The Block Annual Report Summary: Reviewing 2023, Looking Ahead to 2024

^Written by: The Block Research Team^

^Compiled by: angelilu, Foresight News^

This report, titled “2024 Digital Assets Outlook,” is authored by The Block Research Team. It provides an in-depth analysis of four major aspects: the performance of the digital asset market and prices in 2023, the role of infrastructure providers and regulators, the scale and evolution of blockchain platforms, and the development of on-chain applications. Below are the highlights compiled by Foresight News.

1. Market Performance and Activity

In 2023, cryptocurrency prices saw a significant rebound, with the total market capitalization doubling. This round of price recovery was influenced by macroeconomic factors and the end of deleveraging following the FTX bankruptcy. Except for the end of the fourth quarter, investor activity in the crypto space was lower than in previous years, with trading volumes and venture capital transactions reaching multi-year lows.

Overall, crypto asset prices performed well this year. Bitcoin has risen over 125% year-to-date, and most other crypto assets are above their January 1 levels. Notably, Solana has surged nearly 500% this year, rising from under $10 in early January to $65 in November. Bitcoin's dominance (defined as Bitcoin's market cap divided by the total crypto market cap) increased from 38.43% at the beginning of the year to an annual peak of 51.13% at the end of October, the highest level in over two years. Several factors contributed to Bitcoin's rise, primarily the optimistic crypto narrative surrounding the potential approval of a spot ETF for the asset, a story that continued into the second half of the year.

In terms of the macro environment, despite a high interest rate environment and escalating geopolitical tensions causing various financial market dislocations, 2023 presented a stronger macroeconomic backdrop compared to 2022. First, both short-term and long-term interest rates rose significantly above market expectations. Second, the ongoing conflict in Eastern Europe and the new escalation of the situation in the Middle East brought additional uncertainty. Third, the U.S. banking sector experienced a brief period of instability in the spring of 2023, highlighting potential vulnerabilities within the financial system and prompting increased regulatory focus.

Spot Trading Volume

Market activity in crypto assets continued to decline in 2023, influenced by the bankruptcy of several lending institutions. However, as prices rose and investor confidence improved, trading volumes began to increase again. Spot trading volumes saw month-over-month increases in January, February, and March of the first quarter, but there was a significant decline in the second and third quarters. Trading volumes in the fourth quarter have been consistently rising, reaching a six-month high in November. One major reason for the low trading volumes in 2023 was Binance's adjustment of its fee structure. Specifically, Binance ended its zero-fee promotion in March, which had driven trading volumes on the platform in 2022. Between March and April, overall spot trading volumes fell by 38%, while Binance's spot trading volumes decreased by 47% during the same period.

Decentralized exchanges (DEXs) also experienced a surge in 2023, partly due to a decline in trust in centralized institutions following the FTX collapse. In May, driven by a memecoin frenzy, the ratio of DEX trading volume to centralized exchange (CEX) trading volume peaked at over 21%.

Derivatives Trading Volume

The trading trends in derivatives were similar to those in spot trading. This year, the total trading volume of futures contracts peaked in March and hit a low in September, although futures trading volumes remained above the lows of December 2022. In May and June, futures trading volumes reached 4.7 times that of spot trading volumes. This ratio began to decline slightly in the second half of the year but remained high compared to the previous two years.

Private Market

In the private market, the overall number of venture capital transactions and financing amounts have significantly slowed down, with the number of financing rounds being similar to the transaction numbers in 2021. In terms of actual financing amounts, the annual low of $498 million in August marked the lowest total financing value since January 2021. However, financing is a lagging indicator, as the development and completion of transactions take time, and transaction records are typically logged from the time the actual transaction occurs, which does not always get disclosed immediately. The financing amount in November saw a month-on-month increase of 99%, reaching a six-month high. Overall, compared to previous years, the distribution of funds across industries appears to be more diversified, with investments in crypto projects still primarily concentrated in North America.

