2023 Global Blockchain Industry Panorama and Trends

The Crypto Regional Development Index was established based on four dimensions: the proportion of the crypto population, CEX traffic, DeFi traffic, and online search popularity, with the United States, Vietnam, and Russia ranking in the top three. In 2022, there were approximately 320 million global crypto users, over 40% of whom were from Asia, with new user growth dropping from 194 million in 2021 to 25 million.

The highest traffic to CEX exchanges came from the United States, South Korea, and Russia, accounting for over 22% of the total. The U.S. holds the largest market share in the DeFi sector, with DeFi protocol traffic being six times that of Brazil, the second-largest. South America, South Africa, and the Middle East showed the highest interest in the crypto industry. The crypto population in Southeast Asia reached 46 million, second only to North America. In South America and Africa, cryptocurrency applications mainly focus on payments and value storage, with over one-third of the population using stablecoins daily. The infrastructure sector continues to focus on performance optimization, with service facilities becoming more complete.

Ethereum Layer 2 projects are flourishing. New public chains have rapidly developed based on a "modular" technology route. The technology development in the storage sector has diversified, with storage capacity and utilization steadily increasing. Domain names, as the infrastructure for application layers and DIDs, have also seen explosive growth. There are numerous cross-chain bridges, but there is still room for improvement in security and interoperability. In mining, Bitcoin mining faces challenges, while Ethereum is about to enter a new era of staking as a service. In terms of applications, the total TVL across various DeFi chains has decreased by over 70% from historical highs, with leverage clearing and yield rates declining.

The NFT market started strong but has since declined, with total market capitalization dropping by about 42% and the number of active trading users decreasing by approximately 88.9%. NFTfi projects have emerged as the next growth point. GameFi and the Metaverse have shown promising performances but are underdeveloped. In terms of regulatory policies, over 42 sovereign countries and regions globally have implemented 105 regulatory measures and guidelines for the crypto industry this year. Positive policies account for 36%, a significant increase from last year. Comprehensive regulatory frameworks for the industry are on the agenda, with stricter CEX regulations and potential inclusion of on-chain regulation. The bear market continues, and we propose four valuable market bottom indicators, providing suggestions to avoid bear market traps and protect assets.

Finally, we predict some directions for industry development in 2023:

Market bottom formation in early 2023;
Major Web2 social platforms like Twitter will continue to integrate into Web3, bringing new SocialFi development models;
Layer 2 will see an ecological explosion in 2023;
ZK acceleration networks will begin to take off;
DappChain will enter a rapid development phase;
Real demand for on-chain storage will grow rapidly, leading to substantial development in the storage sector;
On-chain regulation will strengthen, and some protocols may face threats;
Cryptocurrencies will be used for payments or authorized as legal tender by more countries.

Due to BTC not meeting the prerequisite for the 200-week indicator before 2014, this indicator began from mid-2014. Historical data shows that the two breaches of the indicator in 2015, the touch of the indicator in 2019, and the breach during "312" in 2020 mostly resulted in short-term touches or rebounds after adjustments. However, currently, BTC prices have been oscillating at the lower end of the indicator since breaching it in June this year and falling back after a breakthrough in August. According to the indicator, BTC has historically breached and oscillated below for the first time, marking the current market as an unprecedented deep bear.

1.2.2 Application: Development and Innovation Amidst the Slump According to DeFillama data, DeFi Total TVL fell from 171 billion USD in January 2022 to a low of 50 billion USD in October 2022. As of the end of October, it was approximately 55 billion USD. Following a series of collapses like Terra, DeFi's TVL experienced two cliff-like declines, confirming the market's entry into a bear phase.

The data below shows the value of unpaid debts in lending protocols, currently around 4 billion USD. Compared to last year's peak of 25 billion USD, this represents an 84% decline. The decrease in on-chain user demand for leverage has led to reduced trading activity, which is a clear characteristic of this bear market.

Currently, the ETH chain remains the main battlefield for DeFi. With the bull market starting in the second half of 2020, explosive growth in protocols, rising coin prices and yields attracted a large influx of funds, increasing liquidity. However, with the market downturn in 2022, both coin prices and yields have declined. Liquidity has been withdrawn, and a significant outflow of funds has accelerated the downward sentiment. Currently, the stablecoin deposit rates of mainstream lending protocols are even lower than U.S. Treasury bonds. Recently, many protocols have suffered from hacker attacks, and incidents like Terra have emerged, causing risk-averse funds to be withdrawn. In this market, the development of Layer 2 public chains has been further promoted, allowing the DeFi ecosystem to develop a second time on Layer 2. The speed of scaling solutions is faster, and costs are lower for ordinary users, making it more attractive for small fund users to participate in DeFi. This is also a good opportunity for Layer 2 development. By observing the TVL data on Layer 2 chains, we found that in April 2022, Layer 2's on-chain TVL reached a peak of 7.5 billion USD, then fell to 3.7 billion USD in July. Unlike other ecosystems, the Layer 2 ecosystem has been on the rise since hitting bottom in July, currently around 5.32 billion USD. This is thanks to the gradual maturity of Layer 2 technology, the issuance of tokens, and the landing of numerous applications, with most Layer 2 chain development teams actively launching incentives, such as pre-airdrop reward activities and token issuance. With the development and progress of Layer 2 scaling solutions, more gameplay and ecological projects will inevitably emerge on-chain in the future.

As the market's heat fades, NFT trading volume has also shown a sluggish posture. The super high volume that appeared in May was due to the issuance of otherdeedforotherside (also known as monkey land), which generated FOMO sentiment at the time. Meanwhile, the total market capitalization of NFTs has dropped by about half. The pricing of NFTs is mainly based on the currency, and the volatility of ETH is significant, making the total market value of NFTs inevitably decline. The market value of NFTs has fallen from about 35 billion USD to 21 billion USD, a decline of about 40%. The decline in the total market value of NFTs has not been as severe as that of ETH due to the continuous release of new assets, consistently supplying NFTs to the market, which also attracts non-NFT users to join NFTs.

Despite the sluggish NFT market, the growth rate of wallets holding NFTs has not slowed down, with approximately 80,000 new wallets added weekly, as shown below. The continuous increase in market users and new products, while the total market value of NFTs slowly declines (as shown above), is a phenomenon of the NFT market eliminating bubbles. NFT prices are trending towards rationality, and more users holding NFTs is a sign of healthy market development.

The secondary market for cryptocurrencies continues to be sluggish, and the primary market is also struggling. According to incomplete statistics from Odaily Planet Daily, the total disclosed financing amount in the global cryptocurrency market in the third quarter of 2022 was 5.841 billion USD, with a total of 442 financing events (excluding fund raising and mergers), concentrated in infrastructure (20 events), technology service providers (50 events), financial service providers (49 events), applications (246 events), and other service providers (77 events). Among them, the application track received the most financing, amounting to 2.605 billion USD. Compared to the first and second quarters of 2022, the total financing amount and the total number of financing events in the third quarter showed a significant decline: according to publicly reported information from Odaily and PANews, there were a total of 511 financing events in the global cryptocurrency market in the second quarter of 2022 (excluding fund raising and mergers), with a disclosed total amount of 12.71 billion USD. In all financing events, the number of transactions exceeding 100 million USD reached 28. In Q1 of this year, there were 461 financing events in the global cryptocurrency market, with a disclosed total amount of 9.2 billion USD.

In Q2, the areas of greatest interest for global cryptocurrency investment institutions were GameFi and NFTs. The gaming and gaming-related infrastructure and technology solutions received a total of 82 financing events, ranking first in number, accounting for 16% of the total financing. The financing amount in the GameFi sector was also far ahead, reaching 2.996 billion USD, accounting for 23.5% of the total financing in the industry.

