Consensus, organized by Coindesk, is one of the premier crypto conferences held annually in the United States. The event features a large expo center with booths, as well as panel and speaking events from some of the most well-known companies and figures in the space, ranging from sitting members of Congress like Senator Cynthia Lummis and Representative Patrick McHenry to founders and CEOs of prominent protocols and companies like Circle, Yuga Labs, Aptos, and many more.
CoinList sent several representatives to Consensus 2023 who met with a vast array of teams building in crypto. Here are our biggest takeaways:
1. With an oversaturation of L1s, crypto is missing a new narrative
There does not appear to be a cohesive narrative in crypto at the moment. In all previous bull cycles we had a narrative that drove excitement and price action, ranging from Decentralized Compute + ETH Killers (2016-2017), DeFi (2020), NFTs + Early Gaming (2021). There isn’t an active narrative and as a result crypto feels adrift.
Without a clear narrative, people are questioning the continued focus on new Layer 1s (and to a lesser degree Layer 2s). Are we ever going to be close to seeing the end of new Layer 1s? The short answer seems to be no — we are likely going to continue to see new Layer 1s until any particular Layer 1 demonstrates enough traction that would be deemed successful from a traditional Web2 lens. Ethereum is the closest, but at the same time has very obvious flaws to achieving mass scale and adoption. Moreover, as long as investors (both retail and VC) continue to put a premium on new Layer 1s, then teams will continue to be incentivized to build them. With Aptos ($9B FDV) and Sui ($12B FDV) in the background, the attention will turn towards new L1s including SEI, Berachain, and others.
Absent the prescience of Nostradamus, narratives are hard to predict in advance. Yet, it’s clear that the crest has fallen a bit on previous narratives that had been gaining traction. While people are still interested in the zero knowledge proof technology, there wasn’t much discussion of it or Account Abstraction. The next narrative appears to be around L2s (whether using ZK or not). However, no one seems particularly excited by this potential narrative as it doesn’t inherently unlock any new user acquisition or consumer products, and it’s mostly a continuation of existing developments.
2. New Layer 2’s are coming, and they won’t stop coming
Following on from the successful launch of Optimism ($8B FDV) and Arbitrum ($12B FDV) tokens, we are likely entering into a wave of novel L2 tokens with various shared network security models. There is a lot of hype around projects like zkSync, Starknet, and Aztec, among others, which are all developing various forms of L2s or Ethereum roll-ups. If the market is going to continue to value L2’s as comparable to L1’s, then it is inevitable that all of these networks will launch tokens, even when they aren’t strictly necessary.
At the same time, many projects are making it easier and easier to develop and roll out your very own L2. Whether you plan to use Optimism, Starkware, Caldera, or others, it’s never been easier to spin up a new L2 as an app-chain, or even just a generalized L2 (see BASE).
The growth in L2s is also driving more innovation in security models and modularity. It’s well known that most L2’s are centralized and secured by a single sequencer. Most of these L2s have declared plans to decentralize over time, but how and when they get there remains a question mark, and the consequences for running a centralized L2 remain unknown. Espresso systems, EigenLayer, Celestia, and many others are tackling the concept of shared network security for L2s in various methods. In the future it might be viable to launch a new L2 without relying on a single sequencer and radically reducing transaction costs.
Given the ever decreasing costs of launching an L2 through template-like deployments or shared network securities models combined with the persistent premium for L2 valuation, we would expect a hyper-saturation of L2s in the coming months and years.
Get ready for the ride.
3. Regulatory environment: slow progress in the U.S., opportunistic in Asia
Everyone is seeking clarity on the U.S. regulatory approach to crypto. In years prior, various U.S. regulatory agencies have taken a narrow approach to enforcement: the focus of the SEC, CFTC, DOJ and others had been to target clear frauds, scams, and AML violations, rather than penalizing businesses that have attempted to operate within the current framework which, in some cases, originated over 70 years ago. However, following many months of increasing regulatory pressure from the U.S. — including Coinbase’s Wells Notice, Kraken’s staking settlement, the Bittrex action and the collapse of several pro-crypto banks — it appears that U.S. regulators have significantly broadened the scope of crypto enforcement.
As a result, almost everyone is keeping an eye on potential regulatory actions in the U.S. Recently, we’ve seen market makers pulling funds from U.S. exchanges (see Jump + Jane Street), Coinbase launched their Bermuda-based exchange, and Gemini is talking of doing the same.
There were, however, some green shoots. Senator Lummis and Rep. McHenry were both in attendance at Consensus. Each spoke about their collaborative approach with the crypto industry and their goals to create sensible legislation that fosters innovation and growth. Realistically, we are likely a ways off from any new legislation, but there are clear traces of bipartisan support for the crypto industry in the United States. Given the buzz on the streets of Austin, the remote status of clearer rules has not dissuaded builders within the United States from working on the next innovations, even though they may seek to restrict U.S. adopters from accessing those innovations for the time being.
In addition, it was clear that many people are excited about Hong Kong and their efforts to open up to the crypto industry and technology more broadly. That said, there is skepticism that this is a long term solution as China (and by proxy Hong Kong) has the ability to shift policy on a whim. Those projects establishing a presence in Hong Kong may be best prepared with an escape hatch built into their business plans. It is clear that Hong Kong is fighting to recapture the flow of funds and innovation that had previously moved from Hong Kong to Singapore.
Other crypto-friendly jurisdictions at the conference included the UAE, Japan, Bahamas and Dubai. In general, it appears many U.S. projects are looking into an offshore strategy as at once a defensive tactic and offensive measure.
4. More dry powder at the seed stage
A prevailing message emerged from conversations with prominent seed-stage industry funds: despite the prevailing uncertainties, these funds are steadfast in deploying dry powder. Numerous seed-stage funds have reported active Q1s and are poised to maintain their momentum, anticipating a robust half-year of funding through 1H 2023. It seems that seed-stage VCs are resuming deployment after a period of observing from the sidelines while refining their investment theses and outlooks.
Within the realm of pre-seed and seed-stage deals, competition among top projects is intensifying, prompting teams to reduce allocations in order to accommodate as many value-added investors as possible in each funding round all while preserving recently adjusted valuations. Our attention was captivated by the exceptional caliber of builders represented at Consensus, spanning various domains such as infrastructure, gaming, and DeFi. Notably, we encountered several builders with a strong focus on cybersecurity, and the growing presence of this cybersecurity sub-narrative may well stir up some excitement and anticipation. So despite takeaways 1 and 2 above, be on the lookout for other narratives (even if only a mere subplot).
5. Crypto gaming is experiencing a reset
While enthusiasm towards crypto gaming has cooled off with regards to the number of deals done and funds deployed, the industry is still generally bullish on the sector being the avenue for mass crypto adoption.
NFTs as collectibles have found clear product-market fit in games. Investors and teams are realizing that existing game-token models have flaws, and they are rethinking how to best fit tokens into gaming ecosystems, potentially abstracting them away from game experiences.
Investor sophistication in the sector has increased as well, and people are starting to better understand that some of the theoretical benefits of crypto in games may just as well backfire as succeed. For instance, while NFTs democratized access to collectibles, they also cannibalize the gameplay experience as it’s too easy for speculators to hoard NFTs (i.e. top tier Gods Unchained decks being too difficult for gamers to purchase). That being said, teams are still building new games, more gaming infrastructure is being developed (i.e. Stardust), and investors are still deploying capital in the sector, now more responsibly and selectively. Though it may seem like crypto gaming hasn’t figured it out just yet, don’t sleep on it.
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