Cryptocurrencies made a huge leap in 2021, and this year, the collapse caused by the Terra incident continues to this day, and perhaps everyone is no stranger to the “summer to winter” that has been repeated in this field.
It is said that the best thing a bear market can do is to learn, but don’t forget to look ahead while you are on the road. For example, this year is coming to an end, what new changes may the crypto industry usher in in 2023? Today the vernacular blockchain brings you a compiled article dedicated to discussing the trends of 2023 and the future.
The following is the main text:
On October 3, 2016, Vitalik Buterin proposed the idea of “running on-chain DEX”, which gave birth to what we call decentralized finance, which is known as DeFi.
Uniswap, Maker Protocol and Compound were among the first few to experience the idea of DeFi. The idea of DeFi was born thanks to the first truly distributed financial system created by Satoshi Nakamoto after the 2008 financial crisis: the Bitcoin blockchain.
A decentralized financial system built on a distributed, open architecture that allows anyone from anywhere in the world to freely conduct peer-to-peer transactions without any centralized intermediaries. For the first time ever, this revolutionary technology has been created without any centralized institutions or corporate greed. The Bitcoin network was worth more than $1.3 trillion in November 2021, while Vitalik’s DeFi philosophy TVL has reached nearly $200 billion.
But today, amid global geopolitical conflicts, rising inflation, rising debt, and the world yet to recover from the COVID-19 pandemic, we are in chaos. As we looked for a better solution, Bitcoin’s market cap also dropped from an all-time high of $1.3 trillion to less than $400 billion, while DeFi’s TVL dropped to less than $60 billion.
Adding fuel to the fire, we saw that when the Terra UST stablecoin crashed, its value fell from $1 to $0, billions of dollars disappeared, and then leading player Three Arrows Capital filed for bankruptcy, CeFi lenders Celsius, BlockFi, Voyager, etc. also suffered significantly, and since then the “crypto winter” in 2022 has officially begun.
So how do we move forward from where we are now?
With less than 70 days to go until 2023, how can we build a better and safer financial system for 2023 and beyond?
The answer is not clear. However, we can learn from the past. Of course, there will be many great ideas to transform our market economy in the rush to a better future, among which, based on the immutable, transparent and open nature of blockchain technology, I am particularly optimistic about the financial system built on it.
So, what follows is my outlook for the development of various sectors of the crypto industry in the coming year.
Real-world assets will be transferred on-chain
While DeFi is still in its infancy, the IMF has found that it is cost-effective given labor and operating costs due to a declining global population. Because DeFi offers lower capital costs, barriers to entry and more accessibility, and an open source flow of information.
Today, we’ve seen some real-world assets (RWAs) move on-chain, and this trend will continue in the future. A recent report, “Introduction to Unreal on Real-World Assets,” suggests that DeFi will swallow up TradFi via RWA.
RWA is usually backed by legal contracts executed by courts and governments, so to contract it into a smart contract on the blockchain, it must first be confirmed by a competent enforcement agency to provide ownership and protection of the asset. Switzerland’s Distributed Ledger Technology Act already does just that: once RWA entries are identified for execution, developers embed them into smart contracts, providing greater security, immutability, and transparency.
RWA can be migrated on-chain in two ways:
- Create a new asset class (freshman) Create a new asset class that does not yet exist. These asset classes will be DeFi native. For example, hash-backed loans, DAO bonds, distributed parameter insurance. Parameter insurance, also known as index insurance, is a new type of insurance that has emerged in recent years. Using the language of blockchain, parties in a parametric insurance scheme can be considered to be participating in distributed ledgers and peer-to-peer networks.
- Reclassifying Existing Assets (Rebirth) Existing asset classes such as corporate loans, mortgages, and sovereign debt will become the ledger on-chain as DeFi can continue to offer cheaper capital costs, better accessibility, security, and low barriers to entry.
02 The god of
If Bitcoin is the king of crypto, in a way, we can call stablecoins the god of crypto. Without a doubt, stablecoins are DeFi’s best invention, keeping virtual assets pegged to real-world values and opening up many new uses and opportunities: collateral, yield rewards, value transfer, etc.
But like blockchain, stablecoins have their trilemma: stability, capital allocation efficiency, and decentralization. Fiat-backed stablecoins like USDT and BUSD have achieved a lot in terms of stability and capital allocation efficiency, but lack decentralization, while cryptographically backed stablecoins like DAI solve the problem of decentralization and stability well, but are affected by capital efficiency. Over the past few years, we’ve seen algorithmic stablecoins grow in popularity and have learned a great deal from the Terra/UST affair.
So what will the next generation of stablecoins look like?
No one has the right answer yet. However, it may be some combination of existing products. Like what:
- Iron Finance is a fractional algorithm stablecoin that is a combination of seigniorage and collateral models
- Frax Protocol is another stablecoin pegged to the Consumer Price Index (CPI).
