1. Rollups (separate execution environments) will onboard more new users than L1’s as a result MEV profits will further decrease. However, ETH will be inflationary as more execution moves to roll ups, but it will still be 25% less than what it would have been with PoW
Rollups saw increasing traction over 2022, with Arbitrum and Optimism coming out as winners in regards to both usage and TVL. Both of them are Optimistic Rollups. Optimistic Rollups with EVM-compatibility have seen flourishing ecosystems being built out, and on both Arbitrum and Optimism we’ve seen grassroots DeFi communities built out that have experimented with various new ideas.
We expect 2023 to be no different in regards to the traction increasingly moving to rollups on popular L1s (in particular Ethereum). However, we also expect to see a thriving rollup ecosystem on top of Data Availability and Consensus layer Celestia by the latter half of the year. Here we expect to see not just EVM rollups, but a myriad of agnostic VMs built for different purposes, and with different users. As a result of the increased flexibility in VMs we also expect an inflow of new developers as they will have more options in VMs to use. We are incredibly excited to see the experimentation these new developers will put forward.
2. MiCA will be implemented and the second order effects (explain second order effects) will ripple across the centralised aspect of the industry, but the decentralized networks themselves will not be affected, as a nature of their properties. Furthermore, Any type of clarification on regulation will increase confidence in crypto assets.
A recurring theme in the crypto industry is regulations. Because of the novel and innovative character of this asset class it has been a challenge for all stakeholders to find the right applicable regulatory measures and comply with those. We expect this ‘struggle’ to continue in 2023.
However, in 2023 we do predict clarity to come in the EU. This will come from the successful implementation of Markets in Crypto Assets (MiCA) in the European Union. We expect that it will not touch the decentralized networks itself, as a nature of their property of being decentralized. It will however, mature the industry to a much needed point. As a result of this more traditional European entities will be able to start exploring crypto and blockchain use-cases. Therefore, we predict a European (neo)bank to start offering DeFi products to their clients in 2023. Finally, in a way large scale regulatory measures like this are recognition for the asset class. The EU wouldn’t put in all this effort if they think crypto assets are not worth regulating.
3. With the lull in the crypto markets, on-chain activity will skew even more strongly to ‘regulatory arbitrage’ use cases
As activity in the 2023 crypto markets is expected to remain somewhat muted, passersby that tentatively stuck around during the last year may eventually tap out anyway in a kind of time-based capitulation. Those that choose to weather the storm are here often for stronger ideological reasons or simply because the decentralised infrastructure of our industry is the only way to access specific (financial) services. One could already notice during the end of the past year that a growing portion of on-chain activity was being dominated by these types of use cases, i.e. GMX for leveraged trading of perpetuals and the emergence of Rollbit and Stake as popular gambling hubs. For those still here, these types of venues may be the only thing to provide them with their dopamine hits in the coming year.
4. Interchain security (ICS) needs no-code customisable systems such as Saga to gain traction.
Interchain Security (ICS), but better described as “derived security” is the concept of “borrowing” the cryptoeconomic security and validator set of an existing valset, such as the Cosmos Hub. While this is great in idea, it does just that, while putting increasing burdens on a valset, where some might not agree with the onboarding of chains. We’ve seen this increasingly with the Cosmos Hub, and they’ve even voted no to a “new” ATOM future known as ATOM 2.0
We expect to see ICS gain traction, because it is a fantastic idea and great technology. However, we expect it to see usage by smaller teams, or teams without the financial means to setup and handle entire validator sets. They might not even want to care about security, but rather derive it from somewhere. They in this case often don’t have the technical expertise or capital to setup entire CosmosSDK blockchains. These developers can, with solutions such as Saga, get a blockchain that is customised to their needs, and even their own gas token - they just have to pay a small fee.
5. Brands adopting NFTs will onboard more new users into the NFT space than PFPs.
While much of the NFT hype of much of the previous two years came through adoption (and a healthy dose of speculation) of gaming-related NFTs and perhaps more importantly PFP NFTs, we expect the dominance of these two categories in the trading volumes of NFTs to shrink in 2023. A great example of 2022 was Reddit, whose ‘Collectible Avatars’ have onboarded more than 5 million people into the realm of NFTs - all unbeknownst to them, having abstracted the term ‘NFT’ away completely from users. Instead of the trends of 2022, we expect to see more ‘traditional’ brands such as Nike, Starbucks, and aforementioned Reddit move into the NFT space and onboard more users (both knowingly and unknowingly) into the digital asset space.
6. Rust based VM’s (CosmWasm, FuelVM, Solana etc) will entice more developers and outperform the EVM in onboarding new developers.
The past year has seen increasing usage and spread of Rust based VM’s. Here we are specifically referring to the rise and fall of the SealevelVM, which is Rust based (used by Solana). There are also other VM’s such as the FuelVM, CosmWasm and Cairo which are all either using Rust or derivatives of Rust called Domain Specific Languages (DSLs). Rust has gained popularity for a few reasons in Web3 - first off, there’s a lot of Rust developers worldwide, it’s focused on memory safety, protection, high performance and has very efficient compilers.
