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2023 blockchain industry review

2023 Blockchain Industry Overview

2023 has been a year of notable progress and challenges in the blockchain industry. In this overview, we cut through the noise to focus on the key developments that matter. We’ll look at how new technologies have emerged, how the market has shifted, and what this all means for the future of blockchain.

2023 blockchain industry review

Web3 Security Roundup

Let’s start with some “good” news. TMR recently reported that the total value stolen from crypto hacks dropped by over 50% compared to 2022, decreasing from nearly $4 billion to $1.7 billion. These are facts, and we won’t deny them. But let’s not get too comfy, we still have a long way to go. Even Vitalik’s X account was compromised this year, along with the accounts of many other well known people. The security standards within the industry need a significant boost. How many crypto projects or companies out there actually have a Chief Information Security Officer (CISO) watching their back? Spoiler: the answer is discouraging.

A report by Hacken shows the security challenges within the crypto space during Q3 of 2023. It details 117 hacking incidents with a total loss of $720 million, highlighting access control breaches as the most financially impactful. And this is not even taking into account the major drama that went on with Ledger on December 14.

This is an opportunity for the entire space to start talking about the things that have to be addressed immediately, such as blind signing. Pascal Gauthier mentioned this in the message he released after the exploit and it was just announced that Ledger will work with dApps to no longer allow blind signing with Ledger devices and allow clear signing instead by mid 2024. And guess what? Our CEO has been fostering this conversation even before this unfortunate event took place. The most recent time he brought it up was in November, when he spoke in a security panel at an event, where he mentioned this subject precisely.

The hacks, vulnerabilities and rug pulls keep getting more creative, but the lesson is always the same: we really need to step up our game with tighter security measures. Yes, this is DeFi, but projects still have the moral responsibility to do everything in their power to avoid these problems. Educating users and developers about the risks of social engineering and phishing is vital, but it’s just one piece of the puzzle. Smart contracts need rigorous and repeated audits, annually, by various firms. This is a costly but necessary investment in an industry where quality often equates to the price paid.

Thorough and continuous vigilance is key to maintaining security and trust in the Web3 ecosystem. But hey, if you are reading this, you already know it.

The Data Availability Era

This year marked a shift in many aspects. One of the areas where we saw new and efficient approaches is data availability, particularly related to scaling solutions. Many of us were recently educated about data availability sampling, a method that allows for the verification of a block’s availability by downloading just a few small samples, instead of the nodes having to download all transaction data.

In this context, Celestia became very popular these last couple of months and started working along other key players in the space. For instance, the Near Foundation ventured into data availability, joining forces with Celestia, with the goal of managing data from L2s on Ethereum and providing an alternative platform for their data handling needs. And later on, in December, Celestia’s integration with Polygon’s Chain Development Kit was announced. This enables developers to utilize this data availability solution when designing and setting up their own Layer 2 networks. And as if all this still wasn’t big enough, we just got a hint that Celestia devs are working on developing a service to let owners of the Solana Saga phone run a Celestia light node. Bullish much? We think so, because this move shows a clear industry trend towards tackling one of the most persistent challenges in blockchain tech.

Data availability and modular blockchains go hand in hand and both were widely covered this year.

Modular Mania

We’ve seen increased interest and development in the modular approach, which is paving the way for more customized and efficient blockchain architectures. An article released in November by the pseudonymous writer and crypto researcher Polynya, titled The horrific inefficiencies of monolithic blockchains, opened a lot of eyes. Particularly the eyes of many members of the ecosystem that don’t necessarily have a tech background.

Polynya explained how monolithic blockchains, where each node has to process all transactions, are inefficient, unsustainable, and pose the risk of centralization, especially as the network grows, since the cost of operating a node and the amount of resources needed to do so increase, leading to fewer nodes and a more centralized network. At the same time, this centralization obviously also poses security risks.

Modular blockchains are the solution to this inefficient system, according to Polynya and many other members of the crypto ecosystem. Technologies like validity proofs and data availability sampling are essential for scalability as they enable higher transaction throughput and lower infrastructure costs.

And speaking of modular architectures, the OP Stack, Optimism’s open-source framework for creating highly scalable and interoperable blockchains, was also very talked about this year. Base, Coinbase’s L2 and one of the chains developed using the OP Stack, has been making a lot of noise since it launched. This is said to be Coinbase’s contribution to the decentralized space and to scaling Ethereum and so far, Base seems to be thriving. To the point where rivals like Kraken and OKX are apparently working on launching their own L2s to compete as well.

Not everything is good news for the OP Stack, though. Back in October we learned that Manta Pacific shifted its strategy by moving away from the OP Stack and instead adopting the Polygon CDK, in order to transition to a zero-knowledge EVM validium. The end goal here is efficiency and a better user experience. But the commitment to a modular blockchain architecture is still there, as Manta plans to use Celestia for data availability to benefit from lower gas fees.

In the end, all these initiatives, as different as they may be, promote a more flexible approach to blockchain infra, potentially leading to more innovative and diverse dApps in the Web3 ecosystem. And honestly, who could be against this?

The L2 Journey – Ethereum

Along the same lines of improvements in scalability and efficiency, we obviously have to touch on Ethereum’s L2s, which are currently in a transitional state towards greater decentralization. The goal is to gradually remove their training wheels to achieve full trustlessness. Each network obviously faces unique challenges depending on the technology they use, and each is at a different stage of implementing their decentralization plans.

The advancements made towards full EVM equivalence this year were remarkable and projects like Scroll, Polygon zkEVM, Linea and Botanix led this development. EVM equivalence is a big milestone as it enables L2 solutions to smoothly support Ethereum’s smart contracts and decentralized applications, thus facilitating easier adoption. The progress made by these projects represents a major step in enhancing scalability and efficiency, while maintaining robust security features.

