Embracing the Consumer Wave: Trends and Topics in the Crypto Industry — Reflecting on H1 2023
The cryptocurrency industry is in a constant state of evolution, and as we are in the middle of the third quarter of 2023, it’s evident that significant advancements are molding the landscape. From the maturing of protocols to the emergence of consumer-ready applications, the crypto space is making remarkable strides toward widespread adoption and integration into mainstream society, even though there is still a very long way to go. In this blog I want to highlight 8 key trends or topics that I have been noticing in 2023 so far.
This is quite a long blog post so here is the TLDR:
Let’s get into some of the details…
- Scalability Upgrades and a New Era of Cheap Data Availability
One of the most anticipated events discussed during Q2 was the Dencun upgrade for Ethereum, which is planned for late 2023. This hardfork introduces EIP4844 (proto-danksharding), which brings a notable scalability upgrade to the Ethereum network. The upgrade enables Ethereum rollups to access a new, cheaper form of blockspace on the Layer-1 called ‘blobspace’, which enables more data storage and is expected to decrease gas fees for Layer-2 rollups (a new fee market for pricing blobs separately from regular transactions will be created). Blobs resemble sidecars that can be added to Ethereum blocks without causing any interference or congestion in the current block space designated for handling regular transactions.
EIP4844 is considered a boost to Ethereum scalability because it makes Layer-2 networks built atop Ethereum more cost-effective. Proto-danksharding lowers the operational cost of rollups, as nodes only need to store data blobs for roughly 30 days, and nodes are only interested in the fact that the data is available. The benefits of proto-danksharding will hence primarily be recognized by rollup sequencers that pay for block space (rollup sequencers bundle user transactions and commit them to Ethereum via smart contracts for finalization, meaning Ethereum is the settlement layer).
In consequence, it is evident that Ethereum and exogenous data availability (DA) solutions, such as Celestia, Avail, and EigenDA, are leading the way in optimizing “data availability” (the assurance that full nodes have been able to access and verify the full set of transaction data associated with a specific block). Rollups need to make sure the data from their state updates (the batches of transaction data) is available to download to ensure accuracy, and primarily rely on Ethereum for DA. Creating dedicated block space (the blobspace) for this functionality therefore enhances scalabilty through rollups.
[The coupling of Data Availabilty Sampling (DAS) with erasure encoding underpins the technology behind full danksharding (next step after proto-danksharding), which are the same techniques that power the technology behind exogenous DA layers such as Polygon Avail and Celestia.]
Given the focus of proto-danksharding on supporting a Layer-2 rollup ecosystem and scaling Ethereum through modularity, the implementation of the code change in the next Ethereum upgrade will be an important testing ground for the modular blockchain thesis at scale, as it is implemented on one of the largest and most prominent public blockchains.
2. L2 Ecosystem Design Pattern Convergence
Staying, in essence, on the topic of Layer-2s, which reduce transaction costs and increase Ethereum’s throughput by processing transactions off-chain, another trend has been emerging. The Layer-2 (L2) ecosystem has been rapidly converging with similar design patterns. Optimism’s OP Stack, Arbitrum’s Orbit, zkSync’s ZK Stack, and Polygon 2.0’s Supernets are all examples of different strategies with increasingly similar end goals. The L2 ecosystem as a whole seems to agree with the vision of generating numerous chains from Ethereum, like webpages were generated from HTTPS. Optimism, with three large chains and several minor ones, is winning this race so far, but others such as Arbitrum, zkSync and Polygon are also increasingly attracting startups to build custom chains using their technologies. [Again, interesting here is to note the theme of modularity.]
The transaction activity of Ethereum rollups like Arbitrum, Optimism, StarkNet, zkSync, and Polygon zkEVM has been growing and the next era of rollups, such as OP Chains on Optimism, L3s on Arbitrum Orbit, or hyperchains on zkSync, will enable different entities with varying objectives to establish their own tailored environments. Think of it as deploying a new rollup chain = creating a new webpage.
The OP Stack, for example, can be seen as a modular and open-source blueprint for creating scalable and interoperable blockchains of all types. The OP stack introduces the concept of Superchains, a collection of tightly integrated and unified L2s (OP Chains) built on top of the OP Stack. It’s not a L3, but rather a network of L2 chains.
