Focus on the Cryptocurrency Market: A Review and Outlook for 2022-2023

06/02/2023·1years ago

In the first half of 2022, a total of $27.4 billion in financing was conducted, with only a slight decrease in DeFi investment frequency (from 348 transactions in 2021 to 226 transactions in the first half of 2022); however, investment amount decreased by over 70% in the second half of the year. As we enter 2023, will there be a turning point in investment trends, or will the market continue to be in a bear market or rebound from the bottom? This article from veDAO Research Institute will review the important events in the cryptocurrency field in 2022 and provide an outlook for the cryptocurrency market in 2023.

2022, the Darkest Moment in the Cryptocurrency Market

In 2022, the cryptocurrency market experienced a long winter starting with the collapse of Luna/UST, brought about by macroeconomic pressures from central bank interest rate hikes around the world and a series of war-related events, severely impacting the cryptocurrency market. At the beginning of 2022, the market value of the cryptocurrency ecosystem reached nearly $3 trillion, but by the end of the year, it had evaporated by $2 trillion. Against the backdrop of the Federal Reserve's aggressive interest rate hikes, the collapse of FTX and Three Arrows Capital led to a continuous decline in cryptocurrency prices. Starting from mid to late June last year, the price of Bitcoin continued to decline, hovering around $16,000 until December. Although there has been some recovery this year (BTC price broke through $21,000 on January 14), compared to the high point in November 2021, Bitcoin is still at the bottom of the bear market.

In addition to the bad news brought by the winter, the cryptocurrency field in 2022 still saw hope: the successful merger of Ethereum, completing the first step in solving the "scalability dilemma" of blockchain; projects like Otherside and StepN sparked a frenzy; and the collapse events once again made the industry begin to recognize and attach importance to compliance and healthy development.

According to inflation data released by the U.S. Department of Labor on the 12th, the U.S. Consumer Price Index (CPI) fell by 0.1% in December 2022, with a year-on-year increase of 6.5%, indicating a continued improvement in the inflation situation. Boosted by the optimistic sentiment that the Federal Reserve may slow down its anti-inflation interest rate hikes, the stock and cryptocurrency markets reacted quickly, with Bitcoin leading the way. In the macro background of a tense financial environment, the correlation between cryptocurrencies and the stock market has become increasingly high, making the release of key CPI data in the United States a crucial factor in the trends of these two asset classes. If the Federal Reserve abandons its goal of curbing inflation, digital currencies are expected to return to a bull market.

Summary and Review of the 2022 Cryptocurrency Market

veDAO Research Institute has selected 10 contents that can highlight the major changes in the cryptocurrency field in 2022, summarizing the cryptocurrency world in 2022 through these 10 different points.

Market Performance: The top 10 cryptocurrencies by market value (BTC, ETH, BNB, XRP, DOGE, ADA, MATIC, DOT, OKB, and LTC) all experienced a decline of over 81%;
Mining: Due to the decline in Bitcoin prices, more and more miners are facing financial difficulties;
Investment Trends: The number of financing transactions increased by 18% year-on-year, with NFT and blockchain gaming attracting the most financing, reaching $8.3 billion. However, there was an overall slowing trend;
Employment in the Cryptocurrency Industry: The number of employees increased from 18,200 in 2019 to 82,248, an increase of over 351%. However, the number of layoffs also peaked at 9,564. Crypto.com had the most layoffs, followed by Coinbase, Kraken, and Bybit;
Layer1: 2022 saw the emergence of application-centric blockchains, such as Cosmos, Avalanche subnets, etc.;
Layer2: Optimistic Rollup currently dominates the Ethereum-based Rollup, but its sustainability remains to be seen;
DeFi: The total locked value decreased from $166 billion to $42.1 billion, a decrease of 74.6%;
NFT: The impact of NFT continued to spread, with intense competition in creator royalties, expansion of Yuga Labs, IP wars, etc.;
Web3 Games: Encountered problems with user retention and token price collapse, but also underwent attempts at brand reshaping, from Play to Earn to Play to Own. In 2023, Web3 games will focus more on platforms, wallets, and on-chain games;
Metaverse: Striving to find market fit in 2022, and will continue to do so in 2023.

