Global Crypto Industry Overview and Trends[2022–2023 Annual Report](First Part)

HTX Research
HTX Research
Published in
80 min readDec 8, 2022



In 2022, the crypto industry entered a deep bear as the Federal Reserve continued to raise interest rates and global liquidity tightened. This year, the total market capitalization of crypto assets shrank by more than $2.2 trillion, and the size of institutional business in CeFi declined by approximately 71.4%. The industry was devastated after a series of incidents, such as the collapse of Terra, the bankruptcy of 3AC and FTX; many giant institutions, such as BlockFi and Genesis, cannot escape from the nightmare of either being bankrupted or liquidated. However, the development of the industry did not stop here: the total amount of investment and financing in the primary market exceeded US$27.7 billion; Ethereum opened a new era of PoS and Layer2 has seen unprecedented growth; X2E pitched a new business model of GameFi, etc. This report provides forecasting and suggestions for 2023 by comprehensive analysis on developments and losses in 2022 on 7 aspects: market, data, investment, region, application, technology, and regulation.

We established regional crypto market development maturity index by inputting variables from four dimensions: percentage of crypto users in total population, CEX volume, DeFi traffic and Internet search hotness, with the U.S., Vietnam and Russia ranked the top three (in the order mentioned). There are approximately 320 million crypto users worldwide in 2022, with over 40% being Asian, and new user growth declined to 25 million from 194 million in 2021. The U.S., South Korea and Russia have the largest number of visits to CEX exchanges, with accumulative share of over 22%. The U.S. has the largest share in DeFi, with almost six times more traffic on DeFi than the second, Brazil. South America, South Africa and the Middle East are highly interested in the crypto industry. The crypto population in Southeast Asia reached 46 million, second only to North America. Cryptocurrencies are used for payments and store of value in most application scenarios in South America and Africa, with more than 1/3 of the nationals using stablecoins daily.

The infrastructure segment is still centered with performance optimization, and service facilities are more advanced. Layer2 projects on Ethereum spring up. Multi-chain networks and high-performance L1 chains have vastly developed thanks to modularization of new L1 chains. The storage segment has seen a diversified growth that storage capacity and utilization rate have gradually climbed. Domain names, as the infrastructure of application layer of Dapps, and DID are also experiencing a boom. Cross-chain bridges are not uncommon, but there is still room for security and interoperability improvement. Although little progress has been made in Bitcoin mining, the Ethereum staking rate is only at 12.56%; a new era of staking-as-a-service is about to begin.

On application layer, DeFi’s TVL across chains is cut over 70% from all-time high; leverage is disappearing and the ROI decreased. The NFT market has cooled down to a bear market from the craze at the beginning of the year, with a decrease of 42% in market cap and a sharp decrease of 88.9% in the number of active users. NFTfi has emerged to be the next breaking point for wild growth. GameFi and Metaverse have eye-catching performance, but still are underdeveloped.

In terms of regulations, over 42 sovereign countries and regions around the world have adopted 105 regulatory measures and guidance for the crypto industry this year; the positive ones accounted for 36% of all the policies, which is a major increase from that of last year. A full-scale regulatory framework for the industry is on the agenda in all countries that regulations on CEXs are tightening and on-chain regulation might be incorporated into the system.

As the bear market continues, we hereby suggest 4 valuable indicators on bottom of the market and provide some suggestions to endure the bear market avoiding traps and enhancing assets protection. Finally, we make some forecasting for the industry in 2023. (1) The market will reach the bottom in early 2023; (2) Social tycoons in Web2, such as Twitter, will continue to pursue Web3, introducing new paradigm of SocialFi; (3) Ecological prosperity for Layer2 will happen in 2023; (4) Accelerated ZK network will start to launch; (5) Dapp chain will usher in a period of rapid growth; (6) bona fide demand for on-chain storage is growing rapidly, and the storage segment will embrace substantial and organic development; (7) on-chain regulation will be strengthened and some protocols may be endangered; (8) cryptocurrencies will be adopted as payment or authorized as fiat currency by more countries.

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Huobi Research:

Flora Li, Stefanie Wei, Barry Jiang, Nolan Liu, Johnny Louey, Siyu Chen, Andy Hoo, Mingwang Zheng, Jimmy Qi, Lucio Lyu


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1. Crypto industry under global economic condition

1.1 Global macroeconomic condition: inflation, interest rate hike and depression

If a story line were to be sketched for 2022, global inflation and the tightening monetary must be on the main line. They are the keynote of the macro market movement that influence all aspects of the global economy, including the cryptocurrency market. Besides, we are currently facing a macroeconomic situation rarely seen in recent decades, macro factors are driving the change of the cryptocurrency market this year over endogenous factors such as regulations, new technologies and segments. The global macro market situation is elaborated in the following graph based on the two main factors: global inflation and tightening monetary policy.

The chart above is a portrait of the trend of benchmark interest rates in the U.S., EU and U.K. from the end of 2021 to date. The most recent round of global interest rate hike has been characterized by a fierce and fast-paced intensity. In the U.S., for example, the Federal Reserve raised the benchmark federal interest rate to 2.5% in 8 months; it took 2 years in the last round to do so. The fast and furious rate hikes have undoubtedly distress tremendously on the price of risky assets all over the world, of which cryptocurrencies are not immune.

The table above illustrates the year-to-date changes of major cryptocurrencies. Evidently, along with the tightening of monetary policy, each one of them has suffered significant declines regardless of the segments. Although the crash of Terra and the merge of Ethereum have had game-changing influences to the industry this year, these events are either one of the consequences of the deteriorating macro environment or did not change the overall downward trend of the industry from the root. Therefore, it can be said that the keywords for the macro market environment of this year are inflation, interest rate hike and depression.

1.2 The year of evanescence for crypto

2022 was a year of lengthy downturn for cryptocurrency, with the external financial environment inundated with panic and a number of devastating internal incidents, almost $2 trillion vanished in market capitalization.

1.2.1 Market: from bull to bear and getting worse

BTC and ETH have remained pillars during the bear market, with relatively small decrease while maintaining high market cap. While the total market cap has fallen between 80%-90% for DeFi and GameFi, most individual assets have fallen on a larger magnitude: for new assets continue to flow in, and the increasing quantity of assets flattened the overall decline; popular assets depreciated faster affected by the overall downturn than that during a bull market with decline of 90% or even more.

200-Week SMA Indicator

For BTC, as a mainstream crypto asset, the 200-week SMA indicator is more suitable for observing the range of BTC’s lowest price from the historical data of over a decade.

The indicator starts from mid-2014 since BTC did not meet the prerequisite of 200 weeks for the indicator before 2014. From historical data, the two breakdowns in 2015, the intersection in 2019, and the “March 12” breakdown in 2020 were mostly un-abiding and followed by a rebound by market adjustment. However, price of BTC has been swinging in the lower part of the indicator for a long time since it fell below the indicator in June this year, and fell again back after the breakout in August. According to the indicator, BTC is historically seen for the first time below and wandering in the lower area, signaling an unprecedented intensive bear market at current.

1.2.2 Applications: developments and innovations in the downturn

According to Defillama data, TVL of DeFi went from 171 billion USD in January 2022 to lowest at 50 billion USD in October 2022, and it is around 55 billion USD at the end of October. With a series of incidents, such as Terra, TVL of DeFi has also fallen sharply for twice, the market is hence accelerated to bearish.

The following figure exhibits the value of outstanding debt in lending protocols. Current balance is about 4 billion USD, 84% less compared to 25 billion USD at highest last year. The demand for leverage on-chain declines, resulting in decrease on-chain trading activity; it is another characteristic of current round of bear market.

Ethereum is still the main battleground for DeFi. Entering to a bull market in the second half of 2020, the explosive growth of the protocols accompanied by simultaneous rise in token prices and rate of return has been long pursued by large amount of funds; liquidity was also enriched in the wave. Whereas in 2022, token prices are cut and so is the rate of return. As liquidity is being extracted and capital is escaping from the market, the panic is further aggravated. Current rates of deposit on stablecoin on mainstream lending protocols are even lower than that of U.S. Treasury. What’s worse, many more protocols have been hacked and more incidents have been triggered, such as the collapse of Terra and the liquidation of FTX, causing risk-averse funds to be withdrawn.

Under such market condition, Layer2 has been vastly promoted, and DeFi ecosystem could have a second spring on Layer2. Scaling is faster and cheaper, the cost for ordinary users will be lower, more users with relatively small amount of capital can also surf in DeFi, which is also beneficial for DeFi.

From TVL of Layer2, in April 2022, the TVL of Layer2 reached a peak of 7.5 billion USD and then went all the way down to 3.7 billion USD in July. Unlike other ecosystems, the TVL of Layer2 has been rising to currently at 5.32 billion USD since the touch of bottom in July. The credit may go to the token offerings and the landing of large number of applications, as well as the fact that most of the Layer2 development teams are actively working on incentives, such as pre-airdrop campaigns and token offerings. With the progress of Layer2 scaling solution, more on-chain activities and ecological projects will eventually become available.

As the market cooled down, trading volume of NFT seems to be in the doldrum. The ultra-high volume occurred in the May was due to the FOMO sentiment generated by the otherdeed issued on otherside at the time. Meanwhile, NFT’s total market cap fell by half, the pricing unit for NFT is in ETH, and ETH per se is highly volatile. The market cap of NFT market dropped from about 35 billion USD to 21 billion USD by over 40%. The drop in NFT’s total market cap was not as large as ETH’s because new releases of NFT have been feeding the market, which has also converted non-NFT users to NFT users at the same time.

Despite the fact that the NFT market is shrinking, current average daily trading volume is only 15% of that in the bull market or even lower, the growth rate on the number of wallets with NFT has never stalled with increases by about 80,000 per week as charted below. The market continues to inflate with new users and new products, while the total market cap of NFT is slowly diminishing (as shown in the chart above), which is a phenomenon of popping the bubbles in the NFT market: prices of NFTs tend to be rational, and more users will buy and hold NFT at the same time, signifying heathy development patterns for the market.

1.2.3 Investments: seeking hope in bear market

The secondary market continues to look sluggish in numbers, not to mention the primary market. According to incomplete statistics from Odaily, the total disclosed fundraising of the cryptocurrency market globally in the third quarter of 2022 was $5.841 billion, with a total of 442 investment and financing events (excluding fundraising by mutual funds and M&A); including 20 on infrastructure, 50 on technology service providers, 49 on financial service providers, 246 on applications and 77 on other service providers. Among them, the application segment received the largest amount of funding at $2.605 billion. Compared to the first and second quarter of 2022, the third quarter saw a significant decline in both the total amount raised and the total number of fundraising events.

According to statistics by publicly available information reported by Odaily and PANews, there were 511 investment and financing events (excluding fundraising by mutual funds and M&A) in the global crypto market in the second quarter of 2022, with a total disclosed amount of $12.71 billion. Among all funding events, there were 28 deals with a funding size of more than $100 million. In Q1, there were 461 global crypto fundraising events with a total disclosed value of $9.2 billion.

In Q2, GameFi and NFT were the most pursued for institutional investors, with 82 fundings for gaming, gaming-related infrastructure and technical solutions, ranking first by number of fundings and accounting for 16% of the total events. GameFi has the largest funding volume with $2.996 billion, which is 23.5% of the total funding volume.

GameFi continued to be favored by capital funds in Q3: $963 million was raised within the GameFi sector, accounting for 16.4% of total fundings by volume and 15% by number (67 out of 442). Most invested targets are blockchain gaming companies, blockchain game guilds and X2E blockchain games.

L1 projects also performed well in Q3 in terms of funding. Although only 13 fundings were made on L1 segment, accounting for only 3% of the total fundings in number, the amount raised reached $625 million, second only to GameFi. The most outstanding two L1 chains are Sui and Aptos built with Move language, which claim to have inherited the Move language from Libra that emphasized in improving security and scalability of L1 chains while massively enhancing the functionality of network. The two appeared on the capital market with valuation of so high that astounded the entire market. With the star effect of new L1 chains, new projects sprung out one after another.

