CoinW Academy: 2023-2024 Annual Research Report on the Cryptocurrency Industry

Author: Kris Xu, CoinW Academy

In 2023, we witnessed the vigorous development of the cryptocurrency sector together. Throughout this period, conflicts and integrations intertwined, showcasing the multifaceted dynamics of the industry's rapid evolution. In this fast-evolving environment, regulation and compliance became the main theme of the year.

The growth of the cryptocurrency market stems from the widespread acceptance and application of cryptocurrencies globally, and this globalization trend has had a particularly significant impact on the market's shaping and influence. Looking back at 2023, it has become necessary to analyze the development dynamics of the cryptocurrency market and the evolution of its landscape in depth.

Today, we will examine the cryptocurrency field from a macro perspective, analyzing and assessing the current state of the cryptocurrency industry comprehensively, from the development of blockchain technology to various segments of the market. While considering technological changes, we will conduct a comprehensive analysis of industry trends, regulatory situations, and market performance in order to gain a deeper understanding of the development direction of the cryptocurrency industry.

2023 Cryptocurrency Market Overview

The market capitalization data of the cryptocurrency market in 2023 reveals the trajectory of its comprehensive development. Initially, the market capitalization experienced a sustained and gradual upward fluctuation, quickly soaring to over $1 trillion at the beginning of 2023. Subsequently, the market capitalization exhibited relatively large fluctuations, but the overall trend remained a steady increase. The second and third quarters of 2023 showed a volatile trend, with market capitalization maintaining in the range of $1.1 trillion to $1.3 trillion, before breaking through and stabilizing above $1.5 trillion in the fourth quarter. The market capitalization once climbed to $1.6 trillion and continued to maintain this level, perfectly concluding the cryptocurrency market for 2023.

Figure 1: Total Market Capitalization of Cryptocurrency in 2023

Sector Overview

2023 witnessed unprecedented turbulence and innovation in the cryptocurrency field, with Ethereum and Bitcoin leading a new era of competition. This year, numerous infrastructure and public chain projects flourished, not only breaking through in decentralization but also focusing on providing fast and convenient trading experiences while actively shaping practical application scenarios that meet market demands. These innovators continuously pushed the boundaries of technology and application, leading the cryptocurrency industry into a more diversified and mature development stage.

Ethereum After the Shanghai Upgrade

In the first half of 2023, the focus in the cryptocurrency field was entirely on the Ethereum Shanghai upgrade (EIP-4895). This upgrade was a highly anticipated major shift for Ethereum stakers, allowing them to withdraw funds staked as validators.

Liquid Staking Derivatives

Staking ETH is part of Ethereum's proof-of-stake mechanism, where stakers need to lock 32 ETH to run validator nodes, ensuring network security and validating transactions' effectiveness. The implementation of the Shanghai upgrade granted stakers the right to withdraw these locked ETH, a feature that was not available on the previous beacon chain.

This transformation accelerated the evolution of the liquid staking derivatives market, known as Liquid Staking Derivatives (LSD). Through LSD services, people can trade staked Ethereum (ETH) in tokenized versions (e.g., sETH) across different platforms. As the liquidity of tokenized versions of staked ETH increased, it alleviated the potential massive sell-off pressure that ETH might have faced, significantly impacting the stability of Ethereum's price. LSD also became one of the hottest sectors in 2023, with governance tokens from excellent LSD service providers like Lido Finance and Rocket Pool becoming some of the most traded tokens.

Figure 2: Amount of ETH Staked Across Protocols

Layer 2

Layer 2 technology is an important solution to the congestion of the Ethereum network. It aims to improve transaction speed, reduce transaction costs, and enhance user experience. Currently, the mainstream Layer 2 technology is primarily Rollup, with Optimistic Rollup holding a dominant position. Currently, Arbitrum and Optimism account for 74.7% of the Total Value Locked (TVL) of all Rollup-type Layer 2 public chains, with ecological protocols, projects, and tools accounting for as much as 66.8%. We can even say that Arbitrum and Optimism are the absolute core of Layer 2 public chains.

