Web 3.0 - 2023 Recap and 2024 Outlook

Acknowledgment

Lead Authors

Lead Authors: Jerome Ostorero and Pratik Wagh from Coinchange.io 

About Coinchange: Coinchange is a FinTech firm offering Earn Infrastructure as part of a trustworthy and regulated platform, that empowers crypto exchanges and their customers to earn returns on their stablecoins. With an average annualized 11% APY returns across Institutional and Retail Portfolios, managing a peak of $50 million in assets under management (AUM), Coinchange’s mission is to offer tools that enhance the capabilities of businesses, enabling them to provide added value to their clientele without compromising on established financial principles. We would like to thank the following authors and reviewers for their inputs in making this research report possible. 

About Dapphaus.io: 

We excel in the creation of immersive 3D web products, environments, curricula, events, games, and activations. With over 15 years of experience, our achievements extend to the construction of complete virtual worlds for various industries and spearheading groundbreaking game releases. Situated in Toronto, Canada, we specialize in real-time, interactive 3D web solutions and games tailored for enterprises and brands, consistently pushing boundaries to redefine digital engagement and deliver tangible business value.

About Moonstream.to:

Moonstream.to provides LiveOps tools for web3 games. Game developers use Moonstream to manage their web3 game economies, control token inflation, drive player engagement and retention, and create utility for web3 integration. The core tools are on-chain analytics, rewards, leaderboards, and game mechanics. Moonstream currently supports EVM-based blockchains and testnets. Visit moonstream.to to learn more about how Moonstream can help your game.

PART 1.0 2023 Market Recap

This section highlights the major trends and developments in 2023, by addressing the current state of various cryptocurrency aspects, including the global market trends, Bitcoin, Ethereum, Crypto regulations, stablecoins and yield, and the state of fundraising. 

1.1 Global Market Trends:

How did the global GDP do for 2023? What is expected in 2024?

What is clear is that the USD is at an inflection point. Although de-dollarization may take many, many generations to unfold, the global monetary regime has already started to shift away from USD dominance – and for good reason. Macroeconomic imbalances in the US are growing as the cost of servicing America’s debt burden is projected by the Congressional Budget Office (CBO) to rise to $1T or 3.1% of GDP by 2028. The CBO expects the federal deficit to expand from an average 3.5% of GDP to 6.1% in the next decade.

On the other hand, the de-dollarization theme has been a topic of discussion since at least the early 1980s, and despite that, the USD still remains the world’s reserve currency. Indeed, the USD’s outsized role in global finance and trade means the USD’s share of all international transactions has hovered around 85-90% for the last four decades. What has changed is the weaponization of global finance that began with increased US sanctions on Russia as a direct result of the war in Ukraine. This has accelerated interest in developing new cross border payment solutions as more countries are striking bilateral agreements to reduce their dependence on the USD. Both France and Brazil (among others) have started to settle commodity trades in Chinese renminbi, for example. More trials are being conducted with central bank digital currencies to avoid today’s cumbersome system of correspondent banks.

The USD’s share of foreign exchange reserves has declined over the last 30 years, but it still comprises the overall majority at 58%.

1.2 State of Bitcoin:

Spot ETF

Bitcoin was oversold in 2022 following the FTX collapse, then in early 2023, US regional banks collapsed and the overhanging debt ceiling issue became evident. These events caused the initial rally for Bitcoin. In the second half of the year, big financial institutions like BlackRock, Invesco, Fidelity, Franklin Templeton filed for spot BTC ETFs strengthening the assets narrative as the ultimate store of value. Spot ETFs if approved, will result in huge inflows of money that was not accessible to crypto before. Will it increase the price of Bitcoin? It is hard to tell as there could be a ‘sell the news’ scenario, plus there is the selling of BTC from FTX and Mt.Gox which could cause a downwards pressure on the price of Bitcoin. The first deadline for BTC Spot ETF approval or rejection is Jan 10th! 

Halving 

The Bitcoin halving will lower bitcoin issuance rewards from 6.25 BTC to 3.125 BTC in late April 2024. 

Historically such an event has lead to price increase as it reinforces Bitcoins scarcity. The last halving was in May 2020, which coincided perfectly with the money printing from central banks. The combined effect caused a sharp rise in BTC price. 2024 halving might not be as dramatic as the last one, yet the timing coincides with expectations of rate cuts from the central banks. 

Miners

Halving could have a negative impact on the miners. Their block reward gets slashed to half of current. The decline in rewards amidst an overall increase in network hash rate means a portion of bitcoin miners may no longer be productive enough to continue mining. The BTC price would have to increase significantly for them to stay profitable. This will impact the miners that have debt and/or high energy costs. We might see some mergers and acquisitions in the mining space in 2024. The side effects of such a consolidation is the concentration of mining power among a few mining pools and the possibility of transaction censorship due to centralization. On the flip side, miners can remain profitable if the fees due to increased transaction volumes go up. Usage of ordinals, atomicals, activity on Layer-2 Lightning Network, smart contract apps built on Rootstock, Stacks, BitVM etc can increase the usage on Bitcoin as a network, resulting in new income for the miners. 

1.3 State of Ethereum:

For 2023, the Ethereum Shapella hard fork has been a noteworthy event in the evolution of the Ethereum blockchain. This upgrade was significant as it included both the Shanghai and Capella updates, which were geared towards enhancing the network's performance and scalability. One of the most prominent features of the Shapella hard fork was the introduction of staking withdrawals, allowing validators to withdraw their staked ETH and rewards from the Beacon Chain.

The Beacon Chain has seen substantial activity throughout the year. Despite the enabling of ETH withdrawals post-Shapella, liquid staking derivatives (LSDs) experienced net ETH inflows, indicating a continued interest in staking on the Beacon Chain. The Ethereum network has managed the inflows and outflows efficiently, maintaining a balance between validators joining and leaving the network. As of December 2023, 28.5M ETH has been staked on the beacon chain. This number was 15.8M ETH in December 2022. 

Over the same period of time, the number of validators has gone up from 493,903 to 890,423 making the overall network more robust and decentralized. 

As for the amount of ETH burned in 2023, the total ETH in circulation has dropped from 120.50M in early January to 120.18M in late December. ETH burning is a part of Ethereum's transaction fee mechanism, where a portion of the transaction fees is permanently removed from circulation. This process was introduced as part of Ethereum's EIP-1559 upgrade and plays a crucial role in the network's economics, potentially affecting Ethereum's supply and its value over time.

Account Abstraction

The concept of account abstraction dates back to at least 2016 and refers to the idea of treating both externally owned accounts (like wallets) and smart contract accounts similarly, thereby simplifying the user experience. Ethereum advanced account abstraction in March 2023 with the introduction of the ERC-4337 standard, opening up new opportunities for users. For example, in the case of Ethereum, it could allow application owners to act as “paymasters” and pay for users’ gas fees or enable users to fund transactions with non-ETH tokens. Account abstraction can also facilitate robust wallet recovery mechanisms to create failsafes against simple human error (like losing a private key, for example). Source: Coinbase report

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ETH Restaking

Staking on Ethereum has increased by over 57% following the Shanghai Fork in April 2023. In the case of restaking, currently being pioneered by EigenLayer, this could be a way for validators to secure data availability layers, oracles, sequencers, consensus networks, and other services on Ethereum. The potential rewards earned from this process will likely represent a new income stream for validators in the form of “security-as-a-service.” EigenLayer officially launched phase 1 on Ethereum mainnet in June 2023 and will begin registering operators to actively validated services (AVS) in 2024, after which restakers will be able to delegate their staked positions to those operators. link

Rollups

The total execution transaction fees paid on rollups have increased from 3% (of all transaction fees) at the start of the year to an average of 9-10% in 2H23, suggesting users are in fact using L2s to transact in the Ethereum ecosystem. The Cancun/Deneb (Dencun) Fork is planned for sometime in 1Q24 which is expected to reduce fees on L2s by another 2-10x with the implementation of Proto-Danksharding, which creates new data space on blocks called blobs.

