The bottom has been touched

It is very likely that the market has already reached the cyclical bottom of crypto: reliance on centralized institutions and on-chain DeFi protocols has diminished, and it is now just a game amongst current users that is only marginally impacted by macroeconomic factors. Unless a serious systemic risk is uncovered, such as variations in response to rapid rules, there is minimal potential for a decrease. Mainstream crypto assets, like BTC and ETH, have established themselves as important asset classes in long-term investment portfolios. In this cycle of a bear market, the price of BTC may hit a bottom around $15000 and $1000 for ETH, and it may stabilize until the first quarter of 2023, after which there will be a significant comeback. The following are the reasons:

On the macro level, after four straight 75bp interest rate hikes, the US CPI has been remarkably alleviated, and voices of halting rate hikes have been heard from several Federal Reserve officials. It is expected that rate hikes will be lower beginning in December, and will end around March 2023. In other words, the rate of rise is reducing, the most difficult portion of this cycle has passed, and the bottom of monetary policy is almost complete.

Although the FTX event in November reduced the price of BTC, which had been holding steady for over five months, to less than $15500, we think the severity and length of the market slump have wiped off the opportunistic and blind positive feelings in the market.

The FTX debacle might be the last nail in the coffin for dysfunctional institutions and enterprises. Market consequences have been witnessed. The market will gradually absorb the impacts, and a bottom will emerge amid the volatility, which is predicted to extend until the first quarter of 2023. Following corrective self-discipline activities and tightened rules, it will be easier to shape the bottom of the present bear market.

SocialFi may be the next trend as web2 social tycoons are rushing there

Elon Musk, CEO of Tesla, signed a $44 billion agreement to acquire Twitter on October 28, 2022. Musk is deeply invested in the cryptocurrency market (for example, Tesla now owns $218 million in digital assets). Furthermore, Musk has actively supported Dogecoin and has attempted to broaden the payment options. Prior to the purchase, several crypto-friendly features debuted on Twitter, such as the tip tool, which premiered in May 2021 to accept Bitcoin payments, and NFT is compatible with being used as a personal avatar. If Twitter entered the crypto market, it would undoubtedly become the unicorn in SocialFi, correcting the stereotypes caused by bad user experience and a lack of data. Furthermore, Twitter will act as a crypto application as well as a social network, enabling more people to enter the crypto business and driving fresh traffic to Web3.

In addition to Twitter, Reddit and Instagram have joined the Web3 sector because the social segment in Web2 is now so crowded that the rivalry is too severe to draw any new visitors, but the Web3 industry is still in its early stages. To gain a competitive edge by entering early, these top platforms must first develop their own moat or perhaps create their own metaverse, to raise the obstacles to the entrance. More inventive measures in the booming SocialFi and NFT categories may be witnessed next year.

Rollup is a step closer to prosperity, with greater technological advancements and cheaper expenses.

Rollup is a genuine scaling solution for Ethereum, and the merging is easy in terms of performance; the upgrading of Rollup aims to increase performance and compatibility while lowering costs.

ZK Rollup has long been acclaimed by the community, but due to the difficulties in EVM compatibility, it has never achieved widespread adoption. According to optimistic projections, zkEVM will make further progress in 2023. At present, the quickest development is being made by zkSync 2.0, which, if successfully developed, will make zkEVM accessible for developers to deploy apps and users for endless interactions between Q4 2022 and 2023. Polygon zkEVM will also be launched on the mainnet in early 2023, with the goal of becoming EVM-equivalent.

Source: Polygon

Furthermore, ZK Rollup has more ambition than "it works" since both zkSync 2.0 and StarkNet have ambitions to fully use ZK Rollup to increase performance and cut costs. The daring action is expected to be accomplished between the second part of next year and 2024 when Bitcoin will be halved and maybe lit up again. Moreover, Optimism's BedRock is expected to be finished next year, and OP Rollup will continue to advance.

Furthermore, the implementation of EIP-4844 will significantly cut Rollup's gas fees: they are mostly comprised of the cost of call data, and lowering data availability costs is a critical step for Rollup to further reduce expenses.

