Last week, the Hashdex Research Team attended the biggest NFT and DeFi event of the year, Blockwork's Permissionless. The three-day conference in Palm Beach, Florida was attended by 7,000 people from all over the world, including several individuals (and conference panelists) representing large traditional institutions. It was a great opportunity to connect with builders, developers, users, and investors about the current state of the crypto markets.
The timing of the conference coincided with the implosion of the Terra protocol, so algorithmic stablecoins were a hot topic. But there were many other interesting highlights that included discussions about scalability issues, poor UI/UX experiences for end-users, and the very promising secular trends that are going to drive the next phase of adoption in the industry.
While there is a lot to unpack from this conference, our three main takeaways are:
Bear markets are for building. There was a general sentiment that down markets are the best time to learn and work on long-term projects. Bear markets can help uncover bad projects, and stress-test the projects with the most potential.
Growing pains are being addressed. There is a lot of talent in the space working hard on several fronts to address growth pains such as scalability & security issues and bad UI/UX experiences. We expect several innovative product roll-outs in the coming months.
It’s still early…so enjoy the ride! Our conversations from the conference reminded us that while this space is developing incredibly fast, crypto and Web3 are still in the early days. There are many exciting things to come.
Below, we share more of what we learned.
Although there was a lot of discussion about the impact of the implosion of the Terra/LUNA stablecoin ecosystem, overall sentiment was one of responsibility and opportunity. Bear markets can help expose bad projects and allow fragile architectures to be stress-tested. This helps people focus on building good and resilient products.
Phrases like “let's keep on building,” “it’s time to review your processes,” and “bear markets are when most innovative stuff is built” were reiterated in panels and discussions. Many seasoned developers and investors made the point that stress conditions like now help separate the good projects from the bad. Naturally, some short-term concerns were also voiced, but a hopeful and responsible sentiment prevailed, underscoring that secular trends are still in place. Nonetheless, Nic Carter of Castle Island Ventures still provoked the crowd at the end of his panel: “The crypto industry has never seen an economic recession.”
Additionally, updates by Ethereum developers Justin Drake and Preston van Loon brought a new injection of enthusiasm into the industry: Drake signaled that August could be the month Ethereum’s next major upgrade, The Merge, is launched.
State of Crypto Report by a16z
a16z (one of most active crypto investors in the world) released its 2022 State of Crypto Report (worth reading it) during the conference with an upbeat tone, emphasizing how (i) Web3 aligns network participants to work together toward a common goal—the growth of the network, (ii) the industry has seen consistent long-term growth driven by a feedback loop between interest and innovation, despite all the ups and downs of the market, and (iii) we´re still just in the infrastructure build-out phase of the industry so it is difficult to visualize how people will eventually use what's been built. As per Chris Dixon´s words:
“I believe we are in the golden period of Web3 now” and
“Blockspace is the best product to be selling in the 2020s.”
One central point of discussion among panelists was related to (i) scalability problems on Ethereum; (ii) bad user experience (UX) / user interface (UI), which are still unacceptable; and (iii) recent massive hacks seen in the industry.
There was consensus that if the industry wants to see massive adoption going forward, it will have to offer much more scalability (in terms of throughput and costs per transaction) and a frictionless experience for users in a much safer way. These are the main pain points to solve in the coming years. They are also the great opportunities ahead.
Stablecoins (Crypto's Killer App)
Stable (or not so stable) coin issues were the most discussed topics overall. Repercussions from the damages caused by the Terra situation were discussed in several panels. From “I told you so” to “Terra was a big experiment that failed drastically,” panelists overall agreed that it was a bad experience for the industry and there are still consequences to come, including a potential slowdown in user adoption.
The term algorithmic stablecoins was considered a curse word. When it comes to regulatory matters, there was consensus that the real implications from the Terra meltdown are still uncertain. It was noted, during the regulation panel, that the report released last November by the President's Working Group on Financial Markets only addressed fiat-backed stablecoins (not algorithmic stablecoins such as Terra), so much uncertainty remains as to whether algorithmic stablecoins can even be regulated.
