Top 5 Crypto Narratives to Watch in 2023

The year 2022 will certainly go down in history as one of the toughest years for the digital asset industry, from a hawkish Fed to idiosyncratic risks that saw crypto giants such as Three Arrows Capital and FTX bite the dust. But for those who have been around for some time, you probably understand that it is in times like these that you as an investor should regroup, digest, and position yourself for an eventual turn of the tides. 

Now, more than one month into the new year, the question investors should sit with is which trends will pick up in 2023? So far, the market has bounced back, with BTC gaining over 40% since the yearly open, while some other assets have recorded even more impressive gains. Most notably, Ethereum staking derivative tokens such as $RPL and $LDO have more than doubled in price.

Builders are back at work
It is easy to be swallowed up by the depths of the crypto bear markets, but worth noticing is how builders are withering the ‘cold winter’ as they develop the next game-changing innovations in the crypto ecosystem. However, finding the next big trends is difficult in the noise and figuring out what themes have a tangible value proposition from those that are more speculatively based is a hard task. 

For this reason, I have decided to outline a few sub-niches I think will thrive in 2023, and potentially be winning sectors of an emerging bull market. Let’s dive right in: 

As much as 2022 may have been a rollercoaster for the entire crypto market, it is hard to ignore the fundamental developments that took place in the DeFi market. For starters, the number of daily active users (DAUs) increased by 2% to hit 641,510, according to DApp Radar. While this growth is a drop in the ocean compared to 2020 and 2021, the growth we saw last year should be indicative of how well the sector is to thrive in improving market conditions. 

So, what’s exactly the play here? At the very least, more crypto natives will gravitate towards decentralized platforms given the events that unfolded last year; some of the most trusted custodial platforms went under, with billions of dollars worth of clients’ funds. Already, the shift is happening, with decentralized exchanges having recorded a 93% month-over-month increase in November 2022 following the collapse of FTX exchange.

Besides the growth in adoption, 2023 will likely be the year that we see the integration of DeFi protocols with traditional finance instruments. MakerDAO, one of the major players in the DeFi lending space, recently passed a proposal to invest in US treasuries and corporate bonds, as well as forming partnerships with traditional banks to provide loans backed by liquidity from real-world assets (RWAs). 

Lastly, several traditional financial institutions are going to make a debut into the DeFi space; JP Morgan already set the pace with its first DeFi transaction in 2022. This introduces a likelihood that permissioned DeFi protocols will pop up to serve the growing demand from tradfi companies looking to leverage decentralized markets while playing by the regulators’ book.

GameFi, an intersection between finance and gaming environments, is another niche that crypto stakeholders should be on the lookout for. Last year, blockchain-oriented games accounted for 49% of the active DApp usage. There was also a growing interest from VCs, with notable players such as Andreessen Horowitz (a16z) and Sequoia Capital expanding their footprint in the NFT and Metaverse ecosystems. 

As 2023 unfolds, signs on the wall show that GameFi is poised for more growth, both in terms of adoption and infrastructure advancement. Innovators in this space are already taking up the challenge to develop more engaging games as opposed to only focusing on ecosystem rewards. But more importantly, traditional game publishers are integrating their established infrastructures with the metaverse; Atari recently launched a suite of experiences in The Sandbox.

Well, that's only the tip of the iceberg. Gamification trends through NFT technology are being adopted by other industries as well. For example, we have emerging DApps such as Fashion League, which uses NFTs to allow players to design personalized 3D fashion NFTs and compete with other participants in the ecosystem. Although still a nascent space of innovation, the gamification of traditional industries is certainly one of the trends to watch this year. 

What's even more fascinating is that international companies such as Gucci, Nike, McDonald's, and Campbell's have already pioneered digital collectibles as a promotional strategy to increase interest in their offerings. Clearly, NFTs are changing the landscape of how businesses interact with consumers in the digital age and will continue to do so in the foreseeable future.

For Ethereum diehard fans, the much-anticipated Shanghai upgrade (EIP-4895) is the talk of the town. This improvement proposal will introduce a withdrawal feature, enabling ETH validators to remove their funds which are locked in the beacon chain. Notably, the event will affect the demand and supply of ETH, as stakers will be able to liquidate their locked ETH while at the same time it will be much easier for more crypto users to opt in and out of ETH staking.

According to the latest update from Ethereum’s developers, the Shanghai upgrade is scheduled for March 2023, and already the narrative seems to be fueling the price action of liquid staking derivative tokens such as $LDO and $RPL. But more significantly, both these ETH staking platforms have gained massive traction, with LIDO leading the pack with a total value locked (TVL) of $8.9 billion, while RPL enjoys slightly less than $1 billion as per DeFi Llama metrics. 

If this upgrade is successful, it is likely that the associated tokens will experience drastic fluctuations, either up or down. All in all, it is remarkable to witness Ethereum's gradual transition from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus. Whether ETH's market cap will challenge BTC's dominance this year remains to be seen; it may be too ambitious for now.

The tokenization of real-world assets is another major theme that will likely shape the digital asset industry outlook in 2023. BCG estimates that the tokenization market will burgeon into a $16 trillion ecosystem by 2030. While this figure may seem too big, other leading investment firms are also of the opinion that asset tokenization will be an area of focus for financial institutions this year. VanEck predicts that close to $25 billion in off-chain assets will be tokenized this year. 

So far, the central bank of Singapore has already partnered with JP Morgan to launch a blockchain pilot dubbed ‘project Guardian’, an initiative that seeks to tokenize bonds and deposits, utilizing smart contracts to facilitate trade executions. While we are still early into the year, asset tokenization is evidently becoming an important theme for institutions looking to improve the efficiency and accessibility of their market instruments. 

“The next generation for markets and next generation for securities will be tokenization of securities.” - Larry Fink, CEO of BlackRock — the world’s largest asset manager. 

Over 100 central banks across the world are currently exploring the feasibility of CBDCs, some are in the research phase while others have already launched. The big question however is whether CBDCs will take off, co-exist with crypto or replace the entire ecosystem? 

According to a recent report by the People’s Bank of China (PBoC), the digital yuan accounted for 0.13% of the total circulation of Chinese renminbi yuan in 2022. Meanwhile, Nigeria’s eNaira usage is only 0.5% of the country’s population. Still a drop in the ocean compared to the circulation of fiat currencies in both jurisdictions. 

That said, the bottom line remains that we are likely to see more CBDC initiatives in 2023. The European Central Bank (ECB) is in the investigative phase of the digital euro, with an implementation bill set for proposal this year. Meanwhile, India recently launched two digital rupee pilots, one for the wholesale market and another for the retail market. 

Based on these trends, the CBDC theme will continue to be a major topic of discussion in 2023. It comes as no surprise that CBDCs were identified as the key tech innovation challenge in last year’s G20 TechSprint.