The Paradox of Crypto's Best Year

2022 was a year of stark contrasts for the cryptocurrency industry. On one hand, token prices plummeted and several major centralized entities like FTX collapsed spectacularly. But looking beyond price action, Ryan Selkis argues that 2022 may have paradoxically been crypto's best year yet in terms of real progress and adoption.

"If you had no context of token price, you'd have thought this was the biggest year for blockchain yet," Selkis noted. He pointed to several major milestones:

• Mainstream Web2 companies started doing full integrations with blockchain technology
• On-chain activity for protocols like Solana skyrocketed
• Ethereum successfully completed The Merge, transitioning to proof-of-stake
• Millions of new users joined the crypto ecosystem

This disconnect between price action and underlying fundamentals is what keeps Selkis optimistic about the long-term potential of blockchain technology. While the market experienced severe turbulence, the core technology and ecosystem continued to advance rapidly.

The Fall of Centralized Exchanges

One of the defining stories of 2022 was the collapse of major centralized crypto entities, most notably FTX. Selkis views these failures as growing pains that will ultimately make the industry stronger and more decentralized.

"All the people and products that I didn't like are dead and all the people that I liked and projects that I was excited about are thriving," he remarked.

Selkis believes the centralized exchange model is fundamentally flawed and creates systemic risk. He advocates for a hybrid approach that maintains the benefits of centralized liquidity while leveraging decentralized custody and settlement.

As an example, he highlighted the integration between hardware wallet maker Ledger and FTX that allowed users to trade using FTX's order books while maintaining self-custody of their assets. Ledger users were protected from FTX's collapse because they never gave up control of their funds.

The Regulatory Landscape

A major focus of the discussion was the current regulatory environment for crypto in the United States. Selkis was highly critical of the SEC's approach, arguing that their obstinance around spot Bitcoin ETFs directly contributed to the credit contagion that took down several major crypto firms in 2022.

"A lot of this contagion would never have happened if they had approved a spot ETF after they approved the futures ETF," Selkis stated. He believes the SEC's refusal to approve spot ETFs while allowing futures-based products is nonsensical and has harmed investors.

Looking ahead, Selkis sees three key priorities for crypto regulation in the US:

1. Stablecoin regulation
2. Oversight of centralized exchanges and custodians
3. Clear definitions around securities vs. commodities for tokens

However, he's not optimistic about comprehensive legislation passing in the near-term given the current political climate. Instead, he expects a period of "litigation and retrenching" that may last through the next presidential cycle.

DeFi's Disruptive Potential

Despite regulatory headwinds, Selkis remains extremely bullish on the potential of decentralized finance (DeFi) to disrupt traditional financial services. He noted that the total market cap of DeFi protocols is currently only around $15 billion, compared to JP Morgan's $400 billion market cap.

"If you're thinking about financial services as like 20 to 25% of the global economy and the things that DeFi can unlock and the rents that it can eviscerate at scale, I still think it's such a transformative component of the industry," Selkis explained.

He believes DeFi has barely scratched the surface of its potential to create a more efficient and accessible global financial system. As long as regulators don't completely stifle innovation, Selkis expects DeFi to continue growing rapidly and eating into the market share of traditional finance.

The Promise of Decentralized Infrastructure

Beyond DeFi, Selkis is particularly excited about the potential of decentralized physical infrastructure networks (D-PIN). He views these as critical for creating a truly resilient and censorship-resistant web3 ecosystem.

The recent decision by major European data center provider Hetzner to ban crypto-related activities highlighted the risks of relying on centralized infrastructure. Selkis believes decentralized alternatives like Filecoin for storage and networks like Helium for connectivity will become increasingly important.

"We sure as hell better have like a decentralized hardware network that's going to be able to like run some of these applications," he stated. With the cloud computing market valued at $5-6 trillion, Selkis sees massive potential for growth in decentralized infrastructure solutions.

The Next Frontier: Decentralized Social

Looking further ahead, Selkis is optimistic about the potential for decentralized social media platforms to challenge the dominance of Web2 giants like Facebook and Twitter. He highlighted projects like Lens Protocol and Farcaster as promising early efforts in this space.

"I think decentralized social, right? So just the current web, right, the browsing experience, the mobile operating systems, and then like the web to like social giants, I think are all absolutely things that could be built around and upgraded," Selkis explained.

