2024 Crypto Outlook: Winner Winner, Chicken Dinner

Ponyo외 9명
Research Analyst/
Jan 17, 2024

Table of Content

1. Intro

2. Macro: Spring Will Come

2-1. Economy: Soft landing, check!

2-2. Interest Rates: Higher rates persist, but expectations for a cut in 2H remain strong

2-3. Market drivers: The perfect storm of one-offs and structural momentum

3. Evolving Regulatory Landscape: Ushering in a More Favorable Environment with Promising Opportunities

3-1. Global regulatory outlook: Unlocking opportunities through comprehensive legalization of crypto assets

3-2. Current state of crypto regulations in Korea: Advancing toward the institutionalization of cryptocurrencies

3-3. Embracing Challenges for Future Growth

4. Blockchain Infrastructure Making Strides

4-1. Cosmos' Appchain vision realized in Ethereum rollup ecosystem

4-2. Alt-L1s will discover PMF centered on scalability and ease of development

5. Major Services Are Poised to Ascend Atop Core Infrastructure; Forthcoming Trends Will Become Evident in 2024

5-1. Gaming: Anticipating a shift in 2024!

5-2. DeFi: Redefining boundaries between DeFi and TradFi

5-3. NFTs: Evolving as a means to improve and expand existing business models

6. Closing Thoughts






1. Intro

"Winner Winner, Chicken Dinner." It’s the famous celebrative victory phrase of the game, PUBG: Battlegrounds. It's a message for those who survived a grueling battle, and it's a message we at Xangle Research would like to dedicate to crypto market participants who are poised to take another leap forward after a long stagnation.

We are pleased to be able to deliver a positive message to crypto builders and investors in this annual outlook report unlike last year. In 2024, we believe that the crypto market will experience an early spring after a long and cold winter due to a variety of internal and external factors, as we predicted in our "2023 Crypto Outlook: Antifragile" report.

From a macroeconomic perspective, we expect the U.S. economy to continue its soft landing and the Federal Reserve to start cutting interest rates in the second half of the year, injecting liquidity back into the market. In the meantime, structural momentum, such as the approval of Bitcoin spot ETFs, halving, progress on legislation, and the weakening of the dollar's hegemony, will drive new funds into the crypto asset market, mainly from institutional investors. Fundamentals will also continue to grow meaningfully as blockchain infrastructure continues to improve and content and services are released on top of it. The fourth quarter of 2023 saw the crypto market ignite on the back of a number of expectations, and we don't see this trend slowing down in the coming year.

We’ve endeavored to make this year’s annual outlook report as informative as possible, as always, and we hope you enjoy reading it.

2. Macro: Spring Will Come

In our 2023 Outlook, we noted that institutional investors are increasingly investing in the crypto asset market due to (1) improved access to investment as infrastructure develops, (2) increased utility of crypto assets, and (3) reduced volatility. We also noted that Bitcoin, the leading crypto asset, is increasingly in correlation with risk assets such as real estate, high-yield bonds, and NASDAQ.

While these three trends held true in 2023, the influx of institutional money into the crypto asset market is increasing with the potential approval of a number of Bitcoin spot ETFs, including BlackRock’s. At the same time, the correlation between Bitcoin and risk assets is at a two-year low, which signals that Bitcoin is finding its place as a fully-fledged asset class in its own right, beyond a simple “investment tool.”

While institutional investors have so far viewed Bitcoin as a risk asset and portfolio booster, it appears that they may gradually begin to utilize it as an alternative to fiat currencies and as a standalone asset with no ties to the TradFi system. While macroeconomic factors such as economic growth and interest rates that influence investor sentiments in general will continue to be important in determining the price movement of the crypto asset market including Bitcoin, the unique dynamics of the crypto market will also play a major role.

We believe that the U.S. economy will make a successful soft landing in 2024 and that the Fed will be able to start cutting rates in the second half of the year. As investor sentiment in crypto assets revives, we expect to see more short-term favorable developments such as the Bitcoin halving and the approval of spot ETFs, as well as structural factors undermining the dollar's hegemony, such as the deteriorating U.S. fiscal position and the growing uncertainty around Fed monetary policy. We believe, with cautious optimism, that 2024 will lay the groundwork for another bull market as the crypto asset market slowly warms up after two long years of crypto winter.

2-1. Economy: Soft landing, check!

We expect that the U.S. will see slower economic growth in 2024 but will avoid recession. Gross domestic product (GDP) can be seen as a sum of consumption (68%), investment (17%), government spending (17%) and net exports (-2%; the U.S. is a net importer and its contribution to GDP is (-) and can considered a constant due to its small share in GDP; Bureau of Economic Analysis, as of July 2023), and it seems there are too few ingredients to accelerate growth. However, we believe also that consumption, investment, and government spending will not deteriorate and remain at healthy levels, allowing the U.S. economy will be able to sustain a soft landing for the reasons below:

2-1-1. Consumption: Solid consumption outlook based on stabilizing housing costs and improving real incomes

The recent U.S. unemployment rate is at 3.9%, and presenting a slight rebound, but remains close to full employment (3%). According to the Bureau of Labor Statistics, the gap between the number of the unemployed and the number of job openings in the U.S. is 3 million, meaning that demand is still higher than supply.

This is largely due to a decline in labor force participation rate in the U.S., which we believe is a structural trend. Chairman Powell also stated in a Fed statement late 2022 that the U.S. economy is experiencing a "structural labor shortage." In particular, the share of adults aged 55 and older retiring early since the pandemic has increased from 48.1% in the 3Q 2019 to 50.3% in 3Q 2021, many of whom have benefited from the post-pandemic surge in asset prices, accumulating wealth and refinancing to make their mortgages more affordable. Thus, with sufficient assets, we think they are unlikely to rejoin the labor market.

It looks like wage growth is likely to remain at current levels, given the increased bargaining power of workers as a result of these structural changes mentioned above and the rigidity of wages. Also, real wages and purchasing power are likely to be further supported by the recent stabilization of prices across a range of items, including housing and energy. The strong wage growth of the past two years has been diluted by higher inflation, and has not resulted in significant increase in real purchasing power (Figure 1).

U.S Wage Growth and Inflation

The stabilization of housing costs is also noteworthy. Housing accounts for about a third of the CPI basket and is the largest component of U.S. household consumption. This means that stable housing costs are prerequisites for maintaining robust consumption. There are mainly two routes that housing costs can affect household spending:

  • Mortgage Rate: Lower mortgage rates reduce interest costs, resulting in increased consumption.
  • Wealth Effect: Increased spending due to real estate appreciation.

For homeowners, the burden of housing cost has been significantly eased by (1) lower mortgage interest through refinancing and (2) limited home price declines.

The strain of mortgage interest has subsided since many homeowners refinanced during the low interest rate environment of 2020-2021, which significantly reduced their burden of interest. According to mortgage data firm Black Knight, nearly two-thirds of all mortgages were at rates below 4% (Figure 2), and about 73% were at fixed rates within 30-year maturities at the end of the first quarter of last year. This means that the vast majority of homeowners have effectively locked in a long-term mortgage at rock-bottom rates.

Figure 2: Distribution of mortgage rates across the U.S.

active primary mortgages by interest rate

We also believe that house prices have limited downside (Figure 3). This is because while interest rate hikes have caused sharp rise in mortgage rates and significantly dampened demand, there has also been a significant reduction in supply. As we've seen, the majority of all mortgages in the U.S. are set at 30-year fixed rates below 4%, and few people would sell their homes at the cost of resetting their mortgages to a higher rate of nearly 8%. Additionally, many people have moved out of urban centers and into the suburbs due to the introduction of telecommuting during the pandemic, and there is little incentive for them to move elsewhere with the majority of businesses still working from home.

ICE House Price Index (HPI) Change

Conversely, for those who don't own a home, housing affordability is easing as rents subside. The national rent growth rate in the U.S. has been subdued since mid-2022 and has been declining rapidly in the second half of 2023, with six consecutive months below 1% due to lower-than-usual demand and rising inventory.

Change in Regional Asking Rents in U.S., YoY

Furthermore, burdensome mortgage rates have created little incentive to buy a home. According to the Federal Home Loan Mortgage Corporation (FHLMC), the 30-year fixed rate was 7.79% at the end of October, putting the monthly principal and interest cost for a buyer to purchase a median-priced home at more than $2,500. That's more than 40% of the median U.S. household income, nearly double the amount year-on-year and the highest since 1984 (Figure 5). And it looks like the situation is likely driving up on goods and services other than housing.

Figure 5: Principal/interest ratio against income across U.S.

National payment-to-income ratio

That's not to say we'll see a repeat of last year's explosive consumption-led growth. However, we expect consumption activity to remain flat, with improving real incomes and stabilizing housing conditions helping to soften the landing.

※ Risk: Exhausting excess savings

The excess savings of U.S. households accumulated during the pandemic have been steadily declining since the reopening. Increased demand for durable goods such as furniture and vehicles as people worked from home in 2020 and 2021, and increased demand for services such as dining and travel with the reopening in 2022 and 2023, have driven consumption, but we are unlikely to see a further explosive expansion this year as these drivers have been exhausted.

2-1-2. Investment: Manufacturing inventory restocking and reshoring spur investment activity

The manufacturing sector experienced an initial surge in demand during the pandemic due to the adoption of work-from-home and the resulting move of dwellings, but it began to slow down after the reopening and is currently in a downturn. However, we believe that this is a normalization of an overheated manufacturing sector from deferred demand and that the trough has been passed.

First, the U.S. ISM Manufacturing Inventories Index is now below its post-pandemic level. The combination of the residual effects of supply chain disruptions, labor shortages, and the anticipated recession has kept production activity conservative, while consumption has remained unexpectedly robust, leading to rapidly depleting inventories. We believe that the restocking cycle in manufacturing could spur enough economic activity to dilute the strength of the overall contraction, provided that household consumption does not come off sharply as noted above.

ISM Manufacturing Inventories Index

Furthermore, the "re-shoring" movement among many global companies to bring production back to their home countries has become a structural trend, highlighting the need for new infrastructure. According to Bank of America, references to reshoring in S&P 500 earnings releases increased 128% year-over-year in the first quarter of 2023, outpacing the capital markets' biggest buzzword of the year, "artificial intelligence."** We believe the reshoring sentiment in the U.S. will serve as momentum for the manufacturing rebound.

Global supply chain disruptions have emerged as top risk for companies during the pandemic, which brought on unforeseen circumstances such as border closures and transportation disruptions—a direct result of increased reliance on overseas production networks. This prompted many companies to relocate production back home to ensure a stable and fast supply chain.

The recent Russia-Ukraine war, the Israeli-Palestinian conflict, and even the China-Taiwan conflict have further heightened geopolitical risks. Thus, the reshoring trend is likely to intensify as more companies seek to reduce their reliance on overseas supply chains that are sensitive to global events.

In the U.S., policy support from the Biden administration's Infrastructure Investment and Jobs Act (IIJA), Creating Helpful Incentives to Produce Semiconductors (CHIPS), and Inflation Reduction Act (IRA) bills are providing incentives for reshoring. According to Deloitte, 200 new green manufacturing projects totaling $88 billion have been announced since the passage of the IRA, potentially creating more than 75,000 new jobs. In fact, manufacturing construction spending has increased significantly since the passage of the three bills - IIJA, CHIPS, and IRA (Figure 7). Annual manufacturing-related construction spending is up 70% year-over-year to $210 billion as of July, paving the way for a manufacturing rebound.

Figure 7: Investment volume for construction in manufacturing industry

Annual construction spending in the US manufacturing industry

※ Risk: Interest rate risk and green investment slowdown

As interest rates rise, investment declines along the curve of marginal efficiency of capital. With the minimum cost of capital for companies, i.e., the base interest rate, at 5.5%, companies will be reserved in their investment decisions unless they can expect a return that exceeds it. This could constrain investment activity this year.

In addition, interest in and investment in the green consumer trends that emerged in the wake of the pandemic is quickly fading. Demand for electric vehicles has fallen short of expectations, major automakers have scaled back production plans in favor of share buybacks, and offshore wind developers have pulled out of one project after another. And the S&P Global Clean Energy Index reflects this and continues to underperform, down 30% this year alone (Figure 8).

ESG Index Performance

2-1-3. Government spending: Significant reduction unlikely before presidential election

The U.S. presidential election is scheduled for November. Looking back at the results of the last 10 U.S. presidential elections, a change of party in power has always occurred when GDP growth rate in the year of the election was below the previous year's (2000, 2008 2016, 2020) (Table 1). This suggests that voters are very sensitive to the economy, and the Biden administration will want to maintain the solo economic growth trend of the U.S. that it has been enjoying until the end of this year.

Past U.S. Presidential Election Results

The recent outbreak of the Israeli-Palestinian war has led to criticism of failed diplomacy in the Middle East, which has spilled over into social conflicts in the United States. So it is likely that the administration will try to keep voters' attention on the economy as much as possible. As such, we believe it will be difficult for the Biden administration to reduce spending this year.

※ Risk: Fiscal health concerns

According to the U.S. Treasury Department, the U.S. deficit is projected to be $1.7 trillion in 2023. Normally, deficits are considered sustainable if they can support GDP growth and tax revenues through fiscal expansion. But the U.S. is hanging in the balance in that respect. The U.S. federal government's total debt is $33 trillion, nearly 123% of GDP, and the interest burden is too high for it to expand fiscal spending, as it must issue bonds at high interest rates for debt maturing this year and beyond. While symbolic, Fitch's downgrade of the U.S. credit rating in August also reflects concerns about the unsustainability of fiscal policy.

Nevertheless, amid widespread speculation of a slowdown in financial markets, U.S. stock indices, a leading barometer of investor sentiment, have continued to be on an upturn. The S&P 500 reached its highest level since March of 2022, while the Nasdaq Composite hit its highest level since July of last year. The VIX index, a measure of market participants' expectations for future stock market volatility and commonly referred to as the fear gauge, also hit a yearly low, reflecting overall optimism about the U.S. economy.

2-2. Interest Rates: Higher rates persist, but expectations for a cut in 2H remain strong

In its September Summary of Economic Projections, the Fed raised its 2024 GDP growth forecast and lowered the unemployment rate. This assumes a soft landing for the U.S. economy, and it's hard to imagine a radical rate cut to stimulate the economy under this scenario, so rates will remain high for longer. However, we believe that the expectation of a rate cut in the second half of the year remains valid (Figure 9).

Figure 9: Summary tables of the Fed's September (above) and December (below) economic projections

Summary tables of the Fed's September and December

Summary tables of the Fed's December economic projections

Expectations for a rate cut should be dealt with care. While markets recently cheered when hawkish Fed governor Christopher Waller hinted at a possible rate cut in the coming months, with the probability of a March rate cut as reflected in CME fed funds futures breaking through the 50% mark, we view this as "selective attention". Given the Fed's repeatedly hawkish rate hike signals to combat inflation, we believe the market was unusually sensitive to news of a possible pivot. After Waller's comments, New York Fed President John Williams and Chair Powell both said in public that monetary policy would remain accommodative for the time being, a sentiment drowned out by market jubilation. But at the end of the day, the Fed's ultimate goal is to stabilize prices and employment (stabilize, not stimulate), not stimulate the economy.

Inflation is coming down. The U.S. CPI for October, released in mid-November, appears to be on a steady downward trajectory at 0% MoM and 3.2% YoY. Service prices, which have been a stubborn inflation driver, are subsiding as the labor market tightness eases a bit. Growth in housing price is also slowing due to falling rents. In the case of commodity prices, mainly durable goods, the Wall Street Journal recently reported that we are moving beyond disinflation (slowing price growth) to deflation (falling prices). Nevertheless, given the slowdown in the economy and unemployment below 4%, inflation is likely to settle into the mid-2% range by the end of 2024, with the Fed's 2% target unlikely to be fully achieved this year.

On the employment front, the U.S. is likely to see modest job growth in 2024, with unemployment growth constrained by a structural decline in the labor force and the economic soft landing.

Under the soft-landing scenario, we believe the Fed will begin to taper in the second half of 2024, as suggested in the September dot plot. While rates would remain "constrained" in the mid-to-high 4% range, the Goldilocks achievement of the U.S. economy and the re-injection of liquidity into the market would provide a foothold for a revival in investor sentiment.

2-3. Market drivers: The perfect storm of one-offs and structural momentum

With investor sentiment expected to remain largely intact from a macroeconomic perspective, there are plenty of ingredients to trigger the cryptocurrency market this year.

As mentioned in the introduction, the crypto market is in the early stages of establishing itself as a distinct financial asset class. This means that market endogenous variables will come into play, and we expect that market participants will start to pay attention to the unique features of cryptocurrencies, such as decentralization and censorship-resistance, and start to seriously consider investing in cryptocurrencies as an alternative to fiat currencies, rather than just as a speculative asset.

2-3-1. One-offs

A. Bitcoin spot ETF approval

The SEC's final response to BlackRock's application for Bitcoin spot ETF was due in January, with final approval expected in 1Q24. In October, the U.S. Court of Appeals for the D.C. Circuit reversed the SEC's denial of Grayscale's application for a spot Bitcoin ETF, effectively ending the litigation, significantly weakening the case for denying approval to other managers. While the 2000s saw the launch of ETFs for a variety of non-equity asset classes, including gold (SPDR Gold Trust; 2004), crude oil (United States Oil Fund; 2006) and emerging market bonds (iShares J.P. Morgan USD EM Bond ETF; 2007), we believe the approval of the Bitcoin spot ETF marks a milestone for an asset class less than 20 years old to be ETFized and recognized as a financial asset. This will significantly improve access to Bitcoin investing.

First, because Bitcoin ETFs are regulated by financial authorities such as the SEC, institutional investors will not need to hold separate private keys, and the risk of hacking or theft will be significantly reduced because asset managers will have surveillance sharing agreements with cryptocurrency exchanges. Logistical burdens will be greatly reduced.

In addition, individual retirement accounts (IRAs) and corporate pension accounts (401Ks) that are restricted from investing in cryptocurrencies will be able to gain Bitcoin exposure through ETFs. The total size of IRA and 401K funds in the U.S. is approximately $22 trillion, so even a 0.5% portfolio allocation would represent an inflow of $100 billion. Given that Bitcoin's market capitalization is currently around $800 billion, we can expect modest upside.

B. Halving

Since Bitcoin was first issued, there have been a total of three halving events—2012, 2016, and 2020. A halving is when the reward for mining is halved according to the code embedded in Bitcoin's protocol, which naturally drives up the price as the supply shrinks (Table 2).

Bitcoin Halving

Looking back over the past three halving cycles, the price has risen in response to reduced supply. However, the upcoming halving in 2024 will only have 3.125 mining rewards, which is an absolute drop in supply compared to past halvings. As such, it's hard to expect a substantial price increase due to the reduced supply.