- RAI is a debt- and algorithm-based stablecoin minted by utilizing Ethereum
- OHM DeFI’s decentralized reserve currency
In the DeFi ecosystem, many concepts will be tested and iterated on until the right one is found to fit best, and enabling the industry to reach mass adoption of stablecoins is key. The current volatility of cryptocurrencies is not yet suitable for everyday life, but stablecoins are, so their success is important for the industry.
03 The popularity of
blockchain technology and the rise of CeDeFi
Companies such as JPMorgan Chase, HSBC, Nasdaq, and Goldman Sachs have embraced open distributed ledger technology, and it is only a matter of time before blockchain technology is popularized.
In addition to Wall Street bankers’ adoption of blockchain and crypto assets, one interesting trend we will see in the coming years is the world of CeDeFi and DeFi. (CeDeFi is a consortium of CeFi and DeFi that combines the best features and attributes of both financial systems.) The DeFi phase, as Bankless calls it, is the concept of fintech in the table and
DeFi in it. Here are some of the trends in fintech becoming crypto’s biggest ally:
- Robinhood launched the DeFi wallet through Polygon
- There are a lot of DApps on Coinbase
- Stripe launched USDC payments on Twitter
As more institutions embrace blockchain crypto, fintech steps up to integrate decentralized finance into their platforms, and more retail users will adopt cryptocurrencies, which will be one of the biggest opportunities for the financial services industry in 2023 and beyond.
Start the infrastructure wallet competition
Wallets are the gateway to the DeFi world, and without them, non-technical users will find it difficult to interact with any blockchain application and protocol.
As more retail users enter the DeFi ecosystem, the demand for specific features in web3 wallets is also increasing. The first generation of web3 wallets was simple and only showed the transactions sent and received, but the next evolution of web3 wallets will need to address the specific needs of different verticals of the blockchain. Metamask currently leads with the most active users, but it’s hard to say if it can have the last laugh. The competition for digital web3 wallets is ongoing, and we may see multiple wallets that can meet the different needs of different users.
And Web3 gamers want to have a wallet that displays their in-game items (skins, weapons, characters) such as Fractal (a Solana-based NFT gaming marketplace). NFT creators and owners can choose wallets that display their NFT art collectibles categories, such as Phantom and Coinbase wallets, while DeFi traders, investors will choose wallets that provide clear statistics on their portfolios.
While custodial wallets provide users with faster accessibility and a better user experience, non-custodial wallets are likely to play a bigger role in Web3 adoption and other financial services because they provide full ownership of assets.
Crypto wallets can be used as a hint to crack and steal user assets and identify unknown addresses. We may see wallets implementing reversible transactions for stolen assets, and zkSNARKs (zero-knowledge proofs) can prove the origin of funds while still providing a greater degree of privacy. The key to winning this race is also the multi-chain wallet, how to better integrate with the market, real-time linking of on-chain data, and finally a simple and easy low-threshold entry process.
DeFi converges everything: NFTFi, GameFi, socialFi, Metaverse, etc
Over the past few years, the blockchain-based ecosystem of economic and financial models has developed into multiple verticals and sub-industries. But in the coming years, we may see them move horizontally rather than vertically. Whether it’s NFTFi, SocialFi, GameFi, or MetaFi, all of these need to work hand-in-hand with DeFi.
“Without the DeFi element, the Metaverse would lack commercial scalability. Without the GameFi element, the community would lack the motivation to keep coming back to the experience. Finally, without the perspective of SocialFi, the credibility of the ecosystem cannot be established. The SocialFi element ensures that users and creators receive value-added credentials. ”
By Arunkumar Krishnakumar。
More countries will promote the development of central bank digital currencies (CBDCs).
Thirteen years have passed since 2008, and Satoshi Nakamoto’s bitcoin has become legal tender in El Salvador and several developing countries. While some governments remain hostile to Bitcoin, blockchain technology is unstoppable. More and more countries are embracing open ledger technology, and some countries are experiencing it through their own economies.
Following China, economic powers such as Europe, the United Kingdom, India, Australia and now the United States are building their own central bank digital currencies (CBDCs). More than 600 million Chinese citizens are now setting up digital wallets for the digital yuan, China’s version of CBDC. Australia has launched a pilot project for CBDC. As larger economies continue to push for CBDCs, more and more will follow suit in 2023 and in the years to come.
While the countries pushing CBDCs are a sign of embracing blockchain technology, we’re not sure what central banks around the world will do. The RBI calls CBDC “the same as fiat currency, only its form is different, although it is uncertain whether CBDC is deployed in a public or private blockchain”. Federal Reserve Chairman Jerome Powell said that the US CBDC “will not be anonymous, and its four characteristics will be decentralization, privacy protection, identity verification and transferability.”
