4 Crypto Narratives to Know in 2023
A peak into a possible future
👋 Welcome to the 44th issue of The Syllabus from Invisible College—a newsletter that helps you navigate the fast-moving world of web3. To get it delivered straight to your inbox, subscribe here:
In last week’s post, we looked back at 2022 and highlighted a few of the good things that happened in an otherwise tough year. This week, we’re looking forward.
Below are what we think will be some of the top crypto narratives in 2023.
Keep in mind, these are narratives, meaning we think people in the crypto space will talk about them. We’re not necessarily predicting that all of these things fully come to fruition this year.
Let’s hop into it!
ETH Withdrawals and Staking
This one dovetails nicely with our top 2022 narratives, namely the Ethereum Merge. Those who chose to stake their ETH to help secure and decentralize the blockchain—and earn rewards for doing so—had to lock it up for an indefinite period of time.
Why is the period of time indefinite? Because the Ethereum developers haven’t deployed the ability to withdraw yet.
The Shanghai upgrade slated for later this year will unlock staking withdraws. While it may seem like that would also unlock the unstaking floodgates and cause a lot of sell pressure on ETH, remember that these are people who voluntarily staked their ETH without any clear future date for withdrawals. Which is to say, they believe in Ethereum (for the most part). The upgrade should also bring in additional stakers since it will then be a more liquid way to earn yield on your ETH.
Keep an eye on liquid staking protocols such as Lido, Rocket Pool, StakeWise, and others.
There’s also an interesting re-staking solution to keep an eye on called EigenLayer. It allows staked ETH to not only secure the Ethereum network but also to secure other apps and services. And, of course, it means that ETH stakers can earn additional yield for also re-staking it with EigenLayer. There’s also a rumored $EIGEN token, but no details as of yet.
Layer 2s Continue to Rise
Simply put, Layer 2 (L2) solutions are blockchains that can scale more than Ethereum Mainnet. They do so by sacrificing on the security portion of the Blockchain Trilemma (where blockchain design typically has to pick two out of three elements between scalability, decentralization, and security) and instead use the security robustness of Ethereum Mainnet to fill that gap. They do so through a mechanism called rollups where the Layer 2 chains send “rolled up” packages of several transaction blocks back to Ethereum instead of each block separately.
The two most popular L2s right now are Arbitrum and Optimism. If you combine their transactions per day, they’re now outpacing Ethereum on most days.
With the upcoming EIP-4844 (Proto-Danksharding) upgrade projected to come to Ethereum in Q3, rollup fees will reduce by 10x-100x. The upgrade will open up scalability massively and may reduce the need for the existence of other monolithic blockchains such as Solana.
zkEVMs are another type of scaling solution for Ethereum. They’re also rollups, but they use an innovative cryptographic technology called zkProofs. The “zk” part stands for zero knowledge.
Here’s a great video where computer scientist Amit Sahai explains the concept of zero-knowledge proofs to 5 different “levels” (child, teen, college student, grad school student, and expert):
This is all often framed as The L2 Wars, where there are winners and losers. And sure, that may end up being true. But no matter which L2s ultimately attract more users and locked value in DeFi, the Ethereum ecosystem, and ETH the asset, will benefit.
Layer 3 Opportunity
L3s are application-specific blockchains built on top of L2 blockchains. They’re all about further reducing transaction costs. With L2s we’ll likely see up to 100x cost reduction, whereas L3s could eclipse 10,000x. All while still being secured by L1, Ethereum Mainnet.
Cue the Xzibit meme:
The more marketing-friendly term for an L3 is appchain. We’ll likely see the rise of appchains as L2s become more widely used and scalable. Look for DeFi-specific appchains to likely lead the way.
Real Yield Comeback
The term real yield was a narrative bandied about crypto Twitter back in the summer and made a short resurgence in the wake of the FTX debacle.
Simply put, real yield is when a project makes more money than it spends. The yield earned from staking ETH is an example of real yield since it’s wholly comprised of a portion of gas fees, but it’s not usually what people are referring to when they use the term. Instead, they’re looking for DeFi protocols where the yield paid out is completely generated from fees the protocol charges.
A prominent example of this type of protocol is GMX. It’s a perpetual exchange, meaning a platform where traders can long and short different assets using varying amounts of leverage. They have a two-token system (GMX and GLP) that pays yield to stakers of those tokens in a sustainable way, without any additional incentives as some other protocols use.
Here’s a good video explainer about how GMX works:
There are new and exciting DeFi protocols coming out, many of which could piggyback on the real yield narrative. In case you missed it before, you can learn about five new protocols in last week’s DeFi Friday edition of the newsletter here:
With the macro markets still not looking too rosy and a looming recession on the horizon, the real yield narrative will almost certainly make another comeback.
For further reading on real yield,
wrote this helpful breakdown back in August:One of the unique aspects of sticking around and learning in the crypto space during the quiet moments of the bear market is that you can be rewarded for participating. Being early to narratives can earn financial returns through possible airdrops or by trading them well. But finding them and especially timing them can be a challenge.
We’re all about learning and digging into the nuances and details of web3 at Invisible College. Join us for our Twitter Spaces events (we’re always up for bringing people up as speakers to chat with us too), share our writing with friends, and play around with new products. And then when the market inevitably turns around, you’ll be in a great position.
As always, none of this should be construed as financial advice. Please do your own research.
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