In 2023, Rollup-type Layer 2 experienced epic growth, with its TVL soaring from $4.44 billion at the beginning of the year to $17.84 billion today. Compared to Optimistic Rollup, ZK Rollup clearly fell behind in 2023. Representative projects zkSync and Starknet did not establish clear token deployment plans in 2023 and faced multiple issues in compatibility with the Ethereum Virtual Machine (EVM). These challenges caused ZK Rollup's market share to lag far behind that of Optimistic Rollup.

Although ZK Rollup technology possesses high security and mathematical verification advantages, it still needs to overcome several challenges in practical application and widespread adoption. With the launch of the Starknet airdrop plan and the increasing maturity of zkSync's EVM compatibility, we hold an optimistic attitude towards the development of ZK Rollup.

Figure 3: Layer 2 TVL

Cancun Upgrade and EIP-4844

The Cancun upgrade is an additional improvement to Ethereum (ETH) following the Shanghai upgrade, primarily including the highly anticipated EIP-4844. EIP-4844 introduces a new transaction type called Blob, which moves transaction data to a temporary "blob" storage, thereby achieving low storage costs. This upgrade aims to enhance the speed of Ethereum Layer 2, reportedly expected to increase it by 10 to even 100 times while significantly reducing costs.

The target launch time for the Cancun upgrade is early 2024, and the current testnet Devnet is actively advancing testing work to ensure the smooth deployment of the Cancun upgrade. This upgrade will greatly stimulate the development of the Layer 2 ecosystem. In the past, the transaction costs paid by users for Layer 2 Rollups were mostly due to data storage, and the implementation of EIP-4844 will reduce Layer 2 transaction fees by an order of magnitude, making the cost of each transaction dozens of times cheaper. This will promote lower transaction fees and better trading experiences, potentially giving rise to more application scenarios. We believe the Cancun upgrade will be an important turning point in the development of Ethereum Layer 2.

Figure 4: Illustration of EIP-4844

The Renaissance of the Bitcoin Ecosystem

Inscriptions, a form of writing on bronze vessels during ancient China's Shang and Zhou dynasties. However, what we refer to today as inscriptions—Bitcoin inscriptions—are a unique asset that writes content into the smallest unit of Bitcoin, satoshi, through the Ordinals protocol. This form of inscription is diverse, encompassing text, images, videos, and audio, with each satoshi assigned a unique ordinal, thus possessing a one-of-a-kind number.

In the development of the Bitcoin ecosystem, various methods have been explored to invigorate it, whether through off-chain verification, the Lightning Network, or forks triggered by certain divergences. Unexpectedly, inscriptions, or the Ordinals protocol, have become the catalyst for awakening the Bitcoin ecosystem.

Fair Launch, a New Way of Issuing Crypto Assets

In the past, traditional token issuance models were often limited to investments from VC institutions, developed by project parties, and ultimately issued tokens as a way to reward early investors. This model typically allowed ordinary investors to participate only in the secondary market. Such token issuance methods are often shrouded in "black boxes," with unfair token distribution and lack of transparency. Large investment institutions often enjoy more "investment privileges," sometimes even leading to early unlocking of tokens or hidden unlocking behaviors, which contradict the promises made in the tokenomics outlined in the white paper.

Fair Launch has disrupted the traditional token issuance model in decentralized crypto networks. It hands over the rights to earn, own, and manage tokens to the community, ensuring that anyone has the opportunity to participate from the very beginning. The core idea of this fair issuance is to prevent early access, pre-mining, or unfair token distribution situations.

Bitcoin (BTC) is considered one of the earliest fair launch tokens. Anyone can earn tokens by providing computational power to the Bitcoin network. Today, this tradition has extended from Bitcoin to Bitcoin ecosystem tokens like BRC-20. Fair Launch makes token distribution more inclusive, allowing the community to participate in the creation and operation of tokens in a fair and transparent manner.

Figure 5: ORDI Deployment Code

In the crypto market, the popularity of assets like ORDI and SATS stems from multiple factors. The popularity of these BRC-20 tokens has sparked imitation from other public chain networks, even attracting many smart contract-supporting blockchain networks to join this "renaissance."

