According to their analysis, the overall macro environment will likely continue putting downward pressure on high-risk assets like cryptocurrency. However, they believe that sideways action is more likely than a severe slide down in the coming year.
Funding and Demand for Projects in 2023
Many projects that have struggled to achieve product-market fit are expected to be slowly abandoned in 2023 due to a lack of funding and demand. This could lead to a decrease in the number of active projects in the crypto space.
M&A Activity and Venture Funding in 2023
The Block Research team predicts that M&A activity will increase in 2023 as companies with grim financial standing seek to be acquired. Venture funding is also expected to slow down dramatically, particularly during the year's first half.
Crypto Prices Correlated to Central Bank Policies
According to analysts, crypto prices will continue to correlate to central banks' monetary policies in 2023. This means that central bank actions, such as interest rate changes, could impact the value of cryptocurrency.
Ethereum Layer-2 Scaling and Modular Blockchains in 2023
The main narrative in the crypto space in 2023 is expected to shift towards Ethereum layer-2 scaling solutions. The total value locked in these solutions is predicted to increase, with zk-rollups outperforming optimistic rollups in relative growth. Major layer-2 solutions such as StarkNet, zkSync, and Arbitrum are also expected to launch their tokens in the coming year.
Modular blockchains, such as Celestia, are also expected to see increased attention and could outperform monolithic blockchains from the previous cycle.
Centralized Crypto Entities and Regulations in 2023
The decline of centralized crypto entities in the past year is expected to lead to intensified regulations for these entities. Binance is predicted to be the center of attention in this regard, while Coinbase is likely to benefit from the fear, uncertainty, and doubt surrounding Binance.
DEXs and Web3 Decentralized Social Ecosystem in 2023
According to the analysts, DEXs are expected to post the strongest fundamental growth metrics relative to other decentralized finance (DeFi) use cases in 2023. The decentralized social ecosystem on Web3 is also expected to experience rapid growth as investments and activity in this subsector increase.
Adoption and Integration of NFTs in 2023
The adoption of non-fungible tokens (NFTs) by traditional brands is expected to accelerate in 2023, bringing more users onboard to NFTs. NFTs are also expected to continue serving as a vessel for integrating crypto with arts and culture.
Market Share and Monopoly Status of Opensea in 2023
Opensea's market share is expected to decrease further in 2023, leading to the loss of its monopoly status in the marketplace.
Introduction to General-Purpose zk-Rollups
In 2023, general-purpose zk-rollups will finally become as usable as Ethereum, with the launch of several native tokens, including Arbitrum, Starknet, zkSync, and Scroll. These scaling protocols will compete with one another, with Polygon zkEVM in a strong position due to its successful switch to a fully functioning zkEVM chain. However, there will initially be a lack of demand for these protocols, and they will only play a significant role in the future with the arrival of more retail investors.
V.C. Capital and Project Funding
There is still a large amount of V.C. capital yet to be allocated, and in 2023, due diligence will finally be taken seriously with a focus on product-market fit. Seed round valuations will return to around $10 million. Many projects, particularly those built on alternate L1s, will run out of money and shut down operations. Some projects may switch to different L2s to improve activity or extend their runways. There will also be a talent exodus as developers and operators are no longer automatically paid $300,000 or more.
Token Economics and Project Sustainability
In 2023, many projects will need to rebuild their token economics fundamentally, as paying out large amounts of tokens as incentives will no longer be viable without a significant influx of new demand. Projects such as Axie and Stephen will not be able to rely on ponzinomics to deliver value.
Cryptocurrency Market Performance
In 2023, Ethereum will outperform Bitcoin, though neither will surpass the other in market dominance. The prices of major cryptocurrencies will remain relatively stable with minimal volatility, with their performance closely tied to the monetary policies of central banks, particularly the Federal Reserve. However, some tokens or NFTs may significantly increase prices due to gambling demand.
In 2023, OpenSea will lose its monopoly status as its approach to enforcing royalties fails. Binance, due to its strong position in both spot and futures trading, will become the focus of global regulations, similar to how Libra was previously. Regulated exchanges like Coinbase in the U.S. may benefit from this regulatory scrutiny. Genesis will file for Chapter 11 bankruptcy, and Gemini may face pressure due to its Earn program. GBTC and ETHE will not be dissolved.
In 2023, U.S. regulators will use the collapse of FTX to overhaul the regulation of the cryptocurrency industry, similar to how Lehman and Enron affected policy worldwide. New legislation, like the Sarbanes-Oxley Act, will be drafted to prevent future FTX-like situations. However, SBF will not see prison time and will continue to plead not guilty.
NFT Market Outlook
Overall, the macro environment will continue to put downward pressure on high-risk assets like cryptocurrency. However, cryptocurrency is considered an uncorrelated asset class. In that case, the market may see the bottom forming on a second NFT wave that will be significantly larger than the one that peaked in 2022. The trading volume for NFTs will exceed the previous ATH of $5 billion in 2023, driven primarily by gaming projects. Many tier-1 crypto games will finally open public access, and a crypto game coin may break into the top 20 market cap.
