BTS VenturesWeb3 Industrial Report and Trends 2022

BTS Labs
31 min readJan 7, 2023

Outline

● 2022 was a challenging year for investing in risky assets. The downturn in the markets affected traditional asset classes such as stocks and bonds as well as cryptocurrency.

● Despite challenges, the ongoing advancements and innovations within the cryptocurrency ecosystem give us a positive outlook for the future of cryptocurrency.

● A significant event in the industry in 2022 was the Ethereum Merge in September, during which the Ethereum network switched from proof-of-work (PoW) to proof-of-stake (PoS), resulting in a 99.9% reduction in energy usage for Ethereum.

● Layer-2 solutions like Optimistic rollups are currently dominating Ethereum-based rollups. It remains to be seen whether it can maintain its position as rollup space becomes increasingly competitive, with Celestia set to launch next year.

● DeFi space experienced a contraction in 2022. The total value locked in DeFi decreased 76.4% from $295.38 billion to $70.22 billion. Terra’s ecosystem collapse in May marked the most drastic crash in value locked.

● The number of funding deals increased by 19.4% year-on-year, and the Infrastructure, DeFi, and Gaming verticals attracted the most funding this year. Nevertheless, there are indications of a slowdown as the overall growth of funding decelerates compared to the previous year.

● There were major regulatory developments for cryptocurrencies and digital assets in 2022, including the first White House bill for crypto regulations and the MiCA regulation in Europe. These laws aimed to create a framework for regulating cryptocurrencies and digital assets, showing recognition of the increasing importance of blockchain technology

● The Terra network and its leader, Do Kwon, rose to the highest tier of the crypto world thanks to big-shot investors, only to fall apart within a few days in May 2022.

● Three Arrows Capital collapsed in the wake of extreme crypto market fluctuations during July 2022.

● FTX collapsed in early November 2022 following a report by CoinDesk highlighting potential leverage and solvency concerns involving FTX-affiliated trading firm Alameda Research.

Introduction

As we step into 2023, the crypto and web3 industry continues to evolve at a rapid pace. The past year has seen significant developments in the adoption of cryptocurrencies, the growth of decentralized finance (DeFi) platforms, Metaverse, GameFi trends, and the emergence of new blockchain technologies.

One of the most notable trends in the industry is the increasing mainstream adoption of cryptocurrencies. From retail investors to major financial institutions, more and more people are starting to see the value in digital assets and the potential they hold forrevolutionizing traditional financial systems. This trend is also reflected in the growing number of merchants and businesses accepting cryptocurrencies as a form of payment globally.

Alongside this adoption trend, the DeFi and GameFi space has seen explosive growth in popularity across various platforms, with Total Value Locked (TVL) reaching $295.38 billion in DeFi per DefiLlama metrics and Unique Active Wallets (UAW) reaching 9.65 million users in GameFi per DappRadar metrics. The decentralized nature of these platforms allows for greater transparency and accessibility, and they are quickly becoming an alternative to traditional financial and gaming institutions.

Another interesting area of development in 2022 is the rise of alternative Layer 1 and Layer 2 blockchains. These alternative blockchains aim to address issues such as scalability, speed, and fees that have been challenging for more established blockchains, and they offer unique features or use different consensus mechanisms to differentiate themselves and meet the needs of specific use cases.

However, the crypto and web3 industries also experienced some challenges in 2022. Regulatory hurdles, security concerns, and market volatility continue to be issues that must be addressed for the industry to reach its full potential.

In 2022, the crypto market experienced a significant downturn due to the Federal Reserve increasing interest rates and reducing global liquidity. This decreased the total market capitalization of crypto assets by over $2.2 trillion and a reduction of institutional activity in the centralized finance (CeFi) sector by about 71.4%. The industry was affected by several negative events, such as the failure of Terra, the bankruptcy of 3AC and FTX, and major institutions such as BlockFi and Genesis facing financial difficulties or liquidation.

Despite these challenges, the industry continued to make progress: the total amount of investment and financing in the primary market exceeded $27.7 billion, Ethereum moved to a proof-of-stake (PoS) consensus algorithm and Layer2 solutions experienced significant growth among other developments.

In this industry report, we will deep dive into these trends and explore the key players, challenges, and opportunities shaping the future of the crypto and web3 space.