1.4 State of Crypto Regulations:

In 2023, the legal and regulatory landscape for cryptocurrencies and digital assets experienced several notable developments

Stoner Cats Web Series NFT Lawsuit: The U.S. Securities and Exchange Commission (SEC) charged Stoner Cats 2 LLC (SC2) for conducting an unregistered offering of crypto asset securities in the form of non-fungible tokens (NFTs). SC2 raised about $8 million from selling over 10,000 NFTs, which were used to finance an animated web series. 

Grayscale vs. SEC: Grayscale achieved a legal victory against the SEC, which could have significant implications for the digital asset industry in the Bitcoin ETF space. 

Ripple (XRP) vs. SEC: Ripple also had a notable legal success against the SEC. The case's outcome was seen as a significant development, as it involved one of the most high-profile legal battles in the cryptocurrency space. 

Sam Bankman-Fried (SBF) Found Guilty: In a major legal development, Sam Bankman-Fried was found guilty. 

Kraken Settlement with SEC: Kraken settled with the SEC for $30 million for offering and promoting their Staking services. They ceased staking offerings in the US. 

Ooki DAO Case: This case represents the increasing legal complexities surrounding decentralized autonomous organizations (DAOs) where a DAO was expected to be treated as a legal entity and the persons voting on its governance platform, were to be held accountable. 

However, keeping specific cases aside, the broader regulatory push for clarity in crypto assets was very encouraging. We saw two positive bills being floated in the Senate regarding stablecoins. We detailed these in our research report here. 

Brian Armstrong the the team at Coinbase launched a ‘Stand With Crypto’ campaign to lobby the folks in DC. 

The Stand With Crypto Alliance, a 501(c)(4) nonprofit, and their website also ranks the various political figures based on their outlook towards crypto. Donations made to the Stand With Crypto Alliance will help shape policy & support policymakers who will champion clear, common-sense legislation that protects consumers and fosters innovation. 

1.5 State of stablecoins:

Approximately US$127B stablecoins are currently in circulation, down 9% from $137B at the start of 2023. At the same time, the total market capitalization of crypto has grown, resulting in stablecoin dominance dropping from nearly 16% of the total crypto market capitalization to 8-9%. 

Source: DeFillama 

Within circulating stablecoins, USDT has greatly increased its share of the market capitalization from $66B at the start of 2023 to more than $91B as of December end. While USDC lost its market share in 2023 from $44B down to $23B. This could be attributed to a few reasons. One being that USDC is perceived as a US regulated stablecoin and global market participants might be deterred to participate due to sanction risks. Another reason is the rising interest rate within the US, making it less attractive for US participants to keep their dollars in USDC when they can earn a safe 5% with US Treasuries. Besides, USDT has always been the stablecoin equivalent of the Eurodollar Market (dollar ex-US) hence the adoption shifted from USDC to USDT. Besides, Tether has come out strong on their reserves attestation, increasing the confidence in the peg stability of USDT. 

The stablecoin landscape in 2023 has also seen increasing engagement from traditional banks and fintech companies. For example, the National Australia Bank completed a cross-border transaction using its stablecoin on the public Ethereum blockchain, and PayPal launched a U.S. dollar-denominated stablecoin, PYUSD, fully backed by U.S. dollar deposits and short-term U.S. treasuries. 

Another notable trend in 2023 was the migration of stablecoins to Layer 2 solutions, which is a reflection of the industry's push for scalability and efficiency.

In 2023, the stablecoin market saw the introduction and adoption of several innovative designs, addressing various challenges and opportunities within the cryptocurrency ecosystem. These new designs include float-pegging, delta-neutral, yield-bearing, and flatcoins, each offering unique features and mechanisms.

Delta-Neutral Stablecoins: The delta-neutral approach focuses on maintaining the value of collateral in the reserve pool through hedging. This strategy ensures that the overall value of the pool is equal to or greater than the market value of the issued and circulating stablecoins. Notable projects utilizing this approach include the UXD Protocol, Pika Protocol, Ethena, Angle Protocol, and Liquity V2. These protocols typically use a combination of collateral spot positions and corresponding short reverse contract positions to offset changes in the spot price of the collateral, achieving a net position close to zero and ensuring stability regardless of market fluctuations

Float-Pegging Stablecoins: Float-pegging is another innovative approach where the stablecoin’s value isn't rigidly pegged to a fiat currency but is allowed to fluctuate within a range. An example of this is the FLOAT Protocol, which aims to complement existing dollar-pegged assets by starting with a stable price that moves slowly based on the wider crypto economy. FLOAT's peg is variable and adjusts over time, sensitive to changes in the price of its collateral (initially just ETH). This design aims to protect the long-term purchasing power of users.

Yield-bearing stablecoins: Such as USDM by Mountain Protocol, represent a significant innovation in the stablecoin and broader DeFi space. Licensed by the Bermuda Monetary Authority, Mountain Protocol's USDM is a pioneering yield-bearing stablecoin, backed by short-term U.S. Treasuries. This approach allows USDM to pass through the yield from these treasuries to users, providing a moderate, ultra-safe return on their USD holdings. As a result, USDM not only maintains a stable value but also offers its holders an additional incentive in the form of yield, aligning the benefits of stablecoins with the income-generating aspects of traditional financial instruments.

Flatcoins: Represent an intriguing evolution in the stablecoin arena, designed to offer a unique blend of stability and growth potential. Unlike traditional stablecoins pegged to a single fiat currency, flatcoins are backed by a diverse basket of assets, meticulously curated to align their value with specific financial goals, such as matching inflation rates.

At coinchange, we published a research paper on the adoption of stablecoins in the global remittance industry and we see a clear trend that most if not all the remittances will be facilitated by stablecoins. And while folks hold stablecoins in their wallets, they will look to earn a yield on their balances. 

The adoption of yield-bearing, dollar-denominated stablecoins is expected to see significant growth in 2024, especially in countries grappling with high inflation rates. These stablecoins offer a dual benefit: preserving purchasing power by holding value in dollars, the world's reserve currency, and generating income through yield. In economies where the local currency is volatile and depreciating, the stability and yield potential of these stablecoins present an attractive financial refuge. Moreover, the burgeoning FIRE (Financial Independence, Retire Early) movement, which emphasizes early retirement through smart financial planning, is likely to further fuel the adoption of such stablecoins. Individuals aiming for financial independence are increasingly seeking investment avenues that offer regular, reliable income that exceeds their expenses. Yield-bearing stablecoins provide a compelling option for these investors, combining the safety of dollar-denominated assets with the added advantage of earning passive income. This trend is set to redefine savings and investment strategies for individuals in high-inflation regions and those pursuing the FIRE lifestyle, making stablecoins a key component in their financial toolkits.

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1.8 State of RWA tokenization:

The amount of money invested in tokenized US government bonds has grown six times to more than $786 million. This is because people are looking to make money in ways that don't rely on typical cryptocurrency yield. In 2024, it's likely that this trend will spread to other types of investments like stocks, private funds, insurance, and carbon credits as investors are looking for ways to earn more money and want to spread their risks by diversifying. 

1.6 State of Yield: 

After the collapse of Celsius and BlockFi, the response and attitude of crypto investors have been mixed. The aftermath of the collapses of Celsius and BlockFi has been a wake-up call for many investors in the crypto space, prompting a re-evaluation of the risks associated with centralized crypto lending platforms. This prompted many investors to turn to pure DeFi yield eliminating centralized counterparties while others simply decided to exit the market altogether. Especially since we started to exit the bear market, investors had turned to earning yield on stablecoins as market participants tend to wait on the sideline with stablecoin before entering the market again. Blue chip DeFi platforms such as AAVE, Compound, and Curve offered yield on stablecoins at a yearly average of 3.3% APR . At the same time, the US treasury kept hiking rates from 3% to close to 6% at the end of the year. This meant that the underlying dollar reserves backing the stablecoins were earning a TradFi yield of 6% minimum, while the remaining CeFi lenders were able to sprinkle a couple of percentage more via their practice and reach an average 7.8% APR for the year. This coupled with clearer regulation around stablecoin lead to the creation of new type of stablecoin called the yield-bearing stablecoin (eg. USDM, USDY, STBT) and almost instantly found its product market fit as seen in the market cap growth of these projects. This meant that investors who already had USDC started looking for higher yields than what AAVE, Compound, Curve or staked Ethereum could provide as USDC does not compete with Yield-bearing stablecoins. Thus platforms such as Coinchange, who run DeFi yield strategies which generated an average 7.2% APY on stablecoin, was one of the beneficiaries as well. 

