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This past year has been a testament to the blockchain space’s ability to recover from even the harshest external conditions. From the depths of the “crypto winter” at the beginning of the year, the overall market cap of the crypto space has grown by 90% to $1.69 trillion, with bitcoin more than doubling from its yearly low of $16k in Jan 2023 to over $40k in December.
This post is part of CoinDesk's "Crypto 2024" predictions package.
In 2023, we’ve continued to feel some of the aftershocks of the wave of major collapses in 2022, most notably the FTX trial and verdict and the Binance plea deal in November, as well as the momentary depegging of the USDC stablecoin in March amid the banking crisis in March . At the same time, we’ve continued to see breakthroughs in the space, including the Ethereum’s Shapella upgrade to a full Proof-of-Stake network, also in March, the ruling that XRP was (mostly) not a security in July, the launch of PayPal’s PYUSD stablecoin and Grayscale’s win over the SEC for the Bitcoin spot ETF in August, and the pioneering of novel tokenized social experiences such as the rise of Friend.tech.
We thus enter 2024 with a great optimism on the road ahead. Here are my top predictions for crypto industry in 2024:
1. The resurgence of Bitcoin and “DeFi Summer 2.0”
In 2023, Bitcoin has staged a comeback, with bitcoin dominance (Bitcoin’s proportion of crypto market cap) rising from 38% in January to around 50% in December, making it one of the top ecosystems to look out for in 2024. There are at least three major catalysts driving its renaissance in the next year: (1) the fourth Bitcoin halving due for April 2024, (2) the expected approval of several Bitcoin spot ETFs from institutional investors, and (3) a rise in programmability features, both on the base protocol (such as Ordinals), as well as Layer 2s and other scalability layers such as Stacks and Rootstock.
On the infrastructure level, we believe we will see a proliferation of Bitcoin L2s and other scalability layer to support smart contracts. The Bitcoin ecosystem should coalesce around one or two Turing-complete smart contract languages, with top contenders including Rust, Solidity, or the extension of a Bitcoin-native language such as Clarity. This language will become the “standard” for Bitcoin development, similar to how Solidity is considered to be the “standard” for Ethereum development.
We also see the fundamentals for a possible “DeFi summer 2.0” on Bitcoin. With Wrapped BTC (WBTC) today having a market cap and Total Value Locked (TVL) of around $6 billion, there is clearly an enormous demand for Bitcoin in DeFi. Today, Ethereum has about 10% of its $273 billion market cap in TVL ($28 billion). As Bitcoin DeFi infrastructure matures, we could potentially see Bitcoin DeFi Total Value Locked (TVL) rise from the current $300M (<0.05% of market cap) to ~1-2% of Bitcoin market cap (~$10-15 billion at current prices). In this process, many Ethereum DeFi practices are likely to be transferred and “naturalized” on Bitcoin, such as the recent rise of BRC-20 inscriptions and ideas such as staking such as in Babylon’s L2.
Bitcoin NFTs, such as those inscribed on Ordinals, may also see increased popularity in 2024. As Bitcoin has much higher cultural recognition and memetic value, it is possible that web2 brands (such as luxury retailers) will choose to release NFTs on Bitcoin, similar to how Tiffanys partnered with Cryptopunks to release the “NFTiff” pendants collection in 2022.
2. Tokenized social experiences for new consumer use cases
Whereas Web2 has moved from social to finance, Web3 is moving from finance to social. In August 2023, friend.tech pioneered a new form of tokenized social experiences on the Base L2, with users able to buy and sell fractionalized “shares” of others’ X (fka. Twitter) accounts, reaching a peak of 30k ETH TVL (~$50 million USD at the time) in October, and inspiring several “copycat projects” such as post.tech on Arbitrum. It seems that friend.tech, through financializing Twitter profiles, has successfully pioneered a new tokenomics model for the SocialFi space.
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In the upcoming year, we expect more experiments in the social space, with tokenization (both as fungible and non-fungible tokens) playing a key role in reinventing the social experience. Fungible tokens are more likely to be novel forms of points and loyalty systems, whereas non-fungible tokens (NFTs) are more likely to serve as profiles and social resources (such as trading cards). Both would be able to be traded on-chain and participate in DeFi ecosystems.
Lens and Farcaster are two of the leading web3-native applications integrating DeFi with social networks. Projects like Blackbird will also popularize tokenized points systems for loyalty programs in specific verticals (such as restaurants), using a combination of stablecoin payments and tokenized rebates to reinvent the consumer experience, functionally providing an on-chain alternative to credit cards.
3. An increase in TradFi-DeFi “bridges” such as stablecoins and mirrored assets
2023 has seen a lot of legal action in crypto, including several high profile wins for the industry such as the XRP ruling and the Grayscale ETF litigation win, and justice being served for financial fraud in Binance and FTX. Alongside this is a large increase in institutional interest and potential ETF approvals for Bitcoin and Ethereum.
In 2024, we expect to see a dramatic increase in institutional adoption, who not only seek for ETFs, but also tokenized real-world assets (RWA) and TradFi financial products. In other words, TradFi assets will be “mirrored” in DeFi, while crypto assets will have increased exposure in TradFi markets, thus creating TradFi-DeFi “bridges” that bring these two worlds closer together for increased liquidity and diversification for investors.
