Written by The Block Research team, the 2024 Digital Assets Outlook report, provides an in-depth analysis of the digital asset market and price performance in 2023, the role of infrastructure providers and regulators, the scale and evolution of blockchain platforms, and the development of on-chain applications.
1. Market performance and activity
Crypto prices have recovered significantly in 2023, with total market capitalization doubling, and this round of price recovery has been affected by macroeconomic factors and the end of deleveraging in the FTX bankruptcy event, with the exception of the end of Q4, investor activity in the crypto space has decreased compared to previous years, with trading volumes and venture capital transactions reaching multi-year lows.
Overall, crypto asset prices have generally performed well this year. Bitcoin is up more than 125% year-to-date, with most other crypto assets above January 1 levels. Solana, in particular, is up nearly 500% year-to-date, rising from less than $10 in early January to $65 in November. Bitcoin's dominance (defined as Bitcoin's market capitalization divided by the total crypto market capitalization) grew from 38.43% at the beginning of the year to an annual peak of 51.13% at the end of October, the highest level in more than two years. Several factors contributed to Bitcoin's rise, starting with the most optimistic crypto narrative of 2023 revolving around spot ETFs that could approve the asset, a saga that continued into the second half of the year.
In terms of the macro environment, 2023 has generally presented a stronger macroeconomic environment than in 2022, despite a higher interest rate environment and heightened geopolitical tensions that have led to various financial market dislocations. First, both short- and long-term interest rates have risen much faster than market expectations, second, the ongoing conflict in Eastern Europe and the newly escalating geopolitical tensions in the Middle East have created additional uncertainty, and third, the U.S. banking sector experienced a brief period of instability in the spring of 2023, highlighting potential vulnerabilities within the financial system and prompting an increase in regulatory focus.
Spot trading volume
Market activity for crypto assets continued to decrease in 2023 due to the bankruptcy of several lending institutions, but as prices rose and investor confidence grew, trading volumes began to increase again. Spot volume saw a month-over-month increase in Q1, January, February, and March, but volumes fell sharply in Q2 and Q3, and volume continued to rise in Q4, reaching a six-month high in November. One of the main reasons for the sluggish trading volume in 2023 was the adjustment of the fee mechanism of Binance, the world's largest cryptocurrency exchange, specifically, Binance ended its zero-fee promotion in March, which drove up trading volume on the platform in 2022, with overall spot trading volume falling by 38% between March and April, while Binance's spot trading volume decreased by 47% over the same period.
Decentralized exchanges have also exploded in 2023, one of the reasons is that after the collapse of FTX, many people's trust in centralized institutions has declined, and in May, the ratio of DEX trading volume to CEX trading volume did peak at more than 21% due to the memecoin mania.
Derivatives trading volume
The derivatives trading trend is broadly similar to that of spot, with total volume in futures contracts peaking in March and hitting lows in September this year, although volume on the futures side has remained consistently above the December 2022 lows. Both May and June saw 4.7 times the volume of futures trading in place. The rate began to decline slightly in the second half of the year, but it is still high compared to the previous two years.
Private Markets
On the private markets side, there was a marked slowdown in both the number of VC deals and the amount of capital raised, with the number of deals raised similar to those raised in 2021, and the annual low of $498 million in August did indeed set the lowest total amount raised since January 2021 in terms of actual company fundraising. However, financing is a lagging indicator because it takes time for a deal to develop and close, and the transaction record is usually recorded from the time the actual transaction takes place, which is not always immediately announced. Funding in November rose 99% month-on-month, hitting a six-month high. Overall, the industry distribution of funds will appear to be more diversified compared to previous years, and investment in crypto projects will still be mainly concentrated in North America.
2. Market infrastructure and regulation
exchange
In the spring of 2023, another important change occurred in the crypto exchange market, with the bankruptcy of several US regional banks that provide a lot of services to the crypto industry, as well as the collapse of several crypto lenders and exchanges in 2022, and the increased scrutiny of US regulators, which led to accusations against several crypto exchanges, with Binance clearly being the focus of regulators' attention.