However, we believe that the combination of historically rising halving prices, the approval of a spot ETF, and expectations of lower interest rates will act a catalyst for capital inflows into the crypto asset market.

2-3-2. Structural momentum

A. Centralization of funds within TradFi system

In the 14 years since the Fed first introduced quantitative easing in the wake of the 2008 financial crisis, a sustained low interest rate environment has injected massive amounts of liquidity into the market, but it has been asymmetrically channeled to a small number of large institutions. Looking at the number of commercial banks in the U.S., both the number of banks and the size of their holdings have increased significantly, from 1,563 banks/8 USDt in 2005 to 2,116 banks/22 USDt in 2023. Average reserves per bank roughly doubled from 5 USDb in 2005 to 10 USDb in 2023, with the top three banks (JP Morgan Chase, Bank of America, and Citibank as of 2023) nearly tripling their average reserves from 934 USDb to 2.5 USDt (Figure 10).

Bank Centralization

The flight to large financial institutions is expected to accelerate since the beginning of 2023. Since 2022, the Fed's aggressive rate hikes have led to the collapse of a number of mid-sized banks, such as Silicon Valley Bank (SVB), that had overextended their long-term debt positions, which has significantly undermined confidence in small and mid-sized banks. As a result, a large amount of individual and institutional money has moved out of small and mid-sized banks and into large financial institutions—a trend that is likely to continue. At the time of SVB's collapse, the Financial Times reported that "executives at large financial institutions, including JPMorgan Chase and Citigroup, are facing the biggest movement of deposit in more than a decade, speeding up the ‘onboarding’ process to accommodate it.”

Behind SVB's failure is a dissonance between U.S. administration and central bank policies. The SVB was able to increase its reckless investment in long-term debt outside of regulatory oversight because the Economic Growth, Regulatory Relief, and Consumer Protection Act, passed by the Trump administration in 2018, deregulated small and mid-sized banks by rolling back the Dodd-Frank Act. The Dodd-Frank Act, which was introduced in response to the 2008 financial crisis, tightened regulation of financial institutions with more than $50 billion in assets, by raising the threshold to $250 billion, allowing smaller institutions like SVB to fall off the radar. In fact, if we look at SVB's portfolio composition, it wasn't until 2018 that the share of long-term bonds (>5 years) exceeded the share of short-term bonds (<5 years) (Figure 11).

Figure 11: SVB customer deposit and portforlio

Silicon Valley Bank A unique business model

While bloated long-term debt holdings increased the duration risk (sensitivity to interest rate changes) of many institutions, the Fed may not have fully grasped the changes in the balance sheets of small and mid-sized banks resulting from the administration's policy changes or underestimated the ripple effect. Major small and mid-sized banks split, and bank runs occurred. And while the Fed belatedly established the Bank Term Funding Program (BTFP), it had the effect of funneling funds to a small number of Too-Big-to-Fail institutions.

There are a growing number of structural factors that could lead to the concentration of market liquidity in a small number of institutions, raising the systemic risk of a cascading collapse of the entire TradFi system, as happened during the global financial crisis. We believe that interest in cryptocurrencies will only grow as this caution spreads, which is supported by the inverse correlation between small and mid-sized bank share prices and the price of Bitcoin in 2023 (Figure 12).

Bitcoin vs U.S. Regional Bank Stock Prices

B. Undermining U.S. fiscal health

The disconnect between the U.S. administration and central bank policy is also undermining U.S. fiscal health. Whereas the U.S. federal government and the Fed worked together to stimulate the economy with both fiscal and monetary expansion in 2020 and 2021, the Fed has recently gone it alone, pushing the federal government's interest burden to unsustainable levels.

The U.S. federal debt is approaching 97% of GDP due to a surge in fiscal spending, including the $1.9 trillion American Rescue Plan (ARP), the largest stimulus package ever approved by the Biden administration in 2021. When the ARP was passed, the federal government was able to issue debt relatively easily until 2021 because the Fed was maintaining zero interest rates, but interest costs now must be considered as it began to tighten monetary policy.

According to the U.S. Government Accountability Office, the federal government's average net interest expenditure over the past two decades has been just 1.5% of GDP, but it is projected to rise to 8.4% by 2051, reaching a whopping $6.6 trillion, given the rapid growth of the national debt in recent years and the continuation of high-interest monetary policy (Figures 13,14).

Figure 13: U.S. debt to GDP ratio

Debt Held by the Public Projected to Grow Faster Than GDP

Figure 14: U.S. debt principal and interest

Primacy Deficit and Total Budget Dificit, Actual, and Projected

As we've mentioned, the Biden administration is unlikely to make significant reductions in fiscal spending, given the upcoming presidential election in November. We also analyze the Treasury Department's announcement in November that it will slow down the issuance of long-term bonds with 10- and 30-year maturities and increase short-term bonds as a strategy to maintain fiscal spending but shorten the duration.

In late October, the 10-year U.S. Treasury yield rose to its highest level since August 2007, just before the global financial crisis, as market concerns about the clash between the administration's stimulative stance (continued long-term debt issuance) and the Fed's tightening stance (continued rate hikes) led to a massive sell-off in long-term bonds. Thus, concerns about the U.S. fiscal position and, by extension, the hegemony of the dollar, could provide momentum for alternative crypto markets.

C. Less predictability in monetary policy

The Fed aims to provide financial markets with a clear and consistent message on the direction of money policy through forward guidance, shaping market expectations and stabilizing the economy. Its communications strategy of being as transparent as possible in providing insights into the decision-making process, including the direction of the policy rate, its expected duration, and an analysis of the state of the economy, serves to instill confidence in the efficacy of monetary policy and encourage orderly response from markets. Trust is a critical component of the effectiveness of monetary policy because it influences how market participants interpret and react to Fed signals.

In the same vein, the Fed has been sending a consistent message of tightening to the markets as it has been raising rates since 2022, stating that intense tightening is necessary to fight inflation and hinting at the possibility of further hikes despite the lowering trend of inflation. However, when the ripple effect of the rate hikes led several regional banks failing and unexpected signs of cracks in the financial markets, the Fed hastily created the BTFP to provide liquidity to failing banks. Essentially, the Fed deviated from its previously consistent message of tightening to stabilize prices and reinjected liquidity in response to market concerns. This decision undermines market confidence in the Fed's forward guidance and calls into question its ability to maintain a transparent and predictable monetary policy. This explains why markets are paying more attention to Waller's dovish comments, even as Chairman Powell continues to deliver a message of austerity.

While the SVB outbreak brought the Fed's inconsistency directly to the forefront with its conflicting policies, the Fed's credibility has actually been under scrutiny since Powell took office. A study this year by the Center for Economic Policy Research found that "market volatility is three times higher during press conferences held by current Chair Jerome Powell than those held by his predecessors, and they tend to reverse the market’s initial reactions to the [FOMC]’s statements." Prior to the pandemic, Powell's press conferences typically reinforced the market's interpretation of the FOMC statement, and the market moved in the same direction as the initial reaction to the statement during the press conference. For example, if the market interpreted the FOMC statement as hawkish and stocks fell, the chairman's comments during the press conference supported that interpretation, and stocks fell further. However, since the pandemic, stock and bond markets have tended to move in the opposite direction during the press conference compared to the initial reaction to the FOMC statement.

If we look at the market's reaction to major U.S. economic data releases since 2022, we have seen a "good is bad & bad is good" phenomenon, where even when a release is generally considered bad, such as rising unemployment, the market interprets it as "the Fed will pivot soon to counteract the recession, which is good for stocks" and the market actually rises. We believe this is a result of growing doubts about the consistency of Fed's policy. A loss of confidence in the central authority in charge of monetary policy means that confidence in the soundness of the dollar is being undermined, making cryptocurrencies more attractive.

3. Evolving Regulatory Landscape: Ushering in a More Favorable Environment with Promising Opportunities

2023 marked a pivotal moment as regulatory jurisdictions took a clear shape, notably in the Western nations and key Asian financial hubs as they actively seek to incorporate crypto assets within a regulatory framework. While the global legalization of virtual assets is still in its early stages, promising strides have been made, especially with the European Union (EU) leading the way by implementing the Markets in Crypto Assets (MiCA) as a foundational law for virtual assets. This has set the stage for other major countries to follow suit, presenting expansive business opportunities.

3-1. Global regulatory outlook: Unlocking opportunities through comprehensive legalization of crypto assets

The legislative developments in key international jurisdictions hold profound implications for Korea, underscoring the need for vigilant observation. A retrospective analysis of regulatory landscapes in the EU, the United States, and Japan offers valuable insights into the future trajectory.

3-1-1. EU: MiCA steers crypto assets towards legal clarity

In a significant move on September 24, 2020, the European Commission (EC) proposed MiCA, a comprehensive legislative framework aimed at providing legal stability to crypto assets. MiCA primarily targets stablecoin and crypto-asset service providers operating outside existing regulatory frameworks. The bill, with approval from EU Finance Ministers on May 16, 2023, is set to be implemented gradually from July 2024 to 2026. MiCA stands as the world's inaugural regulatory law governing the virtual asset market, focusing on fostering innovation, ensuring fair competition, protecting investors, and upholding market integrity and financial stability. This legislative milestone is particularly crucial in preventing lapses in investor protection and addressing Anti Money Laundering (AML) violations, as underscored by events like the FTX exchange bankruptcy. While some critics argue that MiCA's stringent regulations on cryptocurrency issuers and stablecoins may initially impede business activation, the silver lining lies in the establishment of a stable regulatory environment. This stability not only addresses the shortcomings revealed in past events but also presents an opportunity for traditional financial players to enter the market with confidence. Ultimately, MiCA serves as a foundation for sustained growth within the ecosystem by providing the necessary protective measures and regulatory clarity.

MiCA Key Highlights

Key Takeaways

  • MiCA stands as the European Union's cornerstone legislation for the entire crypto-asset industry, including stablecoins.
  • Crypto-assets are neatly classified into three categories: utility tokens, asset-backed tokens, and e-money tokens. Specific definitions for asset-backed and e-money tokens aim to regulate stablecoins tied to fiat currencies, mitigating risks spilling into traditional markets.
  • MiCA imposes strict guidelines on virtual asset white papers. Failure to meet the prescribed format will result in the regulator withholding authorization for trading in the asset.
  • The legislation prohibits the offering of interest on asset-backed tokens and e-money tokens containing stablecoins. This restriction may impact the ability to earn interest on stablecoin deposits. However, MiCA's stance on decentralized finance (DeFi) services like Abena Compound remains uncertain, as it does not explicitly define DeFi.

3-1-2. U.S.: Anticipated rise in exchange regulations coupled with jurisdictional separation for legal stability

The U.S. acknowledges the intertwined nature of crypto exchanges with traditional asset markets, prompted by the FTX bankruptcy's ripple effect on Silvergate Bank and Silicon Valley Bank last year. Recognizing the imperative to safeguard exchange-based investors, the U.S. is actively leveraging regulatory influence to establish a robust framework.

Key regulatory bodies, including the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the U.S. Department of Justice (DOJ), have initiated legal actions against major centralized exchanges such as Kraken, Coinbase, and Binance.

Prosecution by U.S. financial regulatory authorities against crypto exchanges

In a recent development, Binance, the world's largest exchange, pleaded guilty to charges, including violations of the Bank Secrecy Act (BSA) and the International Emergency Economic Powers Act (IEEPA). This resulted in a substantial fine of $4.3 billion (approximately RMB 5.5 trillion), compelling CEO Changpeng Zhao to resign. The regulatory landscape is expected to persistently evolve until the cryptocurrency market is fully integrated into the existing regulatory regime under the jurisdiction of the SEC and CFTC. While some foresee potential constraints on growth, this regulatory evolution seeks to ensure legal stability and protect investors in this dynamic financial landscape.

However, the United States is positioned to develop a distinct cryptocurrency framework bill, drawing inspiration from MiCA, as relying solely on prosecuting exchanges without additional legislation has inherent limitations. The ambiguous jurisdictional landscape among key regulators, namely the SEC and CFTC, has been a contentious issue. To address this, industry stakeholders advocate for consistent legislation to create a secure and reliable legal framework for investors and participants.

Recent legislative strides, such as the Blockchain Regulatory Certainty Act and The Financial Innovation and Technology for the 21st Century Act, enacted in July 2023, aim to dispel regulatory uncertainty by defining the application of regulation based on transaction engagement. The Blockchain Regulatory Certainty Act is a proactive step to tackle uncertainty and encourage innovation in the blockchain sector. It specifies that blockchain developers and service providers not holding users' cryptocurrency funds are not to be classified as financial institutions. Simultaneously, The Financial Innovation and Technology for the 21st Century Act categorizes digital assets into three groups: digital commodities, restricted digital assets, and stablecoins. It proposes that the CFTC oversees digital commodities, while the SEC oversees restricted digital assets. Despite these advancements, the Clarity for Payment Stablecoins Act of 2023, addressing stablecoin regulation, did not pass. Consequently, discussions surrounding stablecoin regulation are expected to persist in the future.

Meanwhile, U.S. financial authorities wield significant influence over the cryptocurrency market, poised to positively impact the financial industry seeking entry into this dynamic space. In anticipation of market institutionalization, major financial institutions are actively positioning themselves within the virtual asset industry. Companies like JPMorgan have already made direct or indirect forays into the crypto market, with plans to further intensify their presence upon system finalization.

Furthermore, a dozen major asset managers, spearheaded by BlackRock, the world's largest asset manager, await approval for bitcoin spot Exchange-Traded Funds (ETFs). Experts in the ETF space anticipate a collective approval by the SEC in January of 2024, signaling a transformative shift. Complementing this trend are various initiatives enhancing the virtual asset industry landscape, including the expansion of commercial activities in regulatory response domains such as operating virtual asset exchanges and supporting the issuance of white papers. Given the profound impact of U.S. regulatory decisions on Korea, vigilant monitoring of future regulatory directions is imperative.

Current landscape of cryptocurrency operations in leading global financial institutions

Key Takeaways

  • The U.S. is laying the groundwork for a regulatory framework centered on major exchanges.
  • Anticipate a sustained, moderately strong regulatory influence from financial authorities during the ongoing transition, potentially tempering growth in the crypto market.
  • The unresolved separation of regulatory jurisdictions among existing institutions presents a risk for companies aiming to engage in the crypto market.
  • The Financial Innovation and Technology for the 21st Century Act is poised to bring clarity to regulatory authorities like the SEC and CFTC, mitigating uncertainty and bolstering legal stability.
  • Traditional financial institutions, including major firms, are progressively making inroads into the crypto space.

3-1-3. Japan aiming to energize the market through crypto-friendly regulations

Following the inauguration of the Kishida administration, Japan has demonstrated a pro-Web3 stance at the core of its new capitalist policy. This shift is reflected in the country's revised regulatory approach, emphasizing the facilitation of emerging businesses like NFTs and metaverses through substantial deregulation. In July 2022, Japan elevated Web3 to a central position in its national growth strategy, establishing the Web3 Policy Office  to oversee developments in the blockchain industry.

Building on various recommendations, the government-approved the white paper on crypto and blockchain regulations in April 2023. This approval signals an active effort to support ecosystem participants whose growth has been hindered by stringent regulations. Additionally, the Japanese government has implemented measures to alleviate the burden on market participants, proactively preparing for the burgeoning Web3 market. Innovative support measures include permitting the issuance of stablecoins, a 20% reduction in the personal income tax rate, and exempting corporate taxes on tokens self-issued by corporations. With this proactive approach to crypto and corresponding regulations, the Japanese crypto industry experienced significant progress in 2023.

Moreover, a proposal for a bill allowing startups to issue crypto-assets surfaced in September, indicating a potential policy addressing the scalability of new investment funds for startups in 2024. The regulatory clarity provided by the government has not only spurred the involvement of startups but has also prompted large corporations to actively enter the market. A notable instance of this trend is the collaboration between Progmat (a subsidiary of MUFG managing digital asset issuance), a major player in the Web2 financial space, and XRP. Additionally, two of Japan's largest general merchandisers, Mitsui C&T and Sony Group, have ventured into new businesses utilizing blockchain, exemplifying the growing Web3 activity.

Key summary of Japan's White Paper on Crypto Regulations

Key Takeaways

  • In April 2023, the government's approval of the Web3 White Paper unveiled tax incentives and other measures aimed at fostering the industry.
  • Legislation facilitating stablecoin operations passed, bringing Japanese financial firms one step closer to issuing and brokering stablecoins. Establishing a stable stablecoin issuance and distribution structure is anticipated to form the bedrock for the growth of the virtual asset market.
  • Innovative fostering measures include a 20% reduction in income tax on crypto assets and the non-collection of corporate taxes.
  • The Web3 industry is witnessing active participation from both startups and large corporations.

3-2. Current state of crypto regulations in Korea: Advancing toward the institutionalization of cryptocurrencies

The initial phase of Korea’s virtual asset  legislation, known as the Act on the Protection of Virtual Asset Users, concentrates on investor protection and does not serve as a foundational law governing the entire market. Aligned with the global trend of integrating virtual assets into institutional systems, the second phase of legislation is anticipated to further accelerate the incorporation of the virtual asset market into the institutional framework.

3-2-1. Implementation of the virtual asset user protection act: Paving the way for institutional integration

On June 30, 2023, the 'Act on the Protection of Virtual Asset Users,' the inaugural phase of the Korean Basic Act on Virtual Assets , successfully passed the plenary session of the National Assembly and is slated for implementation in July 2024. Recognizing the urgent need to safeguard virtual asset users, the National Assembly achieved consensus across party lines, opting for preemptive measures and phased complementary responses rather than awaiting the establishment of international standards. The Act on the Protection of Virtual Asset Users encompasses crucial elements, including: 1) Definition of virtual assets and virtual asset operators, 2) Protection of user assets, 3) Regulation of unfair transactions, 4) Prohibition of arbitrary blocking of deposits and withdrawals related to virtual assets, 5) introduction of obligations, such as monitoring abnormal transactions, 6) Authority of financial authorities to supervise and sanction, and 7) Penalties and fines. These provisions are designed to enhance user protection within the cryptocurrency market.