DeFi Market Outlook
The DeFi market will continue to mature in 2023, with an increasing focus on interoperability and using DeFi as a financial infrastructure. There will be a shift towards decentralized exchanges (DEXs) and decentralized finance protocols (DeFiPs) as the primary means of exchanging and managing digital assets. Decentralized finance platforms will also play a significant role in mainstream cryptocurrency adoption, particularly in emerging markets where traditional financial infrastructure is lacking.
Privacy in Cryptocurrency
Privacy in cryptocurrency will become a more prominent issue in 2023 as regulatory pressure increases and more people become aware of the importance of financial privacy. Projects prioritizing privacy, such as Monero and Zcash, will see increased adoption, and there may be a shift towards more privacy-focused protocols and technologies, like zero-knowledge proofs.
Quantum Computing and Cryptocurrency
Quantum computing will continue to threaten cryptocurrency in 2023 as the technology becomes more advanced and accessible. Cryptocurrency projects must ensure that their protocols resist quantum attacks, either through post-quantum cryptography or by implementing other security measures.
Macroeconomic Factors Affecting Cryptocurrency
In 2023, the macroeconomic environment will significantly impact the cryptocurrency market. In the summer months, China's stimulus and reopening, coupled with a slowing pace of Federal Reserve rate hikes, will boost global risk appetite and benefit cryptocurrency. However, in the fall and winter, attention will shift to Europe's energy crisis, and the upcoming Bitcoin halving in March 2024 will keep industry optimism high overall.
Industry Impact of FTX and Alameda
The fallout from the insolvencies of FTX and Alameda will continue to affect the industry throughout the first half of 2023, with many smaller projects that kept part of their treasury on FTX shutting down. The Bahamas will no longer be a popular jurisdiction for crypto companies. In the year's second half, the focus will shift back to the upcoming regulatory wave, as western lawmakers use the FTX insolvency to implement stricter reporting and deanonymization requirements, which will negatively impact DeFi in western jurisdictions.
Privacy in Cryptocurrency
Privacy will continue to be a major topic of discussion in the industry in 2023, but many participants will ultimately give up on it when push comes to shove. Alternative privacy solutions for crypto natives will continue to thrive in their niche markets.
Regulatory Developments in Asia
After cautious and strong-handed regulation in 2017 and 2018, Asia will become more open to cryptocurrency in 2023, with South Korea and Japan taking steps towards sensible regulation. There will be a migration of industry natives to crypto-friendly jurisdictions, including those in Asia.
Project and Protocol Developments
Arbitrum and StarkNet will launch their native tokens, with both ranking in the top 10 in terms of TVL by the end of the year. Polygon will increase its NFT market share as it onboards more traditional brands. The Cosmos ecosystem will see organic growth due to the development of multiple sidechains, native stablecoin support, and the launch of Celestia. At least one notable rollup will decentralize its sequencing process. Withdrawals of staked ether will be enabled in the year's first half. Coinbase's cbETH will double its market share in Ethereum liquid staking, with the asset widely accepted as collateral by major DeFi protocols. Structured products will gain popularity as crypto natives favor the "real yield" narrative and help boost liquidity for on-chain derivatives products. However, privacy-focused applications will need more support to gain traction due to regulatory pressure.
Funding Difficulties in the Crypto Industry
In 2023, the crypto industry will face difficulties raising equity and debt financing as the period of easy money ends. Companies must be more mindful of spending, leading to continued layoffs and headcount reductions. The increased regulation following the FTX fraud will also be a factor. With interest rates rising to combat inflation, investors are likely to lend to the U.S. government and adopt risk-off strategies. The wide spreads of the previous cycle will probably decline as incumbent Wall Street firms continue to build out their digital asset teams and strategies.
Impact on the Mining Industry
In 2023, more miners will go bankrupt or restructure as they struggle to make debt payments that are more expensive than the machines and BTC treasuries used to secure the loans. Large energy providers will become acquirers of mining equipment, as they have strong balance sheets uncorrelated to recent crypto market downturns and natural synergies with excess supply.
Lower Volatility and Trading Opportunities
The cryptocurrency market will see lower volatility in 2023, providing fewer opportunities for traders to make easy profits. This new market environment will favor those who track forced sellers or find over-levered areas of the ecosystem, potentially boosting demand for crypto options as traders seek to hedge exposure or position around events. Many funds from the 2021-2022 vintage will close due to poor performance, leading to liquidation cascades in the first and second halves of 2023, although these will be smaller than in 2022. Even seemingly "safe" strategies and holdings will be tested, such as liquid staking derivative discounts to ETH dropping to below 90% due to on-chain deleveraging or funds needing liquidity.
There will be more innovation and drama in the stablecoin market in 2023, with developments coming from two different directions. On the one hand, DeFi developers will create censorship-resistant products that creatively integrate into protocols. On the other, policy-minded actors will more fervently explore regulatory-compliant payment tools. The discussion around stablecoins backed by Federal Reserve reserves or carrying deposit insurance will take place in Congress but will not make it onto the floor. Researchers will largely abandon direct CBDC models and propose more integrated solutions that allow commercial banks to issue or "wrap" tokenized central bank reserves or commercial bank liabilities as stablecoins with additional properties before distributing them to retail clients. These stablecoins will probably have similar governance to CBDC or at least be subject to similar oversight. Regulators will also pay more attention to stablecoins as they resemble a new digital version of the euro-dollar market amid growing concerns about competing currency systems (such as in China) and global economic fragmentation. Tether's backing issues will be a major topic of discussion in Capitol Hill, potentially causing a short-term minor depeg like in 2018, but Tether will not collapse. However, a top 10 by market cap stablecoin (either existing or new) will collapse in 2023.