Under the influence of bear market, many institutions did not survive, and some others were severely devastated by some major incidents, dissolved or bankrupted. Most of the crypto investment institutions have switched investment philosophy as opposed to that in a bull market and strengthened level of scrutiny of targets. Not all birds are meant to be caged, as their feathers are just too bright, even in this bear market. The areas that institutions have keen interest[1] can be divided into 2 categories, infrastructure and applications. Overall, infrastructure type of projects are the emphasized ones. According to Huobi Research, the word “Infra” has the highest frequency of mentions, where the 2 main lines are ZK and new L1 chains, with branches being middleware, data, oracle, DID, etc. On application layer, DeFi, GameFi, and social ranked the top 3. Although DeFi has been deserted for a while, it is still the most anticipated for institutions.

[1] For more information, please refer to research report of Huobi Research: “ Gold Mines in the Future: Insights from Interviews with 20 Institutions @

2. Geographic Analysis of the Crypto Industry

2.1 Regional market traffic analysis

After 14 years of development, crypto assets represented by BTC have spread to all regions of the world and exerting influences on many aspects. In order to measure the overall development level of the crypto market in different regions, the degree of penetration and the pace of development in crypto business of each region will be dissected based on the following four dimensions.

(1) Total crypto population and occupation rate: The occupation rate of crypto population refers to the ratio of the number of crypto users to the total population of a country, which most visually reflects the level of adoption for crypto in a country.

(2) Traffic from CEX[1] : Centralized exchanges are vital in the cryptocurrency market. These exchanges are usually user friendly and many crypto novices start with them; most of the users and liquidity in the crypto market are aggregated in centralized exchanges. Our data is extracted from top 100 CEXs in the market based on active users, trading depth, trading volume and reliability.

(3) DeFi traffic[2] : DeFi has become one of the markets with skyrocketing growth in the crypto world in the last two years. With the birth of AMM, liquidity mining and other models, DeFi has absorbed a large number of funds in the market: experienced users and practitioners have actively interacted in Defi applications, and an analysis of the defi protocols could appropriately sketch the landscape of the experience user distribution worldwide. Our analysis is based on the data drilled from nearly 300 mainstream DeFi projects and different L1 chains in terms of TVL, transaction volume, and daily active users.

(4) Keyword search heat: Heat from internet keyword search reflects the level of public interest in the crypto market from a macro perspective.

[1] The centralized exchanges targeted for data input are Binance, Coinbase, FTX, Kraken, Kucoin, Huobi Global,, Bitfinex, Bitstamp, Coincheck, Gemini, Bybit, MEXC, Bithumb, OKX, Poloniex, etc.; traffic data is from similarweb.

[2] The targeted DeFi protocols for data input are MakerDAO, Lido, Curve, AAVE, Uniswap, Convex Finance, Justlend, Pancakeswap, Compound Finance, Instadapp, Balancer, Sushiswap, GMX, Synthetix, dYdX, etc.; traffic data is from similarweb.

2.1.1 Global crypto user growth slows, with Asia accounting for over 40% of the total

The chart below reflects the total number of cryptocurrency users worldwide with KYC based on multiple sources, including but not limited to trading platforms, on-chain wallet information and different service providers.

From 2018 to 2020, the global cryptocurrency market is in the early stage of development with relatively slow user growth; after 2020, the prosperous development of the market attracts many crypto-native users and explosive growth has been seen. The chart above also demonstrates that the growth rate and the absolute value of growth in 2021 are the highest in recent years. The reason might be attributed to the entry of various financial institutions and traditional traders, and with the prevalence of NFT, the crypto market is completely ignited. As we enter 2022, the global macroeconomy is on the verge of recession, but the falling crypto market was surprisingly resilient. By the numbers, the net crypto user population continues to grow worldwide. As of November 2022, the number of crypto users worldwide is approximately 320 million, with a penetration rate of approximately 4.3%. Among these, Asia has the largest crypto user base at approximately 40%.

2.1.2 Top 3 traffic source in CEX: U.S.A, South Korea, Russia

From the data, the overall market size of centralized exchanges declined more significantly in 2022 than that in 2021. Specifically, total crypto asset market capitalization declined by approximately 66% over the past year, cryptocurrency spot trading volume declined by approximately 27%, and the number of unique visitors declined by 24%. It is evident that monthly visits to centralized exchanges are decreasing for both website and mobile App crypto users. This may coincide with the market turning into a deep bear. The continuous gloomy market condition and the depreciating assets are both depressing existing users that interest for trading is slowly worn out.

The graph above illustrates the relationship between the monthly traffic of major CEX visits and the total crypto market capitalization over the past year. The correlation coefficient between the two is 90.8%, which is a strong positive correlation. However, two points are worth noting. First, there is a small divergence between the two in May 2022. This could be due to a black swan event, namely the LUNA crash, where a large number of users were taking advantage of the incident to buy in, or selling on the exchange, instead, pushing up the number of visits in that month. Second, although exchange visits were lower, the decline was much less than the decline in market capitalization. In other words, a large portion of existing users sit tight and assess in the market.

In terms of CEX traffic, the US firmly holds the championship with absolute number of crypto users and market size per se, followed by South Korea, Russia, Turkey and Japan with 7.4%, 6.1%, 5.6% and 3.8%, respectively. Overall, countries on the list all have relatively friendly policies for crypto. South Korea and Japan have high level of solidification in social class due to high unemployment rate and housing prices, so that the younger generation is pinning their future to cryptocurrency investments. Russia, nevertheless, has no other choice but embracing a more open and liberal financial system in light of the strict sanctions from the US. For Turkey has long suffered from hyperinflation, cryptocurrencies have emerged as a monetary alternative in the country.

The graph above depicts the change in monthly visitors for the top five countries. The rate of decline in the United States, South Korea, Russia, Turkey, and Japan are 72.9%, 48.6%, 25.6%, 59.6%, and 38.6%, respectively. Among them, the U.S. has the largest decline, which is mainly due to the macroeconomic impact of the Fed’s successive substantial interest rate hikes, which tightened liquidity while interrupted the risk aversion of funds. Russia has the least decline: economic sanctions are filled all over the world by the war; it seems to have given a place to the borderless cryptocurrency acting as one of the country’s effective complementary payment and trade venue.

2.1.3 The US: where majority of DeFi users are from

The total number of unique users in DeFi worldwide has relatively increased over the past year. Although a series of unfavorable incidents happened in 2022, these users remain confident about the market recovery as they firmly believe in the long-term value of DeFi and its indispensable functions as pillars to the industry. As a result, we believe the fundamentals of the DeFi market remain relatively healthy.

Geographically, the U.S. has an absolute advantage of DeFi market share at 31.8%, far beyond other countries, which may be tied to the fact that DeFi originally rooted in the U.S soil. The U.S. has invested tremendously in the crypto industry with ongoing influx of funds and talents; many startups flocked to tech and financial hubs such as Silicon Valley and NYC. Slightly different from CEX traffic, some developed countries, such as the UK, France, Germany, and Canada are seeing large DeFi traffic. The probable cause may be that DeFi’s user base is more skewed towards professional and experienced users with a higher threshold, which coincides with the macro image of these countries: established financial systems and complete investor education. Brazil is ranked second as it is the number one cryptocurrency market in South America, and several banks and investment firms are offering or preparing to offer services related to the crypto market; asset management firms QR Capital and Hashdex have also launched DeFi ETFs, which have increased the awareness of crypto at large.

2.1.4 “NFT” has become the most discussed topic on crypto worldwide

We have collected keywords related to the crypto market in the past year. With the selection of the 5 most mentioned (in no particular order), we visualized on a map for a more intuitive perception of the distribution of interest in the crypto industry by regions.

In terms of keyword distribution, “BTC”, “DeFi” and “Cryptocurrency” are most frequently searched in South America, South Africa and the Middle East. This is largely due to the underdeveloped financial infrastructure and payment systems in these regions, as well as the suffering from high inflation rate, which makes cryptocurrency a perfect alternative for payments and store of value. “NFT” is surprisingly popular, as it has stormed every single corner of the world: partially because NFT can be well integrated with various industries, such as sports, arts, entertainment, cultural creations, expanding the application scenarios on a larger scale. In addition, with the unique community culture and wealth effect of each NFT, NFT has gone viral worldwide.

The above chart reflects the search volume of various crypto keywords over the past year, which mirrors the level of public interest in crypto. The NFT market lighted the boom of the crypto market: all crypto-related keywords became top searches on the Internet, and the heat continued rising. In 2022, as the overall crypto market went downward, the attention on the industry declined. What’s worse, a series of incidents during Q1 and Q2 added insult to injury. The crypto market entered a dormant state along with the end of several industrial hotspots in the second half of 2022. Due to the nature of mass communication, audiences are more interested in negative news; it explains the spike in search volume tends to occur whenever in market downturns or negative news. But on a wider range of the timeline, the degree of attention on the crypto industry has dropped by nearly half.

2.2 Regional Market Industry Analysis

2.2.1 North America: The main battleground for DeFi innovation

North America is crucial to the global crypto market. The region currently has about 47 million crypto users, representing 14.7% of the global crypto population. As North America is one of the most developed regions in the world, the crypto market is also prosperous. In terms of traffic, the DeFi business conducted within North America is particularly strong. Below we provide a specific analysis on one of the major countries in the region: the United States.

The U.S. is the indicator of the crypto market

Over the past few years, the overall attitude of general public on cryptocurrency has rolled back the United States: more people have started to notice and join the crew of cryptocurrency trading and investments, and the phenomenon is in line with our findings that the U.S. wins in every dimension.

Currently, there are about 46 million crypto users in the U.S., accounting for 13.7% of the total population; the traffic in centralized exchanges and DeFi sector is 9.2% and 31.8%, respectively. Looking at the types of transactions in the U.S. across CEXs, BTC is the main target for U.S. crypto users, followed by Ethereum, Dogecoin, ADA, and other alter coins. To be more specific, the U.S. has the largest BTC trading volume at $1.5 billion. The number also explains why there has often been a strong correlation between price volatility in crypto markets and the U.S. financial markets in recent years. In particular, since 2022, the crypto market has been almost entirely manipulated by the Federal Reserve’s monetary policy; on the other hand, the U.S. has the largest trading volume in DeFi with 31.8% among others. The tolerate environment of DeFi in the U.S. has created fertile soil for innovations as Silicon Valley and New York are filled with enthusiastic developers and strong academic interests, and most projects are more likely to receive early funding and talent support in this paradise.

The rapid growth of the US crypto market can be attributed to the following reasons.

1.Young generation are the main user group in the crypto market. According to Finder survey, young adults aged 18–34 in the US are the main group, accounting for 56% of the total crypto users. Young people appear to be more risk-tolerant compared to middle-aged and elder people who prefer traditional portfolios such as stocks and bonds: the high return potential from cryptocurrencies have strongly stimulated the morale, driving the overall market adoption rate to rise.

2. The regulatory mechanism is more complete day by day. Most states in the U.S. have introduced crypto-friendly bills that promote local crypto activities within the law frame. For example, Ohio has proposed a bill to pay taxes in cryptocurrencies; Wyoming has passed 13 laws, including recognizing cryptocurrencies as currency and allowing local banks to provide custody services for digital assets. With the legal protections, large institutions and financial service providers are able to offer legitimate asset management and related crypto services to U.S. citizens.

3. Others. In addition to the reasons mentioned above, we believe there are a number of events have played an important role in driving the adoption of the U.S. crypto market, such as the entry of large institutions, i.e., Microstrategy and Tesla, the continuous enrichment of the scenarios accepting cryptocurrency payment in the U.S., and the spring of large crypto startups to the U.S.

