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Sharding Capital: 2023 Web3 Growth track forecast

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Every failure is a learning opportunity.

Original source: Sharding Capital

The 2022 crypto market gave a very volatile year-end. Since the beginning of 2022, in the performance of global major asset classes, bitcoin has fallen more than other mainstream asset classes by about 65%. Black swans are frequent in the market. From Luna thunder in May to FTX crash in November and various secondary disasters, coin practitioners and institutions in 2022 have been hit to varying degrees across the board.

2022 has been a year of turmoil, but also a year of harvest. Every failure is a learning opportunity. The cryptocurrency market will become more mature, resilient and resilient. Ethereum successfully completed the Merge in September, turning the Ethereum network into a more powerful processing layer and data availability layer that serves as the infrastructure for rollup, as well as laying the foundation for Sharding. Non-homogeneous tokens (NFT) have brought blockchain technology into mainstream culture, attracting buyers who are not interested in financial cryptocurrencies.

Sharding Capital said the team examined more than 1,000 early stage projects in 2022, and there are still a lot of good entrepreneurs and builders working on them, saying, "We should be more hopeful about 2023 than we think, This is because the black swans in 2022 have laid a good foundation for entering the market. When the industry reshuffles, it is the best time to go beyond the curve. Whether it is individuals or organizations, the more people are afraid to enter the market or stop investing, the more they need to study and deploy."

Combined with positive expectations for 2023, the following share covers Sharding Capital's top 5 growth tracks for cryptocurrencies in the New Year.

TL; DR

1- NFT as the core asset itself will recover stronger related supporting facilities NFTFi will face a blowout demand

2-SocialFi has attracted much attention from Web3 users, and the adoption of smart contract wallet and DID are expected to facilitate user penetration and the formation of network effects

3- DeFi applications with proven business models will capture greater value to achieve organic cash flow growth

4- Ethereum will still be dominant in the public chain competition pattern. L2 ecological development trend is good

5- The next generation of pan-entertainment header applications will lead the Web3 break the outermost edge of the circle

NFT becomes the guiding factor of "new user entry" NFTFi will face a blowout demand

NFT, a representative of alternative assets in crypto assets, focuses on cultural financial attributes with PFP as its core. It is currently on the issuing and trading side of the asset. At present, the characteristics of the total issuance is rare, and the non-homogeneity makes its valuation more complicated, which leads to the low market liquidity of NFT.

NFT's past: A single asset class and a homogenous narrative led to a shortage of assets at the supply end. With less allocation of crypto assets in the downward market, less liquidity will be allocated to NFT (alternative assets in crypto assets). The demand side is cautious to the downward market and cannot generate new investment and consumption demand. Valuation, lending and clearing systems are also flawed.

Current situation of NFT: PFP cultural NFT dominated, the first wave of NFT bubble burst and returned to rationality. NFTFi is the focus of all walks of life, Utility NFT landing difficult.

The future of NFT: enrich the asset types of NFT, expand the internal diversification of PFP type NFT, and promote the financial light attribute of MEME culture and the liquidity of alternative asset itself by starting from the creation and release mode, second creation and infrastructure serving creation and second creation. In addition, Web2 companies and brand action are constantly trying to participate in the NFT wave to expand the audience and increase the brand influence.

产品方面，NFT 的金融化发展现有 EIP 标准，发行标准：ERC-721，ERC-1155，ERC-875，租赁标准：ERC-490，半同质化 Token ：ERC-3525，版税收入：ERC-2981。这些加深 NFT 金融可组合性。NFT 的商业化发展现有 EIP 标准，ERC-5192 的确立，让 SBT 应用具备了大规模采用的可能性。EIP-5643 订阅协议，会员服务 web2.0 的大赛道开放了进入 web3.0 的想象空间。实用性 NFT（Utility NFT）发展任重道远。

It is worth mentioning that NFT has no original sin, no heavy burden to affect the takeoff. NFT is emerging as a key driver of "new user entry", and its core assets will continue to gain traction and strength over time and with increased exposure, so we are very focused on the mainstream narrative weighted liquidity services modules that will spawn NFT financial markets, such as trading, mortgage lending, fragmentation, options and other innovative applications. Such as NFT asset management tools, such as web2.0 IP fans into the web3.0 SDK, etc.

With the evolution of NFT assets, many interesting NFTFi projects have come into view. For example, Sudoswap uses AMM to enable liquidity providers to provide instant liquidity for NFT transactions, and BendDAO solves the demand for instant lending for blue chip NFT holders through point-to-pool. Putty caters to different needs by giving users the option to Put(sell)/Call(buy) a combination of bulls/bears.

