The Block Annual Report Compilation: Looking back at 2023, looking ahead to 2024

The report thoroughly analyzes the performance of the crypto market in 2023, the development of infrastructure and regulatory environments, blockchain platforms and their scaling strategies, and the progress of on-chain applications.

By The Block Research Team

Compiled by Angelilu, Foresight News

This report2024 Digital Assets Outlook” Written by The Block Research team, it provides an in-depth analysis of the four major aspects of the 2023 digital asset market and price performance, the role of infrastructure providers and regulators, the scale and evolution of blockchain platforms, and the development of on-chain applications. The following are highlights compiled by Foresight News.

I. Market performance and activity

Cryptocurrency prices rebounded significantly in 2023, and the total market capitalization doubled. This round of price recovery was affected by macroeconomic factors andFTXThe impact of the end of bankruptcy deleveraging was that, with the exception of the end of the fourth quarter, investors' activity in the crypto sector decreased compared to previous years, and trading volume and venture capital transactions reached multi-year lows.

Overall, crypto asset prices have performed well overall this year.BitcoinIt's up more than 125% so far this year, and most other crypto assets are above January 1 levels. Solana, in particular, is up nearly 500% this year so far, from under $10 in early January to $65 in November. Bitcoin's dominance (defined as Bitcoin's market capitalization divided by total crypto market capitalization) grew 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 more than two years. Several factors contributed to Bitcoin's rise. First, the most optimistic crypto narrative of 2023 revolved around a possible spot ETF approving the asset, a saga that continued until the second half of this year.

As far as the macro environment is concerned, despite the high interest rate environment and heightened geopolitical tension leading to various financial market mispositions, 2023 generally showed a stronger macroeconomic environment than 2022. First, both short-term and long-term interest rate increases far exceeded market expectations. Second, the ongoing conflict in Eastern Europe and the newly escalating geopolitical tension in the Middle East brought additional uncertainty. Third, the US banking industry experienced a brief period of instability in the spring of 2023, highlighting potential fragility within the financial system, and the well led to an increase in regulatory focus.

Spot trading volume

Market activity for crypto assets continued to decline in 2023 due to the bankruptcy of several lenders, but trading volume began to increase again as prices rose and investor confidence grew. Spot trading volume increased month by month in the first quarter, January, February, and March, but trading volume declined sharply in the second and third quarters, and continued to rise in the fourth quarter, reaching a six-month high in November. The biggest reason for the low trading volume in 2023 is the world's largest cryptocurrency exchangeBinanceThe fee mechanism was adjusted. Specifically, Binance ended its zero-fee promotion in March. The campaign boosted trading volume on the platform in 2022. Between March and April, overall spot trading volume fell 38%, while Binance's spot trading volume decreased by 47% during the same period.

Decentralized exchanges also exploded in 2023. One reason is that many people's trust in centralized institutions declined after FTX went out of business. The ratio of DEX trading volume to CEX trading volume peaked at more than 21% in May due to memecoin fanaticism.

Derivatives trading volume

The trend in derivatives trading is similar to spot trading. The total volume of futures contracts peaked in March this year and hit a low in September, although futures volume remained above the December 2022 low. Futures trading volume in May and June both reached 4.7 times that of spot trading. The ratio began to decline slightly in the second half of this year, but is still high compared to the previous two years.

Private equity market

In the private equity market, the overall number of venture capital transactions and financing amounts have slowed significantly. The number of financing transactions is similar to the number of transactions in 2021. As far as the company's actual financing amount is concerned, the annual low of US$498 million in August did indeed set the lowest total financing value since January 2021. However, financing is a lagging indicator because transactions take time to develop and complete, and transaction records are usually recorded from the time the actual transaction occurs, and the actual transaction is not always immediately announced. The amount of financing in November increased 99% month-on-month, reaching a six-month high. Overall, compared to previous years, the industry distribution of capital will appear more diverse, and investment in crypto projects is still mainly concentrated in North America.