A pivotal component of the User Protection Act is the regulation of unfair trade, borrowing the structure of unfair trade regulation under the Capital Market Act. Key contents include:

  • Prohibiting the use of material nonpublic information
  • Prohibiting price manipulation
  • Prohibition of fraudulent and deceptive trading behavior
  • Prohibition of trading in self-issued coins
  • Sanctions for each unfair trade behavior

In the initial phases of cryptocurrency legislation, regulatory authorities initially pursued a legislative process with a foundational or unified legal framework. However, the pressing need for regulations safeguarding cryptocurrency users, exemplified by incidents involving Luna and FTX, prompted the government to pivot its legislative approach to what is commonly referred to as a two-stage strategy. Consequently, the first stage involved the enactment of the Virtual Asset User Protection Act, while the second stage focuses on enacting the Basic Law. Recognizing that the law establishes only minimum standards, there is a necessity to fortify specific standards and provide guidelines through presidential decrees to operationalize the principles outlined in the law. To address this, regulatory bodies such as the Financial Services Commission are reportedly engaged in a study to clarify standards for issuing and distributing virtual assets and to formulate procedures for listing virtual assets.

In line with this, the Financial Services Commission issued a legislative preview of the Enforcement Decree and Supervisory Regulations of the Act on the Protection of Virtual Asset Users on December 11, actively seeking input from stakeholders. The released Enforcement Decree and Supervisory Regulations outline the specific requirements mandated by the Act on the Protection of Virtual Asset Users, with the primary contents as follows.

Key Highlights of Enforcement Decrees and Supervisory Regulations

In the upcoming phases, the government plans to enhance the Virtual Asset Act through a second wave of legislation, encompassing regulations pertaining to the issuance and disclosure of virtual assets. Anticipated in this second phase are regulations on issuance and distribution, the oversight of stablecoins, the establishment of a regulatory framework for virtual asset valuation businesses, advisory and disclosure practices, definition of the business scope of virtual asset exchanges, and measures to address conflicts of interest. This legislative progression is poised to pave the way for the involvement of traditional financial market entities in the cryptocurrency arena. Currently, cryptocurrency exchanges bear the responsibility for securities financing, depository settlement, and credit rating in the traditional market. However, as the second phase of legislation delineates procedures for listing virtual assets, defines the business scope of virtual asset exchanges, and establishes a regulatory framework for the virtual asset valuation industry, there is a likelihood that the roles currently held by virtual asset exchanges will undergo separation. This evolution could lead to direct participation in the virtual asset market by traditional financial companies handling securities finance, depository settlement, and credit rating in the traditional market.

A pertinent example is the establishment of EDXM, a virtual asset exchange in the United States led by traditional financial firms such as Citadel, Fidelity, and Charles Schwab. Officially operational for institutional investors in 2023, EDXM showcases a trend where traditional financial players enter the virtual asset market. Korean financial entities should closely monitor the enactment of the Basic Act on Cryptocurrency to identify new business opportunities within the cryptocurrency market.

Furthermore, in July, the Financial Services Commission unveiled draft guidelines for supervising virtual asset accounting and a proposal for mandatory disclosure of annotations. This proactive step aims to enhance accounting transparency in the virtual asset industry and establish practical accounting regulations tailored to the virtual asset ecosystem.

Financial Services Commission Announcement

With the submission of last year's semi-annual report, WEMADE has enhanced its disclosures concerning its cryptocurrency, WEMIX ($WEMIX). In addition to promptly adopting financial authorities' accounting guidelines, the company consistently issues separate virtual asset disclosures through the WEMIX team, demonstrating dedicated efforts to ensure transparency. Experts note that the full application of accounting guidelines may require more time due to the lack of specific details for integration with the existing system, numerous ambiguous areas, and the early stage of implementation. Nevertheless, there is optimism about the potential resolution of accounting challenges faced by listed companies engaged in cryptocurrency-related businesses, which were previously unclear, and addressing existing uncertainties.

Key Takeaways

  • As a proactive measure to safeguard investors, Korea has enacted the initial phase of legislation, the Act on the Protection of Users of Virtual Assets, and is pursuing a two-phase legislative plan, with the objective of enacting the second phase, the Basic Act on Virtual Assets.
  • The first phase of legislation excluded electronic forms of currency issued by the Bank of Korea from the virtual assets' scope, anticipating the future introduction of CBDCs by the government. It primarily focused on unfair trade regulations to protect investors.
  • The Enforcement Decree, strengthening Phase 1 legislation, encompasses regulations on depository institutions and management methods, along with standards for undisclosed material information in the prohibition of its use. as well as standards for undisclosed material information in the prohibition on the use of undisclosed material information.
  • The government, in collaboration with public-private partnerships, is advancing the second phase of legislation, with the Financial Services Commission and the Financial Supervisory Service actively introducing regulations to establish a virtual asset supervision department.
  • Accounting guidelines for virtual assets are undergoing finalization but still exhibit gaps in several areas.
  • With the ongoing global trend, there is an expectation that traditional financial entities and various Web2 companies will enter the Web3 industry when the second phase of legislation is earnestly prepared and implemented.

3-3. Embracing Challenges for Future Growth

In our earlier exploration, we reflected on the current state of cryptocurrency regulation across major countries and outlined the anticipated direction for 2024. Describing this journey as a "bumpy ride," it is evident that considerable effort is needed to bring the current cryptocurrency market, marked by its ups and downs, under a robust regulatory framework. However, this process is deemed essential for the market's significant advancement.

While challenges lie ahead, the benefits of regulation are poised to make a substantial impact not only on market liquidity expansion but also on public perception. Regulation signifies the acknowledgment of cryptocurrencies by the public and traditional industries for their intrinsic value, transcending their current reputation as speculative and dubious investments.

Furthermore, the regulatory landscape sets the stage for the emergence of new projects that can foster innovative forms of added value. The aspiration is for regulatory changes to catalyze industry development without compromising the foundational ethos of Web3, opening doors to unimaginable possibilities.

4. Blockchain Infrastructure Making Strides

4-1. Cosmos' Appchain vision realized in Ethereum rollup ecosystem

We believe that the Ethereum L2 ecosystem will realize Cosmos’ vision of the interchain future where various appchains are connected and interact with each other. Specifically, here are some of our predictions for the future of Ethereum:

  • Rollups will become an increasingly important part of the Ethereum ecosystem.
  • Hundreds and thousands of AppRollups will be born around a handful of core general purpose rollups (i.e. Arbitrum, Optimism, Polygon, etc.).
  • Evolution of modular frameworks: Time will come when builders will only need to focus on the application layer.
  • The next trend will be shared sequencing and interoperability.

4-1-1. Rollups will play an increasingly important role in the Ethereum ecosystem

Ethereum's vision for danksharding is to utilize the shard chain only as a data availability (DA) layer to store rollup data, while delegating execution of transaction to rollups. Thus, Ethereum's major network upgrades are also focused on growing the rollup ecosystem and actively encouraging users to use rollups. Among those upgrades, we’re particularly keeping a close eye on two upgrades: EIP4844 and ERC4337. And we expect more and more economic activity to take place over time on rollups with lower transaction fees rather than on Ethereum L1.

Ethereum Layer 2 Ecosystem, ZK Rollups, Optimistic Rollups

Source: thirdweb

A. EIP4844 expected to significantly lower rollup costs through blobs (binary large objects)

Ethereum's Dencun hard fork, originally expected to be introduced in late 2023, is now expected to launch early this year. The major update to Dencun, EIP4844 (or Proto-Danksharding), will introduce some of the logic needed for future danksharding and add a transaction type that includes blobs. Blobs will replace calldata, effectively reducing the cost of L1 publication (DA), which accounts for the majority of L2 transaction fees. For more details on EIP4844, read our "EIP4844 and Its Impact on Rollup Economics".

EIP4844 Upgrades by software

Originally, rollups use calldata to store their block data on Ethereum, which is read-only, cheap to use, and has no data size limit. But with the introduction of EIP4844, rollups will be able to store data via blobs. Blob fees are not affected by the demand for blockspace but are determined solely by the supply and demand for blobs in the EIP1559 transaction market. Until the demand for blobs reaches the price discovery zone, blob fees will be effectively zero, which means that L1 publication (DA) fees—90% of the total rollup cost—will be eliminated. In other words, post-EIP4844 rollups storing data as blob carrying transactions will reduce the overall cost by approximately 10x compared to calldata storage.

Post-EIP4844 Layer 1 L1 Publication Process

There is a concern that the cost of blobs could increase exponentially in a short period of time if the demand for blobs reaches the target level, but the current demand for blobs is about 10 times lower than the target, which is expected to take about 1-2 years to reach. There are also discussions about changing the structure of the blob cost blob in preparation for when the target level is reached, so we shouldn't worry about the price rising anytime soon. It is clear that EIP4844 will significantly contribute to cost reduction and mass adoption of rollups, and it is possible that rollups will have the lowest transaction cost on the blockchain immediately after it gets introduced.

B. ERC4337 and its UX innovation to be highly active in the rollup ecosystem

Meanwhile, UserOperations (ERC4337 transactions) introduced for account abstraction (AA) also mostly occur in rollups. With AA gaining traction as a solution to low-level UI/UX and the burden of self-custody, ERC4337 has the advantage of enabling account abstraction without a hard fork. UserOps is happening on major rollups, and the evolution of blockchain UX will continue to be centered around rollups.

UserOps uses contract wallets rather than EOA, which means that creating a wallet and transferring tokens costs more gas. For example, while EOA can create a wallet for free, creating an AA contract wallet would currently require about 385k gas. In addition, gas fees for token transfers are about 4 times higher for Ethereum and 1.4 times higher for ERC20 tokens, so the cost burden on users is high when using UserOps.

Comparing EOA & ERC4337 Wallets

Gas Fee Estimates for ERC4337 Transactions

However, the cost of ERC4337 transactions is relatively low in rollups compared to the base layer (Ethereum). In fact, the number of wallets with UserOps and AA features has been steadily increasing since last summer, with low-gas L2 chains such as Polygon, Optimism, and Avalanche dominating the ERC4337 race. In addition, the cost of UserOps will be much lower if rollup data is stored in blobs with the release of EIP4844, so we expect to see blockchain UX improving around the rollup ecosystem. For more details, please refer to “ERC4337, the Epicenter of UX Innovation”.

ERC4337 Activity 2023

ERC4337 Activity by Blockchain

4-1-2. Countless AppRollups will be born around few core rollup projects

We expect to see hundreds or thousands of AppRollups centered around a few core Rollups that provide open-source SDKs and frameworks in the future. When we say AppRollups, we don't mean general purpose rollups like Optimism or Arbitrum, but rollups that support a single service/application's blockspace, like AppChain.

A. Open-source SDKs, frameworks will make it easier to build AppRollups

Comparing Major Rollup TVLs in Ethereum Ecosystem

The currently leading projects in the rollup race are releasing their own open-source SDKs and frameworks, each with their own architecture and vision. These rollups are providing SDKs to make it easier for organizations and projects that are preparing Web3 services to deploy their own AppRollups on these ecosystems. Examples of typical rollup SDKs include Optimism's OP Stack and Polygon's Chain Development Kit (CDK), while Arbitrum (Orbit), zkSync (Hyperchain), and StarkNet are also growing popular.

OP stack Superchain Layer 2

Polygon CDK, CDK Chains, Polygon PoS, Polygon zkEVM

Regardless of whether the architecture of these rollups is good or bad, the point is that it has become very easy for companies/projects to build their own blockchain on top of Ethereum. Cosmos SDK is a great example of the benefits of providing an open-source SDK for companies to build their own custom chains. And it seems one of the main reasons Com2us (XPLA) and LINE (Finschia) chose Cosmos AppChain was also because Cosmos was the only SDK available at the time. And now that Rollup has its own SDK, we believe it's not unlikely that enterprise demand for the Cosmos SDK will spill over into the rollup ecosystem. In fact, as seen in the cases of Injective Protocol, Canto, and EVMOS, many appchains are leaving Cosmos and migrating to Ethereum (ex. Canto, a Layer 1 blockchain-based DeFi platform, announced in September that it will migrate to Ethereum zk L2 based on Polygon CDK to build a real asset blockchain).

B. Rollup-as-a-Service (RaaS), building rollups will also be outsourced

The emergence of RaaS is also acting as a catalyst to accelerate the flow of approllups. RaaS is a service that makes it easy to deploy, maintain, and manage customized rollups, freeing developers from the technical challenges of mainnet development and allowing them to focus on developing the application layer.

RaaS consists of rollup SDKs and no-code rollup deployment services, and Celestia Rollkit, OP Stack, and Soverign Labs are some examples of rollup SDKs. No-code rollup deployment services allow you to deploy customized rollups with just a few clicks without coding, and examples include Eclipse, Cartesi, Constellation, Alt Layer, Saga, and Conduit. For more details, refer to "Rollup Investment Guide Part1".

Rollup as a service ecosystem, Rollup SDK, No-code deployment service

4-1-3. Evolution of modular frameworks: Rollups will have more freedom in terms of architecture design

As the modular frameworks are evolving in real time, organizations have more freedom and choice in how and to whom they delegate blockchain roles such as transaction execution, settlement, consensus, and data availability. Eventually, we expect that everything from the basic functionality of the blockchain to the proof system of a rollup will be easily modularized.

A. $10B market cap for $TIA in 1 month of mainnet launch? Data availability (DA) layer is coming

Another modular infrastructure to watch for in 2024 is the DA layer. Examples include Celestia and EigenDA, which recently launched their mainnets, and Polygon is also developing its own DA and consensus layers.

  • Celestia: A blockchain for DA and consensus, built on the Cosmos SDK. It is characterized by applying data availability sampling (DAS) and Namespaced Merkle trees (NMT) technology to ensure the reliability of the entire block data when a light node randomly queries the data and receives a valid response to the sampling query. It launched its mainnet on October 31, and as of December 12, $TIA has a market cap of $1.5B ($10.1B FDV).

celestia, responsible for consensus and data availability layers

  • Polygon Avail: A DA layer in development by Polygon that uses KZG commitments to ensure the authenticity of block body data without requiring light nodes to constantly monitor for malicious data.

Polygon Avail's KZG Commitment Architecture

  • EigenDA: A DA layer being developed by EigenLayer, preparing a restaking service, that leverages EigenLayer validators to eliminate the need to bootstrap your own validator pool. It is adopted by Mantle, and unlike Celestia and Polygon Avail, it does not provide other functions besides DA.
B. The 'Optimistic Rollup vs. ZK Rollup' debate will be over

When the "Optimal Rollup vs. ZKRollup" debate was at its peak around 2020-2022, it was commonplace for organizations and projects to compare the technical superiority of the two proof systems while onboarding to rollups. However, with the recent spate of attempts within the rollup ecosystem to offer or blend both proof systems, companies/projects looking to onboard to rollups are no longer faced with having to pick one between Optimal Rollups and ZKRollups, and even the definition of ZKRollups is becoming blurred.

For example, the Optimism Foundation recently released a request for proposals (RFP) for a Zero Knowledge Fraud Proof (ZKFP) system, which is an attempt to move away from the traditional fraud proof-only approach to verification and introduce zero-knowledge proofs. And there is currently development for a zero-knowledge fraud proof system for Optimal rollups based on a zero-knowledge proof system (zkVM—no E!) that works in a common execution environment on RISC Zero and LayerN. Similarly, Polygon is developing the Nightfall mainnet, which utilizes both Optimistic and Zero-Knowledge technologies.

While many people categorize rollup chains and evaluate their strengths and weaknesses based on their proof systems, rollups do not monopolize the right to choose different layers in a modular architecture. If written for a sufficiently generalized purpose, a single proof system can also work as a settlement layer for multiple rollups. This means that a proof system can also choose rollups or apply to multiple chains at the same time. Therefore, the good and bad of a rollup chain shouldn’t be assessed by the strengths and weaknesses of the proof system. In the future, the distinction between optimal rollups and zk-rollups will become irrelevant, and it will be more important for projects that consider building approllups to look at the ecosystem activity rather than proof systems.

4-1-4. Next Trend is Shared Sequencing and Interoperability

As already mentioned, there will be a definite need for a solution that can seamlessly connect approllups when a large number of them are created in the future. As such, we expect shared sequencer networks and interoperability solutions to gain traction once the rollup market has matured.

A. The emergence of shared sequencing networks to address sequencer centralization in rollups

Current rollups all use a single sequencer, which poses problems in terms of censorship resistance, MEV, interoperability, and composability. Various methods have been discussed to decentralize sequencers, including Proof-of-Authority (PoA), PoS-based L2 consensus + leader selection, as well as MEV auctions (MEVA). But the solution that got the most attention recently is the shared sequencer network. A shared sequencer network is a middleware blockchain that is responsible for sequencing rollup transactions, such as Espresso Sequencer, Radius, Astria, and SUAVE. For more details, see "Shared Sequencing Network: A Middleware Blockchain for Decentralizing Rollups".

Shared Sequencers

Source: Evan, Celestia Forum, ‘Sharing a Sequencer Set by Separating Execution from Aggregation

  • Espressosys: An EigenLayer-based network developed by Espressosys, funded by Sequoia and Polychain Capital, that utilizes ETH re-stakers within the EigenLayer as sequencers.
  • Radius: A project that is developing the first and only Sequencing-as-a-Service (SaaS) solution in Korea, it applies time-locked puzzle encryption technology and PVDE technology utilizing zkproof to its own sequencing layer to ensure the privacy and validity of transactions.
  • Metro: A shared sequencer network being developed by Astria, a startup that has raised a total of $5.5M in seed rounds from nine VCs including Maven 11, 1kx, Delphi Digital, and Lemniscap. Astria will utilize Celestia as its DA layer and is building the Astria EVM, inspired by Cevmos and Rollkit.
  • SUAVE: A shared mempool and block builder solution and permissionless EVM chain that can be used on any blockchain. It is a multichain extension of MEV-boost, which is not a shared sequencer network, but has similarities and synergies.
B. The importance of cross-chain solutions to ensure interoperability between blockchains

As the number of blockchains grows, the demand for cross-chain infrastructure to ensure interoperability will grow exponentially. While there have been bridging services that support cross-chain fund transfers, they are typically: 1) expensive, inconvenient, and time-consuming; 2) untrustworthy due to multiple hacks, including lock-and-mint-based bridges; 3) provide synthetic assets rather than native assets; and 4) fragmented asset liquidity across multiple chains. Moreover, existing bridges only support the movement of funds between chains, not complex cross-chain messaging. This is where LayerZero and Chainlink's CCIP come in to complement blockchain interoperability and support native cross-chain transactions.

LayerZero is an endpoint running an interoperability protocol, utilizing oracles and relayers to send and receive messages. With strong security in modular form, low fixed and variable costs, and a rapidly growing ecosystem, LayerZero has the potential to become a cross-chain leader that will become a critical core infrastructure.

LayerZero Ecosystem, LayerZero NFTFI Bridge Gaiming NFT Platform

Source: LayerZeroSpace

In July, Chainlink announced the launch of a testnet for its Cross-Chain Interoperability Protocol (CCIP). Considered a rival to LayerZero, CCIP is rapidly expanding its services by leveraging the already established Oracle network and is positioning itself as a standard cross-chain solution, especially for connecting private chains in TradFi with public chains. And we expect CCIP to become a huge Web2 and Web3 standard in the future.

