The year 2023 in crypto offered a rollercoaster ride. Well, one could argue a year like any other. Not quite so. We have witnessed tremendous downfalls, uncertainties, success stories, unexpected events, and importantly, new products and categories to emerge.
The cryptocurrency world stands strong as the curtains draw on another tumultuous yet transformative year. Although 2023 was demanding, teams continued to build and innovate in every market aspect, from sustained growth in decentralized finance through the emergence of new Layer-1 and Layer-2 blockchains to changes in the regulatory landscape. The crypto ecosystem has faced both unprecedented opportunities and challenges. This comprehensive summary intends to embark readers on a journey through the highs and lows of the crypto world in 2023. We will dive into some of the past year’s most prolific and thrilling events. The news will appear in chronological order, presenting the volatility of the crypto market. We have endured events that initially seemed crushing, threatening the whole industry.
On the contrary, the negative sentiment overshadowed little victories and technology improvements. The remaining bunch can give itself a gentle pat on the back for still being here, including developers, users, investors, institutions, and more. The work never stopped, and new innovative solutions emerged. As 2023 closes, the market seems greener and more optimistic. We will see how it unfolds in 2024. But now, let’s explore the key moments, controversies, and triumphs that have shaped the past year.
1. USDC Depeg: How a Bank Fall Shook DeFi Backbone
As 2022 ended with a massive controversy and the shaken crypto market after the FTX and Alameda collapse, we got a few months to cool off. The first major incident of 2023 happened on March 10 due to Circle’s USDC stablecoin depegging from $1. It resulted from massive USDC selling pressure caused by information that Circle had $3.3B deposited with Silicon Valley Bank (SVB) and could not withdraw them. It stood for 8% of Circle’s funds. As news circulated about the potential insolvency of the bank, triggered by a sharp decline in the value of government bonds it had acquired in recent years due to recent interest rate hikes, numerous firms swiftly initiated the withdrawal of their funds from SVB. The subsequent bank run proved to be devastating. It led to a situation where many SVB customers could not transfer their assets before the bank collapsed, prompting a temporary withdrawal halt.
Crypto regulars, as well as outsiders, were foreshadowing the end of the industry. The sentiment was terrible, and fear hit the lowest marks of the year. Fortunately, swift and transparent actions by Circle brought stability. After three days, USDC regained its peg to $1. However, the entire crypto market was precarious and shaky during that time. People fled from USDC to other stablecoins, oppositely destabilizing them. SVB provided services to an extensive client base of tech startups and crypto businesses, including BlockFi, Avalanche, and Yuga Labs. Although the issue has been staved off, it raised questions about on and off-ramps for blockchain and cryptocurrency companies.
2. Ethereum Shapella Upgrade: The Emergence of LSTfi
Another major event, if not the biggest of the year, happened on April 12. The Ethereum network received an upgrade enabling validators to withdraw their ETH stake from the Beacon Chain to the execution layer. The upgrade package was named Shapella, after the combination of Shanghai and Capella, which are dedicated updates to execution and consensus layers, respectively. It was a significant improvement and the continuation of The Merge and Ethereum’s switch from a proof-of-work to a proof-of-stake consensus mechanism.
The Shapella upgrade accelerated the growth of liquid staking. A handful of crypto natives and commentators feared that the cascade of withdrawals would follow after the implementation. In reality, exactly the opposite happened. The amount of ETH deposited into the staking contract continuously increases. At the time of writing, ETH locked and staked on the Beacon Chain near 28.8M.
We can unanimously agree that 2023 was a bearish year for the entire crypto industry. In this harsh market environment, the liquid staking category sustained notable growth. Issuers and protocols providing LSTs and associated services led the pack in DeFi. Class leaders like Lido and Rocket Pool crushed the competition, gaining billions of dollars in TVL despite difficult market conditions. The Shapella upgrade undoubtedly induced some life into DeFi. To learn more about the liquid staking market, check out our LSTfi Report. Now, let’s wait for the next Ethereum update – Dencun. The upgrade will boost the scalability of the blockchain through the rollups implementation, gas fee optimization, and fortifying the network’s security.
3. Spark Protocol Ignition: The Saving DAI Rally
Lending is another category where the crypto industry witnessed the biggest inflows. Spark Protocol, launched on May 9, stands out as one of the fastest-growing DeFi protocols. It is MakerDAO’s product and a part of the Endgame Plan designed to restructure the decentralized autonomous organization. Spark Protocol will be managed by SparkDAO, a Maker Allocator subDAO, and scheduled for release in May 2024. Spark lending market SparkLend includes stablecoins DAI, USDC, USDT, LSTs, rETH, wstETH, and other cryptocurrencies such as ETH, WBTC, and GNO. Spark Protocol focuses on the DAI ecosystem and introduces sDAI. It is a yield-bearing stablecoin, representing DAI in the Dai Savings Rate (DSR) module, which distributes revenue from the Maker protocol to DAI holders.