Global Crypto Adoption

The global crypto adoption index indicates an increase in the use of cryptocurrencies in various countries around the world, with various regions showing strong growth in areas such as payment processing and storing of value.

There were approximately 320 million crypto users worldwide, with over 40% of them located in Asia. The top three ranked countries were the United States, Vietnam, and Russia. In 2022, the number of new users grew by 25 million+, a decrease from the 194 million added in 2021. The U.S., South Korea, and Russia had the highest number of visits to centralized exchanges (CEX), with a combined share of over 22%.

The U.S. had the largest share of DeFi traffic, with almost six times more activity than Brazil, the second-ranked country. There was also significant interest in the crypto industry in South America, South Africa, and the Middle East. Southeast Asia had the second-largest crypto population, with 46 million users, following North America. In South America and Africa, cryptocurrencies are commonly used for payments and as a store of value, with more than one-third of the population using stablecoins daily.

source: Chainalysis Global Crypto Adoption Index 2022

In terms of regulations, over 42 sovereign countries and regions around the world have adopted 105 regulatory measures and guidance for the crypto industry in 2022. Of these policies, 36% were considered positive, representing an increase from the previous year. Most countries are considering the development of a full-scale regulatory framework for the industry, and regulations on CEXs are becoming stricter. It is also possible that on-chain regulation may be incorporated into the system.

There has also been rapid adoption of cryptocurrency by institutions, with household brands such as Disney, Starbucks, Adidas, and Nike embracing blockchain technology. Major banks have also expressed increasing interest in the sector. For instance, Fidelity launched a crypto service for investors, BlackRock partnered with Coinbase to provide its institutional clients with access to crypto, and Goldman Sachs is developing a crypto data service.

Blockchain VC Funding Facts

The cryptocurrency industry has faced numerous challenges this year, as reflected in venture capital activity. Several major market players, including FTX, Celsius, Voyager, and BlockFi experienced setbacks, causing a decline in investor confidence and leading to a loss of $1.5 trillion in market capitalization in the crypto space.

Despite a decrease in blockchain venture capital funding since May 2022, the industry saw a total of over $36.1 billion in capital investment for the year, an increase of 19.4% from the amount invested in 2021 ($30.3 billion). In terms of sector, the blockchain service category saw a consistent spread of investments throughout the year. It received the most funding with a total of 592 deal rounds made, followed by the DeFi and GameFi categories.

Looking at the deal counts in 2022, a16z, Animoca Brands, and Pantera Capital were among the most active venture capital firms globally, as indicated by the number of deals and companies they invested in. Some of the largest cryptocurrency funds in 2022 included a16z’s $4.5 billion fund and Sequoia’s $2.85 billion fund. The highest amount of capital raised in 2022 was by Citadel Securities, with a total of $1.1 billion.

Public companies such as Alphabet, Blackrock, and Morgan Stanley also invested in blockchain and cryptocurrency projects, with the highest deal activity and amounts coming from these companies.

Layer-1

The year 2022 has seen various competing L1 protocols introduce new consensus algorithms, blockchain architectures, and execution environments. However, Bitcoin and Ethereum continued to maintain dominance with BTC at 39.9% and ETH at 18.3% amounting to 58.2% of the entire market share in terms of market capitalization. Major Cryptoassets By year-to-date (YTD) Percentage of Total Market Capitalization

Though the performance of these protocols has been mixed. In 2022, the total value locked (TVL) in L1s declined and Ethereum saw a decline in market share compared to alternative L1s. Ethereum’s market share (in terms of TVL) fell from 96.91% in 2021 to 62.43% by the end of 2021 and dropped further to 59.01% by June 2022. In contrast, BNB Chain’s TVL dominance increased significantly over the past year, going from 0.78% at the beginning of 2021 to 7.02% at the end of 2021 and 10.02% at the end of 2022. It is worth noting that BNB Chain has demonstrated strong and consistent performance over the past year.

State of TVL on Layer 1 in 2022. source: DefiLlama

Throughout the past year, various L1s have been competing for a larger share of the market. These networks have been working to expand, increase their user base, and emerge victorious in the ongoing battle between multiple blockchain networks. To increase its market share, each L1 has been trying to innovate and find solutions to the challenge of balancing decentralization, security, and scalability.

