Digital assets have seen a wild rise over the past 12 months. Several centralized crypto firms, from hedge fund Three Arrows Capital to crypto exchange FTX, have failed, while the SEC, the Commodities Futures Trading Commission (CFTC) and other US authorities have launched a regulatory assault on crypto-related firms. Furthermore, all risk assets face an uncertain macroeconomic future amid high inflation, a banking crisis and a possible recession.
But we must not forget the long-term asymmetric opportunities that digital assets can offer. Fundamental investors are in search of digital projects which have one of the best probability of mass adoption despite the negative overhang. With this in mind, five key themes have emerged in digital asset markets that could lead on to greater blockchain adoption within the medium to long run.
1. The big players are here: Web2 partnerships and the subsequent wave of Web3 users
To date, digital asset adoption has largely been a native domain Web3 Innovators. To proceed this trend, more early adopters need to affix in. Several firms with pre-crypto origins made significant progress in 2021 and 2022 through initiatives that helped expand Web3’s user base beyond crypto-native.
Four projects specifically have leveraged Polygon, an Ethereum-based scaling solution, to facilitate these efforts.
Polygon + Projects
In lots of these cases, customers don’t even know they’re interacting with blockchain technology. Web2 firms have effectively abstracted the blockchain. So far, Web3 onboarding has been quite technical; By reducing this, brands may also help drive mass adoption.
Google and Amazon have also recognized the worth of partnering with blockchains for node operations. Amazon Web Services has partnered with Avalanche And Google with Solana.
Why are all these brands implementing Web3 plans? Among other things, to enhance their user experience and customer relationships, attract digital natives from Generation Z and develop alternative sources of income.
Given the continued positive momentum in 2023, we expect more major brands to follow their lead and develop their very own blockchain initiatives.
2. Ethereum dominates but must scale to accommodate mass adoption
With 60% of Decentralized Finance (DeFi) Total Value Locked (TVL) and 85% of NFT transaction volume, Ethereum is the clear leader amongst smart contract platforms. However, if thousands and thousands of individuals flock to Web3, the Ethereum network could develop into congested and the worth of transactions on its blockchain could develop into prohibitively high. So how can blockchains scale? We see three possible approaches.
Three blockchain types
- like Solana offer execution, settlement, consensus and data availability multi functional. Apps are built directly on the blockchain. However, this may result in scalability problems – the so-called Blockchain trilemma – if the blockchain is each decentralized and highly secure.
- like Ethereum 2.0, the degrees of execution, settlement and consensus in addition to data availability are separated. “Layer 2s” in the shape of sidechains and rollups help scale the unique “Layer 1” blockchain without sacrificing decentralization or security. Applications are based on each Layer 1 and Layer 2.
- Like Cosmos, they’re ecosystems with relatively secure communication protocols between blockchains, allowing different blockchains to exchange data and value between them.
Due to the Lindy effect and the present dominance of Ethereum and its Layer 2s in latest project launches, we assume that modular blockchains will prevail. However, smaller positions in the opposite blockchain scaling models, especially those with solid tokenomics and attractive relative valuations, can provide a very good hedge.
3. Tokenization brings various exogenous assets onto the chain
Tokenization creates digital representations of assorted assets, from securities and funds to artistic endeavors and other collectibles, and is one of the necessary current Web3 narratives. The advantages of tokenizing assets explain why this topic is gaining a lot traction.
The advantages of tokenization
| Tokenized Securities |
Tokenized Medium |
Tokenized Real Estate, art and Other collectibles |
|
| Better Accessibility |
Opened Securities markets to a worldwide pool from investors |
Power institutional Private market strategies more accessible to Individual investors with lower investments Minimum dimensions, improved Onboarding and potentially higher liquidity |
Enables Fractionation |
| Better Efficiency |
Increased liquidity, faster processing, and lower costs |
Transforms relatively liquid assets convert into easily tradable goods |
The opportunity is large. According to HSBC estimatesBy 2027, the tokenized market volume will reach $24 trillion.
