Direction uncertainty? Crypto Annual Review (ZMQ, 2022–2023)

LIZZIE LU
ZMQuant
Published in
10 min readJan 30, 2023

--

The global economy faced numerous challenges due to macroeconomic and geopolitical factors. We saw the Fed takes action to control inflation, Europe embroiled in conflict, supply chains disrupted, the long-term effects of the COVID-19 pandemic and the corresponding policies in China. Consequently, the global G.D.P. growth rate for 2022 decreased significantly from an estimated 6% in 2021 to 3.2%, while the annual inflation rate rose to 8.8%. The down trends along with black swan events put considerable pressure on cryptocurrency markets. The crypto industry has faced significant difficulties in the past severl months while many institional and individual investors are at a significant loss due to the extremely fluctuating crypto market.

However, the blockchain technology is shown to be an ever-evolving technology that continues to expand its potential for adoption. So many people believe that 2023 is likely to be a year of continued growth for crypto market and Web 3.0 applications. For ZMQ, 2022 was a year of crises and opportunities, we were also exploring new directions of development in order to be more robust and secure.

Review of Major Crypto Events

There is no doubt that LUNA/Terra implosion brought a series of crises in crypto industry. In May 2022, the algorithm-stablecoin leader UST experienced two times of depeg and fell into a death spiral along with Terra’s native token LUNA. The collapse of LUNA/Terra wiped out approximately $45 billion in market capitalisation within a week and resulted in the crash of notable entities including Celsius, 3AC, Voyager Digital, Hodlnaut, etc. In late 2022, a report revealed that the crypto quant trading firm Alameda held a position valued at $5 billion in FTT, the native token of FTX, which prompted concern across the cryptocurrency industry regarding FTX’s solvency. After that, we witnessed a devastating and rapid collapse of FTX and its former CEO’s jailing, which caused more bankruptcies, including BlockFi and Genesis. It can be foreseen that all these crises will have repercussions on the global crypto community for years to come.

In addition to the collapse of crypto companies, there have been substantially hacks and exploits in 2022. In February, an attacker stole $320 million from the Wormhole DeFi platform. In March, Axie Infinity’s Ronin bridge was reportedly hacked via a fake LinkedIn job offer resulting a loss of 173,600 ETH and 25.5 million USDC. In April, a hacker managed to drain around $182 million from Beanstalk Farms after exploiting its vote governance system. The situation in the second half of the year was even worse, and Nomad Bridge, Wintermute and BSC Token Hub were attacked resulting in losses of $190 million, $162.5 million and over $100 million, respectively. The security audit firm Beosin report that, as of 30th December 2022, the entire blockchain ecosystem suffered losses of more than $3.6 billion due to various attacks in 2022, an increase of 47.4% from 2021.

There was not always bad news in 2022. Ethereum reached a major milestone by completing the most intricate upgrade ever, known as “The Merge”. This upgrade has fulfilled the promise of transitioning to a Proof-of-Stake consensus, and reduced the energy consumption of operation by over 99%. Meanwhile, the success of the upgrade and the anticipating ETH unstaking schedules facilitated the development of Liquid Staking Derivatives (LSD). Now, the ETH staking ratio is arround 14%, of which 1/3 is staked via Lido. Besides, L2 has experienced an explosive growth at the same time. The trading volume and TVL on Arbitrum and Optimism were surging due to the development of L2 dApps and airdrops. The trending scaling solution, zkSync, has also released its zkEVM mainnet in October 2022 for internal testing. Polygon, Scroll and some other projects also made great progress in the L2 ecosystem.

The NFT market was relatively active and strong during 2022. In the first half of 2022, the NFT market was vibrant and trading volumes were strong. In May 2022, OpenSea’s daily trading volume reached a high of $544 million, driven by the “Otherdeed for Otherside” series launch. Then, the NFT market has experienced a liquidity crisis where some bad debts and price manipulations occurred on one of the largest NFT lending platform BendDAO. Despite the decrease of trading volumes in recent months, collaborations and innovations of NFTs continue. Moreover, according to a review from Crypto.com Research, there were still over 800,000 players playing and trading NFTs on various blockchain games every day.