However, it is worth acknowledging that BRC-20 tokens still have some limitations. One significant issue is that they are constrained by third-party indexing systems, leading to many counterfeit coins entering the market, such as the recent counterfeit SATS tokens. These tokens were exploited by hackers using a TS hyphen fraud technique, successfully bypassing the detection of the indexing system and being listed on the DEX market. This exposed some weaknesses of BRC-20 tokens in indexing verification and filtering.

Figure 6: ORDI Price Trends in 2023

The prosperity of the inscription market has brought endless controversy. Due to inherent issues with the BTC network, high gas fees and abnormal congestion on-chain have been heavily criticized. Frequent BRC20 token transactions have led to a surge in BTC network gas fees, even reaching as high as 300 sat/vb per unit during the concentrated minting of popular token products. This situation has been welcomed by Bitcoin miners, and some believe that miners are the behind-the-scenes drivers of Bitcoin's ecosystem prosperity.

At the same time, these issues have sparked dissatisfaction among many Bitcoin purists. On December 6, 2023, Bitcoin Core developer Luke Dashjr pointed out that Bitcoin inscriptions are exploiting vulnerabilities in Bitcoin Core to attack the Bitcoin blockchain. This "garbage" data left on the Bitcoin chain has caused network congestion. Luke Dashjr hopes to ultimately fix this issue before the release of version v27 in 2024, fundamentally addressing the risks posed by inscriptions.

However, it is evident that the profits and popularity brought by the inscription market have united the vast majority of node maintainers and miners. We believe that the market has its own rules and patterns. As a representative of decentralization, it is difficult for developers to act unilaterally. The market and users will make the right choices. A flourishing diversity will become the main theme of the BRC20 market and even more blockchain networks and their tokens.

True Digital Collectibles—Bitcoin NFTs

When the Ordinals protocol first emerged, Bitcoin NFTs were the earliest application examples. Bitcoin Punks, based on the Bitcoin mainnet Ordinals protocol, completed minting on February 9, 2023, with a total of 10,000. Although it mimicked the well-known blue-chip NFT project Crypto Punk on Ethereum, it still sparked widespread speculation and discussion. Subsequently, Bitcoin Ape was also replicated on the Bitcoin network in a 1:1 manner. People began to realize that even if the Bitcoin blockchain cannot create smart contracts, it can still have NFTs.

Elon Musk once stated on "The Joe Rogan Experience" that many NFTs are not fully stored on-chain, with some people's NFTs stored on external servers, which could pose risks to holders. In other words, he believes that NFTs on Ethereum and other EVM-based public chains are not "real NFTs," as these NFTs merely upload metadata on-chain while actual data like images are stored on centralized external servers.

This viewpoint provides new evidence for the development path of Bitcoin NFTs, as NFTs on the Bitcoin blockchain are truly inscribed on-chain. This characteristic is considered to be the "real NFT."

Focusing on the NFT market, Yuga Labs' Bored Ape NFT project was the first to enter the Bitcoin NFT market, launching TwelveFold, which is Yuga Labs' first NFT collection on the Bitcoin network. Subsequently, more institutions began to pay attention to the potential of the Bitcoin NFT market, leading to an epic growth in the market.

The first blue-chip project, "Bitcoin Frogs," ignited the NFT market. As one of the earliest 10K NFTs, the value of Bitcoin Frogs rapidly soared, with its floor price currently reaching 0.28 BTC. The Bitcoin NFT market has also seen many original artworks that fully utilize the characteristics of the Bitcoin blockchain, such as MNCHRMS's works, which perfectly showcase the idea that "simplicity is eternal" in Bitcoin.

Figure 7: Popular Bitcoin NFTs

As of now, the sales volume of NFTs on the Bitcoin chain has reached $1.83 billion, ranking third in NFT sales, only behind Ethereum ($42.12 billion) and Solana ($4.62 billion). The potential of the Bitcoin NFT market remains to be further explored.

Heir to Memes, DRC-20

Dogecoin was initially seen as a clone of Bitcoin, gaining worldwide popularity due to its humorous nature and meme attributes, becoming the undisputed "king of memes." With the wild growth of BRC-20 ecosystem tokens in the cryptocurrency market, DRC-20 emerged to explore more possibilities and the potential of meme culture in the inscription market.