“Would regulation solve anything for Terra/LUNA? Probably nothing. So why have any regulation for algorithmic stablecoins?” said Brian Quintenz - former commissioner of CFTC and currently legal advisor to a16z.
But panelists also noted the benefits of DeFi for regulators: radical transparency, fairness, and open source—all aspects that reduce the potential for frauds.
“Terra was not a software failure. It was a financial engineering failure.” Nic Carter (nailing it)
Despite the noise and stated concerns regarding stablecoins, there was consensus they are here to stay.
A few sessions were dedicated to DeFi at the conference. In all of them, the main message from panelists was “keep on building.” Given that the development of this segment was paramount for the beginning of the last bull run, spectators were very curious regarding what panelists thought about the current landscape of DeFi and the crypto market overall.
Aave’s CEO, Stani Kulechov, said we are bound to live in a multichain universe (a sentiment echoed by many other panelists), and was proud of AAVE's recent efforts to deploy assets across different blockchains.
Compound’s CEO Robert Leshner was adamant about the importance of building the infrastructure for traditional institutions to work with DeFi applications. Several speakers have stated that infrastructure being adopted by TradFi institutions will possibly become one of the main use cases for DeFi. Haseeb Qureshi (Dragonfly Capital) recognized that DeFi has seen very impressive growth in just two years of existence.
Throughout the event, many speakers noted that they are content with the industry currently being in a bear market given that bear markets reduce the noise and allow projects to improve user experience. They believe that bull runs can be chaotic and associated with euphoria, while bear markets provide a clearer picture of what users are actually demanding and allow for developers to build and update their infrastructure at an optimal pace.
“I think we should celebrate bear markets.” (Stani Kulechov - Aave CEO)
Strong competition on Layer-2 (L2) solutions coming
One of the most interesting discussions was a panel with founders from Polygon, Optimism, Near Protocol, Offchain Labs, and Ava Labs. Given the recent hacks associated with bridges and sidechains, panelists discussed the benefits of the usage of rollups and the inheritance of security to settle transactions on the Ethereum blockchain.
“If I were an [non-Ethereum] L-1 right now, I'd move it to L-2 and secure it on Ethereum.”
Ben Jones of Optimism
Speakers shared their thoughts regarding the future, including the potential for an interoperable multichain universe or a multi-sharded monochain universe (a “superchain”).
Luigi D'Onorio DeMeo of Ava Labs argued that: “It’s inherently risky to put everything onto one major chain...That’s like the CME, there’s one place where everything can break.” He added: “L-2s are like writing a check, and checks can bounce.”
The panel also had Illia Polosukhin of the NEAR protocol throwing a cynical question and raising complexity concerns around L2s: “Given the way transactions are settled in NEAR, the concept of who is L-2 to whom is an interesting question.” From a technical standpoint, we believe that some of the topics discussed in this panel are key for the next phase of scalability and mass-adoption of blockchain technology.
But the overall tone was: (i) L2 scaling solutions are competing very hard against each other to bring transaction fees down; (ii) developers are heads down, building and shipping so adoption of L2s is on the horizon; and (iii) there is an overall impression that a potential “L2 summer” is around the corner.
The interest in this topic was front and center at the event. From TradFi and Web2 firms to crypto natives, the eagerness to better understand the next phase of the internet was undeniable. Chris Dixon (a16z) highlighted that while Web2 helped bring more creators to the web, Web3’s principal innovation will be better aligning incentives among creators, the platform, and consumers.
A few of the sessions were focused on how data should not be owned by tech giants, but by users themselves (which is why initiatives such as Lens Protocol, launched at the conference, were highly regarded). Also, the usage of ZK Proofs as a powerful tool in the process of sharing information without having to share “too much” was discussed.
