(The article is written by Adrian Lai, the Founder & Managing Partner of Newman Capital. No content in this article constitutes any financial advice and is the author’s personal opinion.)
2022 was an overwhelming year for crypto. From the collapse of Luna, Three Arrows, BlockFi, Celsius to the disastrous FTX meltdown, we have seen countless unfulfilled promises which shatter the confidence of any crypto believer. During this holiday season, I have started to digest what happened, connected dots, consolidated thoughts and come up with my predictions for the year 2023. I am not going to talk about things like Digital Currency Group’s survival. Instead, I will revisit fundamentals, some of my predictions are derived from my experiences and macro. As Leonardo Da Vinci would say “Learn how to see. Realize that everything connects to everything else”.
1. The retreat of institutions, family offices are marching in
The FTX contagion has marked the beginning of a liquidity withdrawal from institutions and traditional VCs. Even though firms like Temasek and BlackRock had spoken about their relatively low exposure in FTX, they have probably been scared off by this corporate-governance-non-existent industry. BlackRock’s Chief Larry Fink said following the implosion of FTX, the crypto industry will likely collapse as well. We should expect another J.P. Morgan-like inner conflict of Jamie Dimon calling crypto tokens “pet rocks” while the company is registering their crypto wallet trademark. The 2018-like narrative would come up again, “blockchain technology is what we invest in, not crypto”. Well, if you are already hearing things like that, the market is probably close to bottom (NFA). Even so, according to a study by Longitude Research and Matrixport, 50% of mass affluent individuals are interested in crypto after May 2022 (v.s. 25% pre Luna crash).
There’s an influx of family offices at the current prices, particularly in Hong Kong and Singapore. For any entrepreneur who raised $ from an institution v.s. a family office you would probably know there are clear distinctions on their value-adds, and I think these differences are particularly amplified in this industry and will gear it towards a different direction from what we have seen. Families invest in more flexible terms, and with several phone calls they can mobilize companies they control to provide support for portfolios. Meanwhile, arguably lots of investments made by institutional investors in crypto companies are hedges against the fact that crypto is naturally challenging the incumbents. If you are running a crypto exchange, will you wonder what’s the true intention when the national stock exchange proposes an investment? The crypto space is still nascent, and it needs investors which are synergistic, reactive and non-conflicting.
2. A web2-friendly peripheral architecture for mass adoption
2017-2018 had the world witnessing the no-cap fundraising upside for ICOs (and also the downside) - crowdfunding was the first use case for crypto to reach the masses. 2019-2020 we had DeFis taking over the industry with Uniswap surpassing Coinbase in trading volume in Oct 2020. From 2020 onwards we had web3 gaming, Metaverse and NFTs (BAYC, Azuki, etc.) taking the seat. The proliferation of DeFi did bring lots of users into crypto. Yet, most came for unsustainable yield based on ponzinomics and even worse, cross-protocol leveraged ponzinomics. DeFi brings tons of innovations but not mass adoptions until true yield can be found. Metaverse had a fancy beginning until we knew Decentraland and The Sandbox have less than 1000 DAUs but are valued at 1b+ dollars, according to data from DappRadar.
In a decentralized world, as we play a game, scroll a social page or shop at an e-commerce store, on-boarding with ease and user journey should never be a compromise. My view is - not until a web2-friendly peripheral architecture has been built crypto can be massly adopted for usage (not trading), which should be the only and ultimate factor for crypto to be a quadrillion industry. What is part of the peripheral architecture? Anything that DOESN’T add an extra layer of burden to users as gamers/ creators/ shoppers. Just recently, we invested in an account abstraction infrastructure SDK (using ERC-4337) that helps developers (starting with gaming studios) create web2-like onboarding experiences. Not to drill into the technical details, but account abstraction is a mechanism that turns your usual crypto wallets into customizable smart contracts, so to help you access self-custodial wallets safer mainly because it’s much easier to use than before.
Now we are on wallets, have you ever convinced your parents to set-up a Matemask wallet? I bet 9/10 of them failed to do so as they went through the 24 letters. Human behavior is to stick to what we are used to, social-login is proven to be an effective way to onboard users. Companies like Web3auth are doing amazing things to allow passwordless login onto web3 applications. According to the company, conversion rate can be increased by 74% through one-click logins. Now that you can be on-boarded easier than your Metamask days, you are interested in using a decentralized Spotify service, but you want to subscribe to the service with your bitcoin. We invested in a project that makes automated recurring payments seamless and gasless, 1-click check out and boom! - you can now make one-time / recurring payments as easy as using your web2 services.
Many asked me at which stage is crypto at - Very early. We are still pre the Facebook-equivalent explosive growth in 2012 - the year that they reached 1 billion users. One step at a time, let’s first figure out the architecture that enables mass adoptions in future.