Binance has faced multiple challenges this year, including regulatory hurdles and executive departures, and the catalyst for Binance's loss of dominance was the decision to terminate zero-fee Bitcoin trading, which was part of Binance's five-year anniversary celebrations, which began in July 2022. Binance's dominance slipped by October, remaining below 40% throughout the fourth quarter of 2023. Binance and its CEO Changpeng Zhao (CZ) were both sued by the U.S. Commodity Futures Trading Commission (CFTC) in March and the U.S. Securities and Exchange Commission (SEC) in early June. The U.S. Department of Justice also opened a criminal investigation into Binance, which ended at the end of November and ended with a $4 billion fine, which is still subject to an ongoing civil lawsuit by the U.S. Securities and Exchange Commission, which is likely to result in additional fines.
Coinbase was much less affected by the SEC case, with a stable market share of around 6%, benefiting from more positive news, including being named as a partner for multiple Bitcoin ETF applicants and the launch of Base, an optimistic rollup product.
Stablecoins and CBDCs
The overall stablecoin supply began to decline after the de-peg of TerraUSD in May 2022, and while the total crypto market capitalization grew from about $830 billion at the beginning of the year to $1.48 trillion in November, the total stablecoin supply fell slightly from about $140 billion at the beginning of the year to $125 billion in November, which may be partly due to the increase in the interest rate environment.
The market share of stablecoins has also changed significantly during 2023, with Tether being the main beneficiary. Since Circle's USDC is mostly traded in DeFi and its user base is likely to be more US-centric, it suffers the most from the negative impact of high yields, in addition, due to the depreciation of BUSD, making Tether's USDT more actively used on exchanges such as Binance.
Affected by high interest rates, the enthusiasm of enterprises to launch stablecoins in 2023 is high, and the most high-profile corporate stablecoin is PayPal's PYUSD launched on August 7, issued by Paxos, and the market capitalization of PYUSD has broken through the top 20 stablecoins, exceeding $150 million.
In 2023, CBDC projects continue to advance: the Bank for International Settlements Innovation Hub (BIS Innovation Hub) and the mBridge project, a collaboration led by a number of central banks, including the Hong Kong Monetary Authority, the Central Bank of the United Arab Emirates, the Digital Currency Institute of the People's Bank of China and the Bank of Thailand, have made great strides in the transformation of wholesale cross-border payments. In addition, China's digital yuan (e-CNY) adoption has surged, the UAE's digital dirham strategy has made significant progress, Brazil's central bank has been aggressively advancing the development of its CBDC, the digital euro project is in the preparation phase, and the Monetary Authority of Singapore MAS has issued a real-time CBDC for wholesale settlement.
At the same time, the stablecoin market has also undergone significant changes due to rising interest rates and increased regulatory scrutiny. Throughout 2023, several established stablecoins have experienced a de-counterfeiting event, eroding their market share, while others have been phased out under regulatory pressure. Tether is the main beneficiary of these changes, with its market share growing in 2023 to levels not seen since 2020, when the market was far less competitive. At the same time, new entrants poured into the market, attracted by the more lucrative business models brought about by rising Treasury yields. Many businesses and central banks have also developed stablecoin and central bank digital currency (CBDC) plans, respectively.
Traditional banks
On the traditional banking side, 2023 has seen several unexpected negative shocks, including brief but sharp turmoil in the U.S. and European banking sectors in the spring, highlighting growing regulatory pressures and institutional reluctance to serve the crypto industry. In addition, the bankruptcy of two traditional cryptocurrency-friendly financial institutions, Signature and Silvergate, has also led to the liquidation of the cryptocurrency industry.
New institutions applying for ETFs
2023 has seen a number of positive signs of institutional adoption of Bitcoin, most notably large asset managers submitting applications for a range of spot Bitcoin ETFs. BlackRock's surprise application in June set off this application spree, marking a shift in mainstream acceptance of Bitcoin. Grayscale's legal victory in August significantly boosted optimism about the approval of the Bitcoin spot ETF, with more than 10 applicants currently awaiting the approval results.