Spark’s TVL has grown tremendously in 2023. In just seven months, the value of assets deposited into the protocol reached $1.7B. That is correct, billions! Spark Protocol offers competitive APYs thanks to the direct connection with Maker and its Direct Deposit Dai Module (D3M). Spark’s increasing popularity and TVL helped it to settle in the Top15 DeFi protocols regarding the value locked.
4. Multichain Multihack: The Bridge Exploit Threat
A peculiar hack shrouded in mystery and spanned across months involving Multichain concludes in July. Multichain is a cross-chain router protocol providing bridging services for all sorts of cryptocurrencies and networks. On July 6, protocol suffered unauthorized withdrawals totaling $125M. The incident has been deemed as an insider hack or rug pull. The losses forced the Multichain team to halt all operations and stop the protocol impacting users and liquidity providers. Cross-chain bridge protocols have become attractive targets for hackers, primarily because of their experimental architecture and untested solutions. Bridges tend to possess substantial centralized repositories of bridged assets. The Wormhole Bridge hack is reportedly one of the largest hacks in the crypto industry’s history, resulting in the exploit of $325M. Although Multichain had an advanced protocol design, the losses seemed unrelated to the technical structure and rather pointed to an insider job and private keys being compromised.
The Multichain hack caused a $125M loss. The assets on the Fantom bridge were impacted the most, including wETH, wBTC, and USDC. Interestingly, stolen funds were not transferred to any mixers or swapped for less centralized cryptocurrencies. Circle and Tether were able to freeze half of the lost assets, around $65M. Although an external hacker might have carried out the Multichain exploit, it had more complex associated issues. In addition to the lost funds, the Multichain CEO was arrested by the Chinese police, the team could not contact him, and the platform’s MPC keys were lost. The CEO’s family was also involved, transferring the remaining assets to controlled addresses.
It has been an unusual hack with many variables. As always, with such incidents, individuals and related companies suffer. Fantom ecosystem took a massive blow as Multichain was its main bridge. The protocol’s TVL crashed drastically after the keys were compromised. It shrank to less than $200M, decreasing over $1B. Today’s value is not even comparable or significant because what is irrecoverable is the trust. Fantom swiftly moved on days after the hack and collaborated with new cross-chain protocols such as Axelar and LayerZero. The worst always hits users who lost funds permanently and gained a negative attitude towards crypto.
5. Vyper DeFi Bite: Someone Found a Needle in a Haystack
On July 30, hackers took advantage of a flaw in the Vyper programming language. It is a Pythonic smart contract programming language compatible with the Ethereum Virtual Machine (EVM). The attack exploited zero-day weaknesses in the Vyper compiler, making smart contracts compiled with affected versions susceptible to reentrancy attacks due to failed reentrancy locks.
Re-entrancy, a prevalent vulnerability in smart contracts, is notably associated with the Ethereum blockchain. This susceptibility gained notoriety during the 2016 DAO hack but has persisted in various DeFi protocols and smart contract hacks. The vulnerability emerges from Ethereum’s similar treatment of user and smart contract accounts during value transfers, providing a chance for smart contracts to execute code through a fallback function. A re-entrancy attack exploits a check-interaction-effects code pattern, allowing a malicious contract to repeatedly call a vulnerable function before it updates its internal state. To protect against such attacks, the check-effects-interaction code pattern is recommended, ensuring state updates precede value transfers. Security audits, often overlooked, play a crucial role in identifying and mitigating re-entrancy vulnerabilities, a well-known threat in the DeFi space.
Vyper’s smart contract flaws led to an exploit of Curve Finance and stealing an estimated $70M from several projects, including Alchemix, JPEG’D, and Metronome. Whitehat hackers intervened, mitigating the losses to around $52M. In detail, affected projects included Alchemix, where attackers withdrew 5,000 ETH before the protocol could secure its assets. Curve Finance’s CRV/ETH pool only suffered two exploits, totaling over $18.5 million. JPEG’d experienced a failed attempt, but a subsequent attack drained nearly $11.5 million. Metronome’s msETH/WETH contract was manipulated for over $1.6 million. This malicious tactic targeted the contract’s logic to drain funds, highlighting the urgent need for improved security measures within the DeFi ecosystem.
The Vyper exploit, which mostly affected Curve Finance, had additional consequences. The crypto market is volatile, and negative news like hacks influence token prices. CRV price decreased as a result of pool exploits on Curve. This event drew attention to Michael Egorov’s (Curve Finance founder) DeFi loan positions. Egorov had around $100M in loans across various lending protocols backed by 427.5M CRV tokens. It was not a healthy situation where a slight pushdown of an unstable market could trigger liquidations. Curve founder had major positions on Aave and Frax, 305M CRV backing a 63.2M USDT and 59M CRV supplied against 15.8M FRAX, respectively. The stakes were enormous as liquidations could have potentially led to DeFi lending implosion. Fortunately, Egorov started paying off his debt, lowering the utilization rate and introducing additional capital via OTC markets. As days went by, the liquidation risk decreased. The entire debt on Aave was settled later in August.
