might have noticed in the latest Chainflip lightpaper that we have decided to add cross-chain messaging support and aggregation in the Chainflip swapping app to the immediate product goals, both of which will greatly support Chainflip in its mission to displace the centralised exchange, and drive volume for the protocol through external integrations and a product interface centred around benefiting the user - making sure they can do what they want to do.
Over 2023 I think users will be surprised by the rapidly improving swapping experiences on offer, and through close collaboration, the builders in this space will be able to invoke the “Uniswap Effect” on most crypto spot markets, just as was done to the ERC-20 token markets in 2020.
Do I think this means that Binance, Coinbase, and so on will follow FTX to the depths of the deep blue sea? No, but I do think that their market share of the spot markets will wane throughout the year to the massive benefit of both users and protocols.
On-Chain Activity to Rise
The market crash of 2022 has caused the markets for many Web3 projects to evaporate, and general usage of already successful protocols is also way down. Volumes have been subdued these last few months as well. You don’t have to look at too many metrics to conclude that things have slowed dramatically this year, but perhaps the best metric to look at is transaction fees paid. Ethereum gas fees have been at multi-year lows. Until very recently, the last time gas fees were this cheap was before the DeFi summer of 2020.
Spikes in activity (and thus gas fees) have been getting more frequent, and not just in response to market volatility and chaos. It’s clear that demand for block-space is once again increasing, and will likely continue this trend throughout 2023, even if we don’t see extreme rallies. There are good reasons for this too, with the Web3 community still finding lots of opportunities and utility on-chain despite the depressed markets.
As the product and protocols that drive on-chain activity make further improvements over this quieter period, I think that 2023 will see higher & sustained levels of on-chain activity than 2022.
High-Profile Launches of Projects Founded in 2020/21
Although most launches over 2022 have either been cancelled, postponed, or dramatically scaled back, there has continued to be a strong market for high-profile projects launching new tokens. Aptos, although it seems like they have been badly affected by the FTX saga, cleared a staggering $350m in their October ICO, for example.
It is just one of many projects that received early-stage funding during the mad rush of 2020 and 2021. Hundreds of projects collectively received billions from private and public funding, much of which has yet to launch. Chainflip is in this boat, with our much anticipated cross-chain AMM ready to roll in 2023 after 2 years of development - and we won’t be the only project launching with a splash in our respective categories.
Although a project could raise up to 9 figures in 20/21, building and scaling a team to execute the vision takes time, therefore a lot of the protocols yet to launch are genuinely very exciting and different to much of the simpler, less ambitious launches previously seen throughout the 2020/21 period. With the Sui launch receiving just as much hype as Aptos, having also been founded in 2021, I expect to see a lot of other heavy-hitters completing their initial launches throughout 2023 in preparation for a recovering global economy and renewed interest in the Web3 sector.
What I don’t think we will see is a lot of low-grade projects having much in the way of success in these market conditions, with much of the attention going back towards BTC, ETH, and other major projects for the year given the lower-risk appetite likely to pervade the mindset of market participants after a year from hell.
Macro Effects on the Crypto Markets
I’ve been following the geopolitical and economic movements all year to try and asses the true implications of Russia’s invasion of Ukraine, the ensuing energy market chaos, China’s persistent COVID lockdowns, record-high inflation around the world, and many other knock-on effects like on food security, infrastructure sabotage, private and public debt, and the currency markets, and I’m pleased to say things are looking up.
The West is winning the energy war, and despite the intense fear of a cold winter in Europe earlier this year, within 8 months the Europeans and Americans have reorganised their energy markets to practically guarantee energy independence from Russia, with more supply and energy transport infrastructure coming online in the next 12 months. My prediction is that European energy prices will stabilise at about 30% above their pre-invasion levels - enough to stave off further inflation and perhaps also avert a recession in Europe altogether. Thankfully I also won’t freeze in my Berlin apartment, as it's currently -6C at night. Rough!
Inflation is a hard thing to put a lid on, and I expect further, though less severe rate hikes throughout 2023, even though the various shortages, supply chain issues, a weakened China, and the general hangover of 3 years of pandemic appear to be slowly coming to an end. Whether Russia’s war will end in 2023 is anyone’s guess, but it wont come cheap. In spite of that, I think it’s likely that the macro-environment will surprise a lot of people next year - the worst has come and yet inflation is coming down and the Fed, despite the aggressive rhetoric, is struggling to slow down the jobs market.
