2023 Predictions
Roy Deploy - Issue #1
2022 was full of highs and lows. In September, a watershed moment went down for the history books. The Merge on Ethereum was the software equivalent to the moon landing.
Zero-knowledge (ZK) took the crypto world by storm, coming to market years ahead of anticipation, igniting an arms race to bona fide zk-EVMs by Polygon, Scroll, Matter Labs, and virtually every cryptography professor and their mother. $900m was raised by ZK startups in the first 6 months of 2022. Additionally, NFTs brought 10 million+ users into the world of crypto. The advent of NFTs led to more sophisticated uses of non-fungible tokens to represent everything from identity to credit-worthiness. Decentralized identity and decentralized credit score protocols flourished.
On the other hand, the daisy-chain implosions from 3AC to FTX left the crypto-verse disillusioned, policymakers bombastic, and, worst of all, countless lives and livelihoods ravaged. $50B+ worth of capitalization evaporated and stories of life savings lost ran wild. The opacity of CeFi vindicated crypto-believers’ view that centralization is an original sin. As a result, DeFi adoption went up by 30-70%. Still, we yearn for DeFi with better custody solutions and regulatory clarity.
Overall, we also learned that crypto isn’t much of a hedge (yet!). BTC and ETH prices largely moved with global liquidity — with a 90-day correlation of 0.59 — which may not be a bad thing! A counter-market digital gold for hedging isn’t very useful, but an infrastructure for the new open economy that moves with the ebbs and flows of the market is very useful.
Now, after a roller-coaster 2022 in crypto, we are bracing for a prolonged winter, when much building will take place. It’s trite but true! All the issues exposed during the last bull run pointed to problem areas that await visionary founders to solve, which we’ll cover in a future post. For now, here’s what I (and some peers at HashKey) think will happen in 2023:
1. Modular blockchains will bring execution, sequencing, data availability and additional layers such as block production and AA to expanded markets
“Divide and conquer” - Julius Caesar. If we can’t solve the blockchain trilemma in one single swoop, let’s break it down and solve it module by module. Ethereum Foundation is hell-bent on making ethereum lightweight and unhackably decentralized, while spinning out execution, data availability, account abstraction, MEV and sequencing to other blockchains.
“My goal: insulate the Ethereum base layer from centralizing tendencies of complicated stuff happening on top of / around Ethereum” - Vitalik Buterin, mev.day
MEV emerged as a new frontier and a double-edged sword, with good MEV stablizing prices and bad MEV fleecing users. Toal MEV extracted from Ethereum reached $687m. EF adopted PBS out of several proposals to solve bad MEV. Proposer-Builder Separation (PBS) leverages efficient markets and aligned incentives to turn MEV from an centralizing force into a public good.
MEV occurs at the mempool phase, before the blocks become picked and confirmed. bloXroute Labs provides a suite of mempool services that promise speed and uncongested block propagation to support the bloXroute MEV-Boost implementation and MEV relays. Having more players in this space fosters MEV technological diversity, which we are very excited about.
To run an efficient market, data availability is crucial, to avoid price discrepencies and trust-based business making. A stealth startup in HashKey portfolio is working to bring MEV data to increase transparency and efficiency in MEV markets.
Another important component of blockchain is the data availability (DA) layer. In this category, Celestia leverages data availability proofs to provide a horizontally scalable DA layer to L1, L2, and AppChains alike. DA issue must be solved to unlock features such as sharding and light clients that are important to mass scalability and mass participation in crypto.
2. DeFi Expands and Becomes More Compliant while CeFi Becomes More Transparent and Consolidates
“Code is law,” outcries crypto users in the aftermath of CeFi implosions. Celcius paid off Aave loans according to smart contracts, as opposed to ‘dumb contracts’ that will take years to litigate. Much hope rests on the reliability of DeFi smart contracts to drive a financial system that is transparent and loophole-free.
However, DeFi still has many issues around security. MoveBit proposes to leverage the Move language’s natively supported formal verification to boost the fidelity and efficiency around smart contract audit and monitoring. Chaos Labs secures protocols through best-in-class agent- and scenario-based simulations for more sustainable tokenomics and lasting communities. In 2023, we are excited about DeFi projects that provide exquisite user experiences, sound security, higher capital efficiency, and real economic yields.