6. Ripple Win-ish: The SEC Security Saga
Ripple Labs, established in 2012, aimed to facilitate low-cost cross-border money transfers using the RippleNet network and XRP cryptocurrency. The crypto market grew, and Ripple raised additional funds. However, the SEC filed a 2020 lawsuit alleging Ripple conducted an unregistered securities offering by selling XRP. The SEC claimed that Ripple’s founders raised funds through XRP, enriching themselves and promoting XRP sales for operational support.
The SEC argued that XRP is a security, subject to registration and disclosure requirements. The Howey test, determining if an investment contract is a security, was applied, leading the SEC to assert that XRP satisfied its requirements. The test verifies whether investors have or have not influence over the assets. Traditionally, no control determines security. Ripple chose legal confrontation, claiming the SEC lacked fair notice and exhibited bias, challenging the SEC’s authority. Despite XRP’s delisting by Coinbase, Ripple’s legal battle continued. On July 13, 2023, the court ruled in Ripple’s favor, stating that XRP sales on public exchanges did not break the law. However, Ripple was found to have violated securities laws in sales to institutional buyers, resulting in a partial victory for the SEC. Later that year, the SEC dropped claims against two Ripple executives in its lawsuit. The legal process raised calls for legislation and clearer regulations.
News about Ripple’s win skyrocketed XRP’s price and increased by over 70% on July 13. The crypto community became enthusiastic, and the court decision sparked positive vibes in the industry. Unfortunately, high prices do not last long, and all enthusiasm faded away, resetting the valuation to pre-win levels.
7. SBF Trial: 110 Years of Solitude?
FTX and Alameda Research collapse ended the terrible 2022, with consequences resonating throughout the entire next year. The fall caused the domino effect, spreading across the crypto and the financial ecosystem. The CEO of FTX, Sam Bankman-Fried, aka SBF, was charged in late 2022 with money laundering, wire fraud, securities fraud, and other counts alleging he used customer money from failed crypto exchange FTX to support his other company, Alameda Research. Hundreds of thousands of people lost their assets, businesses and projects lost funding, the crypto market liquidity was severely damaged, and last but not least, the industry’s reputation was tarnished, putting off individual investors and institutions. SBF and top executives mismanaged and muddled around $8.7B of users’ deposits, setting up the process for inevitable failure.
The process of recovery to reimburse affected customers carried on throughout 2023. According to debtors reports, around $7B has been recovered in liquid assets. Unfortunately, many of those assets are various cryptocurrencies and tokens which have high price volatility. FTX’s new management is preparing to sell the assets gradually as the company holds billions of dollars in cryptocurrencies such as SOL, BTC, ETH, APT, and more. Galaxy Digital became an advisor to help hedge and sell FTX crypto holdings. Recently, FTX debtors revised the reorganization plan and proposed that the value of customer asset claims will be retroactively set to the exchange collapse in November 2022.
Sam Bankman-Fried was tried in October 2023. The public trial concluded in a New York court on November 3, with the jury declaring him guilty on all seven charges. These charges encompass two counts of wire fraud, two counts of wire fraud conspiracy, one count each of securities fraud, commodities fraud conspiracy, and money laundering conspiracy. The sentencing is scheduled for March 28, 2024. The maximum possible sentence SBF faces is 110 years. Unfortunately, white-collar criminals, whose potential sentences might span a lifetime, ultimately confront only a fraction of the possible punishment.
FTX and Alameda Research collapse led to other major cryptocurrency services troubles. The contagion proved to be widespread and severe. Many companies went bankrupt and became insolvent, owing staggering sums of money. One of the most impacted was Digital Currency Group (DCG). Its subsidiary, Genesis Global, was an FTX creditor and suffered greatly due to the market collapse. Genesis reportedly had $3B in liabilities, $175M locked up on the fallen exchange, and owed Gemini $900M. Winklevoss brothers, Gemini founders, sued DCG over the outstanding withdrawals. Genesis and Gemini partnered on the Earn product offering crypto lending. The program stopped due to the repayment halt. If that is not enough, DCG also controls Grayscale, a crypto wealth management company. Parent company issues scared customers and endangered the Bitcoin GBTC Trust. FTX butterfly effect brought to the keens several companies. In 2023, crypto lenders BlockFi and Voyager filed for bankruptcy.
8. EigenLayer Restaking Revolution: A Star is Born
EigenLayer stands out as one of the most groundbreaking protocols in the crypto space. It introduces the pioneering concept of restaking, placing crypto-economic security at its forefront. This innovative feature empowers users who have staked their ETH directly or through liquid staking tokens to engage in EigenLayer smart contracts. The protocol facilitates the restaking of their ETH or LSTs, extending security to various network applications and unlocking additional rewards.
The EigenLayer protocol launch is scheduled in phases to onboard specific network participants. These stages include stakers, node operators, and service integrations. Testnet for the initial stakers onboarding phase had started in April 2023 and after successful staking functionalities tests, the mainnet launched in May. EigenLayer began the Stage 2 testnet in November. The second stage marks a thrilling advancement in the protocol. Operators now have the opportunity to join the network and commence validation for the inaugural actively validated services (AVS), EigenDA. Restakers can delegate their stake to operators, initiating shared security utilization with EigenDA. Additionally, Rollups can integrate with EigenDA, and start exploration into cost-effective, hyperscale throughput use cases.