In 2022, it is notable that Terra had a massive decline in market share due to the downfall of the network, with other chains such as BNB Chain and Ethereum taking over a significant portion of Terra’s TVL. This change in market share is likely one of the most significant events to occur in the world of L1s.

Ethereum Merge

Another L1 development story in 2022 was Ethereum’s merger. The merge upgrade is Ethereum’s long-awaited migration from its current “Proof-of-Work” consensus mechanism to a “Proof-of-Stake” system on the 16th of September.

The Ethereum Merge, which took place on September 15th of 2022, was likely one of the most impressive engineering achievements of 2022. The chart below shows the mean and median block intervals throughout the year, with a clear distinction between the variable block times of the Proof-of-Work algorithm and the precise, predetermined 12-second block times of the Proof-of-Stake algorithm. This transition is visible in the chart showing an improvement in the network.

Since the Merge, the number of active validators has increased by 13.3%, with over 484k validators now operational. This brings the total ETH staked to 15.618M ETH, which is equivalent to 12.89% of the circulating supply.

Along with the transition to Proof-of-Stake, the Ethereum monetary policy was adjusted to a significantly lower emission schedule. The nominal rate of issuance is around +0.5%, however, after factoring in Ethereum EIP1559 burn mechanism, this is almost entirely offset to around +0.1% on a typical day. This compares to a net inflation rate of +3.9% before the Merge, showing just how dramatic the change to issuance has been.

At the time of writing, the total supply of ETH has decreased by 242 ETH since the Ethereum Merge. This represents a net deflation in the ETH supply, as the current coin supply is lower than it was at the time of the Merge. Without the Merge, it is estimated that an additional 1.044 million ETH would have been released into circulation according to the previous issuance schedule.

From an end user’s perspective, The Merge’s impact on their experience of using the Ethereum network has been minimal. There have been no significant changes to gas fees, for example. However, The Merge is an important step towards improving the scalability of the Ethereum blockchain, paving the way for future upgrades.

BNBChain Growth

BNB Chain spent 2022 continuing its steady growth journey. TVL grew from 7.02% at the end of 2021 to 9.24% by the end of 2022, and the chain did a noteworthy job in terms of fees compared to competitors, ranking second after Ethereum.

With new product innovations, BNB Chain remained competitive. A key event in 2022 was the launch of the BNB Chain Application Sidechain (“BAS”), which will allow developers to port data and assets from the BNB Chain, reducing strain on the network’s limited transactional resources.

BNB Chain will embrace large-scale applications, including GameFi, SocialFi, and the Metaverse. In particular, they are scaling from one chain to multi-chain, improving scaling solutions, and expanding the validator set of BSC from 21 to 41. BNB Chain also announced to open-source BNB Beacon Chain alongside the Binance decentralized exchange (“DEX”), making it accessible for developers to build on.

The chart shows the number of unique addresses on BNBChain exceeded Ethereum and reached an impressive 230 million, making it the largest layer 1 blockchain.

In addition, the network saw record-breaking highs in terms of transaction volume, reaching 9.8 million in May of 2022, and daily active users peaking at 2.2 million in October.

WAX and Solana

In 2022, the top 10 L1s showed varying levels of change in their transaction counts compared to the previous year. Among them, the WAX protocol has experienced the greatest growth, with a 48.26% (6.32 billion) increase in transaction count and the highest overall number of transactions. The Hive protocol has also seen significant growth with a 27.57% (730 million) increase in transaction count. Both of these networks are driven by games.

While Solana suffered numerous challenges in 2022, the Solana network followed as the second largest L1 by the number of transactions in 2022 with a very small increase of 0.06% (942 million) compared to the previous year. An area that has stood out for Solana is the NFT ecosystem, which is a bright spot for the blockchain. Earlier in 2022, Magic Eden, a Solana NFT marketplace, topped OpenSea’s daily trading volume as Solana NFTs gained traction.

On the other hand, the BNB Chain saw a significant decrease in transaction count, with a 45.32% (420 million) drop compared to the previous year. This decrease occurred despite the BNB Chain attracting the most increase in the number of addresses daily.

