Reflections on 2023: Navigating Crypto Challenges and Emerging Trends
Reflections on 2023: Navigating Crypto Challenges and Emerging Trends
Lessons, events and trends from 2023
As we bid farewell to the tumultuous year of 2023 in the cryptocurrency industry, it's crucial to reflect on the challenges faced, lessons learned, and emerging trends that are shaping the landscape. The past year brought both adversity and innovation, prompting a reevaluation of strategies and a deeper understanding of the dynamics at play.
Reflecting on Last Year
2023 was a rollercoaster ride for the crypto markets. The aftermath of the FTX and Terra collapses, coupled with the broader macroeconomic situation, triggered a significant market crash. Sentiment hit rock bottom, and the absence of retail investors added to the challenges. However, amidst the chaos, numerous projects persevered, building despite the adversities. Bitcoin's price sentiment turned positive mid-year, and some altcoins experienced a late-year rally, indicating resilience in the face of adversity.
Let us dig in on the main events, narratives and lessons we can learn from this last year.
1. Bitcoin Ordinals
During the last year, the Bitcoin community has found itself entangled in a heated debate over the emergence of Bitcoin Ordinals, which essentially function as non-fungible tokens (NFTs) on the Bitcoin blockchain. The controversy has given rise to conflicting viewpoints within the community, with discussions intensifying on the potential impact of Ordinals on Bitcoin's fundamental principles and functionality.
The Call for a Hard Fork
One perspective in the debate advocates for a hard fork of Bitcoin to address the Ordinals issue. This faction suggests that a fork, similar to the instances of Bitcoin Cash and Bitcoin SV, could allow Ordinal supporters to maintain their vision without interference from core developers seeking to eliminate Ordinals. The same group highlights the potential rift in the Bitcoin community and the challenges Ordinals face in the face of upcoming protocol changes.
Ordinals as Innovation
On the other side of the debate, some argue that Ordinals represent innovation and a natural evolution of the Bitcoin blockchain. They credit Segregated Witness (SegWit) and Taproot upgrades for enabling Ordinals, emphasizing that the technology adheres to existing consensus rules. Proponents believe that Ordinals meet market demand and push the boundaries of Bitcoin, providing a valuable stress test for the network.
(Un)expected effect
Some data sheds light on the current state of the Bitcoin network, reporting a massive surge in Ordinals-related network activity. With daily inscriptions reaching 400,000 and trading volumes hitting $40,000, debates around the impact on gas fees and questions the decentralized nature of Bitcoin emerge. Nonetheless, this fact is also increases the fear of censorship debate sparked due to the surge in gas fees caused by Ordinals.
A Call for Understanding and Competing
Some other people offer a unique perspective on how to approach the Ordinals debate. They advise critics to gain a deeper understanding of the technology by actively using Ordinals, engaging with developers from the Ordinals ecosystem, and exploring competition to drive innovation. They challenge the traditional approach of criticism and suggest that proactive engagement and market competition may be more effective.
Conclusion
The Bitcoin Ordinals debate is multifaceted, encompassing discussions on technology, market dynamics, and the future of Bitcoin. As the community grapples with these conflicting viewpoints, it remains to be seen how the ongoing debate will shape the trajectory of Bitcoin and its ability to adapt to emerging technologies and user demands.
2. USDC Depeg
Circle’s USD pegged coin(USDC), one of the prominent stablecoins in the cryptocurrency market, experienced a significant deviation from its $1 peg earlier in 2023, triggering concerns and a subsequent sell-off. The sudden depegging occurred shortly after Circle, the issuer of USDC, disclosed difficulties in withdrawing $3.3 billion of its $40 billion reserves from Silicon Valley Bank (SVB). This revelation led to a rapid decline in the stablecoin's value, shedding light on the intricacies of its underlying financial infrastructure.
On March 9, Circle initiated a wire transfer to extract its funds from SVB as the FDIC-insured bank was on the verge of shutting down its operations. However, by March 11, Circle confirmed that the wire transfers were not fully processed, leaving $3.3 billion of USDC reserves still held by SVB. The delay in withdrawing a significant portion of its reserves contributed to a loss of confidence in USDC's stability.
Following the revelation, data from Cointelegraph Markets Pro and TradingView illustrated an immediate and substantial decline in USDC prices. The stablecoin, which had been pegged at $1, plummeted to $0.8774, representing a loss of over 10% of its value. The market response reflected concerns over the liquidity and backing of USDC, as users sought to divest from the stablecoin amid the withdrawal challenges faced by Circle.
The USDC depegging incident serves as a reminder of the vulnerability of stablecoins. In this case, the attack vector came from the traditional market, and in previous cases (UST PTSD) came from design failures, which reminds us to stay cautious and diversify. As the crypto community navigates the aftermath of this event, attention will likely be drawn to increased scrutiny and transparency regarding stablecoin reserves and the mechanisms in place to address unexpected challenges.
