Written by: Steven Goulden, Senior Research Analyst at Cumberland
The past year has been beset with negative headlines for the DeFi industry, but we’d be remiss to not acknowledge the non-crypto headlines adversely impacting the industry as well. The Russia-Ukraine War, significant tech-sector layoffs and rapidly evolving monetary policy have impacted TradFi and DeFi markets alike. Despite an improving macro narrative heading into the end of the year, for DeFi and blockchain technology to really demonstrate its potential, it needs to deliver on its already-known goals and compelling new fundamental narratives need to emerge. In 2023, we anticipate that we’ll see meaningful green shoots break the surface in several key areas, which will pave the way for significant progress in the next 6-24 months. Aside from the macro-economic theme, we’ve identified several idiosyncratic developments worth paying close attention to. Each has the potential to be the catalyst for a Cambrian Explosion of cryptoasset uses cases, similar to the exponential growth of the technology sector seen a decade ago with the advent of Web2 & SaaS.
BTC/ETH as a reserve asset and/or global payment medium – winners BTC, ETH
Given the confiscation of Russian reserve assets and the various sanctions enforced this year, there is an increasing case to be made by exporter nations for investing excess reserves in non-developed market government bonds. And, with the dollar close to historical highs, exporter nations also are now less concerned with buying US treasuries to depress their own currencies vs. USD. Even a small central bank allocation to BTC or ETH would be material and would likely lead to other exporting states following suit.
NFTs meet IP – winners MATIC, LOOKS, XMON
NFTs have highlighted the power of digital ownership and demonstrated version 0.1 of an important use case for the capabilities of blockchain technology, Nonetheless, thus far they’ve largely been confined to the art space. Going forward, we believe NFTs will expand beyond this and become a go-to method of tokenizing IP. The opportunity here is significant: there is ~$80t of intangible assets on corporate balance sheets at this point.
While this vertical within crypto is still in its infancy, several notable companies with non-crypto origins have made significant progress in adopting the technology to monetize IP and improve customer engagement. NBA Topshots was one of the earliest projects to garner significant interest, ultimately opening the door to lookalike projects, but the proliferation hasn’t stopped there. One recent high-profile partnership is the collaboration between Starbucks and Polygon to generate NFTs for Starbucks customers. Similarly, Nike (arguably one of the greatest marketing operators globally) has heavily invested here, working with high profile designers on, for example, NFT and physical footwear. They recently announced the launch of Swoosh, where users can design NFTs.
Listening to these companies talk about Web3 initiatives, it’s clear they see digital engagement with customers and fans as a new aspect of the retail experience. NFTs also can be used as part of a loyalty scheme if crypto payments are used; for example, a customer could buy a coffee with USDC through a mobile-based crypto wallet containing their NFT to automatically collect points or discounts.
Lastly, selling NFTs to retail users has the potential to generate material, high-margin revenues to a user base willing to pay six figures for a high-end profile picture such as a CryptoPunk. Nike earned up to $200m last year selling digital sneakers, and luxury brands are now beginning to realize the potential, making it easy to imagine Gucci NFTs as a profile picture or even digital accessories in the metaverse.
Web3 begins to hit its stride – winners BTRST, HNT, RNDR, SOL
After seven years and several attempts, we haven’t yet seen meaningful traction across projects targeting ‘real-world utility’ for blockchain technology. Why? Because it’s extremely challenging to disrupt existing Web2 monopolies in already established verticals. It’s even more challenging to do so when adoption means investing in technology and operational changes across multiple stakeholders with different priorities. Now try to do that via a project being run by decentralized governance.
That said, we are beginning to see a number of genuinely useful ‘real world’ platforms emerge, many of which are on Solana. Some examples would be Braintrust (hiring site for high-end IT workers), Helium (IoT and 5G connectivity), Render (decentralized GPU capacity), Hivemapper (decentralized Google Maps disruptor), and Teleport (decentralized ride sharing and eventually a scalable infrastructure layer for gig economy platforms).
The reality is that it takes time to build and bootstrap projects like these, and so we anticipate material traction is probably 12+ months out, with serious user adoption probably 2-5 years away.
But despite the setbacks, we think real-world Web3 is essentially the killer app of crypto:
Gaming – winners MATIC, IMX, FLOW, ENJ/EFI
There are ~3b gamers in the world, of which around 200m are serious. The total addressable market (“TAM”) is around $200-300b, yet these users usually don’t own in-game items and have little control or governance over these gaming ecosystems. The most obvious application is for gaming studios to mint NFTs with a crypto-native partner (like Enjin) and then sell them through the game to players. These NFTs could be bought or sold in-game or on platforms like OpenSea. It takes around 2-3 years to build a triple A (highest-quality blockbuster) game, which at least partially explains why we have yet to see a Web3 game that becomes a star, and instead have mostly seen products based around play-to-earn mechanics. But given the material TAM, the profitability implications for gaming studios are significant and it strikes us as an easy pitch to sell digital assets to gamers as they are typically tech-savvy.. We expect material adoption once genuinely popular games begin to emerge, most likely in 2023/4.
Read Part 4 of our Year in Review series, “Finding a Footing in Private Markets.”
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