Supervision
Regulatory pressure has increased in 2023, following the collapse of several centralized companies in 2022. The U.S. appears to have taken a tougher stance on the sector compared to other jurisdictions, with some countries, particularly in Asia, seeing the U.S. pullback as an opportunity. However, the pushback from the US regulator was largely limited to enforcement and decrees, without passing any meaningful regulations, and judicial review of the SEC's past actions was interpreted as slightly favorable to the arguments raised by the industry.
3. Blockchain platform and expansion
Ethereum
In 2023, Ethereum dominated all network usage metrics in L1 blockchains, and as of the third quarter of 2023, Ethereum received about 75% of the transaction fees paid by L1 users, totaling about $1.75 billion. As of December 2023, Ethereum's TVL grew by about 19% year-over-year, compared to a combined loss of about 20% for Avalanche, Sui, Cosmos, Canto, Aptos, Fantom, and Near.
In terms of scaling, Mantle became a significant player in the Optimiums space this year, with Mantle launching in July and quickly gaining market attention as TVL's largest off-chain DA L2. Mantle says it will adopt EigenDA as its DA provider once it's available. At the same time, Polygon PoS is undergoing a major transformation and will move from a sidechain to a zkEVM Validium by Q1 2024. Launched in November 2023, Celestia, a modular blockchain, is gaining traction for leveraging erasure coding for efficient DA sampling and creating probabilistic DA proofs. Going forward, companies such as Avail, EigenDA, and Synapse Chain will contribute to an expanding ecosystem of solutions to address DA-related challenges.
The Ethereum protocol currently forms a rollup-centric (rollup-centric) roadmap, specifically danksharding, which is a modest tweaking of the traditional sharding approach and introduces significant simplifications, with danksharding being the key ruleset and format that is indispensable for implementing sharding in the upcoming protocol upgrade in Q1 2024.
Other Layer 1
In 2023, Ethereum's competitors' market share has adjusted, with Tron's TVL increasing by about 100% from the beginning of 2023 to December, and BNB Chain's TVL falling by about 38% over the same period, one of the important reasons for this adjustment is the shift in stablecoin share and the regulatory actions faced by the BNB ecosystem.
As can be seen from the price performance of SOL (Solana) and TIA (Celestia), the market's focus on these two chains, which represent the opposite of the integration versus modularity debate, performed better in 2023, with Solana's market cap growing by about 430% in the first 11 months of 2023 and the TIA token rising by about 167% in the month following its launch in early November.
The Cosmos community has embraced the concept of modularity from the beginning and has native infrastructure and tools such as Inter-Blockchain Communication (IBC) and the Cosmos SDK, but this inherent modularity has come at the cost of distracting users and liquidity between Cosmos chains, so the Cosmos appchain is at a disadvantage in terms of composability and liquidity concentration compared to other generic L1s. On December 1, Osmosis and Canto's combined stablecoin market cap was just $78 million, much lower than Cosmos Hub's combined market cap and even lower than their mid-cap L1 competitors like BNB Chain ($5 billion) or Solana ($1.6 billion). Benefiting from Circle's deployment of native USDC through Noble in September and the launch of the Celestia mainnet on October 31, Osmosis' stablecoin supply soared to a year-to-date high in November, suggesting an impact on the liquidity of a particular chain in anticipation of trading demand.
In 2023, both Polkadot and Avalanche faced challenges, with the total TVL of Polkadot parachains falling from about $561 million to about $335 million on December 1 during the year, due to the stagnant pace of development of Polkadot's XCMP (Cross-Consensus Messaging) protocol. In the Avalanche ecosystem, the number of real-time subnets continues to grow in 2023, but user activity is still low compared to the Avalanche C-chain. Overall inflows into the subnets were also limited, with the two most active subnets, DFK Chain and Beam, totaling about $8.8 million in TVL as of December 1. The Avalanche subnet faced similar challenges to the newly launched Cosmos chain, and network security became a key issue at the beginning of the subnet's inception due to the need to build an economic moat large enough to prevent economic attacks.
