The case for decentralised finance strengthened in 2022: Seven DeFi experts share insights and predictions

For many in the crypto space, the Terra LUNA and FTX implosions showed the importance of decentralised finance. Here, Stockhead gathers some end-of-year thoughts from seven respected DeFi experts.

Crypto 2022 – what did the DeFi experts learn?

To state the bleeding obvious (once again), 2022 was, at times, brutal for crypto. Especially regarding the wider perception of the industry, thanks to certain feet-shooting, black-swan events we’re all sick of hearing about. But what’s your take? Any silver linings?

Mark Lurie, CEO of Shipyard Software: “The failure of centralised financial institutions within crypto has an enormous silver lining, which is the renewed attention and emphasis on DeFi.

“FTX and the failure of the centralised financial lenders really puts the problems with custody in relief. Ultimately, that will help massively more people than it has hurt.”

Kadan Stadelmann, Chief Technology Officer of Komodo: “If there’s one takeaway, it’s the power and importance of self custody.

“Although financial sovereignty can seem like a challenge, it’s important to understand the security implications of holding your own funds in a secure wallet versus trusting third parties with them.”

Brian Fu, Co-Founder and Co-Project Lead of zkLend: “The sequential bankruptcies of Three Arrows Capital, FTX, Genesis and BlockFi sent a clear signal to the industry of the risks of centralised exchanges and lending platforms, where the flow of funds and financial health are not transparent and hard for users to assess/monitor.

“Truly decentralised exchanges, market makers (i.e. dYdX, Uniswap), and lending protocols (i.e. AAVE and Compound) have been working as intended throughout both market shocks in May and September. This strengthens the case for DeFi and its advantages over CeFi, especially at times of highly volatile markets.”

Barney Mannerings, Co-Founder, Vega Protocol: “There are lots of things to get excited about… Watching the new generation of projects that were born in the wreckage of the 2017 ICO boom come to fruition, it’s hard not to be incredibly optimistic if you truly understand what’s being built.

“We’re witnessing the birth of a scalable, modular, easy-to-use, global, private, and unstoppable new infrastructure for many parts of society itself. Every component from the base chains to wallets to identity and credential protocols, from privacy to storage to new forms of funding and organisation, and even new media is being worked on.

“I expect the things that are emerging now and will start to take hold in the next year or two will feel completely different to crypto and ‘web3’ so far, in a really good way.”

Isidoros Passadis, Master of Validators of the Lido multi-chain liquid staking solution: “Taking a look at the wider Ethereum community, the completion of the Merge marked a massive achievement for the network in 2022.

“Lido is proud to have played a key role in building up the economic security of the Ethereum Beacon Chain by democratising access to staking. This has benefitted users across the ecosystem and showed decentralised staking’s resilience in the face of some of the worst events in crypto history.”

Chjango Unchained, Contributor at Osmosis, (former Head of Ecosystem at Cosmos): “A positive moment for the Cosmos ecosystem in particular was in January and February of 2022, when Osmosis and other app chains in Cosmos saw their highest daily active volume.

“Essentially, after Bitcoin peaked in December 2021, the Cosmos ecosystem saw a massive influx of interest and new capital toward the end of altcoin season, as the market started to see Cosmos as the winning cross-chain project over other interoperability solutions.”

How does the crypto industry strengthen in 2023?

Kadan Stadelmann, Komodo: “For the crypto industry to achieve credibility next year and grow out of the bear market, security must be held to a higher standard. Security must come above all else including comfort and usability. It’s essential to reshape the narrative of why crypto matters for the average consumer so that the mainstream isn’t intimidated by the technology.

“In order to prevent attacks and ultimately reach a fully trustless and interoperable future, users must understand that self custody is the only real solution. Educating people about self custody and how it differs for each type of bridge and DEX must be a focus for crypto communities in 2023.”

Chjango Unchained, Osmosis: “Decentralised Web and infrastructure is less sexy, but it’s what is needed. Let’s focus less on speculation, and spend more time on building the infrastructure that will make Web3 a reality.

“I expected the decentralised web narrative to gain traction, but instead we saw the Web3 narrative play out. Decentralised Web refers to the infrastructure that applications are built on, whereas Web3 refers to the end user applications.

“What I mean by infrastructure is projects like Akash, IPFS, Jackal Protocol and more, which provide decentralised storage, node access, and cloud solutions, among other things.

“The underlying infrastructure that encompasses the Decentralised Web is critical to the growth and long-term success of DeFi and Web3.”