CCIP & LayerZero: Similarities and differences

4-2. Alt-L1s will discover PMF centered on scalability and ease of development

The Ethereum Virtual Machine (EVM) is still a strong narrative in the blockchain market today. When we say EVMs, we don't just mean Ethereum, but blockchains that have forked Ethereum or are Ethereum-compatible. Some prominent examples of EVM chains include Polygon, BNB, Tron, and Klaytn.

The advantage of EVM-compatible chains is their strong interoperability with Ethereum and the EVM-based ecosystem. This allows expanded reach of users and projects, and the widespread use of the Solidity language makes it easy to absorb the developer community. Product development is also facilitated by the availability of a wide range of EVM-based libraries and tools. Thanks to these advantages, EVM chains have a market share of over 90% of the total blockchain market in terms of total value locked (TVL) and users. Solidity is still going strong as the most widely used blockchain programming language.

Comparing Layer1 TVL Trends, TVL Share by Blockchain, Comparing Key Metrics by Blockchain

While it's true that many companies and projects are finding a home in L2 ecosystem based on EVM, there are plenty of opportunities for L1 blockchains other than Ethereum. Blockchain is still a nascent technology with a global penetration rate of around 2-3%, and it's unclear whether Ethereum will be able to achieve the same level of market dominance when the blockchain market begins to scale in the future. Each organization and project will choose a chain that fits their goals and needs, and non-EVM-based "Alt L1s" will be a viable option.

"Alt L1" refers to L1 blockchains that are not EVM-based. Alt L1s are trying to overcome Ethereum's main limitations of scalability and ease of development. Chains are emerging that use VMs that differ from the EVM structure or adopt different consensus algorithms and structures to provide high scalability at high speeds and low fees. There are also chains that provide a more convenient development environment by allowing the deployment of own chains, tokens, and smart contracts through CLI.

As the market continues to evolve, a variety of new requirements emerge. New opportunities are opening up for projects that need to be fast, projects that need development support, developers who prefer programming languages other than Solidity, and long-tail projects that need long-term support. Non-EVM Alt L1s are gaining ground in the market to meet these diverse needs. In this report, we will focus on Solana, Avalanche, and Move-based blockchains (Aptos and Sui).

4-2-1. SOLAVAX, without Luna, will be a major Alt-L1 in 2024

A. Solana

Solana began to be shunned by organizations and projects in 2022 due to ongoing network issues, and to make matters worse, its TVL and coin value plummeted after the FTX debacle in late 2022. However, despite its post-FTX struggles, Solana has proven to be resilient. In 2023, Solana has been the epitome of bottom-up growth, with a solid community built around small and medium-sized projects.

Trends in $SOL Performance

The continued growth of the Solana community has contributed to this recovery. Even during the $SOL price downturn, Solana continued to organize various ecosystem activities centered on real builders and fan base. Signs of a recovery began in January 2023 with the BONK token airdrop to the Solana community. Recently, the foundation and community have been working hard to help Mad Lads, a Solana-based NFT project, reach the top spot in 24-hour trading volume for all NFTs, including Ethereum.

Large-scale hackathons continued to be held, such as Sandstorm, organized by LamportDAO, a builder community of Solana contributors, and the Grizzlython and Hyperdrive hackathons organized by the Solana foundation. The Grizzlython hackathon was particularly well attended, with 10,000 participants and 813 submissions.

Solana's locally based community, Superteam, expanded to the United Kingdom, United Arab Emirates, and more, and the Superteam World Tour showed its commitment to expanding Solana's local community globally. Solana University, which supports student developers, is also active, bringing young developers and users into the ecosystem with global potential.

VISA Solana

Source: VISA

Solana Pay shopify

Source: Solana

The Solana Foundation has also seen some big partnerships with major global companies last year, including Google Cloud, VISA, and Shopify, although they are fewer in number than other chains. These partnerships are a testament to Solana's proven track record of consistently delivering high throughput and low fees as it bounced back from setbacks. Notably, in announcing support for USDC payments on the Solana network, VISA stated that Solana has the potential to support major payment systems like VISA with its high-speed transaction processing, scalability, and low transaction costs. This proven chain performance suggests that Solana remains a technically sound solution for mass adoption.

With such a strong community and business favorability, Solana has been on a recovery trend, with the $SOL price returning to pre-FTX levels by Q4 2023. In 2023, Solana showed how important community and real-world users are to a blockchain, beyond just providing infrastructure and token incentives. With this lesson learned, we expect Solana to continue to grow this year with a developer-first mindset and high scalability.

B. Avalanche

In contrast to Solana, which has an ecosystem centered on small and medium-sized projects, Avalanche is building its ecosystem from the top down, focusing on large enterprises. Avalanche has been actively adopted by global corporations and game companies such as JPM, Citi, SK, Shrapnel, and Off the Grid, among others, for its convenient subnet-centric blockchain development. As of December 10, 2023, the total number of subnets has increased to 96.

Avalanche Market Cap and No. of subnets

Avalanche is particularly strong in the financial sector with its subnet technology. Avalanche has significantly reduced the technical barriers for enterprises/institutions through its Evergreen Subnets to adopt blockchain by offering customized blockchains designed to meet their specific needs and industry-wide considerations. In July of 2023, Avalanche also launched "Avalanche Vista," a real-world asset (RWA) tokenization and investment initiative worth up to $50 million to accelerate the growth of RWA tokenization and on-chain finance.

These efforts have led to some big wins in the financial sector last year, including the world's largest private equity firm KKR tokenizing with Avalanche. JPMorgan, participating in the Monetary Authority of Singapore's (MAS) DeFi pilot, Project Guardian, announced a Proof-of-Concept for wealth and asset management innovation utilizing Avalanche's Evergreen subnet, and Citi Group revealed that it has tested foreign exchange (FX) trading using Avalanche's Evergreen subnet.

End-to-end portfolio management & interoperability POC

Meanwhile, the Avalanche-based UPTN project, led by SK Planet, is also showing impressive performance. UPTN is a Web3 service that aims to increase the universality of OK Cashbag points and improve profitability, and it plans to launch various services, starting with Road to Rich, to incorporate blockchain into real life. Unlike in PFP project, transaction fees occur in the process of users installing/removing TEM NFTs on Racky and secondary transactions actively occur to acquire desired TEM NFTs. This means Road to Rich is less affected by conditions of the cryptocurrency market and has relatively low revenue volatility and advantageous structure for profitability defense. According to Explorer data, the number of UPTN Station subscribers exceeded 200,000 as of November, six months after the service was launched, and the maximum number of transactions per day was 276k. For more details, please refer to "UPTN Project: SK Planet's Arc Reactor".

UTN Station Monthly Accumulated Subscribers

Finally, Avalanche is also expanding its ecosystem in the gaming sector by utilizing subnets. We've partnered with major game companies like GREE and Neowiz, and AAA game studios like Sharpnel and Off The Grid are actually building on the subnet. With many game companies like WEMIX, XPLA, Krafton, and others focusing on building their own chains, Avalanche's ability to easily deploy, manage, and build subnets through its Web3 launchpad, Ava Cloud, is a huge advantage.

  • Shrapnel: This AAA FPS game is built on Unreal Engine 5 and is being developed by the same team that brought us HALO, Call of Duty, and Westworld. Shrapnel has received funding from top VCs such as Polychain Capital and Dragonfly Capital. Set on Earth in 2044, players will be able to extract resources and fight battles in the game while creating content through an NFT economic system. The team behind Shrapnel said they chose the subnet for its customization and security, and are aiming to launch in 2024.
  • Off The Grid: A cyberpunk battle royale game being developed by AAA game studio Gunzilla Games. Off The Grid will be integrated into the GUNZ platform, which is based on the Avalanche subnet and will offer an NFT-based digital economy system where players have full ownership. Through its partnership with Ava Labs, Gunzilla Games said it aims to "leverage the high scalability and security of the Avalanche subnet to provide the best possible gaming experience."
  • DeFi Kingdoms (DFK): A P2E game originally launched on the Harmony chain, DeFi Kingdoms began supporting the Avalanche subnet with the launch of Crystalvale. As a subnet of DeFi Kingdoms, the DFK chain is generating the highest number of transactions and active addresses of all subnets.
  • Dexalot: Dexalot is Avalanche's first Central Limit Order Book (CLOB) DEX, which aims to minimize slippage and custody risk. It is backed by the Avalanche Multiverse program in exchange for achieving subnet milestones and launched its subnet in February of last year.
  • Beam: Merit Circle DAO launched this gaming project using the Avalanche subnet. The Beam subnet operates independently and provides customized services for both gamers and game developers. Beam is using Merit Circle DAO's token ($MC) as its gas and the DAO's governance token. The project offers a variety of games and infrastructure products, which will initially include games like Trial Xtreme, Walker World, and Hash Rush.

4-2-2. I Like to Move It Move It: Facebook giants surfacing

With the advancement of blockchain technology, new chains have recently begun to gain traction, including Aptos and Sui, part of the Move family of so-called "Next Generation Chains". Aptos and Sui are based on the Move language, which was derived from Meta's (formerly Facebook) blockchain project Diem.

Move was developed to address the security limitations and transaction parallelism issues of the existing blockchain programming language, Solidity. The Move language minimizes security vulnerabilities such as double-spending and reentrancy attacks, and provides high scalability by enabling transaction parallelism. Move is convenient for representing ownership and assets, which are at the core elements of blockchain, and other chains are looking to adopt it.

Aptos and Sui build on the strengths of the Move language to provide greater scalability and enhanced security that existing blockchains lack. Based on their superior technology, Aptos and Sui, as latecomers, are making significant efforts to expand their ecosystems and acquire users.

A. Aptos

Aptos is an upstart PoS blockchain created by former Facebook Diem developers with a focus on speed and reliability. Aptos is designed to achieve a theoretical +100,000 TPS and sub-second latency and supports the Move language, providing a stable, fast, and flexible development environment. Aptos has raised approximately $350M in funding from a number of leading institutional investors including a16z, Tiger Global Management, Paxos, Jump Crypto, Multicoin Capital, and Paypal Ventures. The Aptos ecosystem is currently home to the largest number of projects in the DeFi and tooling space, and the company is collaborating with early ecosystem members such as Pontem and BlueMove to expand the ecosystem.

In addition to its technical strengths through Move, Aptos is also internally well-designed, allowing for quick and efficient technical updates. In the eight months since its launch, Aptos has passed 24 AIPs, continuously updating the chain without a single downtime. (AIP is a network enhancement proposal, similar to Ethereum's EIP.) Aptos is able to support such fast and immediate upgrades because of its modular architecture that allows for protocol upgrades without a hard fork, as well as its implementation of an on-chain governance system that allows for real-time upgrades. With these rapid protocol upgrades, Aptos is building a future-proof network that can accommodate large numbers of users by more than tripling network throughput and reducing gas fees for some transactions by 99%.

Key AIP, AIP Architecture

Aptos is aggressively partnering with big Web2 companies to adapt, even as a nascent chain, based on its technological potential. Within a year of its mainnet launch, Aptos has partnered with global giants such as Microsoft, Mastercard, and NBCUniversal, leading to various collaborations. In Korea, the company was the first to have a regional head, and the result was a successful partnership with SK Telecom, Lotte Daehong Communications, Seoul Land subsidiary, MARBLEX, Intella X, and other large game companies with large user bases. While the onboarding of the METAPIXEL project, one of the most anticipated in the gaming space, ended in failure, the announced partnerships show that the top-down enterprise adoption will continue.

Aptos Key Partnerships 2023, Microsoft, Mastercard, NBC Universal, Google Cloud

Beyond the business side of things, Aptos has made a number of efforts to build its ecosystem and community. Since the beginning of 2023, it launched a world hackathon tour to select and support quality projects in each region. Through various acceleration and grant programs, including the Move-oriented Web3 grant program that supports Move-based projects, existing products have added multi-chain functionality that extends to Aptos, birthing many new Move-based projects.

As such, Aptos is leveraging the strengths of the Move language and accelerating technical updates through governance such as AIP to meet the public’s technical expectations. Although the ecosystem and infrastructure are being built through foundation-led partnerships, grants, and hackathons, we believe that the key to success in 2024 will be to continue to show good chain performance and gain community and real users.

B. Sui

Sui launched its mainnet in May 2023 with much anticipation. Similar to Aptos, it garnered much attention since 2022 due to the emphasis on Move-based technology by formerly Meta team as well as investments by major VCs and large enterprises. After the mainnet launch, Sui was quickly listed on major exchanges such as Binance, KuCoin, and OKEx overseas, and Upbit and Bithumb in South Korea.

Sui Market Cap and TVL

Sui has seen its token price and TVL grow since Q3 2023. According to on-chain data analytics firm Defillama, the TVL of Sui has been attracting a lot of funds, surpassing $100 million for the first time, and the growth of DeFi protocols such as Cetus and Scallp has had a major impact. In particular, Deep Book, which Sui started supporting in July of 2023, has made it easier for other protocols to implement limit order algorithms through its liquidity layer SDK. Various ecosystem projects such as KriyaDEX, Turbos_finance, AftermathFi, CetusProtocol, KaironLabs, MovEx, etc. have joined the development and have begun to implement and support various trading features.

Sui is also actively adapting to the gaming space through partnerships, tooling, and infrastructure development. For example, NHN and BLRD, a subsidiary of Japanese gaming giant GREE, have announced plans to develop a Web3 game powered by Sui. Sui has launched Play Beyond, a Web3 game portal platform, to provide a gateway for users to access Sui-based games, and is partnering with Space and Time to make zk-based tools available for games and dApps.

The Sui Foundation is also aggressively implementing ecosystem expansion programs. The Sui Builder House World Tour brings local developers from around the world to onboard into the Sui ecosystem, and the GrantHub currently supports 86 projects with grants. These efforts have resulted in the onboarding of many Aptos-based projects from the same Move language family to the Sui chain, with many projects building in the DeFi and tooling space. It also encouraged artists, developers, and researchers to take interest in its technology and ecosystem through its NFT growth program SUMM3r on Sui, and the Sui Research Award for researchers.

In addition to the grants and outreach programs, Sui also focuses on tooling and infrastructure to help projects grow. Sui has partnered with Tencent and Alibaba Cloud to build an infrastructure base for ecosystem developers, and has continued to develop tools like zkLogin and dApp kits to make it easier for developers to build Sui-based products.

Move-based chains have been challenged for their performance as newer chains that use a new language and consensus algorithm. However, the 10 minigames introduced during Quest 3 last year were actually played by users, proving that the Sui network can handle millions of transactions simultaneously while maintaining low gas costs. Going forward, it will be important for Sui to continue to provide the infrastructure and tooling to make it easy for developers to build Sui-based products, and to engage the community and real-world users by demonstrating good chain performance.

5. Major Services Are Poised to Ascend Atop Core Infrastructure; Forthcoming Trends Will Become Evident in 2024

5-1. Gaming: Anticipating a shift in 2024!

5-1-1. 2023 recap: A lackluster year for gaming

The blockchain gaming sector experienced a sluggish year in 2023, primarily attributed to two key factors: 1) Games produced en masse by major gaming companies, employing conventional Play-to-Earn (P2E) strategies on aging intellectual properties, fell short of expectations, and 2) the market's attention eluded low-quality games released by Web3 game studios, a predicament that was somewhat anticipated. Despite the release of over 700 blockchain games in 2023, more than 70% failed to retain user interest.

major game companies in South Korea rapidlyproduced P2E games

the failure rate of blockchain games

The impact of the crypto market downturn cannot be understated. The general decline in cryptocurrency prices diminished the allure of blockchain games. In the absence of a significant enhancement in the gaming experience resulting from blockchain integration, the absolute size of rewards diminished. Consequently, the incentive to engage with blockchain games designed as peer-to-peer experiences waned.

The cryptocurrency market experienced a significant downturn starting from 2Q22

Blockchain Games Tops the Decline ListA lack of consideration for the value that blockchain technology brings to gaming also played a pivotal role. Many gaming companies, inspired by the global success of titles like Exo Infinity and Mir 4, hastily replicated the successful formula and inundated the market with blockchain games. Although sustainability concerns prompted adjustments to the tokenomics model, the fundamental focus on P2E persisted. The repeated release and subsequent failure of games unable to transcend the P2E paradigm fostered disillusionment and skepticism towards blockchain games.

Changes in the Tokenomics Model of Blockchain Games

5-1-2. 2024 outlook: Diverse markets, evolving companies

Anticipate significant shifts in the landscape in 2023. Firstly, there's been a notable recovery in the crypto market since 4Q23, primarily fueled by the hopeful expectations surrounding the approval of a Bitcoin spot ETF. Undoubtedly, a more conducive environment for blockchain games is taking shape.

The cryptocurrency market has succeeded in rebounding from 4Q23

Forecasts suggest that blockchain games to be unveiled in 2024 will showcase distinctive characteristics. 2) A new phase of blockchain game development, transcending the Play-to-Earn (P2E) framework, is in progress, primarily spearheaded by prominent Korean gaming companies. In contrast to 1H23, where there was a rush to release blockchain games adhering to existing P2E conventions, the focus is now shifting towards unlocking the intrinsic value that blockchain technology can bring to the gaming industry. 3) Additionally, Web3 game studios, backed by substantial investments, are gearing up to launch AAA games. Considering the typical production cost and timeline associated with AAA games, it is widely believed that the groundwork has been laid for the introduction of AAA games in 2024.

Global blockchain investment volume and resources for AAA game development

5-1-3. Deciphering the landscape: Large game companies vs. web3 game studios

A. Large game companies (1): South korea leads the way with trial and error, retaining valuable know-how

South Korea stands at the forefront of blockchain gaming, boasting an unparalleled number of active large game companies in this sector. This trend is expected to persist into the year 2024. While it's true that Korea has yet to produce a globally successful blockchain game on the scale of <MIR4 Global>, the iterative process of trial and error among the first movers is deemed inevitable.

A prominent Korean game company is presently advancing the development of a new tier of blockchain games that transcends P2E. Having absorbed valuable lessons in 2022 and 2023, marked by numerous trials and errors, the company has realigned its direction and revamped its strategy. This underscores that the preceding two years have not been in vain. The accumulated know-how in blockchain game development and operation, gained as a pioneer, stands as a distinctive competitive edge and a valuable asset for game companies. The continual accumulation of know-how, pivotal for a game's success and longevity, widens the gap between Korean game companies and their overseas counterparts. This, in turn, enhances the likelihood of securing a leading position in the blockchain game market.

