Written by: Binance Research
Compiled by: Odaily Planet Daily Nan Zhi
2023 Review
2023 marks the year of recovery for the crypto market, with global crypto market capitalization growing by approximately 109%. This impressive growth is mainly due to the significant progress made in the first quarter and fourth quarter, achieving growth of 48.3% and 54.4% respectively. This is in sharp contrast to the difficult times of 2022, when the market fell by approximately 64%, driven by a series of turbulent events such as the de-anchoring of UST, the bankruptcy of multiple lending institutions, and the FTX thunderstorm.
The key factors for a strong performance in 2023 include a number of major developments. The most critical of these is the optimism brought by the spot Bitcoin ETF and the expectation of the upcoming Bitcoin halving. The strong macroeconomic background (resilience of global GDP growth and slowing inflation) also creates a favorable environment for cryptocurrencies in 2023.
Despite the significant gains, 2023 is not without challenges. In March, chaos in the banking sector affected the crypto market, causing the USDC stablecoin to temporarily become unanchored. In August, traders suffered losses of up to $1 billion due to liquidations amid macroeconomic uncertainty related to the Chinese economy and signs that the Federal Reserve was considering further interest rate hikes. But the crypto market showed resilience, quickly recovering and regaining momentum in the following months.
As we look to the future of the crypto market, the lessons of 2023 highlight the crypto industry’s ability to adapt, innovate, and grow in the face of challenges. A strong recovery in 2023 provides the foundation for more breakthroughs, growth, and possibilities in the crypto space.
Outlook for 2024
Looking ahead, we are pleased with the market’s strong performance over the past year and are looking forward to the following themes.
Bitcoin narrative still at the forefront
Throughout 2023, Bitcoin has been in the spotlight thanks to various narratives, such as Ordinals/BRC-20, the approval of spot Bitcoin ETFs, and the halving in 2024. Ordinals and BRC-20 mark the 0 to 1 innovation in Bitcoin's evolution, introducing the deployment, minting, and transfer of homogeneous tokens on the Bitcoin network for the first time. These tokens have also quickly become Alpha investment targets for Bitcoin ecosystem investors. At the same time, the recently approved spot ETF may introduce a large amount of liquidity to the crypto market and mark the mainstream recognition of Bitcoin as a legitimate asset.
Going into 2024, the momentum is likely to continue. The SEC's final decision is out, and it's likely to be positive. Historically, crypto markets have performed well in the year following the Bitcoin halving event. Therefore, the recent approval of spot ETFs and optimism ahead of the April halving could trigger significant market volatility.
Additionally, since Ordinals and BRC-20 have smaller market caps and meme properties, we may witness more dramatic price fluctuations if Bitcoin rises rapidly under the corresponding events. It is expected that the Ordinals and BRC-20 ecosystems will develop further. Most notably, the launch of more Bitcoin scaling solutions, such as Stacks’ sBTC, will be an interesting development that will help enhance Bitcoin’s functionality.
Ownership economy applications gain further momentum
Blockchain technology enables users to regain sovereignty over resources traditionally controlled by large entities, including personal data, creative content, and computing resources. For example, centralized storage services may require users to give up control of their data, exposing them to the risk of privacy leaks and single points of failure. Various projects are exploring alternative solutions that give users greater control over their assets and information. Two notable areas in this regard are decentralized physical network infrastructure (DePin) and decentralized social media (DeSoc).
Although the concepts of DePin and DeSoc have been around for some time, they only started to gain significant momentum in 2023. This shift can be attributed to maturing infrastructure development, increased awareness, and the growth of the user base in the crypto space. For DeSoc, Friend.tech is the main growth driver in 2023, generating significant revenue comparable to some of the top protocols. Friend.tech demonstrates the potential of decentralized social media, enabling users to monetize their creations without the limitations imposed by a central platform. In 2024, we may see similar apps exploring various forms of social media, including music, video, and written content.
Meanwhile, DePin becomes a hot narrative in late 2023. These protocols are seen as having high growth potential due to their large markets and ability to scale rapidly through bottom-up growth strategies. In 2024, we are likely to witness accelerated adoption of DePin and DeSoc projects, leveraging their potential for growth and market penetration.
