Original Title: "2024 Crypto Market Outlook"

Original Source: Coinbase Research

Translated by: Deep Tide TechFlow

The total market value of the cryptocurrency market doubled in 2023, indicating that cryptocurrencies have survived the bear market and are now in a bull market. Coinbase wrote a long article mainly introducing its expected dominant narrative in the cryptocurrency market in 2024, as well as in-depth discussions on Bitcoin, Ethereum, stablecoins, and more.

主要观点

translates to

Main Points

Coinbase believes that at least in the first half of 2024, the main focus of institutional investment will continue to be on Bitcoin, partly due to the strong demand from traditional investors to enter this market.

·In 2024, a favorable macro environment will be provided for risk assets, and more importantly, encryption regulations will continue to be promoted, promoting the long-term adoption of cryptocurrencies.

·Web3 developers will continue to focus on building practical use cases, and the technical foundation is already evident.

·The foundation for a better user experience in encryption is being established, which will help the industry bridge the gap from early adopters to mainstream users.

Author's Note

The total market value of the encryption market will double in 2023, indicating that this asset class has ended the "cold winter" and is now in transition. However, we believe it is too early to label this point now, or that the market's improvement is evidence against those who are pessimistic about cryptocurrencies. Obviously, despite the difficulties faced by the cryptocurrency industry, the developments we have seen in the past year have exceeded expectations. This proves that cryptocurrencies will continue to exist, and the challenge now is to seize the opportunity and create a better future.

The catalyst for the revival of cryptocurrency in 2023 has nothing to do with innovative ways of characterizing its value. The US regional banking crisis and increasing geopolitical conflicts, among other factors, have strengthened Bitcoin's position as a safe haven. In addition, the implicit recognition of the disruptive potential of cryptocurrencies by some of the top financial institutions in the US through their applications for physically-backed Bitcoin ETFs may be a harbinger of more explicit regulation, which could help eliminate the friction that prevents capital inflows.

Progress is rarely smooth sailing, and in order to create a more resilient market, Web3 developers need to continue building real-world use cases that help bridge the gap from early adopters to mainstream users.

The potential implications are already quite clear - from web2 products such as payments, gaming, and social media, to specific advances in cryptocurrency such as decentralized identity and decentralized physical infrastructure networks. The former is easier for investors to understand, but these projects face tough competition from mature web2 giants. The latter may change the technological landscape, but development time is longer and widespread user adoption is more distant. However, blockchain infrastructure has made significant progress in the past two years, creating the necessary conditions for these application experiments and innovations, and we are now approaching a turning point.

Asset tokenization is another important use case that is currently attracting traditional financial participants into this field. A comprehensive implementation may still require 1-2 years, but the resurgence of tokenization themes reflects economic reality: the current opportunity cost is higher than when the epidemic was just lifted. This makes the capital efficiency of instant settlement of buybacks, bonds, and other capital market tools even more important.

Against this backdrop, we believe that the long-term trend of institutions adopting cryptocurrencies will accelerate. In fact, it is rumored that the rebound of Bitcoin at the end of 2023 has already attracted a wider range of institutional clients to enter the cryptocurrency field, whether they are traditional macro funds or ultra-high net worth individuals. We expect the launch of a US spot Bitcoin ETF to accelerate this trend, potentially leading to the creation of more complex derivative products that rely on compliance-friendly spot ETFs as a basis. Ultimately, this will improve liquidity and price discovery for all market participants.

We believe that the aforementioned content represents some fundamental themes of the cryptocurrency market in 2024, which we will discuss in this article.

Topic 1: The Next Cycle

Bitcoin Hegemony

The market situation in 2023 is basically developing as expected in our 2023 Cryptocurrency Market Outlook. The selection of digital assets is shifting towards higher quality targets, leading to Bitcoin's dominant position steadily rising above 50% for the first time since April 2021. This is largely due to the participation of several well-known and established financial giants in the United States applying for spot Bitcoin ETFs, as their involvement in the field helps validate and enhance the prospects of cryptocurrencies as an emerging asset class. Although there may be some capital shifting towards higher-risk targets in the cryptocurrency market next year, we believe that institutional funds will remain firmly anchored in Bitcoin at least until the first half of 2024. In addition, the strong demand from traditional investors to enter this market will make it difficult to shake Bitcoin's dominance in the short term.

The unique narrative of Bitcoin is expected to continue to outperform traditional assets in the second half of 2023. We believe this trend will continue next year unless a widespread safe-haven environment triggers liquidity demand. Even in a more challenging macroeconomic backdrop, Bitcoin may perform well, unless restrictive monetary policies that maintain capital stagnation are limited by the fiscal advantages of the United States and other countries. The commercial real estate sector in the United States looks fragile and may bring new pressure to regional banks. These two developments should continue the long-term trend of Bitcoin as an alternative to the traditional financial system. All of these factors may strengthen the narrative of deflation associated with the Bitcoin halving in April 2024.

