2023 – the Year Ahead
2022 has been a rough ride for the blockchain space. The collapse of Three Arrows, revolving shutdowns of Solana, the failure-to-launch of Cardano’s stablecoin, two billion in bridge hacks, the Terra-Luna implosion, the FTX – Blockfi – Genesis domino chain, which is still bringing down smaller exchanges as I write this. It would take a book to properly document the ignorance, arrogance, negligence and outright malfeasance. That book will be a horror story, and somebody’s probably writing it right now. Like all horror stories, it begins with an original sin- in this case people buying into hype in the irrational belief that it is possible to become wealthy with little thought and no effort. Like all horror stories, it ends with a morality statement. For the blockchain industry it’s simple. Don’t invest in something you don’t understand. That said, this correction was both inevitable and necessary, and Bankman-Fried’s arrest marks a turning point will squeeze the hype and outright fraud from the space, leaving sunlight for companies with less sizzle and more steak. With this as backdrop and the usual caveats on forward-looking statements, here’s what we’ll see in 2023.
1. We will see more enforcement. FTX presented more red flags than a North Korean victory parade, but regulators didn’t recognize them, or didn’t understand the need for action if they did. In this it was just the largest domino of a whole chain of enterprises with business practices ranging from sketchy through outright fraudulent. This was an embarrassing failure, and they will be much more vigilant next time around. This does not mean they will catch everything, but we should not again see something as large and fraudulent as FTX escape enforcement radar.
2. We will see serious due diligence. If there’s any comfort for the regulators who missed FTX’s red flags, it’s that Sequoia Capital missed them first. Among many others, there was the fact Bankman-Fried was playing League of Legends on a pitch call with them, a fact Sequoia later touted in a 14,000 word profile piece posted on their home page. This is a scene straight out of the series Silicon Valley, and it cost them a hundred and fifty million dollars. They were hardly alone in getting FOMOed out of their cash, investors large and small have been hammered this year, but once bitten, twice shy. There will be less capital overall in the space in 2023, but it will be directed to companies with strong fundamentals to back up their vision.
3. We will see more, and smarter regulation. Blockchain is a new technology and it always takes awhile for regulation to catch up. The SEC’s belated action on Ripple, just for example, shows both that they didn’t understand what it was when it came out, and still don’t understand how to deal with it now. However the situation is improving. Here in Canada Bill C-249, designed to develop a crypto regulatory framework, was defeated in the wake of FTX, but in Europe the Financial Stability Board has laid out a plan to establish a globally coherent set of rules to govern the space. As in Internet Privacy and ESG, Europe’s initiative will wind up dragging the rest of the world along with it, even those parts that would rather not come. Regulation, despite the preferences of the cryptoanarchists, is a good thing, and will give confidence to both investors and users, necessary for the space to reach its potential.
4. We will not see 10x increases for Bitcoin. Bitcoin remains the original and by far the largest blockchain platform. This is both its strength and its weakness. The astronomic investment of computational energy in the network has made it inviolably secure, but this gives it tremendously high real transaction costs. These are currently subsidized by new minting, but as block rewards continue to halve, these subsidies will end, meaning the full cost will have to be born by transactors, which will strictly limit its utility. This math is inextricably tied to Bitcoin’s glacial transaction speed. Bitcoin’s price will certainly increase from its current low, but as newer, better technologies come online they will steal its context, and so its valuation.
5. Proof of Stake will prove to be a mistake. The motivation to move beyond Proof of Work is strong, its ruinous power demand speaks for itself, and I just put myself on record forecasting Bitcoin’s decline for just this reason. However Proof of Stake is not the answer. Where PoW works like precious metal, efficiently encapsulating energy in a verifiable token, Proof of Stake works like fiat currency, efficiently motivating stakeholders to enrich themselves through inflation and the Cantillon Effect. This is not good news for Ethereum, which just Merged thousands of independent mining nodes into six major stakeholders – who just happen to be the major blockchain exchanges. Vitalik is brilliant and the Ethereum community has pioneered the vast majority of blockchain innovation since Satoshi launched Bitcoin itself, but this will not end well. The situation is even worse for the many L1 systems which were PoS from the beginning, or some thinly veiled variant of it. Fortunately better technologies are in the pipeline. As with the FTX collapse, this situation will offer opportunity to those paying attention to the fundamentals, but pitfalls for the naive. Watch this space.
6. The future is accessibility. Every single one of us in the blockchain space is, by definition, a tech-forward early adopter. However, the average user will never be comfortable working with complex wallets sending funds to addresses defined by long strings of random characters. Most of the transaction market, over two trillion dollars, will remain out of reach until we produce a system that the average user can use easily, and with complete confidence. This is a tremendous opportunity for banks, who already have a business model that consists of making transactions easier. Here again, innovations now in the pipeline will produce quantum leaps in this area, making blockchain systems available to a much wider audience.
It’s always risky to make predictions, and I’m ready to be proven wrong as the year unfolds.. However there’s one prediction I can make with absolute certainty. The blockchain space will continue to be a major driver of financial, and computational, innovation on a global scale. To quote John Paul Jones, those who will not risk, cannot win. There is opportunity aplenty for those with the vision and drive to seize it. We are just about to enter the stage these technologies gain global traction, because next-generation systems that address the problems above are poised to come online. Crypto-winter is hard, but it sets the seed for spring. Growth will happen for those with the vision and agility to take advantage of adversity.