Proto-danksharding (EIP-4844) offers a novel transaction format known as "blob-carrying transactions," in which raw transaction data from Rollup is saved in a blob at a substantially lower cost than calldata. EVM is not required to access this data; instead, it just needs to check its availability, which involves retrieving the data's KZG polynomial commitment.

Rollup will be able to grow enormously with little effort, while transaction costs will be greatly decreased, allowing Rollup to be as cheap as other L1 chains, lighting the whole ecosystem. However, the burden is so large that it cannot be completed in a matter of days: if everything works perfectly, it may be deployed in the Shanghai update with the withdrawal feature, which is still an optimistic estimate. If the workload becomes too heavy, it may be postponed until the second part of next year or possibly 2024.

Accelerated ZK network: the cornerstone for widespread ZK adoption.

Because of the reduced quantity of data that must be posted to the chain and the lack of a 7-day challenge period, ZK Rollup has greater long-term benefits among Rollups. The major issue that plagued ZK Rollup, in the beginning, is set to be solved with the creation of zkEVM. The fundamental contradiction in the evolution of ZK Rollup leaves the sluggish and expensive creation of ZKP after being able to be compatible with more sorts of operations.

The method of creating a zero-knowledge proof is complicated: it entails converting the program logic into a mathematical circuit that contains not only arithmetic operations but also logical operations like "with," "or," "and not," bit operations, hash operations, and smart contract activities. A mathematical circuit, on the other hand, can only do basic computations such as addition and multiplication. Simulating complicated programs with such minimal tools is almost difficult. Because Ethereum was not meant to be compatible with zero-knowledge proofs, the opcode is not conducive to them. Even for basic tasks such as transferring, the TPS is limited to one transaction per second at most. The complexity of the syntax for ZKP will be greatly enhanced by zkEVM, resulting in slower proof production, and only special hardware will be able to construct proof in a timely way.

Currently, the only cure for boosting the ZKP creation process is a customized high-performance ZK accelerator processor. It is also a good idea to implement an incentive system to drive the validator to compete for the reward, but with one condition: operations must be more decentralized. Even if the sorting or executing step is centralized, at least two teams must be present during the validation phase. In this event, a faster ZK mining sector, comparable to Bitcoin mining, will emerge, and ZK Rollup will enter a more developed phase. Other than Rollup, ZK will gain traction when quicker creation of ZKP and cheaper costs are accomplished. A "GPU-FPGA-ASIC" development path is also possible for ZK acceleration hardware. Because ASIC is clearly not yet viable, the winner is still unknown, and it is among the first two.

It just takes time to accelerate the ZK network, and optimistically, it is probable to see projects that can meet basic demand, but mainstream acceptance can never be accomplished in a year or so.

A loss of trust in centralized platforms is a positive for DEXs.

This report's overriding subject is customers' loss of faith in centralized systems, particularly in cryptocurrency markets.

The fall of FTX presented a systemic danger to cryptocurrency markets, and the exchange's implosion took down a number of industry heavyweights. This event's devastation will be felt for months and years to come. However, there is a clear silver lining for decentralized alternatives.

Hayden from Uniswap is not allowed to touch user monies in Uniswap pools in order to purchase naming rights for an NBA franchise or to sponsor big sports events. Antonio from dYdX is unable to access customer collateral on the platform in order to make a significant loan to his fictitious investment fund. In summary, the concepts and architecture of DeFi platforms do not allow for the same centralization and dangers that led to FTX's demise, namely, dictatorial control by one or a few persons. We think that as time passes and the wounds of FTX heal, more and more individuals will begin to recognize this as well.

DeFi protocols are auditable in real-time thanks to the underlying openness afforded by public ledger blockchains, and there are various possible pathways DEXs may go in the next years.

In light of recent events, DEXs like Uniswap, 0x, Curve, dYdX, and GMX have stood strong. More crypto native players migrating from centralized exchanges to self-custody may result in larger volumes on DEXs in the future. In all honesty, the fact that DEXs are a saving grace is a rather apparent point. However, given the large disparity in UX between CEXs and DEXs today, we are unlikely to see this materialize in a significant manner very soon until that gap narrows significantly.

