The Great Reset: Navigating Crypto in 2023 - Delphi Digital
2023-01-16 04:23:37 UTC
All authors of this report have fully disclosed their token holdings. Please click here for the disclosures.
Note: If you’re interested in reading individual sector reports, please follow the respective links below. If you’d prefer to listen to audio versions of the reports, you may use the Listen button just above the Table of Contents on the left. The sector Year Ahead reports were originally published between December 05 – 21, 2022.
This introduction was written by Co-Founder Kevin Kelly to share a few personal thoughts to prelude the full Year Ahead report. Navigate to any sector report using the Table of Contents above.
We titled this year’s report The Great Reset because we believe that’s what 2022 represented for crypto — a great reset in prices, expectations, and speculative interest all across the industry. Every major tailwind that propelled the crypto market higher from Q2 2020-Q4 2021 turned against it, resulting in one of the sharpest and quickest price drawdowns we’ve seen to date.
Bull markets are where most investors make their money, and bear markets are where you fight to preserve those gains. But long drawdowns have a silver lining in that they encourage deeper reflection, giving all of us a chance to re-evaluate what really matters and where we really want to spend our time.
‘Tis the season where everyone predicts what next year — and the years to come — will bring. For me, I spent the majority of my holiday brainpower thinking about the big picture: 1) because I’m a macro guy at heart, so I can’t help but think big picture, and 2) because I believe we could be on the cusp of a serious inflection point, one that could accelerate the trajectory of this industry and shorten the timeline for Web3 to really move the needle beyond today’s small (yet enthusiastic) user base.
Crypto has largely been a speculator’s market, and that’s still true today. But speculation isn’t inherently evil. The term “speculation” tends to carry a negative connotation. But, like most things, it sits on a spectrum. Hype and excitement drive interest, which attracts capital, which gives entrepreneurs the resources to build innovative products leveraging new technologies. Without speculation, capital wouldn’t flow to such risky ventures (and society would still be stuck in the Stone Age). In fact, I’d argue speculation is more than beneficial — it’s imperative at this stage.
The truth is there aren’t many people who are really driven to build boring products with boring use cases that offer boring returns. We need the visionaries, the hungry entrepreneurs who see the sky as their north star, not their limit. The ones who breathe life into those around them, creating waves of excitement with ripple effects that extend far beyond their own reach.
Now, not all entrepreneurs are created equal — this year we saw firsthand how an entire industry can fall victim to a select few who let ego or profits get in the way of progress and purpose. But history is littered with examples of hubris (and even outright fraud). Innovation attracts a wide array of actors — some good, some bad, some in between.
All innovation cycles start off being extremely speculative. The dotcom frenzy of the late 90s culminated in one of the most infamous market bubbles of the last century. Inflated expectations stoked higher valuations, and when market conditions turned, these 90s high-flyers were hit the hardest. Like all hype cycles, speculation got ahead of reality, and fundamentals needed time to catch up.
Fast forward twenty years and the tech sector is now home to many of the largest and most profitable companies in the world. But today’s corporate behemoths weren’t overnight successes. At the height of the dotcom era, Amazon’s market cap was north of $34B before it surpassed $1B in annual revenue. AMZN subsequently suffered a 94% drawdown in the depths of the dotcom crash, even as its revenue growth and market share expanded. Price multiple compression was the primary driver of the equity market’s initial decline in 2000, similar to what we just witnessed in 2022.
Crypto is facing a similar challenge, and it would be naïve to say the crypto market’s rapid valuation expansion over the last several years was driven by pure fundamentals over speculation. The question now is whether crypto is in an analogous period of dejection akin to the post-tech bubble, or if this is all just smoke and mirrors without any underlying substance.
Crypto Innovation Cycles
The crypto industry itself has gone through multiple hype cycles, each fueled by speculation on the back of new innovation triggers.
Bitcoin experienced a short-lived spike in 2013, but its true mainstream hype cycle happened in 2017. The “digital gold” narrative gained traction, as macro conditions were ripe for a new type of digitally-scarce speculative asset to thrive. Risk was in vogue, financial conditions were easing, the dollar dropped >10%, and equity volatility hit a multi-decade low as stocks kept marching higher.
