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The Crypto Regional Development Index was established based on four dimensions: the proportion of the crypto population, CEX traffic, DeFi traffic, and online search popularity, with the United States, Vietnam, and Russia ranking in the top three. In 2022, there were approximately 320 million global crypto users, over 40% of whom were from Asia, with new user growth dropping from 194 million in 2021 to 25 million.

The highest traffic to CEX exchanges came from the United States, South Korea, and Russia, accounting for over 22% of the total. The U.S. holds the largest market share in the DeFi sector, with DeFi protocol traffic being six times that of Brazil, the second-largest. South America, South Africa, and the Middle East showed the highest interest in the crypto industry. The Southeast Asian crypto population reached 46 million, second only to North America. In South America and Africa, cryptocurrency applications mainly focus on payment and value storage, with over one-third of citizens using stablecoins daily. The infrastructure sector continues to focus on performance optimization, with service facilities becoming more comprehensive.

Ethereum Layer 2 projects are flourishing. New public chains have rapidly developed based on a "modular" technology route. The technology development in the storage sector has diversified, with storage capacity and utilization steadily increasing. Domain names, as the infrastructure for application layers and DIDs, have also seen explosive growth. There are numerous cross-chain bridges, but security and interoperability still have room for improvement. In mining, Bitcoin mining is facing challenges, while Ethereum is about to enter a new era of staking as a service. On the application front, the total TVL across various DeFi chains has decreased by over 70% from its historical peak, with leverage being cleared and yields declining.

The NFT market opened high but fell low, with the total market value decreasing by about 42% and the number of active trading users dropping by approximately 88.9%. NFTfi projects have emerged as the next growth point. GameFi and the Metaverse have shown bright performances but are underdeveloped. In terms of regulatory policies, over 42 sovereign countries and regions globally have implemented 105 regulatory measures and guidelines for the crypto industry this year. Positive policies account for 36%, a significant increase from last year. Comprehensive regulatory frameworks for the industry have been put on the agenda, with stricter regulations for CEXs and on-chain regulations potentially being incorporated into the system. The bear market continues, and we have proposed four valuable market bottom indicators, along with suggestions for avoiding bear market traps and protecting assets.

Finally, we have predicted some directions for industry development in 2023:

1. The market will bottom out in early 2023;
2. Major Web2 social platforms like Twitter will continue to integrate into Web3, bringing new SocialFi development models;
3. Layer 2 will see an ecological explosion in 2023;
4. ZK acceleration networks will begin to take off;
5. DappChain will enter a rapid development phase;
6. The real demand for on-chain storage will grow rapidly, leading to substantial development in the storage sector;
7. On-chain regulation will strengthen, and some protocols may face threats;
8. Cryptocurrencies will be used for payments or authorized as legal tender by more countries.

Due to the fact that before 2014, BTC did not meet the prerequisite for the 200-week indicator, this indicator began from mid-2014. From historical data, the two breaches of the indicator in 2015, the touch of the indicator in 2019, and the breach of the indicator during "312" in 2020 were mostly just brief touches or adjustments before rebounding. However, currently, BTC prices have been fluctuating long-term below the indicator since breaking it in June this year and falling back after breaking through in August. According to the indicator, BTC has historically broken below and oscillated, marking the current market as an unprecedented deep bear.

1.2.2 Application: Development and Innovation in a Slump

According to DeFillama data, the total TVL of DeFi dropped from 171 billion USD in January 2022 to a low of 50 billion USD in October 2022. As of the end of October, it was approximately 55 billion USD. Following a series of collapses like Terra, DeFi's TVL experienced two cliff-like declines, confirming the market's entry into a bear phase.

The data below shows the value of unpaid debts in lending protocols. The current data is approximately 4 billion USD, a decrease of 84% compared to last year's peak of 25 billion USD. The decline in user demand for leverage on-chain has led to reduced trading activity, which is a notable feature of this bear market.

Currently, the ETH chain remains the main battlefield for DeFi. With the onset of the bull market in the second half of 2020, explosive growth in protocols, rising token prices, and yields attracted a massive influx of funds. Liquidity also increased accordingly. However, as the market declined in 2022, both token prices and yields fell simultaneously. Liquidity was drained, and a large outflow of funds accelerated the downward sentiment. Currently, the stablecoin deposit rates of mainstream lending protocols are even lower than U.S. Treasury bonds. Recently, many protocols have suffered from hacker attacks, and incidents like Terra have emerged, causing risk-averse funds to be withdrawn. In this market, the development of Layer 2 public chains has been further promoted, allowing the DeFi ecosystem to develop a second time on Layer 2. The speed of scaling solutions is faster, costs are lower for ordinary users, and it is more attractive for small fund users to participate in DeFi. This is also a good opportunity for Layer 2 development. By observing the TVL data on Layer 2 chains, we found that in April 2022, the on-chain TVL of Layer 2 reached its peak of 7.5 billion USD, and then fell to 3.7 billion USD by July. Unlike other ecosystems, the Layer 2 ecosystem has been on the rise since hitting bottom in July, currently around 5.32 billion USD. This is thanks to the gradual maturity of Layer 2 technology, the start of token issuance, and the landing of numerous applications, with most Layer 2 chain development teams actively launching incentives, such as pre-airdrop reward activities and token issuance. With the development and progress of Layer 2 scaling solutions, more gameplay and ecological projects will inevitably emerge on-chain in the future.

As the market's heat fades, NFT trading volume has also shown a sluggish posture. The super high volume that appeared in May was due to the issuance of otherdeedforotherside (also known as Monkey Land), which generated FOMO sentiment at that time. Meanwhile, the total market value of NFTs has fallen by about half. The pricing of NFTs is mainly based on the currency, and the volatility of ETH is also significant, leading to an inevitable decline in the total market value of NFTs. The market value of NFTs dropped from about 35 billion USD to 21 billion USD, a decline of about 40%. The decline in the total market value of NFTs has not been as severe as that of ETH, as NFTs have continuously released new assets, consistently supplying the market with NFTs, which also attracts non-NFT users to join the NFT space.

Despite the sluggish NFT market, the growth rate of wallets holding NFTs has not slowed down, with approximately 80,000 new wallets added weekly, as shown below. The continuous increase in market users and new products, while the total market value of NFTs slowly declines (as shown above), indicates a phenomenon of market bubble elimination. The prices of NFTs are becoming more rational, and an increasing number of users are holding NFTs, which is a sign of healthy market development.

The secondary market for cryptocurrencies remains sluggish, and the primary market is also struggling. According to incomplete statistics from Odaily Planet Daily, the total disclosed financing amount in the global cryptocurrency market in the third quarter of 2022 was 5.841 billion USD, with a total of 442 financing events (excluding fund-raising and mergers), concentrated in infrastructure (20 events), technology service providers (50 events), financial service providers (49 events), applications (246 events), and other service providers (77 events). Among them, the application track received the most financing, amounting to 2.605 billion USD. Compared to the first and second quarters of 2022, the total financing amount and the total number of financing events in the third quarter saw a significant decline: according to publicly available information compiled by Odaily and PANews, there were a total of 511 financing events in the global cryptocurrency market in the second quarter of 2022 (excluding fund-raising and mergers), with a disclosed total amount of 12.71 billion USD. Among all financing events, the number of transactions exceeding 100 million USD reached 28. In Q1 of this year, there were a total of 461 financing events in the global cryptocurrency market, with a disclosed total amount of 9.2 billion USD.

In Q2, the areas of greatest interest to global cryptocurrency investment institutions were GameFi and NFTs. Games, game-related infrastructure, and technology solutions collectively received 82 financing events, ranking first in number, accounting for 16% of the total financing. The financing amount in the GameFi sector was also significantly ahead, reaching 2.996 billion USD, accounting for 23.5% of the total financing in the industry.

The trend of capital favoring investments in GameFi continued in Q3. The financing amount for the GameFi sector was 963 million USD, accounting for 16.4% of the total financing amount, with 15% (67 events) of the 442 financing events. This included chain game developers, chain game guilds, and X2E chain game projects.

