The investments made in crypto in 2022 surpassed what was done in 2021. The expectations of investors in 2022 were met with disastrous losses which accrued to $3.9 billion in total with FTX being a major part of it. According to the CMC report, this outcome will drive a new strategy for investments in 2023.
VCs are expected to pay closer attention to risk management, especially in the DeFi market. In addition to this intense scrutiny, CMC said that VCs will ask for a seat on the board of the companies they invest in, which would also include CeFi platforms.
Proof of Reserve and uncluttered services
In light of the catastrophe of how FTX went down, CMC projects that the relevance of Proof of Reserve will skyrocket in 2023 particularly as a guide for institutional traders.
“Most institutional traders are now demanding Proof of Reserves (PoR), a cryptographic method by which exchanges can prove their assets on hand match their liabilities,” it added.
Furthermore, the services offered by several exchanges will become less complex and more streamlined. CMC explained that this trend will become more frequent to entice VCs to invest in firms that have simplified functions.
Therefore, unlike today’s exchanges that “serve as custodians, brokerages, lenders, and exchanges, all in the same bundle,” going into 2023, these parts will be divided.
No one should be surprised to see a trading system where users don’t have to custody their funds with Binance before they can trade on the platform. CMC highlighted that the advantage of this structure is to avoid the theft of users’ funds.
Thanks to the FTX and SBF scenario that proved to be a bitter lesson for many as “both traditional and crypto VCs are now painfully aware that deception can occur at even the highest levels of venture finance, and that even the largest institutional investors can be blindsided by it”.
The Future of Market Making
On the growth of market making in the crypto industry, the report states that there will be more institutionalization as the demand for liquidity will increase; increase in interoperability across market makers; and capital efficiency where “liquidity providers on centralized venues have to fully fund their order books at each exchange, given fragmented markets and an inability to cross-margin”.
CMC added that market makers will reduce dependence on centralized exchanges by decreasing the capital provided on such platforms while favoring platforms like ClearLoop that allow trading via third-party custodians.
On the other hand, CMC noted that exchanges will reduce trading fees and increase transparency to attract more users to their platforms.
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