The launch of the first smart contract protocol — Ethereum — drastically simplified the process for creating new crypto assets (via its standardized ERC-20 contract), laying the foundation for the ICO craze of 2017 (which also benefited from the same favorable macro backdrop).
The launch of more sophisticated DeFi protocols like Uniswap, Aave, Compound, and Synthetix made trading, lending, and borrowing crypto assets much easier than archaic alternatives, and the advent of liquidity mining (and the copycat projects that spawned from its early success) paved the way for “DeFi Summer” in 2020.
Gaming and NFTs caught fire in 2021 as attention shifted to more mainstream and consumer-friendly use cases beyond DeFi speculation. Game developers and creators alike leveraged fungible and non-fungible tokens to build new ecosystems and engagement models (some even used a combination of both). The hype behind this new wave of assets and use cases — again coupled with extremely favorable macro tailwinds — pushed crypto markets to new heights once again.
Additionally, this surge in transaction activity led to spikes in transaction costs, which accelerated the “L1 wars” narrative and sparked critical debates around the optimal blockchain architectures for different application types (you’ll find plenty of in-depth commentary on the tradeoffs between modular vs. monolithic chains in this report too, don’t worry).
The point is, each of these hype cycles brought more attention, users, and capital to the crypto ecosystem and built upon the advances made by those prior, expanding the capabilities of what’s possible with crypto/Web3 technologies.
We needed all of these innovations for different reasons. We needed highly secure protocols to facilitate open, permissionless transactions on a global scale. We needed standardization to optimize the creation of — and interaction between — digital assets that operate on top of these protocols. We needed decentralized financial applications to create more efficient, liquid markets for acquiring, selling, lending, and borrowing these new asset types. We needed non-fungible token standards to introduce more uniqueness, specificity, and customization to digital assets. And we needed to show that the design space of applicable use cases goes way beyond just trading DeFi tokens on DeFi rails with other DeFi traders.
There’s a lot we still need, too. We need more mature derivatives markets for hedging and risk management. We need standards around decentralized identity to unlock new primitives like unsecured lending and credible reputation systems. We need more UX improvements and abstraction (where appropriate). We need more regulatory clarity. We need…a lot of things.
But I believe we’re finally at a point where there are enough puzzle pieces — that can be reconfigured in enough ways to meet a wider spectrum of needs and use cases — to put us on the cusp of another, even bigger, creative explosion. One that will once again redefine what’s possible (and bring back some speculation to a market that, frankly, could use it).
We’ve all heard the rallying cry of the crypto faithful that “bear markets are where you build.” This mantra has a lot of merit — many of today’s prominent protocols and applications were built in the depths of prior downturns. In the early stages of any emergent technology, a lot of attention has to be focused on the technical aspects of what’s being built. Without that upfront investment, nothing else that could come after matters.
But building is only one side of the equation. Demand is what’s needed to maximize the value of all the sweat equity that goes into bear market building. Demand leads to more usage, which leads to faster feedback cycles, which leads to better products, which leads to more demand and more usage. And the reality is, we’re facing a demand shortage right now.
If we really want to shift the Web3 demand curve, we need to think about ways to meet the world where it is today and bring it along this journey with us. In order for us to get to this phase, we need more examples of how this technology can benefit more people beyond just leveraged speculation. Web3 products need to provide valuable utility in order for people to understand the potential applications that are possible in this new world.
That’s one reason why I’m so bullish on the long-term prospect of NFTs. Their relatability makes them uniquely positioned to attract a broader audience, which will bring in new sources of demand and buying power. The creation of new asset types will also benefit the entire crypto economy by increasing the total surface area for new participants to interact with digital assets (which I believe will be the gateway for the next wave of Web3 enthusiasts).
If we want to show the world the power of what’s being built here, we need to give the world more reasons to care. That means creating more products that more people want to engage with and getting those products in front of the very people who are most likely to find value in using them. That’s how we move the needle, at least in my view, because changing consumer behavior is a tall task without relevant and rewarding experiences to catalyze it.
That’s enough from me, now onto the good stuff. This Year Ahead report is broken down by sector and focuses on the major trends and themes our team is tracking heading into 2023.