In Q3, L1 projects also performed well in financing. Although the L1 track had only 13 financing events, accounting for only 3% of the total number of financing events, its total financing amount reached 625 million USD, making it the sub-track with the highest financing amount after GameFi. Notably, the two major public chains of the Move language, Sui and Aptos, claimed to inherit the Move development language of Libra and focus on improving L1's security and scalability while significantly enhancing network performance. High valuation financing attracted the attention of the entire market. Under the star effect of new public chains, new projects have emerged one after another.

Due to the prolonged bear market, many institutions have not successfully weathered the storm, and some have disbanded or gone bankrupt due to the impact of collapse events. Most cryptocurrency investment institutions have shifted their style since the bull market, strengthening their selection of investment projects. Although excellent projects are still difficult to overshadow in this environment, the areas of focus for institutions can be divided into two major categories: infrastructure and applications. Overall, there is a greater focus on infrastructure projects. According to publicly available survey results from Huobi Research, the frequency of mentions of infrastructure is the highest, with two main lines being ZK and new public chains, while areas like middleware, data, oracles, and DIDs also clearly have infrastructure components. In terms of application projects, DeFi, GameFi, and social applications rank in the top three. Although DeFi has been quiet for a while, it remains the direction most favored by institutions.

-2. Analysis of the Crypto Market by Region#

2.1 Regional Market Traffic Analysis

After 14 years of development, crypto assets represented by BTC have influenced and spread to various regions around the world, rapidly developing from points to areas. To assess the development level of the crypto market in different regions globally, we will analyze and judge the penetration and development speed of crypto asset businesses in various regions from the following four dimensions:

1. Total number of crypto users and penetration rate: The penetration rate of the crypto population refers to the ratio of the number of crypto users in a country to the total population of that country, which most intuitively reflects the adoption of the crypto market in a country;

2. CEX traffic: Centralized exchanges are an important part of the cryptocurrency market. These exchanges are usually easy to use, and many crypto newcomers start exploring the crypto world through them. Most users and liquidity funds in the crypto market are concentrated in centralized exchanges. We selected the top 100 CEXs in the market based on their active users, depth, trading volume, and reliability;

3. DeFi traffic: DeFi has become one of the fastest-growing areas in the crypto market in the past two years. With the emergence of models like AMM and liquidity mining, DeFi has rapidly attracted a large amount of capital from the market, and many industry veterans and practitioners have actively participated in the interaction of DeFi applications. Analyzing DeFi protocols can help us accurately analyze the distribution of global crypto veterans. We selected nearly 300 mainstream DeFi projects on different public chains based on their TVL, trading volume, and daily active users;

4. Keyword popularity: Online popularity can reflect the public's interest in the crypto market from a more macro perspective.

From 2018 to 2020, the global cryptocurrency market was in its early development stage, with user growth being relatively slow; after 2020, the booming ecosystem attracted many crypto-native users, leading to explosive growth. The growth rate and absolute growth value in 2021 were the highest in recent years. This may be due to numerous financial institutions and traditional traders entering the market, coupled with the popularity of NFTs, which ignited enthusiasm for the crypto market. Entering 2022, the global macro economy was on the brink of recession, but the declining crypto market demonstrated surprising resilience. From the data, the global crypto user population continued to grow. As of November 2022, the total number of crypto users worldwide was approximately 320 million, with a penetration rate of about 4.3%. Among them, the crypto market user population in Asia accounted for the largest share, at about 40%.

From the data obtained, it was found that the overall market size of centralized exchanges in 2022 significantly decreased compared to 2021. Specifically, the total market value of crypto assets decreased by about 66% over the past year, the spot trading volume of cryptocurrencies decreased by about 27%, and the number of unique visitors decreased by 24%. From this data, it is evident that the monthly visit volume of crypto users on centralized exchanges, both on the web and mobile, continues to decline. This is related to the gradual transition of the crypto market into a deep bear phase. The continuous decline in market conditions and the shrinking of assets have led to a decreasing interest in trading among existing crypto users.

The chart shows the relationship between the monthly visit traffic of major CEXs and the total market value of cryptocurrencies over the past year. The correlation coefficient between the two is 90.8%, indicating a strong positive correlation. However, two points are worth noting.

First, there was a slight divergence between the two in May 2022. This may have been due to black swan events like the LUNA collapse, where a large number of users needed to sell or bottom-fish on exchanges, which instead boosted the visit volume of exchanges that month.

Second, although the visit volume of exchanges has declined, the extent of the decline is much smaller than the decrease in market value. This indicates that there is still a significant portion of existing users in the crypto market who maintain continuous attention to the crypto market.

In the CEX traffic share, the United States firmly occupies the top spot due to its absolute number of crypto users and market size advantages, followed by South Korea, Russia, Turkey, and Japan with shares of 7.4%, 6.1%, 5.6%, and 3.8%, respectively. Overall, the leading countries have relatively friendly policies towards the crypto industry. South Korea and Japan, due to high unemployment rates and housing prices, have severe class solidification, leading young people to pin their hopes for upward mobility on cryptocurrency investments. Russia has been forced to choose a more open and free financial system due to sanctions. Turkey has long suffered from high inflation, and cryptocurrencies have emerged as a means of currency substitution in the country.

The chart above shows the monthly visitor changes for the top five countries. The decline rates for the United States, South Korea, Russia, Turkey, and Japan are 72.9%, 48.6%, 25.6%, 59.6%, and 38.6%, respectively. Among them, the United States experienced the largest decline, primarily influenced by macroeconomic factors, with the Federal Reserve continuously raising interest rates, tightening liquidity while changing the risk preferences of funds; while Russia's decline was the least. The global economic sanctions triggered by the war seem to have given the borderless crypto market a place to thrive, becoming one of the effective payment and trade channels for the country.

2.1.3 DeFi Users: The United States Holds Absolute Advantage

In the past year, the total number of independent DeFi users globally has relatively increased. In 2022, even with a series of collapses, decouplings, and attacks occurring in the industry, the long-term value and fundamental functions of DeFi still maintained user confidence, and they held an optimistic view of the future market recovery. Therefore, we believe that the fundamentals of the DeFi market remain relatively healthy.

From a regional perspective, the market share advantage of the United States in DeFi is significant, accounting for 31.8%, far exceeding other countries, which is related to the origin of DeFi projects in the United States. In recent years, the U.S. has continuously embraced the crypto industry, attracting a large amount of capital and talent, with many crypto startups flocking to financial technology centers like Silicon Valley and New York. Unlike the traffic of CEXs, in the DeFi traffic share, developed countries such as the UK, France, Germany, and Canada rank high. This may be due to the user base of DeFi being more professional and experienced, with higher thresholds, and these countries having more mature financial systems and deeper investor education. Brazil ranks second, as it is the largest cryptocurrency market in Latin America, and some banks and investment companies are currently providing or preparing to offer services related to the crypto market. Asset management companies like QR Capital and Hashdex have also launched DeFi ETFs, which have played a role in popularization.

2.1.4 "NFT" Becomes the Most Focused Crypto Topic Globally

We collected the main keywords related to the crypto market over the past year and selected the five most frequently mentioned words (not ranked) to create a visual map for readers to intuitively feel the interest distribution of various regions in the crypto industry.

From the keyword distribution, "BTC," "DeFi," and "Cryptocurrency" are most densely concentrated in regions such as South America, South Africa, and the Middle East, largely due to the underdeveloped financial infrastructure and payment systems in these areas, coupled with long-term high inflation rates, making cryptocurrencies an excellent substitute for daily payments and value storage. The performance of "NFT" is surprising, as its popularity has almost penetrated every corner of the world. This may be because NFTs can integrate well with various industries such as sports, art, entertainment, culture, and gaming, making them easy to gain traction; combined with the unique community culture and wealth effects of each NFT, it further expands its influence, creating a global NFT trend.

The chart above shows the search volume of various crypto keywords over the past year, reflecting the public's interest in the crypto field. The NFT market, which rose in 2021, has made crypto popular, with various crypto keywords occupying the heat ranking of internet users, and search traffic continuing to increase. Entering 2022, as the overall crypto market declined, industry attention began to wane. A series of incidents in Q1 and Q2 further dampened the already fragile market sentiment. After the few major industry hotspots in the second half of 2022 ended, global attention to the crypto market is in a relatively quiet state. Due to the characteristics of mass communication, negative news always attracts more readers, so peaks in search volume often occur during periods of rapid market decline and negative news. However, looking at the longer time frame, public attention to the crypto industry has decreased by nearly half.