How is that this theme expressed in liquid token portfolios or non-fungible assets (NFAs)? Through smart contract platforms that provide the general public blockchain and settlement infrastructure for these tokenized assets. KKR has tokenized its healthcare fund And Hamilton Lane is its flagship fund valued at $2.1 billion through Avalanche or Polygon. Decentralized applications (DApps) – for instance Maker, Centrifuge, Maple Finance and Ondo Finance – help users connect real-world assets (RWAs) with DeFi.
4. RWAs may also help counteract the circularity of DeFi
DeFi “Self-reference“was a perceived shortcoming of the sector. For example, a DeFi user can take out a loan through the Aave lending protocol to enable leveraged trading of assets on the decentralized exchange Uniswap.
We are optimistic about opportunities to interrupt this circularity problem by integrating external information and “real world” use cases into closed blockchain networks. There are many recent examples of non-crypto-native firms turning to DeFi.
The Maker lending protocol allows users to borrow their DAI stablecoins by locking collateral in Maker’s smart contracts. Maker relies on Ethereum and determines what collateral they accept, in addition to the collateralization ratios for every collateral type. Most collateral on Maker today is in the shape of stablecoins, corresponding to: B. USD Coins (USDCs) pegged to the US dollar, but RWAs are a fast-growing segment. At the beginning of Q4 2022, RWAs accounted for just 2% of collateral on Maker, but That share has increased to 13%, and RWA revenue currently accounts for greater than half of Maker revenue. In fact, RWA collateral now includes US Treasuries above MIP65 and loans from Huntingdon Valley Bank in Pennsylvaniaand investment grade Asset-backed securities via BlockTower Capital.
RWA activity
Built on the Ethereum and Solana blockchains, Maple Finance is one other lending protocol that gives lending professionals with an infrastructure to operate on-chain lending businesses. It was announced earlier this 12 months a $100 million receivables financing poolwhich allows Intero Capital Solutions to borrow USDC against receivables and Investors can lend their USDC for a goal return of 10%.
5. NFTs: The Underrated Advantage
NFT activity boomed in 2021 with sales volume and unique buyers increasing by 41,784% and 6,959%, respectively. accordingly . In 2023, NFT activity is back on the rise because of two key events: the disruptive adoption of Blura Ethereum NFT marketplace, and the explosive popularity of Bitcoin atomic numberswhich allows users to write down text, images and other data onto Satoshis or smaller Bitcoin units.
NFT activity
The 2021 boom is harking back to the Initial Coin Offerings (ICOs) in 2017 and serves as a DeFI proof of concept. Cartoon monkey and pixelated punk “profile picture” NFTs notwithstanding, we consider a much larger marketplace for digital collectibles includes the next verticals:
- : NFTs allow players to more fully own their in-game land, avatars, and other assets they’ve earned and invested in. Gaming NFTs could possibly be sold, traded, and moved between different metaverses, allowing users to move their in-game digital assets from game A to game B as a substitute of ranging from scratch.
- : Fans could spend money on and support their favorite music artists through NFTs. For example, they might purchase a share of an artist’s song, which supplies them licensing rights each time that song is played on streaming services. NFTs could also give fans real-world experiences, corresponding to early access to latest track releases or meet-and-greets with the artist.
- : NFTs even have applications within the live events industry. Through Ticketmaster’s partnership with the Blockchain FlowOrganizers can now issue NFTs around live shows. Similar to music NFTs, these applications could enhance fans’ experiences and function digital collectibles. There’s one now on the Ticketmaster website wallet and NFT marketplace for collectors to share and trade.
- : The centralized Web2 social media giants cash in on content they do not create. Due to social media’s current ad-driven business model, actual content creators are underpaid or not paid in any respect. By storing their social media on a public blockchain via NFTs representing profiles, likes, comments, and other activities, content creators can recover value for his or her work through social tipping, secondary marketplaces for profiles, and other concepts.
- in Web3, like runa.eth, are much like their Web2 counterparts like runa.com: they will function web sites and email addresses. These domains are technically represented as NFTs on blockchains and offer additional use cases – for instance, for data storage, allowing users to then grant applications permission to access specific information. This allows users to move their data across the web via NFTs and gain broader ownership of their online identity.
Of course, the digital assets space remains to be in its early stages of development. Although it is not any longer in its infancy, it is much from being a mature market. Therefore, it stays each highly speculative and filled with potential.
That’s why it’s value maintaining a tally of it – and proceeding with caution.
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