Every movement needs an oracle or two, and crypto is no exception. Each year for the last six years, Messari’s Ryan Selkis has written a year-end summary highlighting crypto’s key trends and events. He also offers some predictions for the following year.
Selkis founded Messari in 2018 as a crypto market intelligence service for companies and professionals in crypto/Web3. The reports have evolved into a yearly Messari Crypto Theses. It’s free and serves as a potent lead gen tool for the Messari Pro business subscription service.
The 2023 report presents well-written research-backed information, salted with a generous dose of crypto evangelism and opinion. Be warned: the information assumes the reader has expert knowledge of crypto and happenings in the area. The report provides an excellent study resource for anyone wanting to get up to speed in real-time on crypto.
This year’s report covered not only DeFi but also the top 10 trends for nine leading crypto topics, totaling about 90 key sections. The entire report clocks in at 168 pages.
Sometimes key points are layered between anecdotes that assume the reader has insider context. We know our readers are busy, so we’ve wrangled the info to put together a top-line summary of what Messari had to say about DeFi in 2022 and trends for 2023. Let’s take a look.
Messari 2023 DeFi Trend 1: dApps Still Showing Promise
If you remember, dApps are applications built on top of a base blockchain called L1 protocols, like Ethereum, for example. The dApps use smart contracts to execute actions. One analogy to understand the context for dApps is to compare blockchain to the internet, smart contracts would be the Web, and dApps to websites.
Key features of dApps include multi-chain adoption, stablecoin models that boost profitability, and a customer base that is increasingly more concerned with the benefits they experience with the dApp rather than the underlying blockchain brand. In other words, dApps garner chain-agnostic brand loyalty as users reap tangible benefits from the functionality.
dApps are also showing revenue growth from nailing their UVP and business model. Messari advises keeping an eye on Aave, Uniswap, Maker, Curve, Frax, Balancer, dYdX, Synthetic, and Lido.
Challenges that limit growth for dApps’ user base mirror those of the crypto industry in general, specifically the uncertainty in regulatory oversight. For example, Aave blocked its front end from US residents after the US imposed sanctions on Tornado Cash and arrested one of its developers.
Even before that incident, a lack of confidence and poor user experience with wallets and browsers continues to hamper adoption growth.
Messari 2023 DeFi Trend 2: Uniswap Unicorn
Uniswap is a decentralized crypto exchange, or DEX, that runs on the Ethereum blockchain. Traders can exchange Ethereum tokens (ERC-20) without a centralized intermediary. Investors can earn fees by lending their crypto to liquidity pool reserves.
Uniswap is different from centralized exchanges such as Coinbase and Binance. Centralized exchanges are (obviously) governed by the company that operates the exchange. To participate, users cede control of funds to the exchange that uses a traditional order book system to facilitate trading.
Uniswap is a decentralized exchange (DEX) that uses a trading model called an automated liquidity protocol.
Through extensive industry turmoil in the last couple of years, Uniswap emerged as the only Unicorn, or billion-dollar valuation, DeFi protocol.
According to Messari, several DEXs face an array of issues diluting their threat to Uniswap’s dominance. PancakeSwap strays a bit back to centralized land with its ties to Binance and its use of a somewhat centralized infrastructure for settling transactions.
Curve and Balancer are both dealing with prominent token holders exercising (or some might say - abusing) their position of influence in a very TradFi-cozy way. Sushi‘s messy leadership reorg inevitably created growth-killing lags, Terra’s collapse aftershock rocked Osmosis, and Serum went down with the FTX ship.
As a wily old Chinese sage once said, “May you live in interesting times”.
Messari credits Uniswap’s growth and dominance to the value it creates for users relative to other players in the marketplace, even as competition heats up (and flames out) in the space.
Messari 2023 DeFi Trend 3: DeFi Meets IRL
The combination of decentralization and real-world assets was potent for DeFi lenders in 2022. Compared to the centralized lender meltdowns last year, the leading DeFi lending protocols look refreshingly staid.
For example, real assets such as real estate, commercial loans, and trade receivables in MakerDAO’s portfolio went from 10% in July to 57% in December. According to Messari, lenders such as MakerDAO fared better because they are better collateralized, more transparent, and show better performance in risk management.
Messari 2023 DeFi Trend 4: Undercollaterized DeFi Lending
While overcollateralized DeFi lender yields from margin trading fell last year, riskier lending in the form of undercollateralized loans led to double-digit yields for lenders Goldfinch and Maple Finance. Messari credits undercollateralized lenders’ initial resilience to superior risk management but also points out they have not escaped the chill of crypto winter altogether.
Maple liquidated $37 million worth of loans due to the fallout from the FTX debacle, and distressed loans make up about 25% of its $41 M active loan portfolio.
While Goldfinch loans did not ride the ups and downs of crypto volatility, partly because it lends to non-crypto borrowers, their risk exposure comes from fintech and the developing economies sectors. Goldfinch is down 90% since its early 2022 public launch.