2.2 Regional Market Industry Analysis

2.2.1 North America: The Main Battlefield for DeFi

North America is an important part of the global crypto market. Currently, the region has about 47 million crypto users, accounting for 14.7% of the global crypto population. As one of the most economically developed regions in the world, the crypto market is also very active. From the perspective of traffic share, DeFi business in North America is particularly strong. Below we will analyze the United States, one of the major countries in this region.

In recent years, the perception of cryptocurrencies in the United States has undergone a significant change. More and more people are beginning to pay attention to cryptocurrency investment and trading, and are joining this trend. The crypto market indicators we listed also reflect this phenomenon, with the United States ranking at the forefront in various dimensions. Currently, there are about 46 million crypto market users in the U.S., accounting for 13.7% of the total population; the traffic share in centralized exchanges and DeFi fields is 9.2% and 31.8%, respectively. In terms of the types of transactions on various CEXs in the U.S., BTC is the primary choice for U.S. crypto users, followed by Ethereum, Dogecoin, ADA, and other cryptocurrencies. Specifically, the U.S. leads the world with approximately 1.5 billion USD in BTC trading volume. The leading data performance also explains why the price fluctuations in the crypto market in recent years often have a strong correlation with the U.S. risk market. Especially since 2022, the price direction of the crypto market has been almost entirely guided by the Federal Reserve's monetary policy; on the other hand, the U.S. accounts for 31.8% of the trading volume in many DeFi protocols, which is also far ahead. The embrace of DeFi has made the U.S. a frontier for DeFi innovation, with a large number of developers gathering in Silicon Valley, New York, and other areas, making it easier for most projects to secure early funding and talent support in this fertile ground.

The rapid development of the U.S. crypto market can be attributed to several key reasons:

1. Young people are the main user group in the crypto market. According to a Finder survey, young people aged 18-34 in the U.S. make up the majority, accounting for 56% of total crypto users. Compared to older individuals who prefer traditional investment portfolios like stocks and bonds, young people seem to be more willing to take risks, and the high returns that cryptocurrencies may bring attract them, driving overall market adoption.

2. The process of compliance is increasingly advancing. Most states in the U.S. have introduced crypto-friendly legislation, promoting the legalization of crypto activities locally. For example, Ohio proposed a bill to allow tax payments in cryptocurrency; Wyoming passed 13 laws, including recognizing cryptocurrencies as money and allowing local banks to provide custody services for digital assets. With these laws, large institutions and financial service providers can offer legalized asset management and related crypto services to U.S. users.

3. Other factors. In addition to the reasons mentioned above, we believe that other events have played an important role in promoting the development of the U.S. crypto market, such as the entry of large institutions like Microstrategy and Tesla, the gradually rich offline cryptocurrency payment scenarios in the U.S., and the influx of large crypto startups into the country.

In recent years, the crypto market in Southeast Asia has grown rapidly. Currently, the total number of crypto users is approximately 46 million, second only to the North American market. Although the region is primarily composed of lower-middle-income countries, the crypto user penetration rates in some Southeast Asian countries (such as Vietnam, the Philippines, and Thailand) are quite remarkable, with crypto activities penetrating many everyday scenarios.

• Vietnam: The country with the highest cryptocurrency adoption rate

The number of crypto users in the country is about 20 million, accounting for more than one-fifth of its total population, successfully ranking at the top of the world's high cryptocurrency adoption countries. The main reasons for the growth of the emerging crypto market represented by Vietnam include:

1. Aligning with local financial reform and modernization requirements. Over the past decade, Southeast Asian countries and governments have placed great importance on emerging technologies like blockchain, hoping they can pave the way for economic digitization. In Vietnam, cashless payments have gradually become the norm, and the local government has set relatively lenient crypto tax policies to expand cryptocurrency adoption. At the same time, due to the underdeveloped traditional financial system in the region, the services available are very limited, leading users to turn to more efficient cryptocurrencies.

2. GameFi has become a popular investment scenario for users. Based on the cultural environment and consumption habits of the Southeast Asian region, gaming is an extremely important component. According to public data, Indonesia had the highest mobile game download rate at 38% in 2020, followed by Vietnam at 22%; the Philippines and Vietnam ranked high in terms of game payment rates, at 55% and 50%, respectively. The developed gaming industry environment has also provided a good foundation for the birth of blockchain games. In 2021, the phenomenal chain game Axie Infinity was launched, and its innovative "play-to-earn" model quickly ignited market enthusiasm, attracting a large number of users and funds to flood in, making Southeast Asia undoubtedly the center of GameFi.

Singapore has seized opportunities in recent years amid the saturation of the U.S. and Chinese internet markets and the rise of Southeast Asian economies, especially during the accelerated digital transformation post-pandemic. Singapore has gradually become a hotbed for internet entrepreneurship, attracting a large number of innovators and unicorn companies, including those in the crypto field. Singapore provides a highly open policy environment for the crypto industry, with clear regulations while allowing significant room for innovative tolerance. According to reports from the Gyroscope, the Monetary Authority of Singapore has provided enhanced regulatory sandbox methods in DeFi, which are more inclusive. Even if a license is not obtained, specific payment services can be temporarily allowed under exemption regulations. Therefore, Singapore has gradually become one of the most crypto-friendly regions globally. Data released by KPMG shows that in 2021, Singapore had over 80 venture capital transactions in the crypto field, totaling as much as 1.48 billion USD; compared to 2020, when the number was only 26, with a total of 110 million USD, the amount increased nearly 14 times.

The vast expanse of the African continent, with numerous countries, boasts the highest number of crypto users globally. Below, we analyze several key countries:

• Japan and South Korea: Extremely active in crypto trading activities

The performance of Japan and South Korea in terms of exchange traffic share cannot be ignored. Specifically, South Korea ranks second with 7.4%, while Japan ranks sixth with 3.85%. On one hand, major crypto exchanges like Upbit, Bithumb, CoinOne, Korbit, and Gopax are located in Japan and South Korea, boosting their data performance in this regard; on the other hand, according to reports from Coindesk, the high unemployment rates and high housing prices in both countries have forced local young people to seek alternative means of wealth creation. Especially in South Korea, there is almost a nationwide phenomenon of trading cryptocurrencies. In addition to employment and high consumption pressures, the solidification of classes and monopolies by chaebols have made it exceptionally difficult for the lower class to start businesses. Cryptocurrencies, as a borderless investment, are viewed by young people as an important means to escape poverty and accumulate wealth. Data shows that one in five young South Koreans is trading Bitcoin. Moreover, the local government's legalization of owning, selling, and purchasing crypto assets, along with potential future tax incentives, has made the crypto market increasingly popular in the region.

• Hong Kong: The Sleeping Eastern Financial Center

Hong Kong's crypto market has long been in a gray area. As a former Asian center, Hong Kong attracted a large number of well-known crypto companies like Animoca, FTX, and BitMEX due to its developed financial industry and inherent advantages of being backed by the mainland market. However, with the series of comprehensive bans on crypto activities by mainland China, Hong Kong quickly lost its market advantage; coupled with the steady progress of CBDC pilot work in Hong Kong, the Hong Kong Monetary Authority also hopes to bring potential cryptocurrencies under regulatory oversight. The tightening policy environment has accelerated the departure of many practitioners and crypto companies, leading to a rapid decline in Hong Kong's crypto market share over the past few years. However, with the release of a new virtual asset policy declaration on October 31, 2022, clarifying the legality of local crypto activities, the reopened Hong Kong crypto market is expected to rise again in the future.