Ethereum Shanghai Upgrade

In a previous article, veDAO Research Institute provided a detailed explanation of the Shanghai upgrade. Here is a summary of the key points of the Shanghai upgrade:

Unlocked the staking withdrawal function of Ethereum; reduced the gas fees for Layer-2 solutions running on the Ethereum blockchain; the Shanghai upgrade will introduce EOF to achieve the advantages of code and data separation, making it easy to introduce various changes to maintain Ethereum's leading position in the field. Although the future trend of ETH after the Shanghai upgrade is not clear, based on the activated EIP, this upgrade should have a positive impact on the recovery of the cryptocurrency market.

Expansion of Layer 2 Ecosystem

Layer 1 aims to ensure decentralization and security, making the underlying chain absolutely reliable and trustworthy, achieving global consensus, and transmitting trust to Layer 2 through economic incentives; while the purpose of Layer 2 is to improve efficiency, reduce costs, and meet the business needs of various scenarios.

After years of iterative updates, Layer 2 scaling solutions aim to achieve scalability, alleviate congestion and high gas fees on the Ethereum network, and have become the mainstream technical solution for scaling blockchain technology. The technical innovation and rapid development of Layer 2 are also driving the development of the DeFi market, NFT, and more. Despite the cryptocurrency market's winter in 2022, many projects are still focusing on Layer 2. In the new year, the cryptocurrency world's demand for scaling and various applications remains unchanged, so the expansion of the Layer 2 ecosystem will continue to be a hot track, with a focus on better addressing issues such as low composability and liquidity, and advancing the development of cross-L2 bridge networks. In improving network throughput, reducing developer workload, and transaction efficiency, the importance of Layer 2 is self-evident.

Decentralized Stablecoins

Regulation was also an important topic in the cryptocurrency world in 2022, and as more and more Web3 institutions or protocols actively or passively follow OFAC's regulatory policies, the importance of stablecoins has begun to re-emerge. Decentralized stablecoins with resistance to censorship, permissionless, and decentralization are crucial. However, the collapse of Luna/UST in 2022 has once again raised doubts about the feasibility of decentralized stablecoins.

But this is also an opportunity, as the risks faced by centralized stablecoins become more apparent, the adoption of decentralized stablecoins will gradually increase. However, due to the high barriers to entry in the cryptocurrency world and the influx of new investors, the paradigm shift from centralized to decentralized stablecoins will occur imperceptibly, rather than rapidly. In 2023, we may be fortunate to see new and impressive projects in this track, which will also drive the steady expansion of the stablecoin market to a trillion-dollar market value.

Omnichain

In 2022, the emergence of the interoperability protocol LayerZero made the concept of Omnichain hot. LayerZero, as a message transmission layer, aims to allow smart contracts to easily communicate between many blockchains, or more precisely, any blockchain. At the same time, Omnichain is hot because it has the potential to bring NFT and related projects to the entire chain and exist in a more extensive manner, which may indeed prove to be a key catalyst for bringing NFT activities to other chains.

In blockchain, if each blockchain is treated as an independent ledger and there is no interconnection between different ledgers, the data and user assets on each chain are relatively independent, which greatly limits the development potential of blockchain. Only by achieving interoperability between different blockchains can data and assets circulate comprehensively. Omnichain is precisely through solving the interoperability between blockchains, making it more likely to create super applications, and will also be a focus of the cryptocurrency world in 2023.

NFT+DeFi

The essence of NFT-Fi (NFT+DeFi) is to solve the problem of insufficient liquidity for NFTs, with many projects exploring pricing valuation, trading, BNPL, lending, derivatives, fractionalization, and leasing. From the analysis of various sub-tracks of NFT-Fi, the development of various NFT-Fi projects is highly dependent on the pricing valuation of NFTs, which can be called the cornerstone of NFT-Fi, but NFT pricing valuation is still in its early stages, affecting the development of the entire industry.

In the first half of 2022, the wave of BAYC and MAYC purchases sparked by Yuga Labs' airdrop made NFT lending protocols a leverage tool for some players, and then at the end of December, when Ape Staking's staking function went live, multiple lending protocols launched pairing functions and staking yield pools, once again attracting many users to participate. In 2022, NFT lending saw the most new competitors in the NFT-Fi sub-track, with a rich variety of products such as fractionalization, futures, options, and relatively mature products.

The impact of NFT continued to spread in 2022, and in the new year, the NFT+DeFi track will see more attempts, and it is worth continuing to pay attention to which method will ultimately become the next wave.

