Global Blockchain Industry Panorama and Trends (below)
Global Blockchain Industry Panorama and Trends (below)
5. CEFI5.1 Current status of institutional business development
The entire 2022 institutional business picture is extremely correlated with the crypto market as a whole. As seen in CryptoCompare's data from November 2021 to October 2022, the size of institutional business declined from nearly 70B at the end of last year to around 22B. And it is encouraging to see a small recovery in October compared to September, up about 1.76%, the first rise since July, but still not exceeding the peak in March. In terms of net inflows, 2022 institutional business also turned from negative to positive in October, reaching $730K, compared to negative $9.2M in September. it is easy to see that this situation is perfectly in line with the April-June institutional mine-storming event (see 5.3 in this chapter).
5.2 Custodial business competition/service landscape
The trust business (crypto asset custody business) is the first part of the institutional business to grow. 2022, there are more than 150 institutions offering custody business. Those at the head of the pack remain Fireblocks, Coinbase, BitGo, ledger, etc. As shown in the chart below, Fireblocks ventured into the crypto trust market back in 2018 and supports more than 1,500 types of assets in custody. In terms of geographical distribution, most of the head players are concentrated in the United States, most of the hosting methods are self-hosted (only one adopts hybrid hosting), and from the technical point of view, MPC (multi-party computing) technology has been gradually overlaid from the simple HSM technology in the past.
In terms of the range of products offered, they are gradually divided into three categories. One category is to provide services only to institutional customers, typical representatives are BitGo, Hex, and another category is to provide services to both institutional customers and retail customers (including high net worth individuals), such as BlockFi, Coinbase, etc. The third category is relatively special, they specialize in providing hardware services for the market, such as hot and cold wallets, hosting systems, etc. Typical representatives include Fireblocks, Bitbond, etc. These three categories form the current competitive product landscape of the hosting market.
5.2.1 CeFi Lending and Capital Management Business
Institutional lending business refers to the provision of crypto asset lending services to institutional investors and some high net worth individuals (including home office) with institutions as the main customers. The borrowers are usually quantitative institutions, exchanges, mining pools, project parties, etc. Quantitative institutions and exchanges usually use institutional lending services for hedging and part of their working capital, while mining pools use lending to pay their electricity bills and purchase fixed assets such as mining machines. Correspondingly, the lenders of institutional lending services are usually long-term holders such as wealth management institutions and family offices.
The major players in Cefi lending in 2022 are Copper, Hex, Matrixport, BitGo, etc. Their main services and models are shown in the table below.
At present, the faster way to match loans is through email or wechat to match customer needs (Hex or Bitgo's model), the broker model will be easier. The pool dealer is difficult to build due to compliance reasons.
5.3 Statistics and impact of institutional mine incidents
The cryptocurrency market experienced two large institutional cascades of crashes in 2022. The first was Terra's collapse. Due to improper risk management, Three Arrows Capital suffered huge losses in the Terra collapse, implicating other investors and opening up a financial exposure in the cryptocurrency world. As a result, institutions that had financial dealings with Three Arrows Capital were implicated. The bankruptcy of Three Arrows Capital reflected the huge risk of unsecured lending (credit lending) in the cryptocurrency market, which led to a series of institutional meltdowns. Governments have also been alerted by the string of risky bursts in the cryptocurrency market and have decided to implement stricter regulations to prevent similar incidents from happening again.
The second storm was the FTX meltdown. Coindesk published an article pointing out this risky issue on Alameda's balance sheet and warning about it. The founder of Coinan, CZ, then announced that he would sell his FTT holdings to hedge the risk, which triggered a panic in the market and caused the price of FTT to plummet, thus causing the asset side of FTX to shrink significantly and triggering a run on users. Eventually FTX because of user runs led to liquidity depletion, and holdings of FTT and SOL and other assets fell sharply resulting in insolvency, and eventually declared bankruptcy. The collapse of FTX, which was already one of the most spectacular disasters in financial history, came just hours after its bankruptcy filing, when the FTX Exchange was hacked and over $600 million was siphoned off from the cryptocurrency exchange, leaving most users unable to withdraw their funds. The repercussions of the FTX incident are spreading.
5.3.1 Storming institutions storming inventory
1. Terraform Labs
Terraform Labs is the cryptocurrency company responsible for the development of the Terra blockchain network and Anchor. The company created the stablecoin TerraUSD, but later decoupled it from the U.S. dollar and led to the collapse of Terra and a massive sell-off in the cryptocurrency market. the Luna token, once a cryptocurrency worth over $40 billion, lost its value as TerraUSD broke its peg to the U.S. dollar, and Terraform Labs suffered huge losses as a result. Terra's collapse was the genesis of a string of institutional crashes that followed.
2. Three Arrows Capital
Three Arrows Capital is a cryptocurrency hedge fund based in Singapore. Until March 2022, Three Arrows Capital had $10 billion in assets under management and it was known as one of the most prominent cryptocurrency firms in the world. However, its $200 million investment in Luna tokens was one of the main reasons for its bankruptcy. The company declared bankruptcy on June 29, two days after it received a notice of default on a loan from Voyager Digital. The company defaulted on a loan of more than $650 million to Voyager Digital in June of this year. A British Virgin Islands court has since ordered Three Arrows Capital to liquidate its assets after finding the fund insolvent.
3. Voyager Digital
Voyager Digital is a U.S. cryptocurrency lender that operates primarily in the United States and Canada. On July 6, Voyager Digital disclosed that it had filed for Chapter 11 bankruptcy protection after losing more than $650 million in bad loans to Three Arrows Capital, plunging it into financial crisis and at one point suspending trading and freezing customer funds. Despite a rescue loan from FTX founder Sam Bankman-Fried's trading firm, Alameda Research, in June, Voyager Digital was unable to avoid filing for bankruptcy. The company also said in its Chapter 11 filing that it had more than 100,000 creditors at this point, along with liabilities of between $1 billion and $10 billion. FTX has since acquired Voyager Digital for $1.4 billion, and after the FTX crash, CZ expressed interest in acquiring Voyager Digital again in November.
4. Celsius Network
Celsius Network is an American and Israeli cryptocurrency company. The company was once a leader among cryptocurrency lending platforms. However, in June this year, it halted trading and withdrawals from the platform and about $12 billion in user assets were frozen. celsius Network filed for bankruptcy protection on July 13. The company also fired about a quarter of its employees on July 4. Celsius was also damaged later in the FTX meltdown by having assets placed on FTX, which is now estimated to be close to $$354 million affected.
5. Babel Finance
Babel Finance is a cryptocurrency lender based in Hong Kong. The company stopped all withdrawals for its users in June. After announcing the cessation of user withdrawals, Babel Finance disclosed that it had been hit by unprecedented liquidity problems due to volatile cryptocurrency market sentiment.Babel Finance was one of many cryptocurrency companies hit by the ripples of Terra and Three Arrows, which saw billions of dollars of its investors' funds frozen.
CoinFLEX is a futures exchange. It temporarily halted all withdrawals in June due to financial issues due to the recent cryptocurrency downturn. coinFLEX later announced plans to recover $84 million in outstanding funds. It has also partially reopened withdrawals for users with a cap of 10%, leaving 90% in locked funds, which users still cannot withdraw or trade. The freeze is due to liquidity issues at CoinFLEX as a result of a $47 million margin default by a CoinFLEX lender. CoinFLEX's funding gap is also estimated at $84 million.
BlockFi is one of the world's leading cryptocurrency companies, which provides financing services and loans. The company suffered a loss of $80 million because of bad loans from Three Arrows Capital. In June, BlockFi announced that the company would lay off 20% employees, after which FTX acquired the hard-hit BlockFi for $240 million, and then, in the wake of the FTX crash, BlockFi announced that it had significant exposure to FTX (approximately $355 million frozen at FTX), suspended user withdrawals, and declared bankruptcy on November 28.
8. Genesis Trading
Genesis is a well-known cryptocurrency company that provides crypto asset trading, lending, custody and brokerage services with tens of billions of dollars in assets under management. genesis had $$1.75 billion in funds tied up in FTX in the FTX crash. genesis announced on November 16 that due to its exposure to FTX, it has suspended redemptions and issuance of new loans. Genesis is currently seeking $$ in emergency loan bailouts to meet high redemption requests from customers.
Vauld, a Singapore-based cryptocurrency company that provides cryptocurrency lending and investment services to more than 800,000 customers, announced on July 4 that it was halting all customer withdrawals and deposits. vauld's CEO Darshan Bathija said unreliable and unstable market conditions had led to financial challenges for the company. The company had been operating strongly for about four years and raised $27 million through investors such as Coinbase Ventures. Vauld has also faced liquidity problems because of the collapse of the Terra UST stablecoin and other institutional crashes, which have seen its customers withdraw $197.7 million since June 12.
10. ftx storm mine agency inventory
Since the FTX meltdown just occurred in November, the following list takes stock of institutions known to have been affected (not all institutions may choose to disclose their shortfalls on the FTX in the event of a meltdown). Most institutions are known to have been affected because their funds were tied up in the FTX and could not be withdrawn, and some were hit because they held large amounts of FTT.
6. NFT6.1 NFT market status
NFT is a new crypto track that emerged in 2021 and has received a lot of attention from the market since April 2021. NFT has gradually heated up and entered the public eye since the second half of last year and culminated in early 2022, but its performance shows weakness and lack of momentum amidst the worrisome environment of the crypto industry.
6.1.1 NFT market heat declined with the overall market
Throughout 2022, the total NFT market declined from 31.14B in January to 21.73B in October, a decline of approximately 42%, and the single-day transaction value declined from 842M in January to 48M in October, a decline of approximately 94%. active users of NFT transactions declined from 45K at the end of 2021 to 0.5M, with buyers and sellers correspondingly There was a significant decline. We see major transaction activity in January, April and June, and a rather dismal performance from the second half of the year onwards. In contrast, the cumulative subscriber size of NFT reached 3,426,600 from 1,445,900 at the beginning of the year, representing a relative growth of 1,38% (the NFT market only started in the second half of 2021). The increase in the total number of subscribers is accompanied by a decrease in the number of active trading subscribers indicating an increase in the number of takers, with most subscribers in a holding loss position.
6.1.2 High interest in NFT in Asian markets
The Google trend graph shows that NFT search trends on Google peaked in mid-January 2022, started to decline thereafter, had another small peak in April-May, and has been on a declining trend since then.
In terms of geographical interest, mainland China ranks first in the search index, followed by Hong Kong, and ranking 3rd-5th are Singapore, Nigeria and Taiwan respectively, while the US ranks 19th. This is still high compared to the previous year, when the interest in NFT from Chinese regions (Mainland China, Hong Kong, Singapore) gradually surpassed that from Europe and the US in the context of the bear market.