Regulations and Volatility in the U.S.
Despite opportunities for a more regulated crypto-derivatives market in the U.S., volatility will remain high due to the impact of macroeconomic factors and the need for mature institutional infrastructure. The price of Bitcoin will continue to be driven by retail and the actions of whales, while developments will more influence the price of Ethereum in DeFi. Both assets will see increased adoption and mainstream recognition but will not surpass their all-time highs in 2023.
Increased Adoption and Mainstream Recognition
Cryptocurrency will see increased adoption and mainstream recognition in 2023, with more traditional financial institutions offering digital asset products and services. The growth of the NFT market will also continue, focusing on lower-priced items and more practical use cases. However, regulatory uncertainty and the potential for market manipulation will still be concerns.
Market Consolidation and Project Failures
There will be market consolidation in the crypto industry in 2023 as smaller projects struggle to survive. Many will pivot to different L2s or switch to alternative L1s to improve their chances of the activity or prolong their runway. Token economics will also be fundamentally reworked for many projects, as paying out large amounts of tokens as incentives will no longer make sense when there is not a lot of new demand coming in. Some projects, such as Axie and Stepn, will no longer be able to rely on ponzinomics to deliver value.
Competition Between Scaling Protocols
General-purpose zk-rollups, such as Arbitrum, Starknet, zkSync, and Scroll, will finally launch in 2023 and become more usable, leading to a discussion about the value accrual of L2 tokens against ETH itself. These scaling protocols will face fierce competition, especially between Polygon zkEVM, Starknet, zkSync, and Scroll. While there may initially be a lack of demand for these protocols, they will play a significant role as the next wave of retail arrives. Polygon gets a head start by successfully switching its PoS chain to a fully functioning zkEVM chain.
V.C. Capital and Valuations
While there is still a lot of V.C. capital on the sidelines waiting to be allocated, due diligence will be taken more seriously for the first time in years, focusing on product market fit. Valuations for seed rounds will return to nearly $10 million. Many projects, especially those built on alternative L1s, will need more money and close down operations. The talent exodus from crypto will continue as developers and operators are no longer automatically paid $300k+.
Changes in the Token Market
The token market will change in 2023, with the focus shifting away from ponzinomics and towards more practical use cases. OpenSea will lose its monopoly status, and its abusive approach to enforcing royalties will fail. Binance, due to its strong position in spot and futures trading, will become the focus of regulations globally, similar to how Libra was previously. Regulated US-based exchanges, such as Coinbase, will likely benefit. Genesis will file for Chapter 11, and Gemini will face pressure due to its Earn program, but GBTC and ETHE will not be dissolved.
Regulatory Changes and Legal Outcomes
In 2023, U.S. regulators will use the FTX collapse to change how the crypto industry is governed, similar to how Lehman and Enron affected policy worldwide. New legislation similar to the Sarbanes-Oxley Act will be drafted to prevent FTX-like situations from happening in the future. SBF will not see a day in prison in 2023 and will continue to plead not guilty.
Market Performance and Correlations
Crypto prices will continue to behave like tech stocks and be fully correlated to the monetary policies of central banks, primarily the Federal Reserve. When there are hints of decreasing interest rates in the short term, crypto will surge. However, this may not happen in 2023, so the prices of major coins will stay roughly the same with little volatility. Some tokens or NFTs that see significant gains may scratch the gambling itch. Ethereum will outperform Bitcoin in 2023, but neither will surpass the other in market cap.
Dapps to Address User Experience Challenges in 2023
In 2023, there will be a shift in focus from infrastructure-driven development to application-based development. This shift will likely lead to improvements in user experience as Ethereum Improvement Proposals (EIPs) that enable account abstraction, such as EIP 4337, make the experience of using dapps smoother. There will also be a greater focus on use cases that take advantage of design spaces previously limited by the high cost of block space on layer 1 (L1) blockchain networks.
Interoperability to Improve in 2023 with Oracles and Bridging Solutions
In 2023, there will be progress in interoperability solutions across different layer 2 (L2) networks. This will be due in part to the use of oracles as a messaging bus with more risk mitigation features than the existing bridging approach. Projects like LayerZero have already begun experimenting with this approach, but further maturity in 2023 will allow for a truly robust interoperability solution.
Regulatory Changes to Affect DeFi in 2023
There is a high probability that regulators will enact new legislation related to certain practices in the cryptocurrency space, particularly in the decentralized finance (DeFi) subsector. This follows the arrest of Tornado Cash developer Alexey Pertsev in 2022 and the U.S. Treasury's sanctions on Tornado Cash as a software protocol. There will likely be clearer guidance on mixing mixers and the consequences of using mixing services. The existing miner extractable value (MEV) space is also likely to face more investigation and scrutiny, leading some dapps to consider design features that mitigate MEV.