Web3 Digital Identity

Decentralized Identity (DID) is the hub of Web3 and a bottleneck for the development of the application layer. DID is still in the early exploration stage, with various forms, which can be divided into off-chain identity authentication, on-chain identity aggregation, on-chain credit rating, and on-chain behavior authentication. Currently, interactions in Web3 are based on wallet addresses, but the cost of creating a new address is almost negligible, and few people will bind themselves to an address. This means that users can abandon a Web3 digital "identity" represented by an address at any time, and can create a large number of address "identities" at zero cost, leading to a series of problems.

In response to this phenomenon, Vitalik and his partners published an article called "Decentralized Society: Finding Web3’s Soul" in May 2022, in which they argued that Web3 currently has significant limitations at the application layer, stemming from the lack of native components representing "human identity and social relationships" in Web3. This has led to many applications relying on the centralized Web2 architecture they originally sought to surpass when implementing key functions, thereby replicating the limitations of the latter and failing to achieve a closed-loop Web3. They also proposed "soulbound" tokens (SBTs) to address the issue of true Web3 identity.

In 2022, Web3 digital identity was also a hot topic, but due to its early stage, the performance of this track was not ideal; however, the importance of DID means that this track will still be one of the hotspots in 2023.

Modular Blockchain

Looking back at the first decade of the blockchain industry, there was only a single type of blockchain: experiments such as early plasma, multi-chain, and sharding attempted to break this situation, but it was not until the emergence of rollups, validiums, and data availability chains that the end of the era of a single blockchain was foretold. The concept of modularity originated from the Layer 1 blockchain Celestia, sparked attention from Delphi Digital's research report, and is gradually becoming more widely known.

The difference between modular blockchain and monolithic blockchain lies mainly in the fact that a monolithic blockchain implements execution, settlement, consensus, and data availability in the same network at the same functional layer, while a modular blockchain separates these functions into multiple modules. Let's take a look at the 4 core functional layers that make up a blockchain:

Execution layer: Nodes execute user transactions through the execution layer.

Settlement layer: Used to verify the execution results of rollups and resolve disputes, updating the global state.

Consensus layer: Reaches consensus on the validity of state transitions, providing ordering and final determinism.

Data availability: Used to store and guarantee transaction data.

A monolithic blockchain implements all 4 of these functions on the same network, and given that its entire transaction lifecycle is processed on the same network, it is highly unscalable. Scalability refers to the ability of a blockchain to process an increasing volume of transactions while maintaining low verification resource requirements: a blockchain's ability to process a growing volume of transactions while maintaining low verification resource requirements.

A modular blockchain proposes the separation of the execution layer, settlement layer, and data availability layer. The modular blockchain stack will consist of multiple layers and will depend on each other to create a system that includes all of the above components. Because a modular blockchain does not process transactions on the same layer, it allows the blockchain to scale computing while maintaining the network's trustless and decentralized characteristics by breaking the correlation between throughput and verification costs, while maintaining the network's trustless and decentralized characteristics.

In short, if a chain encompasses all 4 of these functions, it is a monolithic blockchain. The problems faced by monolithic blockchains are also the problems faced by current L1s: transactions, settlements, and block production are all queued. Modular blockchain addresses the question of "how to achieve scalability while ensuring decentralization and security," a question that has attracted countless people since the birth of blockchain. Therefore, modularity is becoming one of the industry's most cutting-edge trends, and its impact in the future will become even more apparent.

2022 has passed, but the cryptocurrency market's winter has not yet come to an end, although perhaps spring is quietly approaching. Despite being in a bear market cycle, we still see tremendous development prospects for the Web3 industry: 2023 will be a year full of changes and will lay the foundation for the next bull market cycle. In 2023, we may see the beginning of a new uptrend; liquidity conditions may undergo significant changes, and the US dollar may weaken. With improved liquidity, the cryptocurrency industry will enter a benign development cycle, bringing positive foundations for the future.

In the new year, the cryptocurrency world still faces more challenges and more opportunities. Let us focus on the future and embrace a better Web3.

veDAO is a decentralized investment and financing platform led by DAO, committed to discovering the most valuable information in the industry, and enthusiastic about exploring the underlying logic and cutting-edge tracks of the digital encryption field, allowing every role within the organization to fulfill its responsibilities and receive rewards.

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