Developing countries are likely to design more open CBDCs in order to benefit from Bitcoin and other cryptocurrency networks, while larger economies will adopt CBDC designs that are in line with their banking policies, have less anonymity, and remain more differentiated from Bitcoin and other cryptocurrency networks.
for implementing a successful technology strategy
In the paradigm shift of the financial system, economic markets and technological development. For the first time in human civilization, the financial system has become so transparent, immutable, and open to anyone, anywhere, economic markets have become more volatile and accessible, and technology has become more powerful and involving more people. In this paradigm shift, building financial systems and services will be the most important part. So how do we build better, safer financial technology for all?
There are a few implementation tips, but they are limited to blockchain technology for financial services:
1) Implementation of zero-knowledge proofs (ZK-proofs) for under-collateralized LoansBy leveraging zk proof-of-technology and on-chain KYC using soul-bound tokens, decentralized identity can be realized to parallel IDs and undercollateralized loans.
Most of the DeFi protocols we have now are based on over-collateralization, as on-chain KYC has not yet been implemented. Future DeFi protocols could implement ZK proofs for on-chain KYC and even start issuing loans based on a user’s credit or spending history.
2) Loans using social-based NFTs as collateral As social and financial connections become more and more connected, next-generation finance can be built on top of social NFTs, gaming NFTs, and Metaverses. This will attract more users because these sub-segments allow for a larger audience.
Financial products can be structured to provide loans for social NFTs, gaming NFTs, and virtual land as collateral.
3) DAO-focused financial services are currently uncertain how to build financial services around DAOs, guilds, or even web3 communities. But we’ve become convinced that DAOs and guilds are basically the next generation of organizations or even companies.
DeFi protocols will play a huge role in innovation in lending to DAOs and guilds, and the market is expected to be promising.
4) Interoperability – The future of multi-chain financial services built on only one chain is so isolated that DeFi in the future will definitely be multi-chain. Since a chain’s assets can only exist natively on its native chain, packaged assets and bridges can be built to interact with other chains.
Source: Dmitriy Berenzon, 2021.9.8
For example, Polygon has more than seven chains:
- Polygon mainnet – a modified proof-of-stake blockchain,
- Polygon Supernet – an application dedicated to blockchain,
- Polygon Availability – a blockchain centered around data availability,
- Polygon Zero，
- Polygon Miden,
- Polygon zkEVM- zk-rollup blockchains.
- Polygon Nightfall
5) Easy-to-use DeFi onboarding process The current onboarding process for DeFi is too complicated. An ordinary person with practically no technical background will not be able to handle the first 5,6 steps. For the next generation of blockchain-based financial services, an easy-to-use onboarding process will be key. ENS domain names should be easily readable addresses. Most importantly, the simple user experience and easy onboarding process will be an important part of DeFi.
6) Marketplace Infrastructure, Tools, and Discovery Platforms For mass adoption, we need better marketplace infrastructure, tools, and discovery platforms for NFT, DApp, and DeFi protocols.
7) Community and Goal Manager Unlike web2 companies, web3 organizations are largely community-driven. To win the web3 competition, the community and DAO will play a central role.
8) In addition to being community-driven, next-generation protocols, projects, and services will be open source, regularly receiving community feedback, iterating on them, and building them in an open-source collaborative way with community support.
9) Technologies that are changing the competitive landscape Some technologies that are changing the competitive landscape:
Zero-knowledge proofs are one of the most innovative concepts in cryptography. The protocols and services associated with it will be a huge success in the coming years.
- L2 on-chain extensions
Since the Leyer1 blockchain suffers from scalability by taking a foothold in decentralization and security, L2 chains like Polygon are the solution for scalability. More and more DApps and services will be built on top of the L2 chain, rather than directly on the L1 chain.
- Soul binding token (SBT)
SBT is one of the latest developments in blockchain. Unlike NFTs, SBTs are non-transferable but represent a person’s identity. It will become one of the most interesting technologies in cryptography and will change the way we look at online identities, online social status, and even academic records, medical records, credit histories, and more.
- Cross-chain bridge protocol
As protocols become more and more chained, cross-chain bridges will play a major role in connecting and bridging the multi-chain gap. Cross-chain inter-bridge protocols will be the future of hosting most assets and a solution for cross-chain interoperability.
The market is going through a “crypto winter,” the ecosystem is clinging to the narrative, builders are building sleeplessly, and everything is steadily developing. Better agreements are being built, venture capital continues to pour cash in, and communities remain strong. From soulbound to zk-proof, from community to open source, from L2 to bridges, the next generation of financial systems will be fully owned by users and asset holders.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/2023-defi-including-bitcoin-will-break-the-window-paper-of-traditional-finance/
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