Market Speculation and Valuations to Remain Muted in 2023
In 2023, there is expected less focus on quantitative tightening through central bank rate hikes. However, the second-order effects of this contraction will continue to be felt throughout the year. This is likely to keep cryptocurrency valuations within ranges below prior all-time highs and result in muted speculation compared to the period before the second half of 2022. As a result, there will likely be a greater focus on long-term design decisions in the cryptocurrency space.
Institutional Investors Seek Low-Risk Options in 2023
Trust in central exchange (CEX) and centralized finance (CeFi) lending services are at an all-time low due to the events of 2022. Many market participants seek risk management, operational transparency, and market expertise, which should have been addressed during the bull market. These issues are addressed, and trust is regained. Institutional investors will be hesitant to take on more aggressive positions and instead search for defensive or low-risk capital management strategies. Crypto financial services will need to release more structured products with principal protection to meet these needs and maintain their current level of operations. In 2023, it is expected that more institutional investors will look to staking as a safer source of yield, particularly with the release of more enterprise-grade liquid staking protocols.
TradFi and Crypto Correlation to Remain High During Downturns
In 2023, it is expected that the correlation between traditional finance (TradFi) and cryptocurrency markets will remain high during downturns as both markets share increasingly common participants. However, the crypto market will likely bottom before TradFi. While equities may see another downturn due to a worse-than-expected earnings cycle, crypto prices are expected to remain relatively stable. It is also predicted that a less hawkish Federal Reserve (FED) will benefit the crypto market in the first half of 2023.
ETH Will Not Flip BTC in 2023, and L2 Scaling Solutions Take Center Stage
It is unlikely that ETH will flip to BTC in 2023. It is predicted that no other level 1 (L1) blockchain will reverse ETH. Instead, the main narrative in 2023 is expected to shift towards ETH Layer-2 scaling solutions. It is predicted that two of these solutions, Arbitrum and Starknet, will launch tokens and become some of the top few L2s by total value locked (TVL). The total TVL of L2s is expected to surpass $20bn. It is also predicted that the Solana ecosystem will be revived in 2023.
Binance Gains Legitimacy and DEX Volumes Increase in 2023
It is expected that in 2023, Binance will gain legitimacy from regulators outside the United States. It is also predicted that the volume ratio between decentralized exchanges (DEXs) and centralized exchanges (CEXs) will grow to approximately 25%. OpenSea's market share is expected to fall to around 25%. In 2023, it is also expected that at least one to three blockchain-based games that are enjoyable for players will be launched and made playable.
Coinbase Sees Market Share Increase After FTX Collapse
In 2023, there is expected to be a strong push for Coinbase following the collapse of FTX. As a result, Coinbase is expected to gain market share, but it will remain second to Binance. DEXs are also expected to see significant volume growth, particularly in anticipation of any regulatory pushback. While it is unlikely that anything too meaningful will be pushed through on the U.S. side, the looming threat could dampen the market further into the year. The concentration of volumes on only a few CEXs will also contribute to a DEX-centered narrative, particularly in light of the concerns raised by the FTX collapse.
Derivatives Volumes to Outpace Spot in Traditional Crypto Markets
In 2023, it is expected that the ratio of a spot to derivatives volumes will fall as traditional markets become more accepting of cryptocurrency. However, the perceived risks of the trading spot may hold some individuals back. Both futures and options are expected to see increases in volumes and open interest in terms of the underlying asset, particularly on more traditional exchanges like the Chicago Mercantile Exchange (CME).
NFT Adoption to be Led by Crypto-Native Teams in 2023
In 2023, it is predicted that a few more notable brands and celebrities will try their hand at non-fungible tokens (NFTs), which may bring in some retail users. However, only some of these projects are expected to stick, and more meaningful adoption is expected to come through projects developed by crypto-native teams. Projects that are well thought out and have a strong user experience, potentially minimizing the "crypto aspects" for retail users, will be successful in capturing users who already use cryptocurrency.
Stricter Western Crypto Legislation and Relevance of Non-BTC/ETH Chains in 2023
The first half of 2023 is expected to be manageable in crypto legislation as the fallout from the FTX collapse will start to unfold, and some funds may close or go through restructuring. However, western crypto legislation is expected to take on a stricter tone. Non-BTC/ETH chains are expected to continue losing relevance as the market stays in "safe havens" amid global political instability and inflation concerns. However, it is predicted that both of these issues will show signs of improvement in the second half of 2023 or by the end of the year, leading to a more "exciting" crypto market as customer appetite for risk increases.
Innovative SocialFi Applications and Pump-and-Dump Scenarios in 2023
In 2023, it is expected that there will be some long-awaited NFT games and other innovative SocialFi applications entering the market. However, cautious macro timing may result in these projects experiencing "pump-and-dump" scenarios, where the attractiveness of the application is still heavily influenced by the price action of its underlying token.
Appchain Thesis Strengthens, and Z.K. Chains Gain Traction in 2023
In 2023, it is expected that the Appchain thesis will be strengthened as more apps launch on Cosmos and Ethereum L2 chains. Z.K. chains are also predicted to scale up and gain some traction. Rollups are expected to make significant technological improvements in scalability and performance, but sequencers face technical challenges. It is also predicted that the push for privacy-preserving technologies will continue, with more progress in developing zero-knowledge proofs (ZKPs) and implementing ZKPs in layer two solutions.