The Ordinals protocol plays a crucial role in the BRC20 ecosystem, while Cardinals is the biggest boost for the DRC20 ecosystem, defining the smallest indivisible unit in Dogecoin—"elon." In the Dogecoin system, 1 Dogecoin equals 100 million elons. Each elon is sequentially numbered according to the order of mining, starting from 0. These numbers are called "Cardinals," representing the order of each elon in the total supply.

The DRC-20 standard not only brings new development prospects for Dogecoin but also represents an interesting and creative change to the traditional cryptocurrency paradigm. By introducing Cardinals, the Dogecoin community has established a unique connection between memes and cryptocurrencies, laying a solid foundation for the future development of DRC-20 tokens.

We believe that in this era where Fair Launch models are popular, Memecoins have their inherent advantages. In addition to the Bitcoin ecosystem led by BRC20, the Dogecoin ecosystem led by DRC20 should not be underestimated in the future.

DeFi, Returning to the Financial Essence of Cryptocurrency

At the end of 2022, the Lehman moment of FTX cast a shadow over centralized exchanges (CEX), prompting users to urgently focus on how to safely handle their crypto assets. Compared to the era of innovation in DeFi in 2021 and the financial opportunities brought by DeFi Summer, the main theme of the DeFi industry in 2023 has shown a stable development trend. This can be glimpsed from the total locked value of all DeFi projects. Compared to the overall growth of 205.89% in the total market capitalization of cryptocurrencies, the total locked value of DeFi projects only grew by 51.04%.

Figure 8: DeFi TVL

Currently, the heat in the DeFi sector is mainly concentrated on liquid staking, lending protocols, cross-chain bridges, decentralized exchanges, stablecoins, and RWA (real-world assets on-chain) protocols, with protocol revenue becoming an important indicator of DeFi project value.

Maker has gradually started purchasing U.S. Treasury bonds since 2022 to benefit from rising interest rates. In the eight Federal Reserve interest rate decisions of 2023, the Fed raised rates four times by 25 basis points while maintaining rates unchanged four times. As one of the beneficiaries, Maker topped the DeFi project revenue list with $95.91 million in revenue.

Thanks to the successful implementation of the Shanghai upgrade and the booming development of the LSD sector, Lido ranks second with a revenue of $55.79 million. The overview of the LSD sector has been mentioned earlier, so it will not be repeated here. Following closely is PancakeSwap in third place with a revenue of $52.31 million; fourth is the asset management protocol Convex Finance with $42.23 million; and fifth is the decentralized perpetual swap exchange GMX with $37.52 million in revenue.

Figure 9: 2023 DeFi Protocol Revenue Rankings

In the distribution of DeFi protocols across public chains, Ethereum is indeed the undisputed leader. Ethereum has 2,363 DeFi protocols on its chain, with a total locked value (TVL) of $33.298 billion. Following Ethereum is Tron, which, despite having only about 20 protocols, still maintains a leading position with a TVL of $8 billion.

Notably, Solana has seen an astonishing 98.98% growth in its TVL over the past month. We will continue to monitor Solana and look forward to its future development.

How to Bring RWA (Real-World Assets) On-Chain?

We have noticed that RWA (real-world assets on-chain) is one of the hottest sectors this year. Many established DeFi projects have entered the field, but the overall market is still in its early stages. Due to the current need for compliance development of cryptocurrencies by traditional finance and regulatory institutions, RWA seems to be a good topic. Well-known Wall Street institutions like BlackRock and Morgan Stanley believe that RWA will be a trillion-dollar market.

In 2023, many RWA projects made substantial breakthroughs and progress. MakerDAO is one of the earliest protocols in the DeFi space to adopt RWA, having started incorporating RWA into its strategic planning as early as 2020 to expand the issuance of the DAI stablecoin. DAI, as a stablecoin pegged to the U.S. dollar, is one of the most common applications of MakerDAO.