Arbitrum Orbit is in the process of developing and launching L3 solution atop the Arbitrum mainnet. These L3s, also known as app-chains, serve as platforms for smart contracts dedicated to particular decentralized applications. These app-chains utilize the security provided by the L2, which itself relies on the security of the L1 (Ethereum). You could say they are a rollup for an L2. Through the implementation of Orbit, Arbitrum aspires to establish itself as a settlement layer comparable to Ethereum. This strengthens the inherent value of its primary chain and reinforces the long-term scalability of the wider Arbitrum ecosystem.
zkSync has a vision of creating an expansive network of interconnected blockchains called Hyperchains, characterized by their trustless nature and adaptability. This concept embodies their perspective on achieving L3 scalability. Central to zkSync’s vision is the establishment of a foundational basechain (zkSync Era), which acts as the cornerstone for developing Hyperchains. These Hyperchains inherit the security attributes of the basechain, thereby ensuring a resilient and dependable infrastructure.
Polygon has developed four core products, firstly the Polygon PoS sidechain, secondly Supernets (the solution for developing app-chains), thirdly Polygon’s EVM-equivalent zk-rollup solution and lastly Polygon 2.0, which has the goal of amalgamating all offerings, harnessing zk technology to empower a collective of L2 chains, and integrating an innovative cross-chain coordination protocol.
Taking these developments into consideration, I would argue that Optimism, Arbitrum, zkSync, and Polygon propose comparable visions to enhance scalability through a multi-chain and somewhat modular design pattern.
3. Upgrades, Mainnet Alpha and EVM Extends Reach
We are in a Bear Market, which means it is time to build. Many upgrades, improvements and mind boggling innovations have come out of the market downturn so far. A few examples include:
- Chainlink, the leading data oracle network in the cryptoeconomy, announced the launch of its Cross-Chain Interoperability Protocol (CCIP) on mainnet. This protocol facilitates seamless communication between different blockchain networks and currently supports Ethereum, Optimism, Polygon, and Avalanche. The CCIP aims to create a more capable and flexible DeFi ecosystem, with projects like Aave and Synthetix already adopting it.
- Starknet, announced “App-chains”, which are application-specific blockchains and will allow teams to create bespoke chains that retain the benefits of the public Starknet while avoiding congestion and implementing unique features not supported on the public chain. [Well.. no surprises here after we just read in point 2 above…]
- L2 project Mantle Network launched its mainnet alpha, providing developers with a platform to build and test applications ahead of a full network launch. Mantle’s modular approach, combining its own transaction execution, Ethereum L1 for settlement, and EigenLayer for maintaining data availability, promises to be a significant advancement in the Ethereum scaling scene. [Are you also starting to see the recurring themes of data availability, modularity, app-chains/multi-chains, scalability, interoperability…]
- ConsenSys unveiled its Linea zkEVM alpha to the public. This “zkEVM” style combines zero-knowledge (zk) proofs with full Ethereum Virtual Machine (EVM) equivalence for high accessibility and scalability. Linea has gained an edge by being the enshrined L2 across popular ConsenSys projects like MetaMask and Infura. [Oh and of course zk-technology and EVM-compatibility are also popular topics in 2023…]
- Tezos and Solana also have major developments to showcase, both introducing EVM-compatible solutions. Tezos introduced Etherlink, while Solana announced Solang, enabling developers to write smart contracts in Solidity on their chains.
- In addition, NEAR introduced the Blockchain Operating System (BOS) for the open web. With the BOS, NEAR has built an industry first, with decentralized frontends and forkable components for developers. An interactive Polygon zkEVM app dashboard launched on the BOS, focusing on discoverability for zkEVM developers and users on the open web, while vastly improving user experience.
4. Protocol/Application Convergence: Unifying Services into Superapps
DeFi applications are experiencing a convergence towards vertically integrated superapps, where they offer a suite of services to users. For example, Aave, MakerDAO, and Frax are all experiencing a convergent evolution towards decentralized stablecoin and money-market ecosystems. Aave, renowned for its money-market platform, introduces the decentralized stablecoin GHO. Meanwhile, MakerDAO, a pioneer in decentralized stablecoins (DAI), introduces the money-market “Spark.” Frax has been diligently working on building its stablecoin-money-market-LSD ecosystem vertical. These protocols are now competing in areas such as Total Value Locked (TVL), stablecoin supply, and fees. This convergence signifies an industry-wide recognition of the importance of these categories and a drive to offer comprehensive solutions.
Another example is UniswapX, which aims to provide free-market competition-based order fulfillment for decentralized order execution. UniswapX acts as a bridge-abstraction layer, allowing users to choose their preferred solution for fulfilling cross-chain DEX swaps. This development complements the existing Uniswap automated market maker (AMM) model, providing a new vertical that harnesses complexity and ensures correctness through off-chain order execution. Again, arguably a convergence into a sort of superapp.