Central Bank Digital Currencies and Increased Institutional Adoption in 2023
In 2023, it is expected that central bank digital currencies (CBDCs) will continue to be a hot topic, and more progress will be made in their development. It is also predicted that institutional adoption of cryptocurrency will increase, with more traditional financial institutions entering the space and offering crypto-related products and services. There will likely be a focus on improving the infrastructure and regulatory environment for institutional participation in the crypto market.
Ethereum to Overtake Bitcoin in Market Capitalization
According to recent predictions, Ethereum's market capitalization is expected to surpass that of Bitcoin in 2023, driven by increased adoption of Layer 2s and Ethereum's disinflationary model. This shift may occur even if both ETH and BTC prices decline.
Layer 2 ecosystems, such as Arbitrum, StarkNet, and zkSync, are expected to see pockets of growth, potentially fueled by airdrops. The polygon may also experience growth in TVL, depending on the success of its zkEVM efforts.
As for the gaming industry, platforms like GameFi and P2E are expected to phase out in favor of games with practical use cases for blockchain technology. Trading card games, such as Gods Unchained and Parallel Alpha, are likely among the top contenders.
SocialFi is predicted to undergo a pump-and-dump cycle, while protocols like Lens and Farcaster are expected to emerge as decentralized alternatives to existing social media frameworks. So-Col may also emerge as a strong contender in this space.
Increased Regulation for Centralized Entities
Recent market events have led to a forecasted increase in regulation for centralized entities. As a result, it is expected that customers will continue to prefer self-custody of their assets until credibility is regained. This trend may contribute to the growth of decentralized exchanges like dYdX and Uniswap. Governments may also implement regulatory schemes targeting decentralized entities, though the impact of these regulations is expected to take time due to lengthy processes and the need for consensus.
Web 3.0 social networking protocols, such as Lens Protocol and Bluesky Social, are expected to develop further to gain market share from traditional social networking services. These protocols will initially attract users by speculating potential token airdrops, though these are expected to occur in Q4 2023 or later. To appeal to a wider audience, these protocols must offer attractive features to non-crypto native users.
The options market is expected to grow as demand for hedging crypto exposures increases during uncertain market conditions. Both institutional and retail demand is expected to drive this growth, with option vault protocols developing new options strategies to meet retail demand.
Layer 2s to Gain Traction, Ethereum to Focus on MEV Issues
Layer 2 technologies are expected to continue gaining traction, with Arbitrum launching its token and outperforming Optimism's token and the overall crypto market. TVL for Layer 2s as a whole is predicted to increase, with Z.K. rollups outperforming optimistic rollups in relative growth. StarkNet and zkSync are among the major ZK rollups expected to launch or sell their tokens, which are also predicted to outperform the overall market. Polygon is expected to benefit from this growth by association.
As people become more confident in Ethereum's scalability due to Layer 2 technologies, user experience is expected to improve with cheaper and faster transactions. This may lead to growth in user bases and activity for Ethereum dapps that integrate Layer 2 technologies. However, the shift in activity from Ethereum to scaling solutions may create downward price pressure on ETH and upward pressure on scaling solutions. The increased focus on scaling solutions may also bring attention to design weaknesses that bad actors may exploit.
Other predictions for Ethereum include a delay in shipping sharding to 2024 and a focus on MEV issues in the current year. Celestia is expected to launch its token, and modularity is expected to become a hot topic. Wintermute is predicted to launch a derivatives exchange that outsources the storage of customer funds to trusted custodians.
Bitcoin to Experience Price Decrease, Altcoins to Flourish
According to recent predictions, Bitcoin is expected to experience a decrease in price due to a lack of significant catalysts and a focus on alternative coins. This shift may lead to an increase in the market share of altcoins, with Ethereum, Binance Coin, and Cardano among those expected to perform well.
Decentralized Finance to Continue Rapid Growth
Decentralized finance (DeFi) is expected to continue its rapid growth, with an increase in the number of users and the total value locked (TVL) in DeFi protocols. This growth may be driven by the expansion of DeFi beyond Ethereum to other blockchain networks and the development of new products and services within the DeFi space.
Institutional Investment to Increase, with a Focus on Digital Assets
Institutional investment in digital assets is expected to increase in the coming years, driven by a combination of factors, including the maturing of the industry and the perceived stability of digital assets compared to traditional financial markets. This trend may lead to the development of new products and services aimed at institutional investors and an increase in the number of institutional investors participating in the market.
Overall, the cryptocurrency market is expected to continue evolving in the coming years, focusing on scaling solutions, decentralized finance, and institutional investment. While there may be fluctuations in prices and market conditions, the underlying technology and adoption of cryptocurrencies are expected to continue growing.
Overall Crypto Price Outlook for 2023
Crypto prices in 2023 will continue to be influenced by macroeconomic conditions and will remain correlated with other risky assets. A weak earnings season could lead to a decline in equities, negatively impacting crypto due to fears of recession. Additionally, bearish sentiment and the aftermath of the FTX/Alameda collapse will put downward pressure on crypto prices in the year's first half. However, if there is a rise in inflation later in the year, we may see significant upward movements in crypto prices.
