Looking for the next trend: Reviewing the top 10 events in the cryptocurrency market in the first half of 2023.
Original Author: Jesse Zheng, SUSS NiFT Researcher; Fishery Isla, Biteye Core Contributor.
Text Editor: Crush, Biteye Core Contributor.
Original Source: @BiteyeCN
As of the first half of 2023, cryptocurrencies have taken the lead among global risk assets. However, the process of rising has not been smooth sailing, with price fluctuations causing concern.
What breakthroughs have occurred in the industry in the past six months? And what experiences can we learn from them to find the next trend? In this issue, let's review the top ten events in the cryptocurrency market in the first half of 2023 to find the answers.
01 Shanghai Upgrade - A New Chapter for the Ethereum Network
The most important event for Ethereum in the first half of this year is undoubtedly the Shanghai Upgrade. This is the final significant step for Ethereum's transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS).
Seven months after the Ethereum "merge" upgrade, on April 12, Ethereum simultaneously underwent the Shanghai Upgrade and the Capella Upgrade (allowing stakers who did not provide withdrawal credentials at the initial deposit to provide them and thus enable withdrawals).
By bringing the withdrawal function to the execution layer, stakers are able to withdraw the 18 million ETH locked since 2020 from the beacon chain to the execution layer. The upgrade provides the option for full withdrawal or withdrawal of staking rewards, making staked tokens more liquid. It enhances investors' confidence in Ethereum as an "internet bond" and improves the security of the Ethereum network.
In addition, although the Shanghai Upgrade does not lower gas fees, the implementation of EIP-3651, EIP-3855, and EIP-3869 reduces the gas costs for Ethereum developers and block creators.
Despite some early stakers making withdrawal operations after the completion of the Shanghai Upgrade, the overall trend shows that the net inflow of staking is still greater than the net outflow, indicating an accelerating increase in staked amount and validator count.
Through steady technical upgrades, Ethereum continues to improve its blockchain performance, bringing confidence to users and investors. The market has also begun to develop financial infrastructure around staked Ethereum, with projects such as LSD-based stablecoin issuance, Flash Loan leverage, and yield enhancement gaining widespread attention.
However, currently Lido occupies 31% of the staking market share, and the Ethereum ecosystem needs to promote decentralized node technology and attract more excellent staking service providers to participate in order to reduce the risk of network centralization.
02 Layer 2 is the only way to achieve large-scale implementation
On June 12th, Vitalik Buterin, co-founder of Ethereum, pointed out in the latest blog post that for Ethereum to achieve long-term sustainable development, Layer 2 expansion is one of the important technological shifts.
If Ethereum is a kingdom, then Layer 2 is the city-states within that kingdom, and the development of these city-states relates to the rise and fall of the kingdom.
According to L2beat data, Arbitrum and Optimism have gained the advantage in the L2 market with the more mature technology of Optimism Rollup, with market shares of approximately 64.55% and 18.58% respectively.
Users received the airdrop from Arbitrum on March 23rd, further strengthening their faith in the Ethereum community due to the tremendous wealth effect.
Other events worth paying attention to:
1. Optimism completed the mainnet upgrade of Bedrock on June 7th, which further reduces transaction costs, shortens system delays, and improves node performance.
2. Coinbase launched L2 Base based on the OP Stack, but does not plan to issue dedicated tokens. It plans to release the mainnet this year. At the same time, another L2 expansion solution, Zero Knowledge Rollup, has made significant progress.
3. Type 1 zkEVM: Taiko launched the Alpha-3 incentive testnet on June 7th, mainly testing the economic incentives in the protocol, the interaction between proposers and verifiers, and the interaction between proposers and the protocol's initial layer (L3).
4. Type-2 zkEVM: Major projects in this track include Scroll, Linea, and Polygon zkEVM.
Polygon zkEVM mainnet Beta version has officially launched as scheduled on March 27th, using ETH for gas fees and MATIC tokens for staking and governance;
Scroll and Ethereum Foundation jointly open-source development zkEVM, expected to launch the mainnet in the third quarter;
Linea is expected to launch the mainnet in July, with a focus on Multi Prover and Layer 3.