The trend of capital favoring GameFi continued in Q3. The financing amount in the GameFi sector was 963 million USD, accounting for 16.4% of the total financing amount, with 15% (67 events) of the 442 financing events. This includes chain game developers, chain game guilds, and X2E chain game projects.

In Q3, L1 projects also performed well in financing. Although the L1 track had only 13 financing events, accounting for 3% of the total financing events, its total financing amount reached 625 million USD, making it the sub-track with the highest financing amount after GameFi. Notably, the two major public chains of the Move language, Sui and Aptos, claimed to inherit the Move development language of Libra and focus on improving L1's security and scalability while significantly enhancing network performance. High valuation financing has attracted the attention of the entire market. Under the star effect of new public chains, new projects have emerged one after another.

Due to the prolonged bear market, many institutions have not successfully weathered the storm, and some have disbanded or gone bankrupt due to the impact of collapse events. Most cryptocurrency investment institutions have shifted their style since the bull market, strengthening the screening of investment projects. Although in this environment, excellent projects are also difficult to overshadow. The key areas of focus for institutions can be divided into two major categories: infrastructure and applications. Overall, there is a greater focus on infrastructure projects. According to publicly released research results from Huobi Research, the frequency of mentions of infrastructure is the highest, with two main lines being ZK and new public chains, while areas like middleware, data, oracles, and DIDs also clearly have infrastructure components. In terms of application projects, DeFi, GameFi, and social applications rank in the top three. Although DeFi has been quiet for a while, it remains the direction most favored by institutions.

-2. Analysis of the Crypto Market by Region#

2.1 Regional Market Traffic Analysis After 14 years of development, crypto assets represented by BTC have influenced and spread to various regions globally, rapidly developing from point to area. To assess the development level of the crypto market in different regions worldwide, we will analyze and judge the penetration and development speed of crypto asset businesses in each region from the following four dimensions:

Total number of crypto users and penetration rate: The penetration rate of crypto users refers to the ratio of the number of crypto users in a country to the total population of that country, which intuitively reflects the adoption of the crypto market in a country;
CEX traffic: Centralized exchanges are an important component of the cryptocurrency market. These exchanges are usually easy to use, and many crypto newcomers start exploring the crypto world through them. Most users and liquidity in the crypto market are concentrated in centralized exchanges. We selected the top 100 CEXs in the market based on their active users, depth, trading volume, and reliability;
DeFi traffic: DeFi has become one of the fastest-growing areas in the crypto market in the past two years. With the emergence of models like AMM and liquidity mining, DeFi has quickly attracted a large amount of capital from the market, and many industry veterans and practitioners have actively participated in DeFi applications. Analyzing DeFi protocols can help us accurately analyze the distribution of global crypto veterans. We selected nearly 300 mainstream DeFi projects on different public chains based on DeFi protocol TVL, trading volume, daily active users, etc.;
Keyword popularity: Online popularity can reflect the public's interest in the crypto market from a more macro perspective.

From 2018 to 2020, the global cryptocurrency market was in its early development stage, with slow user growth; after 2020, the flourishing ecosystem attracted many crypto-native users, leading to explosive growth. The growth rate and absolute growth value in 2021 were the highest in recent years. This may be due to many financial institutions and traditional traders entering the market, coupled with the popularity of NFTs, which ignited enthusiasm for the crypto market. Entering 2022, the global macro economy was on the brink of recession, but the declining crypto market showed surprising resilience. Data shows that the number of crypto users worldwide continued to grow. As of November 2022, the total number of crypto users globally was approximately 320 million, with a penetration rate of about 4.3%. Among them, the Asia region accounted for the largest share of crypto market users, approximately 40%.

The data obtained shows that the overall market size of centralized exchanges in 2022 has significantly decreased compared to 2021. Specifically, the total market capitalization of crypto assets has decreased by about 66% over the past year, spot trading volume has decreased by about 27%, and the number of unique visitors has decreased by 24%. From this data, it is evident that the monthly visit volume of crypto users to centralized exchanges is continuously decreasing, both on the web and mobile. This is related to the gradual transition of the crypto market into a deep bear market. The continuous decline in market conditions and the shrinking of assets have led to a decrease in trading interest among existing crypto users.

The chart shows the relationship between the monthly visit traffic of major CEXs over the past year and the total market capitalization of cryptocurrencies. The correlation coefficient between the two is 90.8%, indicating a strong positive correlation. However, two points are worth noting.

First, there was a slight divergence between the two in May 2022. This may be due to black swan events like the LUNA collapse, where a large number of users needed to sell or bottom-fish on exchanges, which instead pushed up the visit volume of exchanges that month.

Second, although exchange visit volume has decreased, the decline is much smaller than the extent of the market capitalization drop. This indicates that there is still a significant portion of existing users in the crypto market who maintain continuous attention to it.

In the CEX traffic share, the United States firmly occupies the top spot due to its absolute number of crypto users and market size advantages, followed by South Korea, Russia, Turkey, and Japan with shares of 7.4%, 6.1%, 5.6%, and 3.8%, respectively. Overall, the leading countries have relatively friendly policies towards the crypto industry. South Korea and Japan, due to high unemployment rates and housing prices, have severe class stratification, leading young people to pin their hopes for upward mobility on cryptocurrency investments. Russia has been forced to choose a more open and free financial system due to sanctions. Turkey has long suffered from high inflation, with cryptocurrencies serving as a substitute currency in the country.

The chart above shows the monthly visitor changes for the top five countries. The decline rates for the United States, South Korea, Russia, Turkey, and Japan are 72.9%, 48.6%, 25.6%, 59.6%, and 38.6%, respectively. Among them, the United States saw the largest decline, mainly due to macroeconomic impacts, with the Federal Reserve continuously raising interest rates, tightening liquidity while changing the risk preferences of funds; while Russia's decline was the smallest. The global economic sanctions triggered by the war seem to have given the borderless crypto market a place to thrive, becoming one of the effective payment and trade channels for the country.

2.1.3 DeFi Users: The U.S. Holds Absolute Advantage In the past year, the total number of independent DeFi users globally has relatively increased. In 2022, even with a series of collapses, decouplings, and attacks in the industry, the long-term value and fundamental functions of DeFi still maintained user confidence, and they held an optimistic view of the future market recovery. Therefore, we believe that the fundamentals of the DeFi market remain relatively healthy.

From the regional share perspective, the U.S. has a clear market share advantage in DeFi, accounting for 31.8%, far exceeding other countries, which is related to the origin of DeFi projects in the U.S. In recent years, the U.S. has continuously embraced the crypto industry, attracting a large amount of capital and talent, with many crypto startups flocking to financial technology centers like Silicon Valley and New York. Unlike CEX traffic, in DeFi traffic share, developed countries such as the UK, France, Germany, and Canada rank high. This may be due to the user base of DeFi being more professional and experienced, with higher barriers to entry, and these countries having more mature financial systems and deeper investor education. Brazil ranks second, as it is the largest cryptocurrency market in Latin America, and some banks and investment companies are providing or preparing to offer services related to the crypto market. Asset management companies like QR Capital and Hashdex have also launched DeFi ETFs, playing a role in popularization.

2.1.4 "NFT" Becomes the Most Watched Crypto Topic Globally We collected the main keywords related to the crypto market over the past year and selected the five most frequently mentioned words (in no particular order) to create a visual map, allowing readers to intuitively feel the interest distribution in the crypto industry across different regions.

From the keyword distribution, "BTC," "DeFi," and "Cryptocurrency" are most densely concentrated in regions like South America, South Africa, and the Middle East, largely due to the underdeveloped financial infrastructure and payment systems in these areas, coupled with long-term high inflation rates, making cryptocurrencies an excellent alternative for daily payments and value storage. The performance of "NFT" is surprising, as its popularity has permeated almost every corner of the world. This may be because NFTs can integrate well with various industries such as sports, art, entertainment, culture, and gaming, making it easy to gain traction; combined with the unique community culture and wealth effects of each NFT, its influence has further expanded, creating a global NFT trend.

