Predictions, Premonitions, & Protocols

For the first newsletter of the year, I like to kick it off with a few predictions for what the new year has in store for crypto...

If you want to see which of my 2022 predictions were spot on and which were wildly off, check it out here (January 2022 Newsletter)!

Overall I give it a: B+

I was dead on with the timeline of the ETH Merge, the rise of India, the return of China BTC mining, the first ever NFT bear market, and the emergence of Web3 dapps.

The biggest thing I got right was obviously calling the collapse of FTX a full year before it happened. 

But I also missed the single most important story of the year: Macro. Last year, I called BS on the Fed's ability to bring down inflation, but I underestimated how far they'd go to suicide-bomb the economy to try... and therefore was off on most price targets. 

C'est la vie.

On to 2023: 

"Unless predictions about the future are connected to an explanation that makes sense, they are little better than fortune cookies. False or true they leave you every bit as much in the dark about why things happen." 

- James Dale Davidson, THE GREAT RECKONING

Adoption: Crypto adoption in 2022 increased, even as prices slid, and will increase even more as prices rebound in 2023. Like 2014 & 2018, 2022 was a brief hiccup in an otherwise UpOnly adoption trend. Funding and talent will continue to pour in & innovation will accelerate. DeFi & Web3 use cases have broken out of the crypto bubble into the “real” world and new companies, countries, and individuals will be adopting BTC, Web3, & DeFi tech in various shapes & forms at an increasing rate.

Bitcoin: Considering how well BTC performed during the downturn, I’m incredibly bullish for this upcoming cycle. The only sellers this year were those who were force liquidated or held on CEXs. Virtually no one voluntarily sold BTC. Lightning Network will continue to go parabolic as (L)apps improve the consumer UX. In 2023, buying a cup of coffee with a few thousand Sats will be as idiot-proof as scanning a QR code menu. As far as price goes, Ryan Selkis put it best: “We’re in sell-a-kidney-to-buy-more territory”.

Crosschain: After the ungodly amount of bridge catastrophes this year, users may finally be getting the message that Wrapped assets are dead. Long live interoperable native assets. THORChain is the only protocol with a working solution to this and RUNE should benefit as the market moves away from CEXs, bridges, and wrapped assets all in one shot.

DAOs: It will not be the year for DAOs I’m sorry to say. I think we could definitely see some interesting one-offs coordinating capital for a very specific thing, but until the DAO sector solves the Tragedy of the Commons problem and better DAO tooling evolves (see last years note). A reconceptualization of DAOs is in the cards though as Web3 center stage. Helium, Uniswap, and even Bitcoin are all technically DAOs, and these types of DAOs will provide a template for asynchronous, globally distributed, resource coordination.

DeFi: 2022’s CeFi collapses will force a DeFi barbell. Many will finally see the light of self-custody & transparent, code-based financial protocols, while many others double down on even more highly regulated centralized players like Coinbase. Spot & derivatives DEXs with good UX will get a big boost post-FTX, and the sector’s focus on generating sustainable real yield & revenue will replace recursive ponzinomics.

DeSoc: Decentralized social media will permanently change how value flows between creators & consumers over the internet. But not this year. It’s too early. There are only a few thousand total users of DeSoc today and a long way to go before we’re ready for billions. However… the inevitably INSANE competition for the dominant “decentralized Facebook”, (experimentation on value distribution, take rates, tokenomic designs, dApp interfaces, creator/consumer dynamics, etc.) may catalyze a similar bull run as “DeFi Summer” back in 2020. Experiments combining onchain reputation, organization, and ownership (DIDs, DAOs, & NFTs, respectively) will be important to watch.

Ethereum: ETH remains the dominant smart contracting chain and outperforms BTC as activity picks up and its deflationary economics take effect. 2023 is not the Year of the Flippening, but this might be the cycle…

Exchanges: Last year I wrote “Only a massive exchange attack will get people to migrate to DEXs. Get your assets off exchanges ASAP”. Obviously and unfortunately, that came true and this year I’m betting DEXs shine as a result. DEX liquidity will improve as market makers migrate to DEXs post-FTX, onchain orderbooks like Sei Network and DeFi derivs protocols like GMX attempt to fill the FTX vacuum.