Apart from the aforementioned, there were numerous other remarkable occurrences in 2022. Tornado Cash was sanctioned by the Treasury’s Office of Foreign Assets Control (OFAC). After that, stablecoin issuer Circle froze USD Coin funds in affected wallets. StepN cleared all accounts based in mainland China. Aptos and Sui have gained popularity and become the latest trending blockchains. The price of some meme tokens like Dogecoin went up dramatically after Elon Musk’s twitter takeover…

In a nutshell, we have truly experienced a bull-to-bear market process with almost all crypto assets had a sharp drop in prices. The total circulation supply of the stablecoins has dropped from the ATH of 175 billion in May 2022 to 130 billion now. The TVL of all DeFi projects on top 10 blockchains has decreased over 70%. Furthermore, a large number of crypto companies in the industry were laying off staff, closing down, and even going bankrupt. 2022 was indeed a tumultuous year for the crypto industry.

Achievements of ZMQ

Take stock of past security incidents, investors and crypto projects are always the most vulnerable groups. It is not easy to make money in a bear market, and it is a bolt from the blue if the principal is lost. Therefore, investors and crypto projects must choose a safe platform that always regards safety as the top priority. ZMQ is a global leading quantitative trading company that places a great emphasis on asset security.

As a professional algorithmic trading firm, we at ZMQ focus on providing liquidity globally for crypto projects and exchanges, institution-grand crypto investment and consulting services, and bring better price discovery, trade execution, and transparency to investors and efficient pricing to the marketplace. Market Making is especially important in the crypto field. ZMQ provides professional digital assets market-making service for token projects and exchanges by using sophisticated trading algorithms that automatically quote prices on both the buy and sell side of the order book, and helps our clients to establish a reliable and efficient market. Besides, ZMQ also provides asset management services for HNWIs, MOM, FOF, Family offices, VC Funds, and token projects on different exchanges worldwide. Our team is full of financial experience to build comprehensive models to efficiently extract alpha in the digital asset yield curve.

We have more than 50 people who work in quantitative analysis, trading, business development, and IT Infrastructure group with a strong emphasis on collaboration to execute trading activities on behalf of investors. Comprised of mathematicians, statisticians and technologists, this team creates trading strategies scientifically by combining quantitative expertise with a sophisticated understanding of derivatives and financial markets. We empower exceptional talents in mathematics, physics, and computer science to seek scientific boundaries, push through them, and apply cutting-edge research technologies to the global crypto markets. In one words, we will give you practical financial advices and go-to-market strategies to help you grow.

Since jumping into the crypto field in 2018, ZMQ worked as a designated market maker (DMM) for 80+ platforms and 350+ issued coins/tokens. Our HFT MM strategies and deployable bots power $1~3bn in daily trading volume for more than 2000 trading pairs, including spot and derivatives. Our AI integrated professional trading algorithms can simulate the market performance in the best way, which helped us expand the size of AUM to $300m last year. Our ultimate goal is to bridge the worlds of cryptocurrency and institutional investing together.

Outlook of Key Trends

According to the recent markets, people tend to believe that the Fed will shift to dovish, which helps lay the groundwork for the next crypto bull market soon. Therefore, it is important to be aware of new projects in Web 3.0 in 2023 that demonstrates creativity, consistency, and technological advancement. Meanwhile, there will be more focus on the the international developments in the regulatory framework. With more comprehensive legislation and compliance requirements, centralised exchanges, stablecoins or maybe some on-chain dApps will face new regulations and policies.

Despite regulatory pressure, Ethereum is expected to remain the most widely funded, adopted, and developed blockchain. We will see continued innovation in ETH staking as capitals are seeking out more secure forms of yield farming in this field. One of the stongest evidences is that the LSD sector took the lead of the recent rebounding after ETH staking withdrawals was confirmed in Shanghai upgrade. According to Ethereum’s TVS (Total Value Secured) and other POS chains’ staking ratio, the ETH staking ratio is expected to be much higher in the long run. Thus, more competition will emerge in the LSD sector which is ruled by Lido at the moment. It is noteworthy that Frax Finance has recently entered the sector gaining a substantial portion of the market, and its market share is likely to increase even more in the upcoming weeks. Besides, we should also pay close attention to some ETH staking related projects, including MEV-boost, SSV and Re-Staking.

Although the recent Ethereum upgrade is proved to be a huge progress, promising the blockchain to be more secure and sustainable, the processing capacity is still extremely limited. Furthermore, with the rapid increase of on-chain application scenarios, these applications’ requirements for execution layer are also more diversified. Therefore, L2s and their corresponding ecosystems will definitely experience a new round of explosive growth in 2023. Apart from Optimism and Polygon, we are expecting other L2s, like Starkware, zkSync, Scroll, etc., issuing their native tokens in the near future. On top of that, we may participate in a new form of POW mining and receive rewards from some of ZK Rollup solutions. In this case, many people have strong believe on ZK Rollup rather than other solutions in the long-term, due to its scalability and security. In particular, we should be very excited for the public launch of the very first zk-EVM by zkSync, and both native and cross-chain protocols launching on zkSync are definitely worth paying attention.

