Crypto market bottom and on-chain storage demand in 2023: Huobi

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Huobi Research predicts a crypto market bottom in 2023, along with significant breakthroughs in on-chain storage and layer two deployments.

Huobi researchers dove into the major events that happened in the crypto market and industry in 2022 to try to predict how they might shape the landscape in the coming year.

Huobi predicts a market bottom in the first quarter of 2023

As leverage on DeFi protocols declines and the Fed has likely passed the most difficult phase of its tightening strategy, Huobi believes that market jitters caused by FTX’s fall will form a bottom for the industry of crypto in the first quarter of 2023.

According to former Binances Chief Strategy Officer Gin Chao, past cycles suggest that Bitcoin peaks on average 18-24 months after a low. Depending on where market participants thought the 2022 low was, they could see a top by the end of 2023 or possibly a bit later given the current macro environment.

Investors show strong interest in L1 projects

Despite the prolonged bear market, Huobi’s report estimates that industry investment in Web3 projects exceeded $27 billion in 2022. Although down from previous quarters, this figure suggests that institutional interest for decentralized finance remains healthy. An increase in the number of unique DeFi users over the past year is bolstering investor interest.

Source: Huobi Research

Investments in the third quarter totaled around $6 billion, with Layer 1 (L1) application development on Sui and Aptos blockchains receiving $625 million.

Investors also favored infrastructure projects over L1 blockchains, zero-knowledge deployments, and middleware applications such as decentralized identities and oracles.

A Layer 1 blockchain provides the basic infrastructure and rules for processing and completing transactions in a blockchain ecosystem. Special layer two (L2) chains, called roll-ups, improve the scalability of L1 chains. This is done by executing batches of transactions and posting that data to L1.

The bear market has seen the launch of several new L2 DeFi projects, a trend that is expected to continue in 2023. The total value locked in decentralized applications increased by 131% between January and October 2022 to reach 7.5% of the value total locked to Ethereum.

Source: Huobi ResearchDeFi protocols need disruptive products to survive in 2023

The success of DeFis in 2023 will likely come from protocols guaranteeing a stable revenue stream instead of relying on users to provide liquidity in exchange for rewards.

They will also need to explore the offering of financial derivatives to disrupt the concentration of power of a handful of protocols. Finally, protocols will need to adopt the necessary regulations to survive and thrive. The EU Crypto Asset Markets Bill, due for ratification in 2023, includes rules for the DeFi industry.

Special-purpose blockchains designed solely to run decentralized applications will likely also be all the rage in 2023, Huobi speculates.

Projects like Axie Infinity and DeFi Kingdoms are already running on proprietary layer-two dApp blockchains. Several existing L1s can provide the substrate for these L2s, including Polygon, Avalanche, and BNB Chain.

Additionally, the interest of wealthy Web2 moguls like Jack Dorsey and Twitter CEO Elon Musk in cryptocurrencies will likely see more polish brought to social media dApps in 2023.

Work on unconscious accumulations will continue in 2023

Zero-knowledge (ZK) rollups are a class of rollups that display a summary of changes required on the L1 due to transactions on the L2. In addition to the proposed changes, L2s submit proof of validity, which is a cryptographic assurance policy that the proposed L1 changes are, in fact, the result of executing transactions in an L2 batch.

According to Huobi, validity proofs are complex and ZK roll-ups may require special hardware to speed up proof generation. Until that happens, ZK roll-up development will increase in 2023 but not reach mass adoption.

ZK deployment projects to watch in 2023 are Starknet and zkSync 2.0, the latter being the fastest ZK L2. Work is underway to reduce aggregation costs by compressing transaction data sent to L1. These improvements will begin in the second half of 2023 and continue into 2024.

Huobi expects the demand for on-chain storage to increase significantly

Next year will also see increased demand for blockchain storage, predicts Huobi.

A significant upgrade from decentralized on-chain storage protocols like Filecoin is the addition of programmability.

Filecoin has already introduced a FileCoin virtual machine. It executes the smart contract code needed to run the basic logic of the Filecoin network.

In the second phase of the upgrade, scheduled for 2023 and 2024, users will be allowed to deploy custom smart contracts on the FVM, while Filecoin will close the FVM compatibility gap with the Ethereum Virtual Machine (EVM) . The EVM is the part of the Ethereum blockchain that runs smart contract code.

Source: Huobi Research

Improved FVM compatibility with EVM will allow native Ethereum applications like MetaMask to work on the Filecoin network.

How will the regulation work out?

The regulations will likely address national security concerns posed by specific projects like TornadoCash and projects whose assets are primarily held by its founders. New laws introduced in 2023 could also require on-chain protocols to perform know-your-customer checks and hold a protocol community accountable for legal penalties.

DeFi hacks can speed up regulations and possibly make them cheaper to draft and implement in 2023, Chao suggested.

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Disclaimer Information provided as part of independent research represents the views of the author and does not constitute investment, trading or financial advice. BeinCrypto does not recommend buying, selling, trading, holding or investing in cryptocurrencies

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