We won’t see the kind of stimulus fuelled mega-pumps of 20/21 any time soon, but ETH and BTC were showing signs of wanting to break out before the FTX calamity. If the global economy starts recovering, crypto may take a hot minute to to join in, with the ongoing migraine following the FTX collapse likely to dull an otherwise positive environment. We may, however, re-enter the old paradigm of extreme price volatility. Maybe decentralised derivatives markets are a good pick for 2023?
Out with the Metaverse, in with digital art and NFTs (again!)
In the last few months, attention previously dedicated to the NFT world has been shifting towards the metaverse. However, it seems that the recent backlash towards high-profile metaverse projects has started coming on thick-and-fast.
The most common reason is that building virtual worlds that are fun and/or productive to interact with is shockingly difficult. The video game industry is built around creating experiences in virtual worlds, and they have had in-game purchases and markets for decades.
With no expertise and a naive vision, it’s no wonder that Facebook (I refuse to call them Meta) so far managed to produce little more than a bland and lifeless product that looks like it was made for the Playstation 1.
If I sound salty, it’s because I am. I have always loved gaming (Big PC boi reporting in), and all the metaverse projects are doing is drawing talent away from my favourite game studios to work on dumb projects - where they could be producing incredible titles for VR, new in-game economies in the next generation of strategy and RPG games or coming up with something new all together, instead they are wasting billions building a VR Habbo Hotel that no one wants.
My prediction for 2023 is that the metaverse narrative will fall away as users realise that building truly compelling digital experiences takes a lot more than a positive attitude and some good funding.
Instead, I think we will see a renaissance in the NFT world, with generative and digital art quietly making strong headway in the mainstream. While all this nonsense has been going on, Stable Diffusion and other incredible algorithmic creativity have inspired new thinking in the art world. We may have seen peak BoredApe, but I’m quite certain that in 2023 we will see more and more value placed on the most compelling works of the digital art movement, which has been largely funded by the NFT wave of 2021.
Regulatory Fervour to focus on CeFi
This year was pretty big for regulation in Web3. Most notably, sanctions touched the space in ways we haven’t seen before, with Tornado Cash itself (however you define that) being targeted directly for the first time. The collapse of FTX is also going to massively accelerate the increasing regulation of centralised exchange businesses globally.
However, we hurtle towards the end of 2023 with little meaningful progress on clarification of crypto regulations globally despite much debate. The OFAC guidelines have created a flurry of discussion around censorship after the Merge, and legislation continues to emerge and push through the houses of many globally influential governments. MiCA in the EU could have far reaching consequences for the industry - it also might not. Various types of crypto legislation are still under discussion in the US. Ultimately, businesses still don’t know what they need to do, governments don’t know what they want them to do, and those left to enforce any policy remain under-resourced and as confused as the rest of us.
With the world going through a lot and the general decline in the Web3 world of late, regulation is much less likely to focus on protocols and instead squarely on the centralised operators, including stablecoins.
Terra may have killed algorithmic stablecoins forever, meanwhile the rise of USDC and other popular token-based US dollar products seem to be gaining legitimacy with regulators who see it’s power as a geopolitical tool rather than a threat. The European Union is trying to accelerate the adoption of Euro-denominated digital currency in several ways.
The hyper-aggressive attitude of regulators in the past seems to have been replaced by a more balanced but equally chaotic set of legislators and bureaucrats who are now seeing who is the real threat to society in the Web3 space. I expect a new wave of globally aligned rules coming from regulators this year to enforce new standards in the exchange, lending, and custody businesses within the space to try and prevent another FTX from happening.
I see regulation playing a prominent role in 2023, and I think it will be the stage-setter for the future of regulation in the industry, and could determine the future for stablecoins and digital money in the West more broadly. I also think it will actually turn out to be a good thing for decentralisation and long-term growth of the space, provided protocols don’t get caught in the crossfire with legislation that targets centralised operators, but forgets to explicitly exclude decentralised protocols.
There's light at the end of the tunnel
I am excited for next year. Various pieces of the jigsaw puzzle are fitting into place and I believe for those willing to tolerate volatility and weather the storm, 2023 should be the beginning of the next leg up on crypto’s journey to Web3’s wide use around the world.
Hopefully that was some enjoyable speculative drivel for you. I hope that the FTX disaster didn’t impact you too directly, and that you too are excited by the opportunities that 2023, a better year, might bring. I, personally, think 2023 is the best possible year we could have picked to launch Chainflip. Let's make it happen.