2. Market Infrastructure and Regulation

Exchanges

In the spring of 2023, another significant change occurred in the cryptocurrency exchange market, with several regional banks in the U.S. that provided extensive services to the crypto industry going bankrupt, alongside the collapse of multiple crypto lending institutions and exchanges in 2022. U.S. regulators intensified scrutiny, leading to charges against several cryptocurrency exchanges, with Binance clearly being the focal point of regulatory attention.

Binance faced multiple challenges this year, including regulatory hurdles and executive departures. The catalyst for Binance's loss of dominance was its decision to end zero-fee Bitcoin trading, a promotion that was part of Binance's fifth-anniversary celebration, which began in July 2022. By October, Binance's dominance had declined and remained below 40% throughout the fourth quarter of 2023. In March, both Binance and its CEO Changpeng Zhao (CZ) were sued by the U.S. Commodity Futures Trading Commission (CFTC), and in early June, they faced a lawsuit from the U.S. Securities and Exchange Commission (SEC). The U.S. Department of Justice also conducted a criminal investigation into Binance, which concluded at the end of November with a settlement of $4 billion in fines. Binance still needs to contend with ongoing civil litigation from the SEC, which could likely lead to additional fines.

Coinbase was much less affected by the SEC case, maintaining a market share of around 6%, benefiting from more favorable news, including being designated as a partner for multiple Bitcoin ETF applications and launching its Optimistic Rollup product, Base.

Stablecoins and CBDCs

The overall supply of stablecoins began to decline after the de-pegging of TerraUSD in May 2022. In 2023, while the total market capitalization of cryptocurrencies grew from approximately $830 billion at the beginning of the year to $1.48 trillion in November, the supply of stablecoins slightly decreased from about $140 billion at the beginning of the year to $125 billion in November, partly due to the rising interest rate environment.

During 2023, there were also significant changes in the market share of stablecoins, with Tether being the primary beneficiary. Circle's USDC, which is primarily traded in DeFi and has a user base that may be more U.S.-centric, was most negatively impacted by high yields. Additionally, the depreciation of BUSD made Tether's USDT more actively used on exchanges like Binance.

Due to high interest rates, there was a strong enthusiasm among enterprises to launch stablecoins in 2023, with the most notable being PayPal's PYUSD, launched on August 7, issued by Paxos, which has surpassed $150 million in market capitalization, entering the top 20 stablecoins.

In 2023, CBDC projects continued to advance: the Bank for International Settlements (BIS) Innovation Hub and several central banks, including the Hong Kong Monetary Authority, the Central Bank of the UAE, the Digital Currency Research Institute of the People's Bank of China, and the Bank of Thailand, made significant progress in the mBridge project for wholesale cross-border payment transformation. Additionally, the adoption of China's digital yuan (e-CNY) surged, the UAE's digital dirham strategy made significant strides, the Brazilian central bank actively promoted the development of its CBDC, the digital euro project entered the preparation stage, and the Monetary Authority of Singapore (MAS) issued a real-time CBDC for wholesale settlement.

At the same time, the stablecoin market underwent significant changes due to rising interest rates and increased regulatory scrutiny. Throughout 2023, several established stablecoins experienced a "cleaning up" event that eroded their market shares, while other stablecoins were phased out under regulatory pressure. Tether was the main beneficiary of these changes, with its market share growing to levels not seen since 2020, a time when market competition was far less intense than it is now. Meanwhile, new entrants flooded the market, attracted by more profitable business models brought about by rising treasury yields. Many enterprises and central banks also developed plans for stablecoins and central bank digital currencies (CBDCs).

Traditional Banks

In the traditional banking sector, 2023 experienced several unexpected negative shocks, including a brief but severe turmoil in the U.S. and European banking sectors in the spring, highlighting increasing regulatory pressure and institutions' reluctance to serve the cryptocurrency industry. Additionally, the bankruptcies of two crypto-friendly traditional financial institutions, Signature and Silvergate, also led to a reckoning in the cryptocurrency industry.

New Institutions Applying for ETFs

In 2023, there were positive signs of institutional adoption of Bitcoin, with large asset management firms submitting a series of applications for spot Bitcoin ETFs. BlackRock's unexpected application in June sparked this wave of applications, marking a shift towards mainstream acceptance of Bitcoin. Grayscale's legal victory in August significantly boosted optimism for the approval of Bitcoin spot ETFs, with over 10 applicants currently awaiting approval results.