Source: Delphi Digital

On the way ahead, there are potentially wider ramifications for DEXs, notably how volumes migrate from CEXs to DEXs. How could DEXs arrange their exchange plans to take advantage of the present situation?

Consider the current condition of professional market makers. An exchange that they (and everyone else) thought was healthy and solvent collapsed while many of these companies still had money in their accounts. If FTX was doing unethical things behind the scenes, the next logical question is, which other exchanges are doing the same? Perhaps market participants will now see that DEXs are the way ahead for price discovery and trading in cryptocurrency.

On the other hand, these protocols are only as robust as their weakest line of code, and thus are vulnerable to hacking.

Aside from that, what is the best approach to entice market makers to your DEX, assuming they begin to spend more cash to provide liquidity on DEXs?

The most apparent solution seems to be order book-based DEXs such as 0x, dYdX, Injective, Sei, and Zeta). Market makers are intimately aware of order books and would be more at ease as an LP on these DEXs vs. AMMs with pre-determined price curves.

Will a significant outflow of market-making money from CEXs prove to be a lucrative opportunity for orderbook DEXs? Perhaps.

A multi-chain network promotes the growth of the app-specific chain.

The notion of an application chain did not emerge overnight; Cosmos intended to build an ecosystem of universal connectedness from the start. Application chains are sovereign blockchains for specialized apps that may be constructed using the same development tools as the main chain and share cross-chain and security capabilities inside the primary chain's ecosystem. It is not technically difficult for a Dapp to develop a proprietary chain, and most L1 chains, such as Cosmos, Octopus Network, Polygon, Avalanche, BNB Chain, and so on, could offer the soil. A Dapp chain, on the other hand, is bound by several conditions:

Higher costs to maintain its own network security.
The degree of matching between the mother chain and the Dapp chain in aspects such as speed, user preferences, EVM compatibility, and so on.

DeFi Kingdoms, dYdX, and Axie Infinity are presently Dapps that have successfully moved from on-chain eco-applications to sovereign blockchains; the latter two are on Layer2. Furthermore, around 46% of the ApeCoin community supports the development of ApeChain. It is becoming more prevalent and trendy, particularly for projects in GameFi and Metaverse.

Among the applications listed above, certain revenue thresholds and user volume are already attained before establishing an independent chain; they do not rely on the main ecosystem, so their fate is in their own hands. Becoming a Dapp chain does nothing but boost efficiency, user experience, and project valuation. Furthermore, Dapp will be more competent in value discovery, such as engaging in staking and running its own sequencer or verifier to capture MEV, hence lowering transaction costs and so on. Dapp chain adds life to the competitive environment of multi-chain networks, and in order for additional Dapp chains to be constructed, different chains must give greater assistance in terms of cross-chain capabilities, security, and ecological finance.

Expansion and upgrades: the storage portion is ready to go.

Despite the fact that the storage sector is not the primary emphasis, more genuine demand has emerged or is on the way for the storage segment with more channels and more developed capabilities, which pushes the storage segment to become one of the most essential infrastructures in Web3.

For starters, more actual data is being saved in multiple storage systems. Filecoin launched the Filecoin Plus (FIL+) program late last year, and actual data storage has increased in tandem. As of the third quarter of this year, 138 clients were employing huge datasets (100TiB). Web3 platforms and blockchain projects such as OpenSea, Rarible, MakersPlace, MagicEden, Project Galaxy, and others are among them, as well a huge number of more conventional clients such as UC Berkeley, USC Shoah Foundation, Starling Labs, and others. Arweave has partnered with Meta to host digital collections created by Instagram creators on Arweave. Storage protocols get more legitimate demand, which is more consistent and projected to build up rather than the instability of the crypto market, giving a solid foundation for storage protocols.

Second, more channels are interconnected. Users may now access Web3 data held on Arweave by paying with AVAX, ETH, or tokens to upload data to the Arweave network through Bundlr Network. Other storage protocols may imitate: storage protocols may be expanded with additional channels and penetrate every part of the Web3 universe, securing the core characteristic of storage.