Funding and Adoption of Stablecoins
There may be a decrease in private funding for crypto projects in 2023 compared to the past two years, but funding levels will still be higher than in 2020 and previous years. Some projects that received funding during the market exuberance of 2020 and 2021 may struggle due to a tougher fundraising environment and a lack of product-market fit and may ultimately shut down. On the other hand, well-capitalized venture capital funds will continue to support high-quality projects. The demand and adoption of dollar-pegged stablecoins, especially in developing countries, will likely increase due to global inflation and its impact on weaker currencies. Projects that make it easy for individuals to purchase stablecoins using fiat currencies will likely see strong adoption.
Crypto Regulations and ETH Market Dominance
The U.S. Congress is expected to be more active in passing crypto regulations in 2023 and may enact less favorable regulations to the industry than desired. Ethereum (ETH) is predicted to increase its market cap dominance relative to Bitcoin (BTC) due to reduced issuance, fee-burning, and the "ultra-sound money" narrative. However, ETH will remain within BTC in market cap dominance in 2023. ETH is expected to gain increased "moneyness" and a monetary premium, partly by becoming the default reserve asset on layer 2 (L2) networks. The concept of an "ETH-killer" will fade in 2023, and competition among L2 networks will become a major focus.
Adoption of Optimistic and Z.K. Rollups
Optimistic rollups are expected to see more users and transactions as activity continue to migrate to these networks from Ethereum Virtual Machine (EVM)-compatible layer 1 (L1) networks. Z.K. rollups will take longer to gain adoption but are expected to pick up in the second half of the year as zkEVMs onboard popular apps. App-specific rollups functioning as L2s or L3s will challenge L1 app chains and attract attention from institutional players interested in deploying their blockchains.
Growth of zk-Related Applications and Compliance
2023 will mark the beginning of significant growth in zk-related applications across various sectors, including privacy, identity, and bridging. There will be a significant focus on developing credible forms of zk-compliance as privacy-related applications face regulatory scrutiny.
DeFi Growth and NFT Adoption
There will be significant growth in the "real-world asset" (RWA) sector within decentralized finance (DeFi) throughout 2023. As DeFi yields decline due to falling prices, reduced interest in liquidity mining, and the decline of large market makers, RWAs will be an appealing source of yield due to the high-interest rate environment for traditional fixed-income assets. The adoption of non-fungible tokens (NFTs) will accelerate in 2023, particularly among traditional brands. NFTs will be integrated into digital collectibles and overcome the technology's negative image. Although the overall NFT market may not experience a major bull run, some sub-sectors, such as dynamic crypto art, will thrive as artists create more works that are only possible using blockchain technology. Generative art grails will become more detached from the rest of the NFT market in terms of price performance, with the blue-chip PFP segment experiencing the most significant price increases. However, the rest of the NFT market is expected to remain relatively stable, with isolated pockets of hype.
Decentralized Exchanges and Centralized Finance
Decentralized exchanges (DEXs) are expected to continue to grow in 2023, with new DEXs launching and existing ones improving their infrastructure and user experience. DEXs will face increased competition from centralized exchanges launching their DEXs and traditional financial institutions entering the crypto space. Centralized finance (CeFi) will continue to grow in 2023, with traditional financial institutions launching their crypto products and services and improving regulatory clarity.
Infrastructure and Scalability
Crypto infrastructure and scalability will be major focus areas in 2023, with significant progress expected. Layer 2 solutions, such as optimistic and zk rollups, will see increased adoption and will play a crucial role in improving scalability. The development of cross-chain bridges will also advance, allowing for greater interoperability between different blockchain networks. In terms of infrastructure, there will be a continued emphasis on improving user experience and making it easier for mainstream users to adopt crypto.
Institutional Adoption and Investment
Institutional adoption and investment in crypto will continue to grow in 2023, with more traditional financial institutions entering the space and offering crypto products and services. Introducing regulated custody solutions and other infrastructure improvements will make it easier for institutions to enter the market. The growth in institutional adoption and investment will also drive the development of more sophisticated financial products and services, such as futures and options.
In summary, 2023 will be a year of continued growth and development for the crypto industry, with significant progress expected in infrastructure, scalability, and institutional adoption. There will be challenges, such as regulatory hurdles and the impact of macroeconomic conditions, but overall the industry is poised for continued growth. The adoption of stablecoins, DEXs, and NFTs is expected to increase, and the development of sophisticated financial products and services will drive further institutional adoption. However, the market may also experience some setbacks, such as the closure of poorly performing projects and the possibility of unfriendly regulations.
Crypto Market Winter Continues in H1 2023
The crypto and traditional markets have experienced a winter season in the first half of 2023 due to a minor recession in the U.S. and a more severe one in Europe. There is still a high level of fear and uncertainty surrounding centralized exchanges once one of the larger exchanges undergoes a proper audit from a reputable auditing firm. As a result, decentralized exchanges (DEXes) and perpetual/options protocols have seen increased adoption, with new protocols launching innovative features. However, trading futures in decentralized finance (DeFi) will likely remain a more advanced activity for power users.