• India: Regulatory Uncertainty, Crypto Market Pressing Forward

The Reserve Bank of India is not as interested in crypto technology as other countries' central banks; its finance minister once declared in 2018 that the Reserve Bank of India would completely ban cryptocurrencies, but this was never elevated to a legal level. This means that crypto trading is in a gray area in India. Therefore, despite the significant development resistance faced by India's crypto market for a long time, it has not stopped moving forward. Until last year, the Supreme Court of India ruled that the Reserve Bank's ban on cryptocurrencies was unconstitutional, marking a relaxation of India's policies. The shift in government regulation has greatly promoted the development of India's crypto economy. According to reports from Coindesk, the number of investors in rural areas of India wishing to buy and trade cryptocurrencies has significantly increased, with rural registrations on CoinswithKuber growing by 135%; meanwhile, since the beginning of this year, the Indian blockchain industry has completed 16 financing transactions, totaling over 627 million USD, which is 14.25 times that of 2021. Additionally, despite India's large population base, the education level of young people is good, making them more receptive and understanding of cutting-edge blockchain and cryptocurrency technologies and concepts. Many existing excellent technology development teams in the crypto field, such as Matic and Starkware, come from India, and they have all become leading projects in their respective technical branches. These factors reflect the enormous potential of India's crypto market.

2.2.4 Europe: One of the Main Forces in Crypto, War Has Not Stopped Market Progress

In Europe, we focus on Russia and Ukraine. From our data, both Russia and Ukraine rank high in various indicators. This is largely due to the outbreak of the Russia-Ukraine war, which has led to an increase in crypto activities in both countries. From the Russian side, the current population holding cryptocurrencies exceeds 14.6 million, accounting for 10.1% of the total population. The country has taken many proactive measures in establishing regulations related to cryptocurrencies. In September 2022, Russia legislated to approve the use of hydropower, nuclear power, and other resources for cryptocurrency mining in certain regions. Additionally, due to the war, the country has been forced to exit SWIFT under Western sanctions, making cryptocurrencies an important supplement for foreign trade settlements. Similarly, in September, the Central Bank of Russia officially announced the legalization of cross-border payments using cryptocurrencies like Bitcoin and Ethereum. As for Ukraine, the sudden war has caused a severe blow to the country's economy, with high inflation; coupled with the central bank's martial law strictly limiting cash transactions for residents, many Ukrainians view cryptocurrencies as an effective hedge against inflation. Therefore, since the war began, the volume of cryptocurrency transfers in Ukraine has continued to grow.

The main reasons for the adoption of cryptocurrencies in major countries in South America and Africa are largely consistent, mainly due to financial crises, high inflation, and excessive depreciation of fiat currencies. Typical countries include Venezuela, Argentina, Brazil, Morocco, and Egypt. Although not all cryptocurrencies can be used as risk hedging tools, stablecoins are certainly a good means for these regions to serve as asset reserves. According to public data, due to maintaining an annual inflation rate of up to 8%, at least one-third of people in South America and Africa are accustomed to using stablecoins for retail transactions and daily asset reserves. At the same time, these regions also have the highest proportion of using stablecoins for reward payments in the world.

The collapse of Terra can be said to be one of the worst events in 2022 and even in the entire industry’s history. Terra was once a sensation in the entire crypto circle, ranking among the top ten crypto assets.

Its collapse left many investors with nothing and further exacerbated the already bearish cryptocurrency market. Founded in 2018, Terra was established through the dual-token mechanism of the "stablecoin" UST and the "governance token" Luna. In early 2022, Terra's founder Do Kwan launched a protocol called Anchor: as long as UST was deposited, a fixed annual yield of 20% could be obtained.

Thus, LUNA attracted many investors, and its decentralized nature also won favor in the crypto circle. After the launch of the Anchor protocol, most of the UST in circulation was deposited in the protocol. Before the collapse of UST, nearly 75% of UST (up to 14 billion) was held in the Anchor protocol, and many investors even mortgaged other crypto assets to borrow UST to earn a 20% annual yield. As the demand for UST grew, the price of LUNA also surged, breaking through 100 USD. At its peak, the issuance of UST exceeded 15 billion, making it the largest decentralized algorithmic stablecoin in the crypto circle. In May 2022, the UST liquidity pool in Curve lost balance due to significant sell-offs by users, leading to UST's decoupling and a continuous decline in price. Faced with the imbalance of UST, Do Kwan used the LFG team fund to sell 80,000 BTC to buy back UST.

Unfortunately, the market had lost confidence in Terra, and other users began to sell UST. The algorithm of Terra simultaneously caused massive inflation of LUNA, leading to a death spiral for LUNA and UST. Traders on the Terra chain could not keep up with the massive sell-offs, making the collapse inevitable.

The collapse of Terra caused significant losses in the market, with the price of UST dropping to $0.2 within days, and the price of LUNA also plummeting to zero, resulting in a market capitalization evaporation of $40 billion for the Terra Network, with many investors suffering severe losses. Additionally, the sale of 80,000 BTC by LFG also had a huge impact on the market, causing the price of Bitcoin to drop and leading to a more severe bear market overall.

Three Arrows Capital (3AC) is a cryptocurrency hedge fund founded in 2012 by founders Su Zhu and Kyle Davies. Three Arrows Capital is known for its high-leverage bets, borrowing large sums from various companies and investing in many different digital asset projects. In March 2022, its assets under management reached $10 billion, with a portfolio including tokens like Avalanche, Solana, Polkadot, and Terra. Three Arrows Capital was undoubtedly an investment giant in the crypto circle. After the collapse of Terra, rumors began to circulate that Three Arrows Capital was facing liquidity issues, and there were also reports suggesting that the company had misappropriated client funds. On June 14, Su Zhu deleted references to digital currencies like Ethereum from his Twitter bio and tweeted, "We are in communication with relevant parties and are fully committed to resolving this issue."

However, Su Zhu did not specify the exact nature of the "issue" he was addressing. A week later, the digital asset brokerage firm Voyager Digital announced that it had lent 15,250 BTC and $350 million in stablecoin USDC to Three Arrows Capital. At the time, the total loan amount exceeded $675 million. Voyager Digital demanded that Three Arrows Capital repay the entire outstanding loan by June 27, or face default. Ultimately, Three Arrows Capital did not repay the loan, and Voyager immediately sought compensation from Three Arrows Capital through legal means.

After the exposure of the situation, other lenders to Three Arrows Capital also demanded repayment, including Genesis Global Trading, BlockFi, BitMex, FTX, and Blockchain, among others. Three Arrows Capital was forced to sell its assets and even sold off 80,000 stETH (over $84 million) in a significant sell-off on Curve, leading to the decoupling of stETH (which once decoupled to 0.94 ETH).

Three Arrows Capital opened a funding gap in the crypto circle, with far-reaching effects. However, due to a lack of transparency, no one knew who held exposure to them. As more and more institutions disclosed Three Arrows Capital's bad debts, panic spread throughout the industry, leading to a withdrawal of funds and the crypto industry entering a "Lehman moment."

3.3 The FTX Incident Triggers an Industry Earthquake

In November of this year, FTX announced bankruptcy due to user withdrawals leading to liquidity exhaustion and insolvency.

This can be considered the largest risk event since the onset of this bear market, with widespread and profound impacts. FTX was founded in 2019 by Sam Bankman-Fried, along with its sister company Alameda. In just three short years from its inception to its collapse, FTX had become the second-largest centralized exchange in the industry with a market capitalization of $24 billion, and its founder SBF's personal assets reached $15.6 billion. However, within a week, all these assets turned to dust. The root cause of the issue was that FTX, as a centralized exchange, held a large amount of user assets. Its sister company Alameda required a significant amount of funds for its operations, so it used tokens such as FTT and SOL as collateral to borrow user funds from FTX. As a result, although the value of user assets on FTX did not change significantly on paper, they had transformed from assets containing a large amount of stablecoins and BTC to holding a large amount of FTT and SOL, leading to severe asset homogeneity and high volatility. The trigger for the situation was Coindesk discovering issues on FTX's balance sheet and publishing an analysis article to warn the market. Subsequently, Binance's founder CZ announced that he would sell his holdings of FTT to mitigate risk, triggering market panic and causing the price of FTT to plummet, which significantly shrank FTX's asset side and sparked a wave of user withdrawals. Ultimately, FTX faced liquidity exhaustion due to user withdrawals, and the significant drop in the value of its holdings in FTT and SOL led to insolvency, resulting in its eventual bankruptcy.