2.2.2 Southeast Asia: the emerging market, crypto user base surged

The crypto market in Southeast Asia has grown very rapidly in recent years. The total crypto population is currently about 46 million, second only to the North American region. Although it is mostly composed by medium-low and medium-high income countries, the purchasing power per capita is not as high as that of developed regions. However, some Southeast Asian countries (e.g., Vietnam, Philippines, Thailand) have relatively outstanding crypto user base, and crypto s have penetrated scenarios in daily life.

Vietnam: the nation with the highest adoption rate in cryptocurrency

With around 20 million crypto users, or more than one-fifth of its total population, the country has managed to become the first nation with the highest adoption rate in cryptocurrency.

The main reasons for the growth of the emerging crypto market in Southeast Asia, represented by Vietnam, are the following: (1) It conforms with local financial development and modernization standard. Over the past decade, governments of Southeast Asian countries have been keen to emerging technologies, such as blockchain, and relying higher degree of digitalization of the economy on it. In Vietnam, cashless is becoming the norm in the country, and the local government has set a relatively flexible crypto tax standard to further facilitate the adoption of cryptocurrencies. At the same time, traditional financial system in the region is still primitive, turning users away to the more efficient alternative: cryptocurrency; (2) Gamefi has become a popular investment destination for users. Based on the humanitarian environment and consumption preference in Southeast Asia, gaming is somewhat essential in this region. According to public data, the highest number of mobile game downloads in Indonesia was 38% in 2020, followed by Vietnam reaching 22%; the Philippines and Vietnam ranked high in in-game purchase, 55% and 50% respectively. The mature gaming market is the perfect greenhouse for blockchain games to flourish. The phenomenal blockchain game, Axie Infinity, whose innovative “play-to-earn” model reaved the market; people feared to miss out and popped in, and so did the funds, Southeast Asia has become the GameFi hub thereafter.

Singapore: the new hub of crypto, and the prime node of Web3

Singapore has seized the opportunity in the vicissitude of the US and China Internet markets and the rise of the Southeast Asian economy in recent years, especially in the momentum of digital transformation after the pandemic. Singapore has become the best destination for technology startups, luring a large number of innovators and unicorn companies, which naturally includes the crypto players. Singapore maintains highly tolerance and openness for the crypto industry: regulations are enforced, but there is still plenty of room for innovation. According to the Gyro Finance, the Monetary Authority of Singapore offers a more open approach of regulation in DeFi as the Regulatory Sandbox Plus that specific payment services are temporarily allowed to be offered under exemption regulations even if for a license is not yet applied. As a result, Singapore is emerging as one of the most crypto-friendly regions in the world. According to data released by KPMG, there were over 80 venture capital investments in Singapore in 2021 on crypto, totaled $1.48 billion; compared to 2020 when the number was only 26, totaled $110 million, a nearly 1400% increase in terms of value.

2.2.3 Other regions in Asia: huge market to be explored, market enthusiasm remains

Asia Pacific is vast in territory and constituted by many countries, and it has the most crypto users in the world. The following countries has been actively engaged in crypto.

Japan and South Korea: Crypto trading activities are extremely active

Japan and South Korea have contributed tremendous traffic to exchanges. Specifically, South Korea ranked second with 7.4% and Japan ranked sixth with 3.85% in Asia. On the one hand, major crypto exchanges such as Upbit, Bithumb, CoinOne, Korbit and Gopax are located in Japan and South Korea, piling up the numbers; on the other hand, according to Coindesk, high unemployment rate and high housing prices in both countries have daunted domestic young fellows that they have to seek out other alternatives for wealth creation. People in South Korea, in particular, are most all in the game of cryptocurrency speculation. In addition to the stress of high unemployment and high consumption, the stationary state of social class and monopolistic economy has paved the way of entrepreneurship with full of thorns for people in the bottom. Cryptocurrency, however, as a type of borderless investment, is perceived as the only antidote to escape from poverty, become rich and even squeeze in an upper social class. According to the data, 1 in 5 young Koreans has investment in Bitcoin. In addition, local government encourages their citizens to buy, sell and own crypto assets, among other things, as well as a possible future proposal for a preferential tax law to be in effect; all the efforts have made the crypto market increasingly popular in the region.

Hong Kong: the sleeping financial center in the East

The crypto market in Hong Kong has been gray for a long time. As the former center of Asia, Hong Kong has attracted a large number of well-known crypto companies like Animoca, FTX, BitMEX, etc. thanks to its financial establishments and the intimacy with Mainland China. However, with a series of sweeping bans on crypto activities in Mainland China, Hong Kong has lost the advantage. Moreover, as the CBDC pilot work landed gradually in Hong Kong, the Hong Kong Monetary Authority is looking to add potential cryptocurrencies to the range of regulation. The tightening policy environment has accelerated the exodus of a large number of practitioners and crypto businesses, resulting in Hong Kong’s crypto market shrinking over the past few years. However, the re-opened Hong Kong crypto market is expected to be boosted in the future with the release of a new virtual asset policy declaration on October 31, 2022, which clarifies the legitimacy of local crypto activities.

India: crypto market marches ahead as regulation swings

The Reserve Bank of India is not as interested in crypto as other central banks, and its Minister of Finance had declared to the public in 2018 that the Reserve Bank of India would ban cryptocurrencies in all aspects, but the subject matter does not reach the height of law enforcement. The blurred attitude has put the crypto market of India nowhere but in the shade as it is not illegal as a crime, nor it can be brought on the table. The crypto market in India has not stalled in progress, despite the fact of a large resistance from the government for a long time.

Until last year, the Supreme Court of India arbitrated that the RBI’s ban on cryptocurrencies was a violation of the Indian Constitution Law, marking an era of loosened regulatory environment. The change in regulatory attitude has substantially promoted economic growth of India. According to Coindesk, there has been a significant increase in investors looking to buy and trade cryptocurrencies in rural India, with Coinswith Kuber seeing a 135% increase of registration from rural India; meanwhile, 16 crypto deals were closed for fundraising this year in India, totaled more than $627 million, 14.25 times more than that in 2021. In addition, although India has a large population, the overall education level of younger generation is high, which provides the ground building for better understanding of the concept of blockchain and cutting-edge technologies of cryptocurrency. A large number of outstanding developer teams in crypto, such as Matic and Starkware, are from India, and they have become the headlines in their respective technological segment. In all, it is no doubt that the crypto market in India has huge potential in the future.

2.2.4 Europe: the war never stops the march of crypto legion

In the European region, not only us but the whole world lay eyes on Russia and Ukraine. From our data, both Russia and Ukraine also ranked high in all indicators. This is due in large part to the outbreak of the Russia-Ukraine war, which led to an increase in crypto activity in both countries.

From the Russian side, there are currently more than 14.6 million people holding cryptocurrencies, representing 10.1% of the total population. The country has taken a lot of proactive steps in establishing regulations related to cryptocurrencies. In September 2022, Russia passed legislation approving the activities of utilizing hydro and nuclear power for cryptocurrency mining in some parts of the country. Additionally, cryptocurrencies could be a significant tool for foreign trade settlements as the country has had to withdraw from global SWIFT due to sanctions from countries around the world. Also in September, Russia’s central bank officially announced the legalization of cross-border payments with cryptocurrencies such as Bitcoin and Ethereum.

As for Ukraine, the country’s economy has been hit hard by the sudden war and faced hyperinflation; what’s worse, local central bank’s issued martial law, restricting cash transactions for Ukrainian citizens, many Ukrainians consider cryptocurrencies as an effective method to hedge against inflation. As a result, the volume of cryptocurrency transfers in Ukraine has continued to grow since the war started.

2.2.5 South America & Africa: application scenarios are dominated by payment processing and store of value

Most of the major countries in South America and Africa have adopted cryptocurrencies for almost the same rationale: domestic financial crisis, high inflation and devalued local currency. Some of the typical countries are Venezuela, Argentina, Brazil, Morocco and Egypt.

While not all cryptocurrencies can be used as a risk hedging tool, stablecoins are always ideal for value preservation of assets in these regions. According to publicly available data, at least more than 1/3 of the population in South America and Africa are used to paying stablecoins for retail transactions or as savings due to the perennially high annual inflation of over 8%. At the same time, these regions also have the highest percentage of paying stablecoins as compensation in the world.

2.2.6 Crypto market development maturity index, the U.S. on the top

Finally, based on the above analysis combining the four indicators in this chapter, the crypto market development maturity index for 15 different countries in the world[4] is listed below.

[4] All inputs are equally weighted to simplify the model and avoid subjective bias, even though we are aware that this may cause a certain amount of error but as big.

From the matrix, the U.S. has the highest crypto market maturity, but not as much as emerging markets such as Vietnam in terms of market penetration. This may be due to the fact that the U.S. financial system is more developed: although the amount of funds is substantial, investors have many asset allocation alternatives other than cryptocurrencies. In contrast, investors in emerging markets such as Vietnam, Argentina and Brazil have rather few options, cryptocurrencies, therefore, as borderless, highly lucrative and highly liquid as it is, are extremely favored. The potential emerging markets should not be underestimated as the regulatory environment is completed along with the development of the crypto market.

3. Top 10 events in the crypto industry in 2022

3.1 The collapse of Terra: the beginning of deeper bearish

Terra’s collapse is to be said as the most infamous incident ever, which was once praised as one of the top 10 crypto assets. Many investors went broke because of the meltdown, and the crypto market has become even worse despite of the presence of a long existing bearish.

Founded in 2018, Terra is a blockchain for payments built on a dual-currency mechanism of a “stablecoin” UST and a “governance token” Luna. At the beginning of 2022, Do Kwan, the founder of Terra, announced a protocol of Anchor: 20% in annualized returns for deposits of UST; it has lured many investors by not only the high return but the decentralized nature. After the launch of Anchor, most of the USTs on the market were deposited into the protocol, even before the collapse of UST, nearly 75% of USTs (up to 14B) were on Anchor, and many investors borrowed UST for staking with mortgaging other cryptocurrency assets just to earn the 20% APR of UST. As the demand for UST soared, the price of LUNA climbed over $100; UST has had its glories being the largest decentralized stablecoin by issuing over $15 billion.

In May 2022, Terra has lost the buttress as some users were dumping USTs in Curve, de-pegged UST from USD, and the price fell dramatically; Do Kwon sold 80,000 BTC in LFG holdings to rebalance UST, but the confidence of the market has long gone that many others joined the dumping. Terra’s algorithm has altered LUNA into large issuance phase; hence LUNA & UST are all stormed into a death spiral. On-chain traders were unable to keep pace with the dumping, and the collapse therefore became inevitable.

Terra’s collapse has incurred countless losses on the market that the price of UST fell to $0.2 within days and LUNA’s price slide to almost zero; Terra’s market cap evaporated by $40 billion, and many investors have seen severe damages. On top of that, the 80,000 Bitcoins sold by LFG further deteriorated the market that the price of BTC was lower day by day, leading the market to a deeper bearish market.

3.2 The bankruptcy of 3AC: the “Lehman Moment” in crypto

Three Arrows Capital (3AC) is a cryptocurrency hedge fund founded by Su Zhu and Kyle Davies in 2012. Known for highly leverage philosophy, 3AC has borrowed large amounts of money from different companies and invested in different digital asset projects. As of March 2022, its assets under management had reached $10 billion, with a portfolio that included tokens such as Avalanche, Solana, Polkadot and Terra. Three Arrows Capital is undoubtedly an investment giant within the cryptocurrency community.

In the immediate aftermath of Terra’s collapse, news circulated that Three Arrows Capital was facing liquidity problems and that the company was suspected of misappropriating client funds. On June 14, 2022, Su Zhu removed the digital currency tab from his social media Twitter account profile, which included ETH, and tweeted, “We are in communication with the relevant parties and are fully committed to resolving this issue.” However, Su Zhu did not specify the exact content of the “issue” he was responding to.