One of the most prominent narratives in 2023 is Solana's recovery, both in terms of its valuation and the market's acceptance of its integrated scaling approach. Between the second half of 2022 and 2023, the Solana core team implemented a series of key measures that made the network operate far more reliably than in previous years, and the effectiveness of these measures was verified during several major peak demand periods in 2023, with the Mad Lads NFT minting event in April and the PYTH token offering in late November, both of which saw a significant spike in user transaction volumes, but no significant drop in throughput in terms of transactions per second.
L1s that offer a similar value proposition to Solana – low-cost parallel execution, such as Aptos and Sui, were spun off from Meta's previous Diem project and used the Move VM as the execution environment, and as of December 1, the two chains together attracted about $255 million in TVL, with growth accelerating in the second half of the year. Sui's faster growth rate over the past year relative to Aptos may be related to the incentive program that ran throughout the year.
Layer 2
Among the Layer2s that adopt Optimistic rollups (ORs), the TVL side leads the way with Arbitrum One, and the ARB token airdrop is an event to watch in 2023 with Arbitrum One being a noteworthy event when there are 4 million addresses eligible to apply for the airdrop on Arbitrum One, and the second or second in TVL is OP Mainnet, formerly known as "Optimism", with a market capitalization of more than $3.4 billion.
In the ZKR space, there is currently no clear leader, and while dYdX has occupied the ZKR space of TVL for quite some time, it has already started to make inroads into the Cosmos layer 1 chain, the next two competing ZKRs are zkSync Era, with a TVL market cap of $440 million, and Starknet, with a TVL market cap of $140 million, and while zkSync Era has significantly more TVL than Starknet, a portion of its TVL originally came from zkSync Lite。 Since the two ZKRs are likely to release governance tokens in 2024, they are currently attracting a lot of on-chain activity.
Bitcoin scaling
There is no doubt that the Lightning Network is the most prominent scaling solution for Bitcoin scaling. In addition, it is currently TVL's largest Bitcoin scaling solution. Its TVL has soared from about $85 million in January 2023 to nearly $200 million at the time of writing. However, a more accurate measure of the Lightning Network's growth is a 7.0% increase from 5,000 bitcoins in January 2023 to 5,346 bitcoins in November 2023. This suggests that TVL's growth is primarily driven by the rise in the price of Bitcoin, rather than Bitcoin, which is actually put into the Lightning Network. The increase in the capacity of the Lightning Network can be attributed to the integration with Nostr, a decentralized messaging protocol.
There are a few other Bitcoin scaling solutions, including DeFiChain, Rootstock, and Stacks, but sidechains don't seem to be effectively capturing Bitcoin's scaling needs, with DeFiChain, Rootstock, and Stacks having TVLs of $173 million, $106 million, and $19 million, respectively, lower than the Lightning Network's $200 million. There are few projects in the Bitcoin L2 space, such as the ZK rollup being developed by Alpen Labs, BitVM is the latest upgrade to the Bitcoin blockchain that aims to bring Turing-complete programming expressions to Bitcoin. However, technically, BitVM does not make Bitcoin Turing-complete.
BRC-20s
Bitcoin Ordinals is a satoshis that is assigned a unique identifier and additional metadata, and it takes advantage of SegWit's low transaction fees and Taproot upgrades, a unique identifier and extra data that allows a single satoshis to be used as an NFT. The same framework was later extended to mint fungible tokens, namely BRC-20s. Both BRC-20s and Bitcoin NFTS have been heavily speculated, bringing a lot of on-chain activity to the Bitcoin blockchain, resulting in a surge in the share of Bitcoin miners' revenue from transaction fees.
Although the framework used to deploy Ordinal NFTs and BRC-20 tokens is not technically designed to scale Bitcoin, it does show that innovation is possible on the Bitcoin blockchain. In addition, the rise of Bitcoin Ordinals was an unexpected product in the SegWit and Taproot upgrades. There is a good chance that we will see further innovation on the Bitcoin blockchain, which will be a bit slower than most other blockchains, given the limitations of the Bitcoin scripting language.