Ethereum Layer-2s Compete for Market Share in H2 2023
In the second half of 2023, Ethereum layer-2s will compete for market share with the launch of zk-rollups. This shift in attention away from Ethereum, specifically ETHER, will cause Ethereum to decrease in value compared to Bitcoin (ETH/BTC pair), particularly as staked ETH unlocks. The layer-2 competition will heat up with the Arbitrum token launch and various events to drive user adoption. This will highlight the significant development differences between some layer-2s, particularly decentralization. It will become clear that the industry needs to move towards a multi-chain future with multiple layer-2s and even layer-3s, and any future layer-1 launches will not gain traction.
Market Recovery and DeFi Crime Crackdown in H2 2023
The markets are expected to begin recovering in the second half of 2023, with inflation decreasing significantly (although not to the target level of 2%) and the U.S. Federal Reserve pausing interest rate hikes and keeping rates at around 5% until 2024. There will also be a crackdown on DeFi-related crime, such as the Mango market case, as U.S. courts actively pursue crypto-related crimes. This ultimately benefits the industry by reducing unethical DeFi activity, but it may also lead to tighter regulation and reduced privacy in the long term. In response, new privacy-focused projects will emerge in the year's second half to push back against strict or unfair regulations and censorship that significantly impact privacy.
SEC Case and Widespread NFT Adoption in 2023
By the end of 2023, the Securities and Exchange Commission (SEC) is expected to bring another case against a popular crypto project (similar to the XRP case) and require projects that are not decentralized to register as securities to trade on US-based exchanges. This will prompt protocols to achieve a higher level of decentralization. However, there will still be limited clarity from the SEC on which projects are considered securities and commodities. Additionally, there will be new use cases for non-fungible tokens (NFTs) towards the end of the year, and more traditional brands will continue entering the NFT space. Polygon is expected to particularly benefit from this trend and eventually become a top 10 project by market capitalization. However, the focus will shift from building an ecosystem on top of an NFT collection to using NFTs as part of a larger ecosystem.
Privacy Coins and Regulatory Scrutiny
As regulatory scrutiny increases, it may become more difficult for full privacy coins to find success. However, alternative solutions like zk. money that balance privacy, censorship resistance, and regulatory compliance may find a strong product-market fit.
Stablecoins and the Future of Dollarization
The United States is expected to introduce a national legal framework for stablecoins, which could lead to significant growth in the market cap of stablecoins and further dollarization in the digital asset space. Central bank digital currencies (CBDCs) may also see limited adoption unless they are built on public rails or incentivize usage.
The Move towards Mobile Blockchains
As most blockchain use cases and users are located in the developing world, where mobile access is prevalent in everyday life, blockchains are expected to become more "mobile" in the coming years.
Crypto Markets and Central Bank Pivots
Unless central banks pivot, the crypto market is expected to trend sideways or downward.
Bearish Market Conditions and Decreased Volatility
The market is expected to remain bearish for the first half of 2023, with recessions in the U.S. and Europe leading to weak earnings and downward pressure on equities. As a result, crypto markets are also likely to follow suit and trade sideways with decreased volatility. It may take years to restore public trust in cryptocurrency following the fraudulent behavior of companies like FTX. Many institutions are expected to buy digital assets only once macroeconomic conditions improve and the public forgets.
Emerging Use Cases for Distributed Ledger Technology
Despite the challenges faced by the crypto market, the value proposition of distributed ledger technology in providing more efficient value transfer and trustless financial rails remains. Projects like Project Guardian, a collaboration between the Monetary Authority of Singapore and firms including JPMorgan and HSBC, aim to further asset tokenization and the development of institutional-grade DeFi protocols.
Ethereum and the Future of Layer 1 Blockchains
While Ethereum is not expected to surpass Bitcoin in terms of market cap in 2023, it is likely to gain significant ground and outperform most non-EVM-compatible layer 1 (L1) blockchains. Polygon may be an exception, thanks to the launch of Polygon zkEVM and its strong product-market fit in retail and asset tokenization use cases.
Decentralized Options and Perpetual Futures Protocols
As trust in centralized trading venues decreases, traffic and volume are expected to shift towards decentralized options and perpetual futures protocols. The token launch by Arbitrum in late 2023 could also lead to a mini altcoin season for tokens within its ecosystem.
The Future of Layer 2 Scaling
There is expected to be significant growth in the total value locked (TVL) in Ethereum layer 2 (L2) scaling solutions, potentially surpassing the TVL of non-Ethereum L1s. While there may be advancements in zk-rollup technology, most are expected to wait to launch or see significant traction in 2023.
Predictions for the Crypto Industry in 2023
Blockchain technologies prioritizing privacy and censorship resistance will be in high demand in 2023. It is also expected that Ethereum stake withdrawals will be enabled in the second half of 2023, but there will not be a spot Bitcoin ETF in 2023. In addition, regulatory challenges from the SEC classifying certain tokens and coins as securities will likely occur in 2024 or later. There will also be an increase in legislative bills introduced in the U.S. Congress that will test the unity and lobbying efforts of the crypto community.
Scaling Solutions and User Adoption in 2023
The adoption of layer-2 and sidechain-based scaling solutions will continue to grow in 2023, addressing issues related to limited block space. However, these solutions may also raise concerns about their complexity and need for decentralization. There will also be a shift in user adoption and investment patterns towards innovative applications rather than the technical features of the underlying layer-1 blockchain. Platforms with the ability to generate revenue will be particularly important. The development of application-specific blockchains and interoperable ecosystems, such as Cosmos, will also continue to advance.