The following week, digital asset broker Voyager Digital said it had lent 15,250 Bitcoins and $350 million in stablecoin USDC to Three Arrows Capital. The loans totaled more than $675 million back then. Voyager Digital urged that Three Arrows Capital repay all outstanding loans by June 27, or default; Three Arrows Capital did not repay the loan in time, and Voyager then sought compensation from Three Arrows Capital through legal means. After the incident came to public exposure, other lenders of Three Arrows Capital, including Genesis Global Trading, BlockFi, BitMex, FTX, and Blockchain, among others, screamed for repayment of their loans. Three Arrows Capital was compelled to liquidate, and even sold off 80,000 stETH (over $84 million) in the stETH/ETH pool on Curve, causing stETH to a state of de-peg (stETH was once 0.94 ETH).

Three Arrows Capital opened up an exposure in the cryptocurrency world that had far-reaching consequences. However, due to the lack of transparency, no one knew who held the next grenade; as more and more institutions disclosed bad debts of Three Arrows Capital, the whole industry was in the horror, and money continued escaping the scene, since then, the crypto industry encountered the “Lehman Moment”.

3.3 The FTX incident: an earthquake in the industry

In November, FTX declared bankruptcy due to a run on its users that drained its liquidity to insolvent. This must be the incident of the year since entering the current bear market, and the impact is beyond imagination and the scope of time.

FTX was founded in 2019, along with its sister company Alameda, by Sam Bankman-Fried. In the three short years since its inception until the crash, FTX had become a tycoon with $24 billion in market cap, the second largest centralized exchange in the industry. For SBF, the core founder, had $15.6 billion in personal assets. But within a week, all of those assets had been wiped out.

The shocking incident is rooted long before as it is holding client assets as a centralized exchange. Meanwhile, since Alameda, as a sister company, is in need of working capital for business development, it lent from FTX by mortgaging FTTs and SOLs as collateral. In this way, the original mix of client assets is replaced by highly identical and volatile altcoins, such as FTT and SOL, from stablecoin and BTC, although the change in book value is not significant. Coindesk pulled the trigger by a posting on findings from FTX’s balance sheet. The founder of Binance, CZ, then announced that he would sell off his FTT holdings to hedge the risk, which blew up the panic and caused the price of FTT to plummet, thus the mass devaluation on FTX’s assets on the book and users are turning their back on FTX simultaneously. Ultimately, FTX filed for bankruptcy protection as the liquidity was vacuumed and the remaining assets, which are the severely depreciated FTTs and SOLs, are too little to pay off the debt.

The market has been catastrophically damaged by the FTX incident. As leading companies in crypto, FTX and Alameda have been seen involved in numerous projects, especially during this year’s bear market, they have repeatedly come to the rescue of companies in the industry during crisis, portrayed an image of being the central bank in the cryptocurrency world. According to incomplete statistics, FTX has participated in more than 110 projects in the form of direct investment, some of which are listed below:

In addition, other projects that have dealings with FTX, such as bitDao and MIM, as well as investment companies, such as Sequoia Capital and Temasek, have also suffered severe losses with plunge in token price and write-offs as bad debts. The incident of FTX can be called the “Lehman Moment” for the crypto industry that the impact and losses are far more devastating than that of the crash of LUNA and the bankruptcy of 3AC.

In addition to the meltdown of the market and losses of the companies and projects involved, this incident has also had a serious impact on the entire ecosystem that centralized exchanges, being the most directly affected, have faced unprecedent distrust. Since the outbreak, all major exchanges have been under the pressure of mass withdrawals from users, revealing the huge distrust of centralized exchanges by current users under the influence of panic. In response, major exchanges have taken remedial actions, such as disclosing proof of reserve, calling on establishing code of conduct and setting on funds for industrial resurrection. However, in the long run, the ecosystem will be subject to more changes: decentralized exchanges may become popular again as the ongoing trend of distrust on centralized exchanges and the voice of decentralization is louder; licenses for compliance will be more expensive and more difficult to be issued, and regulations will be stricter; the information transparency of each project or institution will be significantly improved after this incident; users are starting to be wary of the industry, and the bearish market will be prolonged along with the continuous drop in token price etc. Nonetheless, for a wound cannot heal without pains, and greater opportunities always come out of higher risk. As the market is slowly tranquilized, the industry will become healthier as the infected area is properly treated and come off.

3.4 Radical interest rate hikes: highly-risky assets bear the brunt

As forementioned, the most critical factors in global macro markets in 2022 are global inflation and responsive monetary tightening policies, i.e., interest rate hikes, by central banks of each country. This round of inflation is high and recurring, and the interest hikes are fast with large increment. The following chart illustrates the inflation and benchmark interest rate of the United States since 1980.

From Figure 3–3, current inflation rate in the US has reached highest level since 1980, while the benchmark interest rate has also reached highest level since 2008 in eight months, and it is expected to be raised until the second quarter of next year. In this context, various countries and industries around the world reflected the frigidity of the financial winter. The table below depicts changes of various assets classes in 2022.

From Table 3–2, influenced by radical interest hikes from the Federal Reserve, all asset classes are influenced globally; except for bulk commodities, which the price increased and influenced by exogenous forces other than the monetary policy, a substantial decline was spotted on various stock markets, currencies, and treasuries across the globe; the 2-year U.S. treasury bonds, which represent the short-term cost of funds, and the NASDAQ, which is dominated by technology stocks, fell relatively more. In this situation, the cryptocurrency industry is hardly immune. What’s more, the cryptocurrency industry has a high leverage ratio compared to traditional industry due to its nature of speculation, and the deleveraging process is relatively more violent and drastic under the global tightening of capital. To be more specific, although the Terra crash, the bankruptcy of Three Arrows Capital and the other major incidents were triggered by problems of their own, the problem underneath it was the exhausted liquidity under the overall environment of tight monetary policy. Therefore, contraction of liquidity by interest rate hikes of the Federal Reserve would have become the one to blame when viewing critical events in crypto in 2022 retrospectively in the future.

3.5 The merge of Ethereum: a new era of POS has come

On September 15, 2022, the much-anticipated merge of Ethereum was successfully completed, officially switching from Proof of Work (PoW) to Proof of Stake (PoS) as the consensus mechanism for the mainnet of Ethereum.

As a world-class computer, Ethereum has been implementing the proof-of-work consensus mechanism to ensure the security of the system since its inception, and various transactions, smart contracts, accounts and other complex functions are running on top of this core mechanism. As the ecological applications on Ethereum continue to flourish, the current infrastructure poses a challenge to system scalability, and the limitations of PoW severely limit the future development of Ethereum. To address the scalability issue, the team has given a series of network upgrade solutions.

The merge is the second network upgrade in the series, which combines the two existing independent blockchains in the eco, namely the mainnet Ethereum and the Beacon Chain, achieving a switch in consensus mechanism while retaining the original function of executing smart contracts with complete historical data and user states.

After the merge, Ethereum will have corresponding changes in block structure, network structure, consensus mechanism and node types. The new blocks can be regarded as a combination of beacon blocks and original PoW blocks, in which the strings in the block related to PoW consensus will be modified to 0 or constant accordingly; the network structure will adopt the architecture of “consensus layer + execution layer”, in which the consensus layer will coordinate and command the execution layer to generate and synchronize blocks; after the merge, the types of Ethereum nodes will be more abundant. The addition of stateless nodes will contribute not only in maintaining the level of decentralization of the network, but also preparing for sharing in the future.

The merge of Ethereum is a landmark for the cryptocurrency market: for Ethereum, the merge is a key step to further performance improvement, and the conversion to proof-of-stake lays the foundation for the subsequent sharding and scaling of Ethereum. Besides, the issuance of ETH will drop significantly after the merge, and with the destruction of EIP-1559, ETH will most likely enter deflation in the future. For the industry, the merge has renounced mass GPU mining, and miners will have to switch to alternative chains or exit. As Ethereum gradually making upgrades to remedy the shortcomings, other POS chains will inevitably become less competitive in the future. From a deeper view, the merge is a significant change responding to the appeal of reducing carbon emission globally. Although Bitcoin’s endurance has once proved the robustness of PoW, the iterated calculations for finding the unique hash value on miners has been a burden to energy consumption. The transition of Ethereum to PoS will reduce global energy consumption by about 0.4% per year as a result.

3.6 Sanctions on Tornado Cash raised industry-wise concerns on regulations

On August 8, 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) added Tornado Cash and its associated crypto wallet addresses to its Specially Designated Nationals List (SDN), prohibiting U.S. citizens from interacting with the protocol or any addresses on Ethereum associated with it, and if they do so, penalties will be charged. According to the official Tornado Cash Twitter, they face the following sanctions.

  • Tornado Cash page suspended by GitHub
  • Tornado Cash contributor accounts are banned
  • USDC in the Tornado Cash protocol are seized
  • RPC requests rejected by Infura, Alchemy

The main reason for Tornado Cash’s ban is that the North Korean hacker group Lazarus Group used Tornado Cash for money laundering on a large scale at up to $7 billion in illegal activities, posing a threat to U.S. national security; $437 million assets for on-chain addresses are included in the sanctions.

In response to the sanctions, a large number of service providers with DeFi protocols banned access to Tornado cash and blocked relevant wallet addresses. Tornado Cash also sparked discussions on whether the blockchain should resist censorship and whether the cryptocurrency industry should cater to regulation, etc. Core Ethereum developers also set up a developer conference call to discuss in detail the response strategies to national-level regulatory scrutiny, etc. The Tornado Cash incident not only brought up profound thinking about the conflict between privacy and regulation, but also marked the official launch of actions by regulatory entities worldwide against the wild west of DeFi.

3.7 The Layer2 craze is back: tokens were offered by OP

The biggest event in Layer2 this year was the issuance of OP by the mainstream Optimistic Rollup protocol, Optimism, driving the growth per se along with the Layer2 segment against the overall market condition.

Growth in Layer2 slowed down in early 2022; Layer2 protocols attempted attracting users and spurring the growth by all means. First, in April, the number one Optimistic Rollup protocol, Arbitrum, released a campaign for ecological exploration, “The Arbitrum Odyssey”, to encourage users to engage in on-chain activities to be eligible for NFT rewards. As the morale soared, it was too overwhelming and exceeded the network’s preset capacity, the event had to be called off. Not long after, Optimism announced the issuance plan of native token, OP, and unveiled the economic model. In early June, Optimism released an incentive fund with 5.4% of the initial supply of OP tokens to fund builders and projects in the OP ecosystem. These initiatives helped Optimism’s TVL (in ETH terms) grow more than four times in six months.

Optimism is the first one to issue tokens out of the four famous projects in Rollup, and the performance has served as a role model for others. On July 13, the ZK Rollup team, StarkWare, released three articles in a row stating the plan of token issuance on affiliate product, StarkNet, along with the application scenarios, initial supply of issuance and distribution of tokens; 10 billion tokens are already minted on StarkNet, and part of the initial supply will be awarded to the contributors and related investors of StarkNet.

At this point, two of the four staring projects have either issued tokens or had clear plans to do so; the remaining two will follow sooner or later. While zkSync has stated in its official user documentation on token issuing, and Arbitrum cannot avoid token issuance unless the championship is no longer the intention to maintain.

In addition to token issuance, technical upgrades are being made (detailed analysis followed in later part). Arbitrum launched the Nitro network as upgrade in August, increasing network throughput and reducing transaction costs. Optimism announced a major upgrade of Bedrock to be launched in Q4 this year, enabling Ethereum equivalence, shortening deposit time from L1 to L2, and reducing transaction costs. StarkNet implements Rust-VM, significantly lowering the barriers for developers on the Rust language. ZkSync 2.0’s mainnet will be released in November. (Phase 1 available to developing team only)

Layer2 protocols dedicated to improving user experience and performance by technical upgrades; when more methods are introduced, such as token issuance, the network will be endowed with the capability for value discovery that developers and users can further be incentivized. In retrospect, the timing of Optimism’s token offering coincided with the turning point in Layer2’s overall TVL this year. From then on, TVL of Layer2 grew by 63%, making it one of the few areas that still managed to grow in the bear market. This summer is not quite a “Layer2 Summer,” but Layer2 has demonstrated exuberant vitality, and maybe next summer would bring a surprise.