The chart above shows the search volume of various crypto keywords over the past year, reflecting the public's interest in the crypto field. The NFT market that emerged in 2021 made crypto popular, with various crypto keywords occupying the heat rankings of internet users, and search traffic continuously increasing. Entering 2022, as the overall crypto market declined, industry attention began to wane. A series of incidents in Q1 and Q2 further dampened the already fragile market sentiment. After the few major industry hot events in the second half of 2022 concluded, global attention to the crypto market is in a relatively quiet state. Due to the characteristics of mass communication, negative news always attracts more readers, so search volume peaks often occur during periods of rapid price declines and negative news. However, looking at the longer time frame, public interest in the crypto industry has decreased by nearly half.

2.2 Regional Market Industry Analysis

2.2.1 North America: The Main Battlefield for DeFi North America is an important part of the global crypto market. Currently, the region has about 47 million crypto users, accounting for 14.7% of the global crypto population. As one of the most economically developed regions in the world, the crypto market is also very active. From the perspective of traffic share, the DeFi business in North America is particularly strong. Below we will conduct a specific analysis of the United States, one of the major countries in this region.

In recent years, the perception of cryptocurrencies in the United States has undergone a significant change. More and more people are beginning to pay attention to cryptocurrency investment and trading, and many have joined this trend. The crypto market indicators we listed also reflect this phenomenon, with the U.S. ranking at the forefront in various dimensions. Currently, there are about 46 million crypto users in the U.S., accounting for 13.7% of the total population; the traffic share in centralized exchanges and DeFi fields is 9.2% and 31.8%, respectively. In terms of the types of transactions on various CEXs in the U.S., BTC is the primary choice for U.S. crypto users, followed by Ethereum, Dogecoin, ADA, and other cryptocurrencies. Specifically, the U.S. leads the world with approximately 1.5 billion USD in BTC trading volume. The leading data performance also explains why the price fluctuations in the crypto market in recent years have often shown a strong correlation with the U.S. risk market. Especially since 2022, the price trends in the crypto market have been almost entirely guided by the Federal Reserve's monetary policy; on the other hand, the U.S. has also led in trading volume in many DeFi protocols, accounting for 31.8%. Embracing DeFi has also made the U.S. a frontier for DeFi innovation, with a large number of developers concentrated in places like Silicon Valley and New York, making it easier for most projects to gain early funding and talent support in this fertile ground.

The rapid development of the U.S. crypto market can be attributed to several key reasons:

Young people are the main user group in the crypto market. According to a Finder survey, young people aged 18-34 in the U.S. make up the majority, accounting for 56% of total crypto users. Compared to older individuals who prefer traditional investment portfolios like stocks and bonds, young people seem more willing to take risks, and the high returns that cryptocurrencies can bring attract them, driving overall market adoption.
The process of compliance is increasingly advancing. Most states in the U.S. have introduced crypto-friendly legislation, promoting the legalization of local crypto activities. For example, Ohio proposed a bill allowing tax payments in cryptocurrency; Wyoming passed 13 laws, including recognizing cryptocurrencies as currency and allowing local banks to provide custody services for digital assets. With these laws, large institutions and financial service providers can offer legalized asset management and related crypto services to U.S. users.
Other factors. In addition to the above reasons, we believe that several events have played an important role in promoting the development of the U.S. crypto market, such as the entry of large institutions like Microstrategy and Tesla, the gradual enrichment of offline cryptocurrency payment scenarios in the U.S., and the influx of large crypto startups into the country.

In recent years, the crypto market in Southeast Asia has grown rapidly. Currently, the total number of crypto users is approximately 46 million, second only to the North American market. Although the region is mainly composed of low- to middle-income countries, the crypto user penetration rates in some Southeast Asian countries (such as Vietnam, the Philippines, and Thailand) are quite prominent, with crypto activities penetrating many everyday scenarios.

Vietnam: The country with the highest cryptocurrency adoption rate. The number of crypto users in the country is about 20 million, accounting for over one-fifth of its total population, successfully ranking first among countries with high cryptocurrency adoption globally. The main reasons for the growth of the emerging crypto market represented by Vietnam are as follows:

Aligning with local financial reforms and modernization requirements. Over the past decade, Southeast Asian countries and governments have placed great importance on emerging technologies like blockchain and expect them to pave the way for economic digitization. In Vietnam, cashless payments have gradually become the norm, and the local government has set relatively relaxed crypto tax policies to promote cryptocurrency adoption; at the same time, due to the underdeveloped traditional financial system in the region, the services available are very limited, forcing users to turn to more efficient cryptocurrencies.
GameFi has become a popular investment scenario for users. Based on the cultural environment and consumption habits in Southeast Asia, gaming is an extremely important component of the region.

According to public data, Indonesia had the highest mobile game downloads at 38% in 2020, followed by Vietnam at 22%; the Philippines and Vietnam ranked high in terms of game payment rates, at 55% and 50%, respectively. The developed gaming industry environment has also provided fertile ground for the birth of blockchain games. In 2021, the phenomenon-level chain game Axie Infinity emerged, and its innovative "play-to-earn" model quickly ignited market enthusiasm, attracting a large influx of users and capital, making Southeast Asia undoubtedly the center of GameFi.

Singapore has seized opportunities amid the saturation of the Chinese and American internet markets and the rise of the Southeast Asian economy, especially during the accelerated digital transformation post-pandemic. Singapore has gradually become a hotbed for internet entrepreneurship, attracting a large number of innovators and unicorn companies, including those in the crypto field. Singapore provides a highly open policy environment for the crypto industry, with clear regulations while allowing significant room for innovative tolerance. According to reports, the Monetary Authority of Singapore has provided enhanced regulatory sandbox measures in DeFi, allowing specific payment services to be temporarily permitted even if a license has not been obtained. Therefore, Singapore has gradually become one of the most crypto-friendly regions globally.

The vast expanse of the African continent is home to the largest number of crypto users globally. Below, we select a few key countries for analysis:

Japan and South Korea: Extremely active in crypto trading activities. The performance of these two countries in terms of exchange traffic share cannot be ignored. Specifically, South Korea ranks second with 7.4%, while Japan ranks sixth with 3.85%. On one hand, major crypto exchanges like Upbit, Bithumb, CoinOne, Korbit, and Gopax are located in Japan and South Korea, boosting their data performance in this regard; on the other hand, according to Coindesk reports, the high unemployment rates and high housing prices in both countries have forced local young people to seek other means of wealth creation. Especially in South Korea, the situation has almost turned into a nationwide cryptocurrency trading phenomenon. In addition to employment and high consumption pressures, the severe class stratification and chaebols' monopolies have made it exceptionally difficult for the lower class to start their own businesses. Cryptocurrencies, as a borderless investment, are seen by young people as an important means to escape poverty and accumulate wealth. Data shows that one in every five young South Koreans is trading Bitcoin. Furthermore, the local government's legalization of owning, selling, and purchasing crypto assets, as well as potential favorable tax proposals, have made the crypto market increasingly popular in the region.
Hong Kong: The Sleeping Eastern Financial Center. Hong Kong's crypto market has long been in a gray area. As a former Asian center, Hong Kong attracted a large number of well-known crypto companies like Animoca, FTX, and BitMEX due to its developed financial industry and inherent advantages of being backed by the mainland market. However, with the series of comprehensive bans on crypto activities imposed by mainland China, Hong Kong quickly lost its market advantage; coupled with the steady progress of CBDC pilot work in Hong Kong, the Hong Kong Monetary Authority also hopes to bring potential cryptocurrencies under regulatory oversight. The tightening policy environment has accelerated the exodus of many practitioners and crypto companies, leading to a rapid decline in Hong Kong's crypto market share in recent years. However, with the new virtual asset policy declaration released on October 31, 2022, clarifying the legality of local crypto activities, the reopened Hong Kong crypto market is expected to rise again in the future.
India: Regulatory Uncertainty, Crypto Market Pressing Forward. The Reserve Bank of India is not as interested in crypto technology as other countries' central banks. Its finance minister once declared in 2018 that the Reserve Bank of India would comprehensively ban cryptocurrencies, but this was never elevated to a legal level. This means that crypto trading in India is in a gray area. Therefore, although there has been significant development resistance in India's crypto market for a long time, it has not stopped its progress. Until last year, the Supreme Court of India ruled that the Reserve Bank's ban on cryptocurrencies was unconstitutional, marking a relaxation of India's policies. The shift in government regulation has greatly promoted the development of India's crypto economy. According to Coindesk reports, the number of investors in rural areas of India wishing to buy and trade cryptocurrencies has significantly increased, with CoinswithKuber's rural registrations growing by 135%; meanwhile, since the beginning of this year, the Indian blockchain industry has completed 16 financing transactions, totaling over 627 million USD, which is 14.25 times that of 2021. Additionally, despite India's large population base, the education level of young people is good, making them more receptive and understanding of cutting-edge technologies and concepts related to blockchain and cryptocurrencies. Many existing excellent technical development teams in the crypto field, such as Matic and Starkware, come from India, and they have become leading projects in their respective technical branches. All of these reflect the enormous potential of India's crypto market.

