Binance Research Annual Report: 8 Key Focus Areas for 2024

Original Title: "Full-Year 2023 & Themes for 2024"
Original Author: Binance Research
Original Translation: Odaily Planet Daily

2023 Review

The year 2023 marked a year of recovery for the crypto market, with the global crypto market cap growing by approximately 109%. This remarkable growth was primarily driven by significant progress made in the first and fourth quarters, achieving growth rates of 48.3% and 54.4%, respectively. In stark contrast to the challenging times of 2022, when the market fell by about 64% due to a series of tumultuous events such as the UST de-pegging, the bankruptcy of several lending institutions, and the FTX collapse.

Key factors contributing to the strong performance in 2023 included a series of major developments. Among the most critical was the optimism brought by the approval of spot Bitcoin ETFs and the anticipation of the upcoming Bitcoin halving. A strong macroeconomic backdrop (resilience in global GDP growth and a slowdown in inflation) also created a favorable environment for cryptocurrencies in 2023.

Despite the significant gains, 2023 was not without challenges. In March, turmoil in the banking sector impacted the crypto market, leading to a temporary de-pegging of the USDC stablecoin. In August, due to macroeconomic uncertainties related to the Chinese economy and signs of the Federal Reserve considering further interest rate hikes, traders suffered losses of up to $1 billion due to liquidations. However, the crypto market demonstrated resilience, quickly recovering and regaining momentum in the following months.

As we look ahead to the future of the crypto market, the lessons of 2023 highlight the industry's ability to adapt, innovate, and grow in the face of challenges. The strong recovery in 2023 provides a foundation for further breakthroughs, growth, and possibilities in the crypto space.

2024 Outlook

Looking forward, we are pleased with the excellent performance of the market over the past year and are particularly excited about the following themes.

Bitcoin Narrative Remains at the Forefront

Throughout 2023, Bitcoin has remained in the spotlight thanks to various narratives, such as Ordinals/BRC-20, the approval of spot Bitcoin ETFs, and the halving in 2024. Ordinals and BRC-20 represent a 0 to 1 innovation in the evolution of Bitcoin, introducing the deployment, minting, and transfer of fungible tokens on the Bitcoin network for the first time. These tokens quickly became alpha investment targets for Bitcoin ecosystem investors. Meanwhile, the recently approved spot ETFs may bring significant liquidity to the crypto market and signify mainstream recognition of Bitcoin as a legitimate asset.

As we enter 2024, this momentum may continue. The SEC's final decision has been made, and it is likely to be positive. Historically, the year following a Bitcoin halving event has seen strong performance in the crypto market. Therefore, the recent approval of spot ETFs and the optimism leading up to the halving in April may trigger significant market volatility.

Additionally, due to the relatively small market caps and meme characteristics of Ordinals and BRC-20, if Bitcoin experiences a rapid rise under corresponding events, we may witness even more pronounced price fluctuations. The Ordinals and BRC-20 ecosystems are expected to further develop. Notably, the introduction of more Bitcoin scaling solutions, such as Stacks' sBTC, will be an interesting development that enhances Bitcoin's functionality.

Ownership Economy Applications Gain Further Momentum

Blockchain technology enables users to reclaim sovereignty over resources traditionally controlled by large entities, including personal data, creative content, and computing resources. For example, centralized storage services may require users to relinquish control over their data, exposing them to privacy breaches and single points of failure. Various projects are exploring alternative solutions that empower users with greater control over their assets and information. Two notable areas in this regard are decentralized physical network infrastructure (DePin) and decentralized social media (DeSoc).

Although the concepts of DePin and DeSoc have existed for some time, they began to gain significant momentum only in 2023. This shift can be attributed to the maturation of infrastructure development, increased awareness, and the growth of the user base in the crypto space. For DeSoc, Friend.tech emerged as a major growth driver in 2023, generating substantial revenue comparable to some top protocols. Friend.tech showcased the potential of decentralized social media, allowing users to monetize their creations without restrictions imposed by central platforms. In 2024, we may see similar applications exploring various forms of social media, including music, video, and written content.

Meanwhile, DePin became a hot narrative by the end of 2023. These protocols are viewed as having high growth potential due to their vast market and ability to expand rapidly through bottom-up growth strategies. In 2024, we may witness accelerated adoption of DePin and DeSoc projects, leveraging their potential for growth and market penetration.