The protocol has established multiple RWA vaults, primarily using U.S. Treasury bonds as collateral. Especially in the current overall downturn of the DeFi industry, MakerDAO has further increased its layout in RWA, particularly in U.S. Treasury investments. In 2023, the platform continuously expanded the scope of RWA, including a partnership with Coinbase to open a real asset vault through its custody services, injecting up to $500 million in USDC stablecoins and paying an annual interest of 2.6%. MakerDAO has also purchased and invested in a large amount of U.S. Treasury bonds through RWA vaults. By more effectively allocating assets to government bonds and investment-grade bonds and increasing the fees charged to DAI borrowers, MakerDAO's revenue has seen significant growth. As mentioned earlier, Maker, as the largest beneficiary of U.S. Treasury purchases, topped the DeFi project revenue list with $95.91 million.

In addition to MakerDAO, Compound is also one of the leaders in the RWA sector. Compound announced the establishment of a new company, Superstate, focused on on-chain bonds, with Superstate's fund investing in "ultra-short government securities," including U.S. Treasury bonds and securities.

When discussing RWA (real-world assets), most projects currently focus on investments in U.S. Treasury bonds and securities. However, many projects are also making unremitting efforts to explore on-chain lending, synthetic assets, on-chain real estate, carbon trading, and other real-world collectibles trading. We believe that as the blockchain industry develops in compliance, the RWA sector in 2024 will create greater market value. With continuous innovation, more creative new types of on-chain assets are about to emerge.

X to Earn

X to Earn has been hailed as the perfect fusion of Web2 and Web3, attracting the attention of major investment institutions. This model originated from early DeFi staking projects, namely Stake to Earn, which achieved corresponding staking rewards through staking tokens. As the cryptocurrency market continues to evolve, this model has been applied to more and more fields.

In X to Earn, X typically represents the application scenario of the project, while "to Earn" indicates its profit model. This model has penetrated various aspects of life, with gaming being one of the best combinations. The blockchain game Axie Infinity first proposed the concept of Play to Earn, with gameplay, token economics, and the NFT market revolving around the Play to Earn model. Since then, more and more concepts have begun to introduce the idea of X to Earn and corresponding asset issuance methods.

In 2023, a large number of X to Earn projects emerged, with Play to Earn and Social to Earn being the most prominent. These projects extended and developed many mature economic models and financial systems, namely what we know as GameFi and SocialFi.

GameFi

Decentralized application technology is becoming increasingly mature, and the application scenarios of NFTs on major public chains are continuously expanding, triggering explosive growth in the GameFi market. According to a global gaming market report released by GameIndustry.biz, the total revenue of the global gaming market is approximately $184 billion. This massive market has attracted the attention of numerous investment institutions and game developers, who are beginning to explore the integration with Web3 technology, and many Web2 games are also attempting blockchain transformations.

Traditional game developers typically rely on unique game content and excellent gaming experiences to attract players to pay. In contrast, GameFi operates in a completely different way; it first establishes a complete token economic system, relying on players being able to earn rewards through gameplay (Play to Earn) to attract them to participate in the game. Countless Web3 game developers are exploring along this path; however, attracting new users has become a challenge. They rely on the performance, costs, and convenience of transactions on public chains. At the same time, limited by costs and talent shortages, insufficient gaming experiences are also a significant issue. Nevertheless, gaming remains an ideal entry point into the Web3 world. We expect that in the future, GameFi will grow into a market worth hundreds of billions of dollars.

Figure 10: Proportion of GameFi Public Chains

So far, over 2,700 games are active on the blockchain, with the GameFi market capitalization reaching $8.56 billion and over 1.23 million daily active players. Among these games, 30.8% run on the BSC chain, 18.5% on Polygon, and 17.7% on Ethereum, with these three chains accounting for the vast majority of GameFi's share.

Notably, many emerging chain games are active on Arbitrum, such as the recently popular xPET. xPET is a pet-raising game based on an extension program embedded with X, where pets can engage in activities like Twitter companionship, farming, adventures, and PVE, ultimately generating token rewards. Players upgrade pets through token consumption, thereby expanding related earnings. This combination of GameFi and SocialFi is a new attempt, utilizing existing social networks to expand pet games, which may be a breakthrough for GameFi in acquiring new users.
SocialFi

Discussions around SocialFi mainly focus on two core aspects: first, establishing a decentralized social media model, and second, constructing a viable economic model to support these platforms. In this field, many projects have explored from different angles. For example, Lens Protocol has established a fully decentralized social application, while FriendTech has achieved success in its economic model.

