Crypto-focused venture capital firm Pantera Capital, which has around $3.8 billion in assets under management, has summed up its guidance for 2023 and the future is in decentralized finance (DeFi).
The bear market that emerged early last year was compounded by a spate of high-profile exploits and bankruptcies, including the implosion of multi-billion dollar exchange FTX and the filing of crypto lender Genesis, a sister company of CoinDesk, last week.
“Pantera has managed blockchain funds in three previous “crypto winters,” noted Dan Morehead, Pantera’s CEO and co-chief investment officer, in the foreword of his investor letter titled “The Year Ahead.”
“Everyone has reportedly had catastrophic events. For example, when Mt. Gox went down, it represented an 85% market share – much larger than FTX today,” Morehead continued. “Blockchain will change the world. It will certainly survive these problems.”
Crypto Market Prospects 2023
“Looking ahead, it seems fairly obvious that the historical arc of the world’s financial tracks will culminate in blockchain-based systems with smart contracts. The real questions are how do we get there and what needs to happen to get there,” Pantera co-chief investment officer Joey Krug wrote in a section of the letter.
He noted that scalability systems have brought transaction fees below 10 cents on the Ethereum blockchain. He expects that future upgrades to Ethereum and protocol extensions for Layer 2 scalability systems will further push transaction fees down to around 1 cent, which would help decentralized exchanges compete with the larger centralized exchanges.
Krug sees the “end state” of crypto as a world where “the average person will have apps on their phone that will give them access to DeFi, where they can conduct unbanked/brokered financial transactions with lower fees, global liquidity and markets, operating 24/7.” However, Krug wrote that reaching this final state will require solutions to a number of current problems, which can be broken down into two categories: increasing liquidity in DeFi and making DeFi easier to use, in particular for crypto newbies.
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In terms of liquidity, Krug said it is important to get more institutional capital into DeFi in the form of more federal or state regulated custodians that directly support the use of Ethereum. Another method would be to aggregate liquidity across multiple chains, layer 2s and liquidity pools on those chains, which would allow apps to essentially look for best price and execution after users submit a trade. However, such aggregation would require the construction of secure cross-chain bridges — which might seem like a lofty goal after the wave of exploits for such bridges in 2022.
As for the usability issues with DeFi, Krug said they have gotten better, but there is still room for improvement, particularly with crypto wallets. Simplified user experience or UX design, elimination of trading fees that have to be paid in Ether (ETH) regardless of the asset traded, and better fiat ramps are all listed as major improvements.
Paul Veradittakit, general partner at Pantera Capital, outlined his 2023 outlook in a CoinDesk article in December, predicting increased investment in DeFi, Ethereum scalability technology, and non-fungible tokens (NFT).
Read more: Crypto funding collapsed in 2022, but VC head sees opportunity in 2023
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