We have also seen a general increase in Rust based Ethereum tooling, which will further entice developers to use Ethereum, without having to utilise Solidity or Vyper.
- pwasm-ethereum - Collection of externs to interact with ethereum-like network.
- Lighthouse - Fast Ethereum consensus layer client
- Ethereum WebAssembly
- oasis_std - OASIS API reference
- SputnikVM - Rust Ethereum Virtual Machine Implementation
- rust-web3 - Rust implementation of Web3.js library
- Wavelet - Wavelet smart contract in Rust
- Foundry- Toolkit for Ethereum application development
- Ethers_rs- Ethereum library and wallet implementation
- SewUp - A library to help you build your Ethereum webassembly contract with Rust and just like develop in a common backend
We expect Rust based VMs and tooling to continue seeing growth as developers put security first. This is particularly going to come from developers moving over from Solidity and Web2 to utilise the Fuel and Cairo VMs in the Ethereum Ecosystem, alongside CosmWasm in the Cosmos Ecosystem. This could also be reinforced by a Near or Polkadot renaissance, whom are both Rust based.
7. Liquidity providers will prioritize yield bearing counter pairs.
With the rise in popularity of Liquid Staking Derivatives (LSD’s), we will see a rapid increase of yield bearing counter assets in DeFi. Whereas in the past, many liquidity pools had exposure to naked stablecoins or ETH, we expect this to change in 2023. Balancer already has noted some success with its bb-a-USD liquidity pools, which deploys stablecoins into AAVE to generate extra yield for the liquidity providers (LPs). Similarly, LSD’s will further enable liquidity providers to earn staking rewards while also pocketing the fees of the DEX they provide liquidity on.
Over time, this will be a positive improvement for DeFi, where more LPs could be lured in by more of the attractive yields. Naked ETH or USD pairings will lose market share compared to these assets since they represent a significant loss in capital compared to the alternative. Additionally, liquidity for these LSDs will improve because of this, which further encourages people to stake their assets, increasing the velocity in DeFi or, in the case of ETH, increasing the amount of staked ETH.
8. Fueled by adoption of account abstraction, self-custody will increase in popularity.
Recent events in the crypto industry - culminating in the latest FTX debacle - have once more underlined the fundamental arguments for decentralized and trustless networks as opposed to the centralized, trusted, and opaque systems we have grown both used and averse to. With these events, CEXs have seen record outflows with on-chain balances continuing to grow. However, as valuable as the concept of self-custody may be, the UX that new and existing users face when using their crypto-wallets is at the very least a stumbling block, and at the very worst a serious security issue. With the introduction of (amongst others) EIP-4337, Ethereum will finally get to utilize the benefits of account abstraction as the concept of EOAs and contract wallets will be merged into a new account type on the VM level. Important UX changes include the introduction of social recovery features, session keys, transactions with sponsored or alternative gas fee tokens, and more. We predict that the introduction of this UX improvement will remove a ton of friction in the onboarding and UX of our industry, with a whole ecosystem of new wallet and on-chain experiences popping up already.
9. Bridging solutions will gravitate towards ZKP and Light Client state monitoring and verification as a result of increasingly elaborate attacks on bridge networks and smart contracts.
Current bridging solutions rely heavily on a large number of trust assumptions, whether that is small subsets of validators or people - or even smart contracts. We are of the belief that bridging solutions are only secure when they’re as secure as the chains they are bridging. This can be achieved through light clients cryptographically verifying state on connected chains, such as with IBC.
Furthermore, we also believe that a mixture of Zero-Knowledge Proofs (ZKPs) and light clients (non-storing nodes that interact with full nodes) in the case one of the chains aren’t compatible with light clients, can achieve trust minimised bridging. This can be achieved by using ZKPs to verify block headers (the information about a block) on chains without support of light clients in an open source verifier contract. This can be further optimised by recursion, which is the ability to put ZKPs within ZKPs, which can further optimise costs. Because of this we expect more volume to go through bridges that utilise ZKP and light clients than smart contract based bridges at the end of 2023. We also predict less bridging exploits (denominated in ETH) to take place because of this.
10. Another winner-takes-all in the gaming market, with a single crypto-based game taking the majority of the user activity.
As we’ve seen time and time again in the crypto markets, hype cycles are often swift and exponential, meaning that users are often looking to get into the ‘next best thing’ to not miss out in case something hits big. The crypto gaming sector has emulated this in the past, often accompanied by the use of heavily incentivised P2E mechanics; see Axie Infinity and Stepn for illuminating examples of these types of trajectories. What this typically means is that the mindshare of the community in our industry is quickly ‘hiveminded’ into whatever new thing there is. With the aforementioned introduction of account abstraction, which will particularly improve the UX of crypto gaming, and the slow introduction of more crypto-based elements into new games, the stage seems set for another smash hit game to suck in the majority of attention and activity in the crypto gaming space.