3.8 Where is GameFi heading: X to Earn ends with StepN

Once with 1 million in number of active users and 4.72 million in number of registered users with up to $122.5 million profit in a quarter, STEPN was one of the most remarkable projects of GameFi and X to Earn in 2022. But STEPN eventually entered a bottleneck, and falling into a death spiral, burying the boom of X to Earn in 2022.

Walking to earn is the core scheme for STEPN to convince users. Since the launch, STEPN has seen exponential growth favored by crypto-native users as well as users from the world of Web2. At its peak in May, STEPN had 700,000 active users, accounting for nearly 20% of Solana’s unique daily paid users; STEPN saw a linear decline in active users and a steady decline in new users since then.

In addition to the impact of the bear market in cryptocurrencies and the panic caused by the LUNA crash, the announcement in July 2022 that STEPN was clearing users in Mainland China, added fuel to the fire that users were dumping crypto assets relevant to STEPN. GST, as STEPN’s utility token, lost control in inflated during descending demand, causing a plummet in price. STEPN opened up a new paradigm for X to Earn, and also presented future projects of X to Earn with textbook model of methodology on mass growth and decay by unsustainable user acquisition and retention.

3.9 The largest M&A of the year: the acquisition of Huobi

The largest crypto exchange in mandarin-speaking market, Huobi, was officially acquired by About Capital in Hong Kong in early October 2022, which is mostly the largest M&A deal in the cryptocurrency industry so far this year.

Huobi Group was established in 2013 by Lin Li. Along with the growth of the cryptocurrency market, the market share of Huobi exchange gradually increased and became the exchange with the largest market share in the mandarin-speaking world after 2017; the overall Huobi eco is in the leading position, and each business branch has earned quite good reputation, such as Huobi University and Huobi Investment. Until 2021, Huobi, Binance and OKEX are regarded as the top three of cryptocurrency exchanges in Chinese-speaking market.

However, the Mainland China has promulgated the strictest regulatory policies on cryptocurrency among various countries in the world, including complete ban on cryptocurrency trading, cryptocurrency mining and any businesses related to cryptocurrency by companies registered within Mainland China. Followed by the bans, crypto-related companies represented by Huobi, abandoned the market of Mainland China and started a brand-new sail for the market overseas. Before the complete change of strategy, the average daily trading volume of Huobi exceeded US$60 billion, with over US$90 billion at highest; it shrank to US$5 billion, a decline over 90%, with the side effects of the exit along with the bear market then.

Nonetheless, as a legacy exchange, Huobi has solid foundation and countless valuable assets, Huobi Global holds legitimate licenses in the US, Hong Kong, South Korea and Japan, and has a publicly-traded company in Hong Kong as Huobi Tech Holdings (now as New Huo Tech, HK.1611), which are quite attractive to potential buyers. Therefore, after several rounds of negotiations, in early October, About Capital in Hong Kong announced the final acquisition of all shares of Huobi Global held by Lin Li.

About Capital Management is a Hong Kong-based asset management firm founded in 2008 by Ted Chen, who is also a partner at Greenwoods HK. In the first plenary meeting after the acquisition, About Capital announced the establishment of a global advisory board with the aim of guiding the strategic moves and development of the Huobi Global, whose list includes Ted Chen, founder of About Capital, Jun Du, co-founder of Huobi, Justin Sun, founder of TRON, Yang Wang, Vice President of Hong Kong University of Science and Technology and Leah Wald, co-founder of Valkyrie Investment. Justin Sun, as the representative of the advisory board, announced several important initiatives, including empowerments on $HT and upgraded strategy on business development overseas. In the following week, the price of $HT rose more than 80%, reflecting the market’s recognition of this acquisition and the strategic adjustment of Huobi. It is believed that Huobi will retrieve the glory in the future after this acquisition and a series of strategic adjustments.

3.10 Framework design on upper-level: complete regulation is on the agenda

Almost all governments, represented by the US and EU, have seen an accelerated pace on completing regulation framework on crypto since last boom of the crypto market.

On March 9, 2022 President Biden signed the Executive Order on Ensuring Responsible Development of Digital Assets, the first-ever governmental actions in whole from U.S. to address the risks and harness the potential benefits of digital assets and their underlying technologies. The order establishes a national policy on digital assets covering six key priorities: consumer and investor protection, financial stability, illegal fundraising, leadership of the US in the global financial system and economical competition, financial inclusivity and innovations with responsibility.

The White House released its first draft regulatory framework for the cryptocurrency industry on September 16, which is consistent with the Executive Order on Ensuring Responsible Development of Digital Assets; it also mentioned existing regulators such as the SEC and CFTC for enforcement purpose, and provided a new frame for expanded cooperation between the U.S. and its partners through the G7, G20, Financial Action Task Force (FATF) and Financial Stability Board (FSB).

On June 30, 2022, President of the EU Council and the European Parliament reached provisional agreement on the Markets in Crypto Assets (MiCA) proposal, the EU Council approved the text of the final Markets in Crypto Assets on October 5, and the MiCA bill was passed by the European Parliament Committee on October 10 with 28 votes in affirmative and 1 vote against, followed by a final vote on the MiCA in the plenary session of the European Parliament, which will take effect in 12–18 months once passed. On October 10, the European Parliament Committee also conducted a vote on the Transfer of Funds Regulation, which serves as a bill of anti-money-laundering that requires the identity of both the sender and the recipient to be included in a crypto transaction. Both bills, once in effect, will establish a unified crypto regulatory framework in the EU, and it will be the most comprehensive regulation of crypto assets in major judicial areas all over the world; it also forms a strong shield for service providers and investors engaged in crypto assets.

The regulatory framework regarding crypto launched by the U.S. and EU will have a huge impact on the global crypto market. The U.S. and EU will take the lead in establishing a unified crypto regulatory system, which will not only enhance the regulatory efficiency and enforcement efforts in their own jurisdictions, but also provide a reference model for other countries.

4. Infrastructure of Web3

4.1 The breakthrough of Ethereum

4.1.1 Rollup

Rollup is a promising solution for off-chain scaling: the main idea of Rollup is that users make transactions in Layer 2 (off-chain), the Layer 2 operator compresses and packages the transactions, submits the compressed transaction data and proof of conversion of the off-chain state to the chain, and the data is finally subject to validations by validators on the main Ethereum network (in the future, other Layers 1 may also be capable of this work). The number of bytes required to store this batch of data consists of off-chain transactions on the Ethereum mainnet has been reduced due to the use of more efficient encoding methods, the intervention of data size to be uploaded along with other measures. Rollup saves the consumption of on-chain resources on the one hand, and retains the availability of data on the other hand, that is to say, the Ethereum main network can censor and guarantee that no one could tamper with the off-chain transactions. Vitalik has also claimed, “Rollup is the only trustless scalability solution for Ethereum in the short-medium term, and possibly the long term.”

Rollup has taken shape at the beginning of 2022, and achieved massive growth against the pessimistic market condition this year. According to L2beat data[1] , on January 1, 2022, Rollup’s overall TVL was 1.56M ETH, which is about 4.5% of the TVL of Ethereum. As of October 20, 2022, Rollup’s TVL has reached 3.62M ETH, an increase of 131%, which is nearly 7.5% of the TVL of Ethereum. The overall crypto market is somewhat cheerless this year, the price of ETH was merely 65% compared to the same period last year, and it is not easy for Rollup to achieve growth in such an environment.

[1] The TVL of Rollup accounts for 97% of the overall TVL of Layer 2, so the former term is hereby used to represent the latter. The price of ETH is volatile in USD, so this article uses ETH as price unit to measure the value of TVL instead of USD.

In terms of the number of project deployments, according to DeFiLlama, there were approximately 210 projects on Rollup (projects deployed on multiple Rollups are counted as only 1) and 585 projects on the Ethereum mainnet as of the end of October 2022, which is 35.9% of the total number of projects, a significant increase from 19.3% at the beginning of the year. It was previously proposed that Rollup would become less important if the gas fee on the Ethereum mainnet dropped. But the fact is that both the price of ETH and the average gas fee have dropped this year, and the gas fee of the Ethereum mainnet will drop even more, but Rollup still attracts a large number of project deployments. This proves that many project teams are optimistic about the future of Ethereum and Rollup, and a “Rollup-centric” Ethereum network is in its rudimentary shape.

For the number of addresses, based on the estimated number of addresses published by each Rollup’s blockchain browser, Rollup has a total of 4M addresses, quadrupled from the beginning of the year. There are 209M addresses on the main Ethereum network, and the number of Rollup addresses now accounts for approximately 2% rather than less of 1%. Although some growth has been made, there is still a long way to go in user acquisition.

Rollup’s growth against the market is mainly driven by the technology per se. This year, Rollup’s progress has been made mainly in 5 perspectives: improving compatibility, reducing costs of data availability, lowering validation costs, improving the level of decentralization, and developing zkEVM.

● Improving compatibility

As compatibility with EVM facilitates the deployment for all kinds of projects, OP Rollup’s TVL accounts for more than 80% of the current Rollup. However, compatible with EVM does not guarantee the deployment without a single glitch; in other words, code adjustments must be made prior to the deployment. As a result, improving the compatibility of EVM and eliminating the difference with Ethereum has always been the focus of OP Rollup.

Arbitrum One migrated to Nitro in early September in order to improve the network compatibility, and the base layer of Nitro’s client software is compiled directly from the core of Geth (the mainstream Ethereum client), which replaces Arbitrum’s custom EVM simulator to carry out execution and state maintenance functions, ensuring that Nitro is highly compatible with Ethereum. Optimism has introduced “Ethereum equivalence” this year after an EVM equivalence upgrade late last year. It will be implemented in Bedrock, a major upgrade planned for Q4, designed to minimize differences with Ethereum so that Optimism could share and collaborate on the same core of code. With better compatibility, it will cost projects less to deploy as more Ethereum compatible tools could become available, and the network effect of the OP Rollup protocol could be optimized.

● Reducing costs of data availability

Rollup has 2 major costs, one is the cost of data availability (DA) handed over to L1, and the other is its own operational costs. Since the execution of Rollup is off-chain and the workload is low in most cases, therefore, the operating cost accounts for a relatively small portion while the DA cost dominates.

To reduce DA costs, teams have worked on improving bulk processing and compression systems. Optimism, for instance, has reduced fees by 30% by setting more reasonable fee parameters, and more efficient compression algorithms will be engaged to reduce fees even further. In addition to these conventional interventions, Arbitrum has introduced a new product, Nova, which reduces DA fees to the bottom line. Nova is built on Arbitrum’s Anytrust technology, which stores and provides data off-chain utilizing the Data Availability Committee (DAC), switching back to Rollup mode only when the DAC is questioned by users. The DAC operates only when there are at least 2 honest members present, which is a much weaker trust assumption and much feasible to implement than the traditional BFT-type consensus, which requires 2/3 of all the nodes to remain honest. Inherently, it is a tradeoff that a minimal additional trust assumption is exchanged for a lower cost and faster withdrawal time. Nova is perfect for gaming and social projects, and around 10 projects are already running on Nova. Volition mode is also officially available on StarEX, which provides options to users that raw transaction data could be either stored on Ethereum or in the DAC according to specific application scenario.

