Crypto Outlook 2023:

The Hottest Crypto Trends to Watch for This Year

Table of contents:

Introduction
1

Federal Reserve
2

Crypto Staking Regulations

4

LSD
6

Shanghai Upgrade
9

AI tokens
11

Decentralized Stablecoins
13

Summary
14

The year 2022 was a challenging one for the market, and if we were to
take lessons from the last crashes, the conclusion would be that trying to
peek into the future of crypto is a completely fruitless endeavor. Indeed,
no one in their right mind could have imagined that multibillion-dollar
companies would collapse almost overnight, the entire industry would find
itself under the regulatory microscope from governments worldwide, or
that the scope of the years-long fraud will drive from the space even the
most starry-eyed believers. 

The only thing we can be sure about is that 2023 starts with the lessons
from the previous crisis — and is poised to be a landmark year for the
crypto sector. While the future may not be crystal clear, we can still
forecast some trends that we expect to dominate the market in the year
ahead.  

Summar
Fundamentally, we think that cryptocurrency prices will continue to
move in sync with the stock market, and the macroeconomic
headwinds — such as geopolitical tensions around the war in Ukraine,
Fed rate hikes, and subdued consumer spending growth —  will still
create uncertainty in the industry.
Regulation-wise, in 2023 we should see more clarity on major legal
questions as a response to the FTX collapse and the subsequent string
of bankruptcies from major crypto firms. Meanwhile, proof-of-stake
cryptocurrencies are likely to face escalating enforcement actions as
the SEC is calling their yield-generating nature into question
For market watchers, the emerging narratives to keep an eye on in
2023 will be liquid staking derivatives (LSDs), AI tokens, and
decentralized stablecoins. 

1
All eyes on Federal Reserve

If 2022 has taught us anything, it’s that crypto isn’t decoupled from
traditional markets and geopolitical tensions. The macro environment will
continue to influence crypto prices in 2023, with Federal Reserve rate
hikes having the most impact on the industry. 

While the Fed has already raised interest rates seven times during the
2022 tightening cycle, investors forecast that it will stand pat through
2023. The Federal Reserve’s recent decision to slow down rate hikes may
indicate a first step towards less hawkish stance, as Chair Jerome Powell
emphasized the signs of disinflationary process in the economy following
the Federal Reserve's latest policy meeting on February 1, which saw the
central bank raise its benchmark interest rate by another 25 basis points.

The process "is going to take quite a bit of time, and is not going to be
smooth," Powell said, indicating that the chances for a pivot in 2023 are
slim. The Chair’s comments suggest that the Federal Reserve plans to
keep rates elevated in the year ahead. And Fed officials seem aligned on
keeping monetary policy tight — according to December 14 FOMC
projections, not a single committee member expects rate cuts in 2023,
whereas their outlook for 2024 is significantly more diverse.

2
"A number of participants emphasized that it would be important to
clearly communicate that a slowing in the pace of rate increases was not
an indication of any weakening of the Committee’s resolve to achieve its
price-stability goal or a judgment that inflation was already on a
persistent downward path," Fed minutes from December meeting read. "In
view of the persistent and unacceptably high level of inflation, several
participants commented that historical experience cautioned against
prematurely loosening monetary policy."

For now, it looks like those hoping for Fed’s pivot will have to wait a bit
longer. As higher rates generally lower investors’ appetite for risky assets,
the future of crypto in 2023 is likely to be shaped by cautious optimism
and uncertainty, with no strong bull run in sight until early 2024.

3
Gensler is coming after crypto staking

On February 9, the U.S. Securities and Exchange Commission hit Kraken

with a $30 million fine and forced the crypto exchange to discontinue its
staking-as-a-service offering for the U.S. customers. In a complaint,
regulator argued that Kraken’s program advertised annual investment
returns of as much as 21 percent, and therefore amounted to the sale of a
security that should have been registered with the agency.

SEC’s charges against Kraken raised existential concerns for the future of
staking on the PoS blockchains like Ethereum, Solana, and Cardano. The
regulator has a long track record of arguing that crypto lending offerings
— the ones that involve depositing crypto with a centralized platform —
are securities under the Howey test, and has successfully fined several
crypto lenders for selling unregistered securities, with Genesis and Gemini
being the latest companies to get sued by the commission. Crypto
staking, while not exactly synonymous with crypto lending, may face the
same challenges if the SEC does move to restrict it.

source: nansen.ai
4
If the regulator is successful in banning centralized staking offerings, a
major stream of revenue for CeFi companies would run dry. Out of $25
billion worth of Ether currently staked on the blockchain, around 25% is
held by a trio of exchanges — Coinbase, Kraken, and Binance, with
Coinbase being the second-largest staker after the decentralized service
Lido.