6.1.3 NFT head effect is obvious, the long tail market appears
From the classification of NFT, about 12.67B out of 21.73B for the whole 2022 is PFP category, accounting for 58%, followed by collectibles and games NFT. this indicates that the NFT market is still dominated by avatar series, and there is not much innovation and out of the loop in category expansion compared to 2021.
Looking at the NFT ensemble, the top three are BAYC, CryptoPunks, and Otherside lands. Almost more than half of the top ten (Meebits and Punk were acquired by Yuga Lab) are occupied by Yuga Labs family. There is a trend of constant strength at the head.
However, excluding the first ten more famous NFT, other niche NFT category accounted for 62.05%, the long-tail market showed that the NFT market gradually comply with the "two-eight phenomenon".
6.2 New Trends in NFT - Meme Bubble Bursting, Layer Nesting
Throughout 2022, the NFT market began its downward spiral in May (marked by the Monkey Land offering on May 1) after a honeymoon period from January to April. From May to October, all kinds of Meme NFTs came out against the backdrop of the bear market. From the very first we-are-going-to-die to the very pyramid scheme Mts and finally to goblintown.wtf, which kept draining the confidence of NFT players in the bear market. Especially goblintown.wtf, which raised $20m in 1 week under the powerful "pyramid scheme", and was also the "ugliest" NFT. The "Shit God, Shit Beast" series was based on this nesting operation, which also attracted a large number of FOMO people. NFT Meme is one of the biggest features of the NFT market in 2022.
Another innovative model for the NFT market in 2022 is the increasingly awesome storytelling relationships and enhanced narrative between the NFT series. Together with the combination with airdrops and issuing Tokens, the trend and gameplay combined with Crypto is also born. Especially borrowing from DEFI's playstyle, a new chapter of NFTfi has been gradually born and enriched.
6.3 NFTfi - First signs of success, still emerging
NFT (non-homogenized token) has become an indispensable part of the crypto world, and now NFT has developed from a pure PFP project to a combination with games, meta-universe, collateralized lending, etc., and is initially forming a model of NFT + decentralized finance. However, essentially, NFT is a non-homogenized token, and its indivisibility leads it to encounter greater difficulties in liquidity compared to FT, such as limited transaction accuracy, higher capital usage, and insufficient price discovery mechanism.
To address these issues with NFT, finance-based applications and tools for NFT assets have emerged in the market, aiming to increase the liquidity and priceability of NFT assets through the combination of NFT and Finance, using financialization to improve the utilization of NFT funds in order to create a better NFT user experience, and we collectively refer to such applications and tools as NFTfi applications.
6.3.1 NFT lending - coming into its own
NFT lending is the most direct way to address the liquidity of NFT assets and is the most significant demand in the current NFT market. Prior to 2022, there was little discussion of NFT lending in the market, while this year NFT lending began to gradually gain momentum. 2022 NFT lending market is dominated by two models: P2P peer-to-peer lending and P2Pool peer-to-money pool lending. The more typical representatives are NFTfi protocol and BendDAO protocol. Both have advantages and disadvantages in terms of transaction frequency, trial scope and price discovery effectiveness, and the overall market is still very small in terms of the proportion of relatively homogeneous token lending.
From the aforementioned section we know that the whole NFT market in 2022 is in a downward trend, thus leading to the development of NFT lending programs did not come out of the better market, the current NFT lending mainly stays in the blue-chip NFT field, while for the low and medium-priced NFT, it is not widely recognized in the lending market for the time being due to the problem of high price volatility and the lack of prophecy machines.
Overall, NFT lending has seen some innovation in 2022, but development is still slow, and the overall market is still small in terms of relative homogeneity token lending and relatively limited in market capacity. Future expansion to waist or tail NFT lending is expected, while more financial derivatives and application scenarios are realized in the model.
6.3.2 Status of NFT Mobility Solutions
The entire crypto market environment contracted in 2022 and NFT liquidity solutions were created. the main NFT liquidity solutions currently in vogue are NFT fragmentation, funding crowdfunding protocols, and liquidity pooling protocols.
● NFT fragmentation enhances both the user trading experience and capital utilization by transforming NFT into homogenized tokens with higher transaction precision and using mortgages, pledges and leverage of homogenized tokens or equity.
:: Funding crowdfunding protocols nicely address the excessive user threshold of the market from the demand side, allowing participants to pool their funds and co-manage NFT in a multi-signatory environment.
● And the liquidity pool protocol brings together many NFTs near the floor price, providing users with a stable platform for market making.
Overall, mobility solutions are emerging in 2022, with some projects (such as PartyBid) gaining capital and investment. Various emerging projects are starting to emerge.
The above-mentioned liquidity solutions have various ideas, all of which can improve funding efficiency to a certain extent. However, limited by pricing difficulties and other issues, the liquidity of long-tail and rare NFT categories has never been effectively resolved. In the future, as the accumulation of historical trading prices makes NFT quotation mechanism gradually improved, the liquidity of NFT will definitely become better and better.
6.3.3 NFT Aggregator - Stronger is Stronger
NFT aggregator is the integration of listings, offers information from different order book trading marketplaces into one platform, providing one-stop buying, listing and selling. NFT aggregators performed extremely well in the first half of 2022, with Genie and Gem being taken over by SudoSwap and OpenSea respectively. The entire aggregator track is basically dominated by Gem and Genie, showing a strong state of strength.
On the other hand, NFT aggregators meet the needs of information aggregation and trade aggregation, and integration with upstream trading markets and downstream data analytics tools is in progress, with upstream trading markets/agreements naturally relying on aggregators as a tool to provide them with a "channel", while downstream data analytics tools provide users with attribute, ranking, chip distribution and other services when screening NFT. The first half of 2022 has already seen the acquisition of aggregators by upstream trading agreements, and the integration of aggregators with data analytics tools is underway, with more integration expected next year. Vertical integration of NFT aggregators with trading markets and data analytics tools is the trend.
7. DeFi: The darkness before the dawn
In the early days, DeFi's development had been lukewarm and the variety of protocols was very limited, mostly based on the infrastructure of traditional financial models mapped to blockchain platforms. It was not until 2020 that DeFi saw explosive growth with the introduction of the Automated Market Maker (AMM) system and liquidity mining across the board, attracting a massive influx of capital. at the end of 2021, DeFi's Total Value Lock-in (TVL) peaked at $182.16 billion.
As we enter 2022, DeFi has also suffered a huge impact in a general environment of macroeconomic uncertainty, geopolitical tensions, black swan events (Terra crash, 3AC, Celsius and FTX thunderstorm), increase in DeFi on-chain attacks and vulnerabilities, and general downturn in the crypto market. This section aims to reflect the current state of the DeFi market from different dimensions.
7.1 DeFi market status under the bear market
Currently, the total value TVL locked in DeFi agreements is $44.56 billion, which has declined by 75.5% compared to the all-time high of $182.16 billion, directly reflecting the massive devaluation and withdrawal of capital from the DeFi market. In terms of protocol categories, DEX and lending remain the main tracks in DeFi, with the sum of the two TVLs accounting for approximately 68.1%, down compared to 2021. In terms of the public chain category, Terra has seen the biggest drop in TVL over the past year, mainly due to the collapse of UST, which led to its public chain value nearly going to zero, followed by the FTX thunderstorm, which led to a major impact on the Solana ecosystem. The rest of the major public chain TVLs have also declined, such as BSC down about 45.1% and Avalance about 59.2%. This is not only because of the bear market, but according to Beosin's blockchain security report, the DeFi space saw over 30 hacking incidents in Q3 2022, causing over $400 million in losses and making the whole circuit even more snowballed.
DEX is a very important infrastructure in DeFi, and its trading volume is a direct reflection of market confidence and activity. Among the top 10 DEXs, the total daily trading volume fell precipitously from a high of $19.19 billion to a low of only $740 million. However, the DEX track continues to show a clear headline effect. According to Dune Analytics data, Uniswap, DoDo, and Curve are the three protocols that cumulatively account for nearly 90% of total trading volume. Among them, Uniswap is firmly occupying the leading position in the industry with a ratio of 67.5%.
While DEX has not seen a major update like Uniswap V3 in the past year, there have been some minor upgrades to various DEX protocols to weather the current crypto market winter.
1. DEX integration of NFT transactions is becoming a trend. On the one hand, the DEX head application Uniswap, for example, announced at the end of July that it was enabling NFT trading through the upcoming integration of the existing NFT trading platform Sudoswap, and claimed that users would be able to access both on-chain liquidity provided by sudoAMM in the future. On the other hand, DEX, represented by PancakeSwap, has also developed and integrated an NFT trading marketplace on its own platform, bringing a maximum growth of about 40% to the revenue side of the protocol.
2. Promote product diversification and provide one-stop service. Currently, many DEX protocols no longer only have Swap function, they also provide cross-chain, lending, staking and finance functions on the platform to enhance user stickiness and attract more capital. In addition, some DEX based on AMM model (SushiSwap, PancakeSwap, etc.) have also derived the traditional limit order model on the platform to bring a better trading experience for users.
3. Full migration to Layer2 and accelerated multi-chain deployment process. With the gradual implementation of Layer2 technology represented by Rollup, many DEXs have announced integrated extension solutions to reduce transaction costs and improve transaction speed. At the same time, more and more protocols are being deployed to emerging public chains other than Ether to capture a larger user base.
●borrowing and lending
Lending is the second largest TVL track in DeFi. total borrowings in DeFi fell from $28.4 billion to a low of $16.2 billion, and total deposits fell from $78.2 billion to a low of $40.3 billion. Lending agreement yields are also declining significantly. Yields on mainstream lending platforms Compound, AAVE and MakerDAO for stablecoin USDC, DAI lenders are only between 0% and 1.5%.
The cold market has caused many lending protocols to start actively seeking changes in their business. Take the lending head application AAVE for example, its upcoming native stablecoin GHO tries to use the widely used scenario of stablecoin to expand the platform development and build its own ecological moat. On the other hand, with the official launch of ERC-4626 protocol, all interest-bearing credential-based assets such as Lido's stETH and cToken on Compound can be seamlessly connected to various lending protocols through this interface. In the future, as more types of interest-bearing credentials are incorporated into the collateral and lending assets supported by the lending protocol, the efficiency of users' funds will be further improved.
7.2 DeFi's Survival and Future Outlook
As you can see from the above data, the DeFi track is in a tough spot in a bear market. We have a few suggestions for DeFi projects that are experiencing a bear market.
(1) Get off subsidies and build a stable source of income.Liquidity mining was the starting gun for the rise of DeFi and was a key driver of the project's early cold start, so it has become almost standard in the DeFi protocol. However, liquidity mining is by its very nature a special form of subsidy. This model can allow projects that simply don't have stable liquidity and a long-term operational plan to attract an influx of capital through high returns created out of thin air by issuing native tokens. When the DeFi protocol subsidizes users with tokens and fees for a long time, the loyalty of these users will be very dependent on liquidity mining. At this point, if the token price is diluted by mining and selling eventually causing the platform subsidies to be eroded, the project's trading volume, pool liquidity and depth will quickly dry up. Therefore, blindly promising excessive returns or even subsidies is not the way for DeFi to survive in the long run. Only those projects that slowly move away from subsidies and can maintain real and substantial value through sustained revenue generation are likely to meet another explosion in the future.