1.7 State of crypto fundraising:

The overall volume and value of deals in the global venture capital environment has slowed sharply since 4Q21, irrespective of the investment sector, due mainly to higher opportunity costs (as interest rates have increased) as well as worries surrounding the overall health of some economies, as reflected in US regional bank failures in early 2023. For crypto specifically, a moderation of the VC trend partly reflects the reputational damage caused by the fallout from FTX’s collapse in late 2022 and the resulting regulatory uncertainty – specifically in the US. According to The Block, the total amount of blockchain and/or crypto funding declined to US$10.6B in the first 11 months of 2023, down from $32.4B over the same period in 2022 Source: Coinbase

The sum of the amounts raised by the companies listed above is $1,308,000,000. 

• In the first quarter of 2023, venture capitalists invested $2.4 billion into crypto-focused startups and protocols, which was the lowest investment amount in over two years, dating back to the fourth quarter of 2020. However, there was an increase in deal count, with 439 deals in Q1 2023 compared to 366 in the previous quarter. This increase was primarily driven by growth in pre-seed deals, which constituted 20% of the total deals, the highest share since the first quarter of 2021.
• The second quarter of 2023 saw a continuation of the downward trend in investment in the crypto and blockchain sector, with $2.32 billion invested. This was a new cycle low and the lowest since the fourth quarter of 2020. Despite a slight increase in the deal count, the total capital invested by venture capitalists in crypto and blockchain startups continued to decline quarter-over-quarter.
• The third quarter of 2023 witnessed the lowest level of activity since the fourth quarter of 2020 in terms of both the number of deals and total capital invested. The crypto and blockchain sector received $1.975 billion in investments, marking a new cycle low and maintaining the downtrend that began after reaching a peak of $12 billion in the first quarter of 2022.

PART 2.0 2023 Coinchange Recap

2.1 Summary of 2023 Research Reports

In 2023, our research team (Jerome Ostorero, Director of Research, and Pratik Wagh, Head of Research) published 3 long-form research reports: 

1. Crosschain Interoperability and Security 

This report discusses the critical need for interoperability among blockchains to enhance liquidity and connectivity. It explains that bridges serve as a key solution, allowing seamless transactions across different blockchains. Various types of bridges, categorized based on their utility and validation methods, are explored, highlighting the complexities and security considerations involved. The report delves into the reasons behind the high incidence of bridge hacks in the decentralized finance (DeFi) space, emphasizing the importance of robust security measures across economic, implementation, and environmental aspects. It then shifts focus to preventative strategies for bridge security, advocating for proactive measures such as following best practices, rigorous testing, real-time monitoring, and risk assessment frameworks. These measures are aimed at minimizing the chances of hacks and ensuring efficient response and recovery in case of security breaches. The report underscores the growing challenge of maintaining secure and efficient bridges in the blockchain ecosystem and the necessity of continuous innovation and vigilance in this domain.

This report was co-authored by LI.FI, Hacken, and co-published by the Cross-Chain Coalition

2. Institutional DeFi in 2023, Regenerative Finance (ReFi)

This report delves into the field of Institutional Decentralized Finance (DeFi) and Regenerative Finance (ReFi), exploring their applications, implications, and challenges. It discusses how Institutional DeFi, through blockchain technology, is revolutionizing traditional financial services like payments, trading, and insurance, highlighting the transformative role of asset tokenization. The report also covers the impact of Institutional DeFi on social and environmental initiatives, emphasizing its role in fostering transparency, financial inclusion, and innovative investment models through Regenerative Finance. Additionally, it examines the crucial infrastructures, like Celo, Chainlink, and Polygon, that support asset tokenization and contribute to a more sustainable future in the finance sector.

This report was co-authored by Securrency, Toucan Protocol, Goldfinch, RWAxyz, Nick Halaris, RealT, Homebase, and Polygon. 

3. Stablecoin Landscape and the Remittance Use Case

This report provides a thorough analysis of the stablecoin market and its application in the remittance industry. It is divided into three parts: The first part introduces stablecoins, discussing their concept, types, market leaders, trends, and regulatory aspects in different global regions. The second part focuses on remittances, examining the role of traditional financial services and the potential of stablecoins in enhancing cross-border payments. The third part showcases practical applications, highlighting initiatives like Hedera's international remittance projects and Circle's USDC in remittance partnerships. 

This report was co-authored by Hedera, Myna, Glo-Dollar, Brale, Unocoin and reviewed by the Ethereum Enterprise Alliance

2.2 Coinchange 2023 updates

In the year-to-date performance evaluation, Coinchange has demonstrated an impressive 100% revenue growth, owing to its strategic initiatives and market positioning. The expansion of its client base, with a fivefold increase, shows a strong market demand for our Earn Product. Our brokerage product doubled the trade volume indicating an increased activity level that contributes significantly to the revenue stream. We introduced a new product offering, Prepaid Cards Payout, focused on diversifying revenue sources and expanding our product portfolio, making Coinchange the only company to offer this unique suite of products. Our new partnerships with Earn product partners such as Unocoin (India’s most trusted exchange), Bytedex, Kanga, and Conomy, have opened up new avenues for growth and collaboration in the dynamic and competitive digital asset environment. Here is a quick timeline of our highlights in 2023: 

Dec 2023

• More than 14,000 people tuned in to one of our largest X-Spaces for global exchanges 
• Coinchange partnered with Bytedex (ByteExchange) using our API to offer Stablecoin Earn feature to their users. 
• Our EMEA General Manager Alex Borowski, presented at the NBX Berlin 2023 conference on "How DeFi Can Empower CeFi and TradFi".

Nov 2023

• Got featured in The Block & Coindesk for raising $10M to scale our API Yield Service. The funding round was led by G1.VC, Spirit Blockchain, Good News Ventures, K2.CA and Atoia Ventures, with Mintfox also participating.
• Announced the support for EUR. All clients, regardless of their country, can now use EUR on their Coinchange web accounts.
• 3300+ people tuned in to listen to Global Entrepreneur, Crypto Industry Leader and 3x Founder (Lykke, Trust Square, flovtec) Anton Golub on our X-Space.
• 1400+ people tuned in to listen to AlphaShares NFT Show sponsored by Coinchange.
• We published our "The Stablecoin Landscape & Remittance Use Case" Research Report co-authored by industry legends from Hedera, Myna, UnoCoin Exchange, Glo Dollar, Brale and reviewed by the Ethereum Enterprise Alliance (EEA). 
• Our CEO Spoke at SiGMA Malta to discuss Blockchain and Finance.
• Nearly 21,000 people joined us on our largest X-Space of the year with Brian D. Evans discussing ‘New Business Models for Crypto Exchanges and Wallets’

Oct 2023

• Our CEO Maxim Galash and Head of Research Pratik Wagh appeared on Unocoin’s Live Stream discussing ‘How to generate passive income with Stablecoins’. Unocoin is India’s first and one of the top 5 crypto exchanges. 
• Our Head of Research Pratik Wagh published an OP-ED on Crypto News titled ‘Decentralized finance is changing our everyday lives’ exploring the transformative impacts of DeFi across sectors such as Real Estate, Climate Change & Insurance.

