Will the crypto market get better next year after experiencing a hellish 2022?

The circle experienced a hellish year in 2022. Will 2023 be better?

I think it will probably be better. After all, it is hard to imagine that in 2023, no matter how much “thunderstorm” and “deleveraging” there are, even FTX has collapsed. How much worse can it be? I can only think of an “epic” event like the closure of the leading CEX that will make the environment in the circle worse.

Following the idea of ​​review, we will still look forward to what is worth looking forward to in 23 years from the perspectives of macro, public chain, Defi, NFT, etc.

Let me make it clear first that it is just worth looking forward to . If you take this as the main investment theme for next year, you will most likely be slapped in the face. After all, if you look back at the outlook and expectations of various institutions and KOLs for the coming year over the years, the accuracy rate is actually quite low.

This is also the fun part of this market, it always develops in unexpected directions. Just as at the end of 2020, when everyone was looking forward to further innovations in Defi, Polkadot and Layer2, it was unexpected that the hottest ones in 2021 were Alt Layer1 Solana, Luna, GameFi Axie and Cryptopunks Monkey NFT. At the end of 2021, no one would have expected that Luna would collapse, 3AC would go bankrupt, and FTX would close down in 2022...

But at the same time, don’t be afraid of being embarrassed, we still have to make the necessary predictions and prospects!

01. Macro

The super main line of 22 years has forced every participant to become an economist, and they can easily come up with confusing terms such as interest rate hikes, balance sheet reduction, dot plots, CPI, etc.

However, if you ask these people (including me) to predict what the macro environment will be like next year, most of them will be dumbfounded. This is also a question for half-baked economics enthusiasts, and I can barely explain it by reviewing the market. Forget about predicting the future... After all, even professional economics professors often cannot see the future direction clearly. If they could see it clearly, there would not be the economic crisis in 2008.

But there are at least a few relatively certain things you can still understand:

• Rate hikes

  The interest rate has now reached the range of 4.25-4.50%. According to the dot plot, interest rates will continue to rise next year and will not stop until they reach around 5. This event will most likely occur in Q1 or Q2 of next year. In other words, interest rate hikes will continue, but the pace will slow down. But don't fantasize about loose monetary policy next year and a surge in Bitcoin prices.

• Recession and rate cuts

  Many people now believe that there will be an economic recession next year. Whether it will happen or how severe it will be, no one knows. But if it does happen, the current price of crypto assets may not be affected by this expectation , so is there a possibility that Bitcoin will continue to fall next year? Of course there is.

  As for the rate cut, it is highly likely that we will have to wait until the Fed reaches or approaches the 2% inflation target. What about the timing? Q4 next year? Or the year after. At that time, it will naturally be a good thing for the price support in the circle, but it is highly likely that the price will be reflected in advance , that is, a few months before the rate cut, when there is a dawn and signs of a rate cut, it will start to rise, and will not wait until the day of the actual rate cut. In the financial market, the word "expectation" is the key.

02. Public Chain

In the 23 years of public chains, the two prominent schools are bound to be the "hardest hit areas" of speculation and investment.

• The first prominent school is ZK

If nothing unexpected happens, in the first half of the year we will see the mainnet launches of the four major ZK-based L2s: Starknet, Zk-sync, Scroll, and Polygon ZKEVM.

Fortunately, there are only two in the OP series (Arb and OP, yes, I automatically ignored Metis, Boba and other forks, Copycat is not worthy of being on the list), and there are four in the ZK series... So we are happy to see that the already fragmented L2 liquidity is now further fragmented.

In addition to the problem of liquidity fragmentation, there are also performance considerations. The overall overhead of the ZK system is actually greater than that of OP, although in theory, ZK has a higher TPS and is cheaper than OP when the block is full (because ZK needs to upload less transaction data than OP, OP needs to upload some intermediate status information to facilitate the challenge of the verifier, but ZK only needs to upload proof information for batch transactions).

But at the beginning, the first block is unlikely to be fully loaded, and secondly, there is still a lot of room for improvement in circuit optimization and hardware acceleration , so at this time next year, the performance and cost of the ZK series are actually inferior to those of the OP series. As for whether users will pay for the security of this "mathematics > game", it depends on the market performance at that time.

• The second popular concept is naturally the term modular blockchain.

Celestia, which has become popular, is expected to launch its mainnet next year. The previous four-layer model broke down various types of Rollups into pieces, and the various permutations and combinations made those who don’t understand technology dizzy.

It's time to take the mule or horse out for a walk.

However, at this point next year, I personally feel that it is a bit uncertain for two reasons:

First, DA layers like Celestia rely on a large number of Appchains based on Rollup. For example, Arb, Op, and ZK series of big players are unlikely to use third-party DA layers. They either use ETH or make their own solutions like Validuim. Therefore, the real service object of the DA layer is Appchain. It feels like the Appchain explosion next year is 1-2 years ahead of schedule.