In the meantime, EigenLayer introduced new liquid staking tokens and raised the cap limits. The protocol utilizes nine LSTs currently, including rETH, stETH, cbETH, and recently added wBETH (Binance), osETH (Stakewise), swETH (Swell), AnkrETH (Ankr), EthX (Stader), oETH (Origin ETH). Liquid Collective, utilizing LsETH, Frax with sfrxETH, and Mantle’s mETH, are currently in the process of undergoing audits and implementing strategies for early 2024 integration. EigenLayer increased caps for the first LSTs (rETH, stETH, cbETH). The adjusted caps, prioritizing security, will uniformly set a new cap of 200k for each LST, with a global pause mechanism when the total LST TVL approaches 500k ETH. Native restaking remains uncapped. The December 18th cap increase marked the fourth opportunity this year for the community to restake on EigenLayer, reflecting significant progress with 543k ETH in restaked capital across native and LST restaking. The latest cap increase almost tripled the amount of locked ETH in the protocol and took less than two weeks. The demand for EigenLayer restaking pools showcases interest among the crypto community. EigenLayer is cooking something special here.
EigenLayer revolutionizes the Ethereum landscape by enabling stakers to enhance the security of various applications through a process known as restaking. This approach creates a shared security pool, reducing capital requirements for stakers and boosting trust assurances for individual services. EigenLayer addresses the challenge faced by creators of new decentralized Ethereum services in establishing a unique trust network, allowing any service, regardless of its nature, to access Ethereum stakers’ collective security. The protocol introduces concepts such as a pooled security mechanism, an open marketplace, and multiple yield-generating possibilities, including native restaking, LST restaking, ETH LP restaking, and LST LP restaking. EigenLayer operates in the testnet phase, showcasing impressive metrics, and aims to foster decentralized innovation within the crypto space by serving as a passkey for restaking.
9. CZ Steps Down as the Binance CEO: The End of an Era
On November 21, Changpeng Zhao, aka CZ, the founder of the biggest crypto exchange Binance, announced his resignation from the CEO position. The news broke amid the U.S. Department of Justice’s announcement of a $4.3B settlement with the exchange. CZ pleaded guilty to charges, including violating anti-money laundering and sanction laws. Although Zhao parted ways with the company on the operational level and relinquished his executive role as part of the plea deal, he is expected to maintain his majority stake. The move aims to avert jail time while settling legal matters. The former CEO acknowledged his mistakes and emphasized the need to take responsibility for them.
CZ expressed confidence in Binance’s future growth under the leadership of the new CEO, Richard Teng, formerly the Global Head of Regional Markets at Binance. Teng brings over three decades of financial services and regulatory experience. Zhao will remain available for consultation but plans to take a break, considering passive investing and mentorship roles in areas like blockchain, Web3, DeFi, AI, and biotech, signaling a transition from the CEO role to a more advisory capacity in the entrepreneurial space. Zhao is the most famed and influential person in the crypto space. His expertise can benefit the industry immensely.
Throughout the year, Binance, the world’s largest cryptocurrency exchange, experienced a gradual decline in its spot market share, falling from 55% at the beginning of the year to 30.1% in December, according to CCData. The monthly spot volumes saw a significant drop from $474B to $114B from January to September. A small rebound in trading volumes was registered since September. CZ’s departure from Binance was not an isolated incident. The company also faced a series of executive departures in 2023. Despite the decline, Binance remains the largest cryptocurrency exchange, holding a significant lead over other CEXs. While Binance’s daily trading volume hovers around $18B-$19B, the following exchanges battle for a second spot around $3B-$4B.
10. Crypto Spot ETF: The Race Between BTC & ETH
The news about BTC spot ETF has been resonating throughout the entire 2023. The investment vehicle met considerable resistance from the Securities and Exchange Commission. The SEC’s leading argument holding the discussion back was investors’ protection against highly volatile assets. It was an obscure point because Bitcoin futures ETFs have been running since 2021, and BTC futures contracts have been available on CME since 2017. Futures products are more risky by design, providing leveraged exposure. Hence, the delayed decision about crypto spot ETFs seemed irrational.
The legislative work for the spot ETF sped up in 2023. The SEC has been dragging on the decision to approve BTC spot ETFs for too long. The commission has not met a few deadlines already. Twelve ETF applications are waiting for approval. BlackRock, the world’s largest asset manager, was the first applicant in June 2023. The company was soon followed by other institutions, including Fidelity, Franklin Templeton, VanEck, and more. The SEC has rejected or postponed every application to date. However, something is brewing. Many industry experts and commentators foreshadow the approval in January 2024. It is the month when many proposals reach the third deadline date. There is a possibility that the SEC will accept several applications at once, not granting first-mover advantage to any financial institution. Worth pointing out is the fact that approval does not mean an automatic ETF launch the next day. It is just the beginning of the release process, which can take a few months before we see an operational and active Bitcoin spot ETF.