5. From Protocols to Consumer-Ready Applications
With protocols and infrastructure reaching a new level of maturity, more of the industry is now shifting its focus towards building consumer applications. While there is still plenty of room for improvement and innovation on the infrastructure side, the foundational problems have largely been identified and are arguably in the process of being solved.
Q2 of this year clearly displayed a stronger demand for consumer-facing blockchain-enabled applications, catering to individuals who might not be well-versed with private keys, or who have most of their funds on centralized exchanges. The reduction in protocol costs opens doors for innovative revenue models that subsidize user transactions, rendering crypto more accessible and enticing to a broader audience.
An important step in this endeavour is to improve the UX/UI design of blockchain applications (the userability for the “normie”). Blockchain technology should become largely invisible, like how most people don’t know or question how “the internet” works, or how a bank transaction is executed, they just receive answers to their questions on e.g. Google and see that money is or is not in their bank account.
A standout example of this user-centric direction is evident in the Gnosis ecosystem. Gnosis has introduced Gnosis Safe (high security crypto vault), Gnosis Chain (high-speed L2 zkEVM Polygon Supernet), Gnosis Pay (payments-focused chain built on Gnosis Chain), and Gnosis Card (fintech payments on top of Gnosis Pay, partnered with Visa), effectively bridging the gap between traditional finance and Web3, facilitating seamless crypto payments in real-world scenarios.
6. The Growing Dominance of Stablecoins
Stablecoins, a type of cryptocurrency designed to maintain a stable value by pegging it to an underlying asset, have witnessed remarkable adoption in recent years, with the projection of substantial growth in transaction values going forward.
A recent study from Juniper Research, has found that the value of payment transactions powered by stablecoins will exceed $187 billion globally by 2028, up from $53 billion in 2023. A suggestion is that stablecoins’ popularity is driven by their ability to offer a secure and reliable means of transferring value while avoiding the price volatility commonly associated with traditional cryptocurrencies like Bitcoin or Ethereum. Therefore, the steady rise of stablecoin transaction values over the next few years points towards their increasing role in various financial applications.
As traditional financial systems encounter challenges and opportunities in an increasingly digital world, stablecoins are emerging as a bridge between the fiat and digital currency realms. Due to their resilience and effectiveness as a medium of exchange, store of value, and unit of account, and their ability to combine stability with the efficiency and accessibility of cryptocurrencies, stablecoins can be seen as a promising tool for transforming various financial processes, from remittances including cross-border transactions with reduced fees and settlement times, to decentralized finance (DeFi) applications. Advantages include providing financial services to the unbanked and underbanked populations. [Which is honestly the reason why I ended up in this industry.]
The most recent example of a new stablecoin was that launched by Paypal, in August of Q3. Even if the parameters around PYUSD are somewhat controversial, PayPal has around 435M active accounts and getting just 1% of those accounts to start interacting with crypto payments would dramatically expand active users in the ecosystem. With a robust infrastructure for seamless entry and exit, PayPal is strategically positioned to simplify the intricate aspects of stablecoin usage. As user numbers surge, a plethora of new applications will follow suit, hastening the widespread adoption of Web3 as a mainstream offering.
7. Real World Assets Popularity is on the Rise
The value of physical assets can be unlocked by representing them as digital tokens on a blockchain. Transactions involving assets like stocks, real estate, and carbon credits are currently time-intensive due to paperwork and settlement processes. Converting these assets into digital tokens on a blockchain can enable real-time value exchange, eliminating delays and improving cross-border payments and securitization. This approach maintains asset characteristics while enhancing accessibility on digital platforms, going beyond securitization by monetizing the “right to use.”
Digitization of assets involves converting ownership rights into digital tokens on a blockchain, fostering faster movement across platforms, removing geographic barriers, and creating opportunities for fractional ownership.
Traditional finance companies are increasingly embracing Ethereum-based real-world asset (RWA) protocols in the decentralized finance (DeFi) landscape. These RWA protocols facilitate tokenization and trading of tangible assets like stocks, real estate, and commodities. Offering advantages over traditional finance, they ensure transparent smart contracts and enable asset financialization on decentralized platforms. Notably, uncollateralized lending protocols TrueFi and Maple experienced strong 2023 growth (26.6% and 117.8% respectively), as did the real-world asset tokenization platform Centrifuge (32% YTD increase). In contrast, the DeFi pulse index gained 13%, while DeFi blue-chip tokens from Glassnode dropped 7% since the year’s start. Rising interest led to increased popularity of governance tokens of RWA protocols. The adoption of RWA-based strategies was hindered by a lack of on-chain assets, but increased tokenization is changing this. Ondo Finance, a leading RWA protocol, enables direct investment in ETFs managed by established asset managers. Key traditional finance players like Goldman Sachs, Microsoft, and Deloitte explore digital asset tokenization through blockchain startup partnerships. Siemens, a German tech giant, issued a $64 million digital bond on a public blockchain in February 2023.
