It is often said that to predict the future, we have to understand the past. 2022 saw record interest rate hikes on a global basis in the effort by central banks to combat the persistent growth of inflation, which was exacerbated by the Ukraine-Russia war and supply chain shocks from COVID-19. As the US teetered on the brink of recession, Crypto as a whole followed traditional financial asset movement as both BTC and ETH faced a 65% and 67% pullback respectively. Together with the collapse of Terra, FTX, and their collateral damages, more volatility was expected going into 2023 as the crypto industry heads into its first recession-like environment.

Knowing so, what will (has to) change in 2023? We believe there are 3 key areas: more regulations, the growing importance of self-custody solutions, and the advancement of innovations and solutions around DeFi. In light of the collapse of Terra and FTX, calls for more stringent regulations over the crypto industry have never been higher. Notably, all major collapses in the crypto industry in 2022 stemmed from centralized platforms/solutions providers while their decentralized counterparts remained largely unaffected (from an operational standpoint).

As such, we expect the Fed, SEC, and other international governing bodies to come up with tighter regulations going into 2023 and beyond. Further, more inflows of funds and adoption, be it retail or institutional investors, should flow toward more DeFi projects as the wounds from the notable 2022 CeFi collapse are still raw. We can also expect greater innovations and novel solutions in the DeFi space as more users inevitably enter the space. Projects solving real world issues such as token management and accounting solutions, wallet UIUX, international remittance service providers, and ZK Technology comes into mind.

Other opportunities of investments within the DeFi space include self-custodial solutions, security, compliance and KYC, novel yield farming methods, gamification of financial products, and crypto tax solutions should be areas of focus for investors going into 2023. Another major focus should be on DeFi projects that are built on Ethereum. This is largely due to its implementation of EIP 4844, which increases scalability by increasing the TPS on the blockchain by a magnitude. With ~45% of all new DeFI DApps built on Ethereum, this would provide a good starting point for investors to focus on.

Finally, to drive home our case for DeFi, let us briefly touch on the growing possibility (or imminent) launch of CBDCs. CBDCs and freedom are directly opposing concepts. Should a CBDC be implemented somewhere, the government of that country will have absolute control of one’s financial freedom, something in which cryptocurrencies, DeFi and self-custody in particular, aim to solve. Assume for instance a central bank believes that demand in its nation is lacking and that its people should spend more. The central bank would be free to take away one’s money or threaten to do so in order to promote spending. Hence, the importance of DeFi has arguably never been higher.