AI Integration Increases

Since OpenAI's ChatGPT sparked intense global interest in AI applications in 2023, AI and crypto (AI x Crypto) have become one of the main narratives in recent months, with numerous projects continuing to emerge. We believe that the integration of AI with crypto is a growth area worth watching. Although it is still in its early stages, integrating AI into the crypto ecosystem opens up a range of possibilities regarding potential use cases and offers alternatives to existing solutions.

Projects that have begun integrating AI already provide services such as trading automation, predictive analytics, generative art, data analysis, and DAO operations. Looking ahead, there are many more use cases yet to be discovered.

For instance, training AI models requires vast amounts of data input and resources, often limiting this activity to tech giants. This leads to reduced transparency and closed development. However, by utilizing decentralized storage for data management, we can achieve greater transparency and security. This democratizes the AI model training process, allowing for broader participation, which could lead to a surge in innovation and development in the field.

Real World Asset (RWA) Growth

RWA tokenization showcases the powerful use cases of blockchain technology. By bringing off-chain assets onto the blockchain, RWA tokenization provides greater transparency and efficiency while opening up new possibilities in terms of composability and potential use cases.

As we enter 2024, we expect RWA to benefit from the tailwinds of rising interest rate expectations. Tokenized treasuries remain a highlight, offering crypto investors an alternative and attractive source of yield. Furthermore, as institutional adoption of RWA accelerates, the development of related infrastructure, such as decentralized identity, oracle, and interoperability solutions, is also expected to gain momentum. These elements are crucial for establishing a comprehensive RWA ecosystem.

On-Chain Liquidity Landscape Thrives

Liquidity is crucial for on-chain ecosystems, especially for DeFi. Since Uniswap introduced the AMM model, there has been significant development. This evolution has given rise to multi-layered liquidity models that support various on-chain activities, including token swaps, derivatives trading, and yield management.

As the market gradually gains momentum, on-chain liquidity and the scale of financial activities are expected to increase. Two noteworthy categories are liquidity management and request for quote (RFQ) systems. The concentrated liquidity market makers (CLMM) promoted by Uniswap V3 address the issue of capital inefficiency. However, challenges such as impermanent loss (IL) and just-in-time (JIT) liquidity, which require active position management, still pose difficulties for less experienced participants. This has led to the emergence of liquidity protocols that optimize CLMM liquidity provider positions using various strategies. Currently, Uniswap V3 alone has a total value locked (TVL) of $2.4 billion, while the comprehensive value managed by these liquidity management protocols is only $400 million. This gap highlights the growth potential, especially with the upcoming Uniswap V4, which may introduce more advanced liquidity optimization features.

RFQ systems, represented by projects such as Uniswap X, CoW Swap, and 1inch Fusion, facilitate matching between traders and market makers, often utilizing mechanisms like Dutch auctions to ensure competitive pricing. The advantages of the RFQ model include competitive pricing, MEV protection, zero slippage, and gasless order processing. As on-chain trading infrastructure continues to advance, the likelihood of adopting this efficient model is expected to increase.

Institutional Adoption Accelerates

2023 witnessed the arrival of institutions, and more are expected to join the crypto space. During the bear market of the past year, prestigious traditional asset management giants like BlackRock and Fidelity entered the crypto field, demonstrating their confidence in the industry's long-term potential.

Security Remains Crucial

In the crypto industry, security plays a vital role in building and maintaining user trust. According to DeFiLlama, losses from DeFi attacks in 2023 exceeded $1 billion, a significant improvement compared to approximately $3.28 billion stolen in 2022.

Given the importance of security, we expect continued focus on this area in 2024. This attention may manifest in various forms, such as product innovation, educational initiatives, and enhancements to user experience.

Account Abstraction Becomes More Important

To attract the next billion users and accelerate blockchain adoption, accessibility and inclusivity are crucial. Ideally, users should be able to easily use DApps and engage in any on-chain activities. However, there is still significant room for improvement in practice. For instance, most trading still occurs on centralized exchanges. Even at its peak in May 2023, decentralized exchanges accounted for only 20% of total CEX trading volume.

Several innovations make us excited about the future. For example, account abstraction facilitates the implementation of smart contract wallets with enhanced usability, featuring social recovery and significantly improving the overall user experience. Given the fierce competition among wallet providers, we may see rapid development in this area.