5. Type-3 zkEVM: Kakarot has achieved 100% bytecode equivalence and is transitioning to Type 2.5. Kakarot is committed to deploying zkEVM as L3 on Starknet.
6. Type-4 zkEVM: zkSync Era mainnet was opened to the public on March 24th, with currently high interaction fees and mostly native projects. Most blue-chip protocols have not been deployed yet. Another prominent Type-4 project, StarkNet, will undergo a mainnet upgrade in June, officially activating Cairo 1, updating the sequencer, improving scalability and transaction latency, but overall user experience still needs to be improved.
From the data perspective, the amount of ETH-denominated locked assets on L2 has increased from approximately 3.64 million at the beginning of the year to 4.82 million in mid-June, indicating a continued trend of transactions shifting to L2.
However, the current transaction volume on all L2s is still lower than that of Ethereum. Except for a few leading L2s, most L2s have low transaction volume. Moreover, there are several L2 plans scheduled to launch the mainnet in the second half of the year. Whether the market needs so many L2s remains to be seen.
03 Move Public Chain Ecosystem, Rise or Fall
At the beginning of 2023, with the gradual improvement of the macro environment and the confirmation of Ethereum's Shanghai upgrade schedule, the entire secondary market has entered a small bull market for nearly a quarter.
Since the first day of the new year, the total market value of cryptocurrencies has reversed its downward trend.
The market at the beginning of the year mainly revolves around the secondary market speculation of CEX, compared to the relatively dull primary market of MEME and various other cryptocurrencies. Aptos, a public chain in the Move series, has performed the most outstandingly in this market, with a circulating market value of 500 million US dollars. In just 20 days, it has surged to 3 billion US dollars, leading a wave of "unlocking and rallying" market.
After a brief surge, the subsequent market of Aptos has continued to decline. Similar to most altcoins, it has now returned to the level when FTX was exposed to fraud. Another star project in the Move series, SUI, reached its peak as soon as it was launched and has since experienced a continuous decline in coin price.
The Move series represents a different direction of scalable development compared to Ethereum Layer 2. The security and flexibility of Move have become one of the main advantages of this new public chain.
Currently, the Move series is still in a very early stage. The projects that use the Move language include: Aptos, Sui, 0L Network, and Starcoin. These four projects have all been launched on the mainnet, so Move-related developers can receive real income, which helps attract more developers and reserve strength for the next bullish market.
Furthermore, it is worth mentioning that as a new technology, Move still needs time to prove its stability. Beosin recently discovered a severe vulnerability in the Move VM, which can cause a network-wide crash of public chains like Sui and Aptos. Currently, this vulnerability has been properly addressed.
In the short term, the Move series public chains have concentrated chips, large amounts of token unlocking, and volatile prices, which pose certain risks. In the long run, considering the various advantages of Move compared to EVM, its market share is expected to increase significantly in the next bullish market. As a new force, it will compete for the market with traditional public chains that have been verified by time.
04 Blur and NFT market
In the NFT market in February, the most notable event was the launch of the BLUR token. The bid mining mechanism of BLUR not only allowed a large wave of users to receive airdrops of BLUR, but also injected significant liquidity into the NFT market, ushering in a small spring and having a profound impact on the future of the NFT space.
The biggest impact is that the dense bidding orders provided an opportunity for early NFT whales to exit. These whales previously held a massive amount of blue-chip NFTs at a very low cost. However, due to the insufficient liquidity on the monopolized market period of Opensea, the cost of exit was high. A large-scale sell-off not only incurred high friction costs, but also had the potential to crash the entire NFT market.
Therefore, BLUR provided a good exit opportunity for these whales, which could be large institutions, KOLs, etc. As they exited, the vested interests decreased and the hype surrounding BLUR also declined.