Geopolitics: I’m doubling down on India again this year (best devs in the world, positive demographics, smart & hardworking, internet-native & fluent in memes). The U.S. will establish itself as the land of regulated (e.g., equity financed) DeFi while innovation in the token economy continues in India and elsewhere. The deglobalization trend will continue in 2023, but the fear of geopolitical destabilization will cool, allowing price to be driven more by fundamentals than fear this year.

L1s: I think 2023 will be seen as the beginning of the end of the monolithic blockchain era, and the start of modular blockchains. This will fuel app development as it atomizes the workspace, making it easier for devs to build. Appchain L1s like Cosmos & Modular L0s like Celestia highlight this trend towards modularization.

NFTs: Art NFTs will continue, but “Access NFTs” will outline a new use case for one-of-a-kind tokens. Examples being token gated meetings, private Discord chats, Tesla door unlock, Google Doc permissions, ENS website domains, sign in with Ethereum (SIWE), ticketing & in-person events, content ownership, POAPs, attestations, decentralized social media. However, the term “NFT” has a connotation so far removed from its potential use cases, I wouldn’t be surprised to see a rebrand.

Privacy: This has historically been the Widowmaker trade. BUT… 2023 could be a big year for privacy tech. As regulation heats up in the DeFi space, permissionless DeFi will focus more on privacy solutions. Projects like Secret Network (SCRT) are already doing this. As zero-knowledge tech gets adopted for scaling, it’s easy to see how the focus could next become zk for privacy (its original intended use). Combining Ethereum’s programmability with Zcash’s privacy has long been a holy grail for the industry. Balaji and Vitalik have both recently been talking about this topic.

Regulation: In 2022, regulators actively hindered the growth of transparent DeFi protocols while supporting toxic products like GBTC & FTX. In 2023, we need to do a better job of self-regulating (making Proof-of-Reserves an industry standard) and promoting the consumer protection benefits of code-based finance. There will be more scrutiny of the crypto industry this year, specifically stablecoins & CeFi platforms, but no blanket ban. Web3 will be relatively untouched as it is less explicitly financial in nature, easier to tout innovation leadership, and provides competition to Big Tech oligopoly.

Web3: Web3 apps are ready to go mainstream. Already there’s no reason not to use Web3 apps like Huddle01 which offer better quality, better prices, better UX, more features, etc. DeSoc is obviously the big one here, but 2023 won’t be its year. Web3 infrastructure and a handful of consumer dapps will be the focus. De-Physical Infrastructure (“DePIN”), PoPW, Work-to-Earn, DeWi, and related concepts will thrive. They tie crypto to the real world, provide real value to the world, and enable individual users to participate for side income.

Zero-Knowledge Proofs: A handful of ZKP use cases will arrive (privacy, scaling, bridging, identity/reputation, credit scoring) but 2023 won’t be their breakout year. The lack of product readiness and lack of consumer understanding will inhibit adoption. 2023 will be more about acclimating users to the new tech. 
 

Conclusion

"All models are wrong, but some are useful". The predictions above are bound to be wrong to varying degrees, but the process of prediction (i.e. filtering new information through an open-minded, intellectually honest mental framework for understanding how the industry works in order to produce directionally correct forward-looking projections) is useful for painting a clear picture of where the crypto industry is heading.

The M31 Capital team is constantly absorbing new information and updating our mental models to better understand the mechanics of this industry. In doing so we gain an ever clearer picture of the decentralized future and we're extremely proud to be, with your help, on the side of history bringing this important technology into existence. 

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About M31 Capital

M31 Capital is a global investment firm dedicated to crypto assets and blockchain technologies that support individual sovereignty.

Website: https://www.m31.capital/

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