However, no effective method has yet been found to combine these two key points effectively, leading to many SocialFi projects rising quickly but then rapidly declining. Taking FriendTech as an example, it is an original decentralized social application that integrates financial engineering. The application provides a chat room that allows users to purchase keys from Twitter KOLs or others, thus gaining access to their internal group chats. The price of the keys fluctuates with market demand; the more buyers there are, the higher the price. The project team charges a 10% fee to share with the chat room creators.

This economic model quickly attracted many influential figures on social media. Their fans are willing to spend high costs to purchase keys for exclusive information. However, as the enthusiasm of these influencers waned, coupled with the platform's lack of effective methods to maintain activity and the continuously rising key prices, this social experiment ultimately led to a complete failure.

Outlook for 2024

As we welcome 2024, CoinW Academy will continue to delve into research on the cryptocurrency and blockchain industry, aiming to provide richer and higher-quality research content. We are confident about the future of the cryptocurrency and blockchain industry and firmly believe that the development prospects will be remarkable. Here are the areas we will focus on, which are expected to see significant progress in 2024:

The Revival of DeFi: With the continuous development of DeFi, in line with the trend of global cryptocurrency market compliance, we expect to witness more compliant decentralized financial products and services embracing regulation, more refined governance models, and more efficient liquidity solutions. At the same time, cryptocurrency wealth management products from traditional financial institutions may also emerge, benefiting more funds from this move, with the revival of DeFi being at the forefront.

The Bitcoin Inscription Market: Bitcoin and other public chain inscriptions will continue to see innovation. Despite being limited by the indexing mechanism for inscriptions and the current immaturity of technology, hacker attacks and unknown vulnerabilities may pose certain impacts on the inscription industry, but the development and exploration of more underlying facilities will also promote the growth of this field. Beyond tokenized inscriptions, image NFT-type inscriptions will also become an important research direction.

Fair Launch: Fair launch assets became the hottest asset issuance method in 2023, attracting a large number of new users. As the cryptocurrency field gradually integrates into regulatory frameworks, the token issuance method of Fair Launch is also gradually being recognized and accepted by more mainstream institutions. The fair and just token issuance method is highly regarded and recognized in terms of legality, and this trend is expected to continue to expand in 2024. We anticipate that Fair Launch assets will continue to expand their influence, becoming a mainstream token issuance method and potentially extending to more asset types.

RWA: With the advancement of spot Bitcoin ETFs, more funds from traditional financial institutions are about to enter the cryptocurrency industry. Existing decentralized financial projects in the cryptocurrency industry will also continue to integrate more real-world assets (RWA) and expand more categories of real-world assets based on existing foundations, especially projects and applications related to carbon neutrality, real estate, and securities that align with blockchain concepts will continue to explore in this field.

GameFi: Gaming is an important bridge connecting the traditional internet (Web2) with Web3, and it is also a crucial entry point for bringing in new users. In 2024, we expect more dedicated gaming public chain projects to emerge, and more chain-reformed games will join the blockchain ranks. More chain games that integrate social elements will combine SocialFi and GameFi, addressing pain points and eliminating weaknesses, making efforts to improve the quality of games and user growth.

Non-EVM Public Chains: This will be an era of flourishing diversity, where more public chain projects will no longer be constrained by the Ethereum Virtual Machine, and research and development of high-performance non-EVM public chains will achieve more valuable results. At the same time, cross-chain bridges and multi-chain connectivity will also be important research topics, with more modular blockchains and application chains appearing in the market awaiting user validation.

Layer 2: The anticipated airdrops of Starknet and zkSync will become key focus areas in the Layer 2 sector in 2024, and the performance improvements brought by the Cancun upgrade to many Layer 2 public chains should not be underestimated, making rich and diverse dapps and low-cost, high-quality on-chain interactions possible.

CoinW Academy will continue to monitor the development of these areas and maintain close contact with industry experts, scholars, and developers to provide timely and accurate information and insights for a wide range of learners. In this ever-changing field, we believe that knowledge and understanding will be the keys to success. Therefore, let us look forward to and strive to shape a bright future for the cryptocurrency and blockchain industry together.