The horizon is adorned with several highly anticipated titles for 2024, including WEMADE's Night Crows Global, Nexon's MapleStory Universe, and KRAFTON's OVERDARE. In this article, we will explore the value they have unearthed from the aftermath of P2E over the past two years and delve into how they have endeavored to incorporate that value into their games.

B. Large game companies (2): Fast follower Japan, slow but sure change

Japan, closely observing the global success of MIR4 Global, becomes the second country after South Korea where game companies actively embrace blockchain. Notably, the latter part of the 2023 witnessed significant transformations: 1) numerous game companies declared their entry into the blockchain game market, 2) business plans underwent refinement, and 3) the depth of contemplation regarding blockchain games underwent a shift.

While Japan has progressed from contemplating blockchain adoption to exploring practical business directions, the expectation for rapid development, akin to Korea, remains modest. 1) Japan strategically positions itself as a fast follower, opting for an R&D-oriented approach until a successful model emerges. Consequently, the blockchain games slated for release in 2024 are likely to serve as light tests to gauge market reactions. Additionally, 2) Japanese game companies exhibit a higher utilization rate of game IP than their Korean counterparts, leading to a more cautious approach to leveraging IP for blockchain games. Despite discussions surrounding major IP utilization, the actual release of IP-based games is expected to take considerable time.

However, in 2024, the landscape allows for successful blockchain games centered around major Korean game companies like Night Crows Global, MapleStory Universe, and OVERDARE. Therefore, unlike 2024, it is anticipated that 2025 will be the year when Japanese game companies actively delve into developing their blockchain game business. If Japan, a traditional gaming powerhouse and global IP giant, commits seriously, the resulting acceleration and impact are poised to be beyond imagination.

C. Web3 game studios: It’s time to showcase results

Following the recognition of blockchain game potential with the success of Axe Infinity in 2021, traditional game companies, VCs, and funds have started investing heavily in Web3 game studios. The cumulative investment from 3Q21 to 3Q23 reached $10.1B, a significant figure yet still modest compared to the overall gaming industry's financial influx.

Web3 game studios securing substantial investments are now unveiling AAA game releases. Considering that AAA games typically take more than three years to develop, we anticipate that 2024 will mark the period when Web3 game studios, having commenced development three years ago, will earnestly showcase their work. Web3 games released in 2024 are poised to be distinct and should be so. Gamers have raised the bar, and games falling short of it will swiftly fade from the market.

D. Big game companies will up their game, and Web3 game studios will expand vertically

Leveraging their proven planning and development capabilities, large game companies can produce complete blockchain games that meet the high standards of gamers. Even if they face setbacks, they have enough resilience to endure. On the flip side, Web3 game studios are lighter in weight compared to the big players and can experiment with models that actively incorporate Web3 elements. The reception of this experimental approach among Web2 users is uncertain, but exploring new models is worthwhile. After all, it was Sky Mavis, a small Vietnamese game studio, not a major game company, that set the stage for P2E.

In the future, we anticipate that large game companies and Web3 game studios will collaborate to expand the size of the blockchain game market by building complements rather than competitive substitutes. Large game companies, with their already substantial user base, will play a role in reducing the barriers to entry for blockchain games from a Web2.5 perspective, attracting users to the market. Web3 game studios are expected to contribute to the vertical expansion of the market by offering experimental blockchain game models to new users.

5-1-4. Project Update

A. Nexon (MapleStory Universe): Big brother is coming

Nexon, among the domestic game companies pioneering beyond Play-to-Earn (P2E), is currently immersed in the development of MapleStory Universe (MSU). MSU stands as a blockchain ecosystem built upon Nexon's monumental intellectual property, MapleStory (MS), renowned for accumulating over $4 billion in sales. In a groundbreaking approach, MSU adopts a structure that rewards both game players and content creators. Through the integration of blockchain technology, creators can leverage game assets within MSU in the form of NFTs, extending their utility to diverse content such as games and decentralized applications (dApps). A comprehensive overview of Nexon's MSU can be found in the original Zangle Original article titled "MapleStory Universe: Reawakening Nexon's Innovative DNA" (published on November 27).

MapleStory: Nexon's most iconic IP

Nexon envisions blockchain technology as a means to holistically expand the MS intellectual property. Unlike a distinct entity, MSU is not a separate ecosystem but a seamless extension of the underlying MS IP. Recognizing the pivotal role of intellectual property in the gaming industry, Nexon faces the challenge of consistently updating game content and launching new titles annually. MSU emerges as Nexon's initiative to foster self-sustainability for IPs by continuously delivering fresh content through collaboration with creators. Importantly, this content creation extends beyond the space of traditional games.

Drawing from the lessons of MapleStory World (MSW), we can assess the viability of MSU's strategy in practice. MSW, a UGC platform launched in September '22, shares similarities with MSU, excluding the Web3 element. The initial performance of MSW was modest until the release of Artale in August '23, a game incorporating the original MS. Artale, tapping into user nostalgia, surpassed 10,000 concurrent users within two months, sparking a revival of MSW. The sequence of "successful game appearance → increased demand traffic → increased supply traffic → expanded content → enhanced user experience → heightened demand/supply traffic" marked its growth.


However, Artale exposed issues within MSW: 1) ownership of user items resides within MSW, and 2) an unstable creator revenue settlement system hinders the smooth formation of a derivative ecosystem, restricting scalability. MSU aims to address these concerns through blockchain technology. Firstly, MSU liberally opens up the IP, granting creators the right to issue items (NFTs) without copyright infringement risks. Users are relieved of worries about infinite item generation and forced rollbacks, as experienced in MSW. Secondly, while coin issuance is not explicitly mentioned, introducing coins and a fair revenue distribution system through smart contracts can substantially enhance the revenue settlement system.

MSU plans to conduct a small-scale test to evaluate settlement efficiency and gauge new users' responses to the ecosystem, with the aim of a full launch in '24. The significance of MSU lies in its departure from P2E, presenting a novel direction and perspective for the blockchain game market. Positioned with a long-term outlook, viewing blockchain games as the next phase in the gaming industry rather than a short-term profit venture, MSU aims to create a healthier ecosystem. If the introduction of blockchain overcomes the limitations of MSW and contributes to the expansion of MS IP, it is poised to usher in a transformative era for concerned game companies, such as Nexon.

B. KRAFTON (OVERDARE): Redefining blockchain games beyond the blockchain

KRAFTON, Korea's top game company with a market capitalization of $7.6B, is embarking on the OVERDARE project, following a blockchain gaming approach similar to Nexon but with unique nuances. The OVERDARE project encompasses 1) Settlus, a mainnet built on Cosmos, and 2) OVERDARE, a UGC game platform that draws inspiration from Settlus, representing the second UGC game platform.

Krafton: Annual Revenue & OVERDARE Governance Structure

OVERDARE shares fundamental similarities with Roblox, where creators contribute game content and items, earning a share of revenue from item sales. Distinguishing features include 1) original items created by developers being issued as Non-Fungible Tokens (NFTs), 2) the ability to sell items based on external NFTs, and 3) recording sales history on the blockchain. This framework brings significant advantages for both creators and KRAFTON.

For creators:

  1. Transparent revenue settlement: With item sales recorded on the blockchain, creators benefit from transparent and verifiable revenue settlements.
  2. IP ownership: Since the items created are stored on the blockchain as NFTs, creators retain ownership of the intellectual property (IP). This not only safeguards their creations but opens new avenues for revenue through IP licensing.


  1. External IP integration: The ability to create game content and items based on external NFTs allows Krafton to spur platform growth by incorporating external intellectual properties.
  2. Platform attraction: The appeal of creators lies in the fact that IP generated within OVERDARE can find utility beyond the platform, attracting creators swiftly. The implications of this are directly tied to Krafton's revenue streams.

OVERDARE Platform Structure

Roblox Growth Cycle & Revenue distribution

In contrast to platforms like Roblox, Fortnite, and Minecraft, OVERDARE ensures users enjoy the exact same gaming experience. The uniqueness lies in how OVERDARE strategically eliminates all visible blockchain elements from its user interface. By integrating blockchain as an invisible backend technology, it eradicates the typical entry barriers associated with foreground blockchain implementation. Crafted to allure a broad Web2 user base, this approach aims at attracting a larger audience, diverging from the strategy of Nexon, where NFTs take center stage, viewing wallet usage as a potential hurdle to overcome in the future.

Number of game users: Top 3 Web2 vs. Web3 games

OVERDARE is slated for testing in 1Q24, with a global launch planned for the first half of this year. Much like Nexon's pursuit of early user acquisition through MapleStory N content, Krafton aims to captivate users with an array of self-produced games spanning various genres. The potential success of OVERDARE draws inspiration from established examples like Roblox, Fortnite, and Minecraft. However, despite offering a parallel user experience to its competitors, OVERDARE must demonstrate how blockchain technology provides creators with a distinct edge. Should OVERDARE swiftly attract and engage creators, it may serve as a catalyst, prompting major global game companies in similar genres to contemplate embracing blockchain technology.

The Impact of Proven UGC Game Platforms

C. Com2uS (XPLA): Joy in ownership

Com2uS, akin to numerous local game enterprises, is carefully considering the potential benefits that blockchain technology could introduce to the gaming landscape. Throughout 2022 to 2023, the company launched games that seamlessly integrated blockchain into its core IPs, including Summoners War, MiniGame Paradise, and MLB 9 Innings 23 . These titles garnered substantial popularity within the traditional Web2 platforms. However, the results failed to meet the market's expectations. Despite the optimistic outlook that leveraging successful Web2 IPs would effortlessly draw in users, the anticipated smooth transition of existing users did not materialize. From the user's standpoint, this lack of transition can be ascribed to several factors: 1) the absence of fresh content, 2) high entry barriers, and 3) a revenue model that did not measure up to the benchmarks set by early Play-to-Earn (P2E) games.

Com2uS 11 Blockchain  Games Launched from 2022 to 2023 XPLA Games

Com2us Core IP, summoners War & Minigame Party

Leveraging these valuable insights, Com2uS is set to redefine the gaming landscape in 2024 by embracing the unique value proposition offered by blockchain technology. Aligned with Com2uS' visionary approach of "Play to Own" (P2O), emphasizing strengthened user ownership of in-game items through NFTs, the company aims to rectify past shortcomings. While many blockchain games stress user ownership, Com2uS recognizes that the true essence of "ownership" is often realized not during gameplay but when the game service concludes. To address this, Com2uS envisions building an ecosystem where the same item (NFT) can seamlessly transcend across multiple games, providing users with a continuous sense of ownership during gameplay. This approach yields several significant outcomes:

For Users:

  • Elimination of switching costs between games, enabling a more immersive gaming experience with the same investment of time, effort, and money.

For Com2uS:

  • Extended user engagement within the XPLA ecosystem, resulting in reduced churn rates and reinforcing user loyalty—a substantial advantage for marketing new games.
  • A direct translation of increased user retention to enhanced revenue streams for Com2uS.

Yet, creating an ecosystem where items are shareable introduces the potential for disrupting the equilibrium between early and late users, as well as paid and unpaid users. This situation can easily escalate into a high-stakes game, making it imperative to adeptly address this challenge to ensure long-term viability. In Chromatic Souls: AFK Raid, launched in April 22, Com2uS took a strategic approach to mitigate the divide between NFT-paying and non-paying users.

Com2uS has ambitious plans for the next year, aiming to release a diverse array of new games, including AAA titles. Notably, a fresh addition from Carbonated, a Web3 game studio founded by developers with experience in global game companies such as EA, Zynga, and Sony, is in the pipeline. This promises the introduction of relatively high-quality blockchain games. Going beyond merely issuing game items as NFTs, Com2uS seeks to showcase the value of blockchain games by addressing the desires of Web2 users. The anticipation lies in whether these endeavors will resonate with the preferences of Web2 users.

D. WEMADE(WEMIX): Will WEMADE (WEMIX) become the next ‘Steam?’

In 2023, WEMADE remains steadfast in its commitment to solidify its standing as the premier global blockchain gaming platform. Aligning with its established strategy, the company aims to leverage its popular IPs on WEMIX Play and introduce diverse external games, capitalizing on the user traffic generated through this approach.

A notable highlight on the horizon is the imminent release of Night Crows Global in 1Q24. This game, building on a more robust IP than the groundbreaking <MIR4 Global>, which set the tone for blockchain games in Korea, is a PC/mobile MMORPG. Having demonstrated its gaming prowess with a remarkable ascent to the top spot in the daily sales rankings of both app markets since its April launch, Night Crows Global is anticipated to propel the WEMIX ecosystem to new heights. For an in-depth exploration of WEMADE's "Night Crows Global," refer to the Xangle Original article "About Blockchain Gaming, and Night Crows Global" (published on October 25).

MIR4 Global Wemade Weimix, MIR4 Activity Mertics

Night Crows dominated MIR4 in Korean Box Office Performance

Despite the addition of new games each quarter to WEMIX Play, non-WEMADE IPs have yet to make a significant impact among users. Since its peak in 4Q21, the user base has steadily declined, especially since 1Q22. To counter this trend, WEMADE has proposed two strategies for platform expansion: 1) ongoing diversification of the game lineup and 2) venturing into an omnichain network. With more than 130 blockchain games signing on with WEMIX Play and the introduction of the omnichain project “unagi,” the platform is poised to serve games across various chains, starting with Night Crows Global.

Game Releases continue, but user number is declining,, WEMIX Play

In the case of Steam and the Epic Games Store, the first-mover advantage of gaming platforms is evident. Game developers gravitate towards platforms with established user bases, and users naturally flock to spaces offering a plethora of games. Breaking into the market and catching up with a game platform established through the cycle of user influx, developer influx, content expansion, and subsequent user influx is an arduous task. While there is a potential for heightened competition in the market's early stages, the dominant position of the platform is fortified by being 1) the largest blockchain gaming platform in Korea and globally, and 2) actively prioritizing ongoing platform expansion, signaling a likelihood of sustained dominance.

First mover advantage of gaming platforms evident

E. Japan: Ganbare Ganbare Senpai

In the Xangle Original article published on March 6, titled "Asia Blockchain Gaming Deepdive” we delved into the current landscape of Japanese gaming giants venturing into the blockchain gaming arena. Our analysis revealed that although Japan entered the market later than South Korea, their approach to adopting blockchain technology closely aligned with that of Korean game companies. While no game company has released a blockchain game, several have outlined their initial forays into blockchain games (Square Enix's "Symbiogenesis" and Sega's "Three Kingdoms War"). Furthermore, although no game company is directly pursuing L1 business, entities like Sega, Bandai Namco, and others have indirectly entered the L1 business sphere by participating as validators in the Oasis Network.

Navigating through the latter half of 2023, notable transformations have marked the landscape. 1) The influx of game companies into the blockchain gaming market has surged, 2) business strategies have undergone a process of refinement, and 3) there has been a profound shift in the conceptualization of blockchain gaming. Primarily, major industry players like Sony, GREE, DMM Games, and Enish have freshly ventured into the blockchain game market, reflecting a trend where nearly all Japanese game companies have internal blockchain teams actively preparing related services. Secondly, entities that initially entered the blockchain space indirectly—engaging as validators or managing funds—have pivoted towards directly launching blockchain games (e.g., Bandai Namco's "RYUZO" and Konami's "Project Zircon"), with discussions revolving around leveraging major intellectual properties. Lastly, the narrative around blockchain games has transcended the initial query of "Why Blockchain?" to delve into the more nuanced considerations of "How to harness blockchain?" and "How to formulate a distribution strategy for blockchain games?". The discourse has shifted from contemplation about blockchain introduction to the exploration of pragmatic business avenues.

Major Japanese blockchain game status

Based on our engagements with Japanese game companies, it is evident that Square Enix and Konami currently stand out as the most earnest contenders in the space of blockchain games. While some game companies delegate actual game development to entities like Double Jump Tokyo, focusing solely on finalization and distribution, Square Enix and Konami have explicitly affirmed their direct involvement in the development of blockchain games.


  • Square Enix: Established in 1975, Square Enix is a prominent Japanese gaming company renowned for titles like Final Fantasy, Kingdom Hearts, and Dragon Quest, boasting a market capitalization of $4 billion. In its CEO's New Year's address in 2023, the company revealed plans for the development of numerous blockchain games and introduced Symbiogenesis as its inaugural blockchain game. Symbiogenesis narrates the tale of a dragon assault on humanity, prompting their migration to Earth's last sanctuary to escape environmental degradation. Comprising six chapters, the first installment is slated for release on April 21. A total of 10,000 character NFTs will be issued, granting NFT holders access to an exclusive storyline. As outlined in the New Year's announcement, the company anticipates an extensive lineup of blockchain games, commencing with Symbiogenesis.
  • Konami: Established in 1969, Konami is a major Japanese gaming company recognized for titles like Demon Slayer, Metal Gear, and Silent Hill, with a market capitalization of $7 billion. Konami unveiled its inaugural blockchain endeavor, Project Zircon, in September, divulging specifics at Tokyo Game Show 2023, Japan's premier gaming expo. Project Zircon is a tabletop role-playing game (TRPG) set in a world ravaged by catastrophe, where players collaborate with neighbors to navigate the crisis. NFT holders can customize their characters' narratives, and the extensive creative freedom inherent in the TRPG genre enables collaborative game design and play with other users. The NFT exchange Resella, introduced in tandem with Project Zircon, facilitates NFT trading in Japanese yen, significantly reducing the entry barrier for Web2 users.

Square Enix and KONAMI are most invested in Blockcain Games

While Square Enix, Konami, and numerous other game companies are gearing up to release blockchain games in 2024, the pace of development in Japan may not match the rapid strides observed in Korea. Firstly, Japan adopts a strategy of swift follower rather than first mover, likely approaching blockchain gaming from an R&D perspective until a successful model emerges, making their foray more of a cautious market test. Additionally, Japanese game companies are more reserved in leveraging their game IPs for blockchain games compared to their Korean counterparts. Unlike Korean companies utilizing major IPs for blockchain games (e.g., Nexon's MapleStory, WEMADE's Nightcrawl), Japanese game companies exercise caution in this regard. However, in 2024, the landscape may witness successful blockchain games from prominent Korean companies such as MapleStory Universe, OVERDARE, and Night Crows Global. Therefore, unlike 2024, 2025 is poised to be the year when Japanese game companies actively engage in blockchain game business. If Japan, a traditional gaming and global IP powerhouse, commits wholeheartedly, the acceleration and impact could be unprecedented.