2.2.4 Europe: One of the Main Forces in Crypto, War Has Not Stopped Market Progress. In Europe, we focus on Russia and Ukraine. From our data, both Russia and Ukraine rank high in various indicators. This is largely due to the outbreak of the Russia-Ukraine war, which has led to an increase in crypto activities in both countries. From Russia's perspective, the current population holding cryptocurrencies exceeds 14.6 million, accounting for 10.1% of the total population. The country has taken many proactive measures in establishing regulations related to cryptocurrencies. In September 2022, Russia legislated to allow certain regions to use hydropower, nuclear power, and other resources for cryptocurrency mining. Additionally, due to the war, the country has been forced to exit SWIFT under Western sanctions, making cryptocurrencies an important supplement for foreign trade settlements. Similarly, in September, the Central Bank of Russia officially announced the legalization of cross-border payments using cryptocurrencies like Bitcoin and Ethereum. As for Ukraine, the sudden war has dealt a severe blow to the country's economy, with high inflation; coupled with the central bank's martial law strictly limiting cash transactions for residents, many Ukrainians view cryptocurrencies as an effective hedge against inflation. Therefore, since the war began, the volume of cryptocurrency transfers in Ukraine has continued to grow.

In South America and Africa, the reasons for adopting cryptocurrencies are mostly consistent, mainly due to financial crises, high inflation, and excessive depreciation of fiat currencies. Typical countries include Venezuela, Argentina, Brazil, Morocco, and Egypt. Although not all cryptocurrencies can be used as risk hedging tools, stablecoins are certainly a good means for these regions to reserve assets. According to public data, due to maintaining an annual inflation rate of up to 8%, more than one-third of the population in South America and Africa habitually uses stablecoins for retail transactions and daily asset reserves. At the same time, these regions also have the highest proportion of using stablecoins for reward payments in the world.

The collapse of Terra can be said to be one of the worst events in 2022 and even in the history of the entire industry. Terra was once a sensation in the entire crypto circle, ranking among the top ten crypto assets.

Its collapse caused many investors to lose everything and further exacerbated the already bearish cryptocurrency market. Founded in 2018, Terra established a payment blockchain through the dual-token mechanism of the "stablecoin" UST and "governance token" Luna. In early 2022, the founder of Terra, Do Kwan, launched a protocol called Anchor: as long as UST was deposited, a fixed annual yield of 20% could be obtained.

As a result, LUNA attracted many investors, and its decentralized characteristics also won favor in the crypto circle. After the launch of the Anchor protocol, most of the UST in circulation was deposited in the protocol. Before the collapse of UST, nearly 75% of UST (up to 14 billion) was in the Anchor protocol, and many investors even mortgaged other crypto assets to borrow UST to earn a 20% annual yield. As the demand for UST grew, the price of LUNA also rose, breaking through 100 USD. At its peak, the issuance of UST exceeded 15 billion, becoming the largest decentralized algorithmic stablecoin in the crypto circle. In May 2022, the UST liquidity pool in Curve lost balance due to large-scale user sell-offs, causing UST to decouple and its price to plummet. Faced with the imbalance of UST, Do Kwan used the LFG team fund to sell 80,000 BTC to buy back UST.

Unfortunately, the market had lost confidence in Terra, and other users began to sell UST. The algorithm of Terra simultaneously led to a massive increase in LUNA issuance, causing LUNA and UST to enter a death spiral. Traders on the Terra chain could not keep up with the large-scale sell-offs, making the collapse inevitable.

The collapse of Terra caused significant losses in the market, with the price of UST dropping to $0.2 within days, while the price of LUNA also went to zero, resulting in a market capitalization evaporation of $40 billion for the Terra Network, with many investors suffering severe losses. In addition, the sale of 80,000 BTC by LFG also had a huge impact on the market, and the drop in Bitcoin prices further subjected the overall market to a more severe bear market.

Three Arrows Capital (3AC) is a cryptocurrency hedge fund founded by Su Zhu and Kyle Davies in 2012. Three Arrows Capital is known for its high-leverage bets, borrowing large amounts of money from different companies and investing in many different digital asset projects. In March 2022, its assets under management reached $10 billion, with a portfolio including tokens like Avalanche, Solana, Polkadot, and Terra. Three Arrows Capital is undoubtedly an investment giant in the crypto circle. After the collapse of Terra, rumors spread that Three Arrows Capital was facing liquidity issues, and there were also reports that the company was suspected of misappropriating client funds. On June 14, 2022, Su Zhu deleted the cryptocurrency tags from his Twitter bio and tweeted: "We are communicating with relevant parties and are fully committed to resolving this issue."

However, Su Zhu did not clarify the specific content of the "issue" he was addressing. A week later, the digital asset brokerage firm Voyager Digital announced that it had lent 15,250 BTC and $350 million in stablecoin USDC to Three Arrows Capital. Based on the prices at the time, the total loan amount exceeded $675 million. Voyager Digital required Three Arrows Capital to repay all outstanding loans by June 27, or face default. Ultimately, Three Arrows Capital did not repay the loan, and Voyager immediately sought compensation from Three Arrows Capital through legal means.

After the exposure of the situation, other lenders of Three Arrows Capital also demanded repayment, including Genesis Global Trading, BlockFi, BitMex, FTX, and Blockchain, among others. Three Arrows Capital was forced to sell its assets and even sold off 80,000 stETH (over $84 million) in a significant sell-off on Curve, causing stETH to decouple (stETH once decoupled to 0.94 ETH).

Three Arrows Capital opened a funding gap in the crypto circle, with far-reaching effects. However, due to a lack of transparency, no one knew who held exposure to them. As more institutions disclosed Three Arrows Capital's bad debts, panic spread throughout the industry, leading to continuous capital withdrawals and the crypto industry entering a "Lehman moment."

3.3 The FTX Incident Triggers an Industry Earthquake In November this year, FTX announced bankruptcy due to user withdrawals leading to liquidity depletion and insolvency.