Fourth, on-chain applications
Defi
2023 has been a year characterized by consolidation and resilience for DeFi, including DEXs, borrowing markets, and liquid staking, among others.
In terms of TVL, liquid staking is the sector with the highest proportion in the DeFi space. On the other hand, the venture capital environment in the DeFi space continued to deteriorate, reaching its lowest level since the second half of 2020, a downward trend consistent with the broader digital asset market as a whole.
Spot volume in DEXs fluctuated throughout 2023 against the backdrop of a prolonged bear market downturn, followed by signs of a market recovery in Q4, with a $120 billion surge in DEX volume in March, largely attributed to a brief depeg of Circle's USDC over the weekend, in response to concerns about possible contagion from the collapse of Silicon Valley Bank, which holds a portion of Circle's reserves.
Uniswap maintained its leading position in DEX spot trading volume, earning 53% of the transaction share in 2023, with the majority of its transactions coming from Ethereum and Arbitrium One, compared to Curve's share falling from 10% last year to 3.7% this year, a decline that can be attributed to market contraction hindering stablecoin diversification.
The lending space also showed an overall flat trend, with Aave maintaining its dominant position, holding more than 60% of the market share of total outstanding debt, with Compound being the second largest market. In May, Maker's SparkLend entered the lending space, quickly becoming the third-largest lending agreement by total debt outstanding, surpassing the $600 million mark just six months after its launch.
In the collateralized debt position (CDP) stablecoin space, Maker maintained its lead despite a contraction in TVL, reaching a cycle low of $4 billion in October. Outstanding DAI also declined in the middle of the year, only to rebound in August, which is consistent with the rapid adoption of SparkLend mentioned above.
In 2023, the Ethereum liquid staking industry will be a leader in the DeFi space, demonstrating extraordinary resilience, and this outstanding performance can be attributed to two key factors. First, in a bear market characterized by low volatility and waning borrowing interest, the stable yield generated by liquid staking is relatively more attractive than other DeFi activities. Second, the popularity of liquid staking protocols has increased the utility of tokens. Lido maintained its dominance in the Ethereum liquid staking space, with a 78% market share, while Rocket Pool came in second with a 10% share.
Solana's liquid staking space is also on the rise, and it's worth noting that Jito's November TVL surpassed Marinade to firmly take the lead in Solana's liquid staking protocol. This shift highlights the initial success of the Jito Rewards program, which rewards its user base with airdrops.
The real world asset (RWA) tokenization market, excluding fiat-backed stablecoins, has seen an explosion. Notably, 2.8 billion DAI was issued through RWA-collateralized debt positions, representing more than half of the entire 5.4 billion DAI supply. The fees incurred by these RWA positions account for 80% of Maker's disclosed revenue. In addition to Maker's endorsement, the adoption of tokenized securities is also growing, with TVL of tokenized securities holding U.S. Treasuries soaring to $782 million.
Decentralized derivatives trading volume showed signs of growth in 2023, with decentralized perpetual futures trading volume peaking in November, hitting a one-year high, and dYdX's market share declined but still remained number one. At the same time, with the launch of Aevo, decentralized options have gained momentum since the third quarter. Aevo has become a leading decentralized options exchange, significantly outpacing Lyra in terms of trading volume.
The forecast market rally also saw a slight rebound, with Polymarket maintaining its position as the leading prediction market in terms of trading volume, and sports betting market Azuro also making its mark in the space, with monthly trading volumes reaching millions of dollars starting in September.
Against the backdrop of continued growth in transaction volume and usage across all sectors of DeFi, privacy is one of the areas facing significant challenges, especially after the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) imposed sanctions on Tornado Cash in August 2022. In addition, decentralized insurance is also one of the underperforming areas in DeFi, and the decline in demand may be due to a mismatch between supply and demand, or it may be due to overpricing of insurance.