When all is said and done, CeFi remains vitally important as the intermediary between TradFi and DeFi. At $15B market cap and $40B TVL, DeFi is a drop in the ocean against TradFi’s $22 trillion market size and doesn’t even crack the top 100 banks by market cap. It is unlikely that every individual and institution will get their own non-custodial wallet and participate in DeFi directly. In order to onboard tens of trillions of GDP to blockchain, compliant and transparent CeFi and CeDeFi are critically important.
DigiFT is one of the first ‘compliant CeDeFi protocols’ that runs an AMM on-chain, but with the proper AML in place and regulatory licenses to operate. DigiFT’s whitelisted accounts assure clients that their counterparty funds come from reputable sources, while users maintain control over their own non-custodial wallets, and all transactions are settled and verifiable on-chain. We believe that DeFi protocols that prioritize compliance will revolutionize traditional finance and bring increased efficiency to the space. Elwood is a compliant institutional crypto trading platform and financial services provider. The team has obtained licenses in key markets, enabling the creation of a one-stop-shop crypo trading and market data solution that is now used by some of the most prominent institutions.
HashKey believes that compliance is paramount, in order to protect the interests of crypto-participants. HashKey itself went to great lengths to obtain proper licenses to operate a digital asset institution. As new licenses are given out going into 2023, a new wave of CeFi and CeDeFi players will expand on the back of clearer regulatory frameworks.
3. Web3 infrastructure will become productized
During the last bull run, blockchain infra was stretched to the brink. Skyhigh gas fees ($62 per transaction). Unbearable latencies. Massive hacks (over $3B hacked) . Cringe-worthy capital inefficiencies.
In the same period, much of the critical foundational pieces were laid down - including staking, restaking, relayers, data providers, data aggregators, data storage, dev tools, Node-as-a-service, API-as-a-service, on-chain analytics, event triggers and more. (Ok, this was a laundry list. HashKey will publish our proprietary web3-data research in a future post.)
Going forward in 2023 and 2024, these infrastructural pieces will become more productized as they mature around specific use cases and address bigger TAMs. The next frontier of web3 infra competition will advance from ‘being usable and safe’ to ‘being delightful and turnkey’.
We are excited about the tools that Cosmology has built and virtually onboarded to Every. Single. Cosmos zone. From ts-codegen to Create Cosmos App, we are excited about the Firebase for Cosmos. SupraOracles is the first blazing fast, zk-supported and decentralized set of oracles that has the potential to become the most efficient on-chain and cross-chain data feed. Already Supra has achieved 200+ partnerships. Space and Time is an exciting decentralized data warehouse that provides web3-native SQL for smart contracts at enterprise scale. You can think of Space and Time as The Graph meets Snowflake.
Another piece of infrastructure we are excited about is technically web2. DePIN (Decentralized physical infrastructure networks) has the potential to upgrade, decentralize, and improve our decades-old physical infrastructures. More on this later.
4. DID, DeSo, and Decentralized Data will form the foundation for the gig economy and creator economy
Internet 2.0 demoncratized access to information and enabled creators and gig workers around the world. However, historically, a lion’s share of their income goes to centralized big tech, that gate-keep their communities and levy ‘taxes’. As an example, Apple’s 30% tax on NFT sales prevented many of the NFT apps that users love from launching on the App Store.
Decentralized identity and data empowers individuals to take control of their own identity and access to communities, enabling direct engagement and transactions between gig workers and project leaders, as well as creators and their audiences.
EigenTrust is the world’s first social-network driven reputation scoring protocol. Already EigenTrust formed partnerships with Lens Protocol and Farcaster to build the recommendation algorithms for the open internet. BrainTrust — a decentralized platform revolutionizing the gig economy by directly connecting job seekers with new opportunities - is not only customer-first but also customer-owned. BrainTrust shares revenues with users through BTRST tokens. Lava Network is a peer-to-peer RPC-node-as-a-service protocol built on Cosmos. A community-driven RPC protocol can ensure that users own their personal blockchain transaction data. Its mainnet is scheduled to launch in 2023.
While many promising decentralized gaming and decentralized social projects have been launched, I believe the underlying infrastructure isn’t quite there yet to enable smooth user experience for mass adoption. In 2023, we are excited about new modalities for DID, DeSo and DeData that will come out to enable the next SuperApp.
5. ZK will become ubiquitous
Zero-knowledge (ZK) is to blockchain as acceleration chips are to AI. ZK is a key technology to blockchain advancement. The tech advanced years ahead of anticipation, with promises of scalability and privacy— rolling up thousands of transactions into one and obfuscating the details of the transaction yet easily verifiable.