Regulation

Following the collapse of several centralized companies in 2022, regulatory pressure increased in 2023. Compared to other jurisdictions, the U.S. seems to have taken a tougher stance on the industry, with some countries, especially in Asia, viewing the U.S. pullback as an opportunity. However, the U.S. regulators' backlash has primarily been limited to enforcement actions and orders, without any meaningful regulations being passed. Judicial reviews of the SEC's past actions have been interpreted as slightly favorable to the arguments presented by the industry.

3. Blockchain Platforms and Scalability

Ethereum

In 2023, Ethereum dominated various usage metrics among L1 blockchains. As of the third quarter of 2023, Ethereum accounted for about 75% of the transaction fees paid by L1 users, totaling approximately $1.75 billion. By December 2023, Ethereum's Total Value Locked (TVL) had grown by about 19% year-on-year, while the combined TVL of Avalanche, Sui, Cosmos, Canto, Aptos, Fantom, and Near had decreased by about 20%.

In terms of scalability, Mantle emerged as a significant player in the Optimistic rollups space this year, launching in July and quickly gaining market attention, becoming the largest L2 by TVL. Mantle stated that it would adopt EigenDA as its data availability provider once it becomes available. Meanwhile, Polygon PoS is undergoing a significant transformation, transitioning from a sidechain to zkEVM Validium before the first quarter of 2024. The modular blockchain Celestia launched in November 2023, gaining attention for its efficient data availability sampling and the creation of probabilistic data availability proofs through erasure coding. Looking ahead, companies like Avail, EigenDA, and Synapse Chain will contribute to the expanding ecosystem of solutions to address data availability challenges.

The Ethereum protocol has currently formed a rollup-centric roadmap, particularly danksharding, which is a moderate adjustment to traditional sharding methods, introducing significant simplifications. The full realization of danksharding is expected to take several years, and the upcoming protocol upgrade in the first quarter of 2024 will include essential rule sets and formats necessary for implementing sharding.

Other Layer 1

In 2023, the market share of Ethereum's competitors underwent adjustments. Tron’s TVL grew by about 100% from the beginning of 2023 to December, while BNB Chain’s TVL decreased by about 38% during the same period. One significant reason for this adjustment was the shift in stablecoin shares and the regulatory actions faced by the BNB ecosystem.

The price performance of SOL (Solana) and TIA (Celestia) reflects the market's attention on these two chains, representing opposing sides of the integration versus modularity debate, performing well in 2023. Solana's market capitalization grew by about 430% in the first 11 months of 2023, while the TIA token rose by about 167% within a month of its launch in early November.

The Cosmos community has embraced the concept of modularity from the beginning, with native infrastructure and tools like Inter-Blockchain Communication (IBC) and Cosmos SDK. However, this inherent modularity advantage comes at the cost of distracting user attention and liquidity between Cosmos chains, placing Cosmos application chains at a disadvantage in terms of composability and liquidity concentration compared to other general-purpose L1s. As of December 1, the combined market capitalization of the stablecoins on Osmosis and Canto was only $7.8 million, far below the total market capitalization of Cosmos Hub, and even lower than that of mid-sized L1 competitors like BNB Chain ($5 billion) or Solana ($1.6 billion). Benefiting from Circle's deployment of native USDC through Noble in September and the launch of the Celestia mainnet on October 31, Osmosis's stablecoin supply surged to a yearly high in November, indicating that anticipated trading demand could impact liquidity on specific chains.

In 2023, both Polkadot and Avalanche faced challenges. Throughout the year, the total TVL of Polkadot parachains fell from about $561 million to approximately $335 million by December 1, primarily due to stagnation in the development of Polkadot's XCMP (Cross-Consensus Messaging Protocol). In the Avalanche ecosystem, the number of real-time subnets continued to grow in 2023, but user activity remained low compared to the Avalanche C chain. The overall capital inflow into subnets was also limited; as of December 1, the two most active subnets—DFK Chain and Beam—had a combined TVL of about $8.8 million. Avalanche subnets face similar challenges as newly launched Cosmos chains, where establishing a sufficiently large economic moat to prevent economic attacks has become a key issue for subnet formation.