New Trading System

The previous cryptocurrency bear market (2018-19) ended with the emergence of decentralized finance (DeFi) and the rise of multiple L1 networks, which were built ostensibly to meet the expected demand for on-chain block space. Development activity on these platforms further mainstreamed cryptocurrencies, before overall activity stalled towards the end of 2021. Thus, it has been proven that more block space is not necessarily required. In light of the subsequent subdued expectations, developers have decided to use the cryptocurrency bear market as an opportunity for construction. They are committed to addressing the technical barriers that hinder the development of new blockchain use cases.

The first stage of this development is to build the infrastructure needed to implement web3 in the future, such as scaling solutions (L2), security services (re-staking), and hardware (zero-knowledge proofs). These are still important investment opportunities in the cryptocurrency field, but it can be said that a lot of infrastructure has been built in the past two years. As this enables the emergence of more decentralized applications (dapps), we believe that the trading system of cryptocurrencies will evolve with these efforts. In other words, we expect more market participants to focus on finding potential web3 applications to help bridge the gap between early adoption and mainstream use of cryptocurrencies.

Many market participants rely on the analogy of web2 to gain investment ideas in the field of Web3, such as payments, games, and social media. The industry has also seen some use cases with more unique crypto-native styles, including decentralized identity, decentralized physical infrastructure networks, and decentralized computing. We believe that the challenge is not only to identify the industry, but also to pick the winners. Achieving dominance in any particular industry is not just about first-mover advantage (although it helps), but also about achieving and monetizing the correct network effects. Prior to early 2004, there were at least six other social media platforms, including Friendster and MySpace, that had achieved some success but did not reach the same network scale or notoriety as Facebook. Given the newness of the digital asset category, we expect many market participants to rely more on agents and platforms to capture the opportunities we see in the next cycle.

L1 Equalization

In our view, the easing of on-chain activity over the past two years has reduced the demand for L1. Ethereum's dominant position in the smart contract platform remains solid, leaving only a small direct competitive space. About 57% of the total value locked in the crypto ecosystem is on Ethereum, and Ethereum's dominant position in the entire crypto market capitalization is second only to BTC. As market participants pay more attention to applications, we expect more alternative L1s to reposition their networks to better align with the evolving narrative. For example, more industry-specific platforms have already spread in the ecosystem. Some focus on gaming or NFTs (such as Beam, Blast, Immutable X, etc.), while others focus on DeFi (such as dYdX, Osmosis) or institutional participants (such as Avalanche's Evergreen subnet, Kinto).

Meanwhile, the concept of modular blockchain has gained more attention in the crypto community, with many L1s entering to meet the needs of one or more core blockchain components, including data availability, consensus, settlement, and execution. In particular, Celestia's launch on the mainnet by the end of 2023 has reignited discussions around modular blockchain design by providing a plug-and-play data availability layer that is always available. This means that other networks and rollups can use Celestia to publish transaction data and ensure that the data is available on-chain for anyone to inspect. Other EVM-compatible L1s, such as Celo, have chosen to focus on smart contract execution and transition to Ethereum L2.

Despite this, integrated chains like Solana still hold an important position in the cryptocurrency ecosystem, which means the debate between modularity and integration may continue. We believe that the trend of increasing differentiation among chains - both by industry and function - will continue until 2024. However, the value of these blockchains ultimately depends on which projects are built on them and how much usage they attract.

The Evolution of L2

From a positive perspective, we believe that with multiple committees in the US House of Representatives pushing forward the "Payment Stablecoin Clarity Act" and the "21st Century Financial Innovation and Technology Act" (FIT 21 Act) in 2023, more US legislators are recognizing the increasing global regulatory arbitrage risks.

Additionally, the potential approval of a Bitcoin ETF in the spot market by the United States may bring cryptocurrency into a new category of investors and reshape the market in unprecedented ways. Compliant ETFs could become the basis for a range of new financial instruments, such as lending and derivatives, that can be traded between institutional counterparts. We believe that the foundation for cryptocurrency regulation will continue to be established in 2024, bringing more progressive regulatory clarity and more institutional participation in this field in the future.