BTC spot ETFs will introduce new capital into the world’s number-one cryptocurrency. The news will positively influence the entire crypto market. Spot exchange-traded funds will invest in Bitcoins directly and buy the underlying asset, unlike futures ETFs, which acquire derivative price-based contracts. Bitcoin spot ETF could improve market liquidity, opening new investment opportunities for additional traditional finance institutions and investors. Spot Bitcoin ETFs will securely hold coins in a digital vault managed by registered custodians. The fund aims to track the BTC price in the crypto market by buying or selling Bitcoins from holders or authorized exchanges. ETF shares are issued corresponding to the coins held, and these shares are publicly traded on traditional stock exchanges. Authorized participants, typically large financial institutions, create or redeem ETF shares based on market demand, helping maintain alignment with Bitcoin prices. Spot Bitcoin ETFs provide a convenient and liquid way for investors to gain exposure to Bitcoin without dealing with the technicalities of cryptocurrency management. Advantages include convenience, liquidity, regulatory oversight, and potential tax benefits. However, disadvantages involve crypto market volatility, regulatory uncertainty, security risks, management fees, and tracking errors. Investors should weigh these factors before considering spot Bitcoin ETFs.
Moreover, Ether ETFs attracted asset managers and exchange-traded fund providers. Institutions are pushing for Bitcoin initially, but in the meantime, they are sliding in ETH applications. There are eight futures ETH ETFs managed by VanEck, BitWise, Valkyrie, and ProShares already. Furthermore, seven spot Ether ETFs await approval from BlackRock, VanEck, Fidelity, Grayscale, Ark Invest, and more. The SEC presents the same reservations towards spot ETH ETFs, delaying decision approvals. All it takes is the first acceptance, and the floodgates will open. Because on what basis would other applications not be accepted? SEC final deadlines for spot BTC ETFs arrive in mid-March 2024, and the next round for Ether overlaps with Bitcoin in mid-January. The first quarter of 2024 should be interesting regarding spot crypto ETF approvals.
11. Modularism: What Did Celestia Launch Changed?
Initially, blockchain development revolved around the monolithic approach, where a single blockchain performed all functions. Recognizing the challenges of scalability, security, and sovereignty, modular blockchains emerged, decentralizing functions across specialized layers, such as execution, settlement, consensus, and data availability. Unlike monolithic chains, modular blockchains like Celestia prioritize specialization, creating scalable, customizable, and secure systems. This modular design allows developers to mix and match blockchains like Lego pieces, fostering diverse and efficient applications. In contrast, monolithic chains, such as Ethereum, Solana, or Sui, face high hardware requirements, limited control, and costly app issues. The benefits of modular blockchains include scalability, shared security, and sovereignty, offering a more efficient and autonomous blockchain ecosystem. The scalability arises from separating functions, shared security prevents fragmentation, and sovereignty allows independent rule-setting for applications on a sovereign chain like Celestia. Instead of packing everything into one blockchain, modular chains split the responsibilities across different layers.
Celestia took the crypto market by storm. The team has been carefully building throughout 2023, and the mainnet launched on October 31, introducing the first modular data availability network. Celestia utilizes a proof-of-stake consensus mechanism and has its own token, TIA. The initial distribution was airdropped and included only public allocation for early ecosystem participants and R&D. Despite only two months of existence, TIA’s market capitalization has already placed it in the Top50, source Coingecko. The popularity and modular blockchain narrative have the hype, that is for sure. Not only the token price is growing, but the ecosystem is expanding as well. It includes various categories of rollups, RaaS, sequencers, virtual machines, settlement layers, wallets, and cross-chain infrastructure.
The modular design is not reserved only for blockchain architecture. Since its inception, RedStone Oracles has been designed with the principle of several flexible modules to serve the market as the requirements change. Thus, RedStone can offer multiple (currently 3) data delivery models and benefit from the advantages of the modular Oracle architecture.
12. Rollup as a Service: The Inception of RaaS Vertical
With the emergence of new tooling around rollups, a new branch came into existence. Rollup as a Service offers almost instant creation of a dedicated rollup. Three major tech advancements allowed for that. Firstly, the data availability layers like Celestia, EigenDA, and Avail, should significantly diminish the cost of posting transactions to L1. Secondly, specific stacks of well-established rollups like OP-, Arbitrum-, zk- (zkSync), and zkEVM- (Polygon) stack have been made available for teams to utilize. Thirdly, the infrastructure providers of indexers, oracles, explorers, and other tools embraced a design, which is lightweight and easily deployed on new chains. We can name a few leading RaaS providers, such as Caldera, Gelato, Conduit, Altlayer, GatewayFM Sovereign, and Lumoz. On the other hand, big brands that decided to leverage such services include Manta, Lisk, Astar, Lyra, and many other recognizable companies.