II. Market Infrastructure and RegulationExchanges

Another important change in the cryptocurrency exchange market took place in the spring of 2023. Several US regional banks providing numerous services to the cryptocurrency industry went bankrupt, and several cryptocurrency lenders and exchanges went out of business in 2022. US regulators intensified scrutiny, leading to several cryptocurrency exchanges being charged, and Binance is clearly the focus of attention of regulators.

Binance faced multiple challenges this year, including regulatory hurdles and executive turnover. The catalyst for Binance's loss of dominance was the decision to end zero-fee Bitcoin trading. The zero-fee Bitcoin trading promotion was part of Binance's 5th anniversary celebration, which began in July 2022. Binance's dominance declined in October and remained below 40% throughout the fourth quarter of 2023. In March of this year, Binance and its CEOZhao Changpeng(CZ) were both sued by the US Commodity Futures Trading Commission (CFTC) and sued by the US Securities and Exchange Commission (SEC) in early June. The US Department of Justice also launched a criminal investigation against Binance. The investigation ended at the end of November, and a settlement was reached with a $4 billion fine. Binance still has to deal with ongoing civil lawsuits by the US Securities and Exchange Commission, which is likely to result in additional fines.

CoinbaseMuch less affected by the SEC case, the market share stabilized at around 6%, benefiting from more positive news, including partners designated as multiple Bitcoin ETF applicants and the launch of the Optimistic Rollup product Base.

Stablecoins and CBDCs

The overall supply of stablecoins began to decline after TerraUSD was unanchored in May 2022. While the total cryptocurrency market value increased from about $830 billion at the beginning of the year to $1480 billion in November in 2023, the stablecoin supply fell slightly from about $140 billion at the beginning of the year to $125 billion in November. Part of the contradiction may be due to an increase in the interest rate environment.

The market share of stablecoins also changed significantly during 2023, with Tether being the main beneficiary. inasmuchCircleUSDC is mainlyDeFiTrading in China, and its user base is probably more centered around the US, so it is most negatively affected by high yields. Furthermore, due to the depreciation of BUSD,TetherUSDT is more actively used on exchanges such as Binance.

Affected by high interest rates, companies are very enthusiastic about launching stablecoins in 2023. Among them, the most notable corporate stablecoin is PYUSD, which was launched by PayPal on August 7. The issuer is Paxos. PYUSD has broken through the top 20 stablecoins with a market capitalization of more than 150 million US dollars.

In 2023, the CBDC project continued to advance: the Bank for International Settlements Innovation Hub (BIS Innovation Hub) and the mBridge project, a cooperative project led by several central banks, including the Hong Kong Monetary Authority, the Central Bank of the United Arab Emirates, the Digital Currency Research Institute of the People's Bank of China, and the Bank of Thailand, made great progress in the transformation of wholesale cross-border payments. Additionally, China's digital yuan (e-CNY) adoption has surged, the UAE's digital dirham strategy has made significant progress, the Bank of Brazil has been actively promoting the development of its CBDC, the digital euro project is in preparation, and the Monetary Authority of Singapore MAS issues a real-time CBDC for wholesale settlement.

Meanwhile, the stablecoin market has also undergone significant changes due to rising interest rates and increased regulatory scrutiny. Throughout 2023, several mature stablecoins experienced anti-counterfeiting events, eroding their market share, while other stablecoins were eliminated under regulatory pressure. Tether is a major beneficiary of these changes, and its market share grew in 2023 to levels not seen since 2020, when the market competition was far less intense than it is now. At the same time, new entrants are pouring into the market, and they are attracted to more profitable business models brought about by rising treasury yields. Many businesses and central banks have also developed separate stablecoin and central bank digital currency (CBDC) plans.

Traditional banks

In terms of traditional banking, 2023 experienced several unexpected negative shocks, including brief but intense turbulence in the US and European banking sector in the spring, which highlighted growing regulatory pressure and institutional reluctance to provide services to the cryptocurrency industry. Additionally, the bankruptcy of Signature and Silvergate, two traditional crypto-friendly financial institutions, has also led to the liquidation of the cryptocurrency industry.