The robust development of infrastructures will continue to stimulate innovations and developments of various assets, especially NFTs. As can be seen from Liquity’s Chicken Bond and Art Gobblers, NFTs are evolving quickly. They no longer only implies “digital art”, as it is originally a technology for developing and designing on-chain assets. In other words, PFPs and on-chain art collections are “blue-chip” at the current stage, but tokenised financial products, consumables or other assets are the future trend. We have seen numerous NFT innovations like DID, domains, subscriptions, etc., and we can expect more like on-chain bonds, certificates of deposit, and some other financial products in the form of NFTs. In sum, the development of NFT will trigger a revolution of financial paradigm.

In addition to the above trend topics, the development in other areas is expected to be of interest, including more effective and efficient DAO governance, novel blockchain infrastructures, new decentralised stablecoins, visualised depolyment of smart contracts, more secure cross-chain technologies, creative Web 3.0 games, on-chain credit system, etc.

Summary

Obviously, those downtrends of the past will not continue into the new year. It is arguably still the bearish period at the time of writing. Nevertheless, it is natural for crypto industry to fluctuate often between the bear and bull markets. The most important thing is what we have learnt from the past.

Media, institutes and investors should stop deifications and instead seek rational voices in the crypto world. We have witnessed some major CeFi and DeFi projects collapsed last year, so did their founders and CEOs who have received exaggerated admirations and supports from the public. These false publicities resulted in misplaced trust from investors, companies, and regulators. In short, we should confront our fascination with crypto “gurus” and look for prudent and reasonable considerations in this field.

Moreover, to be more rational, we need to understand that economic model is not business model where many people and crypto projects mix it up on purpose. Both the developers and investors should pay more attention to the business model of a project instead of focusing on the economic model which is specifically designed to coordinate relationships and demands among stakeholders. We found that the significance of Tokenomics has been over-emphasised, while the real demands from the market have been overlooked or misinterpreted. Invalid design focus will only bring more Ponzi projects, which will lead to more chaos to the development of crypto industry.

Perhaps the chaos we have seen in this field has not yet ended, and some aftershocks may be released gradually. This will benefit the crypto ecosystem and help the industry develop in a more secure, compliant and peaceful manner to pave the way for new innovations. However, it also means more funds will be lost and more trust will be destroyed. Anyway builders, most of us may agree that the next a few years will be the best period for the development and investment in the crypto industry. We should be prepared for more consequences and continew to build for the future. Please be confiden that the crytpo industry will usher in the brightest dawn soon!

The information in this article is for general guidance only and should not be construed as tax, legal, or investment advice.

Reference

World Economic Outlook, October 2022: Countering the Cost-of-Living Crisis

https://www.imf.org/en/Publications/WEO/Issues/2022/10/11/world-economic-outlook-october-2022

On-chain data

https://defillama.com/

https://dune.com/home

https://l2beat.com/scaling/tvl

Divisions in Sam Bankman-Fried’s Crypto Empire Blur on His Trading Titan Alameda’s Balance Sheet

https://www.coindesk.com/business/2022/11/02/divisions-in-sam-bankman-frieds-crypto-empire-blur-on-his-trading-titan-alamedas-balance-sheet/

Beosin — Global Web3 Security Report 2022

https://www.beosin.com/resources/beosin-global-web3-security-report-2022

2022 Year Review & 2023 Year Ahead

https://crypto.com/research/2022-review-2023-ahead

Ethereum 2.0

https://ethereum.org/en/upgrades/beacon-chain/

By Jason Liu & Lizzie Lu

About ZMQ

ZMQ is a Leading Global Quantitative Market Maker and liquidity provider in Digital Assets. Since jumping into the crypto market in 2018, ZMQ has been focusing on providing liquidity globally for token projects and exchanges, institutional crypto investments and consulting services to bring better price discovery, trading executions, transparency to investors and efficient pricing to the market.

If you have any new ideas about NFT liquidity, please reach out to us at liz@zmquant.com!

Website: www.zmquant.com

Twitter: @zmquant_com

--

--

LIZZIE LU
ZMQuant

Crypto Market Making | Hedge Fund | Investment | Advisory | Marketing | Web3/NFT/Game/DeFi / Layer1,2