The Web3 space is full of lofty promises, most of which were far from being realised even before the spectacular collapse of some of crypto’s biggest names this year. Pixelated cartoon animals were suddenly the future of art and community, and 20% yields were thought to be sustainable until they were not.
Which is why we penned “DeFi is a Rich Nerd’s Pipe Dream” in April, the idea was to address one of the biggest elephants in the room: how realistic is the dream of decentralised finance? After all, the crypto cult likes to brainwash its desperate followers with dreams of finding Ali Baba’s Cave, and DeFi was seen by many as the “future of finance” not because it was actually viable, but because bypassing centralised financial institutions meant that more money could be made.
The funny irony is that crypto’s dramatic decline in 2022 had little to do with the hype and speculation surrounding DeFi or NFTs. The downturn was exacerbated by said trading activities, but it was ultimately caused by some of crypto’s supposedly smartest minds, who decided to go full on Wolf of Wall Street on the market, sending it on a death spiral and breaking countless hearts and banks in the process.
We’ve covered a fair bit of the above developments throughout the year, so in our final roundup of the year, let’s skip the depressing bits and the name-shaming, and instead touch on what made 2022 such a defining year for Web3.
Has the industry lost its way?
During the various conferences and panels Blockhead attended this year, the term “Web2.5” was mentioned countless times by prominent figures in the industry, quite possibly born out of their sudden realisation that achieving full decentralisation might not actually come to fruition in the foreseeable future.
It’s basically the industry saying: “Look, we’ve blown this way out of proportion, and we’re probably not going to make it, so let’s just tell everyone that the halfway point will suffice for now.”
Don’t get us wrong, we think (hope) that the crypto community is still bullish about the “long-term.” At this year’s Token2049 conference held in the midst of the market decline, Blockhead was invited to ultra-extravagant parties on rooftops thrown by some of crypto’s biggest players. Copious amounts of champagne and money were thrown about, and desperate project founders still took any chance they could to pitch their ideas (we saw one who approached every single person waiting at a taxi stand outside of the conference venue).
So where does the industry go from here? While the FTX fiasco isn’t exactly a nail in the coffin, it exposed the ugly failures of crypto that have long been buried under the eye-watering cash grabs, including the dire consequences when a powerful centralised entity sabotages an entire industry that supposedly promotes self-custody and decentralisation.
One of the arguments that can made from this new Web2.5 concept is whether DeFi can actually be “De” Fi moving forward. FTX’s demise showed the world that the same failures which caused the 2008 financial crisis should never have been applied to crypto, which means that there is theoretically room for something completely new and contrarian like DeFi to thrive, if, and only if, the industry can somehow find a way to curb and/or regulate its highly speculative nature and the risk of hacks.
But with government regulators now breathing down on the industry’s neck thanks to the FTX disaster, DeFi might just turn out to be something like regulated CeDeFi, which like Web2.5, just means that decentralisation isn’t actually possible for now. At present, it’s a question that no one seems to be able to answer, and it’s something that regulators and centralised entities like the surviving crypto exchanges will not want to address.
Notable moments not inclusive of fiascos
On a more positive note, Ethereum, the dominant network for DeFi protocols, finally completed “The Merge” in September, which saw it shift to a less energy-intensive PoS (proof-of-stake) consensus mechanism.
While Ethereum’s merge was overshadowed by the gradually declining crypto market, what’s known to be the dominant network for DeFi and NFTs will now be much cheaper and easier to use. Based on this development, there might actually be an increased adoption of “decentralised services,” as the barrier of entry will be lower for both newcomers and developers. We don’t know what type of projects will be built in the coming years, but we hope that the industry will ignore the allure of short-term profitability, and place more emphasis on sustainable applications that have actual use cases.
On the point of interoperability, one of Blockhead’s favourite words to throw about in the office when we’re trying to sound intelligent, some progress has been made in the form of cross-chain bridges between select blockchains.
We’ve previously said that a multi-chain ecosystem where different blockchains each serving a unique purpose will be able interoperate with one another – much like how participants in traditional finance can remain “interconnected” despite using different banks – is crucial to the long-term success of Web3.
However, the idea of interoperability is still very much in its infancy, with US$600 million stolen from cross-chain bridges this year, according to data from Chainalysis. It’s clear that while interoperability might be the key to the adoption blockchain technologies, it’s still the early days, and it’s probably also the least concern at this point in time.
This year also saw the emergence of stablecoins coinciding with urgent efforts from central banks to explore the concept of central bank digital currencies (CBDCs).
According to the Bank of International Settlements (BIS), approximately 80% of the world’s central banks are currently engaged in pilots or other CBDC activities. However, developments remain slow as compared to the stablecoins sector, with only 11 countries having fully launched a CBDC.
There will be several challenges that CBDCs will present, including the disintermediation of banks and cybersecurity risks. However, the largest obstacle to the adoption of CBDCs is arguably privacy concerns, or how governments have to balance the increased transparency in money flows with the financial privacy of the population.
2023: the year of reckoning
It’s safe to say that the crypto bubble has burst again, just as it did during the ICO bust of 2018. Bitcoin, the world’s largest and most popular cryptocurrency, has fallen by more than 65% this year, with the overall crypto market capitalisation shrinking by US$1.4 billion amid the chaos and uncertainty sparked by macroeconomic conditions and the unfortunate chain of events first triggered by the Terra (LUNA) collapse.
However, there are still emerging trends and optimistic signs of a recovery that should not be ignored. For example, we believe that Asia has the potential to become a dominant Web3 ecosystem, with growing interest and adoption witnessed in new and even existing markets such as Indonesia, Philippines, and India.
That being said, it’s unwise to make optimistic predictions for the new year, given the scale of the market collapse this year. But it’s in these periods of turbulence where the industry has the opportunity to collectively reflect on its failures and successes, and work together to build a healthier ecosystem that focuses on the real-world use cases of blockchain technology and cryptocurrencies. This has to go beyond a crypto billionaire simply setting up a recovery fund as a short term sticking plaster solution.
2023 will be the year of reckoning for crypto, and Blockhead is relishing the opportunity to be the voice above the din.