New institutions applying for ETFs

There were some positive signs of institutional adoption of Bitcoin in 2023, most notably the submission of a series of applications for spot Bitcoin ETFs by large asset managers. BlackRock's unexpected application in June set off this wave of applications, marking a shift in mainstream acceptance of Bitcoin. Grayscale's legal victory in August significantly boosted optimism about the approval of a Bitcoin spot ETF. Currently, more than 10 applicants are awaiting approval results.

custodial

Following the collapse of several centralized companies in 2022, regulatory pressure increased in 2023. Compared to other jurisdictions, the US appears to have taken a tougher stance on the industry, and some countries, particularly in Asia, see the US pullback as an opportunity. However, the response from US regulators was mostly limited to enforcement and statutes, without passing any meaningful regulations, and a judicial review of the SEC's past actions was interpreted as slightly favorable to the arguments put forward by the industry.

III. Blockchain Platform and ExpansionEthereum

In 2023, Ethereum dominated all network usage metrics in the L1 blockchain. As of the third quarter of 2023, Ethereum received about 75% of transaction fees paid by L1 users, totaling about $1.75 billion. As of December 2023, Ethereum's TVL grew by around 19% year over year, compared toAvalanche、Sui、Cosmos、Canto、Aptos、FantomTogether with Near's TVL, the loss was about 20%.

In terms of expansion, Mantle became an important player in the Optimiums field this year. Mantle was launched in July and quickly gained market attention, becoming TVL's largest off-chain DA L2. Mantle said it will adopt eiGenda as its DA provider once it is available. Meanwhile, Polygon PoS is undergoing a major transformation, moving from sidechain to zkEVM Validium by the first quarter of 2024. The modular blockchain Celestia was launched in November 2023 and has attracted much attention for using erasure coding to enable efficient DA sampling and create probabilistic DA proofs. Looking ahead, companies such as Avail, eiGenda, and Synapse Chain will contribute to an ever-expanding ecosystem of solutions to address DA-related challenges.

EthereumThe agreement has now formed a rollup-centric (rollup-centered) roadmap, particularly danksharding, which is a moderate adjustment to traditional sharding methods and introducing significant simplified features. The final implementation of danksharding is expected to take several years. In the upcoming protocol upgrade to be carried out in the first quarter of 2024, the key set of rules and formats essential to achieve sharding are included.

Other Layer 1

In 2023, there was an adjustment in the market share of Ethereum's rivals, and Tron's TVL increased by about 100% from the beginning of 2023 to December.BNB ChainThe TVL fell by around 38% over the same period, and one important reason for this adjustment was the shift in stablecoin shares and the regulatory actions facing the BNB ecosystem.

from SOL (Solana) and TIA (CelestiaAs can be seen from the price performance of), the market's attention to these two chains represents the opposite of the integration and modularity debate. They performed well in 2023. Solana's market capitalization increased by about 430% in the first 11 months of 2023, and the TIA token rose by about 167% in the month after its launch in early November.

The Cosmos community has accepted the concept of modularity from the beginning, and has native infrastructure and tools such as inter-blockchain communication (IBC) and Cosmos SDK, but this inherent modular advantage comes at the cost of distracting users and the fluidity between Cosmos chains, so compared to other generic L1s, the Cosmos application chain is at a disadvantage in terms of composability and liquidity concentration. On December 1, the combined market capitalization of Osmosis and Canto was only $78 million, far less than Cosmos Hub's combined market capitalization, or even lower than their mid-tier L1 rivals, such as BNB Chain ($5 billion) or Solana ($1.6 billion). Benefiting from Circle's deployment of native USDC through Noble in September and the Celestia mainnet launch on October 31, Osmosis's stablecoin supply soared to a high point during the year in November, indicating that demand for transactions is expected to have an impact on the liquidity of specific chains.

Both Polkadot and Avalanche faced challenges in 2023, when Polkadot parachains' total TVL fell from around $561 million to around $335 million on December 1, due to the stagnation of development of Polkadot's XCMP (Cross Consensus Messaging) protocol. Within the Avalanche ecosystem, the number of real-time subnets continued to grow in 2023, but user activity was still low compared to the Avalanche C chain. Overall capital inflows to the subnets were also limited, and as of December 1, the two most active subnets — DFK Chain and Beam — had a total TVL of approximately $8.8 million. The Avalanche subnet faced similar challenges to the newly launched Cosmos chain. Due to the need to establish an economic moat large enough to prevent economic attacks, cybersecurity became a key issue at the beginning of the subnet's establishment.

