2022 was not a good year both for crypto and for impact, my two biggest passions. The Ukraine war created huge inflationary pressures that forced the FED to pivot its monetary policy, raising interest rates and draining liquidity from the market. This created a bear market for all risk-on assets, which added to the resulting energy crisis, caused governments all over the world to reduce their spending for addressing the Sustainable Development Goals.
Energy and Foodtech are seeing exponential growth within the impact space and I bet we are close to reaching an inflection point where they will have a profound impact on the global economy. In the medium term cattle sector will be almost extinct because of alternative proteins improvement (liberating lots of productive land to be regenerated) while clean energy will be abundant thanks to improvements in renewables, nuclear fission (future reactors will be modular, small, manufactured in factories, self contained and highly secure), and fission energy is around the corner. An energy-abundant future where burning oil is economically unfeasible is very close.
Alternative materials, 3D printing and robotics will disrupt most manufacturing industries, and aIl together with robotics will just reshape the labor market and world economy dynamics. I will try to write in depth about this topic later this year. The urgent point here is to understand the inflexión point that GPT3 is setting right now. This will be really transformative and will become a key frontier between the companies that understand how to leverage these technologies and the ones that are against or just don´t understand how to use them. Your marketing team can be 10x more efficient right now if leveraging on chat GPT. The problem is that there are not any experts…yet (I bet this will be a massive new job opportunity for 2023 and beyond).
Most important is the switch from sustainable to regenerative that is starting to happen within impact space. I found this table to explain the differences between sustainability and regeneration very inspiring and I did some changes myself:
Finally and connecting to my other favorite topic, 2022 was the year of ReFi (Regenerative Finance) which is basically the intersection of Crypto and Impact. I am very happy that we are not the ugly duck of crypto anymore. During the first years of EthicHub we felt in the wrong place both in crypto space where only super speculative projects were interesting and in impact space where crypto was seen as a very speculative value-less technology.
In the crypto market, the huge deleverage that took place killed many projects, starting with the 40Bn value algorithmic stablecoin Terra which initiated a chain effect that took down many of the biggest centralized entities in the space finally reaching FTX and Alameda Research, the duo that shorted Terra.
Besides the collapse of big centralized players, which has a very good positive side as it means an increase in self custody (always remember: “Not your keys, Not your crypto”), most relevant events were the Ethereum merge and Tornado Cash ban IMO.
Ethereum merge introduced POS (Proof Of Stake) consensus to the biggest smart contract L1 (Layer 1). After years of uncertainty POS was introduced smoothly without any significant incident driving Ethereum in a new era where it could become the first deflationary asset in the world. If transaction demand keeps scaling, the fees used to burn Ether will be more than the Ether minted to secure the network. On the negative side, Ethereum became less Censorship resistant since most POS is in the hands of centralized exchanges based on EEUU so any regulator in the United States could enforce new regulation through these entities.
Tornado Cash ban is a good example of the censorship that could be implemented within the Ethereum ecosystem (all POS blockchains could suffer the same problem). US attack on Tornado cash, a money mixer that helps preserve privacy should be the spark for awakening. It is just wrong that we cannot preserve the privacy of our money and it is absolutely contrary to freedom of speech that a developer has gone to jail for writing open source code that can be used for the good or for the bad. It is like taking Bill Gates to jail because computers helped drug dealers improve their operations. Here is a great twitter thread about the Tornado case.
I wouldn't go that far as to call governments terrorist cartels as Luis Cuende does in this article, but the point is that we have to awaken and commit ourselves to change the direction where governments are automatically going while not understanding the potential of this new paradigm for human coordination. We could end in a dystopian orwellian like future.
Now let's talk about 2023; this article is mostly about my vision on the trends for the cryptomarket in 2023 and beyond.
As it becomes mainstream, investing in crypto is no longer so easy as it was until now. You just had to take the risk and invest in whatever minimally good crypto asset and it went up together with all the market. Now we are entering a much more complex era.
We are living in a very early stage of this technology that is here to stay and to capture immense value. In the first cryptowinter very few people remained really bullish on the value of crypto while in the current one, very few people lost faith in its long term potential. I always like sharing this graph which is the most relevant about long term potential. Crypto is growing faster than the Internet and we are still in the late 90´s in the adoption stage. This means we are still super early!
For the non-believers, I think this article explains very well most of the reasons why crypto will prevail.