Sept 2023

• Attended the Circle Forum NYC along with stablecoin leaders such as Jeremy Allaire discussing yield opportunities with Stablecoins. 
• Released new version of our website. 
• Attended the Mainnet 2023 in NYC by Messari Crypto.
• Our Director of Research & Risk, Jérôme Ostorero, joined the Ethereum Enterprise Alliance for an exclusive interview on how Coinchange is influencing Ethereum and DeFi's future.

July 2023

• Coinchange Research Team led by Jérôme Ostorero & Pratik Wagh published a 40-page deep-dive report, "Institutional #DeFi in 2023, Regenerative Finance (ReFi): fostering adoption through #blockchain innovation" along with co-authors from Polygon, Securrency, Toucan Protocol, Goldfinch, RWA.xyz, Nick Halaris, RealT, and Homebase.  
• Coinchange joined the Ethereum Enterprise Alliance as a member to contribute to the standards and frameworks fostering the adoption of the Ethereum blockchain amongst enterprises.

June 2023

• Attended the round table deep dive into Fintech’s future at the CollisionHQ conference in Toronto.
• Coinchange won the ‘Best Web3 Solution Canada 2023’ award by Global Financial Market Review (GFM). 

May 2023

• We announced our strategic partnership with altFINS allowing their users to gain access to Coinchange's Risk-managed High Yield Earn portfolios.
• Attended the Next Block Expo Warsaw Summit 2023.

April 2023

• Attended the Consensus 2023 conference by Coin Desk
• Coinchange DeFi R&D team developed a new technology called The Framework for Algorithmic Yield Strategies (FAYS) in the DeFi ecosystem.

March 2023

• Attended the FintechMeetup in Las Vegas networking with the TradFi community. 
• Our General Director of the EU Office, Aleksander Borowski, represented Coinchange at the AIBC summit.
• Coinchange Research Team led by Jérôme Ostorero & Pratik Wagh published a 50-pages research report on Crosschain Interoperability and Security along with co-authors from LI.FI, Hacken and the Cross-Chain Coalition. 

Feb 2023

• We published our Risk & Mitigation Paper to provide a comprehensive understanding of the risks associated with Coinchange technology platform and the measures taken to mitigate and manage them. 
• Coinchange was nominated as one of the best treasury management solutions for the Hedgeweek US Digital Assets Award. 

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2.3 Updates from Head of DeFi at Coinchange: 

2.3.1 Platform Development:

Despite the platform's foundation being established last year, this year marked the completion of significant upgrades to the core services, alongside the introduction of new features. Key developments in the core services include:

1.1. Gas Station Service: Automated management of gas.

1.2. Comprehensive Service and Strategy Management: Facilitated through Swagger-based web applications.

1.3. Standalone Balance Grabbers: Implemented for each strategy in production.

1.4. Full CI/CD Implementation: Applied to offchain and onchain development.

1.5. Kubernetes Integration: Updated to run all services on the Kubernetes platform.

These enhancements have enabled more flexible management of digital assets. Coupled with integrations through Qredo and Fireblocks, we now possess the capability to actively and securely manage numerous portfolios and instances effectively, positioning us well for future scaling.

2.3.2 Data Collection, Processing, and Utilization:

This year marks a significant milestone in our data engineering initiatives. Moving away from ad-hoc data acquisition and reliance on tools like Dune Analytics, we have entirely revamped our strategy, focusing on data-centric development from the ground up. Consequently, we have successfully established a comprehensive data management infrastructure, including:

2.1. A network of our nodes, supplemented by an enterprise-grade institutional node service.

2.2. A Clickhouse-based data lake, storing historical data for all supported EVM blockchains. This encompasses transactions, events, and mempool data, with the capability to integrate new blockchain protocol data from their inception rapidly.

2.3. A suite of data grabbers designed for both historical and real-time data processing, covering transactions, events, and mempool data.

2.4. A robust data processing infrastructure, featuring technologies like Apache Kafka and Apache Flink.

2.5. Customizable Grafana-based dashboards extensively utilized by our quantitative analysts and asset managers for real-time insights and analysis.

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2.3.3 On-Chain (Smart Contracts) Development:

This year has been notable for advancements in our on-chain infrastructure. Beyond developing on-chain strategy components, we have achieved several key developments:

3.1. Integration with DeFi Liquidity Aggregators: Our integration with 0x (Matcha) enables us to perform top-tier, complex automated swaps with slippage control, utilizing aggregated liquidity across various blockchains.

3.2. Non-Custodial Instances - Vaults: These allow for fully transparent fund transfers, providing clients with complete control over their assets.

2.3.4 Strategy Development and Implementation:

This year, we achieved significant breakthroughs in two fundamental research areas: the sequencing of lending and borrowing for multiple tokens across various protocols, and active concentrated liquidity provisioning on Uniswap v3. These strategies are pivotal for our long-term approach, with profits primarily derived from fees rather than rewards, enabling us to sustain superior yield capacities on stablecoins and WBTC/WETH.

Additionally, we broadened our strategic spectrum by incorporating liquidity provisioning with hedging and liquidity cascading algorithms. These were applied across various decentralized exchanges (DEXes) and lending/borrowing protocols on different blockchains.

 Overall, we successfully launched over 10 diverse strategies this year. As a result, our target gross Annual Percentage Yield (APY) on stablecoins reached an impressive 15%.

2.4 Update from CTO at Coinchange

2023 has seen significant developments in the Coinchange Client Platform, bringing enhancements in key business areas of customer experience, support for new currencies, trading effectiveness and Earn Infrastructure integrations.

2.4.1 Trading and Currencies

Support for new cryptocurrencies

Five new currencies have been introduced for trading, see list below.  Clients can trade these cryptocurrencies into most of the currencies supported by Coinchange, including fiat currencies USD and EUR. This opens up important on and off ramps for clients. 

• BUSD
• XRP
• USDT TRC20 (Tron)
• LTC
• SOL

Of particular note is support for USDT TRC20 on the Tron network.  With over half of global USDT in circulation being held on the Tron network, clients can use USDT TRC20 tokens with Coinchange services directly. 

Support for EUR

Coinchange added support for clients who want to use EUR currency instead of USD.  Coinchange can:

• Receive SEPA and SWIFT Euro deposits 
• Withdraw Euro to client-verified destination bank via either SEPA or SWIFT
• Trade cryptocurrencies against the Euro
• Perform ForEx exchange between Euro and US Dollar

New Liquidity Provider Integration

A new integration with B2C2 exchange has been implemented. This provides users with better spreads and wider choices of trading pairs.

Sophisticated Order Routing

A sophisticated Order Router was built to easily configure where various currency pairs are traded.  Order Router is easily extended to manage multiple exchanges and trading criteria.

Over-The-Counter (OTC) Trading Support

OTC support allows Coinchange traders to work face-to-face with high value clients to negotiate better spreads on their behalf and ensure trades are properly reflected in the platform.

2.4.2 Earn Infrastructure

Developer Portal and a Sandbox environment

Providing developers with access to a working Sandbox has never been easier.  Developer portal allows developers to instantly register a fully functional Sandbox account, receive an API key, and begin using the API and see earnings in a Testnet environment.

Support Bulk Deposits

Bulk deposits optimize gas transfer fees by allowing to accumulate deposits into batches.  Bulk deposits remove a very important friction point from the user experience.

YaaS Partner Dashboard

A full-featured dashboard to allow Yield-as-a-Service partner to view their Earn Account investment statistics and monthly profits.

2.4.3 User Experience and User Reporting

Business Client Multi-User Support

Business accounts can provide access to multiple users to perform various business functions in the Coinchange account. Different roles can be defined to ensure security and separation of duties.

Client Statement Reports

Monthly PDF statements are now available to be generated for individual users.  Statements can be easily emailed or downloaded.

Improved Business Onboarding Experience

Business onboarding has been streamlined to collect the needed info and provide clear information on next steps.

Email Template Modernization

Email templates were redesigned to have a modern look & feel.