Should the SEC come after Coinbase staking offering, the exchange is
ready to defend itself, CEO Brian Armstrong said on Twitter.  

"The purpose of securities law is to correct for imbalances in information.

But there is no imbalance of information in staking, as all participants are
connected on the blockchain and are able to validate transactions
through a community of users with equal access to the same information.
Trying to superimpose securities law onto a process like staking doesn’t
help consumers at all. Instead, unnecessarily aggressive mandates will
prevent US consumers from accessing basic crypto services in the US
and push users to offshore, unregulated platforms," Coinbase’s chief legal
officer Paul Greval argued in a February 10 blog post.  

Currently, the scope of the regulatory crackdown on crypto staking is

hard to estimate, as it will depend on whether SEC is going to file charges
against Coinbase and how well the exchange will defend such suit.
Perhaps the only thing is clear that as long as Gary Gensler heads the
Commission, another regulatory crackdown on the industry seems
inevitable — and he got plenty of time ahead to come up with more
enforcement actions, since his term as a Chairman ends in 2026.

5
LSDs are the DeFi’s next big thing

The SEC’s looming crackdown on crypto staking, and the potential

winding down and closure of centralized staking products put a spotlight
on the need for the solo validators and decentralized staking pools. 

Solo staking, although considered to be the gold standard of Ethereum

staking, isn’t really for everyone — to be able to run a validator node, one
needs 32 ETH (around $50,000 at today’s prices), a specialized hardware
with a stable Internet connection, and some degree of crypto-savvy. Very
few people have it all — and this is where the liquid staking derivatives
(LSDs) enter the scene.  

LSDs are an innovating solution that allows users to unlock the liquidity of
their staked assets. Basically, it works this way: a liquid staking provider
takes crypto deposits (can be any amount, not necessarily 32 ETH), pools
them together and stakes, and then issues a new token that is a
derivative of the staked asset, hence the name. Through the use of LSDs,
users can earn staking rewards and simultaneously participate in other
DeFi activities. 

Not all of these pooled staking protocols are decentralized: for instance,
the second-largest Ethereum LSD is cbETH, a token issued by Coinbase
to represent Ether staked with the exchange. Still, the majority (73%) of
the liquid staked derivatives market belongs to Lido Finance, the protocol
that was first to pioneer LSDs and has recently become the largest DApp
by total value locked, surpassing DeFi’s unofficial central bank MakerDAO.

6
The SEC’s looming crackdown on crypto staking, and the potential
winding down and closure of centralized staking products put a spotlight
on the need for the solo validators and decentralized staking pools. 

Solo staking, although considered to be the gold standard of Ethereum

staking, isn’t really for everyone — to be able to run a validator node, one
needs 32 ETH (around $50,000 at today’s prices), a specialized hardware
with a stable Internet connection, and some degree of crypto-savvy. Very
few people have it all — and this is where the liquid staking derivatives
(LSDs) enter the scene.  

LSDs are an innovating solution that allows users to unlock the liquidity of
their staked assets. Basically, it works this way: a liquid staking provider
takes crypto deposits (can be any amount, not necessarily 32 ETH), pools
them together and stakes, and then issues a new token that is a
derivative of the staked asset, hence the name. Through the use of LSDs,
users can earn staking rewards and simultaneously participate in other
DeFi activities. 

Not all of these pooled staking protocols are decentralized: for instance,
the second-largest Ethereum LSD is cbETH, a token issued by Coinbase
to represent Ether staked with the exchange. Still, the majority (73%) of
the liquid staked derivatives market belongs to Lido Finance, the protocol
that was first to pioneer LSDs and has recently become the largest DApp
by total value locked, surpassing DeFi’s unofficial central bank MakerDAO.

7
 source: DefiLlama

The tokens behind decentralized liquid staking protocols, such as Lido’s

LDO, Rocket Pool’s RPL, and Frax’s FXS, have recorded significant gains
amid fears of the SEC’s imminent crackdown on the centralized staking
products. Should the regulator go full force against Coinbase and
Binance, two biggest remaining staking-as-a-service providers, Lido and
its smaller competitors are likely to be the prime beneficiaries of such
policies. 

Moreover, the rise of the DeFi staking alternatives could help make
Ethereum’s ecosystem more resilient to centralization risks — and the
upcoming Shanghai upgrade is likely to further increase investors’
appetite for LSDs.

8
Shanghai upgrade to boost Ethereum’s staking ratio

As September’s Merge transitioned Ethereum consensus mechanism from

proof-of-work to proof-of-stake, users could pledge 32 ETH to become
network validators, but the funds were locked indefinitely. Now, the
Shanghai update (EIP-4895), which is tentatively set to take place in
March 2023, will allow users to withdraw their staked Ether and is
expected to have major ramifications for ETH market demand.