Barney Mannerings, Vega Protocol: “We need to ditch the idea of rebuilding the infrastructure of centralised, traditional finance but without rules or oversight. Trusted institutions don’t work without the trust.

“Tradfi works because it has rules. It’s a bunch of wealthy, opaque, and interconnected institutions that only (mostly, bar the odd blow up every decade or two) survive and continue working because they are under constant supervision. Even then they’re at best self serving and often corrupt.

“Crypto needs to go all in on open systems, open code, self (or at least decentralised) custody, and decentralisation where it matters. We succeed when no-one even wants to build a centralised exchange because the decentralised alternatives are so good that the real world sits up, takes notice, and starts to do business on chain.”

Mark Lurie, Shipyard Software: “Despite the headlines, the Web3 space is doing just fine. Builders are pushing forward making progress.

“The space just needs to keep on doing what it’s doing. Institutions, on the other hand, are burned and their adoption will probably be delayed by another five years.”

Predictions for 2023

Danny Chong, co-founder of Tranchess decentralised finance app: “In the wake of two market downturns in 2022, we can expect to see a reduction in native crypto players over the next few years.

“Instead, there will be more focus on a smaller number of more established projects, and a growth in activity by traditional institution players. This will lead to greater integration of DeFi with TradFi, with the onboarding of more financial institutions into the space.”

Chjango Unchained, Osmosis: “Capital is much harder to come by now, so the era of egregious speculation on things like meme tokens and expensive pictures of rocks and apes is over with.”

Mark Lurie, Shipyard Software: “Regulation will emerge that is good for crypto and DeFi. Ultimately, DeFi will persist despite laws and regulations, just like music file sharing did. Meanwhile, lawmakers don’t like making unenforceable laws, so they will eventually come around to passing common sense regulation.”

Barney Mannerings, Vega Protocol: “I have one fear and one hope. My fear is not all regulation or even over-regulation, but the wrong kind of regulation. It’s clear that if when people put their money and trust in centralised organisations this should be regulated. Especially after FTX that’s fair game.

“However, the anti-privacy and anti-decentralisation trends we’re seeing around Tornado Cash, and the sabre rattling about restrictions on non custodial wallets, or applying regulation to the developers of protocols and DEXs is really worrying.

“The hope, which I am actually quite optimistic about, is that we’ll see more mainstream awareness of the issues driving the need for privacy and decentralisation, and that as a result we’ll see some pretty big adoption of a decentralised protocol or system.

“I’m not sure which one, and I’ll go out on a limb and suggest that it’s quite likely to be something that doesn’t have a token, but there are loads of really interesting projects like PeerTube, Matrix, and Mastodon that are really close to being able to challenge their centralised competitors.

“I think we’ll see the beginnings of a breakout success in the not too distant future.”

Brian Fu, zkLend: “ZK-rollup Layer 2s are expected to take on a more prominent role in the crypto space as zkSync and StarkNet are rolling out their production versions in the later part of 2023.

“Protocols building on ZK-rollups will become more sophisticated and continue to develop more intuitive features and interfaces for DeFi, GameFi, NFTs and applications.

“Meanwhile, 2023 will be an introspective year for Ethereum. With the Merge now behind us, much of Ethereum’s roadmap defined (the Surge, Verge, Purge, etc…), and L2 solutions implemented, questions around scalability will take a back seat.

“Rather, issues around centralisation and censorship resistance will become more prevalent as regulatory authorities look to impose economic and trade sanctions on the blockchain. The way participants decide to engage with demands from governments will set the tone for other L1s and even L2s.”

Isidoros Passadis, Lido: “Next year we’ll see history made yet again in the Ethereum ecosystem. The advent of the Shanghai Fork signifies the unlocking of the Beacon Chain, allowing users to withdraw their staked ETH alongside additional rewards.

“In-house, Lido will be further democratising staking through various L2 partnerships to provide more avenues for access.

“And in 2023, we anticipate that liquid staking will gain more in-roads as the range of integrations increases. While 2022 has been a year to overcome challenges, 2023 will see a pick up in staking as a standard.”

Is the bottom in or more pain to come?

So… up, down or sideways for the market in 2023? Venture capitalist Tim Draper still thinks Bitcoin can hit US$250k in 2023. Is he dreaming?

Mark Lurie, Shipyard Software: “There is more pain, but it will hit very quickly. At this point, the major centralised lenders are already going under, even Genesis lending.

“Once the bankruptcies are all exposed and priced into the market, the market will start to recover. But no, I don’t think Bitcoin will hit $250k in 2023.