Increased integration of artificial intelligence (AI)
Since OpenAI's ChatGPT sparked strong interest in AI applications around the world in 2023, AI x Crypto has become one of the main narratives in recent months, with numerous projects continuing to emerge. We believe that the integration of AI and crypto is a growth area worth paying attention to. Although it is still in its early stages, integrating AI in the crypto ecosystem opens up a range of possibilities regarding potential use cases and provides an alternative to existing solutions.
Projects that have begun integrating AI already offer services such as trading automation, predictive analytics, generative art, data analysis, and DAO operations. Looking ahead, there are many more use cases yet to be discovered.
For example, training AI models requires a large amount of data input, which requires a lot of resources, usually limiting this activity to tech giants. This leads to reduced transparency and closed development. However, by leveraging decentralized storage for data management, we can achieve greater transparency and security. This democratizes the AI model training process and allows for wider participation, which may lead to a surge in innovation and development in this field.
Real World Assets (RWA) Growth
RWA tokenization demonstrates a powerful use case for blockchain technology. By bringing off-chain assets to the blockchain, RWA tokenization provides greater transparency and efficiency, and opens up new areas of possibility in terms of composability and potential use cases.
As we head into 2024, we expect RWAs to benefit from expectations of rising interest rates. Tokenized treasuries remain a bright spot, offering crypto investors an alternative and attractive source of yield. In addition, as institutional adoption of RWAs accelerates, the development of related infrastructure, such as decentralized identity, oracles, and interoperability solutions, is also expected to gain momentum. These elements are critical to building a comprehensive RWA ecosystem.
The on-chain liquidity landscape is booming
Liquidity is crucial to on-chain ecosystems, especially for DeFi. Since the introduction of the AMM model on Uniswap, there has been significant development. This evolution has given rise to multi-layered liquidity models that support a variety of on-chain activities, including token swaps, derivatives trading, and yield management.
As the market gradually gains momentum, the scale of on-chain liquidity and financial activities is expected to increase. Two categories worth paying attention to are liquidity management and request for quote (RFQ) systems. Centralized liquidity market makers (CLMMs) popularized by Uniswap V3 address the problem of capital inefficiency. However, issues such as impermanent loss (IL) and just-in-time liquidity (JIT), which require active position management, remain a problem for less experienced participants. This has led to the emergence of liquidity protocols that utilize various strategies to optimize the positions of CLMM liquidity providers. Currently, the TVL of Uniswap V3 alone has reached $2.4 billion, but the combined value managed by these liquidity management protocols is only $400 million. This gap highlights the growth potential, especially with the upcoming launch of Uniswap V4, which may introduce more advanced liquidity optimization features.
RFQ systems, represented by projects such as Uniswap X, CoW Swap, and 1inch Fusion, facilitate matching between traders and market makers, often using mechanisms such as Dutch auctions to ensure competitive pricing. The advantages of the RFQ model include competitive pricing, MEV protection, zero slippage, and gas-free order processing. As on-chain trading infrastructure continues to advance, the likelihood of adopting this efficient model is likely to increase.
Institutional adoption accelerates
2023 saw the arrival of institutions, and we can expect more institutions to join the crypto space. During the bear market of the past year, prestigious traditional asset management giants such as BlackRock and Fidelity entered the crypto space, proving their confidence in the long-term potential of the industry.
Safety remains paramount
In the crypto industry, security plays a vital role in establishing and maintaining user trust, and according to DeFiLlama, DeFi attacks will cause losses of more than $1 billion in 2023. This is a significant improvement from the amount stolen in 2022, which was approximately $3.28 billion.
Given the importance of security, we expect to see continued focus on this area in 2024. This focus may take various forms, such as product innovation, educational initiatives, and improvements to the user experience.
Account abstraction becomes more important
To attract the next billion users and accelerate blockchain adoption, accessibility and inclusion are crucial. Ideally, users should be able to easily use DApps and conduct any on-chain activity. However, in reality, there is still a lot of room for improvement. For example, most transactions still occur on centralized exchanges. Even at its peak in May 2023, decentralized exchanges will still only account for 20% of total CEX trading volume.
There are several innovations that make us excited about the future. For example, account abstraction facilitates the implementation of smart contract wallets with enhanced usability, with features such as social recovery, significantly improving the overall user experience. Given the fierce competition among wallet providers, we may see rapid growth.