FTX's bankruptcy directly triggered an industry earthquake and led to a market crash. As one of the industry leaders, FTX and Alameda participated in numerous project investments, especially during this bear market, where they frequently stepped in to rescue struggling companies, establishing an image of a central bank in the crypto circle. According to incomplete statistics, FTX participated in direct investments in over 110 projects, some of which are listed in the table below:

Aside from the market downturn and the losses suffered by related companies and projects, this incident also had a severe impact on the entire industry ecosystem. The most direct impact was that centralized exchanges faced a crisis of trust. Since the outbreak of the incident, major exchanges have faced withdrawal pressures, revealing the significant distrust users have towards centralized exchanges under the influence of panic. In the face of this situation, major exchanges have taken measures to save themselves, such as disclosing reserve assets and calling for the establishment of industry norms and recovery funds. However, in the long run, this incident will have far-reaching effects on the entire industry ecosystem: users may lose trust in centralized institutions and increase calls for decentralization, potentially leading to a resurgence of decentralized projects; regulation will inevitably be strengthened, making it more difficult and costly to obtain compliance licenses; the information transparency of various projects or institutions will significantly increase after this incident; and the event may shake users' confidence in the entire cryptocurrency industry, leading to prolonged periods of market downturn.

Despite this, we believe that every crisis brings opportunity. Each event's outbreak serves as a detoxification process, and every market downturn presents an opportunity. As the situation gradually stabilizes, the industry will continue to move in a positive direction after experiencing the pain.

Ethereum Merge: The New Era of PoS Begins#

On September 15, 2022, the highly anticipated Ethereum Merge was successfully completed, marking the official transition of the Ethereum mainnet's consensus mechanism from Proof of Work (PoW) to Proof of Stake (PoS).

As a world-class computer, Ethereum has used the PoW consensus mechanism since its inception to ensure system security, with various complex functions such as transactions, smart contracts, and accounts operating on this core mechanism. With the continuous prosperity of ecological applications on Ethereum, the current infrastructure poses challenges to system scalability, and the limitations of PoW severely restrict Ethereum's future development. To address scalability issues, the team proposed a series of network upgrade plans. The Merge is the second network upgrade in this series, combining the existing two independent blockchains of Ethereum mainnet and the Beacon Chain, while retaining the original functionality of executing smart contracts and complete historical data and user states, achieving a switch in the consensus mechanism.

After the Merge, Ethereum underwent corresponding changes in block structure, network structure, consensus mechanism, and node types. The new block can be seen as a combination of beacon blocks and the original PoW blocks, where the block fields related to PoW consensus will be modified to 0 or constants; the network structure will adopt a "consensus layer + execution layer" architecture, with the consensus layer coordinating and directing the execution layer to generate and synchronize blocks; after the Merge, the types of Ethereum nodes will become more diverse. The addition of stateless nodes helps maintain the decentralization of the network and prepares for future sharding architecture.

The Ethereum Merge is a milestone event for the cryptocurrency market: for Ethereum, the Merge is a key step in enhancing performance, and the shift to a PoS mechanism provides the foundational conditions for Ethereum's subsequent sharding expansion. Moreover, after the Merge, the issuance rate of ETH will significantly decrease, and combined with the burning mechanism of EIP-1559, ETH is likely to enter a deflationary phase in the future. For the industry, the Merge signifies the end of the large-scale GPU mining era, forcing miners to flock to alternative chains or exit altogether. As Ethereum gradually addresses its performance shortcomings, it will inevitably squeeze the ecosystems of other PoS public chains. On a deeper level, the Merge is an important change in response to the global call to reduce carbon footprints. The enduring popularity of Bitcoin has allowed the industry to witness the robustness of the PoW mechanism, but its requirement for continuously running mining machines to repeatedly compute until finding a qualifying hash value consumes a significant amount of energy. After Ethereum transitions to PoS, global energy consumption will decrease by approximately 0.4% annually.

3.6 Tornado Cash Regulation: Triggering Reflection and Concerns in the Crypto Industry

On August 8, 2022, the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) added Tornado Cash and its associated crypto wallet addresses to its "Specially Designated Nationals List" (SDN), prohibiting U.S. citizens from interacting with the protocol or any Ethereum addresses associated with it. Those who interact with addresses on the SDN list will face penalties. According to Tornado Cash's official Twitter, its protocol faced sanctions from the following related agencies:

• Tornado Cash GitHub page was shut down
• Tornado Cash contributors' accounts were banned
• Tornado Cash protocol's USDC RPC requests were rejected by Infura and Alchemy

A large number of service providers and DeFi protocols have prohibited access to Tornado Cash and related wallets. The Tornado Cash incident has sparked extensive discussions, including whether blockchains should resist censorship and whether the crypto industry should cater to regulation. Ethereum core developers have also discussed strategies to respond to national-level regulatory scrutiny in developer calls. The Tornado Cash incident not only promotes deep reflection on the conflict between privacy and regulation but also marks the formal action of global regulatory agencies against the wild west of DeFi.

The biggest event in the Layer 2 space this year was the mainstream Optimistic Rollup protocol Optimism issuing the OP token, driving both its own growth and the overall reverse growth of the Layer 2 space. At the beginning of 2022, the growth rate of Layer 2 slowed down. To attract users and stimulate growth, Layer 2 protocols showcased their strengths. First, in April, the top Optimistic Rollup protocol Arbitrum launched an ecological exploration activity called "The Arbitrum Odyssey," encouraging users to use on-chain projects to earn NFT rewards. User enthusiasm was high, but due to the activity being too popular, it exceeded the network's preset capacity, leading to the activity's suspension. Subsequently, Optimism announced the issuance of its native token OP and revealed its economic model. In early June, Optimism announced that it would allocate 5.4% of the initial supply of OP tokens to create an incentive fund to support builders and projects within the OP ecosystem. These measures helped Optimism's TVL (calculated in ETH) grow more than fourfold within six months.

Optimism is the first among the four major Rollup projects to issue tokens, setting a good example for other protocols. On July 13, the ZK Rollup team StarkWare released three articles in succession, announcing that its product StarkNet would issue a native token and introducing the token's application scenarios, issuance quantity, and distribution. It also stated that StarkNet had minted 10 billion tokens and would allocate a portion to contributors and relevant investors in the StarkNet ecosystem. Thus far, two of the four major projects have issued tokens or have clear plans to do so. The remaining two are also expected to issue tokens sooner or later. zkSync has stated in its official user documentation that it will issue a token, and Arbitrum is likely to have to issue a token to solidify its position.

In addition to issuing tokens, Layer 2 is also continuously iterating on the technical level (detailed later). Arbitrum launched the Nitro network upgrade in August, increasing network throughput and reducing transaction costs. Optimism announced a major upgrade, Bedrock, to be launched in Q4 this year, achieving Ethereum equivalence, shortening deposit times from L1 to L2, and reducing transaction costs. StarkNet has implemented Rust-VM, significantly lowering the threshold for Rust language developers. The mainnet of zkSync 2.0 (first phase available only to the team) will launch in November. Layer 2 protocols are continuously improving performance and user experience through technical upgrades and introducing various means to capture value for the network, incentivizing developers and users. Looking back, the timing of Optimism's token issuance coincided with a turning point in the overall TVL of Layer 2 this year. After that, the TVL of Layer 2 grew by 63%, becoming one of the few areas that could achieve growth during the bear market. This summer may not be termed "Layer 2 Summer," but Layer 2 has already shown strong vitality. In the next summer, they may bring surprises.

Once boasting 1 million users and 4.72 million registered users, and able to earn up to $122.5 million in profit in a single quarter, STEPN can be considered one of the most brilliant projects in GameFi and X to Earn in 2022. However, STEPN ultimately fell into a bottleneck and entered a death spiral, marking the end of the X-Earn craze in 2022.

Encouraging users to walk to earn tokens is the core of STEPN. Since the game's launch, STEPN has gained favor in the crypto circle and attracted many new Web2 users, quickly experiencing explosive growth. At its peak in May, STEPN had 700,000 active users, accounting for nearly 20% of Solana's daily unique paid users. After the peak in May, active users plummeted, and new users continued to decrease.

The reasons behind STEPN's decline, aside from the impact of the cryptocurrency market's bear phase and the panic caused by the LUNA collapse, also include STEPN's announcement in July 2022 to withdraw users from mainland China, leading users to sell off related STEPN crypto assets. The utility token GST entered a state of uncontrolled supply inflation due to declining demand, causing its price to plummet. STEPN opened a new model for X to Earn, and the rapid development point of STEPN and its decline due to a lack of sustained user growth also provide reference value for future X to Earn projects.