After this small spring, with the shift in mindset of new NFT holders and factors such as decreasing mining revenue in the BLUR bid, the liquidity in the NFT market began to shrink again. This led to the emergence of the term "NFT Big Three (Doodles, Clone X, Moonbirds)", which is also a microcosm of the entire NFT market.
In such a sluggish NFT market, the market has become particularly sensitive to the actions of project teams. Azuki, which was originally considered a blue-chip project, was removed from the list of blue-chip assets in the market as the main series was affected by the poor quality of the new series Elementals and the price dropped below two digits in the last week of the first half of the year.
Of course, there were still some localized trends in the NFT market over the past six months. The most surprising performance came from Milady Maker and Pudgy Penguins, both projects with highly active communities where people continue to take action.
Community culture is at the core of NFTs. It can be seen that the market still recognizes the narrative of NFT communities. Although this downturn in the NFT market has occurred, it has successfully filtered out a group of project teams that are "taking action", clarifying the direction of NFT development and promoting the long-term growth of the industry.
05 Impact of AI products like ChatGPT on Web3
Since the emergence of ChatGPT at the end of last year, AI has once again become a hot topic in the technology and venture capital circles. The upstream funds of Web3 investment institutions have partially overlapped with the funding sources of AI. This means that if AI continues to be popular, it will have a suction effect and the funds in the Web3 major track will relatively decrease.
Therefore, Web3 projects are striving to align the narrative with AI or utilizing AI technology to enhance team productivity.
Thus, how to utilize AI will be a topic that Web3 teams cannot avoid in the near future. Here are some trends that are happening:
1. Smart Contract AI Audit
Prior to Chatgpt's launch, some smart contract audit teams used AI technology to conduct initial reviews of client contracts to discover basic vulnerabilities. However, these audit teams only had AI perform the initial review, and ultimately, humans were required to complete the full audit report.
ChatGPT is more powerful than any previous AI, so many people have renewed hope that AI can complete a reliable smart contract audit. OpenZeppelin recently conducted an experiment comparing ChatGPT with 28 Ethernaut challenges to see if it could identify smart contract vulnerabilities.
Among the 23 challenges introduced before Chatgpt's training data cutoff date of September 2021, GPT successfully solved 19. Although this is an impressive achievement, GPT performed poorly on the latest level of Ethernaut, failing 4 out of 5 questions.
This indicates that while AI can be used as a tool to discover certain security vulnerabilities, it currently cannot replace the need for human auditors.
2. AI Replacing Positions in Web3 Teams
Just as the emergence of ChatGPT has made many people worry about their positions being completely replaced by AI, practitioners in Web3 teams have similar concerns.
Although it may be harsh, from the perspective of Web3 industry investors who are most fond of trying new things and leading trends, the trend of using AI to replace Web3 team members may occur faster than imagined.
On April 23rd, digital artist Rhett Mankind tweeted that he provided instructions and a budget of $69 to ChatGPT to independently issue a Memecoin.
At the same time, the author detailed the decision-making process, the name of the memecoin, and other related information about AI tools in the YouTube video. In addition, the AI tool also generated the smart contract code for the project.
The market is very interested in this topic, and after a few days of hype, the project's market value once exceeded $50 million. Although the experience of this Meme project may not be replicable, it can inspire us to optimize Web3 projects through AI.
06 US Crypto-Friendly Bank Collapses Highlight Bitcoin's Value
In March of this year, the US banking industry suffered a severe run on the banks, resulting in a sharp decline in stock prices. Crypto-friendly banks Silvergate Bank, Silicon Valley Bank, and Signature Bank collapsed one after another, with the collapses of Silicon Valley Bank and Signature Bank being regarded as the second and third largest bank failures in US history.