One of the most prominent narratives of 2023 is Solana's recovery, both in terms of its valuation and the market's acceptance of its integrated scaling approach. From the second half of 2022 to 2023, the Solana core team implemented a series of key measures that made the network run far more reliably than in previous years. The effectiveness of these measures was verified during several major peak demand periods in 2023. During the Mad Lads NFT minting event in April and the PYTH token issuance event at the end of November, the Solana network's user transaction volume both soared sharply, but in terms of transactions per second, there was no significant drop in throughput.

Providing a similar value proposition to Solana — the low-cost parallel execution L1s, such as Aptos and Sui, were spun off from Meta's Diem project and used the Move virtual machine as the execution environment. As of December 1, the two chains together attracted approximately $255 million in TVL, and the growth rate accelerated in the second half of the year. Sui has grown faster than Aptos over the past year, probably related to the incentive program that runs throughout the year.

layer 2

Among layer 2 using optimistic rollups (ORs), the TVL leader is Arbitrum One, and the ARB token airdrop was an event worth watching in 2023. At that time, Arbitrum One had 4 million addresses eligible to apply for airdrops, and OP Mainnet, formerly known as “Optimism,” ranked second or second in TVL, with a market capitalization of over $3.4 billion.

There is currently no clear leader in the ZKR field, althoughdYdXThe ZKR space in TVL has occupied for quite some time, but it has already begun to advance into the Cosmos tier 1 chain. The next two highly competitive ZKRs are zkSync Era, with a TVL market capitalization of $440 million, and Starknet, which has a TVL market capitalization of $140 million. Although zkSync Era has significantly more TVL than Starknet, part of its TVL originally came from zkSync Lite. Since these two ZKRs are likely to release governance tokens in 2024, they are currently attracting significant on-chain activity.

Bitcoin expansion

Without a doubt, the Lightning Network is the most prominent scaling solution for Bitcoin's expansion. Furthermore, it is currently TVL's largest Bitcoin scaling solution. Its TVL has soared from around $85 million in January 2023 to nearly $200 million at the time of writing. However, a more accurate measure of Lightning Network growth is a 7.0% increase from 5,000 bitcoins in January 2023 to 5,346 bitcoins in November 2023. This suggests that TVL's growth was mainly driven by the rise in Bitcoin's price, rather than Bitcoin actually invested in the Lightning Network. The increase in Lightning Network's capacity can be attributed to integration with decentralized information protocol Nostr.

There are also other Bitcoin scaling solutions. Sidechains include DeFiChain, Rootstock, and Stacks, but sidechains don't seem to be effectively grasping Bitcoin's expansion needs. DeFiChain, Rootstock, and Stacks have TVLs of $173 million, $106 million, and $19 million, respectively, lower than Lightning Network's $200 million. There are few projects in the Bitcoin L2 field, such as the ZK rollup being developed by Alpen Labs. BitVM is the latest upgrade to the Bitcoin blockchain, which aims to bring Turing's fully programmed expression to Bitcoin. Technically, however, BitVM doesn't make Bitcoin Turing perfect.

BRC-20s

BitcoinOrdinalsIt's a type of satoshis that has been assigned a unique identifier and additional metadata. It takes advantage of SegWit's low transaction fees and Taproot upgrades. This unique identifier and additional data allows a single satoshis to be used as an NFT. The same framework was later extended to minting fungible tokens, the BRC-20s. Both BRC-20s and Bitcoin NFTS have been heavily speculated, bringing significant on-chain activity to the Bitcoin blockchain, leading to a surge in the share of Bitcoin miners' revenue from transaction fees.

Although the framework used to deploy Ordinal NFTs and BRC-20 tokens isn't technically meant to extend Bitcoin, it does show that innovation is possible on the Bitcoin blockchain. Furthermore, the rise of Bitcoin Ordinals was an unexpected product of SegWit and Taproot upgrades. We are likely to see further innovation in the Bitcoin blockchain, which will be slower than most other blockchains, given the limitations of the Bitcoin scripting language.