虽然 NFT 仍处于早期阶段，仍面临流动性分散的问题和风险，但我们仍相信 NFT 将在一个周期中获得远超此前的影响力，在社区治理、开发激励和用户资产管理等方面发挥重要作用，NFT 的加总市值与同质化 Token 的加总市值的差距将有机会缩小甚至反超，催生的 NFTFi 需求将相应增加。

SocialFi has attracted much attention from Web3 users and adopted smart contract wallet and DID to facilitate user penetration and the formation of network effects

In the Web2 world, social products can only participate in the creation and distribution, and users have no ownership of the data. Whether it's Facebook or Twitter overseas or Weibo or wechat in China, platforms that use user behavior data and profile data to iterate feed algorithms to enable advertising revenue are essentially expropriating users' digital assets for free.

Social (web3.0) addresses data ownership, privacy, and profitability while focusing on traffic (mobility), attention, and control over users. This dual narrative line of "liquidity sovereignty" is very consistent with the vision of equality, freedom and openness of virtual social communication advocated by the new era. In addition, social platforms hold massive user traffic, profiles, and behavioral data, which contains huge commercial value.

SocialFi apps have the same functionality as web2.0 social products for everyday experiences, but they make it easier for users to have data sovereignty and interact with cryptocurrencies on web3. Its development is built around the composability of data. We can look at SocialFi infrastructure, protocols around data transfer storage and specification classes, middleware, the core social graph around data availability, smart contract wallets that dramatically lower the onboarding threshold, and decentralized ids (DID) that individuals can carry across different DApps.

Emerging SocialFi projects have seen a lot of growth during this bear market, and this number will continue to strengthen in 2023. For example, Lens protocol, a Web 3.0 social protocol built by the Aave team and deployed on Polygon, has nearly doubled monthly engagement, reaching 370,000 monthly engagements in terms of posts, comments, and mirrors (the equivalent of retweets). There's also the decentralized social Phaver, which allows members to discover and connect with each other, through interest discovery and vertical communities, and recently passed the 100,000 download mark.

In addition, Web2 social platforms like Twitter, Instagram and Tiktok have been making moves to gain a foothold in this emerging market. Back in 2021, Twitter launched its in-house Web3 division, Instagram ramped up its bets on NFT and the metacomes, and pan-community products like Tiktok and BiliBili jumped on the NFT/SocialFi wave in more novel ways.

Social is naturally the track and product form with the strongest network effects, and will eventually carry the largest user group and the most viscous user behavior. Its close connection with privacy makes the value proposition of decentralization must be paid attention to. The obvious challenge of the SocialFi circuit today is the lack of mobile Web3 users, but as the directionally specific products we mentioned above mature, the contours of the circuit will become clearer.

DeFi applications with proven business models will capture greater value to achieve organic cash flow growth

DeFi, decentralized finance, is arguably the most dominant use scenario of blockchain. Although the total lock-up volume of DeFi in 2022 continues to shrink due to the downward currency price, from the historical peak of $180 billion in December 2021 to $38.5 billion today on December 31, a drop of about 78%, the number of DeFi users is increasing. The number of people using wallets is increasing.

In fact, the thunderstorms and crisis of confidence in centralized financial institutions such as Celcius or BlockFi just proved DeFi's advantages of security and transparency. Users control the assets themselves, smart contracts manage the assets, and on-chain data is open and transparent. DeFi's trading volume has surged since the FTX collapse, rising 68% from October to November (to about $97 billion).

We have seen many DeFi cases with clear business models that have continued to grow in user volume and transaction volume in bear markets, such as Uniswap continuing to maintain a transaction share of around 50%, Curve rising from 12.9% to 19.6%, Ethereum's Lido/Rocket Pool project, which focuses on liquidity collateral, has seen an 85% increase since the beginning of the year; GMX, Arbitrum's decentralized perpetual trading platform, has grown its market share from 9% to around 15% in the past half year, even outperforming Uniswap on several days; Polygon's Gains Network, a perennial dark horse that supports stocks and currencies in addition to crypto assets, generated $8.1 billion in trading in six months.

The future of DeFi will belong to real applications with solid track logic, endogenous demand and organic growth in agreed revenue. Businesses that are mature in traditional finance but have not yet been adopted on a large scale, such as on-chain order books, derivative agreements, synthetic assets, and other innovative applications with endogenous leverage, are worthy of attention.

Ethereum will still be dominant in the public chain competition pattern. L2 ecological development trend is good

With Vitalik's direct adoption of "A Rollup-centric Roadmap", the Plasma vs. Rollup technology roadmap is basically over by 2022, and both the head L2 project and the corresponding development team are fully engaged in Rollup.