Stablecoins will serve as one of the most important links between the TradFi and DeFi worlds, with stablecoins such as USDC and PYUSD being more widely accepted as both portfolio options and payment tools. With Circle said to consider a 2024 IPO, we also may see an increase in the issuance and usage of non-USD stablecoins, most notably Euro-backed stablecoins such as Circle’s EURC, as well as British Pound, Singaporean Dollar, and Japanese Yen stablecoins. Some of these stablecoins may be launched by state-backed actors. This may also lead to the growth of an on-chain fiat foreign exchange market. Tokenized treasuries have already gained traction with $800m tokenized through platforms like Ondo.
4. The cross-pollination of modular blockchains and Zero Knowledge Proofs
Both the idea of modular blockchains and ZKPs have greatly matured over this past year, such as the recent Celestia mainnet launch, Espresso’s Arbitrum integration, RiscZero’s open-source Zeth prover, and Succinct’s launch of a ZK marketplace. One interesting trend is how these two narratives have merged together, with companies in the ZK space “modularizing” by focusing on specific verticals, such as co-processors, privacy layers, proof marketplaces, and zkDevOps.
In the upcoming year, I expect this trend to continue, with Zero Knowledge Proofs emerging as an interface between different components of the modular blockchain stack. For example, Axiom’s ZK co-processor leverages ZKPs to provide historical state proofs, which can then be used by developers to perform computations in DApps. With ZKPs being the common interface between these different providers, we will see a new era of smart contract composability. This provides developers building DApps with a far greater flexibility for providers and reduces the barrier to entry for the blockchain stack. On the consumer side, ZKPs may see increased use cases as a way to preserve identity and privacy, such as in the form of ZK-based decentralized IDs.
5. More computationally intensive applications moving on-chain, such as AI and DePIN
There has been a lot of time, energy, and capital poured into the scalability problem for decentralized applications. Today, much of the scalability problem has been solved – gas fees on Ethereum L2s are less than 0.02 USD (compared to 11.5 USD for Ethereum mainnet), and on Solana the fees are 3-4 orders of magnitude even lower.
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As this trend continues in the next year, we believe computationally expensive applications (applications can use up gigabytes of RAM) will become much more economically feasible on-chain in the near future. This includes vertical applications such as on-chain AI systems, Decentralized Physical Infrastructure Networks (DePIN), on-chain knowledge graphs, and fully on-chain games and social networks. All this may radically reshape the on-chain data economy, greatly improve both user and developer experience, as they are freed from onerous gas fees and stringent constraints on compute power.
Examples of computationally expensive projects that can take advantage of this much cheaper on-chain “compute” include Hivemapper’s efforts to create a decentralized Google Maps on Solana, Bittensor’s creation of a decentralized machine learning platform, Modulus Labs’ efforts in ZKML and AI-generated NFT art, The Graph’s plans for on-chain knowledge graphs, and the Realmsverse creating an on-chain game world and lore on Starknet.
6. Consolidation of public blockchain ecosystems and a “Hub-and-Spoke” model for appchains
There has been a proliferation in infrastructure projects over the past few years. Despite the commonplace technical categorization of Layer 1 (L1) and Layer 2 (L2), from a user experience perspective there is not much of a difference. This is especially true for a general-purpose public blockchains; today an L1 such as Solana or Avalanche is a direct competitor to an L2 such as Arbitrum or zkSync for users, projects, and volume.
With this homogeneity in place, liquidity serves as a concentrating force for general-purpose public blockchains, benefiting larger incumbent players such as Arbitrum, Optimism and Solana, with the top 4 ecosystems today accounting for ~90% of Total Value Locked (TVL). Smaller ecosystems must concentrate their efforts on specific verticals (such as social, gaming, DeFi) to retain an edge, effectively becoming “appchains” or “sector-chains.” Already, three of the Top 10 L2s by TVL (dydx, Loopring, Ronin) are effectively appchains that specialize in a single vertical. The TVL “break-in” of smaller, newer L2 chains such as Base and Blast also rely heavily on single “killer-apps” (eg. friend.tech and Blur respectively) to establish beachheads in volume.
Moreover, most leading general-purpose public blockchains have released appchain toolkits (OP Stack, Arbitrum Nitro, StarkEx, etc.) to allow appchains to tap into the liquidity on these public networks and place them within their ecosystem orbits. Thus, we’re beginning to see a “hub and spoke” model where there a few general-purpose public blockchains acting as central “hubs,” around which there are numerous “spokes” of specific appchains. In 2024, it may be worth paying attention to major rollup-as-a-service vendors such as Caldera, Conduit, and Eclipse that take advantage of this “hub-and-spoke” move.
Conclusion
As we reach the end of 2023, we have perhaps made it through the worst of the bear market, turning over the page on the series of brutal collapses that we have seen over the past year and a half, and ready to begin exploring novel use cases. Today, we’re at an inflection point, where crypto is no longer solely about financialization, but rather a broader idea of how we redefine consumer, social, and developer experiences using blockchains. I’m very excited to see what 2024 holds for the future of our still nascent industry, as we use decentralized technologies to reimagine our digital culture.