3.9 This Year's Largest Acquisition: Huobi Acquisition

As the largest exchange in the Chinese market, Huobi was officially acquired by a merger fund under Hong Kong's Baidu Capital at a valuation of $3 billion in early October 2022, which may be the largest acquisition in the cryptocurrency industry this year.

Founded in 2013 by Li Lin, Huobi Group has gradually increased its market share alongside the growth of the cryptocurrency market, becoming the largest exchange in the Chinese-speaking world after 2017, with its overall ecological layout being industry-leading, including Huobi University and Huobi Investment, which have good reputations. Until 2021, Huobi, Binance, and OK were regarded as the three giants of Chinese cryptocurrency exchanges. However, in 2021, mainland China implemented the strictest cryptocurrency regulatory policies in the world, including banning mainland users from trading cryptocurrencies, prohibiting virtual currency mining within mainland China, and banning companies registered in mainland China from engaging in virtual currency-related businesses. After the introduction of these regulatory policies, companies related to cryptocurrency businesses, represented by Huobi, announced their exit from the mainland market, fully shifting their operations overseas. Before exiting, Huobi's daily trading volume exceeded $60 billion, peaking at over $90 billion, but after exiting, it faced a bear market, with daily trading volume shrinking to $5 billion, a decline of over 90%. However, as an established exchange, Huobi still possesses deep foundations and valuable assets. In addition to its brand influence, Huobi holds compliance licenses in the U.S., Hong Kong, South Korea, and Japan, and has a listed company, Huobi Technology, in Hong Kong, which remains quite attractive to acquirers. Therefore, after multiple negotiations, in early October, Baidu Capital announced the acquisition of all shares of Huobi Global held by Li Lin.

Hong Kong Baidu Capital, founded by Chen Yihua in 2008, is a Hong Kong asset management company, and he is also a partner at Jinglin Asset. After acquiring Huobi, Baidu Capital announced the establishment of a global advisory committee aimed at guiding the strategic layout and development of Huobi Global. Its members include Baidu Capital founder Chen Yihua, Huobi co-founder Du Jun, TRON founder Justin Sun, Vice President of Hong Kong University of Science and Technology Wang Yang, and Valkyrie Investment co-founder Leah Wald. At the first general meeting after the acquisition, Justin Sun, as a representative of the advisory committee, announced several important measures, including empowering HT and strengthening overseas strategies. In the following week, the price of HT surged over 80%, indicating market recognition of this acquisition and Huobi's strategic adjustments. It is believed that after completing this acquisition and strategic adjustment, Huobi will regain its former glory in the future.

On March 9, 2022, U.S. President Biden signed the executive order on "Ensuring Responsible Innovation in Digital Assets," marking the first comprehensive government measure in U.S. history to address the risks and potential benefits of digital assets and their underlying technologies. This order established a national policy on digital assets covering six key priorities: consumer and investor protection, financial stability, illegal financing, U.S. leadership in the global financial system and economic competitiveness, financial inclusion, and responsible innovation. On September 16, the White House released the first draft of the cryptocurrency industry regulatory framework, which follows the digital asset executive order signed by President Biden in March, mobilizing existing regulatory agencies such as the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission, and expanding cooperation between the U.S. and its partners through G7, G20, the Financial Action Task Force (FATF), and the Financial Stability Board (FSB).

On June 30, 2022, the President of the European Council and the European Parliament reached a temporary agreement on the proposal for the regulation of the crypto asset market (MiCA), and on October 5, the European Council approved the final text of the MiCA regulation. On October 10, the European Parliament committee passed the MiCA bill with 28 votes in favor and 1 against, which will undergo a final vote in the European Parliament plenary session. Once passed, it will take effect in 12-18 months. On October 10, European Parliament members also voted on the Transfer of Funds Regulation (TFR), an anti-money laundering bill requiring that transfers using cryptocurrencies must include the identity information of both the payer and the payee. Once these two bills take effect, they will establish a unified regulatory framework for crypto assets in the EU, becoming the most comprehensive regulatory regulations for crypto assets in major jurisdictions globally, providing strong protection for service providers and investors engaged in crypto assets. The crypto regulatory frameworks introduced by the U.S. and EU will have a significant impact on the global crypto market, as the U.S. and EU will take the lead in establishing a unified crypto regulatory system, which can not only enhance regulatory efficiency and enforcement capabilities within their jurisdictions but also provide a reference model for other countries' regulations.

Web3 Infrastructure#

Rollup is a highly anticipated off-chain scaling solution. The main idea of Rollup is that users conduct transactions on Layer 2 (off-chain), and Layer 2 operators compress and package the transactions, then submit the compressed transaction data and proof of state transition to the main chain, which will be verified by validators on the Ethereum mainnet (and in the future, it could also be other Layer 1s). By using more efficient encoding methods and reducing the amount of data that needs to be uploaded, the number of bytes required for the Ethereum mainnet to store this batch of off-chain transactions has decreased. Additionally, since the Ethereum mainnet does not need to recalculate off-chain transactions, the gas consumed by transactions has also significantly decreased. Rollup reduces on-chain resource consumption while maintaining data availability, meaning that the Ethereum mainnet can view and ensure that no one can tamper with off-chain transactions. Therefore, it can inherit Ethereum's decentralization and security while enhancing scalability, becoming the mainstream technical solution for Layer 2. Vitalik has also stated, "For Ethereum, Rollups are the only trustless scalability solution in the short to medium term, and possibly in the long term." Rollup has already taken shape by early 2022 and achieved reverse growth this year. According to L2beat data, on January 1, 2022, the overall TVL of Rollup was 1.56M ETH, about 4.5% of the TVL of the Ethereum mainnet. As of October 20, 2022, the TVL of Rollup has risen to 3.62M ETH, an increase of 131%, and the ratio to the TVL of the Ethereum mainnet has also risen to around 7.5%. This growth of Rollup in such a poor overall crypto market is remarkable, especially as ETH's price fell by 65% during the same period.

In terms of the number of deployed projects, according to DeFiLlama data, as of the end of October 2022, there are about 210 projects deployed on Rollup (projects deployed on multiple Rollups are counted as one), while there are 585 projects on the Ethereum mainnet. In this regard, the ratio of Rollup to Ethereum is 35.9%, a significant increase from 19.3% at the beginning of the year. Some have speculated that if the gas fees on the Ethereum mainnet decrease, the importance of Rollup will diminish. However, the fact is that this year, both ETH's price and average gas price have decreased, leading to even lower gas fees on the Ethereum mainnet, yet Rollup has still attracted a large number of project deployments. This indicates that many project teams are optimistic about the prospects of Ethereum and Rollup, and a network centered around Rollup is gradually forming.

In terms of address numbers, according to estimates from the blockchain explorers of various Rollups, there are a total of 4 million addresses on Rollup, which has quadrupled since the beginning of the year. The Ethereum mainnet has 209 million addresses, and the number of Rollup addresses has risen from less than 1% of Ethereum addresses to nearly 2%. Although there has been growth, there is still a long way to go in attracting users. The reverse growth of Rollup has been primarily driven by technological advancements. This year, Rollup's progress has mainly focused on enhancing compatibility, reducing data availability costs, lowering verification costs, decentralization, and developing zkEVM.

• Enhancing Compatibility

Due to EVM compatibility, OP Rollup currently accounts for over 80% of the total TVL in Rollup. However, EVM compatibility does not mean that projects can be deployed seamlessly; they still need to make many code adjustments. Enhancing EVM compatibility and narrowing the differences with Ethereum has always been a key focus for OP Rollup. Arbitrum One migrated to Nitro in early September, enhancing network compatibility. The client software of Nitro directly compiles the core of Geth (the mainstream Ethereum client).

Geth uses a customized EVM simulator from Arbitrum to handle execution and state maintenance functions, ensuring that Nitro is highly compatible with Ethereum. After the EVM equivalence upgrade at the end of last year, Optimism proposed the concept of "Ethereum equivalence" this year, which will be achieved in the major upgrade Bedrock planned for Q4, aiming to minimize differences with Ethereum so that Optimism can share and collaborate on the same core code. With stronger compatibility, the cost of project deployment will be lower, and more Ethereum-compatible tools will be available, enhancing the network effects of the OP Rollup protocol.