(2) Reinventing a Sustainable Token Economy.Currently, many DeFi protocols have difficulty accumulating tokens and capturing ecological value effectively. Some existing protocols are starting to experiment with sustainable token economics, such as Curve's ve model. Users wanting to continuously improve governance and corresponding rewards have to keep pledging CRV. this model can solve the previous matter of giant whales gaining governance rights and rewards by purchasing tokens in the short term, and it also gives value to tokens and helps reduce the circulating supply of CRV. As a result, more and more protocols are beginning to explore optimizations in token economics in an attempt to achieve secondary growth by giving tokens a longer-term value.
(3) Explore DeFi financial derivatives.Currently, all tracks of DeFi are relatively saturated and show a clear head effect. It is difficult to find a new continent for development before disruptive innovations appear in the general environment. Therefore, new projects can consider focusing on the direction of relatively mature business in the traditional field but with fewer competitors in the chain, and this category mostly belongs to derivatives. However, although the current models of some derivatives agreements are quite good, they are at a fairly early stage.
(4) Embrace regulation as appropriate.Since the Tornado Cash incident, the crypto industry has just entered the line of sight of modern state embodied regulation, and the early brutal expansion is no longer there. In addition to the U.S., the EU will also launch the EU Market Framework for Crypto Assets (MiCA) for DeFi for regulation next year; in the future, this regulation will not only be a certain protocol, but completely monitor up from the whole blockchain application layer. Therefore, instead of fighting traditional financial regulation, it is better for DeFi protocols to proactively embrace them and find a balance between the blockchain world and traditional censorship.
7.3 Stable Coins7.3.1 The New Boom and Crisis of Algorithmic Stable Coins
Evolution and Collapse
The algorithmic stablecoin received attention back in DeFi Summer 2020, and after two years of exploration, it has evolved into its third generation.
The biggest difference between third generation algorithmic stablecoins and their predecessors is that they are backed by sufficient assets to avoid a "death spiral". Their issuance mechanism requires the destruction or collateralization of a sufficient amount of crypto assets, which almost fundamentally changes the meaning of algorithmic stablecoins. In this paper, we will continue to use the term "algorithmic stablecoin" and define it as a "crypto-asset backed" stablecoin. With backing assets, an algorithmic stablecoin can withstand the overall market volatility and its own price decline, and retain its price anchor in the long run.
They have also made adjustments in the price stabilization mechanism, and for the most part on have adopted the model shown in the figure below.
A nice set of mechanism design does not yet allow the algorithmic stablecoin to achieve scale. A key factor in the expansion of the once popular UST is Anchor, a lending protocol on the Terra public chain, where users can deposit USTs and receive a fixed return of 20% in APY. With the influx of users, LUNA's price, UST's issuance and Anchor's TVL all went up together. In March this year, it even surpassed DAI to become the largest decentralized stablecoin.
However, by May this year, first there was a continuous drop in LUNA price and Anchor's adjustment to floating rates, then there was a disproportionate UST in the Curve pool and a giant whale sell-off, and UST finally came off anchor quickly and never returned to near $1 afterwards. the price of LUNA also dropped to over 99%, and Anchor's TVL was cut within a week. the UST's and Terra's collapse dealt a serious blow to market confidence, leading to a brief de-anchoring of some other algorithmic stablecoins as well, even being characterized by investors as pseudo hits.
In the wake of this, other projects have fallen on hard times. FEI, which used to call itself DeFi 2.0 project on Ether, failed to agree with the victimized users and the community on whether to pay out the full amount and how to deal with treasury assets due to the theft of Rari, the lending agreement it merged with, and suffered the voluntary departure of its co-founder, and the agreement was eventually dissolved. the USN on the NEAR public chain announced in July that it would only accept USDT minted as USN, which effectively abandoned the algorithm stable coin model. In October it was finally announced that it would cease operations due to insolvency. Although still operating, the circulation of USDN based on the Waves public chain was reduced by nearly 90% after repeated de-anchoring. the algorithmic stablecoin hit bottom once again. The only one that has been able to withstand the pressure is USDD, which has a collateral rate of over 300%, support from a group of CEXs such as Huobi, Poloniex, Kucoin, Bybit, Gate and DeFi protocols such as Sun.io and ellipsis, and some restrictions on redemptions, with issuance instead close to doubling.
The chart below compares the market capitalization of UST before and after the collapse with the current mainstream algorithmic stablecoins. The sum of the market capitalization of the top 5 algorithmic stablecoins at that time shrank rapidly from $23 billion on May 8 to less than $4 billion on May 22, a drop of 82.6% in 2 weeks. the total market capitalization of these 5 algorithmic stablecoins is now less than $2.5 billion, a drop of about 90% compared to before the UST collapse.
The only one that has withstood the pressure is USDD, whose issuance mechanism combines the features of both algorithmic and over-collateralized stablecoins. Only TRON DAO Reverse (TDR) whitelisted institutions are allowed to issue USDD as a fully collateralized TRX (algorithmic stablecoin), for which TDR has a reserve of collateralized assets (externally overcollateralized) containing TRX, BTC, and USDC close to 200%. Only these whitelisted institutions have the right to destroy USDD and exchange out TRX. if USDD is at risk of de-anchoring, they will not run it, as this will block future finance. USDD is supported by Huobi, Poloniex, Kucoin, Bybit, Gate and a number of CEX and DeFi protocols such as Sun.io and ellipsis. The support of the application scenario is very rich. So it nearly doubled in issuance despite the near total loss of the track and was granted fiat currency status in the Commonwealth of Dominica on October 7, 2022. This is the second cryptocurrency in the world, after Bitcoin, to be granted legal digital currency status.
Reflection and Insight
Why is this generation of algorithmic stablecoins crashing and what is wrong with that seemingly flawless set of mechanisms?
There are two main types of crypto-asset backed stablecoins according to how they are issued out, one is destruction of backing assets and the other is collateralized backing assets. The risk with destruction-based algorithmic stablecoins is that the system may overmint the backing assets when both the backing assets and the stablecoin price fall, leading to a very severe fall in the backing assets and a collapse of the entire system.
UST is a vivid example. During the UST expansion, most LUNA is destroyed at high prices and the backing assets appear to be adequate, but it appears from the currency standard that not much new assets are being added. This is when the LUNA price suddenly drops sharply and the backing assets become inadequate. And as long as the stabilization mechanism is still running, the selling pressure of LUNA will keep increasing, the drop of LUNA will be deeper, and more LUNA will be needed to meet the demand of user redemption. In the end, it will be difficult to make up the deficit even if all LUNA is resurrected, so additional LUNA will have to be issued. within 1 week after the crash, its total supply has doubled nearly 7000 times the initial supply, which caused the LUNA coin price to go directly to zero. the UST lost its backer and never had any hope of turning over.
Collateralized stablecoins, like destroyed stablecoins, may also experience a situation where both the backing assets and the stablecoin fall and the backing assets may not be in full. At this point, users who redeem first are more likely to get the full amount of assets, while users who arrive late will not be able to get paid. Users who are unable to redeem will have to go to the secondary market to sell their stablecoins, thus causing their prices to drop significantly.
Algorithmic stablecoins exist to provide capital efficiency in a decentralized mechanism. The capital efficiency of a centralized stablecoin has to be viewed in terms of both the efficiency of issuance and the efficiency of long-term returns, and only one of these two can be chosen. Over-collateralized stablecoins are sacrificing capital efficiency of issuance in exchange for long-term asset appreciation. Algorithmic stablecoins gain short-term capital efficiency, which in the long run seems to depend on how much revenue can be generated by the applications that accept this stablecoin.
Algorithmic stablecoins are complementary to over-collateralized stablecoins. For users, if they are more optimistic about the potential of an asset's appreciation, using it to overcollateralize can retain the right to future returns. If you are more optimistic about the near-term development and relatively stable income of a certain ecology, algorithmic stable coins are a better choice.
In the future, if there are new algorithmic stablecoin solutions that can guarantee sufficient collateral assets and reserves, healthy stabilization mechanisms, realize widely used scenarios and adopt flexible capital management strategies, it is still possible to gain market acceptance.
7.3.2 Reinventing the Overcollateralized Stable Coin
In July, two old DeFi protocols, Aave and Curve, both announced that they would be issuing stablecoins, injecting new life into a dormant circuit; Curve's planned stablecoin, called crvUSD, was not disclosed, and Aave's GHO, while still a traditional over-collateralized crypto-asset-based stablecoin, introduced some minor innovations, namely The new role of facilitator has been introduced.
A facilitator is an agreement or entity that has been approved by Aave Governance to acquire the right to cast and destroy GHOs. Facilitators can design their casting and destruction methods according to the characteristics of their business. To control risk, Aave Governance will set a cap on the amount of GHOs that can be minted per facilitator.
The facilitator will mainly bring the following changes
(1) Enhance the flexibility of the GHO stablecoin system. Multiple institutions are able to issue stablecoins conveniently, and there can be a very large degree of freedom in the types of assets that can be pledged. In addition to the traditional minting methods of pledging tokens such as ETH and AAVE, there may be various minting methods such as pledging real world assets (RWA), Delta neutral positions, and credit scores. This could activate the liquidity of more assets.
(2) The GHO will have a "sardine effect" to accelerate the facilitator's economic system, and will perform the same functions as a typical stablecoin, but will be tied to the facilitator's own economic model to drive business operations, incentives, token pledges, and other activities. If properly designed, there should be many protocols willing to join the facilitator.
The main risk of this move is the increased complexity of the protocol, which could be found exploitable by hackers. The overall risk should be manageable considering the strong technical strength of Aave and the cap set on the issuance of facilitators. So it is predicted that GHO can be an important asset in a big way and by a larger range of applications.
8. GameFi & MetaVerse8.1 GameFi8.1.1 Gamefi Market Status and Outlook
GameFi is a new segment born in the 2020 bull market. GameFi combines gaming and finance, gamers play games for fun, while people make money through economic incentives, cleverly financializing games and bringing more new power to the cryptocurrency circle. During last year's bull market, GameFi was a huge success, however, since this year's market downturn, GameFi's downward trend is obvious, showing a strong correlation with the broad market index BTC (Figure 8-1 and Figure 8-2). During this year's bear market, projects built on hype and unsustainable profit models have collapsed particularly hard.
