DeFi 2023: Centralised finance (CeFi) surfaced unfavourable perspectives this year, but what about decentralised finance (DeFi)? Crypto and blockchain technology has come a long way in the past few years, but there has been some rough riding along the way. In this article, some of the top leaders in the crypto, blockchain and Web3 space share their thoughts on what went wrong in 2022 and what we can expect in 2023.
2022 has been a testing year for the crypto and Web3 industry as the markets took a turbulent ride with the rise and fall of Terra/Luna and FTX. But it also saw the growth of multi-chain ecosystems whether it be new layer 2 chains like Solana and Near protocol and Polygon and Starknet.
The promising thing about these ecosystems growing is the focus on the technology and the applications it can enable, which is the most interesting part about the crypto industry. As we reflect on what will resist the bear market, we must go deeper into the fundamentals of crypto technology and figure out why we truly believe in the technology. If we don’t have this conviction in the tech, then it will be hard to survive the trough of this wave.
To the communicators and marketers that are here, take this time to continue building your knowledge about this industry because the builders and developers will need your help to translate what they’re working on to change the world.
2022 has taught the crypto industry that centralised exchanges and centralised finance (CeFi) organisations cannot be fully trusted. In 2023, there will be an even stronger focus on self-custody of assets and a shift towards seeing decentralised finance as a better solution for the future of finance.
2023 will also see the stronger ecosystems thrive. We will also see a move beyond the multi-chain future to an interchain future with the rise of the Cosmos ecosystem which enables teams to build application-focused chains. Here’s what some of the experts say.
DeFi 2023: Kadan Stadelmann, Komodo
Kadan Stadelmann is the CTO of Komodo, who work with blockchain interoperability and atomic swap technology.
The crypto community will grow out of the bear market once the public starts to understand the merits of trustless platforms and self-custody, versus their centralised counterparts. There was over US$3 billion
lost in crypto hacks this year, the majority of which were against centralised exchanges or liquidity pools where users had handed over custody of their funds.
So if there’s one takeaway, it’s the power and importance of self-custody. Although financial sovereignty can be intimidating for users, it’s important to understand the security implications of holding your own funds in a secure wallet versus trusting third parties with them.
Teaching users about the different types of crypto bridges must be a focus for crypto communities in 2023, to prevent attacks and ultimately reach a fully trustless and interoperable future. Cross-chain AMM bridges use single liquidity pools, where each smart contract is tied to a small group of validators. These can get rugpulled or hacked.
Peer-to-peer technology-based bridges provide a higher level of security for cross-chain transactions. They use atomic swaps and order books, and are completely decentralised without the middlemen, as users never lose custody of their funds. It’s essential to reshape the narrative of why crypto matters for the average consumer.
DeFi 2023: Brian Fu, zkLend
Brian Fu is the Co-Founder and Co-Project Lead of zkLend.
The sequential bankruptcies of Three Arrows Capital, FTX, Genesis and BlockFi sent a clear signal to the industry of the risks of centralised exchanges and lending platforms, where the flow of funds and financial health are not transparent and hard for users to assess/monitor.
Truly decentralised exchanges, market makers (i.e. dYdX, Uniswap), and lending protocols (i.e. AAVE and Compound) have been working as intended throughout both market shocks in May and September. This strengthens the case for DeFi and its advantages over CeFi, especially at times of highly volatile markets.
ZK-rollup Layer 2s are expected to take on a more prominent role in the crypto space as zkSync and StarkNet are rolling out their production versions in the later part of 2023. Further to the gradual upgrade in speed and decrease in transaction costs, ZK-rollups will continue to deliver enhanced UX, enabled by applications account abstraction and recursive proofs.
Protocols building on ZK-rollups will become more sophisticated and continue to develop more intuitive features and interfaces for DeFi, GameFi, NFTs and applications. 2023 will be an introspective year for Ethereum. With the Merge now behind us, much of Ethereum’s roadmap defined (the Surge, Verge, Purge, etc), and L2 solutions implemented, questions around scalability will take a back seat.