● Lowering validation costs

OP Rollup resolves disputes relied on fraud proof, which can be further classified as one-round of interactive fraud proof and multiple-round of interactive fraud proof. Previously, Arbitrum used multi-round interactive fraud proofs, while all OP Rollups based on Optimism’s code apply one-round interactive proofs. Multi-round interactive proof reiterates the process of narrowing down the range of dispute off-chain until an execution of dispute is found, then it goes back on-chain to re-execute and arbitrate, thus downscaling the on-chain resources consumed to resolve the dispute at a lower cost than one-round interaction. Optimism is working on a new generation of fraud proof, Cannon, which is a multi-round interactive fraud proof. Other OP Rollups are likely to follow Optimism’s step, and the overall cost of OP Rollup dispute resolution will eventually drop in the future. More importantly, Cannon will use MiniGeth (Optimism’s simplified version of the Geth client) as the EVM simulator, which is essentially a decoupling of Rollup from the main chain. On the one hand, adaptions could be made to EVM upgrade by upgrading MiniGeth, on the other hand, MiniGeth could be replaced with other tools to support other virtual machines on the main chain to implement Rollup.

Differed from OP Rollup, ZK Rollup relies on validity proofs (Zero Knowledge Proof, ZKP) to resolve disputes: no interactive proofs are needed but ZKPs are generated for all the executed statements at once, and the ZKPs are subjected to validations from validators to determine whether the providers of proofs are honest. To improve the efficiency of validation, StarkNet upgrades the recursive STARK proofs. This upgrade takes advantage of the “logarithmic compression” property of STARK proofs, i.e., the time required to generate a proof is approximately linear in the time required to execute the statement, while the time required to validate the proof is approximately logarithmic in the time required to generate the proof. The original SHARP technique generates an accumulative ZKP1 for multiple propositions to be proved, while after the upgrade, the mother proposition is divided into groups, subsidiary proofs are generated for each group, and then these subsidiaries are inputted as propositions to generate an accumulative ZKP2. Due to the logarithmic compression property, validating ZKP2 is much faster than ZKP1, and consumes much less computational resources from the chain. The process of generating proofs is also expedited since multiple subsidiary proofs can be computed in parallel.

● Improving the level of decentralization

An OP Rollup network had an incident earlier this year; the network remained disabled for several hours: Rollup protocols all require Sequencer to sort transactions, and currently Sequencer is operated by the project team or a single closely-related service provider, which is highly centralized. When the Sequencer fails, there is no other equivalent node that can take the duty, so it the network hence becomes paralyzed. Only by improving the level of decentralization of the Rollup protocol can the Gray Rhino be eliminated.

Optimism has made attempts to build a multi-client ecosystem in Bedrock, working with external teams and incentivizing them to create other clients. In turn, multi-client implies that the Sequencer is naturally decentralized, and the risk of single point failure is reduced. This vision is rather ambitious, and it is yet to be proved right. As a high standard may only produce an average output, it could be considered a major victory if Optimism could somehow achieve decentralization of the Sequencer. The possibility cannot be ruled out that when the new version becomes mature, the prerequisite condition for becoming a node is staking OP tokens. In this case, the token would endure a clearer application scenario and revenue stream, and perhaps leading to an unprecedented decentralization in Rollup.

● Developing zkEVM

The focus of ZK Rollup’s development over the last 2 years has been zkEVM. ZkSync, Polygon and Scroll are all actively working on this subject matter and have announced that zkEVM by various versions will be launched on the beta or mainnet by the end of 2022. So far, zkSync is staying at the top that the trial version was on the test network in April and has now achieved compatibility with EVM at bytecode level, materialized the implementation in the circuit and execution environment. In terms of completion on core infrastructure, full node integration is completed that encoded smart contracts are able to be deployed and executed. Recently, the team reiterated that the first zkEVM-compatible ZK Rollup on the Ethereum mainnet will be launched on October 28 this year (it was already online as of this article is published). Although the team is confident about what is coming, the safety switch remains on. The launch version will not contain any project deployment; only the official team will be able to test it with real assets on the mainnet, and other developers will have to wait for further notice. A number of well-known protocols and companies have announced deployment plans on zkSync 2.0, including Uniswap, Chainlink, OKX wallet, Ramp and Banxa (fiat exchange solutions), Hashflow (decentralized crypto exchange), Nexus Mutual (insurance protocol), and so on. When it is available to the public, zkSync’s ecosystem may embrace a boom.

4.1.2 The merge of Ethereum

The biggest upgrade to Ethereum this year must be the merge. The intention of the merge was to transform Ethereum’s original POW consensus mechanism to POS. With the shift in consensus mechanism landed profound changes in the network structure, which also affected Ethereum’s degree of decentralization.

After the merge, Ethereum adopts the architecture of consensus layer + execution layer (execution engine) to generate and synchronize blocks. Transfers and smart contract calls are packaged, broadcasted and executed by the execution engine (the original ETH full node), with the tip portion of the GAS fee still going to the execution engine. The consensus layer acts to first establish communication with the execution engines, requesting to generate or validate Execution Payloads, so that the beacon nodes could generate complete beacon blocks by the output as a basis for consensus. After EIP-1559, the tip portion from the revenue is reduced significantly; the major income of miners comes from rewards. After the merger, lone operation of execution engine is no longer lucrative as it only earns tips; the execution engine must be bundled with the consensus node for staking rewards as revenue. As a result, it is more reasonable to deem the merge as the formation of a new symbiosis that the consensus layer absorbs the execution engine rather than just the joint of two networks. The PoS Ethereum has 450,000 validators, while the PoW version has merely more than 10,000 nodes; the dramatic increase in the number of validators can also enhance the degree of decentralization for the network. However, the huge number of GPU miners are not part of the plan, and they must seek their own way out; it will be discussed later in this report.

Ethereum has always had the problem of state overload, which refers to the fact that the network accumulates more and more data, and requires more and more storage space. In this case, hardware of the nodes bears the burden day by day so that it appears to be more centralized as it goes. For this subject matter, the community has proposed the goal of statelessness, hoping that a light version of client could validate all transactions and states without actually storing any. After switching to PoS, Ethereum aims to achieve statelessness, so that nodes with all states and stateless nodes could all participate in the validation process and keep the network highly decentralized. With statelessness, 3 types of nodes (clients) will be present on Ethereum consensus layer:

1, Client without ETH1 execution engine

2, Client with stateless ETH1 execution engine

3, Client with ETH1 execution engine containing all states

Type 1 client is the lightest client that it only participates in consensus reaching but ineligible to validate the transactions at the execution layer. It supervises other nodes at the consensus layer. Type 3 client has full state, execution capability and consensus capability, in other words, a full node. For full node, investments have to be made on hardware for storage, computation and tokens for staking, it is also more expensive to operate, and certainly there will not be a large number of full nodes. Type 2 nodes are stateless nodes that could request data from type 3 nodes and then process with their own execution engines to validate the eligibility of transactions.

Ethereum has been questioned for the degree of decentralization after the merge. While the changes to the network structure and statelessness both improve the degree of decentralization of the network, the rapid growth of the staking solution provider, Lido, carrying over 1/3 of the total amount at staking, has raised concerns. Some believe that if Lido manages to gather another 1/3 of the equity, it will have control over the network. One thing worth noting is that Lido is not controlled by a single entity. There are 30 node operators inside Lido that are not affiliated with Lido; they are all top-notch node operators with reliable records and subject to legal recourse, requiring a vote from the DAO to qualify for operation and always remaining supervised by the DAO. Therefore, Lido cannot be deemed as a centralized mining pool. On the contrary, it is precisely because of Lido’s continuous efforts in decentralization that it gradually reaches a favorable position in the battle against CEX mining pools. Evidently, the chance of the network being monopolized by a large single entity/consortium is not as great as one might think.

Where is it heading then? In a recent interview, Vitalik expressed four key goals of Ethereum to achieve next year, including scalability, privacy, censorship resistance in base layer and account abstraction, with scalability as “top priority. The Ethereum team believes that scaling will be achieved through Rollup, and the post-merger plan is to become a robust settlement and data availability layer that allows Rollup to operate securely and cost-effectively. As for the future of Ethereum, it will be given in the 10 Predictions section later in this report.

4.2 The breakthrough of L1 chains

One of the biggest technical problems universally faced by L1 chains is scaling, and it is also constrained by the impossible triangle of blockchain (decentralization, scalability, security). Monolithic chains have made attempts to improve performance by adjusting block size, but on-chain congestion, high gas fee, and over-centralization still remain headaches. Currently, the following methods are applied to solve the impossible triangle: 1. Optimize the consensus algorithm to improve consensus efficiency (PoS or NPoS mechanism, finality gadget), which is essentially a trade-off between decentralization and security; 2. Optimize the execution environment to process transactions in parallel, rather than one transaction at a time like EVM; 3. Modularization.

4.2.1 Modularization

Modularization will remain the disrupting topic that cannot be bypassed by any L1 chains in the context of future development. Modularization refers to the process of splitting a complex system into multiple modules that are mutually exclusive from each other: each module has independent logic and function, and they could be assembled to a whole, performing all the functions as a complex system. Modularization has the following advantages: 1. during the development phase, each module can be developed or outsourced at the same time to improve efficiency; 2. each module can work independently, which facilitates isolation in case of problems; 3. pluggable, each module can be combined with each other to perform more functions.

The architecture of blockchain has evolved through three phases. That is, from the traditional monolithic blockchain, to the separation of execution and consensus layers (Layer2), and now to the separation of data availability layers (Celestia and Polygon). Modularization is inevitable in the road of development for L1 chains. This can be illustrated from two aspects: 1. the limitations of monolithic chain; 2. the impossible triangle of blockchain. The limitations of monolithic chain are actually more on the surface, such as Solana, which needs to complete the underlying infrastructure development, network security maintenance and upper ecological construction. If the L1 chain is non-EVM compatible, ecological construction will be even more difficult. In addition, monolithic chains are unfavorable in terms of cost for cross-chain and composability. For Cosmos and Polkadot, on the other hand, unified modular tools are in place on consensus layer and cross-chain, so that L1 chain developers could, instead, focus on design of economic model and innovative explorations on application layer since they are not bound to repetitive work.

Currently, L1 chains, including Ethereum, are already moving forward on the technical route of modularization. The modularization of the consensus layer is represented by Tendermint from Cosmos and Substrate from Polkadot, providing modularization tools for the consensus and communication layers. The separation of the execution layer is represented by Ethereum Layer2, but Layer2 is not authentic blockchain but the scaling components of Ethereum that execute transactions and upload the results to the chain. The separation of the data availability layer is represented by Celestia and Polygon Avail, which are independent L1 chains capable of undertaking data availability. Data availability can also be solved with sharding, which ETH2.0, Near and Polkadot all desire to achieve by different sharding techniques. The common goal of the variety of techniques is to maximize performance on different modules, and each architecture layer could achieve further scaling and optimization without undermining the decentralization and security of the main chain.

From the above modular implementation mechanism, Celestia, a modularized L1 chain, has a more innovative design that it focuses on dealing with data availability issues of other chains, and Layer2 is built on top of it as an execution layer. The development of independent data availability mode is also being replicated, such as Polygon Avail and zkPorter.

From technical implementation and on-chain data reveals these modularization technologies are still in early stages: the on-chain ecosystem and TVL of L1 chains solely related to modularization are relatively weak. However, there are still handful of a plethora of issues yet to be solved regarding sharding, such as the cross-chain interaction and validation between the shards, Rollup will be the scaling solution for Ethereum at least for a long time. Modularization will have its time and room for growth.

Overall, modularized blockchains may have more possibilities on cross-chain, not only limited to cross-chain assets, but also easier to achieve ecological composability. Yet the Terra incident may also repeat. Both sharding and Celestia are still in the early stages of development, and the actual impact on the industry will not be unraveled until they are alive. But reasonable predictions could be made regarding L1 chains in the next bull market: ETH 2.0 may become the infrastructure for the settlement and data layers of its ecosystem by sharding; when Evmos partners with Celestia, Rollup will potentially become the execution layer for other chains rather than just Ethereum. Even if sharding is successful, Celestia will still fit for a bunch of scenarios. The next theme of the L1 chain narrative remains focused on how to break the impossible triangle.