As far as entertainment goes, some of the segments mentioned throughout the event were fashion, games, and music. There seemed to be consensus around music and gaming NFTs being overhyped throughout the last few months. According to speakers, users should stop focusing on NFT prices and the act of trading these digital assets in order to get rich fast, and instead focus on the interesting use cases that are being developed.
In that context, one of the overarching themes was the discussion about how social tokens and NFTs can disrupt the music and gaming business. Angel investor Cooper Turley and Gala Games/Gala Music CEO & COO Sarah Buxton had the opportunity to participate in multiple panels and share opinions on the matter, both making the case for a paradigm shift in which blockchain technology becomes the direct bridge between artists/brands and fans/users, removing traditional middlemen as intermediaries.
There were high hopes from panelists on what DAOs can do, although there was consensus that DAOs are at the earliest stages of what they could become. It was very interesting to learn how DAOs reduce hiring frictions compared to countries such as France which has very strict labor policies. With DAOs, there is a regulatory arbitrage and you can hire in places like France much more easily because you don’t go through the local hiring policies: “Capital and talent flow to where the friction is lowest.”
However, a less enthusiastic view on DAOs was also shared: “The difficulty is to choose which DAO model to use—there is a full spectrum of possibilities.”
TradFi executives from Visa, Morgan Stanley, JP Morgan, and Robinhood spoke at panels. Overall sentiment is that institutions worldwide are spending time to understand crypto, reviewing their compliance and audit requirements, and getting prepared to interact more with this technology, especially DeFi protocols.
Dubai is becoming a crypto hub, benefiting from projects leaving Singapore. 90% of all countries in the world are experimenting with CBDCs, according to a BIS survey. Every major bank in the world is working on crypto infrastructure and major Web2 companies are starting to incorporate blockchain and crypto to their services. This was the general sentiment from large and established traditional financial institutions.
Announcements made during the conference
Builders and developers took the opportunity to announce new initiatives during the conference. Here are some interesting ones:
In DeFi: Alluvial Liquid Staking protocol for institutions was launched during the conference with the backing of Coinbase Cloud and Figment. This may be a potential Lido competitor.
Aave launched Lens protocol on the Polygon blockchain—a Web3 decentralized social platform powered by NFTs where users own their profile and data. This is something to keep an eye on!
Several digital wallet projects and upgrades were also launched during the conference: Robinhood announced a non-custodial crypto wallet for its crypto customers, Coinbase announced a semi-custodial wallet where custody of wallet keys are part-owned by users and part by Coinbase and Ledger announced a browser extension called Ledger Connect that reduces considerably the risk of connecting to scam websites, which may result in friction.
Tracer’s Perpetual Pool V2 was announced, another project that will be interesting to follow.
Blockworks announced the launch of the Blockworks Research platform featuring specialized data and analysis across sectors.
And, as previously noted, Ethereum developer Justin Drake said The Merge may happen as early as August.
Trends worth monitoring
And to wrap-up, here are also some very interesting trends to be monitoring going forward. As it was said before, there is lots of cool stuff being developed. Stay tuned!
Layer-2 solutions involving a mix of Optimistic Roll-ups and Zero Knowledge Roll-ups
Risk Management tools (i.e., insurance)
Intersection between NFTs and DeFi
Web2 intersection with Web3 is here to stay (i.e., Instagram with over a billion daily users has launched a beta version that allows select creators to connect digital wallets and feature NFTs on their Feed, Stories, or messaging. This is good news for adoption.
Gamers are probably the next user base in terms of adoption. There are more than two billion gamers worldwide!
Web3 games will be developed at increasing speeds
DAOs, social tokens, decentralized social networks, and Web3 media might be the next breakthrough in crypto
Permissionless underscored for us just how far the crypto / blockchain industry has come in recent years. The level of discussion and interest in these topics from such a large swath of people and institutions was impressive and a clear sign that both NFTs and DeFi are becoming an increasingly important component of the digital economy. As projects continue to be built and UI/UX is improved, we believe this momentum will only increase. We remain in the early days of this space and are excited for the disruption potential this technology represents.
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