Web App UX Refresh

Web application UI has been redesigned to provide a fresh new look.

2.4.4 Capability to Whitelabel the Platform

Platform backend and frontend structure has been improved to allow easier whitelabeling for interested businesses.   This includes user groups, web app logo and brand name configuration, and many other structures.

2.4.5 Compliance and Regulatory

Blockchain Address KYT/Sanctions screening

Integration with Xplorisk for address deep scanning to ensure cryptocurrency funds are sent and received to/from reputable addresses.

In short, whether market went up, down or sideways, Coinchange team kept shipping, and earning yield for its partners and their clients and we can’t wait to launch more features and products in 2024! We have some really exciting launch updates coming soon. With that in mind, let’s shift our focus on the broader market outlook for 2024 in some of the key categories in the next section of the report. 

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PART 3.0 2024 Outlook

3.1 GameFi sector in 2023 and its 2024 outlook

3.1.1 Background And Its Growth Over the Years

The gaming industry currently represents a total addressable market of approximately US$250 billion, and this figure is expected to grow to $390 billion in the next five years. Recently, Coinchange organized a discussion on Web3 gaming involving various participants, including Neeraj from Moonstream, Fabian from Planet IX, and Corey from Parcel Party. The conversation focused on several key aspects, such as the current landscape of Web3 gaming, the challenges associated with onboarding users onto Web3 games, the prominent blockchain platforms used for gaming, and the potential future of Web3 gaming in the year 2024.

It's worth noting that surveys have shown that a significant majority of gamers have a negative view of NFTs. They don’t mind pay-to-play ethos in gaming. What they don't like is microtransactions and pay-to-win games. Much of the criticism in the gaming industry, whether directed at crypto or traditional games, stems from concerns about how games are monetized. However, it's important to recognize that not all forms of monetization are inherently bad. The key is to find ways to monetize games that do not negatively impact the core gameplay experience or true competitive play.

As a point of historical reference, in 1981, the video games industry generated revenues of $20 billion, which, when adjusted for inflation, would be equivalent to $64 billion today. This provides context for the significant growth seen in the global game revenue, which reached $180 billion in 2021. 

Crypto gaming experienced a surge of interest in 2021, but it has seen a decline in engagement since then. This genre of gaming introduces concepts like digital property rights, verifiable secondary market liquidity, community governance, shared ownership structures, and enhanced funding options for developers through tokenization of in-game assets. However, this tokenization makes managing the in-game economies more complex.

3.1.2 How Have GameFi Business Models Evolved

Initially, the scarcity of in-game resources and financial speculation from non-players maintained demand, attracting extractive participants. These participants exacerbated the supply-demand imbalance by entering early and increasing demand for consumable yielding assets and the items they produce. One proposed solution is restricting the transferability of consumable items in the game's early stages.

A few major issues arise: first, many players are primarily motivated by financial rewards rather than enjoying the game. Second, pay-to-win mechanics in competitive circuits favor players who can afford to spend large sums. And thirdly, leveraging cryptocurrency for gaming leaves companies exposed to the ebbs and flows of the market. When crypto is down so are profits and DAU numbers. Forecasting/projecting revenue becomes quite difficult when not using FIAT as you need to account for the state of the crypto market and the value of your token/coin when realizing revenue. Assuming these gaming companies want to eventually turn crypto to cash. (Unlike traditional game currency which can be pegged to a specific fiat value and changed at any time e.g. robux ~244 ROBUX : 1 USD.)

Efforts have been made to reward gamers for active gameplay, giving them governance powers over the game world. Guilds like Yield Guild have industrialized the scholarship model, offering economic opportunities to many, particularly in countries like the Philippines where play-to-earn games had a life-changing impact during COVID.

Balancing the number of value-extractive players with those who pay for entertainment is vital. Developers should have a clear understanding of their target audience when opening up blockchain game economies, as navigating this path is complex. Games that solely target web3 native users as opposed to the broader gaming market have a hard time with user acquisition as P2E models promise riches not good gaming experiences. User retention is a leaky bucket without a good gaming experience to keep users coming back.

The ideal gaming experience is one where players have agency and freedom without external forces vying for their attention. This is why great games stand the test of time.

The PlayFi model treats players themselves as NFTs, which are permanently burned if they lose. The objective is to encourage users, beyond core competitors, to engage in metagames with metadata. Crypto serves as the backend accounting engine for various functions like ticketing, payments, player NFT contracts, and automated tournament bounty smart contracts, enhancing transparency and liquidity.

Consolidating data, metadata, and infrastructure in one place allows third parties to develop their own metagames around these games, reducing distribution frictions associated with traditional app stores.

Despite growing pains, there is excitement about participating in the evolution of this sector. It's essential to periodically challenge assumptions and consider how susceptible these games are to over-financialization. The industry remains in its early stages, making it challenging to predict which models will prevail. Teams like Lattice, Topology, and Matchbox DAO are pioneering this sector, and their progress is eagerly monitored.

3.1.3 Blockchains Favored By GameFi

In 2023, the landscape of Web3 games witnessed significant developments and trends and is evolving so fast that the numbers in the chart above are already outdated. One notable aspect was the dominance of general-use Layer 1 (L1) blockchain networks, which were the preferred choice for the majority of Web3 games, accounting for 81% of the market. Additionally, Ethereum Virtual Machine (EVM) sidechains played a significant role in this space. As Gamefi matures, we could see a shift from Layer 1 to Layer 2s to eventually networks dedicated to individual games leading to a proliferation of gaming-focused chains. 

Moreover, the gaming industry saw the emergence of application-specific blockchain networks tailored specifically for gaming purposes. These networks constituted a new breed of blockchain infrastructure, representing 43% of the networks launched in 2023, marking an 84% year-on-year growth. These networks aimed to provide specialized solutions to cater to the unique requirements of Web3 games.

In terms of distribution and accessibility, the Epic Games store made a noteworthy transition towards embracing Web3 games. The number of Web3 games listed on the store surged from a mere two in June 2022 to a substantial 69 by October 2023, reflecting the growing interest in Web3 gaming.

In terms of blockchain network usage, the Polygon ecosystem emerged as the primary host for Web3 games, followed closely by Binance Coin (BNB) and the Ethereum Mainnet. OP Stack gained popularity as the choice for new networks, while migration trends leaned towards Arbitrum and Immutable.

Geographically, the Asia-Pacific (APAC) region stood out as having the largest share of Web3 game development teams, underlining the global nature of this industry. The United States remained a significant country market for Web3 game development, while South Korea-based game development teams experienced significant growth in 2023.

The proliferation of networks targeting Web3 gaming was a remarkable trend in 2023, with a total of 81 such networks announced. The majority of Web3 games were free-to-play (F2P), although 26% required players to hold specific Non-Fungible Tokens (NFTs) to access the game, highlighting the integration of blockchain-based ownership.

In terms of game genres, popular categories included RPG, Action, Strategy, and Casual, in that order. Blockchain technology was primarily utilized for tokenizing in-game assets, while game state and logic remained off-chain for most Web3 games. Fully-on-chain games represented a smaller fraction, accounting for only 5%, with strategy titles comprising 40% of them.

Furthermore, Web3 game developers largely adhered to a single-chain strategy for their games. Immutable emerged as the most popular Layer 2 (L2) gaming ecosystem, followed by Arbitrum. Notably, 2023 saw a record number of Web3 games migrating to different blockchain networks, with Polygon, Immutable, and Arbitrum receiving the most games from other chains. Of these migrations, 6 out of 10 games transitioned from Layer 1 (L1) networks to Layer 2 (L2) networks.

Financially, Web3 gaming-related projects managed to secure substantial funding, raising a total of $1.5 billion in the first three quarters of 2023. Finally, the influence of sports and massively multiplayer online (MMO) titles was evident in recent funding activity within the Web3 gaming space. These trends collectively paint a comprehensive picture of the dynamic and evolving Web3 gaming landscape in 2023.