One of the most prominent narratives of 2023 was the resurgence of Solana, both in terms of its valuation and the market's acceptance of its integrated scaling approach. During the second half of 2022 and into 2023, the Solana core team implemented a series of key measures that significantly improved the reliability of network operations compared to previous years. The effectiveness of these measures was validated during several major demand peaks in 2023, with user transaction volumes on the Solana network surging during the Mad Lads NFT minting event in April and the PYTH token issuance event at the end of November. However, the throughput measured in transactions per second did not see a significant decline.

Similar value propositions to Solana—L1s that offer low-cost parallel execution—such as Aptos and Sui, were both spun off from Meta's previous Diem project and utilize the Move virtual machine as their execution environment. As of December 1, these two chains collectively attracted a TVL of about $255 million, with growth accelerating in the second half of the year. Sui has outpaced Aptos in growth over the past year, possibly due to the incentive programs running throughout the year.

Layer 2

Among Layer 2 solutions utilizing Optimistic rollups (ORs), Arbitrum One leads in TVL. The ARB token airdrop was a notable event for Arbitrum One in 2023, with 4 million eligible addresses for the airdrop. OP Mainnet, formerly known as "Optimism," ranks second in TVL, with a market cap exceeding $3.4 billion.

In the ZKR space, there is currently no clear leader. Although dYdX has held a significant position in the ZKR space for a considerable time, it has begun to venture into Cosmos Layer 1. The next two competitive ZKRs are zkSync Era, with a TVL market cap of $440 million, and Starknet, with a TVL market cap of $140 million. While zkSync Era's TVL is significantly higher than Starknet's, part of its TVL initially came from zkSync Lite. As both ZKRs may release governance tokens in 2024, they are currently attracting a large amount of on-chain activity.

Bitcoin Scalability

Undoubtedly, the Lightning Network is the most prominent scaling solution for Bitcoin. Additionally, it is currently the largest Bitcoin scaling solution by TVL. Its TVL has surged from approximately $85 million in January 2023 to nearly $200 million at the time of writing. However, a more accurate measure of the growth of the Lightning Network is the increase in the number of Bitcoins from 5,000 in January 2023 to 5,346 in November 2023, representing a growth rate of 7.0%. This indicates that the growth in TVL is primarily driven by the rise in Bitcoin prices rather than actual Bitcoins being put into the Lightning Network. The increase in Lightning Network capacity can be attributed to its integration with the decentralized information protocol Nostr.

There are also several other Bitcoin scaling solutions, including sidechains like DeFiChain, Rootstock, and Stacks, but sidechains do not seem to effectively capture the demand for Bitcoin scalability. The TVLs of DeFiChain, Rootstock, and Stacks are $173 million, $106 million, and $19 million, respectively, all below the Lightning Network's $200 million. There are few projects in the Bitcoin L2 space, such as the ZK rollup being developed by Alpen Labs, and BitVM, which is the latest upgrade solution for the Bitcoin blockchain, aiming to introduce Turing-complete programming expressions to Bitcoin. However, technically, BitVM does not enable Bitcoin to achieve Turing completeness.

BRC-20s

Bitcoin Ordinals are satoshis assigned unique identifiers and additional metadata, leveraging SegWit's low transaction fees and the Taproot upgrade. This unique identifier and additional data allow individual satoshis to be used as NFTs. The same framework was later extended to mint fungible tokens, known as BRC-20s. Both BRC-20s and Bitcoin NFTs have seen significant speculation, bringing a large amount of on-chain activity to the Bitcoin blockchain and leading to a surge in the share of transaction fees in Bitcoin miners' income.