Topic 3: Connecting the Real World

Tokenization is an important use case for traditional financial institutions, and we expect it to become a significant part of the new cycle in the cryptocurrency market, as it is a key part of "updating the financial system". This mainly involves automating workflows and eliminating certain intermediaries that are no longer needed in the process of asset issuance, trading, and record keeping. Tokenization not only has a product market that is very suitable for distributed ledger technology (DLT), but the current high-yield environment makes the capital efficiency provided by tokenization even more important than two years ago. That is to say, for institutions, even occupying funds for a few days in a high-interest rate environment costs much more than in a low-interest rate environment.

During the process in 2023, we witnessed many new entrants offering tokenized access to on-chain US Treasury bond exposure on public, permissionless networks. Due to digital-native users seeking returns unrelated to traditional cryptocurrency revenue streams, the total assets of on-chain US Treasury bond exposure increased sixfold, exceeding $786 million. Considering the demand for higher-yielding products and diversified sources of returns from customers, we may see tokenization expand to other market instruments, including stocks, private market funds, insurance, and carbon credit quotas by 2024.

With the passage of time, we believe that more commercial and financial sectors will be included in the tokenization aspect, despite the continued significant challenges for market participants posed by regulatory ambiguity and the complexity of managing different jurisdictions - as well as integrating new technologies into traditional processes. Due to the risks associated with public networks such as smart contract vulnerabilities, oracle manipulation, and network interruptions, this has forced most institutions to rely on private blockchains so far. While private blockchains may continue to grow alongside public permissionless chains, this may lead to fragmented liquidity due to interoperability barriers, making it even more difficult to realize all the benefits of tokenization.

One important topic worth paying attention to regarding tokenization is the regulatory progress made by jurisdictions such as Singapore, the European Union, and the United Kingdom. The Monetary Authority of Singapore sponsored "Project Guardian," which has developed dozens of proof-of-concept tokenization projects on both public and private blockchains of top-tier financial institutions worldwide. The EU's DLT pilot scheme has established a framework that enables multilateral trading facilities to utilize blockchain for trade execution and settlement, rather than through central securities depositories. The UK has also launched a pilot scheme seeking more advanced frameworks for issuing tokenized assets on public networks.

Although many people are currently looking for possible commercial "concept validation", we still expect full implementation to continue for many years, as this topic requires regulatory coordination, progress in on-chain identity solutions, and key infrastructure scaling within major institutions.

View on Web3 Games

In the early stages of the cryptocurrency bear market, trading activity sharply declined, and the recent popularity of Web3 games has reignited. Currently, the focus in this field is mainly on attracting the attention of mainstream gamers outside of the "crypto-first" community. Overall, the potential market share of the gaming industry is currently about $250 billion and is expected to grow to $390 billion in the next five years. However, despite the huge investment opportunities, users have generally rejected the existing web3 "Play to earn" model demonstrated by early projects such as Axie Infinity. In fact, this model may lead to greater skepticism among many mainstream gamers towards web3 games.

This prompted developers to conduct more experiments, as they attempted to combine the network effects of high-quality AAA games with sustainable monetization mechanisms. For example, game studios are considering using web3 narratives, such as non-fungible tokens (NFTs), which can be used, transferred, or sold on designated markets within the game. However, surveys indicate that most gamers do not like NFTs, which widely reflects their rejection of "Play to earn". For the gaming industry, the value proposition of utilizing web3 architecture lies in its potential to increase user acquisition and retention rates, but so far, this is still an unproven argument. As many projects' game development processes reach the standard of 2-3 years (following a large amount of fundraising in 2021-2022), we believe that some web3 games that may be released in 2024 could soon provide us with the data and statistics we need to better evaluate this sector.

How to Build a Decentralized Future

One major theme in 2024 (and possibly beyond, depending on development timeframes) is the decentralization of real-world resources. We are particularly focused on the concepts of decentralized physical infrastructure networks (DePIN) and decentralized computing (DeComp). Both DePIN and DeComp utilize token incentives to drive the creation and consumption of real-world resources. In the case of DePIN, these projects rely on creating economic models to help incentivize participants to build physical infrastructure that is not controlled by large corporations or centralized entities (ranging from energy and telecommunications networks to data storage and mobile sensors). Specific examples include Akash, Helium, Hivemapper, and Render.

DeComp is a specific extension of DePIN that relies on a distributed computer network to fulfill specific tasks. With the mainstream adoption of generative artificial intelligence (AI), this concept has regained vitality. The cost of training AI models can be high, and the industry is exploring whether there is an opportunity to adopt decentralized solutions to alleviate this problem. It is currently unclear whether combining blockchain with AI is feasible, but the field is growing. For example, a separate but related research field called zero-knowledge machine learning (ZKML) focuses on privacy and promises to fundamentally change the way AI systems handle sensitive information. ZKML may enable large language models to learn from a set of private data without directly accessing that data.