3.1.4 Final Thoughts and Future of GameFi

During a Twitter Space hosted by Coinchange, a panel of GameFi experts including Neeraj from Moonstream.to, Corey from Party Parcel, and Fabian from Planet IX, delved into pressing questions shaping the Web 3 gaming landscape. The discussion ranged from what Web 3 brings to gaming that motivates industry leaders, to the most successful business models emerging in the space. The experts also critiqued business models and incentive structures that have faltered, offering insights on potential fixes. Further, we explored the distribution of market share across different blockchains within the gaming sector. One of the focal points of our conversation was identifying key trends and developments to watch for in the Web 3 gaming space in 2024, highlighting the dynamic nature of this rapidly evolving industry.

 Giving the player control and ownership is an anchoring principle in Web 3 gaming. Neeraj from Moonstream highlighted how fundamentally, exciting Web3 games let players dictate the game's rules. The potential in Web3 gaming is enormous as we give players the leverage to make changes in the game consistently. 

As we aim for a future where seamless interaction with Web3 games becomes second nature, much deliberation arises. This ambition is rooted in decentralization and power being passed over to the users. However, it must be done such that the users find it simple and easy to use. The focus thus lies on ways to bridge the knowledge gap between gamers and blockchain. Several considerations such as general AI, validator support, and more focus on gameplay than transactional operations are underway, giving an optimistic outlook for the year 2024. 

The space of Web 3 gaming is promising and multifaceted, however the market size is only around $5 Billion while the Web 2 gaming market size is close to $250 Billion. It is worth noting that the mobile market makes up more than 125B. Mobile gaming is most of the market. We believe lightweight/casual gaming will be more likely to adopt this technology and a P2E model before the broader gaming market and AAA titles. We believe this segment is less likely to experience friction adopting P2E leveraging crypto than the hardcore traditional PC gamers who seek great gaming experiences above all. The other vertical that may see adoption of crypto P2E models is online gambling. These users are already “playing to earn” and Gambling industry is also worth over $100B.

Bridging the knowledge gap to onboard Web2 gamers onto Web3 platforms, realizing successful business models, and choosing the right blockchain are some of the key concerns and focus areas. There is even a possibility for infrastructure providers like Coinchange to offer yield earning opportunities, further enhancing the economies in the Web 3 Gaming space. The developments in the Web3 space have practitioners and enthusiasts eager, as they set their sights on a future brimming with potential in the gaming industry. 

With continued exploration, education, and infrastructure development, the world of Web3 gaming is set to revolutionize the gaming industry, laying a solid foundation for the gaming future we all envision.

Sources for GameFi Section

1. Video Games - Worldwide by Statista
2. Creating Sustainable Web3 Gaming Economies
3. State of Web 3 Gaming by G7 DAO 1, 2, 3 and 4
4. The Future of (Crypto) Gaming by Delphi Digital 
5. Coinchange Twitter/ X-Space on Future of GameFi

3.2 Bitcoin in 2024

3.2.1 Spot BTC ETF Approved, What’s Next?

After months of anticipation, the cryptocurrency world witnessed a historic moment. The U.S. Securities and Exchange Commission (SEC) approved 11 spot bitcoin exchange-traded fund (ETF) applications. This decision, hailed as a "watershed" moment, is set to revolutionize the way mainstream investors can access bitcoin. Historically, the launch of the first U.S.-based gold exchange-traded product led to a significant increase in gold prices, a trajectory that bitcoin was expected to follow. Analysts, including those from Standard Chartered Bank, predicted that bitcoin ETFs could attract over $100 billion by year-end.

Although there may be some capital rotation into riskier parts of the asset class in 2024, we believe institutional flows will remain firmly anchored on bitcoin at least through the first half of 2024 strengthen the narrative around the disinflationary supply schedule associated with the Bitcoin halving in April 2024.

The introduction of Bitcoin ETFs (Exchange Traded Funds) has raised significant concerns regarding the centralization of Bitcoin and the potential influence of the U.S. government and large asset management firms on the cryptocurrency network. One of the primary concerns revolves around the clause in Valkyrie’s Bitcoin ETF application, which, if approved, could potentially enable U.S. federal or state regulators to seize, liquidate, or restrict access to the underlying Bitcoin. This is particularly worrisome considering the close political connections of Bitcoin ETF issuers like BlackRock, a major player in the financial industry with significant political ties post-2008 financial crisis. These connections could lead to crypto policies that favor such entities' business interests more than the broader cryptocurrency industry. 

Arthur Hayes, co-founder of BitMEX, echoes these concerns, emphasizing the potential impact of firms like BlackRock on Bitcoin. He worries that large asset managers might dilute Bitcoin's core tenets such as immutability, resistance to censorship, and decentralization.

Another concern is about Bitcoin's fixed supply and the implications for ETF issuers once the supply is exhausted. It's important to note that the total supply of Bitcoin is capped at 21 million. In theory, as the supply of Bitcoin nears its limit, the scarcity could drive up its value. ETF issuers may have to navigate this by relying on existing circulating Bitcoin, potentially increasing market competition for limited supplies. This situation could lead to a scenario where 'paper Bitcoin' is created to represent ownership without direct possession, similar to how gold ETFs operate. This could, in effect, create a dual supply system - one of actual Bitcoin and another of its representation in ETFs. However, this is speculative and would depend on how the market and regulatory environment evolve.

3.2.2 Bitcoin's 2024 Halving and the Miners' Dilemma

As we approach the 2024 Bitcoin Halving, the cryptocurrency community is at the brink of a significant transformation. This event, which is likely to coincide with Tax Day 2024, is not just a routine occurrence in the crypto calendar. It marks a pivotal moment in the evolution of Bitcoin mining and the security of the network at large.

Bitcoin's Deflationary Design and the Halving Mechanism

Image source: Investopedia

Central to Bitcoin's design as a rare, deflationary asset is its halving mechanism. Every four years, the amount of Bitcoin rewarded to miners is slashed by half. This process will continue until the total supply reaches 21 million BTC, a milestone expected around the year 2140. This deliberate approach to reducing the issuance rate is what bolsters Bitcoin's resistance to inflation and underscores its value proposition as a finitely scarce digital asset.

The Impact of Reduced Bitcoin Issuance on Network Security

With the upcoming halving, there will be a significant reduction in the new Bitcoin issuance for miners. This poses a substantial challenge, considering the fact that these miners help the network function and produce ‘blocks’ for people to transact. Despite the need for increased on-chain transaction fees to balance the predictable decline in Bitcoin issuance, historical trends have not shown a significant rise in these fees. This situation raises concerns about the long-term financial sustainability for miners, who need to balance their revenue against expenses like energy, mining equipment and labor. Previous cycles have shown that careful management is crucial for bitcoin miners (e.g Core Scientific bankruptcy in 2022). Bitcoin users/investors have opposite incentives than miners in the sense that users want to pay cheap Tx fees for block space whereas miners would like to be the highest to increase their profit margin. In an environment where supply is fixed and shrinking, the variables are demand and price. However difficult to predict, the catalyst for this upcoming year seems promising even if Tx fees revenue for miners does not increase. 

Possible Futures for Bitcoin Mining

Increased Transaction Fees Through Applications:

Image source: Dune analytics Dashboard

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Bitcoin may see the development of native applications, like Ordinals and Inscriptions, that could potentially generate higher transaction fees. The growing popularity of Ordinals and Inscriptions has led to increased network congestion and higher transaction fees. This is because these applications require significant block space, which becomes scarce as demand rises hence requiring higher fees to be paid for next block inclusion. Miners benefit from more fees per vByte in their blocks, maximizing their rewards for the same computational effort. The future trajectory of Ordinals and their impact on Bitcoin is still uncertain; however for now, it appears that their usage is on the rise. 