The market cap of the crypto market is going to be tens and even hundreds of trillions of Dollars, but we are entering a stage similar to that after the dotcom bubble where it became difficult to invest in the Internet as a whole. It was no longer enough to put the Internet in the slogan to get new investors to pump the value of startup shares. To have good returns investors had to take the complicated decision to choose which was going to be the next great category and even more complicated, choose which will be the champion within that category. Who invested too late in alternative search engines suffered Google first mover advantage, who invested too early in social media suffered Facebook eating all the cake, and who thought FB was going to keep the monopoly of the Social Media didn´t see Instagram or Tiktok coming, just to put a couple of examples.**
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The Appchain Thesis
Back in 2018 I defended that the obsession with the blockchain protocol layer leaving aside the application layer was a bad deal. I was wrong at least temporarily since the big gains in recent years have come from Ethereum and other L1 and not so much from the application layer where only DeFi has gained real traction.
The explanation I find is that we are still in early stages and have very little experience with valuations of crypto assets, so narratives have dominated the space until now and fundamentals are still far from leading the market.
My arguments in 2018 to defend the value of apps vs. L1 were:
-The key to the value of a token is the community around it.
-To generate a community (long term, not speculative one), apart from the alignment of values and positive impact layer, the key is to offer a useful service that people find an interesting cost/value ratio for the service.
-Users do not care about the technology that is under the service.
-When a project is successful and has tens, hundreds or even billions of users, the project has the ability to launch a blockchain with nodes based on its community, which will be grateful and more attached to the opportunity offered to them.
-The competitive advantage offered by a specific blockchain design can be easily copied and merged with the best features of various blockchains to create an ideal blockchain for each project, especially if we are talking about successful projects with enormous financial and therefore technical capacity.
- As a logical result, any successful project will tend to set up its own blockchain and eliminate the "commission" involved in operating on another blockchain.
This has become the Appchain thesis which has been pioneered by Cosmos and is gaining more and more strength with resounding successes such as Osmosis, a DEX built on its own blockchain (a Cosmos SDK) instead of being built on another blockchain.
Avalanche with it´s Subnets, Polkadot and Kusama with their parachains are somehow aligned with this Thesis, but the real contender for Cosmos is Ethereum with easy to launch SDK L2 that will capitalize on the security of Ethereum but allow for total customization and self sovereignty.
Celestia and Fuel Blockchains alone or in combination with Cosmos SDKs and Ethereum L2 SDKs, allow for modular designs with huge adaptability and easy deployment. The concept of Modular Blockchains that leverage on different Blockchains using what fit best for each use case is mindblowing and something very important to keep track of.
The Appchain Thesis in combination with the Modular Blockchains is increasingly calling into question the L1 Thesis which also suffer from very bad practices very well explained in this tweet.
In some way Bitcoin maximalists also criticises the L1 Thesis because they consider that only Bitcoin is decentralized and censorship resistant and with second and third layers to make it more useful and scalable it could eat all the market.
It's important to point out the efforts in this regard: Lighting Network is a L2 payment layer for Bitcoin already operational and quite widespread around the world (specially in El Salvador where bitcoin is Legal Tender) where you can make small instant and privacy preserving payments almost for free and in a scalable way; RSK and some other L2 offer already operational smart contract blockchains secured by Bitcoin instead of their own set of validators; Taro and RGB are about to launch solutions that allow for smartcontracts within Lighting; and Fedimint is building a very interesting custody solution for Lighting.
It cannot be ruled out that the dream of the Bitcoiners comes true and Bitcoin becomes not only a store of value but the universal payment method and the preferred layer to secure smart contracts. Apart from achieving such ambitious goals, at least I bet it will consolidate its position as Gold 2.0 and therefore has a long way to go until it becomes at least a consolidated and reliable store of value.
Ethereum I think will be the Manhattan of the financial system of the future. The place where the big investment funds are created, smart contracts that control hundreds of Billions of Dollars will be launched there, but the big decentralized applications that will take the place of facebook, uber, airbnb, etc., will be built on their own blockchains (that will be interoperable with Ethereum and Bitcoin).
In any case, I see it very difficult for Ethereum to become the internet computer with a quasi-monopoly in the digital asset world that has been defended by Ether-maxis although I personally believe that Ether still has a way to go beyond 2021 ATH.
The rest of L1 have it more complicated, especially those that focus on competing directly with Ethereum for part of the DeFi and NFT cake.
Harmony and Defikingdoms are an example of how once the killer app that fuelled the L1 growth reached a critical mass, they saw the opportunity to set up its own appchain (in this case an Avalanche subnet) taking the bulk of its volume away from the original L1 and together with the bridge hack that Harmony suffered, left the ecosystem in a deep depression.
The same happens in Ethereum with its super successful derivatives DEX DYDX launching its own Cosmos SDK L1, Centrifuge which launched a parachain in Polkadot or even Compound which will launch its own blockchain.