This can be said to be the largest risk event since the beginning of this bear market, with widespread and far-reaching effects. FTX was founded in 2019 by Sam Bankman-Fried and his sister company Alameda. In just three years from its establishment until its collapse, FTX had become the second-largest centralized exchange in the industry, with a market value of $24 billion, and its founder SBF's personal assets reached $15.6 billion. However, within a week, all these assets turned to dust. The root cause of the issue was that FTX, as a centralized exchange, held a large amount of user assets. Its sister company Alameda needed a lot of funds for business, so it used tokens like FTT and SOL as collateral to borrow user funds from FTX. As a result, although the value of user assets on FTX did not change significantly on paper, they had transformed from assets containing large amounts of stablecoins and BTC to holding large amounts of FTT and SOL, leading to severe asset homogeneity and high volatility. The trigger for the incident came when Coindesk discovered issues on FTX's balance sheet and published an analysis article warning about it. Subsequently, Binance founder CZ announced that he would sell his holdings of FTT to avoid risk, triggering market panic and causing the price of FTT to plummet, leading to a significant shrinkage of FTX's asset side and triggering a wave of user withdrawals. Ultimately, FTX faced liquidity depletion due to user withdrawals, and the significant drop in the value of its holdings of FTT and SOL led to insolvency, resulting in its eventual bankruptcy.

FTX's bankruptcy directly triggered an industry earthquake and led to a market crash. As one of the industry leaders, FTX and Alameda participated in investments in numerous projects, especially during this bear market, where they frequently intervened to rescue companies in crisis, establishing an image of a central bank in the crypto circle. According to incomplete statistics, FTX participated in direct investments in over 110 projects, some of which are listed in the table below:

In addition, other projects that had business dealings with FTX, such as BitDao and MIM, as well as investment firms like Sequoia Capital and Temasek, suffered from token crashes and related investment asset write-downs. It can be said that the impact of this FTX bankruptcy event is profound, and the losses it caused are not comparable to those of events like Luna and 3AC, marking a true "Lehman moment" in the crypto circle. Besides the market downturn and losses suffered by related companies and projects, this event has also had a severe impact on the entire industry ecosystem. The most direct impact is that centralized exchanges have faced a trust crisis. Since the outbreak of the incident, major exchanges have faced withdrawal pressures, showing the immense distrust users have towards centralized exchanges under the influence of panic. In the face of this situation, major exchanges have taken measures to save themselves, such as disclosing reserve assets and calling for the establishment of industry norms and recovery funds. However, in the long run, this event will have far-reaching effects on the entire industry ecosystem: users may lose trust in centralized institutions, and calls for decentralization may increase, potentially leading to a resurgence of decentralized projects; regulation will inevitably be further strengthened, making it more difficult and costly to obtain compliance licenses; the information transparency of various projects or institutions will significantly increase after this event; the incident may shake users' confidence in the entire cryptocurrency industry, leading to prolonged periods of market downturn.

Despite this, we believe that no pain, no gain; every event's outbreak is a necessary cleansing, and every market downturn presents an opportunity. As the events gradually settle down, the industry will still move towards a better direction after experiencing growing pains.

Ethereum Merge, Opening a New Era of PoS#

On September 15, 2022, the highly anticipated Ethereum merge was successfully completed, marking the official switch of Ethereum's mainnet consensus mechanism from Proof of Work (PoW) to Proof of Stake (PoS).

As a world-class computer, Ethereum has been using the Proof of Work consensus mechanism since its inception to ensure system security, with various complex functions such as transactions, smart contracts, and accounts operating on this core mechanism. With the continuous prosperity of ecological applications on Ethereum, the current infrastructure poses challenges to system scalability, and the limitations of PoW severely restrict Ethereum's future development. To address scalability issues, the team has proposed a series of network upgrade plans. The merge is the second network upgrade in this series, combining the existing two independent blockchains, the Ethereum mainnet and the Beacon Chain, while retaining the original functionality of executing smart contracts and maintaining complete historical data and user states, achieving a switch in the consensus mechanism.

After the merge, Ethereum has undergone corresponding changes in block structure, network structure, consensus mechanism, and node types. The new block can be seen as a combination of beacon blocks and original PoW blocks, where the block fields related to PoW consensus will be modified to 0 or constants; the network structure will adopt a "consensus layer + execution layer" architecture, with the consensus layer coordinating and directing the execution layer to generate and synchronize blocks; after the merge, the types of Ethereum nodes will become more diverse. The addition of stateless nodes helps maintain the degree of decentralization of the network and prepares for future sharding architecture.

The Ethereum merge is a milestone event for the cryptocurrency market: for Ethereum, the merge is a key step in enhancing performance, and the transition to a Proof of Stake mechanism provides the foundational conditions for Ethereum's subsequent sharding expansion. Moreover, after the merge, the issuance rate of ETH will significantly decrease, and combined with the burning from EIP-1559, ETH is likely to enter a deflationary state in the future. For the industry, the merge signifies the end of the era of large-scale GPU mining, forcing miners to flock to alternative chains or exit altogether. As Ethereum gradually addresses its performance shortcomings, it will inevitably squeeze other PoS public chain ecosystems. On a deeper level, the merge represents an important change in response to the global call to reduce carbon footprints. The enduring popularity of Bitcoin has allowed the industry to witness the robustness of the PoW mechanism, but its requirement for continuously running mining machines to repeatedly compute until finding a hash value that meets the requirements has a huge energy consumption. After transitioning to PoS, Ethereum's annual global energy consumption will also be reduced by approximately 0.4%.

3.6 Tornado Cash Regulation Raises Concerns and Reflections in the Crypto Industry On August 8, 2022, the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) added Tornado Cash and its associated crypto wallet addresses to its "Specially Designated Nationals List" (SDN), prohibiting U.S. citizens from interacting with the protocol or any Ethereum addresses associated with it. Those who interact with addresses on the SDN list will face penalties (as shown). According to Tornado Cash's official Twitter, its protocol has been sanctioned by the following related agencies:

Tornado Cash GitHub page closed
Tornado Cash contributor accounts banned
Tornado Cash protocol's USDC RPC requests rejected by Infura and Alchemy

A large number of service providers and DeFi protocols have prohibited access to Tornado Cash and banned related wallets. Tornado Cash has also sparked extensive discussions, including whether blockchains should resist censorship and whether the crypto industry should cater to regulation. Ethereum core developers have also discussed strategies for responding to national-level regulatory scrutiny in developer conference calls. The Tornado Cash incident not only promoted deep reflections on the conflict between privacy and regulation but also marked the formal action of global regulatory agencies against the wild west of DeFi.

The biggest event in the Layer 2 field this year is the mainstream Optimistic Rollup protocol Optimism issuing the OP token, driving both its own and the overall Layer 2 sector's growth against the trend. At the beginning of 2022, Layer 2's growth rate slowed down. To attract users and stimulate growth, Layer 2 protocols showcased their strengths. First, in April, the leading Optimistic Rollup protocol Arbitrum launched an ecological exploration activity called "The Arbitrum Odyssey," encouraging users to use on-chain projects to earn NFT rewards. User enthusiasm was high, but due to the activity being too popular and exceeding the network's preset capacity, the activity had to be suspended. Subsequently, Optimism officially announced the issuance of its native token OP and disclosed its economic model. In early June, Optimism announced that it would allocate 5.4% of the initial supply of OP tokens to create an incentive fund to support builders and projects within the OP ecosystem. These measures helped Optimism's TVL (calculated in ETH) grow more than fourfold within six months.

Optimism is the first of the four major Rollup projects to issue tokens, and its growth has set a good example for other protocols. On July 13, the ZK Rollup team StarkWare released three articles in succession, announcing that its product StarkNet would issue a native token and introducing the token's application scenarios, issuance quantity, and distribution. It also stated that the StarkNet network had minted 10 billion tokens and would allocate a portion to contributors and related investors in the StarkNet ecosystem. Thus, two of the four major projects have issued tokens or have clear plans to do so. The remaining two will likely issue tokens sooner or later. zkSync has stated in its official user documentation that it will issue a token, and Arbitrum will likely have to issue tokens to solidify its position as the top player. In addition to issuing tokens, Layer 2 is also continuously iterating on the technical level (detailed later).