NFT
In 2023, the NFT market underwent a key shift, with the disappearance of the high platform fee model that was once a major source of revenue, driven by emerging platforms like Blur, and OpenSea's annualized revenue of more than $1 billion in early 2022 plummeted to less than $2 million per month by mid-2023, a drop of nearly 90%.
In 2023, there have also been significant changes to the NFT creator royalty model, with creators now earning 98% less royalty revenue compared to their peak in early 2022. The trend of platforms such as Blur and Sudoswap to reduce or eliminate royalties has sparked heated debate, and while these initiatives aim to maximize liquidity and trading volume, on the other hand, there have been calls to uphold the spirit of NFTs supporting creators and ensuring that creators are fairly compensated for their work.
NFT market share has also changed this year, with volume dominance reaching an all-time high of 80% following the Blur token airdrop in February, while OpenSea's volume market share dropped to less than 15%. OpenSea primarily appeals to retail traders, while new platforms like Blur appeal to a subset of professional traders. On Blur, the top 1% of traders account for about 68% of the platform's trading volume, while on OpenSea, the top 1% of traders contribute only 24% of the platform's trading volume. The ongoing trend of market segmentation in 2024 is likely to add to the impact.
In addition, in 2023, NFT will emerge as it evolves towards financialization, in which NFT lending platforms cater to more risk-averse high-frequency traders mainly by introducing new forms of leverage, with cumulative loan amounts rising to more than $3.3 billion, with lending models including peer-to-peer (P2P), permanent peer-to-peer, and peer-to-pool (P2Pool) systems. Blur's lending platform, Blend, stood out among its peers as the dominant platform, with a record weekly loan volume of $197 million in Q2 2023.
Ordinals
An integral part of Bitcoin's architecture, Ordinals are unique identifiers for every transaction and play a key role in verifying the authenticity, ownership, and uniqueness of digital assets, including NFTs and BRC-20 tokens. Through about 10 months of Ordinals development, Bitcoin developers have built NFT tools that are comparable to other L1 blockchains, such as Ethereum, Polygon, and Solana. Multiple inscription types are supported, including images, text, apps, and audio, the most notable of which is the BRC-20 token standard, the rise of which has dramatically changed the inscription landscape, accounting for more than 95% of new inscriptions as of the time of this report.
Throughout 2023, the Bitcoin ecosystem has undergone a major transformation due to the growing popularity of inscriptions. Since the beginning of the year, miners have accumulated more than $530 million in total fees, of which $90 million has come from Ordinal-related activities. These inscriptions lead to increased fees and congestion in the Bitcoin mempool, as the total size of transactions (in bytes) waiting for confirmation is at its highest level. Currently, inscription-related transactions account for 49% of the Bitcoin network's daily transactions. Although this dominance has since declined slightly from levels seen earlier this year, it highlights the impact of Ordinals on Bitcoin's block space economy, especially as the block reward continues to dwindle, and this change in the transaction landscape has forced miners to adjust their strategies in response to changes in block reward and transaction fee dynamics.
Decentralized social
Decentralization was all the rage when it launched on Coinbase's new Optimistic Rollup solution, Base, in August friend.tech, and less than three months after its launch, it has captured the community's attention, with more than 900,000 unique users on the platform and $475 million in trading volume.
friend.tech's success has inspired forked applications on other blockchains like Solana, Avalanche, and BNB Smart Chain, but none have come close to its success. Stars Arena on Avalanche did show promise, but then on October 5 a vulnerability appeared that resulted in a $3 million loss to the protocol.
Social protocol Farcaster transitioned to a permissionless model since migrating from the Ethereum mainnet to Optimism on October 11, coupled with a $5 per year username renewal fee to develop a high-quality, community-oriented user base, and after the migration, Farcaster user engagement grew significantly, with daily sign-ups doubling and new users contributing about 30% of network activity. In contrast, Lens Protocol, which runs on the Polygon blockchain, offers a wealth of features for creators, but currently has low engagement levels of interaction. At present, there are still obstacles to the development of decentralized social networks, including storage and the lack of a complete content discovery and algorithmic localization model in a fully on-chain environment.