It is worth mentioning that the overall transaction count for all categories has seen a significant increase, with a 72.90% increase compared to the previous year, reaching 9.98 billion. This indicates that the activity across all blockchains and product categories has experienced significant growth in 2022.

In 2022, some new L1 protocols were introduced with notable examples: Aptos, Celestia, and Sui. Highlights of those newer blockchains are:

● Cronos: Its innovations include being the first EVM-compatible chain built on Cosmos, interoperability, and proof-of-authority (PoA).

● Avalanche: It implements the novel leaderless consensus protocols, introduces the Subnets, and uses a directed acyclic graph (DAG) to organize transactions.

● Aptos: It introduced a new consensus algorithm (AptosBFT), parallel execution framework (Block-STM), and the Move programming language.

● Sui: It is similar to Aptos, but also adopts a split of simple and complex transactions, a dual consensus mechanism, and Sui Move.

● Celestia: It is the first modular blockchain network whose goal is to build a scalable data availability layer, enabling the next generation of scalable blockchain architectures.

These blockchains have rapidly expanded ecosystems and increased community interest, and they offer new approaches and solutions to some of the challenges faced by more established protocols. It’s important to note that Celestia is in the early stages of development and any initial advantages they may have may not be long-lasting. Some Web3 projects have already started launching on the Aptos and Sui chains, and it will be interesting to see how this trend develops. Establishing connections with the existing blockchain space may be beneficial for these new chains.

Layer 2

In recent years, one challenge that has come to the forefront of blockchain growth is the limited scalability of existing L1 platforms due to low transaction speeds. To address this issue, many have turned to L2 scaling, which aims to separate the layers of the blockchain by building L1s as secure and dependable foundations and moving more rapid iterations and actions onto L2s.

This approach, known as layer separation, has gained significant traction as a solution to the scalability issues faced by L1 platforms. It is important to note that Layer 2 not only refers to scaling solutions on Ethereum, other blockchain platforms do have scaling solutions. Since the narrative is strongly for Ethereum, many crypto newcomers might mistake that there are only L2s on Ethereum.

Once L1s are strong enough, the majority of transactions can take place on L2s, allowing for further scalability and faster transactions with lower gas costs. When building Layer 2 scaling solutions, they must inherit the underlying security of the main chain. This is one of the elements differentiating them from sidechains, where validators secure the chain. The two main L2 solutions that have seen traction in the last few months are zero-knowledge (ZK) and optimistic rollups.

Zero-Knowledge Rollups

Zero-knowledge rollups (ZK-rollups) are a type of Layer 2 scaling solution that allows for the processing and computation of transactions off-chain. This means that instead of posting all transaction data on the blockchain, ZK-rollups only need to provide validity proofs to finalize transactions. These validity proofs are cryptographic assurances that the proposed state change is the result of executing a given batch of transactions.

By conducting most of the computation off-chain, ZK-rollups reduce the amount of data that needs to be posted on the blockchain, which in turn reduces the amount of processing power required and the amount of capacity used for transaction validation. As a result, gas fees are lower, making transactions faster and cheaper. Additionally, because ZK-rollups only need to request data relevant to smart contracts infrequently, they can also help to reduce the burden on the blockchain.

Optimistic Rollups

Optimistic rollups are another type of Layer 2 scaling solution that allows for the bundling of multiple off-chain transactions into large batches before they are submitted to the blockchain. This approach helps to reduce fees for end-users by spreading the fixed costs of the transactions across the batch. Data aggregators use Merkle roots to compute the batches and increase the speed of the transactions. However, optimistic rollups offer lower throughput compared to Plasma and zero-knowledge rollups.

One key difference between optimistic rollups and zero-knowledge rollups is that they do not publish proof of the validity of transaction batches when posted on-chain. Instead, they rely on the assumption that off-chain transactions are valid.

To ensure the accuracy of these transactions, external validators are used to check the Merkle roots before the blockchain state can be updated. This means that optimistic rollups have to rely on external parties to verify the validity of the transactions, while zero-knowledge rollups use cryptographic assurances to prove their correctness.

When comparing the various Layer 2 scaling solutions, it is important to consider their differences in terms of speed and security. Optimistic rollups and zero-knowledge rollups are generally considered more secure than side chains and Plasma, but they may be slower and have more limited execution capabilities. It is important to carefully evaluate the trade-offs between security and speed when selecting the most appropriate solution for a given use case.

