Watch: Web3 sectors to watch in 2023 | The Crypto Mile
Leaving behind a year of financial fiascos, Yahoo Finance UK looks at the web3 sectors that have the potential to shine in 2023 and beyond.
On this week's episode of The Crypto Mile, Fadi Aboualfa, head of research at enterprise-grade custody provider Copper which helps institutional investors navigate the web3 world to safely acquire, trade and store digital assets.
Aboualfa said institutions that were interested in web3 at the beginning of 2022 are still interested.
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Even after a year of imploding centralised cryptocurrency exchanges, failed hedge funds and disastrous tokenomics, investment is still being channeled into web3 developments.
Capital is being directed at innovations that can facilitate a more open financial system and open access to financial products that would otherwise reserved for wealthy clientele who have access to investment banks and asset management arms.
Aboualfa said: "In 2023 we're going to see a lot more on the custodial side and understanding of the custodial side, simply because it's interesting to see that a lot of the devastation that has happened in crypto in 2022 was actually the reason why crypto exists in the first place, which is ownership of your own assets.
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"I think that's one of the primary things that we're going to see develop more closely the infrastructure around securely storing your assets and teaching people how to securely store their assets rather than, keeping them on these centralised players and taking on these counterparty risks."
He said that the others areas that will attract the interest of institutional investment will be the technology behind central bank digital currencies (CBDCs) and stablecoins, such as USDC (USDC-USD) and USDT (USDT-USD).
Aboualfa added: "The other things that we're going to see will be cross-border payments which will get a lot more focus.
"The cross-border payment industry is a very, very problematic one.
"There are so many cross-border payments and remittances on a daily basis, there's about $9tn (£7.5tn) in counterparty risk on Forex markets because the settlement time takes two days.
"And so there's a lot of focus from the Financial Stability Board and the Bank of International Settlements to actually resolve this issue and we are seeing distributed ledger technology and blockchains being able to assist with this.
Read more: 2022: Year in review
"And so we're seeing a lot more pilots being executed on the idea of being able to remove friction in cross-border payments and reduce the average cost of 6% for cross-border payments to 1% or less."
Institutional interest in NFTs
Institutional interest in non-fungible tokens (NFTs) is expanding. Traditional brands are eager to capture some of the passion and spending frenzy experienced in the NFT craze of 2021 and early 2022.
Aboualfa said these companies are not using their own private blockchain infrastructure, but are deploying their NFTs on public blockchains, such as the polygon network (MATIC-USD).
He added: "When JP Morgan (JPM) modified versions of Aave and Uniswap on Polygon for the tokenisation of some currencies and government bonds and transacting, they didn't use their own private blockchain.
"It's not that JP Morgan doesn't have its own blockchain unit, it does, it's a very good one on Onyx.
"But JP Morgan still decided to test these public protocols out for their pilot projects.
"And so, we will see a lot more testing of both to see what's possible, what's feasible, how can we scale this, can we make things a lot more interoperable and safe."
Goldman Sachs and blockchain technology
David Solomon, CEO of Goldman Sachs (GS), has spoken about the advancements in technology that blockchain and other new ledger-based tools can bring to the world of traditional finance.
In December Solomon said on CNBC’s Squawkbox he is a "big believer" in the disruption that blockchain-based technologies are causing, and that Goldman Sachs is also trying to participate in this revolution.
Solomon named bitcoin and other cryptocurrencies major catalysts to encourage a modernisation of banking platforms.
Solomon said: "The key thing is how can blockchain or other technologies that are not developed yet accelerate the pace of the digitisation of the way financial services are delivered?"
He added that is was important for Goldman Sachs to offer bitcoin to its customers, to let them bet on the market behaviour of the currency.
In the last year, bitcoin has been vindicated as a valid asset by several important banking institutions, including JPMorgan.
Looking ahead to 2023
The macroeconomic environment is expected to remain gloomy as the US Federal Reserve is expected to remain committed to its tightening monetary policy in 2023.
After the crash of the FTX cryptocurrency exchange in early November, global regulatory bodies are expected to accelerate the frameworks that have been developed since the industry's expansion.
ZK tech will accelerate in 2023
ZK rollup technology combines thousands of transactions on the Ethereum network and settles them in one batch using a smart contract.
This enables these transactions to occur in seconds and at a fraction of the cost of trading on the Ethereum main blockchain.
Brian Fu, co-founder and co-project lead of zkLend, said: "ZK-rollup Layer 2s are expected to take on a more prominent role in the crypto space as zkSync and StarkNet are rolling out their production versions in the later part of 2023.
"Further to the gradual upgrade in speed and decrease in transaction costs, ZK-rollups will continue to deliver enhanced user experience, enabled by applications account abstraction and recursive proofs.
"Protocols building on ZK-rollups will become more sophisticated and continue to develop more intuitive features and interfaces for DeFi, GameFi, NFTs and applications."
What is web3?
Web3 is an umbrella term for the future development and manifestation of a "decentralised internet"
The term describes the third iteration of online innovations, an internet where value is exchanged and owned by users, as well as information.
The first incarnation of the online experience has been labelled Web1 and was mostly a read-only affair made up of static websites.
Web2 is what we have now, a more interactive experience, being initiated by social media sites like Bebo, MySpace and then Facebook (META) and Twitter (TWTR), a place were consumers are now also producers, or pro-sumers.
But the definition of web3 is hotly debated. It's most widely used definition sees it as a term to encompass the metaverse, blockchain-based innovations, decentralised finance and storage, cryptocurrencies, NFTs, and decentralised autonomous organizations (DAOs).
Decentralised finance or central bank digital currencies?
There are key jurisdictions across the globe that have committed to creating a nourishing environment for web3 companies to propagate.
Dubai has shown that it is keen to become a web3 leader and cryptocurrency-friendly society.
It is encouraging web3 operations to become domicile in its territory and is promoting itself as a natural home for innovation in the fields of artificial intelligence, cloud computing, and metaverse.
2023 will see certain global hotspots vie to become crypto-friendly global hubs for web3 technology.
Read more: Has yuan become Russia's new dollar?
Major industrial nations will respond by fast-tracking the development of their central bank digital currency technology, with the UK racing to issue a digital pound ahead of the European Central Bank.
The US will be vigilantly monitoring the roll-out of China’s Digital Yuan, a new "programmable money" that could become a reserve currency, whose along China's Belt and Road Initiative trade routes.