Silvergate suffered a run on the banks after accepting too many deposits from the cryptocurrency industry following FTX's collapse. Silicon Valley Bank purchased a large number of long-term bonds during a period of low interest rates, but when the interest rates increased, these bonds depreciated significantly. The bank's run on the banks forced it to sell the bonds at a discount, turning unrealized losses into reality.
Signature Bank has been the target of multiple investigations in the past, and entering the crypto market subjected it to stricter scrutiny.
On March 11, stablecoin service provider Circle admitted that some funds were held in Silicon Valley Bank, causing panic in the market and resulting in the decoupling of USDC, leading to a sharp decline in cryptocurrency prices.
Regulators have always been concerned that the development of crypto assets could have an impact on traditional financial markets, but this time it was a sneak attack from the traditional financial market on crypto assets, sounding the alarm for industry practitioners on risk isolation.
Interestingly, this bank crisis once again reminds people inside and outside the crypto industry of the reason Satoshi Nakamoto invented Bitcoin: "Banks must make people trust that they can manage money well and allow wealth to circulate in the form of electronic currency, but banks create credit bubbles with currency, causing personal wealth to shrink."
Clearly, 15 years later, these banks' repeated collapses have proven Satoshi Nakamoto's vision to the world - banks indeed find it difficult to manage users' money well.
On March 10, the collapse of Silicon Valley Bank resulted in an inflow of $397 million into the ARK Innovation ETF, the largest fund inflow since April 2021.
The positions of USDC on the market have been converted into other stablecoins by cryptocurrency investors, and some have directly bought Bitcoin and Ethereum to boost the price, initiating another mini bull market.
07 MEME Hype and Scams
From late April to early May, the entire market was dominated by MEME and scam projects, while the overall market experienced a sharp correction.
The total cryptocurrency market cap started to rise and then corrected after the active MEME market in mid-April (green arrow).
It perfectly illustrates the saying that scams always come at the end of the market madness. During this period, there were two particularly eye-catching projects, and after their success, a batch of projects imitating them emerged.
Pepe
The Pepe project tweeted its first tweet on April 5th and launched the PEPE token on April 15th. Pepe's official Twitter account stated that they aim to redefine memecoins and change the status quo of numerous derivative meme tokens in the market.
The mechanics of the Pepe project include several aspects. Firstly, Pepe tokens are not presold, meaning everyone has an equal opportunity to participate in the project.
Secondly, Pepe tokens do not have a burn tax, which means no tokens are destroyed during the transaction process. Additionally, Pepe relinquishes contract permissions, making the token issuance and trading more decentralized.
Most importantly, Pepe's liquidity team is well-funded and well-connected, attracting attention from the entire market through pump tactics, and eventually listing on Binance on May 6th at an all-time high before gradually falling back.
AIDOGE
AIDOGE was launched on April 15th and immediately gained widespread attention in the market. The AIDOGE team has tapped into investor preferences by planning to launch the AI NFT series for training, creation, and production.
In addition, AIDOGE has been actively operating and has successively launched decentralized exchanges such as Matcha and Bitget.
The success of AIDOGE is mainly reflected in several aspects. First, it has a "fair" decreasing emission, with the team able to obtain a large amount of chips at the early stage of the decreasing emission period at no cost, relying on insider information for future trading.
Second, AIDOGE can provide higher than normal market-level returns by providing liquidity and compounding interest.
Furthermore, when users purchase AIDOGE tokens equivalent to 100-1000 on the chain, they can participate in a lucky draw every half an hour. This frequency and probability stimulate users' gambling instincts and increase market speculation.
Compared to PEPE, AIDOGE lacks the price effect of being listed on Binance. It reached its peak on April 30th and has since been declining.
From these two representative "tu gou"/MEME projects, it can be seen that after reaching its peak popularity, the degree of retracement is huge, and the secondary risk is very high. Don't forget the old saying, "One's accomplishment brings the withering of a thousand bones." The trends of successful MEME projects are all like this, with countless imitators behind them, and the risk of catching the falling knife is even higher.