Layer 2 solutions differ in Security and Speed.

The landscape of Layer 2 scaling solutions has undergone significant changes in recent years with the introduction of Ethereum Virtual Machine (EVM) zero-knowledge rollups (also known as zkEVM). As L1 platforms become stronger and more reliable, it is expected that a greater proportion of economic activity will shift to L2. To support this increased activity, it is important to enhance the functionality of dApps on L2s through the use of zkEVMs and other initiatives. This is in line with the concept of functionality escape velocity, which suggests that L2 will play an increasingly important role as the capabilities of L1s improve.

If Ethereum continues to evolve into a settlement layer for security and dependability, likely, revenues generated on L2 will increasingly shift away from the Ethereum mainnet. This could result in lower staking yields for validators, potentially introducing new risks to the security of the Ethereum network. As such, it is important to carefully consider the potential implications of this trend and take steps to ensure the ongoing stability and security of the Ethereum network.

Popular L2s vs. Ethereum and their current estimated Fees & TPS

Upon examination of the various characteristics of Layer 2 scaling solutions, including side chains, it appears that zero-knowledge rollups offer the best overall approach in terms of security, performance, usability, and other important considerations. It is important to note, however, that the most suitable solution will depend on the specific needs and constraints of a given use case, and it may be necessary to evaluate the trade-offs between different factors to select the best option.

Optimism and Arbitrum

Optimism and Arbitrum, two of the most significant players in the space (both utilizing optimistic Rollup technology), have seen a massive uptick in usage, with nearly 150 dApps being deployed on them in aggregate. This includes the top dapps in the space, including the likes of Uniswap, Curve, and Aave, among numerous others.

A comparison of dApps on Arbitrum and Optimism; two of the largest and most popular L2 solutions

Layer 3

We have discussed the benefits of Layer 2 scaling, particularly in the context of zk-rollups and the potential of zkEVMs for scaling Ethereum. Another approach to scaling that has been proposed is Layer 3 scaling, which refers to the idea of building a protocol on top of a Layer 2 protocol to further scale the capabilities of the blockchain.

The goal of Layer 3 scaling is to enhance the performance and efficiency of the blockchain without sacrificing security or reliability. One of the main benefits of Layer 3 scaling is that it allows for the addition of new features and functionality to the blockchain without requiring significant changes to the underlying Layer 1 (L1) or Layer 2 (L2) protocols.

A proposed L3 framework developed by StarkWare (the company developing StarkNet) put forward a sophisticated framework in which layers aren’t just stacked on top of each other but assigned different purposes. StarkWare points out three possible designs for a world with Layer 3 scaling.

● L2 for scaling, and L3 for customized functionality — There is no attempt to provide further scalability in this vision. Instead, one layer of the stack helps applications scale, and then separate layers serve a customized functionality (e.g., security).

● L2 for general-purpose scaling, L3 for customized scaling — Customized scaling might come in different forms: specialized applications that use something other than the EVM to do their computation, rollups whose data compression is optimized around data formats for specific applications.

● L2 for rollups, L3 for validium — Validiums are systems that use SNARKs to verify computation but leave data availability up to a trusted third party or committee. Validiums have a lower grade of security than rollups, but can be vastly cheaper.

The key argument is that a three-layer model allows for sub-ecosystems to exist within a single rollup, enabling cross-domain operations within that ecosystem to occur at a low cost without the need to utilize the costly layer 1. One major advantage of L3 scaling is the ability of the app designer to have greater control over the technology stack.

Layer 3 design possibility

Several approaches to Layer 3 scaling have been proposed, including state channels, plasma chains, and sidechains. These solutions aim to improve the scalability of the blockchain by moving certain types of transactions and computations off-chain, while still maintaining the security and integrity of the main chain.

Layer 3 scaling is an active area of research and development in the blockchain community, and it is expected to play an increasingly important role in the future as demand for blockchain-based applications continues to grow in 2023.

Dapp

Despite the challenges and events that have impacted the blockchain industry in 2022, the dApp industry saw significant growth in 2022, with an average of 2.37 million daily unique active wallets (UAW), a 50% increase from the average of 1.58 million in 2021.