He believes decentralized social networks that put users in control of their data and identities could fundamentally reshape how we interact online. While still in very early stages, Selkis views this as one of the most exciting frontiers in crypto.

Maintaining Crypto's Values at Scale

As blockchain technology and crypto assets become more mainstream, there are concerns about whether the industry can maintain its core ethos of decentralization, transparency and user empowerment. Selkis acknowledges this challenge but remains optimistic.

He believes the open source nature of most crypto projects creates strong incentives to maintain interoperability and resist centralization. Additionally, as more traditional companies enter the space, they'll be forced to adopt crypto-native principles to stay competitive.

"I think the transition will be slow at first, like slowly, then suddenly," Selkis predicted. He expects different sectors to hit tipping points at different times rather than seeing a wholesale revolution all at once.

The Path Forward for Crypto

While acknowledging the severe challenges the crypto industry faced in 2022, Selkis remains as bullish as ever on its long-term potential. He believes the core technology and ecosystem are stronger than ever, even if prices and public perception have taken a hit.

Looking ahead, his advice to the industry is simple: "Let's get back to work." He believes the next few years will be critical for demonstrating real-world utility and value creation to overcome regulatory hurdles and rebuild trust.

By focusing on building useful products and expanding access to decentralized finance and infrastructure, Selkis is confident crypto can emerge from this difficult period stronger than ever. While challenges remain, the foundation is in place for blockchain technology to transform numerous industries in the coming years.

The Role of Solana in the Crypto Ecosystem

While not a primary focus of the discussion, Selkis did highlight Solana as one of the layer-1 blockchains well-positioned to emerge stronger from the current bear market. He noted that despite facing significant challenges in 2022, the Solana ecosystem has demonstrated impressive resilience.

"You've very violently shaken out the weak hands and had to kind of go through this crisis of confidence. But now it's kind of like a make or break year. And if you have the solid enough foundation, which I happen to think Solana does, in terms of developer interest in terms of innovation around the edges and infrastructure, then that's where you're really positioned for like the resurgence," Selkis explained.

He drew parallels to Ethereum's journey, suggesting that if Solana can weather the current storm, skeptics may come to view it similarly to how former Bitcoin maximalists now respect Ethereum. This highlights the potential for Solana to cement its position as a leading smart contract platform alongside Ethereum in the coming years.

The Importance of Building Real-World Utility

A key theme throughout the discussion was the critical importance of the crypto industry focusing on building products with real-world utility. Selkis believes this is essential not just for long-term success, but for near-term survival in the face of regulatory pressure.

"When I say build our way out of this, I think that building products that are going to be useful for society, it is an existential need right now," he emphasized. By demonstrating clear value creation and solving real problems, the crypto industry can make a stronger case for its continued existence and growth.

Selkis highlighted several areas where he sees particular potential for crypto to add value:

• Improving financial inclusion and access in developing economies
• Creating more efficient and transparent financial infrastructure
• Enabling new forms of organization and coordination through DAOs
• Empowering users to control their own data and digital identities

By delivering tangible benefits in these areas and others, crypto projects can build broader societal support and make it harder for regulators to take overly restrictive approaches.

The Evolution of Crypto Adoption

Selkis provided an interesting framework for thinking about the current state of crypto adoption across different sectors. Rather than viewing the entire industry as being at a single point on the adoption curve, he sees multiple overlapping cycles playing out simultaneously.

"You've got kind of Bitcoin on one cycle. You've got Ethereum and layer ones and smart contract platforms on another cycle. And then you've got a lot of applications that are all on related but slightly different parts of the curve," he explained.

This means different areas of crypto may hit mainstream adoption at different times:

• Bitcoin as a store of value / digital gold: Most mature, perhaps in the "3rd inning"
• Smart contract platforms like Ethereum: Earlier stages, "2nd inning"
• DeFi protocols: Gained significant traction in 2020-2021 but still early
• NFTs: Exploded in popularity in 2021 but use cases still evolving
• Decentralized social / identity: Very early stages, "1st pitch"

This staggered adoption curve creates ongoing opportunities for growth and innovation across the industry, even as some sectors mature. It also allows for lessons learned in one area to be applied to newer verticals as they develop.