Arbitrum launched the Nitro network upgrade in August, increasing network throughput and reducing transaction costs. Optimism announced that it would launch a major upgrade called Bedrock in Q4 of this year, achieving Ethereum equivalence, shortening deposit times from L1 to L2, and reducing transaction costs. StarkNet has implemented Rust-VM, greatly lowering the threshold for developers using the Rust language. The mainnet of zkSync 2.0 (first phase only available to the team) will launch in November. Layer 2 protocols are continuously improving performance and user experience through technical upgrades and introducing various means to capture value for the network, incentivizing developers and users. Looking back, the timing of Optimism's token issuance was the turning point for the overall TVL of Layer 2 this year. After that, Layer 2's TVL grew by 63%, becoming one of the few areas that could achieve growth during the bear market. This summer may not be termed "Layer 2 Summer," but Layer 2 has already shown strong vitality. In the next summer, they may bring surprises.

Once boasting 1 million users and 4.72 million registered users, generating profits of up to $122.5 million in a single quarter, STEPN can be considered one of the most brilliant projects in GameFi and X to Earn in 2022. However, STEPN ultimately fell into a bottleneck and entered a death spiral, marking the end of the X-Earn craze in 2022.

Encouraging users to walk to earn tokens is the core of STEPN. Since the game's launch, STEPN has gained favor in the crypto circle and attracted many new Web2 users, quickly experiencing explosive growth. At its peak in May, STEPN had 700,000 active users, accounting for nearly 20% of Solana's daily unique paid users. After the peak in May, active users plummeted, and new users continued to decline.

The reasons behind STEPN's decline, aside from the impact of the bear market and the panic caused by the LUNA collapse, include STEPN's announcement in July 2022 to expel users from mainland China, leading users to sell off their STEPN-related crypto assets. The utility token GST of STEPN entered a state of uncontrolled supply expansion due to declining demand, causing its price to plummet. STEPN opened a new model for X to Earn, leading to rapid development and the subsequent decline due to a lack of sustained user growth, providing reference value for future X to Earn projects.

3.9 This Year's Largest Acquisition: Huobi Acquisition As the largest exchange in the Chinese market, Huobi was officially acquired by a merger fund under Hong Kong's Baidu Capital at a valuation of $3 billion in early October 2022, which may be the largest acquisition in the cryptocurrency industry this year.

As the largest exchange in the Chinese market, Huobi was officially acquired by a merger fund under Hong Kong's Baidu Capital at a valuation of $3 billion in early October 2022, which may be the largest acquisition in the cryptocurrency industry this year. Huobi Group was established in 2013, founded by Li Lin. With the growth of the cryptocurrency market, Huobi Exchange's market share gradually increased, becoming the largest exchange in the Chinese-speaking world after 2017, with its overall ecological layout in a leading position in the industry, including Huobi University and Huobi Investment, which have good reputations. Until 2021, Huobi, Binance, and OK were regarded as the three giants of Chinese cryptocurrency exchanges. However, in 2021, mainland China introduced the strictest cryptocurrency regulatory policies in the world, including banning mainland users from trading cryptocurrencies, prohibiting virtual currency mining within mainland China, and banning companies registered in mainland China from engaging in virtual currency-related businesses. After the introduction of regulatory policies, companies related to cryptocurrency businesses, represented by Huobi, announced their exit from the mainland market, fully shifting their operations overseas. Before exiting, Huobi's daily trading volume exceeded $60 billion, peaking at over $90 billion, but after exiting, it faced a bear market, with daily trading volume shrinking to $5 billion, a decline of over 90%. However, as an established exchange, Huobi still possesses deep foundations and valuable assets. In addition to its brand influence, Huobi holds compliance licenses in the U.S., Hong Kong, South Korea, and Japan, and has a listed company, Huobi Technology, in Hong Kong, which remains attractive to acquirers. Therefore, after multiple negotiations, in early October, Baidu Capital announced the acquisition of all shares of Huobi Global held by Li Lin.

Hong Kong Baidu Capital (About Capital Management) was founded by Chen Yihua in 2008 and is a Hong Kong asset management company. He is also a partner at Jinglin Asset. After acquiring Huobi, Baidu Capital announced the establishment of a global advisory committee aimed at guiding the strategic layout and development of Huobi Global, with members including Baidu Capital founder Chen Yihua, Huobi co-founder Du Jun, TRON founder Justin Sun, Vice President of Hong Kong University of Science and Technology Wang Yang, and Valkyrie co-founder Leah Wald. At the first general meeting after the acquisition, Justin Sun, as a representative of the advisory committee, announced several important measures, including empowering HT and strengthening overseas strategies. In the following week, the price of HT surged by over 80%, showing market recognition of this acquisition and Huobi's strategic adjustments. It is believed that after completing this acquisition and strategic adjustment, Huobi will shine again in the future.

On March 9, 2022, U.S. President Biden signed the executive order on "Ensuring Responsible Innovation in Digital Assets," marking the first comprehensive government measure in the U.S. to address risks and leverage the potential benefits of digital assets and their underlying technologies. This order established a national policy on digital assets covering six key priorities: consumer and investor protection, financial stability, illegal financing, U.S. leadership in the global financial system and economic competitiveness, financial inclusion, and responsible innovation. On September 16, the White House released the first draft of the cryptocurrency industry regulatory framework, which follows the digital asset executive order signed by President Biden in March, mobilizing existing regulatory agencies such as the SEC and CFTC, and expanding cooperation between the U.S. and its partners through G7, G20, the Financial Action Task Force (FATF), and the Financial Stability Board (FSB).

On June 30, 2022, the President of the EU Council and the European Parliament reached a provisional agreement on the Markets in Crypto Assets (MiCA) proposal. On October 5, the EU Council approved the final text of the MiCA legislation, and on October 10, the European Parliament Committee passed the MiCA bill with 28 votes in favor and 1 against, which will undergo final voting approval in the European Parliament plenary session. Once approved, it will take effect in 12-18 months. On October 10, European Parliament members also voted on the Transfer of Funds Regulation (TFR), an anti-money laundering bill requiring that transfers made using cryptocurrencies must include the identity information of both the payer and the payee. Once these two bills take effect, they will establish a unified regulatory framework for crypto assets in the EU, becoming the most comprehensive regulatory regulations for crypto assets in major jurisdictions globally, providing strong protection for service providers and investors engaged in crypto assets. The crypto regulatory frameworks launched by the U.S. and EU will have a significant impact on the global crypto market, as the U.S. and EU will take the lead in establishing a unified crypto regulatory system, which can not only enhance regulatory efficiency and enforcement capabilities within their jurisdictions but also provide a reference model for other countries' regulations.

Web3 Infrastructure#

Rollup is a highly anticipated off-chain scaling solution. The main idea of Rollup is that users conduct transactions on Layer 2 (off-chain), and Layer 2 operators compress and package the transactions, then submit the compressed transaction data and proof of state transitions to the main chain, which will be verified by validators of the Ethereum mainnet (and in the future, potentially other Layer 1s). By using more efficient encoding methods and reducing the amount of data that needs to be uploaded, the number of bytes required for the Ethereum mainnet to store this batch of off-chain transactions has decreased. Additionally, since the Ethereum mainnet does not need to recalculate off-chain transactions, the gas consumed by transactions has also significantly decreased. Rollup reduces on-chain resource consumption while maintaining data availability, meaning that the Ethereum mainnet can view and ensure that no one can tamper with off-chain transactions. Therefore, it can enhance scalability while inheriting Ethereum's decentralization and security, becoming the mainstream technical solution for Layer 2. Vitalik has also stated: "For Ethereum, Rollups are the only trustless scalability solution in the short to medium term, and possibly in the long term." By early 2022, Rollup had already taken shape and achieved counter-cyclical growth this year. According to L2beat data, on January 1, 2022, the overall TVL of Rollup was 1.56M ETH, about 4.5% of Ethereum's mainnet TVL. As of October 20, 2022, the TVL of Rollup had risen to 3.62M ETH, an increase of 131%, with the ratio to Ethereum's mainnet TVL rising to around 7.5%. This growth is remarkable given the overall poor performance of the crypto market, with ETH prices dropping by 65% during the same period.