The increasing adoption of blockchain by both consumers and businesses, as well as the growing support from investors, has contributed to the consolidation of the industry. This trend shows the strength and maturity of the industry.

DeFi

Starting with DeFi (decentralized finance), a category of blockchain-based applications that enables financial services such as lending, borrowing, trading, and payment processing without the need for traditional intermediaries. In 2022, DeFi applications reached an average of 652,970 dUAW. Although this is only a 2% minimal growth from 641,510 dUAW in 2021, it remains an impressive achievement for the DeFi segment after the fall of Terra Luna, the plummeting crypto prices and the money hacks on blockchain bridges.

In 2022, the DeFi industry faced numerous challenges, one of which was a significant drop in total value locked (TVL). The TVL, which reflects the value of funds invested in DeFi projects, plummeted from a peak of $295.38 billion in January to $70 billion in December, representing a decrease of 76.4%.

While the TVL in Layer 1 DeFi protocols saw a decline, with Ethereum falling to $32 billion and BNB Chain to $6.5 billion, representing a decrease of 74.56% and 62.5% respectively compared to the previous year. On the other hand, Layer-2 protocols performed somewhat better, with strong growth for Ethereum-based solutions Optimism and Arbitrum. These networks continue to gain popularity with many projects integrating them and users testing their products on them, leading to the displacement of other blockchains from their leading positions.

In 2022, Ethereum, the largest DeFi protocol, saw a decline of 74.56% in its TVL, which amounted to $32 billion. This drop is likely due to the combination of market conditions and the growing use of Layer 2 protocols. Despite this, Ethereum still holds a dominant share of 58% of the total DeFi market’s TVL.

BNB Chain has the second largest TVL with an estimated $6.5 billion. In terms of TVL size, Ethereum and BSC are followed by the blockchain networks Tron, Arbitrum, Polygon, Avalanche, Optimism, Fantom, Cronos, and Solana respectively.

One factor that caused the decrease in TVL through 2022 was the general drop in cryptocurrency values, which affected the DeFi sector. As the value of the cryptocurrencies used in DeFi systems decreased, the TVL also decreased. The overall cryptocurrency market experienced a significant value loss during the period in question, which had a direct impact on DeFi.

Another significant factor was the collapse of the Terra Luna platform, which led to around $50 billion in losses. The Terra Luna platform was the second-largest DeFi ecosystem at the time, and its collapse had a major impact on the DeFi industry as a whole and damaged confidence in DeFi.

Currently, the DeFi protocol MakerDAO holds the largest TVL with $6.04 billion in value locked, representing a dominance of 8.68% over the TVL of other DeFi protocols which is a decrease of 7.85% within the last month. The top DeFi protocols in terms of TVL size, after MakerDAO, include Lido, Aave, Curve, Uniswap, Convex Finance, Pancakeswap, Justlend, Compound Finance, and Instadapp, in that order.

On the other hand, GMX and Alpaca Finance TVL metrics increased by 9.98% and 33.99% respectively during the last month per Defillama metrics.

Despite facing difficulties in the previous year, the DeFi industry remained strong and continued to grow and develop. In 2022, there was an increase in the number of financial applications being built on smart contracts, which served a variety of purposes such as providing basic banking services in areas where traditional banking was not available and facilitating transactions between traditional financial institutions and DeFi protocols.

Overall, 2022 can also be considered a year in which DeFi and traditional finance became more closely linked, as institutions like Huntington Valley Bank, Societe Generale, J.P. Morgan, and DBS conducted pilot projects or transactions with DeFi protocols. It is expected that the industry will continue to develop and transform in the future, building upon the progress made in 2022.

GameFi

GameFi remains the most popular category of blockchain-based applications dominating the industry. In 2021, games had an average of 622,620 daily unique active wallets (dUAW). This number grew by 85% in 2022, reaching 1,152,255 dUAW on average accounting for 49% of dApp activity in 2022. Additionally, there was a 94.17% increase in the number of transactions, reaching a total of 7.44 billion.

Thanks to play-to-earn games like Splinterlands which was the most popular platform according to DappRadar, growing by 85% to reach 217,914 monthly unique active wallets in 2022. Alien Worlds the second most popular game saw a slight decrease in its activity in 2022. With a 3.67% drop, Alien Worlds now reached an average of 178,118 monthly Unique Active Wallets.