13. Major Steps in Sequencer Decentralization of the L2 Stack
In the realm of blockchain technology, sequencers play a pivotal role in ensuring the order and execution of transactions, serving as a crucial link in achieving network consensus and security. Sequencers aggregate user transactions and direct them back to Ethereum. Traditionally, the three main blockchain layers – data availability, ordering, and execution – have been handled by a single blockchain. However, with the advent of layer 2 solutions and rollups, sequencers have become essential in managing transaction orders. The need for decentralization arises to maintain the blockchain’s core neutrality principles and monopolization. Decentralized sequencers, in contrast to centralized ones, mitigate the risks of censorship, ensuring a more robust and secure blockchain ecosystem. The discussion also delves into the Proposer-Builder Separation (PBS) concept and the challenges associated with L2 sequencers performing both proposing and building roles. Sequencers, whether centralized or decentralized, must navigate the delicate balance between scalability, efficiency, and the foundational principle of decentralization. As blockchain technology continues to evolve, the role of sequencers holds the potential to either strengthen or compromise the unique advantages inherent in blockchain’s revolutionary nature.
Offchain Labs, Arbitrum creators, in a collaborative effort with Espresso Systems, introduced decentralized and open shared sequencing technology. It is being implemented in Ethereum rollups. The development of Timeboost, a proposed transaction-ordering policy, is underway, with joint research and technical support provided to integrate it with the Arbitrum technology stack. The Arbitrum sequencer accepts user transactions, generating an ordered sequence that serves as input for the Arbitrum execution stage. At present, the sequencer operates under a first-come, first-served (FCFS) sequencing policy. Timeboost is a modified first-come, first-served procedure. The objective is to create a decentralized and user-aligned future for shared transaction sequencing on Ethereum rollups. The partnership aims to facilitate Espresso Systems in building a production-ready, open-sourced, and distributed implementation of Timeboost, ensuring compatibility with all Ethereum rollups. This initiative is geared towards establishing a neutral and open protocol, transcending individual technology stacks, and enhancing security and interoperability across the Ethereum ecosystem.
In addition, Offchain Labs introduced BOLD (Bounded Liquidity Delay), a dispute protocol designed to enable permissionless validation for Arbitrum chains. This innovation addresses the vulnerabilities of current dispute protocols that are prone to denial-of-service attacks, allowing malicious validators to disrupt the validation process. BOLD guarantees safety, liveness, and minimized latency for Arbitrum-technology chains, making validation safely permissionless. The protocol’s fixed upper bound of 7 days on confirmations prevents delay attacks and provides a more decentralized approach to validation. Offchain Labs has released the code and research specification on GitHub, contributing to the Arbitrum Nitro codebase for further development and testing. The BOLD implementation is modular and audited by Trail of Bits, with plans for future steps, including running a devnet, sharing formal proofs, and preparing for public testing based on community feedback.
Optimism does not fall back and takes the next steps in the technical decentralization roadmap. The OP Stack has introduced its first fault-proof system on the OP Goerli Testnet, marking a significant step toward enhancing decentralization in the Optimism ecosystem. This alpha release showcases a modular design, laying the groundwork for a multi-proof future, including zero-knowledge proofs. The system comprises three key components: a Fault Proof Program (FPP), a Fault Proof Virtual Machine (FPVM), and a dispute game protocol. These elements collaborate to challenge malicious or faulty activities, preserving trust within the network. The unique design of the OP Stack allows for the separation of the FPP and FPVM, enabling the development of diverse proof systems and dispute games. The fault-proof system’s modularity is poised to contribute to both technical and social decentralization within the OP Mainnet and the Superchain, fostering a diverse ecosystem of contributors. The release on OP Goerli Testnet invites community testing, emphasizing the importance of robust fault-proof mechanisms for the entire system.
In conclusion, the recent breakthroughs in blockchain technology, exemplified by Offchain Labs’ partnership with Espresso Systems, the introduction of BOLD (Bounded Liquidity Delay), and the Fault Proof System by OP Stack, mark a transformative phase for the blockchain landscape. The collaboration with Espresso Systems showcases a commitment to decentralized and open shared sequencing technology across Ethereum rollups, promising enhanced safety, security, and user experience. Simultaneously, BOLD’s inventive dispute protocol for Arbitrum chains ensures permissionless validation, addressing vulnerabilities and denial-of-service attacks. OP Stack’s Fault Proof System, with its modular design, not only introduces a multi-proof framework but also fosters community involvement, laying the groundwork for a more secure and decentralized blockchain ecosystem. Together, these advancements signify critical strides toward achieving technical and social decentralization in the ever-evolving realm of blockchain technology.
2023 Was The Year of Layer 2 Launches
14. ZkSync Era Mainnet Launch
The year 2023 witnessed fierce competition between L2 blockchains. It was a battle between zero-knowledge and optimistic rollups. ZkSync introduced the first ZK rollup called Era, which is compatible with the Ethereum Virtual Machine (EVM). It is a scaling solution targeting transaction inefficiency on Ethereum. With the newest iteration of the rollup, the zkSync blockchain started supporting smart contracts. The mainnet launch took place on March 24, initiating the movement for zkEVM-related dapps and protocols. Matter Labs, the company behind zkSync, has experimented with zero-knowledge rollups since 2020 with its first network, Lite. Protocols and infrastructure utilizing zkSync Era include Uniswap, LayerZero, and 1inch.