Japan Game Ips TOP 10 game

Gaming/NFT sector attracts most investment after infrastructure

5-1-5. Web3 game studios: Anticipating AAA games

Following the success of Axie Infinity in 2021, traditional game companies, venture capitalists (VCs), and funds recognized the potential of blockchain games and began pouring substantial investments into Web3 game studios. The investment volume, which was a modest $151.6 million in 2020, surged to $3.9 billion in 2021 and reached $5.2 billion in 2022. Although the cumulative investment volume in 2023 (up to Q3) dropped to $1.0 billion, one-fifth of the previous year, due to the overall downturn in the crypto market, the total investment from Q3 of 2021 to 2023 amounted to an impressive $10.1 billion. This figure, while substantial, still pales in comparison to the overall gaming industry's investment, which has hovered around $1 billion annually, except for the unusually large year in 2021 due to the COVID-19 pandemic and metaverse craze. This underscores the significant growth in blockchain game investments, representing a rising share of the total game industry investment—growing from 1.1% in 2020 to 9.5% in 2021, 38.3% in 2022, and maintaining a robust 38.1% in 2023 (cumulative basis for Q3).

Web3 game studios that attracted substantial investments are now on the cusp of releasing AAA games. AAA game development typically spans more than three years, making 2024 the year for Web3 game studios that received significant investments three years ago to showcase the outcomes. The Web3 projects set to debut in 2024 promise to be transformative. Here are three notable titles expected to fill the gap of the last three years and reshape the perception of blockchain gaming.

  • Illuvium: Illuvium is an AAA game ecosystem based on Unreal Engine 5, developed by the team behind Bioshock, The Last of Us, and Tomb Raider. Consisting of four games—Illuvium Arena, Illuvium Overworld, Illuvium Zero, and Illuvium Beyond—interacting to form one large ecosystem, the company secured $87 million in funding from March 2021 to June 2023. Major investors include Framework Ventures, Delphi Digital, and YGG. Illuvium, powered by Immutable X, launched in beta on the Epic Games Store in late November.
  • Shrapnel: Shrapnel, an Unreal Engine 5-powered AAA FPS game by Neon Machine, a company founded by the team behind the popular game franchises Halo, Call of Duty, and Westworld, has raised $37.5 million in funding from June 2021 to October 2023. Leading investors include Polychain Capital, Dragonfly, Griffin Gaming Partners, and Franklin Templeton. Combining elements from shooter games like PUBG, Counter-Strike, and VALORANT, Shrapnel introduces a User-Generated Content (UGC) feature rewarding users for creating game content, akin to MapleStory Universe and OVERDARE. The game, fully on-chain on the Avalanche subnet, is slated for release in 2024.
  • Off the Grid: Off the Grid, an upcoming AAA cyberpunk battle royale game powered by Unreal Engine 5 from Gunzilla Games, is developed by former EA, Ubisoft, and Blizzard developers. It is co-written by Neill Blomkamp, director of the film District 9, and Richard K. Morgan, writer of the Netflix original Altered Carbon. Raising $71 million in two funding rounds between November 2020 and August 2022, major investors include Blizzard, Animoca Brands, Twitch, and Griffin Gaming Partners. Similar to Shrapnel, it will run on the Avalanche subnet, introducing NFTs as an optional element, with a targeted launch in 2024.

global blockchain investment volume and resources for AAA game development

Images of Illuvium shrapnel off the grid

5-2. DeFi: Redefining boundaries between DeFi and TradFi

5-2-1. Institutional investors in no hurry to return

The Xangle research team observed substantial departure of institutional investors from the market in 2023, spanning from Antifragile in 2022 to the UST depegging incident in May and the subsequent FTX bank run in November. This highlighted various issues, including concerns about decentralization and transparency, leading to ongoing developments in the DeFi space to tackle these challenges. Following these events, there have been mentions of new initiatives like staking liquidity and decentralized futures exchanges, symbolizing efforts to enhance the infrastructure to welcome back institutional investors who may have temporarily stepped away.

DeFi reaches end of crypto winter after liquidity reduction event

However, the Federal Reserve's hawkish interest rate policy aimed at absorbing liquidity has extended beyond the initially anticipated timeframe and is poised to continue draining liquidity from the market well into the middle of 2024. Furthermore, even if the Fed does decide to cut rates in the latter half of 2024, the reduction may not be as substantial as the market anticipates. Consequently, the liquidity tightening is likely to persist longer than market expectations.

These developments are ushering in three notable changes in the acquisition, utilization, and discovery of liquidity within the DeFi market, which has witnessed growth driven by liquidity since DeFi Summer 21. These changes include (1) the emergence of Liquid Staking Providers (LSPs) stemming from naturally occurring cash flows in protocols, (2) the adoption of Liquidity-as-a-Service (LaaS) and cross-chain messaging to enhance the utilization of existing liquidity, and lastly, (3) the comprehensive development of the Real World Asset (RWA) market by seeking liquidity beyond the confines of the crypto space.

5-2-2. The potential of LSDFi, unleashing Web3 native cash flow

A. Liquidity contraction and challenges in the DeFi ecosystem

Initially, addressing the liquidity gap internally, LSDFi emerges as an ecosystem rooted in staking rewards that epitomize protocol-level revenue. For instance, Ethereum stands out as one of the few protocols boasting positive operating income compared to operating expenses, calculated based on fees. As of this month, Ethereum generates over $50 million in revenue, considering token incentives as an expense, positioning its protocol rewards among the most sustainable in the crypto market.

Ethereum operating at a sustainable level

In response to liquidity risks and to enhance accessibility to these cash-flowing staking rewards, Liquid Staking Service Provider (LSP) protocols have surfaced as a viable solution. The popularity of LSPs has surged since the Shanghai Update in 2022, featuring prominent players like Lido ($stETH), Rocket Pool ($rETH), Coinbase ($cbETH), and Frax ($frxETH-sfrxETH). The Liquid Staked Tokens (LST) they offer have augmented their presence in the DeFi ecosystem by over 200%, as measured by Total Value Locked (TVL) in 2022. (For further insights into liquid staking protocols and LSPs, please refer to Liquid Staking Competition Set to Heat Up After Shanghai Update)

Comparing TVL by Top DeFi Protocol Category

  • Liquid staking services can be categorized based on the degree of decentralization. This classification includes services that prioritize accessibility through Centralized Exchanges (CEX) with user-friendly interfaces and straightforward interactions within the exchange (e.g., cbETH). Additionally, services that facilitate liquid staking through permissionless pools, allowing anyone to partake in node operations (e.g., Rocket Pool), are highly decentralized and resistant to censorship.
B. Enter, LSTFi

Exploring the LSTFi Landscape

In this scenario, the LSP provides a liquidity token, $LST. At this point, the consensus and asset value inherent in the $ETH native token are separated through the operator (LSP), giving rise to new possibilities. These include (1) the issuer of LST, the LSP, sharing the security of Ethereum through a security-sharing model and (2) the emergence of LSTFi, which takes the asset value and cash flow potential of LST as a foundational block in the world of decentralized finance (DeFi).

C. LST, introducing new liquidity to the contracting DeFi market
C-1. Leveraging value as a consensus: Shared Security Model

The shared security model has surfaced as an innovative concept where the cryptoeconomic security of a specific protocol or dApp enhances the security of other protocols or middleware. A notable project is EigenLayer, leveraging the asset value of LST and the firmly anchored consensus value in the protocol layer. In this setup, the protocol is structured to re-stake the already liquid LST token, providing a security-as-a-service (AVS) to services requiring security, and sharing some of the security of Ethereum stakers.

This not only contributes additional security to decentralized services but also offers a temporary boost to the security of protocols facing challenges in bootstrapping their early stages due to insufficient market capitalization. This mirrors the approach of Cosmos' InterChain Security (ICS) and serves as a beneficial feature for new projects struggling to establish their initial trust network.

Staker, Ethereum EigenLayer

The service enhanced by the Eigen Layer's additional security is termed AVS. AVS necessitates decentralization, permissionlessness state, and the capability to impartially address consensus-related queries. When services establish slashing conditions for operators, and operators validate and opt-in, the AVS contract acquires slashing rights. The service then operates in accordance with the defined slashing conditions. For detailed information, kindly consult the report 'Eigenlayer, an open marketplace for decentralized trust.'

Eigen Layer's additional security is termed AVS

Presently, the most noteworthy protocol officially integrating Eigen Layer is Mantle ($MNT), an L2 service developed by Bybit. Mantle utilizes EigenDA, a middleware constructed as a DA layer. With recent collaborations with Espressosys, Radius, and Astria, there is a likelihood that some of the decentralized sequencer layer projects, reliant on delegated L1 consensus, will be integrated with the new AVS. To sum up, Eigen Layer's proposed re-staking structure holds the potential to be among the initial applications of LST offering tangible utility beyond mere TVL expansion. This structure not only delivers added profitability for stakers and operators but also contributes to the effective security of protocols adopting Eigen Layer.

C-2. Leveraging LST's value as a DeFi lego block: LSTFi

Now, let's explore decentralized finance (DeFi) protocols that harness the distinctive characteristics of the LST token as a foundational element in LSTFi. These protocols stand out for inheriting the composability of the parent DeFi, offering a high degree of flexibility in designing composable products.

PT YT Pricing Equation

A notable example is Pendle Finance, launched in March 2023, utilizing the LST token as the primary asset for the Yield-Bearing Token (YBToken)*. Pendle Finance separates the interest, dividing it into the Principal Token (PT) and the Yield Token (YT), which exclusively represents the interest until maturity. Additionally, there are various other applications, including insurance and the Shared Security model mentioned earlier. We'll introduce (1) LST Backed CDP: Lybra Finance, (2) LST Index Token: yETH, and (3) Prisma Finance, which combines the strengths of both.

  • Pendle Finance is a unique DeFi protocol that tokenizes yield separated from LSD tokens, providing staking rewards or Yield-Bearing Tokens (YBTokens). It supports the trading of these yield tokens and has become a leading protocol that has paved the way for the LSTFi market.
Case 1. LST-Backed CDP: Lybra Finance

Following the downfall of $UST, an algorithmic stablecoin, overcollateralized stablecoins have become the standard. Leveraging LST's dual attributes—protocol-level rewards and value as an asset—proves to be an ideal scenario for collateralizing stablecoins. Lybra Finance stands out as a prime example, serving as a Collateralized Debt Position (CDP) that enables users to mint $eUSD by depositing Lidar's LST, $stETH, and native $ETH. Liquidation is triggered if the collateralization rate dips below 150%, with 160% collateralization identified as the optimal threshold. Lybra Finance provides an enticing 8% APY for merely holding $eUSD. This yield is derived from staking rewards generated by the deposited ETH, which the project swaps into $eUSD, continuously disbursing it to the issuer. Since its launch in April, Lybra Finance has become one of the most reliable LST-backed CDP stablecoin protocols.

The pegging of $eUSD is achieved through a liquidity pool involving the $eUSD-$USDC pair, with price discovery and pegging operating as follows:

  • If the $eUSD peg exceeds $1, users can mint more, boosting the supply and capitalizing on arbitrage opportunities to lower the $eUSD exchange rate.
  • If the $eUSD peg is less than or equal to $1, users cannot mint more, preventing an increase in supply. Additionally, as the value of $eUSD is below the value of $USDC, a $USDC → $eUSD swap is executed to redeem the collateral, provided the collateralization rate remains above 100%.

Lybra Finance: eUSD & peUSD Minting Structure

However, there are a few concerns associated with Lybra Finance. The primary concern pertains to the sustainability of the $eUSD rate. Presently, it yields around 4.5%, even when factoring in the Miner Extractable Value (MEV) rewards of native $ETH. Similar to past instances, such as with $UST-$ANC, the protocol's capitalization is at risk of deterioration unless staking rewards and the interest rate on borrowed deposited assets surpass the payouts to creditors. While an 8% Annual Percentage Rate (APR) in dollar terms might seem sustainable at the moment, especially with the rising price of Ethereum, the financial stability of a stablecoin protocol offering a fixed rate of return becomes precarious during price downturns, as witnessed with $LUNA-$UST.

Another concern lies in the limited number of supported LSTs compared to competitors. As numerous Liquid Staking Service Providers (LSPs) launch new LSTs, and the aforementioned EigenLayer expands the variety of re-stakable LSTs to an impressive 10, the lack of LST support could act as a barrier to attracting new users and expanding the stablecoin ecosystem. Acknowledging this, various enhancements are being introduced in V2, including additional support for $rETH and $wbETH, issuing $peUSD based on them, and introducing $eUSD as an omnichain token. These improvements are designed to help Lybra maintain a high TVL and overcome potential limitations in LST support.

Case 2. LST index: yETH

The LST Index is a protocol designed to house multiple Liquid Staking Tokens (LSTs) in a vault and monitor the average value of the assets they represent. A notable instance is $yETH, managed by Yearn Finance, serving as a basket comprising seven LSTs: swETh, sfrxETH, wstETH, cbETh, ETHx, mevETH, and rETH. Users seeking risk diversification across different Liquid Staking Service Providers (LSPs) can establish a position in $yETH by either (1) swapping $ETH for $yETH via an Automated Market Maker (AMM) or (2) directly depositing tokens supported by the Vault into the Vault. To qualify for protocol staking rewards from LST, along with additional rewards like swap rewards, users must hold $st-yETH, a token issued exclusively after staking $yETH.

LST Index Token, yETH

LST Index Token, yETH

A distinctive feature of $yETH is its partial adoption of Curve Finance's Bribe model for an index token. This feature allows for the dynamic adjustment of the weight of each LST deposited into the pool through the voting power of $st-yETH (staked $yETH). Consequently, LSTs participating in yETH can fine-tune their weight, with a higher weight enhancing the utility of both LSTs and yETH. As a result, LSPs added to the Vault not only strive for onboarding but also receive various benefits from yETH post-onboarding, fostering a positive cycle that contributes to the growth of the index protocol.

Case 3. Index + Stablecoin: Prisma Finance

Moving on to Prisma Finance ($PRISMA), Prisma stands out as an LST collateralized CDP stablecoin protocol, backed by Ethereum's core DeFi protocols including Curve Finance ($CRV), Convex Finance ($CVX), and Frax Finance ($FRAX). This innovative protocol can issue a stablecoin, $mkUSD, against five types of liquid Ethereum tokens: stETH, rETH, frxETH, wbETH, and cbETH. In developing this protocol, we forked Liquity Finance, an Ethereum collateralized stablecoin issuance protocol, and introduced unique mechanisms such as veTokenomics and Bribery.

$mkUSD is issued by overcollateralizing LST (120% overcollateralize). A notable characteristic is that as Ethereum staking rewards (stETH, rETH, etc.) continue to accumulate, the collateralization rate for positions gradually decreases, provided staking rewards persist. This results in heightened stability. In contrast to many stablecoins that traditionally relied on high APY to attract funds, $mkUSD is designed to be more stable, featuring a $mkUSD stability pool. The $mkUSD contributed to the stability pool is automatically utilized to repurchase collateral during liquidation events. Users who have deposited stablecoins receive ownership of the repurchased collateral, thereby reinforcing the stability of the stablecoin.

Prisma Finance's Stability Pool

Scalability is not compromised. Leveraging the ecosystem of Curve and Praxis, widespread adoption is anticipated. The launch of the $PRISMA token with veTokenomics in November, coupled with the distribution of $PRISMA tokens as an incentive for maintaining the stability module, has propelled the Total Value Locked (TVL) to $431.92M (as of December 10, 2023) in just three months, surpassing Lybra. Notably, the utility to set stablecoin issuance fees/lending fees and token emission rates per collateralized asset in $PRISMA tokens introduces a variation of the bribery mechanism observed in Curve. This multi-faceted approach appears poised to address both competition among onboarded LSTs and the demand for tokens.

D. Trends in other chains - The dawn of Solana DeFi 2.0

Beyond Ethereum, Solana stands out as one of the most thriving blockchain networks. Previously, the Solana ecosystem primarily focused on the NFT market, with the Defi space taking a back seat, especially after the FTX incident. However, recent market improvements have spurred a reawakening in Solana's fortunes. The resurgence is attributed to factors such as its vibrant developer community, airdrop initiatives for key middleware projects like Pyth, and the subsequent surge in Solana's market value. Notably, Solana's DeFi 2.0 metamorphosis, centered around its PoS native token $SOL, is gaining momentum through Liquid Staking Providers (LSPs).

DeFi 2.0 for Solana, Solana DeFi

D-1. Solana LSP

Solana stakers and validators experience a relatively modest guaranteed cash flow compared to Ethereum. This stems from Solana's inherent structure, exposing validators to the risk of financial loss unless they command a substantial portion of the staking pool.

To elaborate, besides covering hosting expenses, Solana validators face a fixed fee of 3 SOL every epoch (2-3 days). Validators have the flexibility to set fees between 0-10%, with Solana network staking rewards constituting approximately 8% of the annualized stake. For instance, a delegated stake of 50,000 SOL in a validator pool would yield around 4,000 SOL in rewards. Even with the maximum fee of 10%, the validator's earnings amount to roughly 400 SOL.

However, the fixed fee per epoch stands at 146 (calculated for a 2.5-day epoch)*3 SOL = 438 SOL, posing an additional expense. This makes it challenging for smaller-scale validators to turn a profit, even when excluding hosting costs.

D-2. The emergence of Jito

Architecture of the Jito MEV boosted Client for Solana

Source: squads blog

Jito ($JTO) is a project that recognized the potential for MEV in Solana and swiftly established the infrastructure to capitalize on it. Jito currently commands a 40% share of MEV clients on Solana, solidifying its position as a dominant force in the ecosystem. Its Liquid Staking Provider (LSP), fueled by a consortium of validators leveraging Jito's MEV client, functions to reward and operate the protocol and its users by redistributing the MEV revenue generated by Solana validators.

In particular, Jito recently unveiled the $JTO token, distributing nearly 10% of its confirmed airdrop volume. This move briefly surpassed Marinade Finance, making it the leading TVL-performing LSP protocol on Solana.

LSP Share in the Solana Chain: Marinade vs Jito

The $JTO token is designed for governance purposes, enabling activities such as setting fees for the JitoSol (Jito's LST) stake pool, adjusting staking delegation strategies, and managing protocol revenue. While the token's purpose requires clarification, Jito is poised to play a pivotal role in Solana DeFi 2.0, making it a protocol to watch for those who believe in Solana's potential, especially in the aftermath of the FTX Bank Run.

D-3. Marinade Finance ($MRND), the Pioneer LSP

If Jito represents the narrative of bootstrapping as an LSP with an unparalleled MEV share on Solana, Marinade Finance is the inaugural LSP protocol on Solana. It boasts institutional clients, collaborates with over 100 major Solana validator organizations, and operates as the largest protocol on Solana to date (in terms of TVL).

mSOL liquid staking, Marinade Finance

Source: Marinade.finance docs

Marinade's governance token, MNDE, stands out for its unique liquidity mining approach. Having initially adopted a linear distribution method for team volume after the initial TGE distribution in October 2021, the project switched its vesting threshold to TVL in February 2023. This new approach, coupled with a key performance indicator (KPI) of TVL, allows for adjustable vesting quantities based on TVL, ensuring the sustainability of the project's team and token incentives.