无论一二级市场估值如何起伏，包括 Arbitrum、Optimisim、StarkNet、zkSync 等在内的头部 L2 生态在实际发展阶段上其实仍属早期，应用体系和用户体验难言成熟（尤其 Zk Rollup），在 Rollup 两大派系 OP Rollup 和 Zk Rollup 技术角度的价值主张短期被证伪的可能性均较低的情况下，我们认为 L2 的多方共存还将维持一段时间，但考虑到 1) L2 Token 在 ETH 生态内的效用存在局限性，2) 始终面临专用链的竞争（参考 dYdX 案例），3) 通用扩容在技术上仍存不确定性（zkEVM 等），直接出手 L2 生态本身需要考虑估值的纪律性。

从开发者的时间和精力份额来看，以太坊的头部优势在熊市期间得到夯实和加强，其中大量开发工作已经均由 L2 直接或间接地承接，Sharding Capital 团队在一线大量看项目的过程中对这一点积累了很强的体感，也将持续关注 L2 生态内优质应用层项目团队的涌现。除了 DeFi 章节中提到的 GMX，Perpetual Protocol 和 Robicon 在 Optimism 生态内即使在 22 年 12 月 UAW 也分别达到 14 万和 10 万，Treasure DAO 的游戏聚合平台+统一 Token 治理模式也启发了不少思考。

鉴于 L2 格局依然处于多方齐放且共存态势持续动态演变的阶段，致力于 L2 互通性的项目方也值得同步关注，归纳来看主要是为应用开发提供多个 L2 的兼容和支持、为用户提供跨 L2 资产转移和 Token 交换等，对这类玩家进行追踪的核心抓手是 To-C 业务交易量与盈利性，To-B 业务的开发者端反馈，以及叠加想象空间更大业务 (如：market making) 的可能性。这一方向的代表性项目 Hop Protocol 和黑马项目 Orbiter 在 2022 年逆势上涨的交易量和营收体现了 L2 跨链不断上升的活跃度。

The next generation of Pan Entertainment header applications will lead the Web3 break the outermost edge of the circle

One of the characteristics of the last cycle is that L1 captured most of the valuation growth of Crypto asset class, and the overall pattern of infrastructure paying more attention to application is very obvious. For example, a city invests a large amount of funds, resources and attention in the construction of highways, but the actual flux of vehicles carrying passengers is not large. And the large capacity of vehicles are still being actively competed for by the highways.

Sharding Capital reckons that infrastructure will still capture most of the incremental valuation in the next cycle, but that the pie for applications will not be as narrow as it was before, continuing to spiral upward. The to-C attribute supported by the token economy will naturally carry more speculative components, but there is still a valuable legacy after the bubble. The overall number of Web3 users will increase by one To two magnitudecompared to the highest point in the last cycle, the penetration to the outermost user end will be extended, and the life cycle of top apps will be extended.

For top apps, Sharding Capital insists that pro-human products have greater potential to break the circle than anti-human products. Therefore, pan-entertainment (games, media, etc.) has natural advantages in guiding positive externality user behaviors. Content starts from creation. Distribute -> Every part of the chain is undergoing revolutionary innovation. We think the AIGC team in creation, the game development/operations team in game development, the team in distribution that has the opportunity to have an advantage in the data store for AI algorithms, and the team in presentation that can fast track the next generation of hardware. It is worth focusing on.

It must be admitted that the financial attribute of Web3 application and the high efficiency of value transmission will lead to more speculative sentiment, which may lead to the ambiguity of value proposition and repeated public opinion in the process of circle breaking. Therefore, whether the above thinking can be successfully realized into the vast flow of Web3 in the next cycle and form sufficient network effects, We're still cautiously optimistic about the killer app of all time, but we're willing to wait and see in 2023.

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If you as Builder are actively exploring the above mentioned directions, please feel free to contact the Sharding team for further inspiration and support.

[Write at the end]

The year 2023 has just begun, but it will only be a brief moment in encryption history. Because the crypto industry is in its early days, year-by-year month-by-month and even day-by-day changes and trends will change the direction of the future.

As ordinary melon eaters, we should treat new things calmly, give enough tolerance and imagination space, but also do a good job of preparation and vigilance, and unconsciously enjoy the large-scale business that may be achieved in the next 10-20 years.

As enthusiastic participants, you are welcome to fully embrace the bubble, maintain the information sensitivity and improve the awareness of the industry, make full use of the information asymmetry arbitrage in the early stage of the industry, and counter-cycle to invest in high-quality assets at relatively low cost (bottom-hunting).

As enthusiastic industry personnel and believers, such as the Sharding team, we need to improve the cognition and understanding of the cycle of the whole industry, control the quality of the first-level investment project and the quality of the founders, place heavy bets on the correctness of the early non-consensus, and not be swayed by the external market environment and emotional changes. As for the new track and market demand, I will unswervingly work with the founder with the attitude of pioneer and leader, accompany the excellent team to grow, invest in the projects that can be used by the people who eat melon, and make money from the enthusiastic participants.

slay 2023, everyone.