• Reducing Data Availability Costs

The costs of Rollup mainly consist of two parts: the data availability (DA) fees paid to L1 and its operational costs. Since Rollup execution is off-chain and the load is relatively low most of the time, operational costs are relatively small, while DA fees account for a larger proportion. To reduce DA costs, various teams have worked on improving batching and compression systems. For example, Optimism has reduced fees by 30% by setting more reasonable fee parameters and will use more efficient compression algorithms to further reduce costs. In addition to these conventional methods, Arbitrum has launched a new product called Nova, which can reduce DA costs to the baseline. Nova is built on Arbitrum's Anytrust technology, utilizing a data availability committee (DAC) to store and provide data off-chain, only reverting to Rollup mode when users question the DAC.

DAC needs to ensure that at least two honest members are present, and compared to traditional BFT consensus requiring 2/3 of nodes to remain honest, its trust assumption is much weaker and easier to achieve. Essentially, it exchanges a minimal additional trust assumption for lower costs and faster withdrawal times. Gaming and social projects are well-suited for deployment on Nova, and nearly ten projects are currently running on Nova.

StarEX has also officially launched the Volition model, allowing users to choose whether the original transaction data is stored on Ethereum or in DAC.

• Reducing Verification Costs

OP Rollup relies on fraud proofs to resolve disputes. Fraud proofs can be either single-round interactive or multi-round interactive. Previously, only Arbitrum used multi-round interactive fraud proofs, while all OP Rollups based on Optimism's code used single-round interactive proofs. Multi-round interactive proofs continuously narrow the scope of disputes off-chain until a disputed execution step is found, then re-execute and arbitrate on-chain, which can reduce the on-chain resources needed to resolve disputes, making it cheaper than single-round interactions. Optimism is developing a new generation of fraud proofs called Cannon, which is a multi-round interactive fraud proof. Other OP Rollups are likely to follow Optimism's upgrade, and the cost of resolving disputes for OP Rollups will generally decrease in the future. More importantly, Cannon will use MiniGeth (a simplified version of the Geth client) as the EVM simulator, which essentially decouples the Rollup solution from the main chain. On one hand, it can adapt to EVM upgrades by upgrading MiniGeth, and on the other hand, it can replace MiniGeth with other tools to support Rollup solutions for other mainchain virtual machines.

ZK Rollup relies on validity proofs (zero-knowledge proofs, ZKP) to resolve disputes. Unlike OP Rollup, it does not require interactive proofs but generates ZKPs for all executed statements at once, with validators verifying the ZKPs to determine whether the prover is honest. To improve verification efficiency, StarkNet has upgraded its recursive STARK proofs. This upgrade leverages the "logarithmic compression" feature of STARK proofs, meaning the time required to generate proofs is roughly linear with the time required to execute statements, while the time required to verify proofs is roughly logarithmic with respect to proof generation. The previously used SHARP technology generates a total ZKP for multiple propositions to be proven, while after the upgrade, propositions will be divided into several groups, generating a small proof for each group, and then generating a total ZKP from these small proofs. Due to the logarithmic compression feature, verifying ZKP2 will be much faster than verifying ZKP1, thus consuming significantly less on-chain computational resources. This move can also accelerate proof generation, as multiple small proofs can be computed in parallel.

• Decentralization

Some OP Rollup networks experienced downtime earlier this year, rendering the network unavailable for several hours. The reason is that Rollup protocols require a Sequencer to order transactions, and currently, Sequencers are operated by the project team itself or closely related single operators, which is very centralized. When a Sequencer fails, there are no other equivalent nodes to continue operating, leading to network paralysis. Only by promoting the decentralization of Rollup protocols can this gray rhino risk be eliminated. Optimism aims to establish a multi-client ecosystem in the Bedrock version, collaborating with external teams and incentivizing them to create other clients. A multi-client approach inherently decentralizes the Sequencer, reducing the risk of single points of failure. This vision is quite ambitious, and whether it can be realized remains uncertain. If Optimism can achieve Sequencer decentralization, it would be a significant victory. It is also possible that once the new version runs smoothly, the conditions for becoming a node will involve staking OP tokens. This would provide a clearer application scenario and source of income for the tokens, potentially leading to a decentralized transformation of Rollup.

In the past two years, the focus of ZK Rollup development has been on zkEVM research. zkSync, Polygon, and Scroll are actively developing and have announced that they will launch their zkEVM versions on testnets or mainnets before the end of 2022. Currently, zkSync has maintained a leading position, having launched its testnet in April, achieving compatibility at the EVM bytecode level, and completing implementations in circuits and execution environments. In terms of core infrastructure, full node integration has been completed, successfully deploying and executing compiled smart contracts. Recently, zkSync has repeatedly stated that the first zkEVM-compatible ZK Rollup running on the Ethereum mainnet will launch on October 28 (it has already launched during proofreading). The team is confident and has kept a backup plan. At launch, no projects will be deployed, and only the official team can test with real assets on the mainnet, after which developers will be allowed to use it. A number of well-known protocols and companies have announced plans to deploy on zkSync 2.0, including Uniswap, Chainlink, OKX wallet, fiat deposit and withdrawal solutions Ramp and Banxa, decentralized crypto trading platform Hashflow, insurance protocol Nexus Mutual, and others. Once opened to the public, the zkSync ecosystem may experience rapid development.

This year, the most significant upgrade for Ethereum itself is the Merge. The purpose of the Merge is to transition Ethereum's original PoW consensus mechanism to a PoS mechanism. With the change in consensus mechanisms, the network structure has also undergone profound changes, affecting Ethereum's degree of decentralization. After the Merge, Ethereum adopts a consensus layer + execution layer (execution engine) architecture to generate and synchronize blocks. User transfers and smart contract calls are packaged, broadcasted, and executed by the execution engine (the original ETH full node), while the tip portion of the GAS fee still belongs to the execution engine. The task of the consensus layer is first to establish communication with the execution engine, requesting them to generate or verify Execution Payloads, after which the beacon nodes reach consensus based on it, generating complete beacon blocks. After EIP-1559, the proportion of the tip portion in revenue has significantly decreased, with miners' main income coming from block rewards. After the Merge, the independently operating execution engine can only earn tips, making it difficult to profit. The execution engine needs to be attached to the consensus nodes to rely on staking rewards for income. Thus, rather than merging two networks, it is more accurate to say that the consensus layer will absorb the execution engine, forming a new symbiotic entity. PoS Ethereum has 450,000 validators, while PoW Ethereum had only over 10,000 nodes, and the significant increase in the number of validators can also enhance the network's degree of decentralization. Of course, the massive GPU mining machines cannot be absorbed; they will need to find a way out, which will be discussed later. Ethereum has long faced the issue of state explosion, meaning that the data accumulated by the network is increasing, requiring more and more storage space. This will increasingly burden the hardware of nodes, forcing them to become more centralized. To address this, the community has proposed a goal of achieving statelessness, allowing light clients to verify all transactions and states without needing to store any actual state. After transitioning to PoS, Ethereum aims to achieve statelessness, allowing nodes with full states and stateless nodes to participate in verification work together while maintaining a high degree of decentralization in the network. With the technology of statelessness, there will be three types of nodes (clients) in the consensus layer of Ethereum after the Merge:

1. Clients without ETH1 execution engines
2. Clients with stateless ETH1 execution engines
3. Clients with full state ETH1 execution engines

The first type of client is the lightest client, which can only participate in reaching consensus and cannot verify transactions on the execution layer. Its significance lies in supervising other types of nodes in the consensus layer.

The third type of client has full state, execution capability, and consensus capability, which can be understood as a full node. It requires investment in hardware for storage and computation, as well as staked tokens, so its cost is higher, and its number will not be large.

