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5 crypto trends to watch in 2023

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It's set to be a big year for crypto - let's look at the major trends investors should keep an eye on.

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Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade.

Cryptocurrencies and decentralised technologies are becoming increasingly mainstream, with new use cases being realised on a regular basis. We spoke with Josh Gilbert, Market Analyst at eToro to get a better idea of what trends investors should keep an eye on this year.

AI x Blockchain

Blockchain and artificial intelligence (AI) are two of the most transformative technologies of our time. Their convergence - where autonomous agents and decentralised software work together to solve complex problems - has the potential to revolutionise many industries, including supply chain management, healthcare and cybersecurity.

Josh is optimistic about the future of many AI projects, including Fetch.ai (FET) and SingularityNET (AGIX), stating that they "only add to the real-life use cases that blockchain and crypto represent. Combining AI and blockchain with its security and efficiency has huge potential moving forward."

However, he also made the point that although AI technology has only recently hit the spotlight, it isn't going anywhere, so there's no need to feel like you're missing out.

"Investors should remember not to jump into those projects purely on FOMO. Those particular crypto assets have already seen huge gains, and investors should ensure they understand exactly what they are investing in with each project."

eToro Guide: Will AI-powered altcoins lead the next bull market?

Decentralised Storage

Blockchain adoption is happening quickly as large businesses, financial institutions, and software development companies recognise decentralisation as a potential to streamline operations.

However, there remains a gap in the market. Existing layer-1 and 2 blockchains are not designed to store large files, as their primary focus is handling transactions and smart contracts.

The lack of sufficient blockchain storage functionality has resulted in much of this data being managed by costly and sometimes vulnerable centralised services.

Fortunately, many crypto projects are working tirelessly to lead the way in building decentralised storage solutions.

Major initiatives such as BNB Chain and its Greenfield project are already in the works. Tech giant Meta has integrated Arweave as part of an NFT storage solution for Instagram. Stratos decentralised data mesh will soon release its unique PoT consensus, which is estimated to offer decentralised storage at 90% cheaper than traditional services.

As the demand for decentralised storage increases and the adoption of blockchain technology continues to expand, the projects that lead the way in this crypto niche are likely to gain more traction and play a crucial role in the next market cycle.

Regulation and adoption

In August last year, Australia's Albanese government announced it would be pioneering a crypto token mapping project and released a consultation paper outlining its goals.

Token mapping aims to establish an understanding of cryptocurrencies' role in Australian financial services and help create suitable regulatory frameworks for the industry.

The government has extended an invitation for comments from the community and stakeholders on the matter, with a deadline for submissions set for March 3.

While submissions remain open, interested parties may look abroad for influence.

Hong Kong has been leading the way regarding crypto regulatory guidelines, with the Securities and Futures Commission (SFC) proposing an initiative to regulate the trading of virtual assets.

Although the consultation period will remain open until March 31, and the fresh licensing system will not be implemented until June 1, the crypto community has responded positively.

Various Chinese-based projects have outperformed the market, while many traders, investors and businesses are calling for Hong Kong to become the new 'crypto hub'.

If Australia opts to follow the lead of Hong Kong, it will likely spell positive news for the country's crypto companies and the ongoing adoption of blockchain technology.

Stablecoins on the rise

Stablecoins offer investors the stability of fiat currency, acting as safe havens during uncertain periods and market downturns. At the same time, users can reap the benefits of blockchain technology, such as cross-border payments and DeFi lending.

Josh Gilbert commented on the growing popularity of stablecoins and their potential to meet the needs of an evolving digital economy.

"Consumers want to transact seamlessly across borders. The idea is to make the financial system more effective, and stablecoins can certainly help this process."

The utility of these products is not lost on DeFi developers, with popular protocols, including Aave (AAVE) and Curve DAO (CRV), scheduled to launch stablecoins in 2023.

Aave's GHO is an algorithmically-backed stablecoin that uses a decentralised autonomous organisation (DAO) to maintain its stability and price. The value of GHO is determined by a price oracle, which updates based on market conditions.

Its supply will be managed through a mint-and-burn mechanism. Users can deposit digital assets as collateral to borrow GHO, and Aave will create (mint) the coins. Users will receive a yield on their underlying assets while they borrow GHO. When users repay their loans, Aave will destroy (burn) the coins, reducing circulation and returning the collateral.

Curve's crvUSD is similar to Aave's GHO in that it will not be backed by hard cash and assets but will be supported by an over-collateralised crypto treasury. It is created by depositing these assets into the Curve protocol, which then mints crvUSD.

This newly minted coin is designed to be highly liquid, less volatile than single-collateral stablecoins and can be used in various DeFi applications.

Stablecoins like GHO and crvUSD are becoming an increasingly important aspect of cryptocurrency. Their ability to provide stability and liquidity will play an essential role in the future of both traditional and decentralised finance.

Ethereum of the future

The Ethereum (ETH) ecosystem is undergoing significant technological advancements. Updates for 2023 include the Shanghai fork and the ongoing development of liquid staking derivatives (ETH LSDs).

So, what do these developments involve, and how might they impact ETH in the coming months?

The Shanghai fork

Scheduled for March 2023, Ethereum's Shanghai upgrade is a hard fork that is expected to bring about significant changes to the network.

The most notable development is the ability for stakers and validators to withdraw assets from the Beacon Chain.

Following the Shanghai fork, ETH stakers who wish to unlock their coins can choose from two options. One option is to generate a "withdrawal credential" to retrieve the rewards earned in recent years. The other option is to exit entirely by unstaking all 32+ ETH required to run a validator node.

Over 16 million ETH, valued at approximately $28 billion, are deposited to the Beacon Chain. While it is unlikely - as many investors see the long-term investment potential in staking Ethereum, if a large quantity of these coins were to be unlocked and sold following the Shanghai upgrade - it could significantly impact prices and lead to an oversaturated market.

As a precautionary measure, the Ethereum Foundation has implemented a daily unlock limit of approximately 40,000 ETH. The aim is to alleviate potentially high selling pressure and decrease the short-term volatility of ETH.

ETH LSDs

DeFi has recently seen a significant surge in popularity. One of the key drivers of this growth has been Ethereum's move to proof-of-stake (PoS) and the rise of "liquid staking".

Ethereum liquid staking derivatives, or ETH LSDs, are a new type of financial instrument that allows users to earn yield by delegating their ETH to a validator via a liquid staking protocol and receiving a synthetic token in exchange. These tokens are backed 1:1 and represent the user's claim on their staked ETH.

Investors utilising Ethereum liquid staking protocols, including Lido DAO (LDO) and Rocket Pool (RPL) are offered greater flexibility over their assets which aren't subject to minimum deposit thresholds, lengthy lockups or risks posed to validators, such as slashing and downtime penalties.

Liquid derivatives can also be used within the DeFi ecosystem – opening the door to multiple potential revenue streams.

The development of ETH LSDs is significant for the future of Ethereum, as it allows users to earn rewards for staking their tokens while still being able to use them in other ways. This is expected to increase the liquidity of Ethereum and drive further adoption of the network.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

Summary

Despite the underwhelming performance of many cryptocurrencies in 2022, development progress has not diminished.

New applications, such as AI and decentralised storage, are being discovered regularly, and updates to the Ethereum blockchain are continuing.

However, regulatory challenges continue to pose a threat as governments seek to strike a balance between consumer protection and innovation.

Nonetheless, 2023 is set to be an exciting year for the crypto industry, with these trends and others shaping the future of the space.

Disclosure: The author owns a range of cryptocurrencies at the time of writing

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