Three underrated product trends: 2022 recap and 2023 predictions

As an annual tradition, I always make three under-the-radar product trend predictions for the upcoming year. Let’s first recap to see how well I did last year before making my three predictions for 2023.

---

1. Vertical specific NFT marketplaces

Verdict: It depends.

OpenSea volume is down 94% from all-time high, and most other verticalized NFT marketplaces are also down by similar percentages; SuperRare and Foundation are down 92% and 90% respectively.

The one exception seems to be music NFTs. Last year I predicted a breakout year in 2022 for music NFTs. While music NFT volumes are still down significantly from all-time highs, there’s still healthy month-over-month growth throughout the bear market.

2. Trust-minimized cross-chain bridges

Verdict: Correct.

Last year I wrote “bridges are massive honeypots and I predict bridge hacks will be the new CEX and DeFi hacks.” Turns out five of the seven biggest hacks of all time are cross-chain bridges, totalling $2.3B in money lost.

All of these hacked bridges took shortcuts in their bridge design and introduced trust assumptions. Examples include having a centralized multisig of a few validators all controlled by the same entity, or having an admin key that can unilaterally upgrade key parameters in the smart contracts. These single points of failure became massive targets for sophisticated hackers like state-sponsored North Koreans. Meanwhile, trust-minimized bridges like Hop haven’t had security incidents to date (knock on wood!) and are commanding large market share.

These hacks show why designing a trust-minimized bridge is hard and why projects shouldn’t duct-tape a solution together and sacrifice security for the sake of prioritizing execution speed. As the old saying goes in cybersecurity, it doesn’t matter that you’re right 99% of the time. You only need to be wrong once to be rekt.

3. Investment DAOs

Verdict: Wrong.

With the exception of a few OG investment DAOs like Flamingo DAO, new DAOs that have popped up were largely gimmicks and media publicity stunts. They got a lot of press coverage and some early usage initially but ultimately no sustained traction nor product-market fit. Number of new DAOs created is also a vanity metric because the venture capital power law applies here – only a small handful of DAOs will capture almost all of the investment returns.

Last year I analogized investment DAOs to fractionalizing collectors instead of artworks, with the big use case for group purchases of expensive grail NFTs. Turns out, collectors prefer buying cheap editions instead to get exposure to blue-chip artists.

---

With that, here are my three underrated product trends for 2023.

1. ENS

ENS is the biggest NFT elephant in the room. It has by far the widest distribution of any NFT project in terms of number of unique holders and is the 10th most called smart contract on Ethereum in the past year.

Yet ENS still isn’t really talked about much on Twitter because it’s not as sexy as JPEGs; speculating on names rather than images seems rather lame. There’s also a misconception that ENS is only about domain squatting popular names and less so about building a passionate community of holders like other NFT projects. But turns out, ENS also has their own version of PFPs in the form of 3 and 4 digit ENS names. Known as the 999 Club and 10k Club, I predict these will be some of the most desirable forms of on-chain identity in the next year.

On top of all this, ENS.Vision has quickly grown to be the leading verticalized marketplace for ENS names and the go-to place to shop ENS names rather than OpenSea. It’s always bullish for the vertical when the verticalized marketplace is capturing more volume than the generalized secondary marketplace.

2. MEV business model for apps and wallets

Over the past few years, MEV has grown from a side gig by crypto-native hobbyists (myself included!) to a professionalized industry requiring dedicated infrastructure to optimize milliseconds in execution speed.

Source: https://explore.flashbots.net

Note that this is only a lower bound estimate – the true total amount of MEV profits could be several times larger. If only there were a way for projects and users to capture this profit instead of searchers and validators!

Enter app-specific chains and rollups. Much has already been written about the appchain thesis in 2022. Unlike the faster/cheaper/better scalability narratives, I think MEV will be the biggest reason why dApps migrate to their own chains or rollups. This is because when dApps are on their own bespoke chains, they can control the sequencer, or the ordering of transactions. Controlling the sequencer is a new business model for dApps because MEV searchers pay dApps for the right to order transactions a certain way in order to do their frontrunning or backrunning. And the payment can become either revenue for the dApp or flow back to the users to compensate for their impermanent loss.

Additionally, MEV could enable a new business model for wallets. Wallets could create their own private mempools for users’ transactions (or partner with a project to build it) and have MEV searchers bid on the right to bundle transactions. Wallets get the bids as revenue and can pass some of it back to users. This is akin to payment for order flow (PFOF), which is how Robinhood makes money as Citadel pays Robinhood to get retail flow.

A common misconception is that all MEV is bad. In reality only a subset of MEV is toxic, such as frontrunning and sandwiching. Arbitrage and liquidations are the unsexy plumbing work that’s critical to keep the on-chain DeFi ecosystem healthy. Without a robust MEV ecosystem, protocols end up with bad debt when markets are dislocated like what happened to MakerDAO on Black Thursday.

In a nutshell, whenever a new business model is created it’s a sign of a 0 to 1 innovation.

3. Generative art

Generative art is a flight to safety from PFPs. Generative art not only has similar properties as collectibles in terms of creating a passionate community of NFT holders, but also is seen as higher quality artworks created by artists who believe in the long-term value of NFTs rather than by random contractors on Fiverr who probably don’t know what an NFT is.

When NFT prices are down, critics dismiss NFTs as having no intrinsic value unless there’s real-world utility associated with owning them. Existing projects are thus pressured to create physical merchandise, build metaverse games, license their brand IP, etc. to create value for their NFT holders.

But in my opinion that’s usually the wrong approach for projects to take. NFT projects have to become a lot more execution oriented, and most projects have demonstrated they’re mainly just good at marketing but not building products. When external dependencies are introduced and expectations are pegged to the project’s development, the project keeps needing to reward NFT owners to make them productive assets otherwise the NFTs become worthless.

This is unlike store of value. It’s counterintuitive, but store of value is a feature not a bug. Being a store of value has bigger upside and TAM than being a company. NFT projects should instead strive to be the place where ETH whales and ultra-high net worth individuals diversify and park their money.

Art is one of the oldest forms of store of value. On-chain generative art is a paradigm shift in the traditional art world because it’s a new art form that can’t be made without the blockchain. And the total market cap of cryptoart is only $1.7B (0.2% of the total market cap of cryptocurrencies) so there’s still tremendous upside potential from here. In a few decades from now, art historians will look back and define this era like they did with Renaissance, Neoclassicism, Romanticism, Modern Art, Contemporary Art, and various other art movements.