Second, how much value can the DA layer capture? In fact, no one really knows . After all, even as ETH for settlement + DA, the value obtained from L2 is more on the ecological and ideological level. If we really talk about how much gas fees L2 contributes, it is actually far less than super DAPPs on L1, such as Uniswap and Opensea. After the deployment of Proto-DankSharding, the L2 fee is reduced by an order of magnitude, and it is even less. At this time, if you take out DA again, Hmm... Can the captured value be worthy of the valuation of billions of assets?

Of course, our circle is not like Web2, where the price-earnings ratio often dominates. Just like when Solana nodes captured that little bit of transaction fee, do you think it is worthy of a market value of tens of billions? Obviously not. Narrative + emotion is often much better than the price-earnings ratio . If you don’t believe it, look at Uni’s Token, which has 0 capture, but still has a market value of tens of billions.

According to the project, the situation is as follows:

• ETH

  The Shanghai upgrade in the first half of the year cancelled EIP4844 (Proto Danksharding) and only focused on POS withdrawals. It was still the usual ETH procrastination style... Do you think EIP4844 will be deployed smoothly in the second half of the year? Hehe, to be honest, I would not be surprised if this "super important upgrade serving L2" is delayed until 2024. ETH, everything is fine, as long as you are fully prepared for the delay. It is definitely the "Blizzard" in the public chain - the boss in quality, and also the boss in procrastination.

• Cosmos

  The Atom 2.0 proposal was rejected due to the additional issuance model, and the community is now arguing over new proposals. However, several technical solutions in Atom 2.0, such as shared security, will most likely be seen next year. 2023-2024 may be the most important two years for Cosmos. Whether the Appchain narrative can take off and whether the 2.0 shared security model can capture enough value for Atom depends on these two years.

• Solana

  Solana suffered heavy losses in the FTX crash due to its deep involvement with FTX and SBF. TVL fled in large quantities, and the entire DEFI ecosystem gradually withered. Many developers also set their sights on new public chains such as Aptos and Sui, and projects went to these new public chains to "open branches". However, from a positive perspective, "unbinding" from SBF gives Solana the opportunity to transition from a "heavy capital chain" to a community chain. For capital projects like Serum with ultra-low circulation and ultra-high FDV, forking out some community projects may have a different future. After all, Solana has made considerable contributions to the technological innovation at the basic level of public chains in recent years.

• Alt Layer1

  It can be said that most Alt Layer1s may not have a good time next year. With Arbitrum's current heyday, innovative projects are emerging in an endless stream, and the four kings of the ZK system will be launched next year, Alt Layer1's competitors are no longer ETH, but a group of Layer2s. The experience is similar, the security is not as good as Layer2, and the developer ecosystem is not comparable. I really can't think of where the way out for most Alt Layer1s is. Gradually withering may be the ending of most Alt Layer1s, just like EOS and NEO. The only ones who have hope of breaking through may be Move's Aptos and Sui, which have both underlying innovation narratives and capital-driven projects.

03. Defi - Spot

Defi's innovation at the spot level has entered a relatively bottleneck period. In 2022, we basically didn't see any eye-catching projects. The only outstanding project might be Euler, a borrowing project? Isolation pools and permissionless are not really so-called "innovations". They are nothing more than occupying a pit in a relatively mature market with continued segmentation, plus the power of capital boost.

There are three directions worth looking forward to in the spot field in 2023:

First, there are Dex and borrowing that are different from the current style . As the on-chain infrastructure continues to improve, the spot market cannot always be dominated by AMM. Order Book will sooner or later take back half of the market. Order Book on Solana has already made some attempts, and high-speed Defi chains like Sei with built-in Clob, and Dex based on Aptos and Sui, will definitely have one or two Order Book types to grab the AMM market. On the borrowing market side, Mars, based on Cosmos multi-chain deployment, is another borrowing product with a different style from AAVE and Compound . This borrowing project that uses IBC, spans multiple chains, and can be centrally managed may have a good development after the rise of the concept of application chain.

Another direction is to build auxiliary projects based on existing infrastructure , such as Arrakis Finance, which manages Uniswap V3's LPToken to optimize LP returns. Or Morpho, a loan pool optimizer built on Compound/AAVE and other loan protocols, transfers loans from the capital pool to a peer-to-peer mechanism, providing better interest rates for both borrowers (pool interest rate as a base). Curve already has a lot of ecological auxiliary projects represented by CVX, and I believe it will not be surprising to see a few new ones come out in 2023.

The last direction is naturally the stablecoin . After the collapse of Luna, the market has a stronger desire for native stablecoins, but on the other hand, the distrust of this "calculated stablecoin" style has reached its peak. Fortunately, AAVE GHO and Curve crvUSD, which are destined to appear in 2023, are both over-collateralized. The leading lending and stablecoin Dex leaders are well-deserved and legitimate to make stablecoins. I hope they can make a "better DAI", because to be honest, in the field of stablecoins, the industry has suffered from MakerDAO for a long time...