In terms of the number of deployed projects, according to DeFiLlama data, as of the end of October 2022, there were about 210 projects deployed on Rollup (projects deployed on multiple Rollups are counted as one), while there were 585 projects on the Ethereum mainnet. In this regard, the ratio of Rollup to Ethereum is 35.9%, a significant increase from 19.3% at the beginning of the year. Some have speculated that if the gas fees on the Ethereum mainnet decrease, the importance of Rollup would diminish. However, the fact is that this year, both ETH prices and average gas prices have decreased, leading to even lower gas fees on the Ethereum mainnet, yet Rollup has still attracted a large number of project deployments. This indicates that many project teams are optimistic about the prospects of Ethereum and Rollup, and a network centered around Rollup is slowly taking shape. In terms of address numbers, according to estimates from the blockchain explorers of various Rollups, there are a total of 4 million addresses on Rollup, quadrupling since the beginning of the year. The Ethereum mainnet has 209 million addresses, and the number of Rollup addresses has risen from less than 1% of Ethereum addresses to nearly 2%. Although growth has been achieved, there is still a long way to go in attracting users. The counter-cyclical growth of Rollup is mainly driven by its technological advancements. This year, Rollup's progress has focused on improving compatibility, reducing data availability costs, lowering verification costs, decentralization, and developing zkEVM.

Improving Compatibility: Due to EVM compatibility, OP Rollup currently accounts for over 80% of the total Rollup market. However, EVM compatibility does not mean that projects can be deployed seamlessly; they still need to make many code adjustments. Improving EVM compatibility and narrowing the gap with Ethereum has always been a key focus for OP Rollup. Arbitrum One migrated to Nitro in early September, enhancing network compatibility. The client software of Nitro directly compiles the core of Geth (the mainstream Ethereum client).

Geth uses Arbitrum's customized EVM simulator to handle execution and state maintenance functions, ensuring high compatibility with Ethereum. Optimism underwent an EVM equivalence upgrade at the end of last year and has proposed the concept of "Ethereum equivalence" this year. It aims to minimize differences with Ethereum so that Optimism can share and collaborate on the same core code. With stronger compatibility, the cost of project deployment will be lower, and more Ethereum-compatible tools will be available, strengthening the network effects of the OP Rollup protocol.

Reducing Data Availability Costs: The costs of Rollup mainly consist of two parts: the data availability (DA) fees paid to L1 and its own operational costs. Since Rollup executes off-chain and is mostly under low load, operational costs are relatively small, while DA fees account for a larger proportion. To reduce DA fees, various teams have worked on improving batching and compression systems. For example, Optimism has reduced fees by 30% by setting more reasonable fee parameters and will use more efficient compression algorithms to further reduce costs. In addition to these conventional methods, Arbitrum has also launched a new product called Nova, which can reduce DA fees to the baseline. Nova is built on Arbitrum's Anytrust technology, utilizing a data availability committee (DAC) to store and provide data off-chain, only reverting to Rollup mode when users question the DAC.

DAC needs to ensure that at least two honest members are present, making its trust assumptions much weaker and easier to achieve compared to traditional BFT consensus requiring 2/3 of nodes to remain honest. Essentially, it trades a minimal additional trust assumption for lower costs and faster withdrawal times. Gaming and social projects are well-suited for deployment on Nova, and nearly ten projects are currently running on Nova.

StarEX has also officially launched the Volition model, allowing users to choose whether the original transaction data is stored on Ethereum or in the DAC.

Reducing Verification Costs: OP Rollup relies on fraud proofs to resolve disputes. Fraud proofs can be either interactive or multi-round. Previously, only Arbitrum used multi-round interactive fraud proofs, while all OP Rollups based on Optimism's code used single-round interactive proofs. Multi-round interactive proofs continuously narrow the scope of disputes off-chain until a disputed execution step is found, then re-execute and arbitrate on-chain, which can reduce the on-chain resources needed to resolve disputes, making it cheaper than single-round interactions. Optimism is developing a new generation of fraud proofs called Cannon, which is a multi-round interactive fraud proof. Other OP Rollups are likely to follow Optimism's upgrade, and the cost of resolving disputes for OP Rollups will generally decrease in the future. More importantly, Cannon will use MiniGeth (a simplified version of the Geth client) as the EVM simulator, essentially decoupling the Rollup solution from the main chain. This allows it to adapt to EVM upgrades through MiniGeth and replace MiniGeth with other tools to support Rollup solutions for other main chain virtual machines.

ZK Rollup relies on validity proofs (zero-knowledge proofs, ZKP) to resolve disputes. Unlike OP Rollup, it does not require interactive proofs but generates ZKPs for all executed statements at once, with validators verifying the ZKPs to determine whether the prover is honest. To improve verification efficiency, StarkNet has upgraded to recursive STARK proofs. This upgrade leverages the "logarithmic compression" feature of STARK proofs, meaning that the time required to generate proofs is roughly linear with the time required to execute statements, while the time to verify proofs is roughly logarithmic with the generation time. The previously used SHARP technology generates a total ZKP for multiple propositions to be proven, while the upgrade will first group propositions into several small groups, generating a small proof for each group, and then generating a total ZKP from these small proofs. Due to the logarithmic compression feature, verifying ZKP2 will be much faster than verifying ZKP1, and it will consume significantly less on-chain computational resources. This move can also accelerate the generation of proofs, as multiple small proofs can be computed in parallel.

Decentralization: Some OP Rollup networks experienced a downtime incident earlier this year, rendering the network unavailable for several hours. The reason is that Rollup protocols require a Sequencer to order transactions, and currently, Sequencers are operated by the project teams themselves or closely related single operators, which is very centralized. When the Sequencer fails, there are no other equivalent nodes to continue operating, leading to network paralysis. Only by promoting the decentralization of Rollup protocols can this gray rhino risk be eliminated. Optimism aims to establish a multi-client ecosystem in the Bedrock version, collaborating with external teams and incentivizing them to create other clients. Multi-client systems naturally decentralize the Sequencer, reducing the risk of single points of failure. This vision is quite ambitious, and whether it can be realized is uncertain. If Optimism can achieve decentralization of the Sequencer, it would be a significant victory. It is also possible that when the new version runs smoothly, the conditions for becoming a node will involve staking OP tokens. This would give the tokens a clearer application scenario and source of income, potentially leading to a decentralized transformation of Rollup.

In the past two years, the focus of ZK Rollup development has been on zkEVM research. zkSync, Polygon, and Scroll are actively developing and have announced that they will launch their zkEVM versions on testnets or mainnets by the end of 2022. Currently, zkSync has maintained a leading position. It launched its testnet in April and has achieved compatibility at the EVM bytecode level, completing implementations in circuits and execution environments. In terms of core infrastructure, full node integration has been completed, successfully deploying and executing compiled smart contracts. Recently, it has repeatedly stated that the first zkEVM compatible ZK Rollup running on the Ethereum mainnet will launch on October 28 (it has already launched during the proofreading). The team is confident and has left a backup plan. At launch, no projects will be deployed, and only the official team can test with real assets on the mainnet before allowing developers to use it. A number of well-known protocols and companies have announced that they will deploy on zkSync 2.0, including Uniswap, Chainlink, OKX Wallet, fiat deposit and withdrawal solutions Ramp and Banxa, decentralized crypto trading platform Hashflow, insurance protocol Nexus Mutual, etc. Once open to the public, the zkSync ecosystem may experience rapid development.

