Crypto and Web3 2023 Wrapped Up: A Year of Resilience and Innovation

The year 2023 was undoubtedly quite an eventful one. Thanks to several hope-inducing catalysts we have witnessed a major crypto market recovery despite unfavorable macroeconomic conditions and an ongoing bear cycle. In this yearly review, we will go over the most important events and technological developments that took place in 2023. We will also hint at what to expect in the following year 2024, although more on this in a separate article.

Crypto Market Dynamic of 2023

Difficult Macroeconomic Climate

The crypto market in 2023 grappled with a complex array of macroeconomic challenges. Central banks' interest rate hikes, aimed at curbing inflation, coupled with geopolitical unrest in Ukraine and the Middle East, stirred market volatility. 

The lingering economic aftermath of the COVID-19 pandemic further strained the global financial climate. Additionally, the crypto sector faced its own turmoil following high-profile collapses like FTX and Terra LUNA in 2022, intensifying regulatory scrutiny and casting a shadow of uncertainty over the industry’s future.

Fear Replaced with Careful Optimism

In stark contrast to these challenges, 2023 also marked a period of robust recovery for the crypto market. The anticipation of Bitcoin spot ETFs acted as a catalyst, sparking institutional interest and fostering a shift in market sentiment from caution to optimism. 

This positive change was mirrored in rising on-chain volumes and a swing towards greed and euphoria, as indicated by the Crypto Fear and Greed Index. The year saw a surge in both institutional and retail adoption of cryptocurrencies, underlining a growing confidence in the potential and resilience of the crypto and web3 sectors amidst a backdrop of global economic and geopolitical challenges.

Focusing on Tech Development

Going through 2023 we have witnessed a constant flow of technological innovations in the crypto and web3 sector. In times of uncertainty, Ethereum is usually in the front of tech developments and this year was no exception. The first major narrative surrounding Ethereum this year was Liquid staking and LSD protocols.

Liquid Staking Derivatives (LSDs) and Their Protocols

In 2023, Ethereum's tech landscape was enriched with Liquid Staking Derivatives (LSDs). Following the launch of Ethereum's Beacon chain in December 2020, which required a hefty 32 ETH stake for validation, LSDs emerged as a game-changer. 

By August 2023, LSD protocols accounted for a significant portion of the total ETH staked, with top LSDs yielding an average of 4.4% APY. The LSD ecosystem, including protocols like Lybra, Pendle, and EigenLayer, witnessed a staggering growth of 58.7x since January 2023. Despite concerns about centralization, LSDs distributed about 100,000 ETH in quarterly staking rewards, indicating their critical role in the Ethereum ecosystem

ETH Stakers Finally Able to Unstake

The Ethereum Shanghai Upgrade, following The Merge, marked a pivotal transition to a full proof-of-stake mechanism. This upgrade, involving the implementation of EIP-4895, enabled ETH withdrawals and significantly reduced tech risks on the blockchain. 

Validators were now able to unstake their ETH, resulting in a dynamic withdrawal system based on the queue of validators. The upgrade was expected to boost staking ratios significantly, thereby enhancing Ethereum's security and attractiveness as a staking platform

Scaling Ethereum with L2 Rollups and ZkEVMs

The year 2023 was also a landmark for zk Proofs and Layer-2 Rollups in Ethereum's scaling strategy. This approach included two types of rollups: optimistic rollups, which assume the validity of off-chain transactions, and zero-knowledge rollups (ZK-rollups) which provide cryptographic proofs of validity. 

Notable developments in this space included Polygon’s zkEVM, which enhanced transaction throughput and reduced costs, ZkSync Era's EVM-compatible ZK-rollup, and the emergence of other ZK-rollup platforms like Linea and Starknet. These innovations were pivotal in increasing transaction processing efficiency and reducing costs.

Main Crypto Narratives and Trends of 2023

Institutional Interest and Increased Retail Adoption

Now more than ever, we are experiencing a heightened institutional interest in blockchain and web3 projects. Looking back, this institutional interest was probably one of the key factors that sparked optimism and market recovery during Q3 2023.