The second type of node is the stateless node, which can request data from the third type of node and then use its execution engine to verify the validity of transactions. A point of concern after the Ethereum Merge is the degree of decentralization of the network. Although the changes in network structure and statelessness can enhance the degree of decentralization, the rapid growth of the staking solution Lido has raised concerns. Lido occupies over one-third of the total staked amount in the network. Some believe that if Lido manages to gather another one-third of the stake, it could have the power to control the network. It is important to note that Lido is not controlled by a single entity. Lido has 30 node operators, which do not have a hierarchical relationship with Lido. They are all top node operators with reliable records and legitimate claims, needing to obtain operational qualifications through DAO voting and are continuously monitored by the DAO. Therefore, Lido should not be equated with centralized mining pools. On the contrary, it is precisely because of Lido's ongoing efforts in decentralization that it has gradually gained an advantage over CEX mining pools. Thus, the risk of a large single entity or consortium controlling the network is not as significant as imagined. Where will Ethereum head after the Merge? Recently, Vitalik stated in an interview that Ethereum developers hope to achieve four key goals next year, including scalability, privacy, foundational layer censorship resistance, and account abstraction, with solving scalability being their "top priority."

The Ethereum team believes that scalability will be achieved through Rollup, so the post-Merge plan is to become a powerful settlement and data availability layer, allowing Rollup to operate securely and at low cost. We will discuss Ethereum's future development in the top ten predictions section.

The regulatory landscape for cryptocurrencies has changed significantly in 2022. According to Huobi Research's statistics on global crypto policies, over 42 sovereign countries and regions have implemented 105 regulatory measures and guidelines for the crypto industry since 2022, excluding mainland China. In terms of regions, the regulatory measures taken by the U.S., EU, and South Korea are more concentrated and intensive. The U.S. continues to maintain the highest level of attention globally, with a total of 22 regulatory policies at the federal and state levels, mainly covering crypto trading, regulatory guidance, judicial rulings, stablecoins, etc.; the EU has produced a total of 9 policies, mainly involving regulatory guidance on crypto through the MiCA and TFR series of bills, stablecoins, and anti-money laundering; South Korea has produced 8 related regulations, mainly in judicial rulings, stablecoins, regulatory guidance, and crypto trading.

Since the beginning of 2022, the proportions of positive, neutral, and negative policies in the global crypto industry have been 36%, 57%, and 7%, respectively. Compared to 2021, where the proportions were 23%, 59%, and 18%, the proportion of positive regulatory policies has significantly increased, while the proportion of negative regulatory policies has decreased. Overall, regulatory policies are developing in a clearly positive direction. Additionally, most countries still prefer to regulate and guide the crypto industry based on moderate regulation.

The crypto field is categorized into 12 directions, including regulatory guidance, crypto trading, stablecoins, DAOs, NFTs, etc., with regulatory guidance, crypto trading, and stablecoins ranking as the top three, accounting for about 62% of the total policy statistics. This indicates that to keep pace with the development of the crypto industry, most countries or regions are actively promoting the establishment of regulatory frameworks for crypto and corresponding business regulatory guidance, as well as supplementing and improving the deficiencies in regulatory policies for crypto trading. Furthermore, due to the impact of the Terra collapse event, governments worldwide have placed a high emphasis on stablecoin regulation.

The MiCA regulation, applicable to the entire EU and surpassing the regulations of individual member states, will grant national authorities additional enforcement powers. MiCA primarily establishes a regulatory framework for crypto assets outside the existing EU financial laws, such as securities tokens and central bank digital currencies, which are not within its regulatory scope. Based on whether crypto assets need to anchor the value of other assets, MiCA categorizes crypto assets into electronic money tokens (EMT), asset-referenced tokens (ART), and other types of crypto assets.

• EMT aims to anchor its value by referencing only one official currency, serving as an electronic substitute for coins or banknotes, essentially "electronic money," such as various payment methods used online like Alipay and WeChat Pay.
• ART aims to anchor its value by referencing any other value or right or a combination thereof, including one or several official currencies. ART encompasses all other asset-backed crypto assets beyond EMT. For example, stablecoins like USDT and USDC, which are backed by dollars or government bonds, and PaxGold, which is backed by physical gold, fall under ART.
• Other types of crypto assets include all other crypto assets that are neither "asset-referenced tokens" nor "electronic money tokens," covering various crypto assets. Compared to EMT and ART, the regulation of other types of crypto assets is relatively lenient, requiring only the submission of a white paper, obtaining approval, and complying with general regulatory rules regarding marketing, organization, and technology.

According to MiCA, the daily transaction volume and transaction amount for stablecoins not backed by euros must not exceed 1 million transactions and 200 million euros, respectively. Currently, the three major stablecoins, USDT, USDC, and BUSD, account for over 75% of the cryptocurrency trading volume, and their daily transaction volume and amount significantly exceed the regulations set by MiCA. If the EU insists on implementing regulatory policies regarding non-euro stablecoins, it may hinder the competitiveness and innovative potential of the EU's crypto market. DeFi and NFTs are not included in the scope of MiCA regulation, and the European Commission is piloting a "embedded regulation" scheme for DeFi. Before the MiCA text was released, there were rumors that NFTs would be subject to the same regulatory scrutiny as cryptocurrencies, possibly due to concerns about undermining the innovation of NFTs, leading to their exclusion from the regulation. The public opinion in the EU regarding the new anti-money laundering bill TFR (Transfer of Funds Regulation) is mixed; supporters believe it helps clarify regulatory boundaries and accelerates the pace of regulating crypto assets, while opponents argue that TFR violates the EU's charter on privacy, and collecting personal identity data may not necessarily help combat money laundering activities.

In El Salvador, which adopted BTC as legal tender in September 2021, many difficulties and issues have arisen over the past year. Nevertheless, several other countries have gradually taken this step, such as the Central African Republic. It is expected that in 2023, more countries will incorporate BTC into their legal tender or allow cryptocurrencies for payments, partly to alleviate severe inflation problems in their countries and partly to introduce new industrial ecosystems to promote economic development. However, due to the bear market in 2022 and the series of industry collapse events, it is estimated that countries will take a more cautious approach when considering incorporating cryptocurrencies into their payment systems. Aside from some developed regions like California in the U.S. adopting crypto payments as an application and experiment of a new technology, other countries considering this are mostly economically underdeveloped nations like El Salvador and the Central African Republic. Their characteristics include a fragile domestic currency system on the brink of collapse, often relying on foreign fiat currencies like the dollar. However, the problem with using foreign fiat currencies is that the domestic economy is affected by the policies of other countries, and during this round of interest rate hikes, these countries have suffered severe economic blows. Therefore, cryptocurrencies, which have characteristics such as not being influenced by the policies of other countries and having relatively fair and transparent issuance mechanisms, naturally become the choice for these countries. Additionally, the outbreak of the Russia-Ukraine war has brought about a trend of global economic division, with Russia experiencing significant growth in crypto trading due to multiple rounds of sanctions from Western countries. Many users hope to avoid asset losses caused by economic sanctions by holding cryptocurrencies. Therefore, we believe that in the coming year, more countries may adopt cryptocurrencies for payments or recognize them as legal tender.

References

1. Cambridge Bitcoin Electricity Consumption Index: https://ccaf.io/cbeci/ghg/methodology
2. Hashrate Index Q3-2022 Report: https://hashrateindex.com/blog/hashrate-index-q3-2022-report-gradually-then-suddenly/
3. How bitcoin mining revenues evaporated over the past months: https://hashrateindex.com/blog/margin-squeeze-how-bitcoin-mining-revenues-evaporated-over-the-past-months/
4. Aptos Tokenomics: https://aptosfoundation.org/currents/aptos-tokenomics-overview
5. GokuStats by Artemis: https://www.gokustats.xyz/dashboard
6. Messari Report: State of filecoin Q3 2022: https://messari.io/report/state-of-filecoin-q3-2022?referrer=all-research
7. Built for Speed: Under the Hoods of Aptos and Sui: https://medium.com/amber-group/built-for-speed-under-the-hoods-of-aptos-and-sui-3f0ae5410f6d
8. How Sui Move differs from Core Move: https://docs.sui.io/learn/sui-move-diffs
9. Move on Aptos: https://aptos.dev/guides/move-guides/move-on-aptos/
10. Move: A Language With Programmable Resources: <https://diem-developers-components.netlify.app/papers/diem-move-a-language-with-programmable-resources/202