Ecosystem Growth and Incentivization in 2023
In 2023, there will be a focus on application-centric growth for blockchain ecosystems, leading to a greater emphasis on catering to the needs of application developers. Decentralized Finance (DeFi) Total Value Locked (TVL) normalized by total crypto market capitalization will increase by at least 50% from the beginning to the end of the year. ETH will become net deflationary again in the year's second half, further strengthening its status as "ultra-sound money" and reducing BTC's market dominance. The future will continue to be multi-chain, with Solana steadily climbing back toward the top thirteen spots. Q4 will see at least one L2 token launch, and the total amount lost in bridge-related exploits will significantly decrease from 2022 levels, not exceeding $500M. NFT volumes will also increase at least four times from the beginning to the end of the year due to the emergence of new use cases and user experience improvement. Incentivization schemes that attract more loyal capital and users will be increasingly adopted in both DeFi and GameFi to encourage slower, more organic growth. At least one blockchain game will reach 400K monthly active users, though it will only surpass peak Axie MAU in 2024. A DAO will purchase over $100M, possibly a third-tier sports team. Venture capital will continue to flow into the industry at a slightly lower rate compared to 2021 and 2022, still exceeding $15B. The GBTC discount will also be significantly narrowed by the end of the year to no more than 15%.
Ethereum Layer-2 Solutions and Decreased Inflation
In 2023, the adoption of Ethereum layer-2 solutions, such as Optimism, that aim to improve Ethereum's scalability will continue to rise. There may also be fewer interest rate hikes and reduced inflation, potentially leading to an increase in appetite for risky assets like cryptocurrencies and a return of retail investors to the industry. Decentralized exchanges, like DYDX, will begin to outperform centralized exchanges as trust in CEXs decreases. DeFi protocols backed by traditional financial institutions will also gain more traction.
Increasing Regulation and Institutional Adoption
Regulatory clarity and institutional adoption of cryptocurrencies will continue to improve in 2023. There will likely be a surge in regulated stablecoins and greater use of digital assets in traditional financial products. The development and adoption of central bank digital currencies (CBDCs) will also accelerate, though their impact on cryptocurrencies remains uncertain. The role of mining and renewable energy in the crypto industry will continue to be a prominent topic, emphasizing sustainability and reducing carbon emissions.
Web3 and the Metaverse
The migration of brands to web3 and the increasing use of web3 customer loyalty programs will drive the growth of web3 social networks in 2023. The metaverse will become more interconnected and easier to navigate, leading to an increase in land prices of at least 2-3x. The Twitter exodus will also contribute to a greater focus on the metaverse.
Market Outlook for 2023: Volatility and Range-bound Trading
The crypto market is expected to remain challenging in 2023, with limited opportunities for new market participants due to macroeconomic conditions. While periods of volatility are expected, it is unlikely that Bitcoin will make new highs. Bitcoin and Ethereum are expected to maintain their dominant positions as market participants look to invest in established value. NFTs will continue to gain adoption among traditional companies, although most NFT volume is expected to be concentrated in a few select projects.
Standout Performers in 2023
Among the cryptocurrencies expected to outperform Bitcoin and Ethereum in 2023 are Binance Coin (BNB) and the soon-to-be-launched Arbitrum token. The launch of the Arbitrum token is expected to drive speculation and adoption of dApps built on the Arbitrum chain, which could reach a total value locked (TVL) of $4B. Shibarium, set to launch in Q2 2023, is also expected to surpass Dogechain in volume and attract more market participants.
Regulatory Landscape and Privacy in 2023
Regulatory action is expected to continue in 2023, targeting DeFi, NFTs, and other crypto-specific applications. Authorities may also bring arrests and charges against influencers and other industry participants. While an increase in regulation is anticipated, the emergence of a strong privacy narrative is not expected. However, small pockets of outperformance may be seen in privacy coins like Monero in response to regulatory action.
ZK Rollups and DeFi in 2023
There will likely be an increase in building activity on Z.K. rollups like Starknet and Aztec, as well as the launch of new DeFi and privacy projects. However, the total value locked in DeFi is expected to remain low, as yields are less attractive compared to other options. Web3 applications designed for mobile use are also expected to launch, improving user experience. The USDC stablecoin will enable the creation of applications similar to Cash App, with more subtle crypto integration.
Market Sentiment and Token Performance in 2023
As interest rate hikes slow, risk-on sentiment is expected to rise, and the crypto market will have its opportunity to perform. However, the number of tokens expected to do well is expected to be significantly lower as the market becomes more value-oriented. Defi tokens with governance rights are expected to decline, while Defi protocols utilizing real-world assets (RWA) on Ethereum, such as Aave and Maker, are expected to grow.
Industry Players in 2023
Binance is expected to face challenges and scrutiny but ultimately maintain its position as a dominant exchange. NFT volume is expected to remain low. Bitcoin is expected to retain its dominance in the market. L1 blockchain protocols are not anticipated to recover their peak valuations, while L2 protocols are expected to continue to outperform. Finally, decentralized finance (DeFi) protocols utilizing real-world assets (RWA) are expected to gain traction, while those focused on governance rights are anticipated to decline.