Outlook for blockchain protocols: Key themes to dominate in 2023
The Ethereum Merge upgrade and the success of Layer-2 solutions were the highlights of last year in the blockchain protocol space. Our Head of Investment Research, Katalin Tischhauser, has identified the key themes to dominate blockchain protocols in 2023.
This is part of our Crypto market outlook 2023. Download the report here.
Highlights of 2022
Ethereum’s decline in market share in 2021 did not carry on into 2022. The “Ethereum killers” did not kill Ethereum, and its market share remained broadly unchanged over the year. Binance Smart Chain continued increasing its share of Total Value Locked (TVL), which nearly doubled last year. More surprisingly, TRON gained significant market share over the year (by nearly quadrupling) and catching up with Binance Smart Chain. Its token price was also a strong outperformer.
Unlike previous bear markets, where a relative “flight to safety” within crypto allowed Bitcoin to outperform and its share of the overall crypto market increased, Bitcoin’s dominance did not rise in 2022 the flawlessly executed Ethereum Merge upgrade was a triumph.
The growth of Layer-2 scalability protocols was another highlight in an otherwise difficult year. Polygon’s user count doubled, and a more recent Layer-2 project, Optimism, increased its active users fivefold.
We expect the following key themes to dominate in 2023:
• Scalability will remain a critical issue for blockchain protocols, as use cases develop and adoption grows. It is an area of intense innovation and venture investment. “Zero knowledge proof” based protocols are gaining in popularity over the still-dominant “optimistic” protocols.
• Ethereum is working on the next phase of their major upgrade, the “Surge”, which is intended to increase Ethereum’s scalability by orders of magnitude. Meanwhile, the Shanghai upgrade, planned for March 2022, will enable withdrawals of staked Ether for the first time.
• Solana’s possible rebound after a tough year was marred by more chain halts in the first half of 2022, and later by a loss of confidence in the project based on FTX’s failure. There have been concerns that FTX may have manipulated the price of Solana as they held about one sixth of Solana’s circulating supply — which is now tied up in the bankruptcy proceedings. However, interest in Solana is growing again, on the back of the technological merit of the project and its committed developer team.
• As applications start attracting significant numbers of users, application-specific chains can better suit the needs of projects in a specific sector.
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