DePIN is a powerful real-world application of blockchain technology with the potential to disrupt existing paradigms, but it is still relatively immature and faces many challenges. These challenges include high initial investment, technical complexity, quality control, and economies of scale. In addition, many DePIN projects focus on how to incentivize participants to provide necessary hardware, but only a few projects have begun to work on promoting a financial model for demand. Although the value proposition of DePIN may come early, realizing these benefits may still take several years. Therefore, we believe that market participants still need to take a long-term view to invest in this industry.

Decentralized Identity

Privacy is the new frontier for blockchain developers, who are leveraging innovations such as zero-knowledge (ZK) proofs and fully homomorphic encryption (FHE) to perform computations while keeping user data encrypted. This has broad applications, particularly in the realm of decentralized identity - where users have complete control and ownership of their personal data. For example, this could enable medical research institutions to analyze patient data and help them discover new trends or patterns for specific diseases without revealing any sensitive health information about the patients. However, to achieve this, we believe individuals need control over their identity data - which is different from the current state where information is stored on many different centralized entity servers.

It can be certain that we are still in the very early stages of solving this problem. However, ZK systems and FHE were once considered purely theoretical concepts, but have recently seen more experimental implementations in the encryption industry. In the next few years, we expect to see greater progress in this field, which may enable us to have end-to-end encryption in web3 applications and networks. If this is the case, then we believe that decentralized identity may have strong product market fit in the future.

Topic 4: The Future of Blockchain

Improved User Experience

Recently, a theme that has emerged during the bear market cycle is how to make cryptocurrency technology more user-friendly and accessible. The additional responsibility of managing cryptocurrency and everything involved with it (wallets, private keys, gas fees, etc.) is not suitable for everyone, making it difficult for the industry to mature unless it can overcome some key user experience-related challenges. Progress in the area of account abstraction seems to have made significant strides in this regard. The concept of account abstraction can be traced back to at least 2016 and refers to treating externally owned accounts (such as wallets) and smart contract accounts in a similar way to simplify the user experience. Ethereum advanced account abstraction in March 2023 by introducing the ERC-4337 standard, opening up new opportunities for users.

For example, taking Ethereum as an example, it can allow application owners to act as "payers" and pay users' gas fees, or enable users to provide funds for transactions using non-ETH tokens. This feature is particularly important for institutional entities that do not want to hold Gas tokens on their balance sheets due to price fluctuations or other reasons. J.P. Morgan's proof-of-concept report as part of Project Guardian emphasizes this point, and all gas payments are processed through Biconomy's Paymaster service.

Due to the upgrade of Dencun, the transaction fees for Rollup may be reduced by 2-10 times. We believe that more decentralized applications (dapps) may pursue the "Gasless transaction" path, effectively allowing users to focus only on advanced interactions. This may also promote the development of new non-financial use cases. Account abstraction can also promote powerful wallet recovery mechanisms to create fault protection against simple human errors (such as lost private keys). The goal of the cryptocurrency ecosystem is to attract new users and encourage existing users to become more active participants.

Validator Middleware and Customizability

Developments such as re-collateralization and Distributed Validator Technology (DVT) are empowering validators with new ways to customize key parameters - to better adapt to changing economic conditions, network demands, and other preferences over time. From an innovation perspective, the growth of validator middleware solutions is already a major theme for 2023, but we believe that their full potential to enhance customizability and unlock new business models has yet to be fully realized.

As far as staking is concerned, EigenLayer is currently leading the way, which may be a way for validators to protect the availability of data layers, oracles, sorters, consensus networks, and other services on Ethereum. The potential returns obtained through this process may represent a new source of income for validators in the form of "security as a service". EigenLayer officially launched the first phase on the Ethereum mainnet in June 2023 and will begin registering active verification services (AVS) operators in 2024, after which stakers will be able to delegate their staking positions to these operators. We believe these developments are worth paying attention to, and when EigenLayer is fully open to the public, we will see how much ETH staked will be allocated to additional security measures.

Meanwhile, the Distributed Validator Technology (DVT) used for proof-of-stake networks can provide more design choices for stakers in terms of setting up and managing validator operations. DVT assigns the responsibility (and private key) of a single validator to multiple node operators, thereby limiting the risk of a single point of failure. This can reduce the risk of slashing and improve security, as the compromise of a single node operator does not threaten the entire validator. Additionally, DVT enables individual stakers to run validators and earn rewards without having to stake too much (assuming they collaborate with others on platforms such as Obol, SSV network, or Diva protocol to meet the staking threshold), thus lowering the entry barrier and promoting greater decentralization. Therefore, we may see DVT enabling validators to be geographically dispersed, reducing liveness and slashing risks.

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