Sino’s New Year Message and Outlook
We outline our goals as a company and we welcome 2023, a year in which we aim to work with founders from all over the world to advance the growth of our industry.
Our Goal
At SGC, our top priority is building long-term, high-trust partnerships and focusing on the growth and development of emerging markets. We believe that by working closely with good actors who are committed to engaging with regulators and other stakeholders, we can drive positive change and contribute to the sustainable growth of this industry.
Reflections
As blockchain industry veterans, we've seen our fair share of ups and downs. We've witnessed the rise and fall of various projects, the changing of narratives, and navigated our way forward despite the cycle of warm embrace and icy discard of blockchain technology by large corporations earlier this year.
Despite these obstacles, we continue to believe in the potential of blockchain as a way to streamline transactions, foster financial inclusion and empower individuals and communities around the world.
This past year has been especially difficult. When the CEO of one of the world’s largest asset managers has to publicly state they did not attack a falling Ponzi scheme, we are making news for the wrong reasons and undoing hard-fought progress.
The events experienced this year have brought some of the existential questions that have long been swept under the rug by a bull market to the forefront, begging for resolution.
We believe these challenges present an opportunity for us to come together and find solutions to our industry’s most pressing problems. We have paid a heavy price to bring these issues to light, and now is the time to work towards solving them and building a stronger, more sustainable future for our industry and for the future generations to come.
Financial System
The modern financial system took hundreds of years to construct, and during that period, the industry learned valuable lessons and established best practices that helped make it strong and resilient.
The blockchain industry is no different. We're learning and growing at a rapid pace, and it's important for us to remember that good technology is just one piece of the puzzle.
In order to create a strong and sustainable industry, we need to focus on governance, management, and business models in addition to technology.
For example, if we want to make centralized exchanges (CEXs) safer, we can add third parties like custodians to the value chain. If we want to make crypto lending safer, we can fund self-regulated organizations (SROs) to create industry underwriting standards.
Essentially, we want to take the best of what we've learned from the traditional financial system and apply it to the decentralized ethos of our industry.
Founders
Founder quality (and ethics) has never been more important.
In the blockchain space, innovations like tokens can sometimes allow founders to achieve financial success without building a successful business. That is a core reason why we must overweight founders in web3.
Successful founders in 2023 will also need a toolkit that allows them to navigate regulatory uncertainties while maintaining strong compliance processes.
Talent
However, it is important to remember that a lot of good people and talent have also entered the space, particularly in emerging markets.
Instead of focusing solely on the price of crypto assets, we should consider the quality of talent entering the ecosystem as a key indicator of the health and potential of our industry. This includes not just engineering talent, but also experts in compliance, management, and entrepreneurship.
Review of 2022
Winners: Stablecoins, Real-World Assets and DeFi
Stablecoins
Stablecoins made the news in 2022 for both right and wrong reasons. They achieved significant transaction growth seeing an average monthly transaction volume of $600M+.
The failure of UST not only led to the industry’s credit crunch and subsequent slew of insolvencies, but also proved that algorithmic stablecoins are still not safe, and centralized ones such as USDT, USDC and BUSD remain more reliable.
It’s possible that stablecoins are in a time race against central bank digital currencies (CBDCs) because both types of digital currencies are vying for a similar market position.
Besides, stablecoins will be accepted based on their underlying assets under Basel III, rather than being classified as crypto. This classification recognizes the fact that stablecoins are backed by a stable asset, such as a fiat currency or commodity, and are therefore less risky than other types of cryptocurrencies. (To learn about Basel III regulatory framework, read this article)
Real-World Assets on Chain
One of the exciting developments we've witnessed in the industry over the past few years is the trend toward putting real-world assets (RWA) on chain, as demonstrated by tokenized stock and even non-financial corporate use cases by Starbucks, Nike, Meta, Disney, and others.
In the past, people were primarily focused on security tokens as a way to bring assets on chain. Over time, we've seen the emergence of other types of RWA that can benefit from the verifiable ownership and low transaction costs offered by blockchains.
This trend towards RWA development could unlock the full potential of composability, as it gives us access to a wider range of asset types on chain. For example, we're excited about the possibility of getting things like tokenized T-bills on chain, as it brings us closer to having a real financial system. The MakerDao/Blocktower deal illustrates the benefits of using blockchains as a rail for assets.
Moreover, the resilience of DeFi protocols and smart contracts during extremely volatile conditions has been remarkable. None of the major blue chip protocols broke in response to these conditions, demonstrating the strength of on-chain finance and smart contracts.
Losers: Regulation and Centralized Entities
Regulation
We had hoped that 2022 would be a year with significant progress in terms of regulation, as increased regulatory clarity is a key step toward mainstream adoption and sustainability. However, the collapses of centralized entities, high-profile hacks, and the failure of Terra have all contributed to regulatory setbacks in the industry.
The Digital Commodities Consumer Protection Act (DCCPA) is among the solutions lawmakers are considering to regulate the industry. If approved, it could impose unnecessary burdens on DeFi exchanges and stifle innovation. One of its major problems is that it does not clearly define what constitutes a digital asset, and what tokens would be considered securities.