According to Footprint's on-chain data, the growth of GameFi projects began to slow significantly in May, with only 41 new projects launched during the month. Much lower than the number of projects launched in Q1, BSC now has the largest gaming ecosystem after a year of growth in 2022, with over 582 GameFi projects currently in place.
Axie Infinity and Stepn were the hottest GameFi projects at one point last year and this year, but they no longer rank in the top three in terms of average active users, and there is a large gap between daily active users and the top three chain game projects, which shows that an unsustainable game model is not conducive to the development of the project in the long run. On the other hand, Alien Worlds and Splinterlands, two lesser known games outside the GameFi space, now dominate. They are still liked by users even after the price has dropped and the return on investment has decreased. This also suggests that the playability of the games can somewhat prevent them from falling into a downward cycle of asset inflation.
In 2022, capital is beginning to focus more on Web3 investments, particularly GameFi and Metaverse, as shown in the chart below. gameFi and Metaverse have exceeded the number of investments under the Tooling, Trading and Lending/Borrowing categories for two consecutive years. Capital investment in these two categories has increased from $874 million in 2021 to $2.4 billion in 2022.
8.1.2 X 2 Earn brings the pop, what about the next pop?
In the first half of this year, Stepn pioneered the introduction of Move to Earn economic model for blockchain, and it was a great success. A large number of Web2 practitioners began to realize that Play 2 Earn is not only limited to various games, adding token economy to traditional Web2 industry scenarios will still be very popular, and the X to Earn model was born under this opportunity, and all of these scenarios, whether it is sports, learning, singing or even sleeping, began to adopt the X To Earn model, trying to transfer the token incentive model The token incentive model has been transferred from online scenes to more realistic offline scenes. However, looking at the development of X To Earn in the past year, the data is not satisfactory. For example, the highest number of daily entrants to Stepn reached 100,000 in May, but now it is less than 10,000, and the users and investors who entered after the decrease in the number of entrants should no longer be able to calculate the return cycle.
For the project side, X To Earn introduces more real-world scenarios to players compared to the Play 2 Earn model, which to some extent solves the current problem of poor playability of the chain game and enhances the interactive stickiness of users and the game, but it is doubtful whether the numerous scenarios really need to join the token economy model and whether it is a sustainable business model that can be justified.
For users, the X To Earn model of the project there is a high threshold problem, users must hold the corresponding NFT to enter its application, this marketing strategy is friendly to the initial users, the early holding of users, often at a lower purchase price, in this invitation system of hunger marketing with a large number of users to follow the wind into the field. With the increase in the subsequent reproduction of NFT, the value is constantly diluted, in the bear market without newcomers to enter the situation is difficult not to be smashed by the early users, so this FOMO mood into the field of users, often buy at high points with the risk of loss. This newcomers into the field to the old users to take over the short and fast model, in fact, is also the main source of criticism X 2 Earn is the side.
X to Earn continues the dual token + NFT incentive model pioneered by Axie infinity, which is an economic model that, if not designed properly, can seriously affect the value of token incentives and thus the retention of daily users. So far, neither Play 2 Earn nor X to Earn has been able to control the inflation of in-game tokens.
In the long run, the influx of X to Earn players will naturally solve the difficulties encountered by the X to Earn project, but the aforementioned points are the urgent problems that X to Earn is facing, such as how to solve the inflation of game NFT and game tokens, enhance the ecological construction of the project, reduce the financial attributes of playing gold back, and truly implement the offline business model. It seems that the solution to all these problems is the only way for X to Earn to get out of the current dilemma.
8.2 Metaverse Market Status and Outlook
2021 is the year of the meta-universe and meta-universe related games such as Roblox, Decentraland and Axie Infinity started to become more and more popular last year. In November of last year, the hype of metaverse reached its peak. This year, as the market went down, meta-universe related boards and projects have cooled down.
According to Statista, the market size of the metaverse reached $38.5 billion in 2021, grew in 2022 to reach $47.48 billion, and is expected to reach $678.8 billion in 2030. In the cryptocurrency space, the metaverse segment also has a relatively large variety of metaverse assets with a total market cap of more than $1.8 billion.
The metaverse is a new type of virtual and real Internet application and social form resulting from the integration of multiple new technologies, which provides an immersive experience based on extended reality technology, generates a mirror image of the real world based on digital twin technology, builds an economic system based on blockchain technology, closely integrates the virtual world with the real world in terms of economic system, social system, and identity system, and allows each user to produce and edit content. . At the industrial level, the underlying technologies of metaverse involve 5G, cloud computing, expanded display, robotics, brain-machine interface, artificial intelligence and blockchain.
At the national level, many governments have now joined forces with companies in the commercial development and institutional design of the metaverse, thereby seizing industry standards, for example.
China: In January this year, the relevant person in charge of the Ministry of Industry and Information Technology said at a conference on the development of small and medium-sized enterprises that it would strongly support and nurture a number of innovative small and medium-sized enterprises that enter into emerging fields such as metaverse, blockchain and artificial intelligence. In addition to the guidance and support for the industrial development of metaverse at the national level, more than 20 provinces, cities and regions have issued also relevant support opinions to provide cultivating soil for the industry standard and development of metaverse and support the landing of related industries.
United States: 2022 In March, Biden signed the Presidential Order on Ensuring Responsible Development of Digital Assets, which requires agencies to study technological innovations and regulatory policies on cryptocurrencies, digital assets, etc., emphasizing the strengthening of the U.S. leadership in the global financial system as well as digital assets. Social giant companies represented by Meta are also actively docking with policy makers and relevant experts to provide reference suggestions from a professional perspective in order to coordinate the various metaverse participants to build a code of conduct for the virtual world.
EU: On September 20, 2022, Ursula von der Leyen, President of the European Commission, presented the priorities for 2023. The letter of intent announces an "initiative on virtual worlds, such as metaverse". The European Commission wants to ensure that people can have a safe and fair metaverse and plans to introduce concrete legislative proposals in 2023.
Korea: On July 2, 2022, the South Korean government announced that it will start investing directly in the Metaverse project. According to a statement by Science and ICT Minister Lim Hyesook, the country will invest more than $177 million to launch national industries and companies in this field. This is one of the first countries in the world to invest money in this field. The investment is part of South Korea's efforts to incorporate a new technology focus into its Digital New Deal, a set of guidelines the government is following to drive industry standards and the transition of citizens to a fully digital society.
In the blockchain field, Meta Universe has also formed several sub-segments, including: GameFi, NFT, Platform, Web3, Social, Virtual World, etc.
At present, the metaverse industry pattern is initially formed, but it takes a long time for the industry to land, and there are more capital speculation speculation concepts at present. Meta-universe stories are relatively new, easy to be packaged, then chased by capital, and quickly generate bubbles. During last year's bull market, a large number of projects were launched, however, when we look back today, many of them no longer exist, and the real meta-universe needs longer-term R&D and investment. However, we should still be optimistic about the market outlook of the meta-universe. This year, even with the market downturn, the scale of the meta-universe exceeded that of last year, which further illustrates the great potential of the industry.
In the meta-universe track, blockchain technology and traditional industries can be organically combined to promote a large number of opportunities. We are able to see that traditional technology companies, game companies, Internet companies, etc. are starting to lay out this industry explicitly, while the primary and secondary markets of traditional finance are also paying extremely high attention to this track. In the future, we believe that meta-universe will be one of the bridges connecting the inside and outside of blockchain, and is an epoch-making product.
9. Encryption Mining: The Perils and Opportunities of PoW, PoS
PoW mining has stumbled in 2022, mainly due to the crypto industry bear market and the ethereum merger. With the bear market, mining costs are rising, many miners are not able to make ends meet in the bear market, and with debt issues and selling bitcoin at low prices, the number of miners' bitcoin positions are falling. The expected Ether merger has caused some Ether miners to shift to PoW-like mining of other tokens. And after the Ether merger, network liquidity pledge contracts have risen and have significant influence in the Ether network verification nodes.
9.1 PoW Mining Market Changes and Status
PoW mining is highly controversial, mainly because the consumption of electric energy is under pressure from both the environment and the government. the largest representative project of PoW consensus is Bitcoin. The changes in the Bitcoin mining industry this year can be analyzed in terms of (1) the pro/con policies of various governments, (2) the restructuring of electricity in various countries, and (3) the changes in the crypto market. The most important thing is to follow two cycles: the macro economic cycle and the block reward halving cycle.
In terms of country policies, the biggest impact on bitcoin mining in 2021 will be China's decommissioning policy, leading to a shift in bitcoin mining activity to other countries, with the U.S. becoming the country with the largest share of bitcoin computing power and some states introducing supportive policies. For example, Texas supports bitcoin miners with wind power for mining using clean energy, and Oklahoma offers tax incentives for bitcoin miners.
According to HashRate Index data, bitcoin mining pools arithmetic power distribution is dominated by the four major mining pools Foundry USA, AntPool, F2Pool and Binance, which occupy more than 70% of arithmetic power. In terms of the market, three major factors affect bitcoin mining: arithmetic power, arithmetic difficulty, and bitcoin price. 2022, bitcoin network-wide arithmetic power is around 200 EH/s, and mining difficulty has been growing. iterations of mining methods and hardware devices have driven bitcoin network arithmetic power growth and mining costs up, and miners' income down. Many mining companies have faced financial problems this year. Since mid-June, the bitcoin price has fallen below $25,000, close to the shutdown price of most miners' coins. We see from the "difficulty/price" curve that the overall "difficulty/price" curve is higher in 2022 compared to 2021, profit margins are much lower, the difficulty of arithmetic is growing much faster than the price of bitcoin, and miners are in decline, but in In August 2022, the factor declined slightly, but miner revenue was at an all-time low for the entire third quarter.
According to CryptoQuant data, there was a massive sell-off of bitcoins by miners during April, June and September, respectively, with bitcoin miner reserves falling to 1.91 million, a nearly 12-year low. Core Science (CORZ), the world's largest bitcoin mining company, sold 7,202 bitcoins in June, and they are now down to 24 and facing bankruptcy. Other PoW networks are also facing declining arithmetic and token prices, such as Monero. with a continued crypto bear market ahead, coupled with a global recession, bitcoin prices could fall below miners' bottom lines, and with soaring energy costs, more miners will face bankruptcy issues.
9.2 The Ethernet merger: A change in the mining landscape
On September 15, 2022, Ethernet completed the merger stepped into a brand new era, after which the Ethernet network was converted from PoW consensus to PoS consensus, and as the PoS mechanism was not using computing power to determine blocks, the Ethernet miners were also eliminated. In May 2022, the hash rate of the Ethernet network reached an all-time high, after which the merger was expected to make miners all start to quit and the hash rate dropped.