Since the mainnet launch in March, the Total Value Locked (TVL) on zkSync Era grew to $600M, according to L2BEAT. The calculations consider asset value bridged to Era and escrow contracts on Ethereum. It gives zkSync Era fourth place among layer 2 blockchains. Various protocols and applications started development and integrations on Era, creating its own small DeFi ecosystem. TVL of projects building on Era accumulates to $162M, based on DefiLlama. The network has the potential to grow as Era inherently facilitates account abstraction, enabling users and developers to program personalized security parameters and implement wallet recovery options, including features like two-factor authentication. This feature can attract hordes of new users, expanding zkSync Era’s share in the Ethereum scaling solution market.
15. Polygon zkEVM Mainnet Launch
It took just three days since the launch of the first zero-knowledge proofs scaling solution for Polygon zkEVM to emerge. Polygon is a layer 2 blockchain addressing the throughput and costs on the Ethereum network. On March 27, Polygon entered the scaling race with its zkEVM. It is a fully EVM-compatible solution, offering lower transaction costs (even though Polygon PoS is significantly cheaper in use than Ethereum) thanks to ZK proofs. Rapid network finalization accompanied by frequent validation proofs ensures high performance. All put together, Polygon zkEVM presents a robust and advanced ecosystem for developers to create different types of decentralized applications with high-quality user experience.
Polygon zkEVM ranks 10th in TVL among layer 2 networks with $135M, based on L2BEAT data. The value of bridged assets constantly increased since October. Development goes full steam on Polygon zkEVM, progressively introducing new applications and protocols utilizing this network. The total value locked amassed in various dapps and DeFi protocols could be more impressive. However, the ecosystem is maintaining a solid capital base.
16. Celo Homecoming to Ethereum as an L2
As the old saying goes, if you cannot beat them, join them. That is what Celo did. cLabs, the development team behind the Celo blockchain, ditched its standalone architecture and focused on becoming a layer 2 solution on Ethereum. In mid-July, cLabs proposed a transition and released an on-chain governance proposal. By the end of the month, the proposal had passed, and Celo began the conversion based on the OP Stack from Optimism. The change aims to bring Ethereum’s liquidity, improve security, and incentivize developers.
Celo’s plans do not end there. Apart from becoming Ethereum’s scaling solution, Celo wants to introduce restaking. The new design predicts off-chain data availability powered by EigenLayer and EigenDA. Celo 2.0 roadmap includes further transitioning into highly scalable zkEVM. Although the new L2 contains drastic technical upgrades, Celo’s mission remains unshifted. The team keeps the mobile-first approach, which ultimately can be the Web3 gateway. Improved architecture will maintain scalability and low transaction costs. All align with Celo’s Regenerative Finance (ReFi) ecosystem and sustainable green-money approach.
17. Linea zkEVM Mainnet Launch
The summer of 2023 can be described as Layer 2 Summer. In July-August, many new scaling blockchains launched their mainnet. On July 14, Linea launched. The network utilizes zero-knowledge proofs and Ethereum Virtual Machine compatibility, making it a zkEVM rollup. Consensys stands behind Linea development. These are the same guys that created the non-custodial Web3 wallet MetaMask. Consensy’s experience and crypto footprint allowed for a new zkEVM rollup to be released with proper developer and ecosystem backing. Linea aims to scale decentralized applications and is compatible with widely used tools, infrastructure, IDEs, and wallets, including MetaMask. Linea is supported by the largest Web3 infrastructure provider, Infura (also Consensys creation). Everything combined should push Linea to popularity and utilization heights.
Linea is in the Top 10 Ethereum scaling solutions regarding total value locked, ranking 8th with $184M. DeFi utilization is a little bit less impressive, accumulating to $55M deposited in protocols on the Linea network. To draw users to the chain, Linea introduced a successful incentive campaign called Voyage: DeFi. Average daily transactions skyrocketed, making Linea the third zkEVM rollup regarding activity and network traffic. The campaign aims to attract users and boost dapps engagement. Linea’s strategy works perfectly as many users speculate on token airdrop. Let’s hope the network will keep up the activity and interest in the long run.
18. Mantle Network L2 Launch (prev. BitDAO)
The group of layer 2 summer debutants includes Mantle Network. It is an Ethereum scaling solution, that prioritizes EVM compatibility for effortless integration with existing contracts and tools. Featuring a modular architecture with an optimistic rollup protocol and innovative data availability solutions, Mantle inherits Ethereum’s security while offering a cost-effective and accessible environment for deploying smart contracts. Mantle Network adopts a modular chain design, distinguishing itself from monolithic chains by segregating transaction execution, consensus, settlement, and storage processes into separate modules. In its initial Mainnet release, Mantle Network operates as a Smart Contract Rollup featuring modular data availability. EigenLayer’s EigenDA technology powers mantle DA. The network launched on July 17 at ETHcc in Paris.