We have seen numerous attempts to integrate blockchain into already running financial operations - namely CBDCs, which have come a long way since the start of 2023. Major brands have started to capitalize on the web3 narrative with projects like Disney Pinnacle, Starbucks Odyssey, and Adidas ALTS.

According to Chainalysis the retail adoption of crypto was the highest in economically disadvantaged regions, such as India, Nigeria, and South American countries. Where the state monetary system has failed, causing for example high inflation or unavailability of financial services, bitcoin and stablecoins tend to substitute its role in people's everyday lives.

Bitcoin Spot ETF Expected Soon

The launch of leveraged Bitcoin futures ETFs and the green light given to Ether futures funds marked significant progress, although the much-anticipated approval of direct Bitcoin Spot ETFs remained pending. 

ProShares Bitcoin Strategy ETF (BITO) saw its assets peak at $1.7 billion, highlighting the growing investor interest in crypto funds. The anticipation for the approval of Bitcoin Spot ETFs remained high, with analysts predicting a potential exodus of assets from existing ETFs like BITO upon approval. This sentiment was echoed across the market, with expectations of significant investor interest in spot Bitcoin ETFs, which could potentially send BTC’s price to new heights if approved.

Memecoin Mania

2023 was also an exceptional year for memecoins, which gained significant investment attention and founded numerous digital communities.

Dogecoin, with its market capitalization exceeding $11 billion, led the pack with substantial growth and real-world applications for payments. 

Shiba Inu ($SHIB), labeled the "Dogecoin killer," also saw a notable recovery, with its market cap exceeding $6 billion. PepeCoin ($PEPE), inspired by "Pepe the Frog," quickly garnered a market cap of over $1 billion after its launch. Floki Inu ($FLOKI), known for its sports partnerships and community engagement, witnessed a significant price surge. Bonk, built on the Solana blockchain, stood out with a decentralized management structure, facilitating NFT payments and token burns.

In addition to memecoins, Telegram Trading Bots (TTBs), such as Unibot, have become popular. These bots allow users to execute trades on a decentralized exchange in a matter of a few clicks directly from their Telegram client. TTBs are especially favorite among high-frequency speculative traders (degens).

Challenges and Concerns Faced

Tightening Regulations

Both the EU and the US have already noticed the increased heightened interest in crypto and blockchain technology and with that inevitably comes regulation and supervision.

The main regulatory framework being finalized in the EU is MiCa, which sets up important definitions of crypto and DeFi terms in the eyes of the government. It further specifies rules that every service provider in the crypto industry has to comply with.

In the US on the other hand we have seen numerous regulatory crackdowns and lawsuits from the SEC (Securities and Exchange Commission). These crackdowns often regarded the alleged sale of unregistered securities (cryptocurrencies) on various exchange platforms.

However, in a positive turn of events, Ripple Labs has achieved a partial court victory against the SEC in a dispute over XRP's status as a security.

Scams, Hacks and Fraudulence

The industry also faced significant challenges with scams, hacks, and fraudulence. In 2023, cryptocurrency users lost nearly $2 billion to these nefarious activities, about half the amount lost in the previous year. This reduction was attributed to improved security protocols and increased community awareness.

Summary and a Look Forward to 2024

As we close the chapter on 2023 in the crypto and web3 space, we reflect on the key themes that shaped this dynamic period. Despite macroeconomic headwinds and regulatory challenges, the industry not only weathered the storm but also advanced significantly. 

Technological breakthroughs, like Liquid Staking Derivatives and Layer-2 Rollups, along with heightened institutional and retail adoption, underscored the sector's robustness and growth potential. The excitement surrounding potential Bitcoin Spot ETFs and the rise of memecoins added to the vibrancy of the market.

Looking forward to 2024, the crypto and web3 landscape is poised for further evolution. With regulatory frameworks like the EU's MiCA and the U.S. Congressional efforts gaining clarity, the industry is expected to mature, offering more stability and investor confidence.

The anticipated approval of Bitcoin Spot ETFs could catalyze new investment flows, while technological innovations will likely continue at a rapid pace, pushing the boundaries of what's possible in this domain.