4.2.2 Development of multi-chain network

Multi-chain network is mainly built on the same development framework and modularization tools, and undergone through at least 6 years of technical development. Cosmos, Polkadot, BNB Chain, Avalanche, Octopus are currently in the network, and possibly Polygon in the future. All these blockchains can provide established modularization tools for their subnets/zones/parallel chains, but differ in terms of shared security and cross-chain capability. The advantages of a multi-chain network are: 1. modularization tools are provided for the convenience of developers; 2. Cross-chain security, fast confirmation and higher composability; 3. each sub-chain carries out specialized execution and application, forming Dapp-specific chain that provides unbiased performance.

(1) Cosmos embarks a new era

Cosmos is top-tier veteran L1 chain in the multi-chain network. With the construction of Evmos, rise of multi-chain network and modularization, and the Cosmoverse conference, the flame never lacks of heat for Cosmos. Thanks to the flexibility of Cosmos’s modularization tools and the upgraded cross-chain capability, many projects have pledged to be a member of the Cosmos ecology, and there are currently over 263 projects deployed on Cosmos with a total market cap of $11.7 billion. According to Map of Zones, there are 51 chains connected with IBC cross-chain bridge; the 24-hour IBC transaction volume is $26.37 million (October 24 data), the number of transactions reached 155,800. Cosmos is ranked first in mainstream cross-chain projects in terms of 24-hour IBC transaction volume and transaction amount, surpassing Multichain, Stargate, Celer cBridge, etc. It is the unique cross-chain features of Cosmos that brings about the cross-chain ecosystem, cultivating far more demand than other projects.

Even though Cosmos has performed well in multi-chain network, it has been suffering from two problems: 1. the technical upgrade is relatively slow, which mainly focusing on the technical upgrade of IBC in 2022, while inter-chain accounts and inter-chain security have been postponed; 2. the role of Cosmos Hub has always been vague in the whole ecosystem, resulting in low value capture capability of $ATOM. In terms of the number of addresses on chain, the number of daily active addresses of Cosmos Hub has remained above 10,000 since January this year, whereas L1 chains such as BSC, Ethereum, Solana and Polygon are all above 300,000. Compared to major Layer2 projects, the number of active addresses is not much different from that of Optimism. Currently, Cosmos Hub’s network staking rate is almost maintained at a safe 66% with 175 active validator nodes, $ATOM’s annual inflation rate is 12.81%, and the overall staking annualized return is about 18.94%.

The Cosmoverse conference held on September 26 revitalized the industry. The most eye-catching part of the conference was the release of the Cosmos Hub 2.0 white paper, which proposed to solve the existing problems of Cosmos in three aspects: (1) introducing four functional components; inter-chain security, liquidity staking, inter-chain scheduler and inter-chain allocator, redefining Cosmos Hub’s new role as the center of the ecosystem; (2) redesigning the economic model to alleviate $ATOM inflation and insufficient application scenarios, and moreover, continuously providing funds for the sake of sustainable development of the ecosystem; (3) establishing a more reasonable and orderly governed DAO to support the implementation of the first two new proposals.

It will not be revealed until next year if the outcome of Cosmos Hub 2.0 could exceed expectations. However, dYdX announced earlier on the migration plan to Cosmos and becoming an independent chain, and Delphi published an article expressing interest conducting join research and development with the Cosmos ecosystem, leaving us enough room for imagination for the future of Cosmos.

(2) Where is Polkadot heading?

Being another multi-chain platform, Polkadot’s parallel chain has been dragging compared to Cosmos, not to mentioned the attention received from users and capital funds. Currently, there are 297 validators in Polkadot network. The staking rate is maintained at around 55%, and the inflation rate of token $DOT is 7.61%. Polkadot’s total market cap reaches $7.5 billion, ranking 11th in cryptocurrency with over 179 projects in the ecosystem. Only 18 chains are connected to XCM cross-chain bridge. From Subscan’s on-chain data, Polkadot has around 1200 daily active addresses, while other parallel chains have only double-digit daily activities. Compared to user activeness, developer activity is more than that of last year, with a record high in September.

Polkadot has fell behind in terms of users, size of ecosystem and market cap compared with Cosmos for several possible causes: (1) Cosmos launched its mainnet in March 2019, and IBC went online smoothly in May 2021; at the same time, it was the blossom of the L1 chains, which successfully enriched the Cosmos eco. Polkadot, on the other hand, launched its mainnet in May 2020 and XCMP in May 22. The incomplete developer tools and infrastructure somewhat deteriorated the situation for Polkadot, leading to the absence of the ride on the L1 chain blossom. (2) Compared with Polkadot, Cosmos has a lower threshold for developers to enter, and projects can participate in the ecological project without staking DOT for auction of slots. (3) During the last two years of favorable market condition, by staking Cosmos could receive a large number of airdrops from ecological projects, attracting users to become part of the Cosmos ecosystem, thus creating a certain wealth effect.

On top of that, Polkadot may face a more difficult situation as the founder, Gavin Wood, resigned from his position as CEO at Parity Technologies. Under the circumstance that Cosmos has already set foot on shared security technology, whether Polkadot could release more flexibility in the parachain slot auction or bring out more technical or model innovations in the future is the key to fight the way out of the siege of new L1 chains.

4.2.3 New technology, new outlook

The blockchain industry is still at an early stage, and there is huge room for L1 chain as infrastructure. As the applications demand for greater performance of the underlying infrastructure, L1 chains with newer technologies came out one after another. The most appealing ones in the second half of this year must be the L1 chains derived from Diem: Aptos, Sui and Linera, whose technical highlights are centered on the impossible triangle of blockchain: the main focus is on programming language, parallelization and consensus mechanism to improve the performance, security and development friendliness of L1 chains.

(1) Consensus mechanism

The consensus mechanism has gone through the glory days of POW led by the Bitcoin network to the new era of POS after the Ethereum merge. Currently, most of the L1 chains have adopted the POS mechanism first proposed in 2012. In addition to POS, other innovative consensus mechanisms have been seen in the field to improve efficiency of block generation and maintain network security, such as PoH of Solana and avalanche consensus of Avalanche.

Performance is reflected in the efficiency, economy and security of consensus reaching, which is mainly determined by the algorithm. Achievements have been made thanks to POS consensus algorithms, such as PBFT, HotStuff, DUMBO, Algorand, all of which could support relatively high TPS in theory.

Both Aptos and Sui inherited the DiemBFT consensus, upgraded on HotStuff consensus, one of which is the memory pool, equivalent to adding an actual storage layer, similar to Solana. This change greatly enhanced the performance of the system. Furthermore, Aptos changed the block structure to reduce the bandwidth needed for consensus reaching.

Sui’s consensus mechanism, as the most charming highlight, is a breakthrough both in terms of degree of innovation and performance evolution. Despite the fact that both Aptos and Sui are variants from HotStuff BFT, Sui modifies the transaction memory pool in DiemBFT, allowing transactions broadcasting directly in the memory pool. Also, a global random coin called Tusk is in place to realize asynchronous consensus. The consensus endows Sui with higher TPS, low latency, and better scalability.

Aptos and Sui’s innovation of the consensus mechanism is rare among new L1 chains at enormous cost of R&D. The innovative consensus mechanism and the finality deterministic algorithm are already challenging work for building L1 chains. It is hard enough to reach current progress, outperforming the previous ones, and it remains something to expect whether exponential growth could be achieved with further modifications on current features.

(2) Programming languages

Ethereum adopts virtual machines and the Solidity programming language to deploy smart contracts, which was one of the fundamental causations ignited the last bull market. But Solidity is unable to support concurrency, not to mention low security and other shortcomings, resulting in an exodus of many blockchains, turning to Rust or developing new programming languages. For instance, Aptos and Sui are built with the Move language. The following figure briefly compares the characteristics of Solidity, Move, and Rust programming languages. In comparison, the Move language excels in security, parallelization, and developer friendliness.

● Security: Move provides comprehensive security for smart contracts at several levels: language design, virtual machine, contract invocation and contract execution.

● Parallelization: Move specialized definitions for digital assets, classifying and identifying transactions, combined with a multi-threaded execution engine that enables transaction data to be executed and processed simultaneously.

● Developer friendly: Move lowers the threshold and reduces complexity for developer, and it takes experienced developers roughly 1–2 days to start fresh with Move; for developers with no smart contract programming experience, it takes roughly 1–2 weeks to learn Move from scratch.

(3) Parallelization

Parallelization is a systematic solution to scalability that programming languages, virtual machines, underlying architecture, consensus algorithms, etc. should all be taken in to consideration. Parallel computing is already mature in web2, while it is just starting in the diffusion process in blockchain.

The newer L1 chains all take the advantage of Block-STM (Software Transactional Memory) parallel execution engine to execute transactions. Unrelated transactions are simultaneously processed on different cores on the same CPU to maximize parallelism by implementing multiple command streams and multiple data streams for transactions. Aptos and Sui differ slightly in handling parallel computing. For example, Sui classifies transaction objects by cocktail of DAG and BFT consensus.

Parallelized computing is not only reflected in the increase of TPS as the existing smart contracts are only suitable for serial execution, such as AMM and NFT minting. Yet to witness the best of what parallel computing is capable in the future, smart contracts need to be algorithmically more in line with the characteristics of parallel computing. This mandates a change in thought patterns in developers and develop better ecological applications to maximize the advantages of parallelized L1 chains.

Innovations from L1 chains out of Diem reveals that: (1) programming language for smart contract is of utmost importance for security level, parallelization and developers; (2) parallelization is undoubtedly right path for the future of L1 chains; (3) consensus mechanism is mostly modifications on BFT, which are trivial algorithm improvements; the room may be small for any more innovations.

In addition to the L1 chains from Diem, the most anticipated upgrade of L1 chains must be sharding, of which represented by, namely, ETH2.0, Polkadot, and Near. The three projects differ in: 1. the random allocation of shard validator and consensus algorithm; 2. ETH2.0 adopts homogeneous sharding, while Polkadot adopts heterogeneous sharding; 3. ETH2.0 uses proof of fraud or ZK-SNARK proofs to achieve higher security for sharding node sampling. The sharding technology has not making major progress this year, and it may take several years of development due to the difficulty of its nature. Whether more innovative technologies will be applied to L1 chains in the future is the common expectation of the whole industry.

4.3 Data dock of Web3: the diffusion process of storage

4.3.1 Status of the storage track

Storage is one of the earlier infrastructures of anticipation; the earliest in the storage segment, Storj and the IPFS protocol, launched back in 2017. As significant as it is, some rank storage alongside computation and consensus as the three pillars of Web3.

However, the primitive intention of blockchain design was not for storing large data base. In order to combine the feature of decentralization from blockchain with the requirement of the ever-expanding data volume, project teams have made diverse designs and bold moves in data storage formats, replication methods, tracking methods, proof of storage, etc., forming 2 major technical routes, which are blockchain network-based storage solutions and P2P network based storage solutions.

The principle of blockchain-based storage is relatively simple, namely storing data in blocks. Arweave is a typical project, as it is not exactly blockchain structured, and the network does not require nodes to store every block. However, its SPoRA consensus mechanism requires nodes to have access to any historical blocks randomly demanded by the network for a block to be generated. Nodes store accumulate historical blocks and preserve in permanent storage in order to increase the probability for block generation. A typical example of P2P network-based storage is Filecoin, where files are stored in nodes of a P2P network (IPFS) rather than on blockchain. These P2P nodes are also nodes of the Filecoin blockchain network, which relies on PoRep, a replication proof to indicate that a defined number of copies are stored, and PoST, a proof of time and space to indicate that data is continuously stored, all proving that the storage task is completed. In addition, there is an aggregated platform-based storage method, which can be considered as a combination of the above two, represented by ColdStack and Stratos. They pair with other protocols to find the most suitable way to for storage.