There are two kinds of ethereum miners, one is ASIC miner, i.e. a shutdown machine that specifically uses ASIC chips as core computing parts for algorithms and has absolute advantages in performance; the other is GPU miner, i.e. graphics card miner. The coins that can be mined with ASIC are Bitcoin, Ether, Ether Classic (ETC), but the ASIC miner of Ether can only be used for ETH and ETC mining, and cannot be converted to other algorithms, so it cannot be sold; the public chains that can use GPU miners are Ether, Litecoin (LTC), Ether Classic (ETC), Dash, Zcash. In addition, GPU miners can also provide arithmetic power in Web3 applications, or high performance computing in Web2 data centers.
Before the Ether merger, miners had three ways out: (1) selling GPU miners; (2) switching to miners on other public chain networks; (3) supporting the Ether hard fork. If miners choose to switch to other networks, the risk in a bear market cannot be estimated and the return is small, so most miners chose to sell their GPU miners, resulting in a decline in graphics card prices of about 50% since December 2021. the remaining small percentage of miners went to ETC, and the ETC coin price increased significantly in July, but the income of ETC for miners is still limited compared to Ether, so its increase is mainly Still due to speculative reasons. After the smooth merger of Ether, ETC's arithmetic power increased 5 times and now remains at 141.4571 TH/S. DASH had a short increase in arithmetic power in September.
The third option for miners has sparked a huge controversy in the industry. So far, it seems that the Ether hard fork project ETHW is successful. In the early stage, it got support from some miners, users and exchanges. the main ETHW mining pools are 2Miners, F2Pool, Nanopool, HeroMiners, Poolin. the whole network has 209 miners in total, and the network hash rate is 35.11 TH/s. ETH holders also got hard fork candy, and the current circulation of ETHW ETHW has already had early ecological developers and ecological applications are gradually being established, including 3 cross-chain bridge projects, 7 wallet projects, 10 DEX projects, and 5 NFT trading markets, etc. There are a total of 52 ecological projects in ETHW. Whether ETHW is likely to become a competitive public chain in the future, it still needs to rely on improving performance and developing special ecological projects.
9.3 PoS Pledge-as-a-Service opens a new era
The GPU mining market for PoW went down the drain after the successful merger of the main Ethernet network, but it also allowed the opening of another opportunity, namely the Ethernet network pledge. Ethernet PoS network verifiers need to pledge at least 32 ETH to run a verifier node. In November 2020, Ether 2.0 has opened the pledge service and as of October 2022, about 15 million ETH have been pledged in the network, accounting for 12.56% of ETH supply and a total of 455,066 verifiers. verifiers must stay online or the pledged ETH will be forfeited, and based on the current state of the network, the annualized verifier Based on the current state of the network, the annualized yield for verifiers is around 4%.
If one does not have 32 ETH or does not have the hardware to do so, there is still an opportunity to participate in network validation and functional nodes, and there are now three ways to do so: (1) through a node operator, known as an ETH 2.0 pledge service provider; (2) a custodian; and (3) liquidity pledging (LiquidStaking). Even with the node operator's pledge service, you still need to deposit 32 ETH, but you don't have to run the hardware. The operator can act on behalf of your verifier, for which you need to pay a service fee. Centralized exchanges and some wallets offer support for small (less than 32 ETH) pledge services, which can help small pledgers round up to 32 ETH to participate in pledging. The first two methods are similar to escrow services and require assurance that the institution is sufficiently trustworthy.
Since the ETH and proceeds from network pledges are not available for removal today, they need to wait until the next network upgrade. Because of this, the long pledge cycle is a waste of resources for investors, so Liquidity Pledge was born. The Liquidity Pledge Protocol is a smart contract that creates a pledge pool on the ethereum chain. The protocol supports users to pledge less than 32 ETH, while minting 1:1 pledge pool tokens for users as pledge credentials, which can be used in other applications to solve the liquidity problem caused by the long lock-up of ETH pledges.
9.3.1 Liquidity Pledge Track Analysis
Liquidity pledging is a direction worthy of attention: (1) The pledging track is highly competitive. Except for the pledge of ETH 2.0, PoS chains are able to support related pledge services, and the pledge track has a wide range of projects, with more than 40,000 pledge-related providers on each chain. (2) ETH pledge has great potential. Compared with the pledge rate of PoS chain networks such as Cosmos, the pledge ratio of ETH has a lot of room to rise. Also, for the security of the network, officials will support more pledgers to participate. (3) Liquidity pledges have been highlighted as an advantage. Liquidity pledging is a track entirely derived from ETH 2.0 and developed accordingly on other PoS chains. In terms of ETH 2.0 pledge market share, liquidity pledge protocols have taken up a significant proportion, with Lido pledge rate ranking first and other protocols such as Rocket Pool and Stkr (Ankr) rising in market share.
For users, the liquidity pledge agreement has three attractions: (1) it is easy to get started, and you do not need to "gather" 32 ETH to participate in the network to verify the return, so it can be seen as a relatively stable and safe fixed-income product; (2) the pledge tokens can be withdrawn at any time, and the threshold is unlimited; (3) the pledge credentials obtained by users can liberate the liquidity of the pledge in the network, improve capital efficiency, and participate in ecological applications such as DeFi; (4) in addition to gaining the network node, users may also gain the governance rights of the agreement.
Each pledge pool and the programs they use will be slightly different.
The pledge credentials on the Ethernet network are stETH, capable of receiving pledge rewards and transaction fees in ERC-20 tokens. The verifier whitelist is selected by the Lido DAO through governance. The token $LDO holder has the right to govern.
● Rocket Pool
The pledge on the Ethernet network is rETH, which differs from Lido in that the Rocket Pool does not leave the decision of choosing the validator to its token holders. Anyone can become a node operator in the network by creating a "minipool", subject to certain pledge conditions as security.
SSV is seen as the most anticipated liquidity pledge program. The most important feature is the complete decentralization of the protocol, which is known as the king of censorship resistance. Asset security is ensured using Distributed Validator Technology (DVT) technology.
The risk of liquidity pledge agreements has also been highlighted in this year's bear market.
(1) Liquidity pledge agreements provide pledge certificates, which are similar to a kind of futures, representing the principal and return of the user's participation in the pledge, and their prices are also influenced by supply and demand. In this year's bear market, especially when there is a lack of confidence in the expected merger of Ether, the price of stETH is "unanchored".
(2) All DeFi protocols may be at risk of smart contract attacks, and while liquidity pledge protocols all use multi-signature technology, they are still essentially escrowed asset solutions, and that would certainly present an asset security risk.
(3) The mechanism of each liquidity pledge agreement is different, but the pledged tokens will eventually circulate to the verifying nodes. lido chooses a group of whitelisted verifying nodes as pledge parties, but still the risk of node mischief.
(4) Liquidity pledged certificates participate in various DeFi ecosystems, but a situation similar to the depletion of the liquidity pool may occur.
(5) Whether the liquidity pledge protocol, which accounts for the absolute majority of verifiers in the Ethernet network, will pose a threat to the decentralization of the network. The protocol's governance tokens may also have some impact on the ecology.
Liquidity pledge protocols also compete fiercely with each other, and their own development needs can be enhanced in two ways: (1) cooperating with other DApps to give pledge credentials more application scenarios, especially in revenue products; (2) deploying more public chains; and (3) improving the security of the protocol, for example, in terms of validators. The future of the protocol depends on the development of the main chain in the long term, similar to the LUNA crash, which dealt a devastating blow to such liquidity pledge protocols. The rest, such as the value capture capability of tokens and the construction of the on-chain DeFi ecosystem, all have an impact on the protocol. The deflationary expectations of ethereum and the increase of pledge returns make liquidity pledge protocols an opportunity in a bear market.
10. Global Crypto Regulatory Policies
For global crypto regulation, 2022 is destined to be a year of significant milestones.
In August Tornado Cash was sanctioned by the U.S. Treasury Department, and the launch of on-chain regulation triggered profound discussions in the industry. after the FTX incident in November, the regulation of central institutions such as CEX will become stricter, and exchange self-regulation and reserve fund transparency may become the industry standard.
The mainstream cryptocurrency countries, represented by the U.S. and Europe, have put comprehensive regulation of cryptocurrencies on the agenda from the top this year. in March, U.S. President Joe Biden signed the Executive Order on Ensuring Responsible Innovation in Digital Assets, which is the first time the U.S. government enacted overall measures to regulate the crypto market. in October, the EU basically passed the MiCA and TFR bills, and the future EU internal will establish a unified crypto regulatory framework. Compared to 2021, the number of positive regulatory policies will gradually increase and the number of negative ones will significantly decrease in 2022, and the policies introduced will focus more on cryptocurrency trading and stablecoins.
This chapter will analyze and study the global encryption policies of various countries in 2022, and provide an in-depth interpretation of the current situation and trends of global encryption policy development.
10.1 The Global Crypto Regulatory Landscape in General
According to Huobi Research's global crypto policy statistics, more than 42 sovereign countries and regions around the world, excluding mainland China, have adopted 105 regulatory measures and guidance for the crypto industry since 2022.
From a regional perspective, the crypto regulatory measures taken by the US, EU and South Korea are more focused and intensive. The U.S. continues to maintain the largest global focus, with a total of 22 federal and state regulatory policies, mainly containing crypto transactions, crypto regulatory guidance, judicial decisions, stable coins, etc.; the EU generated a total of 9, with regulatory policies mainly in crypto regulatory guidance involving the adoption of MiCA and TFR series of bills, stable coins, anti-money laundering, etc.; South Korea generated 8 related regulations, mainly in judicial decisions, stable coins, crypto regulatory guidance, crypto transactions, etc.
To further analyze the policy orientation of global regulatory authorities on the crypto industry, we classify them into positive, neutral and negative policies based on the type of policies, where positive policies are those that have a positive promotion effect on the crypto industry, neutral policies are those that have a regular regulation on the crypto industry without a favorable or negative effect, and negative policies are those that are prohibited or related to administrative penalties, etc.
According to this division rule, the percentages of positive, neutral, and negative policies in the global crypto industry in 2022 are 36%, 57%, and 7%, respectively, with a large percentage increase in positive regulatory policies and a large percentage decrease in negative regulatory policies in 2022 compared to 23%, 59%, and 18% in 2021. The overall regulatory policies move in a significantly positive direction. In addition, most countries still prefer to regulate and guide the crypto industry on the basis of moderate regulation.
Classified according to the crypto field, including: crypto regulatory guidance, crypto trading, stable coins, DAO, NFT and other 12 directions, among which crypto regulatory guidance, crypto trading and stable coins are classified as the top three of all policies, accounting for about 62% of the total statistics. this indicates that in order to catch up with the development of the crypto industry, most countries or regions are actively promoting the crypto regulatory framework in 2022 The development of the crypto regulatory framework and the regulatory guidance for the corresponding business, as well as the supplementation and improvement for the deficiencies of the crypto trading regulatory policies. In addition, the governments of all countries affected by the Terra collapse have placed a high degree of importance on the regulation of stable coins.