The L2 Journey – Bitcoin

On a similar note, one of the most exciting things this year for CoinFabrik has been seeing the evolution and work behind the scenes of Bitcoin’s L2s and Bitcoin DeFi. Particularly, projects like Stacks and ALEX represent a shift towards a more versatile Bitcoin, capable of supporting a wider range of applications and services. We’ve seen, for instance, how the introduction of BRC-20 tokens presented new opportunities in the DeFi space on Bitcoin.

Engaging with Bitcoin through additional layers is crucial to stimulate ongoing activity and to maintain the network’s vitality in the long term and there are players that are focused 24/7 on this (very challenging) mission.

In 2024, the Bitcoin halving event is expected, and before it, Stacks intends to release the Nakamoto upgrade, and later, the release of sBTC is scheduled. These updates, as separate hard forks, are crucial to enhance Stacks’ network security, functionality and overall capabilities. And advancements like these are key to expanding Bitcoin’s use beyond just a store of value, and to transform the way it is used in the DeFi sector. Bitcoin Unleashed was clearly the place to learn about all the exciting things that are brewing in this part of the ecosystem

Inscriptions: A Delicate Topic

And speaking about innovation… Inscriptions were a hot topic this year as well. Popularized by Bitcoin’s Ordinals and initially specific only to the Bitcoin network, inscriptions have since been adopted by EVM-compatible chains like Avalanche, the Binance Smart Chain, Arbitrum, zkSync, etc., and this very recently led to increased transaction volumes and fees, as well as network congestion in all these ecosystems.

And of course, not all innovations are widely agreed on by the entire community. Some Bitcoin maximalists, concerned about the integrity and performance of the blockchain, continue to argue against what they see as misuse of the network for storing non-transactional data. And this ongoing dialogue definitely sparked up the tension between the original vision of Bitcoin and its evolving uses. On one end we have users urging miners to boycott Ordinal transactions through a filter to protect Bitcoin’s integrity, arguing that users who fill Bitcoin’s blockspace with inscriptions are messing with the chain for their own amusement, not respecting its true purpose and categorizing them as “highly immoral and unethical people”.

On the other hand, we have some Bitcoin OGs like Erik Voorhees pointing out the irony in Bitcoin maximalists advocating for a permissionless network, yet being upset when users freely use it in ways they don’t approve of, and Jameson Lopp, who as usual states the obvious: miners are here for profit, they’ll mine whatever’s paying. But banning data on the blockchain could lead to unintended consequences and hamper legit uses. And since we are quoting Bitcoin OGs, what better way to close this section than with this insight from the legendary Adam Back. Enough said now.

The Bitcoin Halving & ETF Hype

We mentioned the halving earlier, and brace yourselves, because in the coming year, news headlines are likely to cover this topic on a daily basis. We could say this is the “natural” key driver of market dynamics and investor interest. And in contrast, the “artificial” driver is probably the Bitcoin ETF which Wall Street has been anxiously expecting for quite some time now, amidst countless speculations. The ETF approval will likely also be a big step for the relationship between traditional financial markets and the emerging world of crypto.

Both events represent important moments in the evolution of the crypto market and they reflect the growing mainstream interest in digital assets. And as we anticipate them, the contrast between decentralized assets like BTC and centralized CBDCs offers much food for thought.

The regulators won’t make things easy, though. A select group of people in the US has openly declared war against innovation and this is currently the greatest challenge for US-based companies, despite them crying for clear regulations. This industry, however, is known to be resilient against all sorts of attacks towards civil liberties, so there’s nothing to fear, friends. This is another battle that crypto will end up winning.

Tokenization of RWA: The Most Popular Trend

If there’s a term we heard over and over again this year, it’s “Tokenization of Real World Assets.” This concept gained traction in diverse sectors like real estate, agriculture and precious metals and even institutions like Goldman Sachs and J.P. Morgan are key players in this trend of digital asset offerings, indicating mainstream acceptance. Next year, we can expect further diversification in tokenizable assets and increased adoption by traditional finance sectors, potentially leading to a more interconnected financial ecosystem.

There is still a long way to go and many technical challenges to overcome, and the market has to adapt and ensure legal compliance and investor protection. The future may bring more accessible investment opportunities and stronger ties between blockchain and traditional finance, but it will not be without careful navigation of the obstacles ahead.

DeFi’s UX Levels Up

We tend to discuss what is going to be the thing that brings mass adoption to decentralized finance. And I bet we can all agree that interoperability and a smooth UX are the main goals to get to this milestone. If we think of interoperability, ThorChain is the first project that comes to mind as undoubtedly they have emerged as a frontrunner in this space. They have managed to build a high complexity system which, despite the occasional network halts and delays with the outbound queue, can undeniably be described as a masterpiece in progress.

When it comes to exploring other avenues in the interoperability arena, this year we started to hear more about Chain Abstraction, which will simplify the experience for dApp users even more, making blockchain tech less fragmented and removing the complexity of dealing with multiple chains. Projects like NEAR and Connext are doing a great job at building and educating the community on this with the end goal of making the experience more user-friendly and intuitive.

And speaking of simplifying the user experience in the decentralized ecosystem, the adoption of Account Abstraction, as outlined in the ERC-4337 roadmap, is expected to play a major role in enhancing this aspect. So as we look forward to 2024, the evolution of these technologies is definitely something to watch closely.

At CoinFabrik, we will keep building, safeguarding the ecosystem and watching the Web3 world evolve. 2024 will mark our 10 year anniversary, so we’re keeping our focus at what we do best, which is continuing to push the boundaries in Web3, and also eyeing new opportunities and challenges that will drive our growth in the next decade.