“That would require the Fed to reduce interest rates and return to money printing, which I don’t think is going to happen in 2023 unless there is a major economic crisis. And if there is an economic crisis, it’s not going to be good for Bitcoin. At this point, Bitcoin responds to macro.”

Chjango Unchained, Osmosis: “I think we are following the normal market cycle. 2023 is going to be similar to 2015. Mt. Gox was hacked in 2015, which caused the markets to come crashing down, leading some to believe that crypto was dead. But then, Ethereum emerged around this time, and boom!

“The growth of Ethereum and ICOs led to the next bull market. So our industry in 2023 might be similar to the way it was in 2015. If we follow this pattern, then 2024 will kickstart the next bull market, and then 2025 will likely be when the crypto markets come raging back.

“This is just one possible outcome though. The other outcome is that the era of these boom and bust cycles are over for the foreseeable future because so much capital has been flushed out.

“In this case, it could be another decade before more capital flows really flows back into this space. If this scenario plays out, the people who remain focused during a lengthy downturn, are those most likely to identify the next Google and make generational wealth.”

Barney Mannerings, Vega Protocol: “I can’t see another crazy bull market for quite a while either, though. That’s probably a good thing, but I do think a handful of networks and protocols will emerge as sensible, scalable, and dare I say robust decentralised technology.

“And they will form the basis for the next period of growth and adoption for crypto and decentralised tech in general.”

Danny Chong, Tranchess: “The crypto industry will be limited by the macro conditions such as high interest rates and sluggish global markets growth.

“Institutions and investors, including reputable players, many of whom have made losses this year, will be more calculative with their funding decisions. Investment activity will be much slower than the past two years with investors taking a ‘wait and see’ attitude.

“Having said that, among the sectors in crypto, DeFi is likely to be the first area to recover as new capital will make its way into other sectors through DeFi.”

What crypto narratives or use cases do you still believe in?

Mark Lurie, Shipyard Software: “Many: The importance of DeFi is more clear than ever, and gaming historically does well even during downturns.”

Barney Mannerings, Vega Protocol: “I believe in decentralised money and finance. I think we can eventually even get there with payments and finally dislodge Visa and MasterCard.

“I believe in using crypto and decentralised protocols for funding people and projects (not just in crypto), especially once the legalities are more settled on how to do that more easily and casually.

“I believe in a decentralised, open, private, and personal-but-interconnected virtual space that probably used to be called the metaverse, but that term may be a lost cause.

“And in the long term, I also believe in tokens and economic mechanisms as a force for good in society. I think people are a bit fed up with them, and a lot are really badly designed and operated, but they are a good solution to some types of problems.

“Tokens and projects probably need to be a lot less capitalistic and crypto needs to lose the ideological opposition to inflation, which, deployed correctly, can be a decentralising force in a system which otherwise tends towards concentration of power and wealth, as too many in crypto do.”

Danny Chong, Tranchess: “Zero knowledge technology. In 2023, we will see greater implementation of this in existing protocols and new players pushing the envelope with zk-SNARKs.

“As ZK tech enables efficient and trustless data sharing, it will help address lack of transparency and centralisation that has led to project collapses, hacks and exploits. It will also encourage greater collaboration across the multi-chain ecosystem.”

What irritates you most about the crypto industry?

Chjango Unchained, Osmosis: “Blockchain is not a panacea. Just because an NFT is issued on a blockchain doesn’t make it inherently scarce or valuable.

“There’s a happy medium or middle ground to walk on in order to properly establish your mental model of this space right now. Not all of crypto is a scam, but also, pictures of apes are not the future.”

Mark Lurie, Shipyard Software: “In the wild west, there were heroes and villains. Crypto is like the wild west, with both good and bad.

“But if it weren’t genuinely exciting, it wouldn’t attract scammers. Perhaps it is an unavoidable aspect of every gold rush. Is that frustrating? Is it avoidable? Perhaps not.”

Barney Mannerings, Vega Protocol: “The obsession with prices and wealth irritates me. Markets are interesting because of the information they convey and the things they enable, but I don’t think worshiping profits and chasing riches makes for healthy or interesting discourse.

“But there are an amazing number of thoughtful, generous and brilliant people in our industry (and in the world in general), and when they share their insights and help us build better it’s an incredible gift.

“Similarly, the world is full of wonders, both natural and artistic, and regardless of the hype and frothiness around NFTs, the influx of art and creativity that boom brought was wonderful.”

The responses in this article were edited lightly for clarity. None of the views expressed should be taken as financial advice.