10.2 Global Regulatory Changes
The year 2022 is an important year for global crypto regulation, and countries in Europe and the United States are speeding up the formulation of regulatory frameworks, and the crypto industry will move from a "barbaric era" with an imperfect regulatory system to an "era of legal system" with clear regulation. In the future, the crypto industry will transition from the "barbaric era" with imperfect regulatory system to the "legal era" with clear regulation. This section introduces the crypto regulatory framework and several landmark regulatory cases in Europe and the United States.
10.2.1 Top-level regulatory framework design on the agenda in Europe and the US
The MiCA bill and the TFR bill were initially adopted by the European Parliament on October 10, 2022, and both bills are expected to enter into force in 2024.
The MiCA, once adopted and implemented, will be directly applicable throughout the EU and will go beyond the legislation of individual member states, and the MiCA will grant national authorities additional enforcement powers.
The MiCA primarily establishes a regulatory framework for cryptoassets that are not regulated by existing EU financial laws, such as security-based tokens and central bank digital currencies, which are outside of its scope. MiCA classifies crypto assets into electronic money tokens ('e-money tokens' or 'e-money tokens'), asset reference tokens ('asset tokens'), and asset reference tokens ('asset tokens'), depending on whether they need to be anchored to the value of other assets. EMT), asset-referenced tokens ('ART'), and other classes of crypto assets.
EMT is designed to anchor the value of an official currency by reference only to it, and is an electronic alternative to coins or banknotes, which is simply called "electronic money", for example, we use various means of currency payments on the Internet, such as Alipay payment, WeChat payment, etc.
● ART is intended to anchor its value by reference to any other value or right or combination thereof, including one or more official currencies, and ART covers all other crypto assets backed by assets other than EMT. For example, USDT and USDC, stablecoins backed by US dollars, treasury bonds, etc., and Pax Gold, backed by physical gold assets, are all part of ART.
Other Crypto Assets are all other crypto assets that are not "asset reference tokens" or "e-money tokens" and cover a wide range of crypto assets. Compared to EMTs and ARTs, other classes of crypto assets are relatively lightly regulated, requiring only the submission of a white paper, approval, and compliance with general regulatory rules such as marketing/organizational/technical.
MiCA's daily number of transactions and trading volume for non-euro-backed stablecoins shall not exceed 1 million and 200 million euros. Currently, the three major stablecoins, USDT, USDC and BUSD, account for more than 75% of cryptocurrency trading volume, and their daily number of transactions and trading volume are significantly more than MiCA's regulations. If the EU is bent on pursuing regulatory policies regarding non-euro stablecoins in the future, it may hinder the competitiveness and innovation potential of the EU crypto market.
DeFi and NFT were not included in the MiCA's regulatory scope. The European Commission is piloting an "embedded regulation" scheme for DeFi, and the MiCA text was preceded by rumors that NFT would be subject to the same regulatory scrutiny as cryptocurrencies, possibly due to concerns about undermining the innovation of NFT, which was ultimately not included.
The EU public has mixed feelings about the new anti-money laundering law, the TFR (Transfer of Funds Regulation), with supporters arguing that it will help clarify regulatory boundaries and speed up the regulation of crypto assets, and opponents arguing that the TRF violates the EU charter on privacy and that the collection of personally identifiable data does not necessarily help combat money laundering activities.
The U.S. regulatory framework came later than the EU, releasing its first draft regulatory framework for the cryptocurrency industry on September 16, which follows the executive order on digital assets signed by President Biden in March, with key objectives including adopting consumer protections, maintaining financial stability, preventing the illegal use of cryptocurrencies, maintaining U.S. leadership in global finance, and responsible technological innovation.
10.2.2 CEX regulation tightens, on-chain protocol regulation gradually unfolds
As the crypto market becomes more and more influential, countries such as Europe and the US are accelerating the regulatory framework for crypto assets, but there are many influential regulatory events in this 2022 year when the old and new regulatory regimes are changing. One category is the plunge of centralized institutions represented by FTX, 3AC, etc., which somehow reflects the lack of existing crypto regulatory measures, and the other category is the handling of the Tornado incident by regulators, which marks the gradual opening of regulation for on-chain assets and on-chain activities.
The FTX bankruptcy is the third influential bankruptcy in 2022 after Terra and 3AC. The main issues in the FTX case are the misappropriation of user funds, affiliate transactions with Alameda Research, etc. At the time of the incident, some U.S. regulators spoke that they were investigating or had already started investigating the issues a few months ago. However, the FTX incident has a lot to do with the lack of regulation of crypto assets in various countries. While traditional financial markets have a clear regulatory system for reserve assets and clear requirements for affiliate transactions and investment companies like Alameda Research, most countries currently have either a lack of clarity or a gap in the regulation of crypto markets, for example, the CFTC The CFTC has jurisdiction over crypto derivatives and the SEC has oversight over crypto assets that qualify as securities under its rules, and these two regulators can also oversee investment companies, but there is clearly not enough regulation of FTX and Alameda Research.
Regulation of on-chain protocols is also a key category of events, including: Tornado cash sanctioned by the U.S. Treasury, the CFTC's filing of a lawsuit against Ooki DAO members, the SEC's prosecution of Ripple Labs, and discussions of whether Ether is a security.
In terms of regulatory motives, Tornado cash was sanctioned because it helped illegal cyber organizations or individuals such as the North Korean hacker group to launder large amounts of mixed currency, which does involve issues of national security, financial stability and cyber security, and no country would tolerate such issues in the long run; the CFTC's prosecution of Ooki DAO members, the SEC's prosecution of Ripple Labs The core of the CFTC's prosecution of Ooki DAO members, the SEC's prosecution of Ripple Labs, the discussion of whether Ether is a security, etc. is whether crypto assets should be brought into the existing securities regulatory system and regulated accordingly, and regulators such as the SEC and CFTC seem to want to bring more crypto assets into their regulatory ambit, while the crypto asset side does not want to be tied to existing securities rules, and some are even looking for and exploiting legal loopholes.
From the perspective of regulatory approach, for serious problems such as Tornado cash, U.S. regulators directly take strong measures such as arresting developers, banning U.S. users from accessing Tornado Cash's official website and restricting third-party cooperation platforms; the prosecution of Ooki DAO members is based on economic penalties such as fines, and the SEC's prosecution of Ripple Labs resulted in a lawsuit from December 2020 until this year. The SEC's prosecution of Ripple Labs began in December 2020 and lasted until this year, the Ether merger has been over for some time SEC and other regulatory agencies have not yet taken any action against Ether. Although regulators such as the SEC and CFTC have the power to regulate securities and sometimes even have more power to interpret securities laws, regulators are currently exercising these regulatory powers with relative caution and restraint, and regulators' prosecutions can sometimes be dismissed by courts at all levels.
From the results and impact of the incident, the US Treasury sanctions did seriously affect the number of users of Tornado Cash, but because Tornado Cash is a decentralized application deployed on Ether, it is still running on the network and has not stopped, affected by this incident some DeFi protocols and developers began to worry about their own security and business compliance. ooki DAO Members were fined $250,000, setting a precedent for regulators to penalize DAOs, and if a DAO does something it needs to be held accountable for, then all involved could be held accountable, for the multi-signature process the signers will likely be held accountable, and for on-chain governance the proposers and voters will likely be held accountable. in late September in the SEC's lawsuit against Ripple, the U.S. District Court rejected the SEC's Ripple won a battle from a judicial litigation standpoint when it denied a motion to withhold documents from former senior officer Bill Hinman's 2018 speech on cryptocurrency-related presentations.
In the future, there will be more and more regulation on on-chain protocols, and regulators will likely continue to take strong measures such as sanctions and arrests for illegal acts that endanger national security, financial stability and network security; for cases of whether crypto assets are securities, on the one hand, with the introduction of new regulatory policies and more and more precedents, the boundaries of regulation will become clearer and clearer, and on-chain protocols can do a good job of circumventing them early. On the other hand, if you face any securities lawsuit, you can argue through the securities law and litigation.
10.3 Trends and characteristics of global regulatory policies
In the process of combing through the global crypto asset regulatory policies in 2022, we found some new trends and features of global regulation.
● Feature 1: Regulation of on-chain protocols may become the new normal
As the crypto market continues to expand, the scale of on-chain protocols is becoming increasingly unnoticeable. many on-chain protocols and assets are currently outside of existing regulatory laws in various countries, and some even have a tendency to challenge existing regimes. tornado cash being sanctioned by the US Treasury, Ooki DAO members being sued by the CFTC, and discussions about whether ethereum is a security are just the beginning of regulators' efforts to More regulatory cases will emerge in the future. While the crypto community believes in "Code is law," governments will not tolerate attempts to circumvent their laws for long. Accordingly, in this new regulatory norm, on-chain protocols will present a significant demand for the compliance market.
● Feature 2: Tighter regulation of central institutions such as CEX
In the next year or two, the EU MiCA and TFR regulatory bills will start to be implemented, the US crypto regulatory framework will be gradually improved and legislated, and more countries' crypto regulatory policies will be landed one after another, a clear and unified crypto regulatory system will emerge within each country, and international regulatory cooperation will be strengthened, which will provide the necessary institutional and enforcement basis for regulating crypto assets.
The huge influence and regulatory inadequacy exposed by the FTX incident will prompt national regulators to focus on the risks of CEX and other central institutions, which may continue to be regulated according to the existing securities regulations in the short term, and will be regulated more deeply and carefully according to the new regulatory framework for crypto assets in the medium and long term, for example: previously most CEX reserves were in a state of lack of regulation, and after the FTX incident After the FTX incident, Binance, Huobi, Gate.io, KuCoin, Poloniex and OKX announced the release of the Merkle tree reserve certificate, which is a step forward from the lack of regulation to industry self-regulation of CEX reserve assets. The next step is expected to be more specific and detailed regulation of exchanges as national regulators either follow the trend of requiring exchanges to regularly publish proof of assets or mandating custody of reserves and other measures.
● Feature 3: Increased competition among countries for the development of crypto assets
Singapore is increasingly becoming a global crypto asset hub; in mid-October, Hong Kong's Financial Secretary Paul Chan published an article entitled "Hong Kong's Innovation Development", which mentioned "promoting Hong Kong's development as an international virtual asset hub", and in late October, Hong Kong published a virtual asset policy manifesto; the newly appointed British Prime Minister Rishi Sunak is Rishi Sunak, the newly appointed UK Prime Minister, is a crypto asset enthusiast and has tweeted in the past that he will work to make the UK a global crypto asset hub. There is also the Middle East and North Africa region, which by some accounts will be the fastest growing cryptocurrency market in 2022, with the UAE continuing to attract crypto companies with its aggressive and friendly regulatory policies, and the country's cryptocurrency market growing at least tenfold in 2022.