Furthermore, the conversion to $mSOL tokens brings automatic rebasing of staking rewards, akin to Raido's $stETH, eliminating the need for users to manually receive and restake staking rewards. With these enhancements, offering a robust pool of validators, a 7-8% APY, and flexibility in adapting token distribution plans based on user feedback, Marinade stands as a prominent project frequently cited as a key LSP protocol for Solana and DeFi 2.0, alongside Zitho.

5-2-3. Liquidity is King

DeFi stands as a sector where the winner-takes-all principle thrives. The abundance of liquidity translates to reduced slippage, heightened stability, lowered operational expenses, and increased profitability, fostering a self-sustaining cycle. It epitomizes the classic winner-takes-all platform.

A. Streamlining in-protocol liquidity flows

Nevertheless, as DeFi witnesses a contraction in liquidity due to the Federal Reserve's hawkish approach to rate hikes, the landscape is evolving to emphasize enhanced capital efficiency with the limited remaining liquidity. To make the most of the available liquidity, efforts are underway to optimize the efficiency of the remaining liquidity. This involves (1) structuring the contract architecture into a singleton configuration for optimal swap processes, as seen in Balancer's Single Vault structure, or (2) streamlining swaps by conducting computations off-chain and executing only essential settlements on-chain, exemplified by 1Inch.

B. Uniswap V4 envisions LaaS through Singleton Contracts

Uniswap, the leading DEX protocol, maintaining a consistently high market share in DeFi, has embarked on enhancing liquidity efficiency. The recent introduction of Uniswap V4 brings forth a new swap aggregator grounded in a singleton architecture, amalgamating the vault structure from Balancer V2 with the routing resource efficiency of Ambient. Additionally, Uniswap X, a novel swap aggregator, reinforces Uniswap's role in revolutionizing the DeFi landscape through its substantial liquidity. The initiative to involve community builders is noteworthy, allowing them to develop hooks and callback contracts and directly contribute to Uniswap's ecosystem.

Balancer V1, Balancer V2

Source: Balancer V2 Docs

However, the unveiling of Uniswap V4 has not been universally praised. Critics argue that V4 reorganizes Uniswap's existing structure rather than introducing a revolutionary change as witnessed in Uniswap V2 and V3. Notably, the architecture of Uniswap V4 draws inspiration from Balancer V2, Ambient (formerly Crocswap), and Cowswap, sparking claims of being a "copycat" solution, albeit with some distinctions. Moreover, the decision to encourage developer participation while implementing a Business Source License (BSL), restricting commercial use of the V4 structure for four years, has raised questions.

single-hop swap, multi-hop swap

Source: Shoal Research 'Ambient Finance: Enhancing AMM efficiency'

It is essential to acknowledge the nuanced distinctions in the detailed structures of these protocols (for a more comprehensive explanation of Uniswap V4, refer to UniswapX — A Deep Dive. As Uniswap, a key player in DeFi's evolving narrative, aligns its trajectory, the trend towards LaaS (Liquidity as a Service) among major DEXs will undoubtedly persist.

C. 1inch Fusion Mode: Enhancing swap efficiency with Resolver Architecture

1inch Fusion Mode: Enhancing swap efficiency with Resolver Architecture

1inch introduces Fusion Mode, a swap efficiency solution founded on the Resolver architecture. The Resolver, empowered by staked 1inch tokens, autonomously validates token information (including token quantity, oracle price, and token) on the backend. Operating in conjunction with a set of resolvers and a self-configured off-chain backend verification and invocation structure as the computation layer, the on-chain component executes contracts based on the received computation information, serving as the settlement layer.

Despite the complex KYC (Know Your Customer) authentication process required for Resolver registration, decentralized dApp enthusiasts can actively participate by staking a specified amount of 1inch tokens (st1inch). This approach aligns with decentralized principles, even though the KYC process adds a layer of complexity.

Unlike Balancer's Single Vault solution, which optimizes smart contract structure with a singleton model, 1inch's computation layer operates in a partially centralized off-chain environment, where full transparency is not guaranteed. This unique architecture enhances efficiency in swap operations.

These instances of liquidity streamlining by major DeFi players like Uniswap, Causecheap, Synthetix, and Balancer underscore the ascent of Liquidity-as-a-Service (LaaS). LaaS not only augments capital efficiency but also outsources liquidity logic to an external contractor. These collective efforts towards building a more sustainable DeFi ecosystem demonstrate a proactive approach to stabilizing the market when liquidity returns. This stands in contrast to past practices, where protocols often overlooked maintenance costs and infrastructure improvements amid reduced liquidity.

5-2-4. Optimizing liquidity across chains: Advancing cross-chain messaging

The DeFi ecosystem within a single chain has traditionally been considered an isolated system, grappling with liquidity disconnects. This issue arises due to the lack of guaranteed computational integrity for destinations beyond the blockchain. Even when liquidity is concentrated on a specific chain, moving liquidity across bridges has been a sensitive topic due to occasional security vulnerabilities, resulting in reduced capital efficiency on other chains. However, with the ongoing decline in liquidity and the stabilization of bridging technology, the effective integration of liquidity across chains has gained prominence. Each bridging solution has evolved beyond basic asset transfer, culminating in a Layer 0, or General Messaging Protocol (GMP), expected to form the foundation for DeFi's transformation from an isolated system to an open and securely interoperable system.

A. Bridging vs. Cross-Chain Messaging

Let's delve into the two primary cross-chain messaging protocols: LayerZero and Axelar ($AXL). Both protocols facilitate communication between endpoints, or gateways, through clients spanning the chain to transmit messages. In the case of LayerZero, relayers and accelerators construct their set of validators to validate the transmitted and received data. This structure's advantage lies in its ability to provide a chain-agnostic response, supporting an expanding array of chains by constructing separate layers with interoperability tailored for each chain.

Bridging vs. Cross-Chain Messaging

Source: Layerzero white paper

LayerZero's message delivery involves four components: an endpoint handling the sending, receiving, and verification of messages between chains; a relay carrying the proof of the message between chains; an oracle conveying blockheader information along with the relay; and, finally, a user application managing the sending, receiving, and consumption of the message.

B. LayerZero: Streamlining DeFi with Cross-Chain + OFT

Similar to how bridging is achieved through cross-chain messaging, a crucial aspect that a messaging protocol must encompass is determining "what utilities it will support through messaging." Expanding on this notion, LayerZero is actively laying the foundation for enhanced capital efficiency in DeFi by introducing OFT, a novel standard following the ERC20 token standard; OFTV2, which extends support to non-EVM chains; and ONFT, a multi-chain NFT standard. Moreover, anticipation is growing for the $ZRO token, with LayerZero Labs recently confirming its launch in the first half of 2024, solidifying its position as one of the key protocols to monitor.

LayerZero: Streamlining DeFi with Cross-Chain + OFT

C. Axelar: Cross-chain messaging platform based on AppChain

Axelar serves as middleware responsible for sending and verifying cross-chain transactions through appchains built with the Cosmos SDK. Employing the Tendermint consensus algorithm to maintain its chain and a distinct message verification mechanism, Axelar is highly compatible within the Cosmos ecosystem, utilizing the IBC protocol. Additionally, it supports inter-chain messaging for over 50 EVM chains, including Polygon, Avalanche, Phantom, Near, and Polkadot.

Axelar: Cross-chain messaging platform based on AppChain

A distinctive feature is that cross-chain messaging is conducted through a gateway contract for each chain, rather than a separate client. The keys of the gateway contract are sharded based on the stakes of the validators on the actual Axelar hub. When a message request reaches the gateway, each validator on the hub converts their verification results into votes for the sharded keys. This structure necessitates only the deployment of the gateway contract to the supporting chains, offering high scalability without compromising decentralization.

Users are not required to hold $AXL tokens to message, as the fee only utilizes the excess gas cost of the native token. Aggregated native tokens are swapped to create token incentives for Axelar validators and holders through buybacks and burns of AXL tokens.

While the absence of TVL and TVS may be perceived as a disadvantage compared to a layered system, Axelar is one of the fastest-growing GMPs in the space. It streamlines the DeFi ecosystem through broad-chain support, facilitates cross-chain swaps on Ondo Finance ($ONDO), supports CCTP* on $USDC, serves as the flagship messaging layer for JP Morgan's Project Onyx, and expands connections to real-world assets (RWA).

  • CCTP (Cross-Chain-Transfer-Protocol) is a stablecoin issued by Circle. When moving $USDC through GMP, assets from the source chain are burned and minted on the destination chain to maintain a unified total supply across multi-chains.
D. Chainlink CCIP: Betting on institutional onboarding

Chainlink CCIP: Betting on institutional onboarding

Introducing Chainlink's Cross-Chain Interoperability Protocol (CCIP), another significant General Messaging Protocol (GMP). While CCIP shares similar functionalities with the preceding projects, it distinguishes itself by specifically targeting players based on private networks, including investment banks and large funds in traditional finance.

CCIP with Independent Security Networks as opposed to LayerZero

In alignment with this objective, CCIP makes certain compromises on the decentralization and trustlessness principles that native messaging protocols typically uphold. CCIP operates relayers that facilitate messages during transmission and a Risk Management Network that, in the event of a risk, may function as a single point of failure (SPOF).

However, this third-party risk assumes a more advantageous position when it comes to onboarding traditional financial institutions. The risk is confined to Chainlink and the set of Oracle nodes that are integrated, aligning with the preferences of traditional financial institutions that seek clear legal responsibility definition.

Smart contract-based messaging expands utility offerings One notable distinction is the reliance on invoking smart contracts. In essence, CCIP operates through relays within CCIP contracts deployed on both chains to transmit and process requests, allowing for adaptable contract-level responses to emerging features.

As witnessed with ERC-20, ERC-1155, 4337, and other standards derived from EIP-20, protocols at the smart contract level exhibit greater scalability compared to GMP at the client level. CCIP's adoption of this architecture is perceived as a strategic move to function by deploying architecture-appropriate smart contracts on a private network established by financial institutions, which formerly utilized payment networks like SWIFT, and communicate based on these contracts. As the intersection with traditional finance, beginning with RWA, becomes more frequent, user experience acknowledging third-party risk and prioritizing the vast number of customers within TradFi who will transition to clients could play a pivotal role in the imminent adoption by institutions.

Comparing Between General Messaging Protocols (GMP)

And there you have it — three major projects striving to address the challenge of cross-chain liquidity disconnection through messaging protocols. In the past, security issues in bridging technology resulted in substantial losses, accumulating to about $3.5 billion. However, as the infrastructure has stabilized and more secure solutions have been researched and released, the ratio of hacking damage to transferred value has steadily decreased.

Declining Bridge Hacking Incidents

Notably, Wormhole, which faced significant hacking losses of up to $350 million in the past, recently secured an additional $225 million in funding, underscoring the significance of cross-chain messaging protocols as one of the most prominent themes in DeFi infrastructure moving forward.

5-2-5. Exploring new sources of liquidity: DeFi pushing boundaries with TradFi

A. Discovering opportunities and venturing into real world assets

Up to this point, we've delved into endeavors aimed at securing liquidity within the cryptocurrency market and enhancing its utilization efficiency. However, with diminishing liquidity and diminishing rewards at the DeFi and protocol levels, there is an ongoing endeavor to broaden access to real-world assets beyond the cryptocurrency market. One notable example is the development of infrastructure for indirect investments in real-world assets using protocol economies within DeFi.

*In this section, for meaningful comparison, the term RWA sector excludes cases where specific entities utilize RWAs to manage funds, such as large stablecoins. For RWA-related protocols, we refer to projects that either (1) facilitate the tokenization of real assets or (2) enable the management of tokenized RWA products.

B. Consistent Focus on the Tokenization of Real-World Assets

Total projected value of tokenized assets, in $tr

The process of tokenizing real-world assets through blockchain technology has emerged as a significant catalyst for institutional investor adoption of cryptocurrencies. A study by BCG projected that $16.1 trillion worth of assets would be tokenized by 2030, with established financial institutions like J.P. Morgan's Onyx and Franklin Templeton actively engaging in blockchain projects tailored to explore and test the possibilities of the tokenization economy.

C. Establishment of an RWA market centered on equity-based yields

In contrast to the past RWA sector, which concentrated on capital liquidation through tokenizing assets like gold and bitcoin, the future RWA sector is anticipated to undergo two significant shifts. Firstly, (1) protocols are diversifying their functions beyond token issuance into distribution and operation, and secondly, (2) a majority of assets are being restructured around real assets with a basis in cash flow. In this annual forecast's DeFi section, we will explore some promising protocols in the RWA sector expected to evolve and adapt to these trends, especially considering the Federal Reserve's projection of maintaining a high-interest rate policy until the middle of 2024.

  • One of the practical utility values of blockchain is liquid staking of the asset, aiming to generate more value by incorporating various real assets that were previously non-securitizable onto the distributed ledger and utilizing them as collateral.
Case 1. Secure and lucrative returns: Exponential growth in the T-Bill Market - Franklin Templeton, Ondo

Treasury Product Market Caps

One of the most notable asset classes in the RWA sector is the U.S. Treasury liquid staking protocol, offering access to short-term U.S. government bonds. With the Federal Reserve increasing interest rates to a 20-year high of 5.5%, creating an appealing environment for risk-free yields, numerous protocols have emerged to cater to the demand for Treasuries, even from within the crypto funds. Two standout examples include Franklin Templeton, a venerable institution with 83 years of history and $1.5 trillion in assets under management (AUM), and Ondo Finance ($ONDO), which has witnessed an impressive 88% growth in TVL in 2023 alone after its launch in 2022.

Firstly, Franklin currently manages $327 million in assets under management (AUM) through FOBXX, a fund that directly oversees bonds under a Registered Transfer Agent license. In terms of practical implementation, Franklin has embarked on tokenizing sovereign bond funds through a dedicated app named Benji Investment. This initiative commenced on the Stellar Lumens ($XLM) network in 2021, and the platform expanded to include Polygon ($POL) in April of 2023. With the total value locked (TVL) more than quadrupling year-to-date (YTD), Franklin stands out as one of the most proactive players in traditional finance, aligning itself with major institutions like JP Morgan and Societé Générale, capitalizing on the upward trend in Treasury rates.

Ondo Finance, on the other hand, achieves indirect exposure to Treasuries by investing in funds that acquire bond ETFs, such as the iShares Short Treasury Bond ETF, and receiving $OUSG as proof of deposit. In contrast to Franklin, Ondo Finance enjoys greater flexibility in utilizing tokenized $OUSG, as it is recorded on a programmable public ledger based on Ethereum Virtual Machines (EVMs) such as Ethereum and Polygon. A noteworthy example is Flux Finance, operated by Ondo Finance. Similar to the birth of the Collateralized Debt Position (CDP) and stablecoin protocol based on the cash flow of LST, Ondo Finance has established a CDP that issues stablecoins with $OUSG as collateral. It's intriguing to observe that the process extends beyond token issuance; Ondo Finance actively manages and exchanges these tokens into major stablecoins such as $USDC, $FRAX, $DAI, and $USDT, enabling their use in decentralized finance (DeFi). This opens up possibilities for novel financial products anchored in Treasury Bills (T-Bills).

Case 2. Private credit market recovery: Centrifuge, Maple Finance

In straightforward terms, private credit refers to a situation where a lender, distinct from a bank, raises funds for a borrower or provides liquidity. Particularly after the 2008 financial crisis, during which banks faced certain restrictions on their operations, the private debt market expanded significantly, reaching $1.5 trillion as of August, serving as a benchmark for this interest rate cycle. Following the subsequent increase in interest rates, bond funds issued as private placements are now offering higher yields. The total on-chain private placement loans have also grown by over 84% year-to-date, reaching approximately $210 million, indicating a substantial growth rate. Although this figure is still below the 21-year total value locked (TVL) of $1.54 billion, the more sustainable funding nature is a positive sign from a fundamental perspective.

Essentially, this shift implies that cryptocurrency and DeFi infrastructure will act as an intermediary between existing funds in DeFi and the restricted and unmerged funds in traditional banking. This brings our focus to two protocols often recognized as major players in this domain: Centrifuge ($CFG) and Maple Finance ($MPL).

Total Originations Grouped by Pool

Centrifuge stands as one of the leading Real World Asset (RWA) projects, having tokenized assets exceeding $469 million since its inception in 2017. The protocol contributes $246 million to the private placement market, holding almost half of the market share. It has introduced a tranche structure that aligns with the characteristics of private placements, primarily borrowed by Securitized Debt Products, and productizes them by separating the expected return and delinquency rate. Notably, Centrifuge has maintained a close relationship with MakerDAO from the protocol's early stages and has experienced rapid growth by supplying senior tranches to MakerDAO within the tranche structure described later.

distribution of returns, protection against losses

*Securitized Debt Products are characterized by a tug-of-war between default rates and expected returns, with products separated by risk and anticipated profit. Centrifuge proposed a liquidity pool divided into Senior / Mezzanine / Junior based on risk and implemented it in Tinlake with a simplified dual-token structure. $DROP (Yield) represents the fixed-rate portion of the senior pool, while $TIN (Risk) reflects the floating-rate portion of the junior pool. The junior pool is exposed to higher volatility than the senior pool, resulting in higher yield and risk.

The technical advantages over other tokenization protocols are also clear. In order to efficiently manage a series of processes from securitization of RWA to the governance layer that operates them, the protocol also operates a centrifuge chain consisting of securitization, tokenization, and governance layers, and provides various functions such as multi-tranche, on-chain net asset value (NAV) calculation, and minting of SPV NFTs in the operational liquidity pool as standard within the chain, which can comprise two or more tranche products at the time of commercialization of in-chain securitized assets.

Multiple Chains, Centrifuge chain

We are also in the process of transitioning to a multi-chain-based liquidity pool in preparation for the future seamless multi-chain DeFi ecosystem. Simply put, a multi-chain-based liquidity pool means that no matter which chain provides liquidity, it is not tied to any other chain, so there is no liquidity disconnection problem. To this end, there are plans to end revenue sharing on Tinlake, which was created in a joint venture with MakerDAO, and migrate to the multi-chain-based architecture described above, while simultaneously reducing the inflation rate of $CFG, which is used for gas and governance. In addition to expanding the scale of simple assets, there are a number of other changes to effectively enhance durability and respond to the upcoming changes in DeFi infrastructure.