Rather, issues around centralisation and censorship resistance will become more prevalent as regulatory authorities look to impose economic and trade sanctions on the blockchain. The way participants decide to engage with demands from governments will set the tone for other L1s and even L2s.
Danny Chong, Tranchess
Danny Chong is the co-founder of Tranchess, a decentralised finance app.
We will see greater implementation of zero-knowledge (ZK) technology in existing protocols and new players pushing the envelope with zk-SNARKs & STARKs. As ZK tech enables efficient and trustless data sharing, it will help address the lack of transparency and centralisation that has led to project collapses, hacks, and exploits.
It will also encourage greater collaboration across the multi-chain ecosystem. In the wake of unexpected occurrences of market failures in 2022, we can expect to see a reduction in native crypto players over the next few years. Instead, there will be a focus on a smaller number of more established projects and an increase in activity by traditional institution players. This will lead to greater integration of DeFi with TradFi, with the onboarding of more financial institutions into the space.
The crypto industry will be constrained by the macro conditions such as high-interest rates and sluggish global markets growth. Institutions and investors, including reputable players, many of whom have made losses this year, will be more calculative with their funding decisions. Investment activities will be much slower than in the past two years with investors taking a “wait and see” attitude.
Their decisions will also be affected by the wider market environment. Investors will be more stringent in their selection of projects with greater due diligence of operational and governance processes, the background of team members, and balance sheets. Having said that, among the sectors in crypto, DeFi is likely to be the first area to recover as new capital will make its way into other sectors through DeFi.
DeFi 2023: Ahmed Al-Balaghi, Biconomy
Ahmed Al-Balaghi is the CEO and Co-Founder of Biconomy, a toolkit to power the Web3 stack.
This year has been a rollercoaster of highs and lows, as the bull market came to a close and we started seeing some of the downturns and fallout that had been predicted at the beginning of 2022. As with all changes, there has been significant fallout and the closing of 2022 has been a time to reflect on what will move the crypto industry forward.
This year saw NFTs continuing to remain relevant despite dipping prices, The Merge dominated headlines and even gained mainstream attention and as a result bringing Ethereum further into the spotlight. These events show how the community is bigger than the negative events and there are those persevering despite the downturns.
With this attention comes more scrutiny and it is likely that governments will ramp up their focus on regulations for the industry. In addition, the fallout from the collapse of so many centralised entities also means that the trust built up until the beginning of 2022 will need to begin being regained in 2023 onwards.
The upcoming year is likely to be tough for many as the bear market will likely go on for quite a bit longer, if not into 2024. Much like all bear markets, the focus will be on building products with better utility, making improvements in onboarding and user retention, and ensuring a better understanding of the space ahead of the next bull cycle.
DeFi 2023: Isidoros Passadis, Lido Finance
Isidoros Passadis is the Master of Validators of Lido, a multi-chain liquid staking solution.
With crypto becoming increasingly interoperable, DeFi staking platforms saw major investment, with staking on Ethereum growing by 76% in 2022. Taking a look at the wider Ethereum community, the completion of the Merge marks a massive achievement for the network.
Major players played a key role in building up the economic security of the Beacon Chain by democratising access to staking. This has benefitted users across the ecosystem and showed decentralised staking’s resilience in the face of some of the worst events in crypto history.
Next year we’ll see history made yet again in the Ethereum ecosystem. The advent of the Shanghai Fork signifies the unlocking of the Beacon Chain, allowing users to withdraw their staked ETH alongside additional rewards.
In 2023, we anticipate that liquid staking will gain more inroads as the range of integrations increases. While 2022 has been a year to overcome challenges, 2023 will see a pick-up in staking as a standard.
Onwards and upwards
In conclusion, 2022 was a challenging year for the crypto, blockchain, and Web3 space, but it also presented many opportunities for growth and innovation. As we look ahead to 2023, these experts predict that we will see continued adoption of decentralised technologies. The future is still bright despite the crypto winter still snowing down. Here’s to DeFi 2023.