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Crystal Balls of Holly  —  Digital Dives Vol. 65

Ever since university, I’ve loved reading year-ahead outlook reports, even if I know they’re seldom accurate. After all, Risk means more things can happen than will happen. It is from the diversity of the possible outcomes that the risk arises.” It’s mostly laughable that strategists attempt to make point estimates of the future state of major asset classes, but there can be some insight in understanding how they arrive at their conclusions. Despite generally being incorrect, the underlying methodology can still provide precise measurements. Regardless, prediction pieces remain a guilty pleasure over the holidays, so if you’ve come across any good ones, then please pass them along.

Source: Oaktree Capital

Sometimes you have to make a call. It can be informative to survey the landscape and think about how things might change in the future. As Van Eck reminded readers of their 2024 predictions, imagination is not just a luxury but a necessary locomotive for investors”. As such, I’ll present some broader themes which are likely to feature heavily in the digital asset headlines next year.

Regulation: Balancing Market Integrity and Innovation

I eagerly await the day when the future of the industry doesn’t hinge on regulatory developments, but that’s likely still several years out. To be clear, oversight will persist in this space. Banks and FinTechs contend with shifting legislation regularly. However, in time, administrators should have a better handle on blockchain technology and its interaction with society such that the rules of engagement will be clear. The digital asset environment may confront fragmentation as we await more definitive action from U.S. lawmakers, but this awkward phase might also catalyze a move towards more unified global regulations.

With the increasing focus on supervision and MiCA around the corner in Europe, projects that are designed to be compliant with existing and potential regulations are likely to attract more institutional capital. Investment in technologies that aid in compliance, such as tools for KYC, AML, and auditing, is also expected to grow. These platforms will make use of artificial intelligence to increase efficiency and improve usability.

Growing Up: The Institutionalization of Digital Assets

The baton is passing from early digital asset pioneers to more established financial players. Visa is running payment infrastructure pilots on Solana, Société Générale and PayPal launched stablecoins in 2023, and we’re likely to see spot crypto ETFs listed on the world’s most important equity market. These plans were laid during the depths of the crypto bear market. Adoption by banks, global asset managers, and established FinTechs underscores a maturation of the ecosystem and brings a focus on risk management, education, and long-term sustainability. Increased capital deployed on blockchains will enhance liquidity and accelerate innovation.

Over the next twelve months, you’re likely to encounter even more headlines featuring the world’s largest brands collaborating with web3 businesses/technology. Companies from Walmart and Outlier Ventures’ accelerator should have MVPs looking for capital soon. More NFT communities will follow Pudgy Penguins’ lead by rolling out games and merchandise. Machine learning algorithms will feast on the streams of data emitted from on-chain activities and provide novel consumer insights. Banks in Europe, the U.K., and APAC will continue to explore blockchain’s potential. However, the most profound change might be from companies who elect to follow FASBs accounting standards update, which permits cryptoassets to be recorded on the balance sheet at fair value. Previously, holdings were categorized as goodwill, which meant their value could only ever be written down. As Van Eck predicts, Coinbase is likely to lead the charge here as they stand to record $100M in annualized revenues from their Layer 2 rollup, Base.

Weekly Fees on Base (in thousands, USD)

Source: Token Terminal

User Experience: The Gateway to Wider Adoption

Speaking of Layer 2s… The continued establishment of scaling solutions and growth of low-fee chain ecosystems are addressing blockchain scalability challenges. Meanwhile, wallet innovations, including account abstraction and intent-based trading, are making crypto more accessible. Enhancing security measures and learning from past mistakes are crucial for building a resilient and user-friendly ecosystem.

During the last cycle, crypto newcomers had to contend with clunky wallet interfaces, seed phrases, and record high gas fees on Ethereum, where most of the innovation was happening. This pushed users to explore the lower cost options on Avalanche, Solana and across Cosmos, but their adventure was still characterized by poor user experience and rampant loss due to grift and security inadequacies. These issues aren't solved today, but those returning to crypto or experiencing it for the first time will encounter much improved circumstances. They can onboard using their email address, effect trades or play games at little or no cost, possibly without even having gas tokens. Vulnerabilities remain, but the ecosystem has learned from the past, and at least for now, discord servers and crypto twitter have an educational bent and many are looking to establish themselves as blockchain sleuths by sniffing out and exposing questionable behavior. Codes and audits continue to be improved through tough lessons learned and AI.

Overpriced JPEGs: The Evolving Role of NFTs

As digitization continues to seep through humanity, taking ownership across a myriad of digital goods will continue to grow in importance. NFTs offer innovative solutions for engagement and on-chain identity management. They can provide secure and verifiable credentials, where each token represents a unique aspect of an individual. This has the potential to revolutionize how we access services online, ensuring privacy and security while maintaining the ease of digital transactions. These qualities will become increasingly important as compliance features more prominently through greater institutional adoption.

The concept of token-bound accounts, introduces dynamic NFTs as wallets that can hold various digital goods and execute automated functions. These assets can act as on-chain agents, executing dollar-cost averaging, or other trading strategies. Alternatively, the NFTs can increase in rarity or have a reputation embedded within as the holder demonstrates loyalty through various actions.

Source: Kiosk

In the gaming world, NFTs are redefining economic models by enabling proprietorship of in-game assets. Players can own, trade, or sell their digital items as they would physical collectibles. Blockchain gaming had 1.2M daily unique active wallets in November, representing 14% month-over-month growth. Across decentralized applications, games dominate with 34% market share and a number of high-quality games are on the cusp of taking the digital asset ecosystem by storm. This is part of a broader feature of crypto whereby ownership creates psychological attachment. Projects appear to have learned from the mistakes of previous cycles and are cultivating communities of individuals drawn together by other factors than asset prices. Don’t get me wrong, you should expect to see rampant speculation next year too.

Blockchain Games Historical Activity

Source: DappRadar

As we look ahead, it's clear that the digital assets and financial markets are on a path of significant transformation and integration. The convergence of regulatory clarity, institutional involvement, technological advancements, and AI integration paints a promising picture for the future of this industry. While challenges remain, the opportunities for growth and innovation are boundless. Let's stay informed and adaptable as we navigate these exciting times.

Happy Holidays!

Aquanow specializes in unlocking digital asset potential for financial institutions. Contact us to explore how our expertise can enhance your performance.

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