The exception here can be the L1´s with focus on solutions that do not compete directly with Ethereum like Filecoin and Arweave (decentralized storage), Golem and Render (decentralized computer resources), Celo because of its focus on UX and on building stablecoins to all FIAT currencies and cash on/off ramps to all countries and many other with specific focus not attended by Ethereum.
I believe in a multichain future and I think many L1 will survive and get more community, but even if they do, many will have a hard way to overcome previous ATH except for some very speculative moments.
Application layer categories to follow
I personally believe it is still early days for social networks and decentralized sharing economy platforms. The user experience (UX) is still complex and there is no critical mass on which to build a network effect that rivals already established platforms.
I also think it is early days for the metaverses. Once again the UX is not ready and the bulk of the economy is still in the real world.
In the next few years I think we will continue to land the current use cases; decentralized shared digital resources (Filecoin, Golem, Render, Arweave, etc), DeFi, GameFi and in general things around NFT´s but making them grow towards the real world. For now all these use cases have only been niches for crypto geeks, but IMO, replacing AWS, the gaming industry and the traditional financial system with ones built on Blockchain is closer than the metaverse or the FB disruptor.
DEFI 2.0 connecting to real world economy
The clearest category for me is what Tomer Bariach (cofounder of Flori Ventures) named DeFi 2.0: connecting DeFi to the real world economy and as he explains in this amazing article this is the biggest opportunity of all for Crypto if it solves the problems of traditional financial systems. For me the most clear bet for the next following years is DeFi becoming mainstream by leveraging on the technology to solve real world problems that TradFi was not able to solve.
I think it is important to envision a taxonomy of this category. As in the traditional financial system, we are going to have at least 3 banking system layers plus a lot of service providers:
-Layer 3 are the projects lending to companies and individuals. Here the big opportunity is to work with users who have no access or limited access to traditional financial services, instead of competing with the traditional financial system for their users and quite small margins, when working with the underserved provides huge margins. These users are the real hope to catalyze the growth of the ecosystem. Here is where EthicHub has its focus. Since 2017 we have the thesis that the real holy grail is in the intersection of crypto and real world impact with focus on the unbanked.
-Layer 2 are Goldfinch, Mapple, Truefi, Centrifuge and other protocols lending to the real world but competing directly with traditional financial institutions since their borrowers are entities already banked, mainly fintech and new layer 3 DEFI 2.0 protocols. These entities basically arbitrage the difference of interest between countries and distribute money across the ecosystem but do not promote a wider crypto users base, nor have specially attractive margins.
-Layer 1 are MakerDAO and other stablecoins issuers. They are the Central Banks of the crypto space and provide the commodity the DeFi ecosystem needs to work. Until we got stablecoins the DeFi ecosystem was almost unable to find a market. These entities set the foundation for this new financial system to arise. There is a lot happening in the stablecoin space and I think in 2023 we could see a new stablecoin emerge to become the leading one. A truly decentralized stablecoin backed by real world assets, with focus on positive impact, built in its own Blockchain in order to be able to claim its neutrality and self security (more about that in a following post).
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Impact Investing and crypto: ReFi
As the Chinese say, crisis equals opportunity, so one way to identify the great opportunities for the crypto world is to analyze where it can contribute to solve the world's great problems, which are generally agreed to be the Sustainable Development Goals (SDGs). This is why ReFi (Regenerative Finance) is such a hot trend.
In traditional finance, contributing to SDGs is called Impact Investing which is becoming a huge thing. Assets under management on impact investing are over 1T thanks to blended finance, a way to align incentives so investors can get attractive returns thanks to concessional entities taking higher risks, less yield, longer terms, or even donating some money for technical assistance.
Can you imagine blended finance empowered by the transparency, efficiency and immutability of smart contracts and leveraging on crypto economics and DAO governance?. This is the catalyst for a huge change that can redirect massive money to change the world for the better IMO.
The rise in consciousness of investors and consumers that demand more impactful products and services blended with the potential of this technology allow us to believe in a regenerative world where we can stop climate change, biodiversity degradation and wealth inequality growth. This is why many people are starting to see sustainability as the next wave for the economy.
ReFi (Regenerative Finance), is about leveraging on crypto to solve real world problems (that I resume as SDGs so we can have common goals with Tradfi Impact Investors). For now has a strong focus on carbon credits which is the easiest way to leverage on this technology for an already operational market, but the problems we are facing in the world are many and ReFi can contribute to solve all of them one way or another.
In 2017 when in EthicHub we started working on the intersection of crypto and impact they were oxymorons. We are very happy that ReFi is becoming one of the biggest and coolest trends and I feel fortunate to be part of this movement. Together we can change the world for the better, Join Us!
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