It takes innovation and some early-stage trial and error to build the fundamentals (e.g., credit scores and insurance) for DeFi undercollateralized lending at scale. When times are tough, tolerance in the marketplace plummets, as well. The nascent efforts of Maple and Goldfinch are suffering from a deep freeze with the crypto winter.
Messari 2023 DeFi Trend 5: More Access for All for ETH Staking
Staking Ethereum starts at a 32 ETH minimum, out of reach for many investors. Innovative protocols like Lido and Rocket Pool created new synthetic assets called “staked ETH.” Lido’s stETH and Rocket Pool’s rETH accrue Ethereum’s staking rewards (for a 10% fee) and are instantly liquid upon minting.
Liquid staking protocols opened the door to staking for thousands of smaller Ethereum investors who did not previously have access. Staked ETH also adds a grassroots, web3ish boost to Ethereum’s post-merge Proof-of-Stake blockchain security.
Messari 2023 DeFi Trend 6: Decentralizing dYdX via Appchain
dYdX is a decentralized exchange (DEX) platform that offers perpetual trading options for over 35 popular cryptocurrencies, including Bitcoin (BTC), Ether (ETH), Dogecoin (DOGE), and Cardano (ADA).
dYdX is launching dYdX V4, a dedicated appchain on Cosmos, a decentralized network of independent parallel blockchains. The move will decentralize the protocol as Validators in V4 will run the dYdX order book instead of the centralized dYdX.
This quote from the Messari report makes an interesting point about the move:
The coming migration will be risky, but it could also create the highest quality perpetuals product on the market and compete effectively with centralized alternatives. That’s timely, given that one of the world’s largest marketplaces for crypto futures just disappeared.
(Messari 2023 Crypto Theses, page 124)
Messari 2023 DeFi Trend 7: On-Chain Asset Managers
As you may know, in traditional finance (TradFi), asset managers oversee and monitor an entity’s assets to maximize return on investment. On-chain asset managers perform similar duties for crytpocurrency assets.
2022 was a rough year for cryptocurrency on-chain managers, partly because regulation friction and flagging market conditions that undermined their value-add. Yet, one person’s fail is an opportunity for someone else. Selkis sees an opportunity for good active managers as memes decline and fundamentals take over.
Coding is improving the ability to create rules-based asset managers, and protocols permitting and expansion of on-chain funds and indices should increase in 2023. Unfortunately, the SEC isn't likely to respond positively due to the requirement of being developed outside of the US.
For the next section, the report oddly clumps two very different trends - crypto-for-good and real estate tokenization - together under the heading of “New Novel Markets.” Let’s look at them as Trend 8a and Trend 8b.
Messari 2023 Defi Trend 8A: ESG and Crypto-For-Good
With the scary headlines, volatility, meltdowns, and speculative activity around crypto investing, it's easy to miss crypto’s exciting potential to help with some significant issues plaguing society.
ESG crypto protocols such as Flowcarbon, Nori, Toucan, and KlimaDAO are improving the carbon credit space via tokenizing carbon offset. These dApps are bringing blockchain’s transparency and aggregation advantages to revamp the traditional carbon market.
Another fascinating crypto-for-good emerging sector is Regenerative Finance. ReFi is a financial model rooted in regenerative economics, encouraging individuals to generate an income by working on and funding public projects.
Examples include innovative peer-to-peer financial tools and services to support regenerative projects such as carbon removal, biodiversity management, ecosystem regen, and protection, or waste removal.
Messari 2023 DeFi Trend 8b: Digitizing Dirt - Real Estate Tokenization
Given the sheer size of the real estate finance sector, it's no surprise that DeFi protocols are entering the marketplace. Examples include Propy, a tokenized real estate protocol, and Vesta Equity, which creates fractionalized ownership. Although the potential upside is enormous, Messari believes that heavy regulation will slow the progress of physical real estate protocols for the foreseeable future.
Messari 2023 DeFi Trend 9: Dilution of DeFi Principles
The long road to compliance includes compromises on regulation, centralized decision-making, and anonymity. For example, Aave recently geofenced U.S. users, and Uniswap Labs delisted tokens last year. Most browser wallets and front ends have IP tracking for AML (anti-money laundering) compliance purposes.
The very nature of DeFi puts many of its protocols at odds with governments and traditional finance. Messari goes so far as to say that DeFi may not survive global regulatory hurdles!
Messari 2023 DeFi Trend 10: Fix Security or Bust
As if regulatory hurdles were not enough to juggle, destructive players came on strong in 2022 with an astonishing $3 billion in on-chain hacks. Poly Network, Nomad, Wormhole, Badger, Mango, and Harmony Horizon were a few examples.
Ongoing security concerns will buoy a thriving sector for security auditors and economic security modelers like Gauntlet and Chaos Labs. Events like the DeFi Security Summit will continue bringing stakeholders together to develop global security standards.
The Bottom Line
The world has seen drastic changes since Messari’s 2021 report when interest rates were near zero, and crypto markets and the S&P were at all-time highs.
Today the pendulum is swinging in the other direction. Even though institutional crypto investment is increasing and the crypto community continues to grow, DeFi’s progress in 2023 will largely hinge on regulatory outcomes.
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This material has been prepared for informational purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.