Diversifying portfolio and exposures to different stablecoins might also be a good option to mitigate possible issues. A good example of that is Sommelier Finance USD vault, which contains a basket of USD pegged stablecoins, managed to rebalance and even profit during those times, as shown in this retrospective article. In the image below, taken from said article, we see that during the volatilty period, the portfolio allocated 25% to USDC, 25% to DAI, and 50% to USDT. Once it became clear that SVB depositors would be made whole, Real Yield USD began converting both DAI and USDT to USDC to capture the available arbitrage opportunity
3. Evaluating Narratives: Appchains, Monolithic Chains, and Modular Chains
One noteworthy development from 2023 was the evolution of blockchain narratives. Three prominent trends were still fighting for supremacy:
Appchains: A focus on specialized blockchains catering to specific applications or industries gained traction. Projects sought to optimize efficiency and scalability by tailoring their blockchains to the unique needs of decentralized applications.
Monolithic Chains: In contrast, some projects continued the trend of comprehensive, all-encompassing blockchains. The idea was to provide a one-size-fits-all solution, addressing a wide array of use cases within a singular blockchain architecture.
Modular Chains: A middle ground between the two extremes, modular chains gained attention. These blockchains aimed to strike a balance, offering a core infrastructure while allowing for modular components that could be customized based on specific requirements.
Understanding these narratives is vital for investors and enthusiasts alike, as they shape the trajectory of the industry and influence project strategies.
The launch of Celestia gave a big boost to the modular thesis, while DeFi growth in Solana made a great impact in the ecosystem, and new appchains on Cosmos thriving also impacted the appchain thesis. Only time will tell.
4. New narratives: Intents
As defined in this article, which will be almost fully quoted thanks to the usefulness and great explanation, an intent is a message signed by a user to express a desired outcome. It contains information about certain parameters, and a solution is only valid if the conditions relating to those parameters are met. Unlike a transaction, an intent describes an ideal end state, rather than a set of instructions to be executed.
A transaction specifies the journey, while an intent specifies the destination.
Intents are journey-agnostic. As long as the desired outcome is reached according to the rules set by the user, the path to that destination is inconsequential to the user.
Understanding Intents: An Analogy
A simple yet intuitive analogy for understanding intents is getting a taxi to the airport for an early flight. Let’s say a user has the following conditions as part of their set of preferences:
Origin: Hotel
Destination: Airport
Arrival time: 6:30am
Capacity: 6 people + suitcases
With these preferences in mind, we can examine the difference between intent-based and transaction-based systems:
An intent-based system is like a rideshare app. The user specifies the above conditions, and the app takes care of finding a suitable driver, determining the best route to avoid traffic, etc. Because the app has access to a wealth of information about factors like driver availability and traffic conditions, it can provide the user with the best possible solution. If the user pre-orders through the app the night before, sure enough, they can expect a 6-person van to show up at 6am to get them to the airport on time - or, if there are no large vehicles available, two regular cars instead.
A transaction-based system is like hailing a taxi in an era before smartphones existed. Instead of ordering through a specialized service, the user has to calculate what time they need to leave in order to arrive on time, and then walk out onto the street early, say at 5:45am, to find a taxi that is available and large enough for their group. Once they manage to hail a taxi, the driver must then figure out the best route to get to the airport by 6:30am - all without access to GPS or live traffic data. If either the user or the driver planned imperfectly, the user can get a poor outcome (arriving late and having to rush through the airport), or completely fail (missing their flight).
In both cases, the user specifies the same set of preferences (get 6 people from the hotel to the airport by 6:30am). However, in one situation, the user can express their conditions in one place with the peace of mind that it will be taken care of by a specialized service provider, whereas in the other situation, the user must exert additional effort to plan ahead and find someone to fulfill their conditions while still facing a higher chance of getting a worse outcome.
(Image credits here)
Risks
While intent-centric services offer a wide array of user experience benefits, one need only look to the taxi analogy to see where the systems can go wrong.
Providing detailed directions for all of our taxi rides, akin to the traditional model of specifying every step in a blockchain transaction, would be prone to errors.
But there's also a problem with the "trust the driver" approach that more closely resembles intent-centric systems: We've all had the experience of hopping into a taxi in an unfamiliar city for what we expect to be a quick ride, only to sit awkwardly as our driver takes a suspiciously long route, running up the meter.
The taxi driver in this analogy is like the solver in an intent-centric system: trusting the solver to take care of a task means trusting them to execute it honestly.
Although intents has been a buzzword in blockchain throughout 2023, the impact is yet to come, but it has paved the way for innovation.