IV. On-chain applicationsDeFi

2023 was a year characterized by consolidation and resilience for DeFi, including the DeFi sector, including DEX, borrowing markets, and liquid staking.

Liquidity staking is the most heavily populated sector in the DeFi sector in terms of TVL. On the other hand, the venture capital environment in the DeFi sector continued to deteriorate, reaching its lowest level since the second half of 2020, a downward trend consistent with the broader digital asset market as a whole.

Spot trading volume in DEX fluctuated throughout 2023. The background was due to the long-term downturn in the bear market, followed by signs of market recovery in the fourth quarter. The surge was mainly due to Circle's USDC's brief decoupling over the weekend. The market's reaction was due to concerns that the collapse of Silicon Valley Bank might cause contagion, and the bank held a portion of Circle's reserves.

In DEX spot trading volumeUniswapMaintaining a leading position, it received 53% of the transaction share in 2023, with most transactions coming from Ethereum and Arbitrium One. In contrast, Curve's share fell from 10% last year to 3.7% this year. This decline can be attributed to market contraction hindering the diversity of stablecoins.

The lending sector is also showing an overall flat market trend.AaveMaintaining a dominant position and accounting for more than 60% of the total outstanding debt,CompoundIt is the second largest market. In May, Maker's SparkLend entered the lending sector and quickly jumped to the third-largest loan agreement in terms of total outstanding debt, breaking the $600 million mark six months after establishment.

In the collateralized debt position (CDP) stablecoin sector, Maker maintained its leading position despite shrinking TVL and reaching a cyclical low of $4 billion in October. Unpaid DAI also declined in the middle of the year, and only rebounded in August, which is consistent with the rapid adoption of SparkLend described above.

In 2023, the Ethereum liquidity staking industry will be a leader in DeFi, showing extraordinary resilience, and this outstanding performance can be attributed to two key factors. First, in a bear market characterized by low volatility and weakening interest in borrowing, stable returns from liquid staking are relatively more attractive than other DeFi activities. Second, the popularity of liquid staking agreements has increased the utility of tokens.LidoIt has maintained its dominant position in the Ethereum liquidity staking sector, taking 78% of the market share, while Rocket Pool is in second place with a 10% share.

Solana's liquidity staking sector is also on the rise. Notably, Jito surpassed Marinade in November's TVL to secure a leading position in Solana's liquid staking protocol. This shift highlights the initial success of the Jito rewards program, which rewards its user base through airdrops.

The real-world asset (RWA) tokenized market (excluding fiat-backed stablecoins) has exploded. Notably, 28 billion DAI was issued through RWA collateralized debt positions, accounting for more than half of the total 54 billion DAI supply. The fees generated by these RWA positions account for 80% of Maker's disclosed revenue. In addition to Maker's approval, the adoption rate of tokenized securities is also growing, and the TVL of tokenized securities holding US Treasury bonds has soared sharply to $782 million.

Decentralized derivatives trading volume showed signs of growth in 2023. Decentralized perpetual futures trading volume peaked in November, reaching a new high in a year. dYdX's market share declined but remained number one. Meanwhile, with the launch of Aevo, decentralized options began to develop well in the third quarter. Aevo has become a leading decentralized options exchange, greatly surpassing Lyra in terms of trading volume.

There was also a slight rebound in predicting the market rebound. Polymarket maintained its position as the leading prediction market in terms of trading volume, and sports betting market Azuro also emerged in this field. Since September, the monthly trading volume has reached millions of dollars.

In the context of continued growth in transaction volume and usage in all areas of DeFi, privacy has become one of the areas facing major challenges, especially in August 2022 by the US Treasury Office of Foreign Assets Control (OFAC)Tornado CashAfter sanctions have been imposed. Furthermore, decentralized insurance is also one of the underperforming areas in DeFi. The decline in demand may be due to a mismatch between supply and demand, or it may also be due to insurance overpricing.