One trend that gained traction in the GameFi sector in 2022 is move-to-earn, a relatively new niche with a range of products and services that reward users for their activeness. A popular project in this sector is STEPN with over 2.23 million accumulated monthly users in 2022 and over 700,000 NFTs minted. Other notable projects in move-to-earn include the Step App, Genopets, and Walken.

We are also seeing more variations to the gamification of different aspects of lifestyle beyond just move-to-earn. For instance, in the “Play-and-earn”, in this model, earning is an additional value proposition that enhances the gaming experience. Some rising projects in this category are Gameta and Metarun. Another variation is “Learn-to-Earn” where projects reward users for educating themselves on a particular topic.

However, the demand for blockchain games faced its fair share of challenges in recent months with most blockchains experiencing a slight decrease in demand towards the last quarter of 2022.

Investment in the blockchain gaming industry has also been mixed in recent months. In Q3 2022, the industry experienced negative year-over-year growth, with a decrease in total deal value and the continuation of a market correction that started earlier in the year. While the number of deals increased 2.6 times year-over-year, the total deal value decreased by 19%.

With the downward trend in investments towards the end of 2022, several major platforms are starting to support blockchain games, such as the Epic Games Store hosting Blankos Block Party and games from Gala Games. Apple will also allow the sale of NFTs, although on a limited basis. This is a positive development for the industry as it will expose a larger audience to NFTs and Web3 technologies. The wider distribution of blockchain games is expected to contribute significantly to the mainstream adoption of these technologies.

Despite the volatile and uncertain nature of the digital asset market in 2022, the level of interest in the blockchain gaming industry shows that major investors are still optimistic about its potential as companies that can produce high-quality content that utilizes blockchain gaming infrastructure continue to receive funding.

NFT

In 2022, the NFT market faced a decrease in volume due to the bear market and overall economic downturn, causing concerns that NFTs may be losing popularity. However, if we exclude the bull market-driven volume and traction of 2021 as an exception, the NFT market in 2022 saw significant progress in many areas, making 2022 a year of exploration as new projects and applications emerged to test the transformative potential of the technology.

One notable trend that has emerged is the volatile nature of NFT trading volume, with significant fluctuations throughout the year. In Q1 2022, the NFT market reached a record high of $12.46 billion in trading volume. However, the market saw a decline in Q2 2022 due to harsh macroeconomic conditions that affected crypto prices and uncertainty surrounding the collapse of Terra, generating $8.4 billion in volume. The second half of 2022 saw a different trajectory than the last part of 2021, with combined Q3 and Q4 trading volumes netting only $4.4 billion, compared to the $23.2 billion of 2021 following data from DappRadar.

The on-chain data for NFT trading volume differed from DeFi’s year-to-date performance. While NFT trading volume only grew by 0.41% year on year, the number of unique traders increased by a significant 876% to reach 10.6 million users in 2022. NFT sales also trended upward, increasing by 10.6% to reach 68.35 million.

In the past few months, an increasing number of marketplaces have been created to facilitate the trade of NFTs. These marketplaces offer a variety of features and cater to different sectors, such as gaming, community building, and decentralization, giving NFT buyers and sellers a range of options. OpenSea remains the most popular NFT marketplace, accounting for 73% of organic NFT trading volume.

Blur, a relatively new decentralized NFT marketplace, launched its platform in October and aims to attract professional traders with its user-friendly interface, zero trading fees, and airdrop rewards. It has quickly gained popularity among active traders. These features enabled Blur to capture significant market share in the final months of the year with more daily trading volume than OpenSea over the fourth quarter, reaching a peak of 52,000 ether (ETH) traded (~$62.4 million), compared with OpenSea’s 13,000 ETH (~$15.6 million) in mid-December.

Several factors have contributed to the continued trading of NFTs in 2022. The increasing adoption of NFTs in mainstream industries like the art world and gaming has helped to increase interest in the market. The development of new technology and platforms for NFTs has also made it easier for people to access and trade these assets, which may have contributed to the growth in the NFT market.

