DeFi Will Be the Foundation of Crypto’s Next Cycle: Pantera Capital

Pantera Capital – a blockchain-focused institutional asset manager – has released a report reviewing the state of the blockchain industry in 2022, and what to expect on the technological and adoption front going forward.

The report predicted that crypto has already bottomed and that the next market cycle will be defined by greater adoption of decentralized finance (Defi). 

The Era of Defi

According to Pantera’s co-Chief Investment Officer (CIO) Joey Krug, the crypto industry has been trending toward self-custody and trust minimization since the fall of Mt. Gox in 2013. Today, wallet providers like Trezor and Ledger – alongside smart contract protocols like Uniswap and 0x – are helping mitigate issues related to centralization and mismanagement. 

“It seems fairly evident that the historical arc of the world’s financial rails will end up as blockchain-based systems using smart contracts,” wrote Krug in the report. He cited scaling solutions enabling sub-ten cent transaction fees coupled with ease of writing smart contract-based systems as drivers of such adoption. 

Much like crypto market prices, Defi activity fell substantially throughout 2022, with total value locked (TVL) across all protocols now just $47 billion – down from roughly $180 billion in late 2021. 

Pantera’s report also reflects a substantial decline in venture capital investment in crypto during that time. According to Pantera general partner Paul Veradittakit, global funding for VC-backed crypto startups fell from $9.8 billion in Q4 2021 to $2.4 billion in Q4 2022. 

Nevertheless, from the money that remained in crypto last year, Defi investment alone took a 42% share of the pie, with the rest going to sectors like gaming, consumer crypto, and dev infrastructure.

“We believe this is a tremendous time to start a company in the blockchain space,” said Veradittakit. “Talent is more educated and passionate about the industry than in previous cycles. A plethora of capital has been raised and is awaiting deployment.”

The Significance of the Merge

Pantera’s investment analyst, Will Reid, called the Ethereum Merge “one of the most technically impressive software updates ever performed.” The upgrade, which took place in September, reduced the ETH’s inflation rate while transitioning the network to a proof-of-stake consensus mechanism. 

Nevertheless, Ethereum still has many drastic upgrades ahead of it, including The Surge, The Scourge, The Verge, The Purge, and The Splurge, as coined by the network’s co-founder Vitalik Buterin. Reid predicted these upgrades will take Ethereum on a path toward greater speed, usability, and decentralization.

“Higher bandwidth, more secure, and more user-friendly blockchains should allow for a similar Cambrian explosion of applications and use cases in Web3,” he said.

Ethereum is the primary network for Defi, accounting for over 50% of TVL across the entire industry.