NFTs

In 2023, there was a critical shift in the NFT market,BlurDriven by emerging platforms, the high platform fee model, which was once the main source of revenue, disappeared.OpenSeaFrom more than $1 billion in annualized revenue in early 2022, its platform revenue dropped sharply to less than $2 million per month by mid-2023, a drop of nearly 90%.

In 2023, the royalty model for NFT creators also underwent significant changes, with creators now receiving 98% less royalty revenue compared to the peak in early 2022. The trend of platforms such as Blur and Sudoswap to reduce or eliminate royalties has sparked heated debate. While these initiatives are aimed at maximizing liquidity and transaction volume, on the other hand, there are calls for maintaining the spirit of NFTs to support creators and ensure that creators are fairly paid for their work.

The share of the NFT market also changed this year. After the Blur token airdrop in February, its dominant trading volume position reached 80% of the market, a record high, while OpenSea's trading volume market share fell to less than 15%. OpenSea mainly attracts retail traders, while new platforms like Blur have attracted some professional traders. On Blur, the top 1% of traders account for around 68% of the platform's trading volume, while on OpenSea, the top 1% of traders only contribute 24% of the platform's trading volume. The continuing trend of market segmentation in 2024 is likely to be further refined.

Furthermore, in 2023, NFTs evolved towards financialization. Among them, NFT lending platforms mainly cater to more risk-averse high-frequency traders by introducing new forms of leverage, and the cumulative loan amount rules rose to more than 3.3 billion US dollars. Loan models include peer-to-peer (P2P), permanent peer-to-peer, and peer-to-pool (P2Pool) systems. Blur's lending platform Blend stood out from its peers and became the dominant platform. Its weekly loan volume reached $197 million in the second quarter of 2023, setting a record.

Ordinals

Ordinals are an integral part of Bitcoin's architecture, are unique identifiers for every transaction, and play a key role in verifying the authenticity, ownership, and uniqueness of digital assets, including NFTs and BRC-20 tokens. Through nearly 10 months of Ordinals development, Bitcoin developers have built L1 blockchains with other L1 blockchains (such as Ethereum,PolygonAn NFT tool comparable to (Solana). Multiple inscription types are supported, including images, text, apps, and audio, the most famous of which is the BRC-20 token standard. The rise of the BRC-20 token has drastically changed the inscription landscape, accounting for more than 95% of new inscriptions as of the publication of this report.

Throughout 2023, the Bitcoin ecosystem underwent a major transformation due to the growing popularity of inscriptions. Since the beginning of this year, miners have accumulated more than US$530 million in total expenses, of which $90 million has come from Ordinal related activities. These inscriptions have led to increased fees and congestion in the Bitcoin memory pool, as the total size of transactions awaiting confirmation (in bytes) is at its highest level. Currently, transactions related to inscriptions account for 49% of daily transactions on the Bitcoin network. Although this dominance has since declined slightly from earlier this year, it highlights the impact of Ordinals on the Bitcoin block space economy, particularly as block rewards continue to decline, and this change in the transaction landscape has forced miners to adjust their strategies to cope with changes in block rewards and transaction fee dynamics.

Decentralized social networking

When friend.tech launched on Coinbase's new Optimistic Rollup Solution Base in August, decentralization was all the rage. Less than three months after launch, it attracted the attention of the community, with over 900,000 unique users on the platform and a transaction volume of $475 million.

The success of friend.tech has inspired forked applications on other blockchains such as Solana, Avalanche, and the BNB Smart Chain, but none have matched its success. Stars Arena on Avalanche did show promise, but then a bug that caused the agreement to lose $3 million appeared on October 5.

Social protocol Farcaster moved from the Ethereum mainnet to on October 11thoptimismAfter that, the transition to a permissionless model, plus a $5 annual username renewal fee, was aimed at cultivating a high-quality, community-oriented user base. After the migration, Farcaster user engagement grew significantly, doubling daily registrations, and new users contributed around 30% of online activity. In contrast, Lens Protocol, which runs on the Polygon blockchain, provides creators with rich functionality, but currently has a low level of engagement. Currently, there are still obstacles to the development of decentralized social networks, including the lack of perfect content discovery and algorithm targeting models in storage and fully on-chain environments.