5. Cosmos: Noble and ICS
In 2023, significant strides were made within the Cosmos ecosystem, marked by notable achievements. These include the introduction of new appchains like dYdX, the emergence of Noble as a dedicated asset issuance chain, and the pioneering launch of the first chain secured by the Cosmos Hub, leveraging Interchain security/replicated security (ICS). Interchain security represents Cosmos' innovative approach to shared security, empowering a provider chain such as the Cosmos Hub to generate blocks for a consumer chain. Validators participating in this ecosystem run dual nodes—one for the Cosmos Hub and another for the consumer chain—earning fees and rewards across both networks.
Over the course of the year, two key milestones were reached in the implementation of ICS:
Neutron debuted as the inaugural ICS-secured chain.
Stride, initially conceived as an independent app chain, seamlessly transitioned into an ICS-secured chain.
These achievements underscore the ongoing narrative of value creation for the Cosmos Hub. However, challenges are still present, particularly concerning scalability, sovereignty, and compensation for validators requiring additional hardware for each ICS chain. Notably, not all chains are well-suited for integration, needing a focus on ecosystem value creation.
A pivotal moment for Cosmos in 2023 was the launch of Noble as an app chain tailored for native asset issuance. Addressing liquidity concerns within the Cosmos ecosystem, Noble introduced native USD-pegged stablecoins, notably in partnership with Circle, the entity responsible for USDC issuance.
Initially anticipated as one of the first chains secured by the Hub through ICS, Noble opted for a PoA (Proof of Authority) model, secured by select validators from the ecosystem. As the maturity of ICS progresses, there is speculation that Noble may seek integration into the ICS network, transitioning into a consumer chain linked to the Cosmos Hub.
Furthermore, the launch of Noble facilitated the standalone deployment of the dYdX chain, leveraging the Cosmos SDK and native USDC collateral, a feat that may have been unattainable without Noble's contribution. In summary, the advancements within the Cosmos ecosystem in 2023 signify a significant step forward in its evolution, with ICS integration and Noble's emergence as pivotal milestones driving ecosystem growth and innovation.
6. Game Theory: Strategic Thinking in a Complex Ecosystem
2023 reinforced the importance of game theory in navigating the crypto landscape. Projects and investors had to adapt to a dynamic environment, considering not only their individual moves but also anticipating the actions of others. The interplay of incentives, competition, and collaboration became increasingly intricate, emphasizing the need for strategic thinking and adaptability.
The application of game theory principles in navigating the complexities of the Web3 space, particularly focusing on the dynamics of Ponzi schemes within the Cryptoverse, is and will always be a usefull skill. We saw it two years ago with Olympus DAO and the (3, 3) meme. In the same manner, we can illustrate (-4, +2) in game theory notation, where one participant's gain comes at the expense of others' losses.
Payoff Function in Game Theory:
The notation (X,Y) is defined as a payoff function in game theory, emphasizing that in most interactions within web3, someone winning often means someone else losing.
The simple truth is that many interactions are not just Zero-Sum but Negative-Sum when considering participation costs.
Ponzinomics Laws to take into account (thanks to Jordi Alexander):
First Law: Money in an isolated system can be redistributed among participants, but it cannot grow beyond what is put in, leading to winners at the expense of losers.
Second Law: Entropy loss in a closed system increases over time, with various sources of entropy in the crypto space, including gas costs, fees, smart contract hackers, and more.
Third Law: As the amount of money decreases in the system, the activity spirals down to zero. Closed Ponzi Systems depend on new revenue to offset entropy loss, and once momentum wanes, a death spiral ensues.
Beware of DeFi Forks:
Aggressive rewards and liquidity mining attract users, increasing Total Value Locked (TVL). However, without sustained inflows, the death spiral takes over, resulting in lower yields, TVL reduction, and a decline in community engagement.
Having always present those points will help us navigate through the noise. Thankfully, those of us present through the year 2023 can catch fast enough projects with dubious credibility, since most of them emerge during bull runs, so they catch retail and inexperienced people.
As we embark on a fresh journey into the new year, the lessons gleaned from the ride of 2023 in the cryptocurrency industry offer valuable insights for the road ahead. While the challenges faced during the past year were formidable, they also spurred resilience, innovation, and a deeper understanding of the dynamic crypto landscape. The web3 community remains steadfast, with developers actively shaping the future of technology. There's always room for learning, improvement, and achievement as we work towards realizing the potential benefits of blockchain technology. Embracing both challenges and opportunities, let's continue to build and contribute to the ever-evolving crypto ecosystem.
Author Bio
You can call me either Kurama or Jordi, and I am a data analyst and web3 research analyst. I’m interested in social models, web3 and decentralization, regenerative and decentralized finance, amongst many other.