“Perhaps the most powerful cryptography technology to come out of the last decade is general-purpose succinct zero-knowledge proofs” - Vitalik
ZK is currently still too cost- and resource- prohibitive for wide adoption. ZK circuits are notoriously difficult to write and expensive to compute as teams at Hermez, Aztec and Scroll can attest.
2023 will see technology advancements that drive down the cost of zk, leading to its widespread adoption and eventual abstraction as an invisible - yet ubiquitous - aspect of the user experience. Most developers will eventually code as they would today and delegate the complex task of proof generation and verification to zk-EVMs.
Aztec’s zk-rollup will allow transactions to be sent off-chain to centralized, optimized, and hardware-accelerated nodes. These nodes will process state transitions as well as generate validity proofs that transactions were processed correctly. Cysic brings hardware-acceleration to zk proofs. Using first FPGA and GPU based varietals of MSM then ASIC-based varietals, Cysic can bring down the time-cost and resource-cost of generating and validating zk proofs. Intmax is an exciting ZK-based L2 that will achieve near-0-gas transactions on-chain. Its proposed zk-EVM can store user data with encryption on-chain to unlock use cases such as biometrics sign-in — paving a future of L2 mass adoption.
We are very excited about zk’s potential to drastically lower costs and improve user experience, and thereby bringing crypto to the masses.
6. Institutions will onboard assets, capital, and investors to blockchain
Since 2020, we’ve heard assertions that insitutions are coming to web3. The realities are that most ‘instis’ are curious at best, dismissive at worst. And those who do participate tend to be ‘hedgies’ arbing away at trades. There are well-intended institutions in VC, FoF and Fintechs of course — however, regulatory uncertainty, volatile markets, and lack of understanding are all main factors to hesitant adoption at large. On top of that, the notorious 2022 CeFi implosions did not help.
Blockchain technology is fundamentally a financial technology, as it enables the digitization of value in varous forms, such as capital, currency, financial instruments, art, infrastructure and beyond. This tech has the potential to greatly increase efficienty by collapsing multiple cost layers in the current financial system into one gas fee. The potential efficiency gains are mind-boggling.
We are excited about Seashell bringing the yields of the blockchain economy to everyday investors through a simplified user interface. Perhaps once the products are proven in retail, institutions will follow in adoption. FalconX is the best-in-class institutional digital asset platform, enabling major institutions to engage with crypto and providing the liquidity that fuels many of the web2.5 and web3 companies you know and love. It grew 80% in December 2022 despite market conditions. We hope more institutional investors will come onboard around the world through such competent intermediaries.
In 2023, we are also excited about bringing real GDP on chain. Similar to Centre, future providers of real-world assets (RWA) will need to be compliant, transparent and auditable. The teams building in this space will require sufficient TradFi experience with deep familiarity with web3. We are cautiously optimistic that 2023 will see more capable teams bringing RWA on-chain. Keep an eye out for a future article from us on the subject of RWAs.
Conclusion
2022 was a monumental chapter in the engineering of an open economy. NFTs onboarded millions of users into crypto. ZK technology advanced years ahead of schedule. The US Senate came awfully close to finally passing legislation around crypto (though influenced by crypto’s most infamous fraudster). The Ethereum Merge strengthened the conviction of crypto-believers that blockchains will endure, evolve, and advance over the course of a multi-decade journey towards an open economy.
In 2023, the number of Ethereum validators has already exceeded half a million. Highly experienced and highly skilled web2 founders are addressing critical issues in web3. We are seeing more compliant and well-intended CeFi builders fill in the void left by CeFi implosions, as well as innovative approaches to rebuilding the infrastructure of blockchains from the ground up.
There are ample spoils ready for the taking. So why not build?
The next bull market will be even more explosive than the last, and HashKey is ready to back visionary founders blazing the trail at the edge of tomorrow.
Disclaimer
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ABOUT ME
Hi, I’m Roy Lu, a Partner at HashKey Capital. HashKey Capital is a multi-stage venture capital firm investing in visionary blockchain founders. Since founding in 2015, HashKey has invested in the most enduring blockchain companies including Cosmos, dydx, Ava Labs, FalconX, Blockdaemon, CoinList, and Dapper Labs. With over $1B AUM, HashKey invests across the stack (from layer0 to dapps) and verticals (from DeFi to zk). HashKey is global in influence and crypto-native, investing in founders everywhere, to find traction anywhere, globally.
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