3. Diminishing idolization leads to DAO evolvement
Every crypto cycle made heroes. The explosive growth of DeFi brought several prominent figures to fame. The fall off of these figures in such a short time frame was unseen. I am a fan of admiration but not too much of idolization. The cult around idolization in crypto was poisonous and had blinded many’s eyes, including investors and communities. Mass media was the culprit. As I always ask myself, “Would I really conduct due diligence when SBF was supposed to be the next Warren Buffet on Fortune Magazine’s cover?”.
Why is 2023 the year that DAOs will truly evolve? What happened has triggered community demand for truthful decentralization in 1) crypto projects’ operations 2) investors’ decision-making power and what I think would be ground-breaking 3) business models of traditional industries (e.g. media). One would recall reverse ICOs in 2017-2018 (an established business to go crypto and conduct fundraising through ICO). We might foresee more of that to happen and this time at the right market timing. Not to mention regulators are looking actively into the industry, we probably can’t find better timing for decision-making to go decentralized.
Those who have read my previous posts know I am an advocate of establishing a DAO infrastructure referencing how proxy voting is being done in traditional finance. Voting delegations, recommendations & analysis are elements that the crypto industry has a unique head start to finally democratize. Check out ISS’s services (https://bit.ly/3Ihnk97) if you are interested in proxy voting. 2023 could be a year for DAO or any equivalent mechanism - simply because people demand transparency finally.
4. China unveils its ambitious national digital asset plan
It’s not a secret that China banned cryptos multiple times with different intensity over the past years. Be it bitcoin mining or crypto trading, the outright bans were disastrous to the industry. I have always had a strong conviction that China has its grand plan on leveraging digital assets (not bitcoin or altcoins in this case) on its national agenda. When we look back in future, the launch of China’s CBDC will be a key determinant to help the country achieve internationalization and re-define the global currency competition landscape. While the US is struggling with voices everywhere on launching its digital currency (which they might mind as well regulate USDC instead), China is years ahead.
I am not a political expert but it would be obvious to know that political race is now heavily digital. The strategic competitions in South East Asia and the Middle East between China and the US might be really interesting with China CBDC’s involvement. Imagine digital RMB/ HKD/ THB/ AED conversion with instant settlement - the main point is without facilitation by Swift. Before that happens, I am genuinely interested in moves in similar fashion but on a smaller scale. The Greater Bay area could definitely be interesting to have connectivity among cities like Hong Kong, Macau, Guangzhou, Shenzhou with a distributed ledger-based financial infrastructure. With one click you can buy a stock on Shenzhen Stock Exchange with HKD, vice versa.
Why 2023? We have already seen signs. China launched Blockchain-based Service Network (BSN) quietly for local enterprises. In June last year, the transaction volume on BSN in China surpassed that of Ethereum globally. While most think China banned NFTs, just right on the first day of 2023, China launched its first national digital asset trading platform “China Digital Asset Trading Platform” jointly built by state-owned companies and a private company. NFTs in China have to be referred to as digital collectibles and are protected by e-commerce laws. What more interesting is the international version of BSN, Spartan Network. Validator nodes include HSBC. We shall see the intertwinement of China’s CBDC and BSN and how these will be the biggest secret weapon of China on the international stage.
5. Re-defining currencies with tokenized assets
In May 2022, Russia’s central bank fixed the price of $5000 rubles to a gram of gold, in light of US and EU sanctions. It was a genius move that pushed the ruble from ~75 for a US dollar to 120. We are at the right time to re-imagine the definition of currency. CBDCs are, again, part of every country’s national agenda. However, to me the followings are even more interesting: 1) currencies backed by real assets, 2) their potential recognition as legal tenders and 3) the possibilities of them issued/minted by private enterprises instead of central banks.
Elaborating beyond my thought on China’s internationalization move with BSN and CBDC, de-dollarisation is amplified with Africa and Egypt stepping up with the New Development Bank of BRICS. De-dollarisation is basically substituting USD with the currency used to trade commodities (e.g. oil). Currencies other than USD which are liquid, gold or any meaningful liquid instruments are contenders. The question now is what kind of resources does the BRICS have? Are we going to see digital coal trading against CBDCs? Let’s not limit our imagination, what if a private company share has a liquid market? Can a currency be created with Sequoia’s portfolio shares as reserve? All of these might not be crazy thoughts and we could see something along the line kickstart in 2023.
It’s 3 in the morning and I can’t stop thinking about how mindblowing the industry is. All I have written are just tips of the iceberg. I still call myself an old-school thinker until I am able to achieve any of the above with GPT-3. It’s time for me to drink a glass of wine, scroll my Twitter feed, look at some memes, and feel blessed that I am a 2022 crypto survivor.