Source: Bundlr network

Third, further functionality will be made accessible. The most intriguing storage increase is the addition of a computer layer, which will provide greater capacity than a hard disk. FVM is now incapable of realizing any required logic by users, while Ceramic remains difficult to reach, and the development kit is unfinished. The second phase of FVM is expected to be completed between next year and 2024. After FVM is implemented, various unique functions for storing and indexing data may become accessible in specific segments for better data management and improved security. Ceramic still needs infrastructure improvements, but Stratos is moving ahead with the launch of mainnet. Different technological solutions will emerge from distinct initiatives, and they will undoubtedly educate and inspire one another. It is realistic to anticipate that new applications and features will emerge from this computer layer based on huge data storage; it is just a question of time, and next year may still be the required input for further progress.

Embedded regulations: more stringent rules for on-chain activity.

Some on-chain operations have previously been regulated; for example, Tornado cash was sanctioned by the US Treasury, Ooki DAO participants were sued by the CFTC, and ETH is being considered as a security.

Regulation of on-chain procedures is intrinsically difficult, and it cannot progress without cost and feasibility concerns. Some incidents this year are regulated or prosecuted under existing legislation, such as the United States Securities Act, the Bank Secrecy Act, and so on. The costs of regulation, prosecution, and enforcement are relatively expensive, and high costs inhibit broad adoption, leaving a place only for minority situations.

With the maturation of national regulatory frameworks for crypto assets in the next year or two, laws, particularly for on-chain protocols, such as the DeFi "embedded regulation" initiative being piloted in the EU, may be enacted. KYC and AML compliance may be necessary for on-chain processes. The regulation of on-chain procedures will be reinforced as the related expenses are successfully lowered.

The on-chain protocols that regulatory authorities are most likely to be concerned with may share the following characteristics: first, projects that may jeopardize national or economic security, such as Tornado Cash, which assisted the North Korean hacker group, Lazarus Group, in laundering over $455 million; second, projects in which the founders/developers own or control the majority of assets, such as XRP. Regulatory parties may take a precautionary approach by mandating all on-chain processes to comply with KYC and AML so that once an unlawful incidence occurs, the regulatory parties are protected. Identities may be established right away before anything worsens. Furthermore, if an on-chain protocol is lawfully sanctioned, the founders, developers, and so on might be held liable, and restraining orders could be issued against users, assets, and partners involved.

More underdeveloped nations will embrace cryptocurrencies as a form of payment or fiat currency.

El Salvador has been in turmoil since the official government recognized Bitcoin as fiat money in September 2021. Nonetheless, other nations, such as the Central African Republic, followed suit. More nations are projected to legalize Bitcoin as a fiat currency or payment method by 2023: on the one hand, hyperinflation may be relieved, and economic development is wanted as new industries may be launched. However, since the bear market is depressing and the incidents are frightening, the governments will look more cautious while taking genuine moves.

Except for developed areas such as California in the United States, where the use of cryptocurrency as a payment method is merely a trial in new technologies, the majority of other countries using cryptocurrency as a payment method are comparatively less advanced nations such as El Salvador and the Central African Republic. Their monetary systems are controlled by other popular currencies, such as US dollars, and their own currencies are vulnerable and on the verge of collapse. Whenever the currency's issuing nation makes economic changes, the home economy suffers greatly, as it did during the recent rounds of interest rate rises. As a result, cryptocurrencies that are less impacted by economic fluctuations while being transparent in their issuance would undoubtedly gain popularity in such nations. Furthermore, the Russia-Ukraine War has shattered the global economic landscape. As Russia is subject to several sanctions imposed by Western nations, crypto transactions like BTC have witnessed enormous development inside Russia: many people are ready to risk asset depreciation as a result of the sanctions by holding cryptocurrencies. As a consequence, more governments may use bitcoin to hedge against the possibility of hostilities or sanctions, and we think that more countries will accept cryptocurrency as a fiat or payment option next year.

Disclaimer:
This article is intended for and only to be used for reference purposes only. No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.

Year-end crypto market report: A summary of 2022: Final part