At a time when global economic growth is generally slowing down, choosing to lay out the crypto industry and competing hard to become a global crypto asset hub is already something that some countries and regions are doing. Competition for crypto assets will lead more countries to adopt a more crypto asset-friendly attitude, which will also encourage more innovation in the crypto industry, which in turn will contribute to its continued growth.
Overall, looking at the global crypto industry policies in 2022, it can be seen that governments are actively establishing and improving the regulatory framework and policies for crypto assets and trying to catch up with the pace of crypto industry development, which will regulate the path of crypto industry development and help drive the crypto industry into the next phase of rapid development.
11. Bear Market Survival Guide11.1 Bear Market Bottom Judgment Indicators
The crypto industry faces all sorts of difficulties in 2022, compounded by the Fed's rate hike. But the more bearish the market, the more there are some great opportunities. Warren Buffett has said, "We welcome market declines because it allows us to pick up more stocks at new, panic-inducingly cheap prices." The same holds true in the crypto industry, where bear markets are a great opportunity for investors, but the question is how to define 'cheap price'.
One way we can determine 'bargain prices' is by referring to market bottom indicators. Capturing the bottom of the market cycle enables us to buy quality projects at the best time.
Here are a few indicators that are informative for determining market bottoms.
(1) The Fed's overnight reverse repo as a basic condition to effectively determine whether funds will flow into the cryptocurrency market
Overnight Reverse Repurchase Agreement (ON RRP) is a tool used by the Federal Reserve to absorb excess market liquidity. An increase in overnight reverse repo means the Fed is absorbing more money, and the opposite is also true. When judging the bottom of the market, we would like to see a continued reduction in the number of Fed overnight reverse repos, as this means that market liquidity is being released, acting like quantitative easing. Because money takes time to flow, the Fed's overnight reverse repo is a leading indicator of market liquidity, which is typically one to two weeks ahead. (Huobi Research's weekly industry report has the Fed's Overnight Reverse Repo indicator, which is valuable for determining the flow of funds and the movement of bitcoin. For more information on how the Fed's overnight reverse repo affects crypto liquidity, see Huobi Research's in-depth research report: Reverse Repurchase Agreements as an Indicator for BTC.
(2) M2 indicators of major central banks
Bitcoin price and total cryptocurrency market cap are proportional to M2The supply of bitcoin is limited and as major central banks issue more money, the market will become more liquid and the currency will depreciate. Raoul Pal, CEO of Globalmacroinvestor.com, believes that this is the main driver of the rise and fall of the cryptocurrency market, not supply: "In the market price of all commodities, I have always believed that demand is more important than Supply is more important. It is the ebb in demand that is causing the outflow of capital and the denominator (BTC/USD) appear."
The following chart reflects the relationship between cryptocurrencies and M2, which shows the explosive trend of M2 leading to the flow of funds into the cryptocurrency market.
When the Federal Reserve and major central banks reveal that they are about to suspend strict economic policies and implement monetary easing, it is the inflection point for M2 to rise, and this turning point is also the end of the bear market cycle. This is the turning point that announces the end of the bear market cycle. By buying quality projects at relatively cheap prices during this period, you will be in a better risk-reward position.
(3) MVRV Ratio
The MVRV ratio is defined as the market capitalization of an asset divided by the realized capitalization. By comparing the two valuation methods, the MVRV ratio can tell us if it is cheap to get a price, which means it is useful for getting to market tops and bottoms. MVRV takes both realized market capitalization and market value into account, making certain values critical when making investment decisions. If the value is above 3.7, it may be a market top and it may make sense to sell the position. If the value is below 1, it may be a market bottom and it may be reasonable to take an incremental long position.
(4) Realized price and cumulative value days (CVDD)
The realized price, provided by Coinmetrics, is an approximation of what the entire market is paying for its bitcoins. In this chart, the liquidity cap is mapped to the price field by dividing it by the total bitcoin supply. CVDD (Cumulative Value Days Destroyed), developed by Willy Woo, has historically reflected the bottom of the market. The CVDD is the ratio of the cumulative sum of such value days destroyed to the age of the market, divided by 6 million as a calibration factor. This model accurately captures the bottom of the market in 2012, 2015, and 2019 as well.
11.2 How to avoid bear traps
In both bull and bear markets, it is absolutely essential for investors to critically assess the sustainability of projects. During a bear market, quality projects will continue to improve and renew. Poor quality projects lack value and practical use and will die out in a short period of time. In addition, user participation decreases, the market is in a stock game, and project hype becomes more and more apparent. Users need to be wary of scams with high returns as a shell, possible hacking and asset security risks.
(1) Be wary of capital markets
During a bear market, users' attention will be focused on high-yield projects, which are less expensive and easier to speculate on than in a bull market. High-yield projects are inherently risky, and project owners will choose to close their projects if they have bad expectations for the market. However, there are some good projects under construction, so as a user, the best way to choose whether or not to participate is after you have fully researched the project. Here is an overview of some of the characteristics of the funding projects that have emerged from the bear market for the reader's reference.
● Project economic inner circle
Most money markets promise high returns, but where the high returns come from is a very important question to consider. The mechanism of the capital plate is very fixed, with four major characteristics: (1) participation in the project requires payment of certain fees, and some of these fees are given to early participants; (2) short revenue cycle, possibly weekly or even daily, stimulating users to recommend and promote the project; (3) tokens less application scenarios, for which there will be the phenomenon of nesting within the project, such as between multiple Tokens and multiple NFT nesting; (4) the project's new features are online for a very short period of time, mostly for imitation discs, without actual on-chain demand. For example, the minting of various NFTs and Token offerings were completed within a month.
● No investment institutions involved
When an investment institution selects a project, it evaluates the project in terms of team, project quality, and market aspects. If a project appears directly on the chain without an investment institution, it is likely because the project is too poor or unable to operate in the long term. The teams of these projects are eager to get the first return of funds to cover the development costs.
● Single community atmosphere
Before participating in a project, you may want to enter the discord community to get a feel of the community atmosphere; FOMO is a feature of the crypto industry, but a community that only talks about revenue without rationally discussing the project building aspect is likely to be a money market.
(2) Risk of coin theft
In the web3 space, hacking is much harder to track and regulate, and according to the statistics, there were 273 hacking incidents with a total loss of over $3 billion as of October. For the average user, we can't read smart contracts, and the risk of hacking from smart contracts is unavoidable, but we can at least choose projects that are audited by organizations like Certik. And the biggest threat for us is phishing attack, hackers will use emails, SMS, fake apps to send us some links, if we accidentally click on these links, we will disclose wallet information and even sign some permissions. So before clicking any link and signing a transaction, look at the source of the link, the address of the transaction and the content of the transaction.
(3) Liquidity risk after deleveraging of centralized institutions
The frequent institutional mines this year, especially the FTX mines, are a serious blow to the crypto industry. We have seen that even well-known institutions are exposed to the risk of bankruptcy. For users, the threat of these centralized institutions' thunderstorms is of two types: (1) bankruptcy of the custodian; and (2) bankruptcy of the centralized exchange.
Ordinary users don't have direct access to the custodian, but the assets we use, such as the cross-chain asset WBTC, some stable coins, are actually the custodian behind the value. If they go bankrupt, these assets will be worthless.
Runaways are also common on centralized exchanges, which are technically custodians as well. The tokens deposited into the exchange are not really under our control. Due to the lack of regulation, it is difficult to hold the exchange legally responsible even if it runs away. To avoid the risks associated with centralized exchanges, users can choose to deposit their funds on the chain or choose a large exchange like Huobi, which regularly has a certificate of funds for customer deposits to ensure no misappropriation of customer funds. We can also keep an eye on the flow of funds from the exchange, paying special attention to the risks associated with large outflows of funds. Try to choose an exchange that has been operating for a long time and has a good reputation, credibility and transparency.
12. Future forecasts for the encryption industry12.1 Bear market shakeout continues, bottom range has emerged
From the point of view of the market, it is now at the bottom of the Crypto cycle, the centralized institutions and the chain DeFiDeFi protocol leverage has been basically cleared, and mainly for the stock of user gaming, and is not completely affected by the macroeconomic impact, unless there is a more serious systemic risk, such as the market changes triggered by regulation, otherwise the downward space is limited. The current mainstream coins such as BTC and ETH have emerged as long-term allocation value, BTC price of about $15,000, or ETH price of about $1000 may be the bottom of this round of bear market, and the bottom may consolidate to 1 quarter of 2023, after which there will be a decent rebound. The reasons are mainly.
At the macroeconomic level, after four consecutive Fed rate hikes of 75bp, the U.S. CPI data has eased significantly and several Fed officials have put out voices to slow down rate hikes, so it is expected to slow down the rate hikes starting in December and stop hiking around March 2023. That means we are already at the stage where the pace of rate hikes is turning, the toughest part of the current hiking cycle has passed, and the bottom of monetary policy is forming.
Crypto market, the outbreak of the FTX incident in November has led to the test of five months of the bottom of the BTC price of $ 18,000 was broken, the price once touched $ 15,500, but we believe that the magnitude and duration of the decline so far this year has basically consumed the speculation and blind optimism in the market, and the FTX incident may have triggered the last drop in the market. The problematic institutions and projects will be cleared out in this round of impact. As the subsequent impact gradually emerges, the market will gradually digest this event and gradually form a bottom in the shock, which is expected to last until the first quarter of 2023, and the subsequent industry self-help and regulatory strengthening will help the bottom of this round of bear market really form.
12.2 Web2 head social running into the field to seize the SocialFi track
On October 28, 2022, Tesla CEO Elon Musk closed a $44 billion deal to buy Twitter. Musk has close ties to the crypto industry; for example, Tesla currently holds $218 million worth of digital assets. In addition, Musk has been publicly supporting Dogecoin and supporting more of its payment applications. twitter has also had some crypto-friendly behavior prior to the acquisition, such as the tip reward feature launched in May 2021 to support bitcoin payments and in January 2022 to support users using NFT as their personal avatar. twitter, if it enters the crypto industry, fills the current SocialFi products with poor user experience and lack of data depth, or become a unicorn in the SocialFi track. And Twitter will not only be satisfied with social, but become Crypto's application platform based on social, allowing more users to walk into the crypto industry and introducing new traffic to Web3.
In addition to Twitter, Reddit and Instagram have also entered the Web3 industry. These head social platforms in the Web2 world are highly competitive and are having a hard time attracting new customers and groups. the Web3 industry is a blue ocean, and in order to capture the market and first opportunity, these head platforms need to build a moat or even create their own meta-universe as soon as possible. We will see these Web2 head platforms bring innovative models in the next year to boost the prosperity of SocialFi and NFT tracks.
12.3 Technology breakthroughs, lower costs, Rollup ecological explosion
Rollup is the right solution for scaling, as merging does not improve the performance of Ethernet. the focus of Rollup upgrade is to improve performance and compatibility while reducing cost.