Crypto's Role in Geopolitics

An interesting point raised by Selkis was the potential for crypto to play an increasingly important role in geopolitics and international finance. He cited the example of developers in Ukraine being able to access funds and continue working even when traditional financial rails were disrupted during the Russian invasion.

Looking ahead, he sees potential for Bitcoin or stablecoins to serve as alternative reserve assets for countries facing sanctions or other economic pressures. This could create a more multipolar global financial system less dominated by the US dollar.

However, Selkis acknowledged this also creates risks of crypto being caught in the crossfire of great power competition. Navigating these geopolitical currents while maintaining crypto's core values of openness and neutrality will be a key challenge for the industry going forward.

The Challenges of Crypto Investing

While remaining optimistic about crypto's long-term potential, Selkis was candid about the challenges of investing in such a volatile and rapidly evolving space. He emphasized the importance of having a long-term perspective and being prepared for severe drawdowns.

"I just have a lot more conviction about where the real risks are. And to me, the real risks are not that this fizzles out, it's that it's stomped out," he explained. In other words, he's less concerned about crypto failing on its own merits than about the potential for excessive regulation or other external factors to strangle the industry.

For investors, this means being prepared for extended periods of underperformance and negative sentiment. But it also creates opportunities for those with conviction to accumulate assets at depressed prices during bear markets.

Selkis advocates for a balanced approach that maintains exposure to core assets like Bitcoin and Ethereum while also selectively investing in promising new projects. He emphasized the importance of thorough research and a willingness to change your mind as the space evolves.

The Future of Crypto Regulation

A significant portion of the discussion focused on the regulatory outlook for crypto, particularly in the United States. Selkis was critical of the current approach taken by agencies like the SEC, arguing that it has created uncertainty and actually harmed investors in some cases.

However, he does see potential for more constructive regulation in certain areas. He highlighted stablecoins as one area where thoughtful regulation could provide clarity and help expand adoption. Similarly, he believes a framework for regulating centralized exchanges as something akin to broker-dealers could help prevent future collapses like FTX.

The more challenging area is around the classification of tokens as securities vs. commodities. Selkis believes this will likely require new legislation to fully resolve, which may take years given the current political climate.

In the meantime, he advocates for the industry to focus on self-regulation and building more robust information systems. His company Messari aims to create "real-time financial reporting for the community" that could serve as an alternative or complement to traditional disclosure requirements.

The Resilience of Open Source

One of the most encouraging aspects of crypto for Selkis is the continued dominance of open source development. Despite increasing involvement from traditional tech companies and financial institutions, the core ethos of transparency and collaboration has largely been maintained.

"I am consistently surprised that open source is still the standard, that interoperability is still the standard," he remarked. This creates powerful network effects and makes it difficult for any single entity to capture too much value or control.

Selkis drew a contrast with the early days of Web 2.0, where promises of open APIs and data portability gave way to walled gardens. He believes crypto's open source foundation makes it more likely to deliver on the vision of a truly open and interoperable internet.

This commitment to openness and interoperability is particularly evident in the Solana ecosystem. Despite being backed by major venture capital firms, Solana has maintained a strong focus on open source development and fostering a vibrant community of independent developers and projects.

The Potential of Blockchain Beyond Finance

While much of the discussion focused on financial applications of blockchain, Selkis also highlighted its potential to transform other industries. He's particularly excited about the ability of NFTs and other token standards to enable new forms of digital ownership and identity.

"I still think just like creating scarce digital assets, whether they're fungible or non-fungible, is something that hasn't really seeped in in terms of its importance to society at large," he explained. This could enable everything from more equitable distribution of digital content revenues to new forms of voting and governance.

Selkis also sees major potential in using blockchain to create more transparent and efficient supply chains, to enable new forms of scientific collaboration, and to create more user-centric social media platforms. While these applications are still in early stages, he believes they could ultimately be as impactful as the financial use cases that have dominated crypto thus far.

