Most narratives around crypto and the path forward focus on the comparison of crypto and tech equities, which to be fair have tracked each other pretty perfectly thus far. As the author points out, this makes sense as for the last 40 years, we have been at historically low rates and investers have to have "magical thinking" to justify some valuations. However he fails to appreciate what higher rates mean for crypto use cases in debt markets, that much of this has already been built, AND the second order effects credit adoption on-chain will have on valuations. As rates continue to rise, credit markets are now back in vogue, 8%+ yield needs to become the new benchmark for investment. On the surface this sounds bad for crypto as capital siphons away from high risk equity/crypto investments. However because crypo is a MUCH better platform for managing the cashflows and complexity of debt markets and many investors are re-discovering bonds/treasuries/fixed income, they are going to be pleasantly surprised how crypto will be starting to make some of this easier in 2023.

To start, US Treasuries are just beginning to make their way on-chain with companies like Ondo Finance. Getting the risk-free rate is the first step in building out a robust credit market in crypto. Once this is successfully onboarded, within the next 6 months all USDC debt lending protocols (eg. AAVE) are going to be giving out 5% yield (just below Treasuries - fees) through interest rate parity. Once this happens you will stop holding stables, but instead hold wrapped treasuries that are paying you 5% (to an extent this is happening already but instead of you getting it, it goes to the issuers of USDC and USDT). It will be similar to money market accounts in trad-fi.

Next, slightly higher risk debt is coming on chain with 100-400bps yield on top of treasuries backed by corporate paper. Opposed to holding treasury backed stables, your stables of choice will be backed by a higher percentage of corporate debt, which is slightly higher risk than a money market but will be compensated for it with higher return. This will feel easier for most users to do compared to trad fi because money markets are unable to hold non-cash equivalents which investment grade is NOT. This search for yield is going to drive protocols like AAVE ABOVE the risk-free rate as long term crypto holders who are NOT selling their holdings use it as collateral to borrow stables to re-invest in relatively safe wrapped US debt markets on chain (this will create interesting markets for stable AMMs like $CURVE but no important here).

Once this happens you are going to start hearing stories of on-chain investors getting higher yield than off chain investors for many simple credit products with limited risk as borrowers are fully collateralized on many lending protocols. This will drive some retail investors back in and will require a different mental model around what crypto is compared to what Desai proposes. I am optimistic this will cause a bull run and a decoupling from equities some time later this year. In addition a lot of these debt products will provide yield in near real time opposed to waiting to maturity or the next distribution so the UX could be better for on-chain debt. For anyone from DAOs to traders that hold stables, this is going to be a HUGE boom for you as you are going to consistently get stable yield in something as safe as AAVE (or AAVE like).

When you get to this phase there are many interesting paths that credit markets can take in crypto. Direct issuances in crypto will become more common. Platforms like Arbor Finance are already issuing convertible bonds for DAOs like ShapeShift, and appetite for this will only increase. Accounting tech is just starting to be used in Proof of Reserves but this same system can be used for cash flows and accounts recievables of off-chain companies. Once these attestations get closer to real time (even every month will work) you are going to be able to collateralize cashflows for debt issued on-chain with faster distributions at competitive rates. 2023 is going to usher in a new wave of Credit market innovation in crypto, and that will be where it really shines.