If you want to invest in such projects, be prepared to lose all your capital.
08 Bitcoin Eco Spring
Bitcoin is quite unique, always being part of the discussion whenever there is a hot topic. This is also where the value of BTC lies. There is a group of pure developers quietly contributing, generating power out of love, rather than relying on financing or team initial shares to sustain their operation like most projects.
Unlike the Ethereum/EVM ecosystem projects that we are familiar with, the BTC community is very open, without paid small groups or entities like the Ethereum Foundation. Any new developments in the BTC ecosystem are published on public forums, although the dissemination of these community updates is relatively slow to the outside world.
Especially in the Chinese-speaking community, it is often the last place to become aware of some of the top-notch developments in the BTC ecosystem.
Nostr is one such example. From as early as when former Twitter CEO Jack tweeted in support of Bitcoin's Layer 2/Social Layer Nostr, the Chinese-speaking community hardly paid attention. Only Biteye specifically published an original article last year introducing the groundbreaking nature of Nostr.
Until February of this year, the Chinese-speaking community gradually realized the importance of Nostr and its social app Damus, setting off a wave of mutual support.
In the past week, Damus has once again been in the spotlight. On June 13, news broke that Apple threatened to remove Damus from the App Store, causing concern for Nostr's future. It is disheartening to see the world's largest tech giant suppressing it.
However, the turnaround came quickly. Just one day after the communication meeting between Damus and Apple, Damus stated that as long as the Zaps function is adjusted, they can continue to stay in the App Store. It is remarkable that a decentralized application can communicate so smoothly with Apple.
This is consistent with Biteye's analysis six months ago. Jack, the former CEO of Twitter and an investor in Nostr, has diligently helped coordinate resources between Nostr, Web2, and Web3.
This "bright future in the midst of adversities" storyline is bound to attract more attention to Nostr and raise expectations for the BTC ecosystem in the social media field.
In the first half of the year, another hot topic in the BTC ecosystem was Ordinals, based on ordinal theory. On this basis, the groundbreaking Brc20 token was created, followed by innovative Orc20, GBRC721, and Stamp tokens, all of which received widespread popularity.
Although Ordinals does not yet have a complete decentralized solution, and its technology still needs improvement, it has rewarded users who frequently follow the BTC community and are willing to try new things.
This market trend reminds us that the information in the BTC community cannot be ignored, and all innovations are worth exploring. We must place importance on the BTC ecosystem going forward.
09 Hong Kong Taking Big Steps towards Web3
Hong Kong used to be the headquarters of many important Web3 institutions. However, due to policy fluctuations, some projects have relocated their headquarters away from Hong Kong.
In the bear market last year, various cryptocurrency exchanges and lending platforms closed down, and regulations tightened in countries such as the United States and Singapore. Many practitioners and investors became disheartened and believed that the future was bleak.
But in November 2022, during Hong Kong Fintech Week, the Hong Kong government released the "Policy Statement on Virtual Asset Development," stating an open and inclusive attitude towards virtual asset practitioners and recognizing the potential of Web3 and distributed technologies as future trends in finance and commerce.
This was interpreted by the industry as the Hong Kong government's re-embrace of Web3, and the policy support brought some relief to practitioners.
This April, Hong Kong held the Web3 Carnival, becoming the largest cryptocurrency enthusiasts exchange event in Asia after the pandemic.
During the Carnival, the Hong Kong government announced multiple policies to support the development of Web3, including allocating HKD 50 million from the budget for industry development, a securities firm student fintech internship program to encourage more outstanding talents to join the fintech industry.
Compared to Singapore's discouragement of retail trading, Hong Kong takes a more proactive approach by allowing exchanges to apply for retail digital asset trading licenses targeting individual investors starting from June 1.
Cryptocurrency promotion slogans can be seen in public places in Hong Kong. In addition, Hong Kong has issued tokenized government green bonds and is expected to introduce a stablecoin regulatory framework by the end of 2024.
