Larry Cermak (The Block) - The Scoop
Larry Cermak unpacks The Block Research's 2023 Digital Asset Outlook Report
Host: Frank Chaparro, The Block
Guest: Larry Cermak, VP of Research at The Block
The 2023 Outlook Report published by The Block
The report covers macro, all the underlying sectors of the crypto industry like Layer 1s, L2s, NFTs, etc. Last year same time, the market was peaking & this year, prices have dipped by 80%. Now is the time when new projects & narratives take birth.
2023 vs. 2022
2022 was a series of events that caused more events. Terra happened, which affected 3AC, which then affected lending firms, which led to leverage wipe-out & liquidity getting pulled out from the market. Alameda & FTX managed to cover things up until November & then blew up. Larry doesn’t think it can get more worse from here. Most projects are already down 80%-90%. Next year will be when projects rebuild, restructure & some acquisitions take place. Volatility will be lower in 2023 & liquidity will continue to be low.
2021 & 2022 are similar to 2017 & 2018. Market topped out in December 2017 & in Late October-November 2021. So, going forward, 2023 could be period of low interest for crypto. But if the Fed changes its direction, then things can change very quickly as there has been high correlation with stocks & macro.
Differences from the 2018 bear market
There are 4 times the number of employees in crypto vs. 2018. Prices are significantly higher than 2018. There is a lot of capital on the side-lines with VCs today & it can still take some time for them to start allocating. In 2018, it wasn’t clear if the industry would survive. In 2018, there weren’t blow-ups of 2022 size where many people lost a lot of money. And in 2022, things are driven by macro.
Is FTX-Alameda collapse bullish for the market?
It’s overstretched to think that their collapse is bullish for prices. The buying pressure at the time when SBF went to jail was likely because people were buying because there was doom all around because of the general saying that prices stabilize or bottom out when there’s chaos all around.
Which sectors can see a comeback?
X-to-earn isn’t a bad idea but most of the models for x2e are made to maximize the short-term returns for investors. The higher the token price goes, the more appealing it becomes for the people to play the game. The more people play the game, the more the token price goes up. But these games eventually run out of interest from players, which then leads to a negative feedback loop. These models need to be built in a sustainable way.
DeFi & NFTs are resilient. DeFi token prices have only gone down in the last 2 years. But DeFi is here to stay, though it will take time for the protocols to become as good as their centralized counterparts. There’s this question of restructuring of DeFi tokens so that they become more appealing for buyers. Example- Uniswap has been around for 2 years but the fee switch for UNI token holders still hasn’t been turned on. Also, from investor perspective, they also think about if the protocol in which they’re investing will be relevant 2 years down the line.
NFTs are seeing these mini-cycles where due to a hype in a type of NFT segment, some NFTs go up. NFTs & DeFi are sticky concepts but its uncertain as to which direction they’ll go towards & which use-cases or projects will become more prominent.
Will protocols start passing on revenue to token holders in 2023?
It’s going to take longer to happen. 2023 will be a slow year & so, the protocols wouldn’t want to turn on the revenue sharing switch when the revenues are effectively zero. In bull markets, revenues of DeFi protocols tend to be 10 times higher than bear market. The DeFi protocols also would want to be clear on the regulatory side before turning the switch on. The more appealing a project is, the more regulatory risk there is for the project. Teams are generally advised to not talk about the token.
Institutional Interest
It has dropped quite a lot. There was an uptick in institutions subscribing to The Block’s Research plans for 6-12 months from when Tesla announced their Bitcoin purchase. All the companies had mandates to know what Bitcoin & Crypto is. The interest has fallen off since then. New interest today is 30% of what it used to be back in the uptick period. But on the positive side, a lot of institutions who hopped on to The Block are still subscribed because they want to stay updated.
The new clients coming in today are interested in niche subjects like exchanges & distressed assets. People are still interested in Bitcoin & Ethereum. Ethereum, post-merge, has been getting slightly more interest than Bitcoin.
Fund raising in 2023 for NFTs & gaming
There were 2.2k raises that happened in 2022 with more than $30 billion raised in total, with 25% going to NFTs & gaming. The funding for this segment & overall funding will drop in 2023. Even when the market starts reversing, it takes time for the capital to come in for new projects to get funded.
There are very few projects in the NFT & gaming space that have worked very well for investors & so, its hard to justify funding more in this segment. We haven’t seen any game other than Axie Infinity succeed in this segment & even that is not doing well recently. Trading cards are an interesting space but the barrier for people to play these games is quite high & so, there need to be some trading card games that are playable by a lot of people.
Scaling
Larry still thinks that zkRollups will sustainably scale blockchains. But he has been disappointed with the time it’s taking for zkRollups to become usable. Optimism & Arbitrum have done well in the Optimistic Rollups space but Larry doesn’t think that Optimistic Rollups are the long-term solution for scaling.
Hopefully, in 2023 we will get mass production zkRollups. But bull markets are the time when such tech will actually get stress-tested.
Crypto credit markets
The crypto credit markets were tested massively in 2022 & they failed. Maple Finance pretends that they’re a DeFi protocol but they’re centralized & so, it’s not surprising to see defaults in loans given out by Maple. On-chain DeFi is over-collateralized & so, bad debt there is rare. But market-makers need under-collateralized loans & they need leverage, which DeFi is not going to provide.
The crypto credit markets will have to be rebuilt. Lenders will be forced to be more transparent. There will be much more scrutiny of clients & counter-parties. The irony is that the most reckless lenders grow the fastest & other lenders follow to stay ahead in the competition; and that’s difficult to prevent in the bull market.
Exchanges & Transparency
Exchanges have already tried to be more transparent. The problem is that its difficult to check all the liabilities. Audits & attestations will find it difficult to understand the liability side of exchanges. We will see more transparency from exchanges though. But proper audits are going to be difficult. And hopefully, exchanges will learn from the things that have happened this year.
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