Facts + Figures

• Ryan Selkis has been full-time in the crypto space since 2013
• The total market cap of DeFi protocols is currently around $15 billion, compared to JP Morgan's $400 billion market cap
• Financial services represent 20-25% of the global economy, highlighting the massive potential for DeFi disruption
• The cloud computing market is valued at $5-6 trillion, while decentralized infrastructure networks have a total market cap of about $3 billion
• Bitcoin adoption may be in the "3rd inning" while Ethereum and other smart contract platforms are in the "2nd inning"
• Newer areas like decentralized social networks are still in very early stages, the "1st pitch"
• Selkis believes comprehensive crypto legislation in the US is unlikely in the near-term given the current political climate
• He expects a period of "litigation and retrenching" that may last through the next presidential cycle
• The SEC's refusal to approve spot Bitcoin ETFs while allowing futures-based products has directly harmed investors according to Selkis
• Ledger's integration with FTX allowed users to trade using FTX's liquidity while maintaining self-custody, protecting them from FTX's collapse
• Selkis sees three key priorities for US crypto regulation: stablecoins, oversight of centralized entities, and clear token classification
• Despite price declines, on-chain activity for protocols like Solana skyrocketed in 2022
• Millions of new users joined the crypto ecosystem in 2022 despite the bear market

Questions Answered

What initially drew Ryan Selkis to crypto?

Ryan Selkis was initially drawn to Bitcoin in 2011 during the US debt sequester crisis, which sparked his interest in alternative currencies and monetary systems. He was attracted by the libertarian ethos and potential for a decentralized currency outside of government control. However, he didn't fully dive in until 2013 when developments like the launch of Coinbase and the shutdown of Silk Road made him take a closer look at the technology and its potential.

How does Selkis view the differences between crypto in 2013 and 2023?

Selkis sees the crypto space as having evolved significantly since 2013, moving from a Bitcoin-centric ecosystem to a much broader industry encompassing various layer-1 protocols, DeFi, NFTs, and more. He believes the core "don't trust, verify" ethos has remained consistent, but the industry has become more diverse and skeptical. Selkis views this increased skepticism as healthy, forcing new projects and individuals to prove their value and commitment to the space's long-term vision.

Was 2022 paradoxically crypto's best year yet?

Despite the severe market downturn, Selkis argues that 2022 may have been crypto's best year in terms of real progress and adoption. He points to increased mainstream integration, growth in on-chain activity for protocols like Solana, Ethereum's successful transition to proof-of-stake, and millions of new users joining the ecosystem. This disconnect between price action and underlying fundamentals is what keeps Selkis optimistic about the long-term potential of blockchain technology.

What is Selkis' view on the fate of centralized exchanges?

Selkis believes the centralized exchange model is fundamentally flawed and creates systemic risk. He advocates for a hybrid approach that maintains the benefits of centralized liquidity while leveraging decentralized custody and settlement. Selkis sees the failures of entities like FTX as painful but necessary growing pains that will ultimately make the industry stronger and more decentralized.

How does Selkis view the current regulatory landscape for crypto?

Selkis is critical of the current regulatory approach in the US, particularly the SEC's stance on spot Bitcoin ETFs. He believes their obstinance has directly contributed to market instability and harmed investors. Looking ahead, Selkis sees three key priorities for crypto regulation: stablecoin oversight, regulation of centralized exchanges/custodians, and clear definitions around token classification. However, he's not optimistic about comprehensive legislation passing in the near-term given the current political climate.

What keeps Selkis hopeful about crypto's future?

Selkis remains optimistic about crypto's future due to the continued rapid pace of innovation and development in the space. He's particularly excited about the potential of DeFi to disrupt traditional finance, the growth of decentralized infrastructure networks, and the emergence of decentralized social platforms. Selkis believes that as long as the industry can continue to build useful products and demonstrate real-world value, it will overcome current challenges and fulfill its transformative potential.

Can crypto maintain its core values as it goes mainstream?

Selkis believes crypto can maintain its core values of decentralization, transparency, and user empowerment as it becomes more mainstream. He points to the resilience of open source development and interoperability standards as evidence that the industry's fundamental ethos remains strong. However, Selkis acknowledges this will be an ongoing challenge and expects a gradual transition as different sectors of the crypto economy hit mainstream adoption at different times.

What exciting projects or technologies is Selkis following for 2023?

For 2023 and beyond, Selkis is particularly excited about three areas: 1) The continued growth and maturation of DeFi protocols, 2) The development of decentralized physical infrastructure networks (D-PIN) for compute, storage, and connectivity, and 3) The emergence of decentralized social media platforms that put users in control of their data and identities. He sees these areas as having massive disruptive potential across various industries.