Leung Hon Kei, Director of Financial Services and FinTech at InvestHK, stated during the Web3 closed-door meeting on June 12 that Hong Kong's proposal to build a Web3 center is essentially not about tokenizing virtual product assets, but about introducing Hong Kong's future economic and social transformation.
This demonstrates the importance of Web3 to Hong Kong. Hong Kong's friendly attitude towards Web3 is expected to attract a large number of practitioners who feel restrained by regulations to explore new opportunities in Hong Kong.
Hong Kong and mainland China have different division of labor, leading to different development directions. Mainland China has abundant technical talents and artists, which can provide cultural IPs and technical support to Hong Kong.
As a pioneer and pilot demonstration point in China, Hong Kong will become the vanguard of China's virtual economy development.
The Battle Between 10 SEC and the Crypto Community
On June 5, the SEC sued Binance, Binance.US, and CEO Changpeng Zhao for allegedly violating federal securities laws and illegally offering and selling securities to U.S. investors.
In this filing, various cryptocurrencies including but not limited to BNB and BUSD are listed as securities: SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, and COTI.
This is another pressure from U.S. regulators following the lawsuit against Binance and its CEO on March 28 for alleged violations of trading and derivatives rules by the Commodity Futures Trading Commission (CFTC).
This regulatory action is not only targeting Binance, as the SEC also filed a lawsuit against Coinbase the next day, claiming that Coinbase provided multiple digital currency trades that are considered securities without registering as a broker, national securities exchange, or clearing agency.
With the growth of the cryptocurrency market, reasonable regulation is beneficial for business compliance and the healthy development of the industry.
It is not only the responsibility of regulators to establish clear and appropriate rules, but also the demand of practitioners in the cryptocurrency industry.
Only with clear and understandable rules can hesitant funds enter the market. However, the SEC's delayed release of unclear rule manuals has triggered multiple rounds of lawsuits, causing turmoil in the cryptocurrency market.
In addition, there is still no unified opinion at the regulatory level in the United States, with contradictory statements from the SEC and CFTC, vying for control over cryptocurrencies.
According to Zippia's data, there are approximately 44.3 million cryptocurrency holders in the United States, accounting for 13.22% of the total population, making it a country with high acceptance of cryptocurrencies.
The recent raids on the cryptocurrency community by the SEC have prompted some market makers to sell off altcoins, drastically reducing market liquidity and causing significant losses for investors.
Regulators should take into account both regulatory and development functions. It is lazy and irresponsible to use outdated regulatory systems on innovative asset classes.
As a result, we can foresee that practitioners who were originally based in the United States will consider relocating to more crypto-friendly countries and regions due to regulatory pressures.
It is important to note that tokenization is not intended to evade securities laws. It is a product of the demand for blockchain technology in real-world applications and an improvement over traditional organizational systems.
The decentralized nature of blockchain makes it more resistant to attacks than any centralized system. If one node is attacked, there are thousands of other nodes in operation.
While some governments are cracking down, there are others that are supportive. The completely opposite regulatory attitudes of the United States and Hong Kong make us wonder if this might mark the beginning of a shift from West to East.
11 Conclusion
The financial market may have bubbles, but technology does not. The Bitcoin and Ethereum ecosystems have made significant progress in the first half of this year.
As the cryptocurrency market continues to expand, comprehensive regulation will also be introduced. Regulation is not necessarily a sign of impending danger, but may be aimed at making the market more standardized and preparing for mass adoption.
Let us continue to participate in the construction of the cryptocurrency market and lead more people towards Web3 to enjoy a better internet.
Note:
This article is the hot events section of the H1 2023 Web3 Blockchain Security Semi-Annual Report by the SUSS NiFT Blockchain Ecosystem Security Alliance. The co-creators of the semi-annual report include SUSS NiFT, Beosin, Biteye, LegalDAO, Footprint Analytis, and Shellboxes. Readers can access the rest of the semi-annual report through this link.