Although the framework for deploying Ordinal NFTs and BRC-20 tokens was not technically designed to scale Bitcoin, it does indicate that innovation on the Bitcoin blockchain is possible. Moreover, the rise of Bitcoin Ordinals is an unexpected product of the SegWit and Taproot upgrades. We are likely to see further innovation on the Bitcoin blockchain, although the pace of innovation may be slower than on most other blockchains due to the limitations of Bitcoin's scripting language.

4. On-Chain Applications

DeFi

2023 was characterized by consolidation and resilience for DeFi, including sectors such as DEXs, lending markets, and liquid staking.

In terms of TVL, liquid staking is the largest segment in the DeFi space. On the other hand, the venture capital environment in the DeFi sector has continued to deteriorate, reaching its lowest level since the second half of 2020, a downward trend consistent with the overall digital asset market.

Spot trading volume in DEXs fluctuated throughout 2023, against the backdrop of a prolonged bear market, followed by signs of market recovery in the fourth quarter. In March, DEX trading volume surged to $120 billion, primarily due to Circle's USDC briefly de-pegging over the weekend, a market reaction to concerns about contagion following the collapse of Silicon Valley Bank, which held part of Circle's reserves.

Uniswap maintained its lead in DEX spot trading volume, capturing 53% of the trading share in 2023, with most of its trading coming from Ethereum and Arbitrum One. In contrast, Curve's share dropped from 10% last year to 3.7% this year, a decline attributed to market contraction hindering the diversity of stablecoins.

The lending sector also showed an overall flat trend, with Aave maintaining dominance, holding over 60% of the market share in total outstanding debt, while Compound ranked as the second-largest market. In May, Maker's SparkLend entered the lending space, quickly rising to become the third-largest lending protocol by total outstanding debt, surpassing $600 million within six months of its establishment.

In the collateralized debt position (CDP) stablecoin sector, despite a contraction in Maker's TVL, which reached a cyclical low of $4 billion in October, it still maintained its leading position. The outstanding DAI also saw a decline mid-year, rebounding only in August, consistent with the rapid adoption of SparkLend mentioned above.

In 2023, the Ethereum liquid staking industry emerged as a leader in the DeFi space, demonstrating remarkable resilience. This outstanding performance can be attributed to two key factors. First, in a bear market characterized by low volatility and weakened lending interest, the stable yields generated by liquid staking were relatively more attractive compared to other DeFi activities. Second, the proliferation of liquid staking protocols increased the utility of tokens. Lido maintained its dominance in the Ethereum liquid staking space, capturing 78% of the market share, while Rocket Pool ranked second with a 10% share.

The liquid staking sector in Solana is also on the rise, with Jito notably surpassing Marinade in TVL in November, solidifying its lead among Solana liquid staking protocols. This shift highlights the initial success of Jito's reward program, which incentivizes its user base through airdrops.

The tokenization market for real-world assets (RWAs) (excluding fiat-backed stablecoins) experienced explosive growth. Notably, $2.8 billion DAI was issued through RWA collateralized debt positions, accounting for over half of the total supply of $5.4 billion DAI. Fees generated from these RWA positions accounted for 80% of Maker's disclosed revenue. In addition to Maker's recognition, the adoption of tokenized securities is also on the rise, with the TVL of tokenized securities holding U.S. Treasury bonds surging to $782 million.

In 2023, the trading volume of decentralized derivatives showed signs of growth, with the trading volume of decentralized perpetual futures peaking in November, reaching a new high for the year. dYdX's market share declined but still maintained the top position. Meanwhile, with the launch of Aevo, decentralized options began to gain momentum starting in the third quarter. Aevo has emerged as a leading decentralized options exchange, significantly surpassing Lyra in trading volume.

The prediction market also saw a slight rebound, with Polymarket maintaining its position as the leading prediction market in terms of trading volume, while the sports betting market Azuro also emerged in this field, achieving monthly trading volumes in the millions since September.

Amidst the continuous growth in trading volume and usage across various DeFi sectors, privacy has become one of the areas facing significant challenges, especially following the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) sanctions against Tornado Cash in August 2022. Additionally, decentralized insurance has also been one of the underperforming areas in DeFi, with declining demand possibly due to a mismatch between supply and demand or excessively high insurance pricing.