Case 3. Maple Finance is warming up

Maple Finance Overview

Maple Finance is an on-chain credit lending project that started in 2020. In the past, it became a major credit lending market platform for crypto proprietary trading players, reaching a loan volume of $2 billion at one point, making it the leading unsecured lending protocol at the time. However, the FTX bank run and subsequent market crash at the end of 2012, which resulted in a $36M default, put the project's future in jeopardy, and it has since reduced its focus on trading with Web3-native institutions and made a bold pivot into a tokenization platform for products such as tokenized T-bills and short-term tax receivables. Currently, cash-oriented assets such as AQRU's U.S. IRS tax receivables credit notes and Treasury Bills ETF tokenization make up the majority of TVL, with a loan volume of around $82M. In addition to this, the company is preparing to rise from its failure by launching a protocol on the base network, attracting additional investment, and expanding to the Asian market, so it is worth paying attention to whether it can regain the market size it once had.

Case 4. Asset Securitization by tokenization: Goldfinch focuses on real-world utility like real estate

Last but not least, Goldfinch ($GFI) is a protocol that, although its loan volume is smaller (around $10.3 million) than the previous two protocols, has most actively utilized the capabilities of blockchain by investing in emerging markets (EMs) and acting as a liquidity bridge between developed and developing countries.

Multiple chains, centrifigue chain

The main feature is that it provides capital from developed countries to developing countries such as Mexico and Nigeria. As such, the main RWA portfolios that are eligible for investment range from ABS (Asset-Backed-Securities) backed loans to business development loans provided by whitelisted fund managers. The actual on-chain tranche structure is as follows: the Backers and the LPs provide liquidity, the Backers take out the loan, and a group called Auditors acts as the auditor and determines the suitability of the product, much like a credit rating agency:

liquidity providers, borrower pools, backers

Source: Teletype

  1. Borrower: Borrowers who have been KYC'd by Goldfinch will create and fund their own borrowing pools, staking $GFI tokens worth twice the cost of Auditors to set up the pool.
  2. Backers will directly fund the Junior Tranche, specifically prioritizing loss capital. Instead, they will independently conduct due diligence and evaluate borrowers.
  3. LPs do not provide direct capital, but instead fund the Senior Pool, which is ultimately passed on to the Senior Tranche. In exchange for providing a secondary loss pool, the Senior Tranche earns a lower return than the Junior Tranche and is prioritized for repayment in the event of a default.
  4. Auditors assess the borrower's ability to repay at Goldfinch, and borrowers must pass a consensual auditor approval process to form a tranche. You can become an auditor by staking GFI after passing the Unique Entity Check*.

*This is a way to ensure that the entity conducting the evaluation is the only entity in order to defend against Sybil attacks, etc. However, the auditor system has not yet been decentralized since the governance vote was passed in June 2022, and it is confirmed that the auditor system is directly operated by Goldfinch and related companies.

Low new loans compared to high lending rates hinder protocol growth. While Goldfinch has good intentions and decent returns in terms of providing liquidity to emerging markets in developing countries with poor financial infrastructure, there are a few things that need to be addressed. First, new lending has been sluggish since December 2022. As most of the liquidity is in long-term loans of 36 months to over 1 year, the protocol's lending volume has not yet plummeted, but as the market focuses on the RWA and private credit markets, it will be necessary to continue to monitor whether the increased liquidity will be injected into emerging markets and ultimately into the Goldfinch.

D. DeFi native protocols increasingly utilize RWA

Revenues per type (relative) MakerDAO Assets per type

Paradoxically, the trend toward greater access to government bonds is also evident in fully crypto-native DeFi protocols. MakerDAO ($MKD), a leading Web3 native protocol, has entered the first phase of its endgame, Pigeon Mode, and has shifted the majority of its cash flow structure from $ETH and $LST to real assets, with over 65% of the protocol's revenue now coming from real assets, including T-bills and RWA. As the importance of real assets continues to be expressed not only by MakerDAO but also by Aave ($AAVE), the first-generation representative DeFi CDP, the tokenization of cash-generating assets in DeFi will continue to grow, and the cash-oriented tokenized RWA market will continue to be a sector to watch going forward.

5-2-6. Clear limitations of the RWA sector

A. The current RWA market was created by the Fed's interest rate policy

With such a long and bright future ahead, the RWA sector still has a lot of work to do. First, the current RWA sector is not a self-sustaining market, and more than 75% of its prominence can be attributed to the dramatic increase in the investment value of cash flow assets due to the Fed's interest hike policy. Whereas the private credit market accounted for 56% of RWA TVL and 0% of T-bills in Q2 2022, today, the share of credit loans has declined to 18% and the amount of RWA assets in T-bills has increased to 27% (rwa.xyz). With the Fed's policy having such a significant impact on the RWA DeFi sector, it is highly influenced by the Fed's policy and there are question marks regarding its inherent utility.

On-Chain RWA: Taking down barrier creates another barrier

Accessibility also leaves a lot to be desired. Most protocols have a high minimum investment amount of over $1M based on KYC and AML, making it difficult or even impossible for anyone other than whales or institutional investors to invest in DeFi.

Secondly, different tokenization methods for different types of tokens also hinder the adoption of the RWA sector in DeFi. For example, precious metals such as gold, highly illiquid real estate, carbon credits that have emerged along with ESG meta, credit-backed bonds, and even artworks use different types of tokenization/operation methods depending on the type of physical asset, so the initial issuance cost is still significant.

Fungible Non Fungible, ERC-20 ERC-721 ERC-1155

The Tokenizer

Finally, there's the Oracle problem—there’s no guarantee that positions built with physical tokenized RWA will be atomized with respect to each other when they're liquidated on-chain. In addition to the practical barrier of increased uncertainty about processing time and value, there is a clear limitation that the liquidation of RWA tokens will be delayed when the collateral rate is reduced due to off-chain → on-chain Oracle updates. And there is also an Oracle problem in the process of quantifying service fees such as transaction fees and freight charges that are actually incurred when a buyback occurs, although they are handled by the asset-specific SPV.

B. Why tokenized RWA is still important

tokenized RWA

In other words, the current high interest rate environment provided by the Fed has driven money into the on-chain RWA market, but there are a lot of loose ends in the sector, including incomplete regulations, unfinished technology, and costs that are not efficient enough. However, we believe that the tokenization of real assets and on-chain RWA markets within DeFi have the potential to disrupt the financial industry if the liquidity that has been generated in the wake of macro is harnessed and a useful infrastructure is built.

Tokens Savings potential in %

In particular, the great advantages of reducing service fees and simplifying complex procedures in the issuance, distribution, and productization of traditional securities remain. Cashlink*, a real asset tokenization infrastructure company, reports that using tokenization protocols can reduce (1) primary market issuance costs, (2) custody and loan servicing costs, and (3) secondary market trading costs by a minimum of 35% and a maximum of 65% compared to current traditional financing methods.

  • Cashlink is a leading tokenization service provider that tokenized €60,000,000 worth of 2023 Fed bonds from Germany’s Siemens onto the Polygon chain, distributing the tokenized bonds to its own traders such as DekaBank, DZ Bank, and Union Investment in the process.

5-2-7. Next Trend: The Big Blur between DeFi and TradFi

A. DeFi on TradFi’s heels

So far, we’ve outlined what we think are the key words in DeFi of 2023 and into 2024, and who we think will be the strongest players in each. This can be summarized as a process of finding additional liquidity within the Web3 as liquidity dries up, improving inefficiencies caused by fragmented liquidity pools, whether they be chains or dApps, and finding new revenue streams outside Web3. However, in this process, the lines between LST and RWA are becoming increasingly blurred. For example, the relationship between staking and LSPs is similar to the business model of an enabler, such as traditional finance where land is pledged as collateral for additional borrowing from banks. In the case of LaaS, it's more like the LP role of traditional finance where they hold liquidity and allow other applications to utilize it. Stablecoins, which we consider to be a product of DeFi, can also be defined as RWA funds that sell products aimed at pegging to the dollar and operate as funds such as capitalized T-bills to earn profits.

B. TradFi flirting with DeFi

While we have been looking at DeFi and DeFi’s trend of adopting TradFi, we are also seeing an increasing number of attempts in TradFi to adopt DeFi. A prime example is Project Onyx, organized by MAS & JPMorgan Project, which includes a messaging layer, DeFi swaps, a private chain SDK, and even major AA players like Biconomy, making it clear that traditional finance giants are keeping up to date with blockchain technology.

Engagement with digital assets/DLT

In addition, a survey by Citi Securities Services found that 70% of commercial banks are already experimenting with digital assets (DLT, distributed ledger technology) and blockchain. Even within the traditional financial sector, new attempts to use blockchain as a new infrastructure for finance continue to be made on a steady basis.

 Citi Securities Services found that 70% of commercial banks are already experimenting with digital assets (DLT, distributed ledger technology) and blockchain.

This technological transformation of financial infrastructure is also occurring in the public sector, with or without private capital. On September 23, 2023, the BIS, which organizes currency swaps, launched Project Mariana*, a project to implement the spot FX market with the use of AMM for cross-border exchange, which borrows from Curve's Stableswap v2 model. In fact, it has the potential to be a much more efficient infrastructure than the existing currency network. In addition, BOCI Hong Kong, an investment banking subsidiary of the state-owned Bank of China, issued a $28 million structured note on Ethereum.

C. Big Blur between DeFi and TradFi is coming

South Korea is no different. Although the CBDC business is mainly conducted on a closed private blockchain, there is a continuous movement to test the clear utility of blockchain, such as unreliability, starting with decentralized databases. With the recent selection of LG CNS and EY Hanyoung for a national CBDC project, it is likely that the regulatory hurdle, one of the biggest barriers to enterprise adoption of blockchain, will be gradually resolved over this year.

In terms of infrastructure, there is also a possibility that the infrastructure that makes the UX increasingly chain-agnostic, such as cross-chain messaging and OFT, will be similar to or better than the existing financial infrastructure. In particular, user-friendly concepts such as EIP4337 Account Abstraction and Intent are being introduced one after another, gradually improving the inconvenient UX. There will continue to be differences between DeFi and traditional finance, such as custody/non-custody, trust/trustlessness, censorship-resistance, and data management. But the essence of finance is the same: the efficient distribution of capital and convenient UX that facilitates it. This suggests that we will soon see the Big Blur, where the boundaries between DeFi (decentralized finance) and TradFi (traditional finance) will eventually be blurred.

5-3. NFTs: Evolving as a means to improve and expand existing business models

In the past, the issuance of NFTs by companies was a simple marketing tool with no clear purpose, resulting in a one-off project. However, if we look at the recent business trends of large enterprises, we can see that they have a clear goal and/or utilization. They recognize that NFTs have the potential to go beyond PFPs, and unlock the limitations or problems of existing business models, provide customers with new experiences, diversify customer touch points to gain control, or strengthen customer engagement and loyalty through self-generated communities. At the same time, we're seeing the word NFT being replaced by more familiar terms such as digital avatars, collectibles, items, memberships, and tickets, depending on how they fit into existing businesses. This is because NFTs are a technology, not a business model in and of themselves.

From a broad perspective, companies are using NFTs in mainly six use cases: 1) post-marketing, 2) Phygital (physical+digital), 3) product authentication and tracking, 4) community and co-creation, 5) IP monetization, and 6) loyalty (see figure below from Dematerialzd.xyz). For better understanding, let's analyze the cases of Starbucks (Odyssey) and SK Planet (UPTN Project), which are most active in blockchain business.

Top NFT Use Cases, NFT post marketing, NFT community, NFT Loyalty

A. Starbucks Odyssey: Loyalty program offers loyal customers coffee experience that satisfies all five senses

Starbucks unveiled its NFT-based loyalty program, Odessey, in September 2022 and launched its beta service in December. Odessey is a service that allows customers to earn and purchase digital collectibles. Customers can complete missions and earn "journey stamps," which are Starbucks NFTs that can be redeemed for engaging benefits such as "participating in a virtual espresso martini making class" and "touring Starbucks' Hacienda Alsacia farm in Costa Rica. The Odyssey program is currently only available to U.S. residents, and only invited employees and customers can participate.

Starbucks NFT, Starbucks OdysseySource: Starbucks

This loyalty program allows the company to offer its loyal customers an experience that goes beyond just consuming coffee to showcasing the company's history, culture, and how coffee is made, thereby increasing customer loyalty and paving the way for business expansion. The Odyssey program is significant because Starbucks is a global company that grew up with user experience, even before the introduction of NFTs. These unique experiences have created a strong customer demand for Starbucks NFTs, with the first paid NFT collection, The Siren Collection Stamp, issued in March 2023, selling out in less than 20 minutes and trading at $275 as of December 6, up 275% from its initial sale price of $100. Additionally, the Holiday Cheer Stamp was once trading for $2,200 despite being a free sticker.

Nifty Gateway The Holiday Cup Collection NFTSource: Nifty Gateway

So, how has the Odyssey program performed and what is the upside? As of December 6, 2023, the total cumulative trading volume of Starbucks NFTs was $3.2M (KRW 4.3B), which generated about $240K in revenue from secondary sales, considering the royalty rate of 7.5%. Combined with the revenue from the first sale, the cumulative revenue from the Odyssey program over a year is around $1M.

The number of stamp holders participating in the program is approximately 42,000, which is 0.056% of the 75 million existing Rewards Program members. If we assume that 1% and 10% of Rewards Program members participate in the Odyssey program, we can roughly estimate $17.8M and $178M in revenue, respectively. Assuming a 10% conversion rate and $178M in sales, Starbucks will achieve 5.5% of its total sales ($32.2B) in 2022 through the Odyssey program.

B. SK Planet UPTN Project: A Solution to enhance point universality and sustainability of OK Cashbag

OK Cashbag, operated by SK Planet's Marketing Platform Division for the past 25 years, initially achieved industry-leading success based on the 'versatility' of points but has recently hit a business-growth wall. Specifically, OK Cashbag started out securing a customer base of 20 million through a strategy of integrating fragmented points into a universal point system through affiliations with over 90,000 stores. Over time, challenges emerged as 1) users and stores started leaving, leading to a reduction in universality, and 2) limitations in the existing point system became apparent in terms of scalability.

Affiliate Vendor:

  • Increase in "cherry-picking" customers who convert their earned points to OK Cashbag and use them at other affiliates.
  • Inability to track data on points and analyze marketing effectiveness


  • Reduced point versatility due to leaving affiliates
  • Decreased attraction factor for younger customers due to partnerships with relatively less popular brands instead of trendy brands

As a result, OK Cashbag users and affiliates began to leave, and the company is currently struggling to attract new users and retain existing customers. For more information on the revenue structure and limitations of OK Cashbag, read “UPTN Project: SK Planet's Arc Reactor”.

The Surfacing of OK Cashbag's Vicious Cycle

In a nutshell, SK Planet has been successful in managing costs in various aspects such as R&D, depreciation, and service costs, centered on the 11Street spin-off in 2018, and has been successful in improving profitability, but has been struggling to grow revenue.

SK Planet Growth Trends

Through blockchain technology, SK Planet aims to achieve both quantitative and qualitative growth by 1) creating a virtuous cycle of improving service effectiveness → attracting new customers and increasing service activity → preventing merchant churn → increasing point universality, and 2) maximizing profits by expanding the value chain. To this end, we have divided the UPTN Project roadmap into two major phases. In Phase 1, various infrastructures will be built, and various contents will be released. In Phase 2, the value chain will be expanded by adding marketplaces and community services based on the services and ecosystem built in Phase 1.

UPTN Station Monthly Accumulated Subscribers

UPTN Projects Overview, Road to Rich

UPTN Station, Platforms, SK PlanetCurrently, SK Planet provides various benefits to revitalize the initial ecosystem and pays users' transaction gas fees, which is causing losses in the short term, but in the long term, the goal is to form a structure that can capture both revenue and profitability. The existing revenue structure of OK Cashbag is based on commissions paid by affiliated vensors and users, but in the future, it is expected to grow through value chain expansion and business diversification.

Value Chain Expansion & Business Diversification

C. Other

The use of NFTs as tickets is also promising. This can be seen as an example of utilizing the proof of origin and authenticity made possible by the NFT's token ID. Hyundai Card introduced NFT tickets for the 2023 Da Vinci Motel event to eliminate the problem of macro softwares and black tickets, and Seoul Land is also utilizing NFTs for entering events and special lounges by using NFTs as proof of authority.

The content/media industries are also expanding their horizons. Experiments such as MODHAUS’s TripleS to engage fans and build a fandom DAO are also worth noting. HYBE, the company behind the success of BTS, is also planning to build a fan participation platform rather than a HYBE-led platform by introducing Web3 to the fandom community. In this case, Web3 will be used to transfer power to the fan community and drive fan engagement in a decentralized way.

We are no longer living in a time where the word “NFT” can simply be thrown around to attract the public’s attention. But rather, it is a time to present practical, utilitarian, and empirical examples. The public is no longer looking for PFP and art NFTs that are difficult to find value beyond community or artistry. Instead, we’re seeing people go wild for Nike’s OF1 box and participate actively in the .Swoosh program. We believe that only NFTs and Web3 elements that prove their intrinsic value based on clear utility will be able to gain public recognition in the market.

6. Closing Thoughts

In contrast to the bear market challenges of 2023, the crypto market, as highlighted in Xangle's annual outlook series titled "Antifragile," not only withstood but deepened its resilience. Bitcoin, now firmly established as a financial asset, is on the brink of launching a spot Bitcoin ETF, signaling its readiness to welcome investments from a global investor base. Layer 2, recently emerging from the Proof of Concept phase, is poised to introduce widely adoptable applications.

We believe the current phase marks a transition beyond the Trough of Disillusionment and into the Slope of Enlightenment, particularly in terms of democratizing technology. User interfaces and experiences are evolving to the extent that blockchain services are becoming accessible to the general public. Companies can now initiate blockchain services by operating their own chains, and the development infrastructure has advanced, easing entry for startups into the blockchain space. Legislative efforts on cryptocurrencies by Western and major Asian countries are mitigating business uncertainties, fostering a climate conducive to increased utilization of blockchain technology. Notably, the active involvement of global giants like Nike, Starbucks, JPM, Nexon, and VISA is accelerating blockchain adoption.

While the crypto market remains in its early stages, comprising less than 1% of the global asset market, and the number of individuals actively using blockchain-based services is likely below 1%, this low market penetration presents an alluring aspect. In an industry with vast untapped potential, substantial growth—whether 10x, 50x, or more—is conceivable. Following the crypto winter that commenced in 2022, signs of a promising spring are evident. As we anticipate another winter, it becomes intriguing to observe the use cases that will propel the crypto market through its cycles.

Looking ahead, 2024 is anticipated to be the tipping point for the mass adoption of blockchain services.

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