With withdrawals enabled, investors will have two options to cash out
their profits: to release just accumulated staking rewards, or to exit
staking entirely. A full exit is subject to a withdrawal queue, which
depends on the number of validators who wish to withdraw. To prevent
massive exits and ease selling pressure, a maximum of 43,000 ETH can
be withdrawn from Beacon Chain per day.   

In the short term, Ethereum price is likely to see a 15 to 20% correction, as

both partial and full withdrawals are likely to exceed the typical ETH daily
trading volume. However, it's still too early to tell exactly what to expect
for the withdrawal period, as it’s difficult to predict how many investors
intend to fully exit their staked positions.

9
Yet, in the medium to long term, Shanghai could be the most bullish
catalyst for ETH price in 2023. According to JPMorgan estimates, the
long-awaited upgrade will raise Ethereum’s staking ratio from the current
14% to the PoS blockchains average of 60%, bringing more capital to the
network and reducing the supply of ETH in circulation.

"Assuming the staking rate converges over time to the 60% average of
other large networks, the number of validators could increase from $0.5
million to $2.2 million and the annual yield in ETH would fall from 7.4%
today to around 5%," the analysts estimate.

10
AI tokens are the new meme coins

The recent success of ChatGPT and the ongoing AI "arms race" between
Google and Microsoft has fueled the AI-themed token rally, with some
coins posting triple-digit gains in a week. The new buzzy class of crypto
assets is gaining momentum, reminiscent of the earlier hype trends in the
industry like the ICO boom, dog-inspired meme coins, Metaverse, and
play-to-earn. 

As the crypto market shows signs of recovery post-FTX collapse, the

resurgence in crypto prices has awakened investors’ appetite for the next
big thing, and the thing happened to be crypto tokens linked to artificial
intelligence. Since November 30, the prices of AI-themed tokens rose by
to 16 times, with DeepBrain Chain (DBC), SingularityNET (AGIX), Botto
(BOTTO), and Fetch.ai (FET) recording the biggest gains.

11
The surge in AI tokens comes as no surprise, given a positive institutional
investor sentiment toward the new buzzy tech. According to a recent
JPMorgan survey, which featured 835 institutional traders in six total
global markets, 53 percent of respondents ranked AI to be the most
influential technology for shaping future trading, with API integration and
Blockchain/DLT scoring 14 and 12 percent respectively.

source: JPMorgan

With such strong backing from institutional investors, AI tokens are likely
to continue to rally off the hype despite their already impressive gains.
However, as trends come and go, it’s worth to keep in mind that most of
these projects are massively overvalued and are yet to produce
commercial results

12
Decentralized stablecoins on the rise

Following its settlement with Kraken, the SEC turned its eye on
stablecoins, ordering Binance’s partner Paxos to stop issuing BUSD. In its
February 13 consumer alert, the New York State Department of Financial
Services said the order was issued "as a result of several unresolved
issues related to Paxos’ oversight of its relationship with Binance." 

According to Morgan Stanley strategists Sheena Shah and Kinji Steimetz,

the broader crypto space should pay attention to the SEC’s moves against
BUSD and similar products, as "falling stablecoin market capitalization
means falling crypto liquidity and leverage."

"We think stablecoin issuers will likely have to register and show they hold
sufficient liquid assets to back the issued stablecoins," they wrote, adding
that "stablecoins play a vital role in crypto trading and their products
potentially compete with the fiat banking system."

13
The Wall Street Journal earlier reported that the SEC would argue that
Paxos’ BUSD was an unregistered security, the same tactics it previously
used successfully against Kraken, Genesis, and Gemini. The enforcement
action against Paxos calls into question the future of the other two main
fiat-backed stablecoins, Tether’s USDT and Circle-Coinbase’s USDC. 

With the uncertainty surrounding the centralized stablecoin issuers, we

expect decentralized stablecoins to make a massive comeback in 2023.
As it often happens in crypto, when the risks associated with centralized
products outweigh the benefits, decentralized alternatives quickly take
over the market share, so this year our eyes will be on MakerDAO’s DAI,
Frax’s FRAX, and Liquidity’s LUSD.

Bottom line

While 2023 is set to bring new challenges for the crypto industry, such as
a high degree of macroeconomic uncertainty and regulatory crackdowns,
we also expect this year to lay foundation for a strong bull run in 2024. 

Additionally, the current emerging trends — such as liquid staking

derivatives, AI tokens, and decentralized stablecoins — prove that despite
the rough 2022, the industry is showing signs of a rebound, constantly
evolving and coming up with the new narratives that boast great potential
for the future.

14