2022 was full of worrying crypto news – media reports suggested that the entire crypto ecosystem was on the brink of disaster and naysayers lined up to declare that the currencies had reached the end of the road. There is no denying that last year seriously damaged crypto’s image.

2023 is therefore going to be an important year for the sector – there’s an urgent need to reinvest in trust and transparency. Reaffirming the soundness of the underlying technology will also be essential if confidence is to be re-established.

Putting regulation first

The good news is that this is already starting to happen, partly as a result of a resurgence in principles-first thinking and partly due to growing awareness that objective regulation can be an ally, not an enemy.

For example, the Markets in Crypto Assets Regulation (MiCA) – the crypto legislative package that the European Union finalised in October and President Biden’s Executive Order on Ensuring Responsible Development of Digital Assets, will both help build trust, a prerequisite for any currency. However, developing effective and proportionate governance will remain challenging because of the speed with which the crypto world continues to evolve. Keeping pace with this will doubtless stretch the knowledge and resources of regulators.  In this sense, it is vital that core companies in the crypto industry engage proactively with regulators to help fill this knowledge gap and ensure incoming regulations are compatible with the space.

There are also questions around priorities. Does consumer protection take the top spot or is financial integrity of greater importance? In addition, conventional financial rules aren’t easily applied to the current range of crypto actors, such as miners, validators and protocol developers. Regulation, although welcome, remains a Gordian Knot of unprecedented complexity. The sector will therefore have to couple compliance with conviction if sense is to prevail.

It’s all beginning to merge

Even before 2022, a major issue with crypto mining was the amount of energy required to verify transactions on blockchains. Ethereum, the second largest cryptocurrency after Bitcoin (based on market cap), therefore decided to shift from the energy-intensive proof-of-work (PoW) to the more environmentally sustainable proof-of-stake (PoS) system. This move from Ethereum last September was revolutionary for the industry - reducing Ethereum’s energy consumption by 99.95%. This could make the currency attractive to environmentally-aware investors during 2023, vastly expanding the potential we can expect from it in the years to come.

Also, Ethereum will begin the year as a near-deflationary PoS currency [a positive], although its gas fees/blockchain charges remain high [a negative]. That said, the emergence of solutions like Polygon, a stack of protocols designed to fix Ethereum’s scalability issues, may well go some way to fixing these issues. Polygon addresses a network’s challenges by handling transactions on a separate Ethereum-compatible blockchain and then returns transactions to the main Ethereum blockchain post-processing - lowering the network load on Ethereum, speeding up transactions and lower transaction costs to less than a cent. Along with this various wallet solutions that implement transaction batching and non-native token payments for gas can help lower the cost of transacting on Ethereum.

Bitcoin – crypto’s poster child – is well positioned for 2023, with start-ups such as Lightening, and protocols such as Taro (Taproot Asset Representation Overlay), making the currency more attractive and cost-effective to trade. Bitcoin’s positive outlook is also based on the growth of its adoption by diverse communities around the world, including El Salvador, although, as with Fiat currencies, global uncertainties and recessionary pressures could dampen performance in the short term.

It’s true that the crypto universe has had its share of imposters and security hazards – there have also been some uninvited guests – but the outlook for 2023 is solid.

Empowering users’ control with self-custody

Self-custody wallets, also known as non-custodial wallets eliminate the growing risks associated with having data stored online and can give the Web3 world more control over privacy and personal information. Providing users with complete control over their funds via private keys, it differs from a custodial wallet by giving users direct control over their funds rather than a crypto exchange or platform.

By offering greater control, self-custody can assist users in regaining control of their digital identities - underlining the solutions crypto offers for issues that have plagued digital industries in recent years. To that end, many projects are working to put control of digital identity back in the hands of users and in 2023, we will see this improve users’ privacy because they will ultimately have more control over their data.

Bolstering security through zero knowledge

Zero-knowledge (ZK) cryptography has long been considered a game-changer for ensuring the privacy, security and integrity of blockchain applications and 2023 is set to be its year. ZK cryptography proof is a way of proving the validity of a statement without revealing the statement itself and is used to secure the transaction fully on a blockchain platform.

While a few chains – including Mina, ZCash and Celo – already use ZK cryptography in production, none of them provide true programmability or full on-chain smart contract functionality. As a result, they are limited in what they can do. But that’s going to change in 2023 and the rapid investment and development of zero-knowledge proofs is an important signal that the technology is getting ready for prime time.

Innovation remains the key to success

Here at Nexo, we were buffeted by the same events as everyone else. The good news is that we turned these trials and tribulations into opportunities for our clients. We started a Web3 fund and invested in 70-plus companies, while our product team debuted the Nexo Card, Nexo Prime, Nexo Pro, the Booster, smart staking, and our non-custodial Nexo Wallet – all designed to make operating with crypto easier and more effective. As a result, we now have more than five million Nexo users, a figure we’re confident will grow in 2023, partly due to the launch of the Nexo Wallet, which opened the door to the benefits of decentralised finance (DeFi) and Web3 identities.

It’s true that the crypto universe has had its share of imposters and security hazards – there have also been some uninvited guests – but the outlook for 2023 is solid. Why? Because crypto’s underlying technology holds out the promise that anyone with net access will be able to access financial products and services in an unintermediated and permissionless way.

In 2023 cryptocurrencies will continue to democratise the financial world... and that’s a fact.