The storage segment has been greatly affected by the overall environment of the crypto industry in 2022, slowing down in growth. The table below illustrates various figures for several mainstream storage protocols in 2022. Filecoin is still the alpha in terms of available storage capacity and actual storage capacity. Filecoin’s storage capacity is now entering a steady growth phase, with storage capacity grew by 15% in the first 3 quarters of the year. While some growth has been seen, it pales in comparison to the high growth rate of 52% in the second half of last year. The highlight is the steady growth in actual storage capacity in use, with 210.8 PB of data stored by the end of the third quarter, more than 700% increase from the beginning of the year. Other protocols also saw growth in storage utilization, but still at low levels, indicating that decentralized storage is still trivial in the overall market for storage. Sia’s higher utilization is mainly due to its stagnant storage capacity growth and high data redundancy, while Arweave storage has a different scheme than others; a horizontal comparison does not tell the true story. Due to low token prices, storage fees and revenues among protocols have declined significantly, and most protocols still do not have a cost advantage compared to centralized cloud storage at approximately $0.0007 per GB per month. The number of nodes in Arweave has declined by more than 60% from last year, and all other protocols have seen modest growth. In terms of ecological construction, the data may be skewed due to the different calculation methods of each own, and the overall number of projects built on or with storage protocols appears to be small, again reflecting the fact that storage has yet to be adopted by majority.

4.3.2 Storage + Computing

Despite the fact that storage has not become massively adopted statistically, upgrades and innovations are taking place. The primary upgrade is the addition of computing capabilities. Most of the current storage solutions only carry out the function of “decentralized hard drive” to meet the rudimentary needs, but storage-based computing remains blank. Although there are several “global computers” in the crypto industry, they are inherently not the same thing. Storage-based computing mainly includes local development environment rendering, data stream insertion and extraction, etc., which are the most common and necessary functions for Web2 applications.

Filecoin introduced the concept of FVM (Filecoin Virtual Machine) to inject programmability to distributed storage networks and unleash more value-creation potential, which was successfully launched in the Filecoin v16 Skyr upgrade in July this year. FVM is a multi-language friendly execution environment based on WASM, endowing smart contract deployments in Filecoin network. The first phase has already been achieved, where the core logic of the Filecoin network can execute smoothly in the FVM, implemented in the built-in smart contract (Filecoin calls it “actor”). The second phase is much more significant that will allow users to deploy custom logic into the network, and Filecoin is fulfilling the vision of “smart contracts + provable storage”. During this phase, FVM will also complete its compatibility with EVM, so that existing smart contracts and EVM tools of Ethereum ecosystem can be leveraged, such as Hardhat, Foundry, Remix, Truffle and MetaMask. In addition, Stratos is trying to provide a more inclusive and complete solution with multiple modules including database storage, static storage, computation and consensus. It divides the network into 3 tiers, of which the resource tier will serve as a universal computing platform, providing various application-oriented function interfaces in addition to storage functions.

4.4 The foundation of application layer: the domain name boom

In the world of Web3, all kinds of wallet addresses are nothing but a string of characters, and the domain name system was in place to simplify identification and communication to a more user-friendly appearance. A domain name can be linked with the wallet, and the domain name can replace the role of wallet in various application scenarios. By using domain name can more convenience be brought to users and fault transaction be avoided simply because of typos in address. As the leader of the DID segment in Web3, the importance of ENS domain name system has earned the reputation.

Back in 2017, ENS, the pioneer in domain name, was launched on Ethereum. It has now coronated with the largest market share in the domain name segment. It has left others so behind both in terms of volume and quality. In other words, the domain name boom of 2022 is indeed the ENS boom. As of this article is published, the market capitalization of ENS domains[7] amounts to $96M (about 52,720 ETH), accounting for 90% of the entire domain name segment. The .sol domain on Solana and the multi-chain domain service provided by Unstoppable also takes a small bite, at $5.8M and $4.17M respectively, accounting for less than 5%. The rest of the domain name projects have too small share to be noticed. In terms of the number of registrations, the difference is not as significant as that of market capitalization. If suitable strategies are applied, other projects could still catch up.

[7] The market value of a domain name is calculated by: whichever of the most recent transaction price of this domain name as NFT or the floor price of NFT from the same series is greater would be considered the value of a single domain name. Possible laundering transactions are excluded, the total value of all domain names is calculated afterwards.

ENS domain names have seen explosive growth this year. From the number of transactions distribution throughout the year, the whole market reached climax in April-May, experienced a short period of stagnancy (a series of incidents in the crypto market happened during April-June), and then revitalized in September-October, with single-day transactions climbed to $12 million.

During August-October, ENS dominated the top 5 of Opensea’s transaction list for a long time, being the pole star in the bear market throughout the year. Driven by ENS domains, other L1 chain domains such as “. apt”, “. bnb” and “. bit” domain names have all published offering plans and roadmaps, lighting the fuse in domain names in the second half of the year.

4.4.1 Why domain name prevails

Despite the various reasons behind the prevalence of domain names, the following 3 are the most convincing:

First, scarcity of domain names per se. After a particular domain name (especially three-digit and four-digit) is registered, it becomes henceforth the only piece in the world. Anyone familiar with Internet domain names should be aware that during the boom of Internet domain names around 2000, the scarcer an Internet domain name is perceived, the greater the premium will be as time goes. Domain name investors in blockchain are quite familiar with the history of the Internet domain name boom back then, so it would be a lifetime shame for them missing this once-in-a-lifetime opportunity.

Second, the innovative mode of blockchain domain name provides ceaseless power for the lasting of domain name era. Traditional domain names are parsed through centralized DNS servers, while blockchain domain names are through on-chain smart contracts, which are also decentralized and more secure for assets. Through on-chain contracts, it is wallet addresses, personal web pages, avatars, Twitter accounts, email addresses, and other objects being resolved by blockchain domain names, more scalable and more applicable at a larger scope. At the same time, as an NFT, it is eligible to engage in all kinds of transactions with other NFTs to participate in ecological interactions on-chain. In addition, the sub-domains derived from the NameWrapper function can be transferred and resolved independently, making ENS domain names even more appealing than traditional domain names.

Third, continuous narratives have pushed the prevalence of domain names to a zenith. Starting with 3D (three-digit domain names) and 4D hype, the concepts of 5D, 6D, emoji, 100 family names, Web3 moments, country codes, etc. continued the story-telling one after another. At the same time, the continued preaching of some well-known KOLs on Twitter (e.g., Nick.eth, 139.eth), etc. also attached more social attributes to the narrative, amplifying the effect to wider range outside the crypto world. It has become the bestseller in the NFT market of 2022.

Due to the scarcity of the domain name per se, the prevalence continues. It will refresh new records in the future, despite there may be some occasional breaks and declines, the wave never stops.

4.5 Cross-chain bridge: the rise and the threat

4.5.1 Status quo and future trend Status quo

As the ecosystems of L1 chains have prospered since 2021, nourishing L1 chains and L2 networks, according to Blockchain-Comparison, the number of Layer1 and Layer2 is now at a sum of 126 at least. As the demand for cross-chain interaction becomes more urgent, cross-chain bridges are thus becoming one of the most needed infrastructures.

According to the latest data from, more than 111 cross-chain bridge projects are currently on the stage, with TVL of more than $16.4 billion for major projects. Most cross-chain bridges are compatible with mainstream L1 chains, supporting more assets from different ecosystems, for example, more than 1,700 cross-chain tokens are supported by major cross-chain bridges. Cross-chain assets are mainly stablecoins and L1 chain tokens, such as USDT, USDC, DAI, WBTC and ETH.

Due to the large differences in the underlying architecture of each L1 and L2 network, the difficulty of implementing cross-chain interoperability remains tough. Current cross-chain bridge mainly plays the role of a bridge for asset to function across different networks. Cross-chain of assets does not stand for moving the bona fide assets from one place to somewhere else, but refers to the process of minting and destruction of native assets on another chain by certain rules, or the exchange of native assets from and to cross-chain assets. Current technical solutions of cross-chain bridge are mainly 3 types, such as lock + minting/destruction, liquidity pool and atomic swap. In terms of cross-chain mechanism, it is mainly achieved by three ways: native cross-chain, external validation and atomic swap. The external validation has lower deployment cost and faster response, and it has been the most common method for cross-chain bridge. However, the security is vulnerable, which has already directed a large number of cross-chain bridge security incidents. Development Trends

Based on the data of cross-chain bridges in 2022, the competition of top cross-chain bridges is inclined to be more intense in the future: the number of cross-chain bridges will continue to increase; ultra-light node is expected to become a new way of cross-chain bridge; cross-chain aggregators will become a new direction; and NFT cross-chain is expected to see a breakthrough.

Currently cross-chain bridges are mainly on top L1 chains, for example, the number of cross-chain bridges on Ethereum, BSC and Polygon reached 101, 74 and 48 respectively. With the emergence of new L1 chain narratives recently, such as high-performance L1 chains and modularized L1 chains, it will inevitably lead to more cross-chain bridges. Only 8 of the current 111 cross-chain bridges have over 100 million in TVL, which accounts for more than 90% of the total cross-chain bridge TVL. This oligopolistic effect is expected to be stronger in the future.

Current cross-chain bridges and communication are conducted by external validation and native validation, with the former being validated by multiple relays and forwarding on-chain messages, while the latter requires running light nodes on chain. Both modes are flawed in some aspects: the former is less secure but less costly and more responsive, while the latter is more costly but more secure for light nodes. Ultra-light nodes (ULN), on the other hand, combine the security of light nodes and the low cost of relays by performing the same validation as light nodes. Instead of preserving all block headers by sequence, ULN block headers are distributed on demand by a decentralized oracle. Layer Zero is the first cross-chain bridge to achieve native cross-chain via ULN (Figure 3). By far, there have been several major security incidents with cross-chain bridges powered by external validation, and the emergence of ultra-light node cross-chain is expected to be trending.

Cross-chain transaction aggregation also comes into being along with cross-chain bridge. Cross-chain transaction aggregation employs algorithms to provide users with the optimal choice of cross-chain paths between chains. Cross-chain + liquidity aggregation can improve capital utilization to a certain extent, and is expected to become a new direction. In addition, NFT assets have not appreciated much compared to other token assets this year. According to nansen data, the total trading volume of NFT in ETH in the past 12 months is only about 21 million ETH, which is less than the total spot trading volume of top NFT exchanges in a day (Figure 4). Although all mainstream cross-chain bridges have supported NFT cross-chain, the handful trading volume of NFT cross-chain has no one to blame as most NFT projects have not discovered suitable application scenarios, let alone most NFTs are short of liquidity. It is expected that in the next year, NFT projects will see a rise in cross-chain demand with the landing of a large number of application scenarios, and the cross-chain volume will see its day till then.

4.5.2 Summary and analysis of cross-chain bridge security events

Cross-chain bridges have now become an inelastic demand, therefore, also the ideal target for the outlaws. Last year, there were 4 major security incidents of cross-chain bridges, and this year, the number increased to 9. The funds stolen also incremented from $660 million last year to $1.38 billion this year; more than $2.2 billion are involved in the incidents. The main causes of the security incidents are code vulnerabilities and logic vulnerabilities, with only 2 of them are the theft of private key. Major cross-chain bridges involved in the theft are summarized in below. In fact, most of the cross-chain bridges had some technical problems one way or another.

Cross-chain bridges are frequently hacked because, on the one hand, hackers covet the large amount of crypto assets; on the other hand, cross-chain technology is still relatively new that a large number of cross-chain bridges just started in 2021, and the technical complexity and immaturity of cross-chain bridge coding standard have exposed many types of bugs, which are mainly concentrated on multi-signature and smart contract vulnerabilities /execution errors.

From project side, the cross-chain bridge per se is vulnerable so that eyes of hackers never left; a project has to prioritize security at the beginning of the design, such as screening for more reliable service providers, higher level of decentralization, more rigorous programming, etc. In addition, external audits should be more emphasized and bounties could be introduced to ensure the security of funds furthermore. For users, cross-chain is safer when choosing a mainstream cross-chain bridge with high security, disabling the authentication of high-risk projects in time and utilizing reputable centralized exchanges to complete the cross-chain.

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