Centralized/CeDefi Entities
The collapses of FTX, BlockFi, Celsius, and Three Arrows Capital in 2022 had negative impacts on their respective users and stakeholders, as well as the industry as a whole.
The whole crypto lending space was wiped out. The current situation of DCG and Genesis is troublesome, and we are monitoring it closely due to its potential contagion effects.
Going Forward (2023)
In 2023, we begin the long road back toward building a strong and sustainable industry. For SGC, that road will continue to wind through underserved emerging markets and the offices of forward-thinking regulators.
Here are some of the trends and verticals we’re excited about.
Crypto Credit and Risk Management
Despite the challenges faced in 2022, at Sino we remain bullish on the potential for crypto-credit to revolutionize the way we think about loans, both for retail and institutional borrowers.
While we recognize that current models for crypto-credit are flawed and have contributed to the popping of the credit bubble, we believe that there is significant potential for this sector to mature and evolve.
To achieve this, it will be necessary to focus on developing reputation and credit scoring primitives that can provide more accurate and transparent assessments of borrower risk.
Furthermore, new business models will be needed to better align incentives and ensure that all stakeholders are working towards shared goals.
In the coming years, there will be increasing demand for better risk management products and tools. The collapses of large crypto institutions in 2022 can largely be attributed to poor governance, poor strategy, lack of business models, and outright fraud, but it is also clear that the tools and products available for managing risk in the crypto space are still relatively nascent.
In 2022, Sino made an investment in an off-chain insurance company, and we are also excited about the roadmap of Clearpool, which includes ways to hedge credit risk.
Decentralized Infrastructure
Decentralized infrastructure networks (DINs) will continue to gain allies among traditional web2 companies as a way to reduce reliance on competitor platforms and gain a foothold in the crypto space.
It is important for DINs to be an alternative to traditional web2 solutions, whether they are competitive with these solutions or not. In this sense, DINs can be compared to fintech funding pools, which appeal to different customer groups and help to hold traditional financial institutions in check, even if they often do not offer the same rates as traditional prime rates.
It will also be interesting to see how the cost of DINs such as Akash Network compares to the low costs of traditional cloud services from companies like Amazon Web Services (AWS) and Google Cloud.
Asia and Emerging Markets
Asia and other emerging markets will likely take center stage again. In the last few years, the focus of the industry has shifted westward, as strategic advantages like BTC mining in China have disappeared or diminished in other regions.
However, we expect to see this trend reversing in the coming year, with a renewed focus on Asia and emerging markets. These regions have unique characteristics and challenges that make them particularly interesting and ripe for innovation in the crypto space, such as high levels of technological adoption and a strong culture of entrepreneurship.
GameFi
In 2021 and 2022, billions of dollars in funding were invested in web3 gaming companies like Axie Infinity, Tearing Spaces, DOMI, and others.
These games, which were still in the early stages of development last year, will now begin to appeal to the global video game user base of over 3 billion people.
With the vast majority of video game players accessing their games on mobile devices, it is critical that GameFi companies find ways to bring blockchain technology and web3 to this platform.
Projects like Saga from Solana Labs are working on this challenge, but there are still hard problems to solve. For example, without wallets that simplify onboarding and distribution, we will fail to achieve meaningful penetration.
Scalability
To make sure crypto can match the current system of credit card transactions, not to mention all the other potential use cases for crypto, it will be necessary to find scaling solutions.
There are several promising approaches to scalability that are currently being explored, including Polygon's zkEVM, Sui's 120k TPS blockchain, Polygon's supernets, and Avalanche's subnets, among others.
This year, we expect Ethereum to go further on its roadmap, which includes the deployment of Zero Knowledge rollups. These will allow for increased transaction throughput by using zero-knowledge proofs to create small, efficient "bundles" of transactions that can be processed quickly and securely.
Along with ZK rollups, Ethereum's roadmap also includes the development of danksharding, which is a technique for dividing the blockchain into smaller, more manageable pieces that can be processed in parallel, and will help layer 2s become much more scalable, and thus, cheaper.
Identity Primitives
Whether it is used for credit provision, KYC, social scoring, or other use cases, verifiable on chain identity is an undeveloped, but essential primitive. The lack of identification in web3 has hindered commerce and effective governance.
Soulbound tokens (SBTs), discussed at length earlier this year, are digital assets that are permanently tied to a specific individual or entity. They have a variety of use cases, such as representing ownership of physical or digital assets, tickets and passes, memberships and subscriptions, and licenses and permissions.
The connections between established entities and SBT holders create an augmented sociality, representing the building blocks for constructing the identity and reputation of web3 users.
With the ability to identify distinct users, soulbound tokens unlock several powerful use cases for Web3, including verifiable credentials, decentralized social networks, governance, and more. In 2023, we think there will be opportunities to further develop use cases around identity and SBTs.
P2P Energy Trading
Blockchain technology is being explored to enable peer-to-peer (P2P) energy trading, a process that allows prosumers (individuals who both consume and produce electricity) to sell excess energy to their neighbors.
P2P energy trading can increase the adoption of renewable energy sources by the general public. Several start-ups have emerged to apply the technology in this field, such as Powerledger, a renewable energy blockchain trading platform that allows consumers and producers to track, trace, and trade every kilowatt of energy produced off-grid.