NFTs

In 2023, the NFT market underwent a critical transformation, with the high platform fee model that was once a major source of revenue disappearing, driven by emerging platforms like Blur. OpenSea's annual revenue exceeded $1 billion at the beginning of 2022, but by mid-2023, its platform revenue plummeted to less than $2 million per month, a nearly 90% decline.

In 2023, the NFT creator royalty model also underwent significant changes, with creator royalty income now reduced by 98% compared to the peak at the beginning of 2022. The trend of platforms like Blur and Sudoswap reducing or eliminating royalties sparked intense debate. While these measures aim to maximize liquidity and trading volume, there are calls to uphold the spirit of supporting creators in the NFT space, ensuring fair compensation for their work.

The market share of NFTs also changed this year. Following the Blur token airdrop in February, its trading volume dominance reached an all-time high of 80% market share, while OpenSea's trading volume market share dropped to below 15%. OpenSea primarily attracts retail traders, while new platforms like Blur appeal to a portion of professional traders. On Blur, the top 1% of traders account for about 68% of the platform's trading volume, whereas on OpenSea, the top 1% of traders contribute only 24% of the platform's trading volume. The ongoing trend of market segmentation in 2024 may further intensify.

Additionally, in 2023, NFTs began to evolve towards financialization, with NFT lending platforms catering to more risk-averse high-frequency traders by introducing new forms of leverage, accumulating loan amounts exceeding $3.3 billion. The lending models include peer-to-peer (P2P), perpetual P2P, and pool systems. The lending platform Blend launched by Blur stood out among its peers, becoming the dominant platform, with weekly loan volumes reaching $197 million in the second quarter of 2023, setting a record.

Ordinals

Ordinals are an integral part of the Bitcoin architecture, serving as unique identifiers for each transaction and playing a key role in verifying the authenticity, ownership, and uniqueness of digital assets, including NFTs and BRC-20 tokens. Through approximately 10 months of Ordinals development, Bitcoin developers have built NFT tools comparable to those on other L1 blockchains like Ethereum, Polygon, and Solana. Supporting various inscription types, including images, text, applications, and audio, the most notable being the BRC-20 token standard, the rise of BRC-20 tokens has significantly altered the inscription landscape, accounting for over 95% of new inscriptions as of the publication of this report.

Throughout 2023, the Bitcoin ecosystem experienced significant transformations due to the growing popularity of inscriptions. Since the beginning of this year, miners have generated a total of over $530 million in fees, with $90 million coming from Ordinal-related activities. These inscriptions have led to increased fees and congestion in the Bitcoin mempool, as the total size of transactions waiting for confirmation (in bytes) reached its highest level. Currently, transactions related to inscriptions account for 49% of the daily transactions on the Bitcoin network. Although this dominance has slightly decreased from earlier this year, it underscores the impact of Ordinals on the economic dynamics of Bitcoin's block space, especially as block rewards continue to decrease. This shift in transaction patterns has forced miners to adjust their strategies to cope with the changing dynamics of block rewards and transaction fees.

Decentralized Social

When friend.tech launched on Coinbase's new Optimistic Rollup solution, Base, in August, decentralized social took off. In less than three months since its launch, it attracted community attention, with over 900,000 unique users and a trading volume of $475 million.

The success of friend.tech inspired the emergence of forked applications on other blockchains like Solana, Avalanche, and BNB Smart Chain, but none have been able to match its success. Stars Arena on Avalanche showed promise but subsequently encountered a vulnerability on October 5 that resulted in a $3 million loss for the protocol.

The social protocol Farcaster transitioned to a permissionless model after migrating from the Ethereum mainnet to Optimism on October 11, along with an annual $5 username renewal fee aimed at fostering a high-quality, community-oriented user base. Following the migration, Farcaster's user engagement significantly increased, with daily registrations doubling and new users contributing about 30% of network activity. In contrast, Lens Protocol, operating on the Polygon blockchain, offers rich features for creators but currently has low engagement levels. The development of decentralized social networks still faces obstacles, including storage issues and a lack of comprehensive content discovery and algorithmic positioning models in a fully on-chain environment.