Other applications such as the Liquid Network which is a Layer 2 sidechain built on top of the Bitcoin blockchain, developed by Blockstream, can also bring more revenue to the miners. The network enables the issuance of various types of tokens, such as securities, stablecoins, and others, on its sidechain. Bitcoin on the Liquid Network is referred to as L-BTC. Users can engage in peg-in transactions, where Bitcoin is locked up to receive an equivalent amount of L-BTC, which can be transacted on the network. It supports various applications like Raretoshi for digital art NFTs and Fuji Money for borrowing Bitcoin-backed synthetic assets and stablecoins. Eventually these transactions are batch-settled on the main Bitcoin blockchain which will result in increased miner fees. 

Rootstock  is an EVM-compatible smart contracts platform. This platform aims to enable DeFi on the Bitcoin network. Rootstock is secured by the same computing power that secures Bitcoin through process called merged mining. RSK and Bitcoin work together when mining, saving power and making the process smoother. Using Bitcoin's security, RSK is protected, and the network stays strong. And since it is EVM-compatible, it is interoperable with Ethereum meaning one can convert their tokens from Ethereum to Rootstock and vice versa using the RSK-ETH token bridge. This can attract the already huge developer base of Ethereum Smart Contracts and further spur transactions on Bitcoin network, resulting in increased revenue for the miners. 

Reducing Operational Expenditure: 

In response to the reduced mining rewards, miners will need to cut operational costs or increase their revenue. This could involve finding cheaper energy sources, using stranded energy from the grid, or repurposing the heat generated from mining for practical applications, thus creating new revenue streams. El Salvador is already using volcano (a.k.a. geothermal) energy to mine Bitcoin, issuing Volcano Bonds to investors supporting this mining operation. 

Image source: K33 Research 

The Bitcoin mining industry, known for its high energy consumption, generates significant amounts of heat, which can be repurposed for heating or food production. In colder regions like Canada and Scandinavia, this repurposed heat is particularly valuable. For instance, the Canadian company Mintgreen is working with the city of North Vancouver to supply heat for buildings and apartments using heat generated by Bitcoin mining. 

Image Source: Compass Mining

This involves using a heat exchanger to transfer heat from the mining process to the district heating system. Additionally, Bitcoin mining heat is being used to support food production processes, such as at Shelter Point Distillery for whiskey production and for heating greenhouses for growing fruits and vegetables. 

Another byproduct of this innovative mining strategies is the decentralization of mining operations. As more nation states and businesses enable local bitcoin mining operations through innovative applications, the Bitcoin mining hashrate could be further decentralized. 

The Path to Irrelevance: 

A less optimistic outcome is Bitcoin gradually becoming irrelevant, mainly due to internal conflicts and lack of innovation (ossification), which would lead to the creation or adoption of a better alternative. Although this is a very very low probability scenario, and it might take decades and decades for this scenario to play out, it is one that Senator Warren and her anti-crypto army would be salivating on. 

Final Thoughts on Bitcoin Mining:

Bitcoin mining, despite its energy intensity, is fundamental to the network's security model. It represents a resilient, counter-mainstream approach, different from the Proof-of-Stake systems common in other cryptocurrencies. The energy requirements of mining serve as a bulwark against state-level interference and contribute to environmental objectives by promoting the development of renewable energy and grid stability. Using electricity as the source to run and secure the network ground the system to “physicality” and its constraints. One cannot by the “click of a button, delete” the hydrodam powering bitcoin mine in Paraguay for example.

The upcoming Bitcoin halving transcends mere symbolism; it signals a period of significant challenges and decisions for the Bitcoin community. Whether it involves nurturing a thriving fee market on the blockchain itself using Layer-2 solutions or building innovating real world use cases that use the heat generated to create additional revenue streams for miners, the decisions made in the immediate future will critically shape Bitcoin's path. The direction taken will determine whether Bitcoin continues as a secure, decentralized and trusted digital store of value or yields to the evolving pressures of the lack of economic incentives.

3.3 We are keeping our eye on Solana

Solana's remarkable resurgence in 2023, marked by a stunning 1000% increase in SOL's value, positions it as a key player in the crypto world for 2024. This resurgence can be largely attributed to a series of technological advancements and significant ecosystem development. At one point in early 2023, the Solana network halted and stopped processing user transactions for more than 18 hours, but users seem to be looking past it. Solana's technology saw substantial improvements with the introduction of features like local fee markets, QUIC, and stake-weighted QoS, which collectively contributed to a significant reduction in the downtime that plagued the network in 2022. Furthermore, the implementation of NFT compression significantly reduced the costs associated with minting and managing NFTs on Solana, catalyzing growth in the DePIN sector. Projects like Helium and Render have already begun leveraging Solana's compression capabilities, underscoring the network's technological prowess. 

Looking ahead to 2024, several major initiatives are set to propel Solana even further. The development and deployment of Firedancer and Sig will enhance performance, with Firedancer offering over tenfold improvements in write throughput and Sig enhancing read throughput similarly. The advancement of Tinydancer as a light client development is particularly crucial, addressing one of the most common criticisms of Solana — the centralization of nodes due to the high costs and technical challenges of hardware. Additionally, the forthcoming token-22 standard will extend the functionalities of Solana tokens, introducing new types like interest-bearing tokens and enabling confidential on-chain transfers. These advancements are not just technical feats but also pivotal steps towards realizing applications that were previously unfeasible, setting Solana apart in sectors like DePIN, payments, consumer apps, and DeFi. With the network hosting a staggering 907 projects from its latest hackathon alone, Solana's platform is ripe for breakthrough applications, further solidifying its position as an industry-leading "operating system" and reshaping narratives around high-performance, integrated networks.

3.4 Decentralized Finance (DeFi) gets more regulated

3.4.1 DeFi Regulations for Yield Optimizers in the EU

The EU regulators in the digital asset space are leading the pack with clear frameworks published. The European Commission, under the guidance of its Directorate General for Financial Stability, Financial Services, and Capital Markets Union (FISMA), is at the forefront of shaping the regulatory landscape for DeFi within Europe. As the digital finance ecosystem evolves, the absence of a concrete definition for DeFi in the existing Markets in Crypto-Assets (MiCA) framework has prompted the Commission to embark on a series of consultations. These discussions aim to refine the regulatory approach towards DeFi, ensuring it aligns with the sector's unique characteristics and challenges.

By December 30, 2024, the European Commission, in collaboration with the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA), is expected to present a comprehensive report. This report will assess the progression of DeFi within the crypto-asset markets, evaluating the need for, and the feasibility of, regulating decentralized crypto-asset systems. A significant aspect of this assessment will be to explore the regulation of crypto-asset lending and borrowing, a core activity within the DeFi space. It promises to deliver precise definitions for various DeFi activities, a crucial step in addressing the regulatory ambiguity that currently exists. 

Creators, owners and operators, or some other persons who maintain control or sufficient influence over DeFi systems, might be considered as Virtual Asset Service Providers (VASP) where they are providing or actively facilitating VASP services. This is true even if they work with others or use automated processes. You can often tell who these owners or operators are because they are linked to the activities.

DeFi yield-optimizing protocols that carefully try to be decentralized might not have to follow some rules under MiCA. Being truly decentralized means that no one person has a lot of power over the assets or how the protocol works even if it uses a smart contract or voting systems.

To truly show they are decentralized, the protocol should allow permissionless access for third-party contributors. This way, external parties can take important roles, which allows for more decentralized control. Also, having multiple frontends  to use the service without any centralized access point or a dedicated team for deployment and maintenance further proves decentralization.  

Another crucial aspect of DeFi is a decentralized governance system. Oftentimes in DeFi, the ownership of the governance token is concentrated in the hands of a few, making the governance not so decentralized. Moving forward it will be an important consideration to build true decentralization in governance as a fundamental principle. Strategies to achieve this could include imposing limits on governance token holdings to prevent the concentration of voting power and empowering sub-decentralized autonomous organizations (subDAOs) with decision-making authorities in specific domains. Encouraging broad participation through incentivization strategies will also play a critical role in fostering a democratized governance model.