Mantle puts its ecosystem first and has the resources to incentivize new developers and attract users. Mantle builds its foundation on the BitDAO merger and mighty treasury. To date, Mantle Treasury has $2.4B worth of assets. It serves as a backing for further growth and development. At inception, Mantle Network had its own native decentralized exchange. In addition, six months after the mainnet launch, the Mantle ecosystem introduced the Mantle Liquidity Staking Protocol (LSP) and released a liquid staking token, mETH. As a layer 2, Mantle sits in 7th place among Ethereum scaling solutions regarding TVL with $260M, according to L2BEAT. Value locked in DeFi protocols operating on Mantle accumulated $124M, source DefiLlama.
19. Base L2 Launch (Coinbase’s chain)
Layer 2 wars took off for good in 2023. The next Ethereum scaling solution came from a heavy-weight – Coinbase. The largest US-based crypto exchange launched its own network, finally. It is called Base and is an optimistic rollup built with OP Stack. Base is a developer-friendly platform for on-chain development. It leverages Ethereum’s security while adopting Coinbase’s best practices and intends to decentralize over time (which would be nice). Offering full EVM compatibility, low fees, and seamless integration with Coinbase’s products, users, and tools, Base aims to empower developers to tap into the vast ecosystem. The project is open source and aspires to become a decentralized, permissionless, and rollup.
It is great to see such initiatives as launching a layer 2 network from a centralized exchange. Coinbase’s enormous client and user base can accelerate Base popularity. At the time of writing, Base is the third-largest scaling solution with $674M worth of assets locked. Worth noticing is the expanded ecosystem of DeFi protocols and applications utilizing Base. At launch, it had over 100 dapps integrations already. The initial adoption and strong development backing are reflected in the TVL, and over $453M has been deposited on the chain.
20. Scroll L2 Mainnet Launch
Ethereum layer 2 solutions were a hot topic in 2023, especially zero-knowledge-based. On October 17, the next competitor entered the ring – Scroll. It is a zkEVM rollup with bytecode-level compatibility. Founded by Ethereum enthusiasts, Scroll is dedicated to advancing zk-proofs. Initially researching prover efficiency, they developed the zkEVM—a scalable Ethereum-like solution. Operating in the open-source realm, Scroll collaborates globally, emphasizing academic roots. Their EVM-compatible solution prioritizes a seamless transition for developers, focusing on security with regular code reviews, external audits, and a robust bug bounty program. Scroll’s commitment extends beyond technology, valuing Ethereum’s spirit and fostering an inclusive, collaborative ecosystem. Scroll emphasizes decentralized sequencer and prover network development. These are bottlenecks suppressing true DeFi decentralization.
Scroll’s qualities include EVM compatibility, a developer-friendly environment, and battle-tested security protocols. The L2 network has a collaborative ecosystem consisting of DeFi top projects. As we stand today, Scroll is the 15th Ethereum scaling solution, according to L2BEAT, locking around $54M worth of assets. The on-chain TVL trend presents an upward trajectory. Scroll is one of the earliest zkEVMs. Therefore, DeFi’s accumulated capital runs lower than the competition.
21. Blast Launch & L2 Incoming
Nearing the end of 2023, the crypto industry has witnessed an astonishing announcement regarding a new upcoming layer 2 blockchain called Blast. It is an Ethereum scaling solution built by the team behind Blur, a leading NFT marketplace protocol. They advertise Blast as the only Ethereum L2 with native yield generation. Blast offers features that enable developers to produce income from dapp deposits efficiently. What sets it apart from other layer 2 solutions is its unique approach of redistributing gas fee revenue to developers, fostering a fair and motivating ecosystem.
What is surprising about Blast the most is its TVL increase rate. The protocol launched its first stage on November 22, 2023, which is not even a testnet and can be referred to as a community incentive period. The value has grown to $1.1B since then, which is quite an achievement. The testnet is scheduled for January 2024, and the mainnet is for the following February. Despite not having a working product, Blast accumulated enormous capital. If Blast launched now, it would jump into the Top 3 Ethereum scaling solutions, according to L2BEAT. It would be a fantastic performance, beating the competition in terms of TVL.
The extraordinary growth and interest are associated with the airdrop campaign prepared by the team. The incentive program is split 50/50 between early community participants and developers. Users earn points by bridging to Blast and inviting friends. The total number of participants has reached 86k already. Blast accepts users’ funds already, but the current process raises several questions. The protocol does not have an operational bridge or a chain. Hence, any deposit still occurs on Ethereum. Blast simply takes users’ assets (stETH, DAI, WETH) and stakes funds in protocols such as Lido. Withdrawals are not available currently. The system raises security concerns and reservations regarding asset safety and key control centralization. Notable investors, including Paradigm, back the project. However, it does not exempt users from conducting essential research.
Similarly, Manta L2 launched its New Paradigm, which also applies the dynamics of the concept of native yield and additional boosts.
What Should You Still Do Before 2024 NYE?
Hey, it is almost welcoming of the New Year time! But before you indulge in the celebration, take a moment to reflect on 2023. Did you get rekt? Did you keep security principles? Which projects you involved in were the most successful? Who meaningful have you met?
The industry progresses month to month, no doubt about that. Hence, it is vital to individually reflect on what went wrong and well this year. Alright, that’s it for 2023, put your party cap on, and see you soon 🎇