This year, the biggest upgrade for Ethereum itself is the merge. The purpose of the merge is to transition Ethereum's original PoW consensus mechanism to a PoS mechanism. With the change in consensus mechanisms, the network structure has also undergone profound changes, affecting Ethereum's degree of decentralization. After the merge, Ethereum adopts a consensus layer + execution layer (execution engine) architecture to generate and synchronize blocks. User transfers and smart contract calls are packaged, broadcast, and executed by the execution engine (the original ETH full node), while the tip portion of the GAS fee still belongs to the execution engine. The task of the consensus layer is to first establish communication with the execution engine, requiring them to generate or verify Execution Payloads, and then the beacon nodes reach consensus based on this to generate complete beacon blocks. After EIP-1559, the proportion of the tip portion in revenue has significantly decreased, with miners' main income coming from block rewards. After the merge, the independently operating execution engine can only obtain tips, making it difficult to profit. The execution engine needs to be attached to the consensus nodes to rely on staking rewards for income. Therefore, rather than being a fusion of two networks, it is more accurate to say that the consensus layer will absorb the execution engine, forming a new symbiotic entity. The PoS Ethereum has 450,000 validators, while PoW Ethereum had only over 10,000 nodes, and the significant increase in the number of validators can also enhance the network's degree of decentralization. Of course, the massive GPU mining machines cannot be absorbed; they will need to find a way out, which will be discussed later. Ethereum has always faced the issue of state explosion, meaning that the data accumulated by the network is increasing, requiring more and more storage space. This will increasingly burden the hardware of nodes, forcing them to become more centralized. To address this, the community has proposed a goal of achieving statelessness, hoping that light clients can verify all transactions and states without needing to actually store any states. After transitioning to PoS, Ethereum aims to achieve statelessness, allowing nodes with full states and stateless nodes to participate in verification work together while maintaining a high degree of network decentralization. With the technology of statelessness, there will be three types of nodes (clients) in the consensus layer of Ethereum after the merge:

Clients without ETH1 execution engines;
Clients with stateless ETH1 execution engines;
Clients with full ETH1 execution engines.

The first type of client is the lightest client, which can only participate in reaching consensus and cannot verify transactions on the execution layer. Its significance lies in supervising other types of nodes in the consensus layer.

The third type of client has full state, execution capabilities, and consensus capabilities, which can be understood as a full node. It requires investment in hardware for storage and computation, as well as staked tokens, so the costs are higher, and the number will not be large.

The second type of node is the stateless node, which can request data from the third type of node and then use its execution engine to verify the validity of transactions. One concern after the Ethereum merge is the degree of decentralization of the network. Although the changes in network structure and statelessness can enhance the degree of decentralization, the rapid growth of the staking solution Lido has raised concerns. Lido occupies over one-third of the total staked amount in the network. Some believe that if Lido manages to gather another one-third of the stake, it could have the ability to control the network. It is important to note that Lido is not controlled by a single entity. Lido has 30 node operators, and they do not have a hierarchical relationship with Lido. They are all top node operators with reliable records and legal recourse, needing to obtain operational qualifications through DAO voting and are constantly monitored by the DAO. Therefore, Lido should not be equated with centralized mining pools. On the contrary, it is precisely because of Lido's continuous efforts towards decentralization that it has gradually gained an advantage over CEX mining pools. Thus, the risk of a large single entity or consortium controlling the network is not as significant as imagined. What direction will Ethereum take after the merge? Vitalik recently stated in an interview that Ethereum developers hope to achieve four key goals next year, including scalability, privacy, resistance to censorship at the base layer, and account abstraction, with addressing scalability being their "top priority."

The Ethereum team believes that scalability will be achieved through Rollup, so the plan after the merge is to become a powerful settlement and data availability layer, allowing Rollup to operate securely and at low cost. We will discuss Ethereum's future development in the top ten predictions section.

The rise of the multi-chain network has facilitated the explosion of DAppChain. The concept of application chains is not unfamiliar; Cosmos envisioned this from the beginning, aiming to create an interconnected ecosystem. Application chains are independent blockchains tailored for specific applications, built using the development tools of the main chain, benefiting from cross-chain capabilities and shared security within the ecosystem created by the main chain. Building a blockchain for DApp applications is no longer a technical issue, as Cosmos, Octopus Network, Polygon, Avalanche, and BNB SmartChain can all provide environments for constructing DAppChains. However, DAppChains are limited by other conditions:

Maintaining their own network security requires greater costs;
Whether the characteristics of the main chain match the DApp product, such as performance, user habits, and EVM compatibility.

Currently, successful transitions from on-chain ecological applications to independent blockchains include DeFi Kingdoms, dYdX, and Axie Infinity. The latter two applications belong to Layer 2. Additionally, about 46% of the Apecoin community members support building ApeChain. This is gradually becoming a significant trend, especially for GameFi and Metaverse projects. From these DApps, it can be seen that they had a certain level of revenue and user base before building their chains and do not rely heavily on other ecological applications, allowing them to form their own moat. Therefore, becoming a DAppChain can further bring benefits in terms of performance, user experience, and project valuation. Furthermore, the token value capture ability of DApps can be improved, such as participating in network validation staking, running their own sorters or validators to capture MEV, thereby reducing transaction costs. DAppChains are not only beneficial to themselves but also bring vitality to the ecosystem of multi-chain networks. To attract more DApp Chains, multi-chain networks also need to provide support in terms of cross-chain capabilities, security, and ecological funds.

Expansion and upgrading go hand in hand, with the storage sector gearing up for launch. Although decentralized storage has not received much attention this year, it has shown signs of continuous progress. The storage sector is seeing or will see more real demand, more access channels, and more advanced functions. These advancements will promote it to become an important infrastructure in the Web3 field. First, storage protocols are storing more real data. Filecoin implemented the Filecoin Plus (FIL+) program at the end of last year, and the volume of real data stored has been continuously increasing. As of Q3 this year, 138 clients have used large datasets (100 TiB).

In addition to Web3 platforms and blockchain projects like OpenSea, Rarible, MakersPlace, MagicEden, and Project Galaxy, there are also many more traditional clients, such as the University of California, Berkeley, the University of Southern California Shoah Foundation, and Starling Labs. Arweave has partnered with Meta, which will use Arweave to store digital collectibles from Instagram creators. Storage protocols are taking on an increasing amount of real demand, which is more stable and expected to continue increasing compared to the volatility of the crypto market, providing a survival foundation for storage protocols.

Second, there are more access channels. Arweave has completed integration with Avalanche and zkSync. This new integration method of Arweave (through Bundlr Network) allows users to access Web3 data storage on Arweave and pay fees using AVAX, ETH, or tokens, uploading data to the Arweave network. This may prompt other storage protocols to follow suit, penetrating more aspects of Web3 through expanding access, thereby strengthening their foundational role.

Third, more functions will emerge. The most important upgrade in storage is the ability to layer on top of the computing layer, which will enable more functions beyond mere hard disk capabilities. Currently, FVM is not yet available for users to implement arbitrary logic, and the access speed of Ceramic is still relatively slow, with its development toolkit not being fully developed. Optimistically, it is expected that the second phase of FVM may be completed by 2023 to 2024. After the launch of FVM, there may be some specialized tools for data storage and retrieval in vertical fields that will help users manage data better and ensure data security. Ceramic still needs to continue improving its infrastructure, while Stratos is advancing towards its mainnet launch. These new projects will bring different technical solutions and inspire each other.