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A typical vetting process for strategies is important to make sure they are safe, work well, and are effective for the yield-optimization protocol. Here's how it works:

1. Someone from the DeFi community, not necessarily a protocol token holder, puts out a new strategy proposal. They share details about how the strategy works, what profits it might bring, what risks are involved, and how it fits with the protocol's goals.
2. Next it enters a phase of community review and discussion conducted on the governance forums. developers, strategists, and other stakeholders, critically evaluate the proposal. They discuss its merits, potential risks, and any possible improvements or optimizations.
3. Then, experts check the strategy's technical details, audit the code, and assess any risks. strategies undergo simulation and testing in a controlled environment.
4. If the strategy passes all these checks, everyone in the community votes on it. If most people agree, the strategy is accepted. It's then implemented into the protocol’s ecosystem by deploying smart contracts, allocating resources, and integrating the strategy with the optimizer's existing protocols.

If the yield strategies are open to the public, allowing anyone to review and understand the approaches taken, then no one can claim that there are restrictions on access to strategy details or particular investors’ eligibility criteria. If a strategy is not tailored to a specific investor (or a group of investors with similar characteristics) and does not consider the unique circumstances or characteristics of the investors, it does not qualify as investment advice on similar grounds. Otherwise yield optimizers could be construed as offering investment advice or related financial services. A potential basis for exempting yield strategies from being classified as investment advice is their universal accessibility. The fact that these strategies are available to the general public without any preferential treatment or exclusive offerings to specific token holders could be a significant factor in this context.

In conclusion, as the European Commission is creating a balanced, forward-looking regulatory framework, one that not only addresses the current challenges but is also flexible enough to adapt to the future innovations within the DeFi ecosystem. 

3.4.2 DeFi Regulations in the US

The subcommittee on digital assets and blockchain technology, Technology Advisory Committee (TAC) of the U.S. Commodity Futures Trading Commission (CFTC) published a report on Jan 8th 2024 related to Decentralized Finance (DeFi). The report highlights several crucial aspects of the rapidly evolving DeFi landscape and the challenges it poses to regulators and policymakers.

Firstly, the report emphasizes that DeFi is characterized by highly automated financial networks that lack a central authority, making them resistant to single points of failure and censorship. However, it acknowledges that DeFi systems vary in their level of decentralization, spanning a multi-level spectrum, raising the need for a nuanced regulatory approach.

The report identifies a range of risks associated with DeFi, including fraud, market manipulation, security vulnerabilities, and the potential for illicit finance activities. It also raises concerns about the impact of DeFi's growth on national security and U.S. leadership in the global financial landscape.

To address these challenges, the report outlines several core issues for policymakers to consider:

• Defining regulatory jurisdiction: Policymakers must determine where DeFi systems fall within the existing regulatory framework, considering subject matter and geographic jurisdiction.
• Expanding the regulatory perimeter: After assessing the risks associated with different DeFi models, policymakers should decide where in the DeFi stack regulatory compliance responsibilities should be located.
• Crafting regulatory responses: Policymakers have a range of regulatory strategies at their disposal, from disclosure and reporting requirements to governance and product regulation.
• Enforcing responsibility in decentralized systems: Regulators face the challenge of holding entities accountable in DeFi systems that often lack centralized governance.
• Mapping counterparty exposures: Policymakers should monitor interdependencies across DeFi balance sheets to identify potential contagion risks.
• Oversight of technology: Regulatory authorities need to evolve their capabilities to keep pace with rapidly changing DeFi technology.
• Ensuring policy objectives: Policymakers must ensure that DeFi adheres to critical policy objectives, such as expanded access, transparency, and responsible governance.
• Mitigating unique threats: Special attention should be given to addressing the unique risks posed by DeFi without stifling innovation.
• Building DeFi infrastructure: Policymakers can play a role in fostering standards, research, and identity infrastructure to support responsible DeFi development.
• Promoting dialogue with industry: Policymakers should facilitate constructive discussions with industry stakeholders to drive meaningful progress and partnerships in the DeFi space.

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At Coinchange we believe that it is our responsibility to speak with the regulators and lead the regulatory efforts so that the bridge between TradFi and DeFi can be a smooth transition. 2024 will likely see more institutions coming into DeFi given that regulators across the globe have started talking about making DeFi safer. The lowest hanging fruit in the regulatory landscape is Stablecoins, which is the next topic. 

3.5 What to expect in Stablecoins for 2024

Stablecoins will serve as one of the most important links between the TradFi and DeFi worlds. Stablecoins such as USDC and PYUSD are now more widely accepted as both portfolio options and payment tools. Circle, which is considering a 2024 IPO, may also contribute to an increase in the issuance and usage of stablecoins. Tokenized treasuries have already gained traction, with $800 million tokenized through platforms like Ondo. 

As we can see in the chart below from Nic Carter’s ‘Regime Change in Stablecoins’ presentation from Token2049 Singapore, Stablecoin volumes are already above those of PayPal and Remittances, and getting very close to those of Visa network. In 2024, we could easily see the volume being higher than Visa and even that of ACH. 

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Around the world, regulators are refining their oversight of stablecoins, as well as broad er digital assets. Noteworthy developments in this regard encompass the establishment of a regulated dual banking system for both traditional and digital assets. Some specific instances include the guidance provided by the New York Department of Financial Services concerning US dollar-backed stablecoins, updates to accounting standards by the American Institute of Certified Public Accountants, the enactment of stablecoin legislation in Singapore, the European Union Markets in Crypto Asset Regulation's framework for cross-jurisdictional governance, and the expansion of regulatory coverage for fiat-backed stablecoins in the United Kingdom. The BIS published a report on how crypto assets should be treated in bank reserves, which should be enacted in January 2025. BIS describes stablecoin in detail for inclusion in Group 1 and Group 2 (CBDC are excluded). As we can see from the image below, the capital treatment for Group 1 stablecoins will be generally based on existing Basel Framework and additional requirement could be added if any infrastructure weakness is observed. 

Image Source: Prudential treatment of cryptoasset exposures by BIS

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In 2024, the adoption of yield-bearing, dollar-denominated stablecoins is expected to see significant growth, especially in countries dealing with high inflation rates. These stablecoins offer a dual benefit: preserving purchasing power by holding value in dollars, the world's reserve currency, and generating income from the reserves. In economies where the local currency is volatile and depreciating, the stability and yield potential of these stablecoins present an attractive financial refuge. USDM is one such stablecoin. The USDM token is a rebasing ERC20 token, redeemable at a pegged 1:1 USD value by primary users. USDM is a fully backed stablecoin, backed by "USDM Reserves", which are held under custody with regulated financial institutions in bankruptcy-remote accounts, segregated from the Company's operating accounts, on behalf of, and for the benefit of, Users. USDM rebases daily, allowing users to receive rewards in the form of an increase in their token balance. These rewards are generated by the interest paid by the US Treasuries held in the USDM Reserves.

At Coinchange, we are actively collaborating with some stablecoin issuers to offer yield as a part of their offering. This means that any fintech company that obtains the necessary license to issue their own stablecoin to the masses will also be able to offer purely on-chain yield (yield generated using transparent DeFi strategies only) to the holders of their stablecoin. Simultaneously, we are partnering with local crypto exchanges and wallet providers to offer yield to their stablecoin users, improve their user retention and increase their revenue. As a part of our 2024 vision, we are strategically targeting the LATAM, MENA, and APAC regions for our expansion, as our research indicates a significant presence and growth of Fintech companies, centralized crypto exchanges, and wallet providers in these regions, signaling a robust and rapidly evolving digital financial ecosystem. In LATAM, we're witnessing an unprecedented adoption of stablecoins, fueled by the population's growing preference for the US dollar and an increasing shift towards blockchain based remittance solutions. The MENA region, with its unique blend of developed and emerging economies, shows a remarkable openness to digital transformation in the financial sector combined with favorable regulations. The APAC region, especially in countries like Singapore and India, technological advancements and digital-savvy population, represents a huge market opportunity.

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