ZK Rollup has been well received by the community for a long time, but has been slow to gain greater adoption because of the difficulty of EVM compatibility. Optimistic estimates suggest that in 2023, zkEVM will achieve a greater degree of progress. The fastest progress at the moment is zkSync 2.0, which, if developed well, will make zkEVM available for developers to deploy applications and users to use freely between Q4 2022 and 2023. polygon zkEVM will also launch on the mainnet in early 2023 and work towards EVM-equivalence (the ability to directly use Ethernet smart contract code without any changes).
Further, ZK Rollup can't just "work." Both zkSync 2.0 and StarkNet have plans to improve performance and reduce costs, allowing ZK Rollup's strengths to be fully realized. This step will likely be completed between the latter part of next year and 2024, when Bitcoin halves and may be a trigger for the market. In addition, Optimism's BedRock is likely to be completed next year, and OP Rollup will continue to progress.
In addition, the introduction of EIP4844 will greatly reduce Rollup's gas costs. the main cost of Rollup is the cost of calldata, and reducing data availability costs is a key move for Rollup to further reduce costs.
Proto-danksharding (EIP-4844) proposes to introduce a new transaction format "blob-carrying transactions", where Rollup's raw transaction data will be stored in a blob at a much lower cost than calldata. EVM does not access this data, but only needs to verify its availability, i.e., the KZG polynomial commitment to access this data.
EIP-4844 will allow Rollup to scale more easily on a large scale, and at the same time, transaction costs will be significantly reduced. Rollup's fees will be as low as those of other public chains, and the ecological explosion will be imminent. However, its development will take a lot of effort and time, and will not happen overnight. If the development goes well, it may be deployed in the Shanghai upgrade along with the withdrawal function, which is a very optimistic estimate. If the workload is high, it could go live in the latter part of next year or even in 2024.
12.4 ZK accelerates network start-ups and lays the foundation for widespread adoption of ZK technology
Among Rollup technologies, ZK Rollup has more long-term advantages because of the smaller amount of data that needs to be uploaded to the chain and the absence of a 7-day challenge period. With the development of zkEVM, the biggest problem that originally plagued ZK Rollup is about to be overcome. After being able to be compatible with more types of operations, the main contradiction in the development of ZK Rollup is the slow and costly generation of ZKP.
The process of constructing a zero-knowledge proof is more complex. It requires transforming the logic of the program into a mathematical circuit, which includes not only arithmetic operations, but also logical operations such as "with", "or", "not", bit operations, Hash operations, and operations on smart contracts. However, digital circuits only have addition and multiplication gates, and it is definitely not easy to simulate complex programs with such simple tools. Ethernet was not originally designed to be compatible with zero-knowledge proofs, and its opcode opcode is not friendly to zero-knowledge proofs. So even for simple transactions like transferring money, it can currently only reach the speed of generating proofs for 1 transaction per second. With zkEVM, the complexity of the ZKP proof statements will increase significantly. This will lead to even slower proof generation and require the use of specialized hardware to generate proofs in a timely manner.
Currently it seems that the main way to speed up ZKP generation is to customize a high-performance ZK accelerator chip. In addition, it is a good idea to introduce an incentive mechanism to motivate provers to compete for the incentive. It presupposes a more decentralized operation of ZK Rollup, even if it is centralized in the sequencing/execution phase, but must be able to allow multiple teams to all participate in the proof phase. This will result in a ZK accelerated mining industry similar to the Bitcoin mining industry, pushing the development of ZK Rollup to a more mature realm. ZK-accelerated hardware is also likely to follow a "GPU-FPGA-ASIC" development path, but ASIC is obviously not yet available, and it is not clear who will win the first two.
The ZK accelerated network will take a longer time to develop, and optimistic estimates suggest that projects that can meet basic needs are likely to emerge in the next year, but it will be difficult to achieve a large-scale explosion within a year.
12.5 Multi-chain Networks Enable the DApp Chain Explosion
The concept of application chains is not new, Cosmos was envisioned from this at the beginning of its existence to create an ecosystem of universal connectivity. Application chains are independent blockchains for specific applications, which are built with the help of development tools of the main chain and have the advantages of cross-chain and shared security within the ecosystem built by the main chain. Smart Chain can provide the building environment for DApp Chain. However, DApp Chain is limited by other conditions: (1) maintaining its own network security requires greater costs; (2) whether the main chain itself has characteristics matching DApp products, such as performance, user habits, EVM compatibility, etc.
Currently, the DApps that have successfully transformed from on-chain eco-applications to standalone blockchains are DeFi Kingdoms, dYdXdx, and Axis Infinity. the latter two applications belong to Layer2. and about 46% members of the Apecoin community support building ApeChain. this is gradually becoming a major trend in the future, especially GameFi, Metaverse-type projects.
It can be seen from these DApps that they are already applications with certain revenue and user volume before building the chain, and are not too dependent on other eco-applications and can form their own moat, so becoming a DApp Chain can further bring benefits in terms of performance, user experience, and project valuation. In addition, DApp's token value capture capability can be improved, such as participating in network verification pledge, running its own sequencer or verifier to capture MEV, thus reducing transaction fees, etc. DApp Chain is not only beneficial to itself, but also brings vitality to the ecosystem of multi-chain networks. In order to attract more DApp Chains, multi-chain networks also need support in cross-chain, security, and ecological funds.
12.6 Expansion and upgrade at the same time, the storage segment is ready to launch
Even though decentralized storage has not gained much traction this year, they are showing signs of continued progress. The storage segment has seen or is about to see more real demand, more access channels and more advanced features. These advances will drive it to become a critical infrastructure for the Web 3 space.
The first is that storage protocols are storing more real data. filecoin implemented the Filecoin Plus (FIL+) program late last year and real data storage continues to increase. As of this Q3, there are 138 customers using large datasets (100TiB). Among them are Web3 platforms and blockchain projects like OpenSea, Rarible, MakersPlace, MagicEden, Project Galaxy, etc., but also a large number of more traditional customers like UC Berkeley, USC Shoah Foundation, Starling Labs, etc. Arweave has entered into a partnership with Meta, which will use Arweave to store the digital collections of Instagram creators. Storage protocols are taking on more and more real demand that is more stable and expected to continue to increase than the volatility of the crypto market, and can provide a viable ground for storage protocols.
The second is more access. arweave completed its integration with Avalanche and zkSync. this new integration with Arweave (via Bundlr Network) allows users to access the Web3 data store on Arweave and pay a fee using AVAX, ETH or tokens to upload data to the Arweave network. This may trigger other storage protocols to follow suit, and by extending more network access, the storage protocol will penetrate more aspects of Web 3 and strengthen its foundational role.
The third is that more functionality will emerge. The most important upgrade to storage is the ability to overlay a compute layer, which will then enable more functionality beyond the hard drive. Currently FVM is not available for users to use and implement arbitrary logic, Ceramic is still slow to access and the development kit is not complete. Optimistically, the second phase of FVM is expected to be completed between next year and 2024, and after the launch of FVM, there may be some special tools for data storage data and retrieval verticals to help users better manage data and ensure data security. These new projects will bring different technical solutions and learn from and inspire each other. It is reasonable to expect new applications and features to grow on this compute layer based on massive data storage, but of course this will take longer and may still be in a state of storage next year.
12.7 "Embedded" regulation on the chain on the agenda to strengthen
2022 has already seen some cases of on-chain protocol regulation, such as Tornado cash being sanctioned by the US Treasury, Ooki DAO members being sued by the CFTC, and discussions on whether Ether is a security.
The regulation of on-chain protocols is a tricky dilemma in itself, and essentially has to be approached from the perspective of cost and feasibility. Several regulatory cases that emerged this year are cases that are regulated or prosecuted within the existing legal system, such as: the U.S. Securities Act, the Bank Secrecy Act, etc. This makes the cost of regulation, prosecution and enforcement relatively high, and the high cost means that it cannot be applied universally on a large scale, and is only suitable for a few typical cases.
In the next one to two years, with the introduction of national regulatory frameworks for crypto assets and the implementation of regulatory policies, on the one hand, legislation specifically for on-chain protocols may be introduced, such as the DeFi "embedded regulation" program being tested in the EU; on the other hand, on-chain protocols may be required to meet anti-money laundering measures such as KYC and AML. When the cost of regulation, prosecution and enforcement is effectively reduced, the regulation of on-chain protocols will be strengthened.
The on-chain protocols that are most likely to come under the attention of regulators may have the following characteristics: first, they have a high impact on national security or economic security, such as the coin mixing protocol Tornado Cash that helped the North Korean hacker group Lazarus Group launder over $455 million; second, the founders/developers own or control most of the project's assets, and the founders/developers are already real names vulnerable to monitoring, such as the SEC's prosecution of XRP as a security, etc. The regulatory approach may be prevention-based, such as requiring on-chain protocols to all meet anti-money laundering measures such as KYC and AML, so that the true identity of the user can be found first in the event of an illegal case. If an on-chain protocol is judicially sanctioned, it will directly punish the founders/developers/community voting users, etc. on the one hand, and take measures to restrict the users/protocol assets/partners of the protocol on the other.
12.8 More Developing Countries Adopting Cryptocurrencies for Payments or as National Fiat Currency
El Salvador has faced many difficulties and problems in the year following the adoption of BTC as legal tender in September 2021. Despite this, there are still countries that have taken this step one after another, such as the Central African Republic. It is expected that in 2023 there will be countries that will include BTC as legal tender or allow cryptocurrencies to be used for payments, with the expectation that it will be used to alleviate severe inflation in the country on the one hand, and to introduce new industrial ecosystems and promote economic development on the other. However, due to the bear market in 2022 and the spate of industry mines, it is estimated that countries will take a more cautious approach when considering the inclusion of cryptocurrencies in their payment systems.
Except for some developed regions such as California in the United States that have adopted crypto payments out of the application and experimentation of a new technology, most of the other countries under consideration are relatively economically backward countries like El Salvador and the Central African Republic. They are characterized by fragile to near collapse national monetary systems and have previously mostly used foreign fiat currencies such as the US dollar. But the problem with using other countries' currencies is that their economies are affected by the policies of other countries, and these countries have been hit hard during the current rate hike cycle. Therefore, cryptocurrencies that are not influenced by other countries' policies and have relatively fair and transparent issuance mechanisms are the natural choice for such countries. Secondly, the Russia-Ukraine war that broke out this year brought about a trend of global economic division, and Russia was subjected to multiple rounds of sanctions by Western countries. Under such circumstances, the trading of cryptocurrencies such as BTC has increased significantly in Russia, and many users hope to avoid the loss of assets caused by economic sanctions by holding cryptocurrencies. Thus war sanctions could also be a reason for countries to support cryptocurrencies and use them as a means of payment and thus avoid losses. Therefore we believe that more countries may adopt cryptocurrency payments or become national fiat currencies in the next year.
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