I believe there will be a lot of regulatory scrutiny (as well as back and forth) around this topic, however, the regulations looming do seem to be favorable towards institutional crypto/blockchain adoption. In addition, as this is a new revenue stream for many institutions, I believe there will be a lot of interest from powerful players to push tokenization of RWA going forward.
8. Regulatory Battles and the Path to Crypto Adoption
As the industry endeavours to become more user-friendly and more real-world use case adaptable, it inevitably faces significant regulatory challenges. However, these battles should be seen as catalysts for growth rather than as a deterrent. By engaging with regulators and legislators, the crypto community is working towards an environment that will ultimately lead to broader acceptance and participation.
In 2023, the cryptocurrency landscape is facing a turning point as regulators worldwide are grappling with the challenge of establishing frameworks that balance innovation with stability, security, and consumer protection. The collapse of FTX in November 2022 highlighted the risks associated with crypto assets (albeit clearly not decentralised) lacking essential safeguards. As the connections between cryptocurrencies and the financial system deepen, concerns about systemic risks and market integrity have escalated and regulators are tasked with striking the right balance between regulation and innovation.
Globally, regulatory approaches to cryptocurrencies are diverse. While at present about 57 countries have legalized cryptocurrencies, around 14 have partial bans, and 9 have general bans. Notably, cryptocurrency adoption rates do not always align with regulatory restrictiveness. Emerging-market economies often lag due to resource constraints. Regulations governing cryptocurrencies are still evolving, varying across areas like payments, investments, derivatives, and taxation.
Stablecoin regulation is a central consideration globally. The EU’s Markets in Crypto-Assets (MiCA) Regulation proposes robust requirements for stablecoin issuers, aiming to prevent collapses and promote transparency. In the US, stablecoin bills propose various regulatory approaches, reflecting competing views on oversight.
With over 60 countries exploring Central Bank Digital Currency (CBDC) projects, it’s evident that CBDCs and cryptocurrency regulations are evolving simultaneously. Crafting a comprehensive regulatory framework in this nascent field is challenging due to the dynamic nature of digital assets and the lack of standardized definitions. [I would also like to use this opportunity to point out the fact that CBDCs come with substancial risks, surveillance concerns and pitfalls.]
Achieving regulatory clarity is crucial for restoring investor confidence, and collaboration among countries is key to refining regulatory approaches. Governments must proactively engage with blockchain advancements, and be open to feedback from industry stakeholders, to harness the potential while safeguarding consumers. A regulatory framework should include e.g. published guidelines for anti-money laundering (AML) and know your customer (KYC) protocols and standards on security tokens.
In conclusion, the crypto industry in Q2/Q3 2023 has witnessed significant advancements in scalability, convergence, interoperability and a shift towards consumer applications. With Ethereum’s Dencun upgrade, the industry is moving closer to achieving a truely scalable solution. Protocol and application convergence is driving competition, innovation and a movement to similar end goals, while the L2 ecosystem is rapidly maturing and exploring a multi-chain, or app-chain, design approach. The topic of modularity keeps coming up, however, not without its critics on hidden costs und unnecessary complexities.
As the industry shifts its focus towards consumers, we can expect to see a surge in more user-friendly applications that leverage the power of blockchain technology, as well as more RWA being tokenized and stablecoins being issued. RWA and stablecoins are creating new frontiers in the financial services industry.
Overall, I can say that in my view all these technologies and new offerings are pursing the same outcome: to make blockchains invisible and catered towards what the user that at present has no interaction with Web3.
As the regulatory landscape continues to evolve, overcoming challenges related to regulatory uncertainty will pave the way for a more robust and inclusive crypto ecosystem with investments flowing back into the industry.
The future looks promising, and it’s time to harness this momentum and build a decentralized world ready to host the needs of billions of users.
…And for those who are thinking what about…. account abstraction, ETH restaking, the plethora of security solutions, increasing institutional and brand involvement from giants like Blackrock and Puma, financial instruments like Bitcoin and Ethereum ETFs, Bitcoin Ordinals, new NFT use cases and Web3 gaming developments, AI… well those topics will have to wait for the next blog post, but they surely are not forgotten.
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