An area of NFT development that has also seen a growing interest is on-chain credentials. On-chain credentials allow users to showcase digital identity and authentically interact with protocols as anonymous individuals. These credentials are NFTs that can either be exchanged or “stuck” to a wallet as soulbound tokens, a new type of tokenized credentials, identity, or affiliation. Ethereum creator, Vitalik Buterin first introduced the idea earlier in 2022.

On-chain credentials can be categorized by their purpose and originator.

The subcategories of purpose typically involve either verifying the identity or proving that an action has been completed. In this classification system, “Name and Profiles” includes information such as domain names and social media accounts, while “Proof-of-Action” highlights user activity such as on-chain achievements, contributions, certifications, or content.

The NFT’s originator is the source of the credential. Apps that offer their credentials are native issuers while Apps without their own NFTs can opt to work with a Credentialing-as-a-Service provider like Galxe or Gateway to develop and distribute credentials. This simplifies the process of launching credentials to third parties by providing the necessary API and infrastructure.

As the popularity of NFTs increased and more applications for them emerged, many prominent brands, companies, and individuals released their own NFT collections and projects. These projects received mixed results.

Several well-known Web2 companies and gaming studios, including Square Enix, Ubisoft, and Zynga, have begun using NFTs and Web3 technology to enhance their products and services. In addition, top brands like Gucci, Nike, and Adidas are incorporating NFTs into their marketing efforts to connect more closely with their customers. Instagram, which has over 500 million daily active users, has also become a major platform for NFTs.

Throughout 2022, the NFT market has undergone significant growth and evolution, seeing the emergence of various trends and advances. It is uncertain how the market will develop in the future, but it is clear that NFTs represent a dynamic and rapidly growing market with a lot of potential for further growth and innovation.

Noteworthy categories with significant growth

The High-Risk category is another area of development that is of particular interest due to the potential consequences of these types of applications. These are dapps that are considered to be too risky due to their nature or the potential consequences of their use.

In 2021, the average number of dUAW for High-Risk applications was 37,269. However, this number saw a significant increase in 2022, reaching an average of 145,825 dUAW, a 291% increase. The increase in dUAW for High-Risk applications suggests that blockchain users may be less risk-averse.

This could be due to the potential benefits of these applications, or a shift in how users perceive and evaluate risk. It is possible that the increasing number of dUAW for High-Risk applications could be a result of a shift in the way that users perceive and evaluate risk, as the potential benefits of these types of applications may outweigh the potential risks.

One more category that gained traction is Social dapps. These focus on enabling communication and interaction between users, such as social networks and messaging platforms. In 2021, social dapps had an average of 15,054 dUAW. This number grew by 206% in 2022, reaching 46,410 dUAW on average.

Social dapps and protocols have made meaningful explorations along asset creation and ownership, open data and identity, and a composable ecosystem as its core value propositions.

Many social dapps are built on public Layer 1 blockchain platforms like Ethereum, but some use customized infrastructure designed specifically for social apps. Some examples of social-specific Layer 1 blockchain platforms include DeSo and Crossbell. Other protocols that are built on the public Layer 1 platform and cater to social applications include Cyberconnect, RSS3, Lens Protocol, and Farcaster.

There are several exciting developments in the Web3 social space that offer unique benefits that cannot be achieved on Web2. However, it remains to be seen if any of these innovations will become widely adopted, as the path to mass adoption is still uncertain.

Hacking

Blockchain is a highly secure technology framework due to its use of cryptographic encryption and decentralized structure. However, vulnerabilities in smart contract code, malicious actors, or inadequate security practices can still lead to negative consequences. The large number of cryptocurrency attacks that occur annually highlights the need to understand these threats and implement safeguards.

During the year 2022, there were numerous incidents of hacking and exploitation in the cryptocurrency industry. As of the time of writing, the estimated total losses from cryptocurrency hacks in 2022 are around $3.7 billion. This metric is excluding the Terra Luna scandal which resulted in $40 billion lost in crypto tokens. This is significantly more than the combined losses from all scams in 2022.

The frequency of hacks is inversely related to their magnitude, meaning that fewer hacks generally result in larger payouts. Of these losses, vulnerabilities in bridges were responsible for more than one-third of the total amount. Most chains suffered from one hack, but the BNB Chain and Ethereum have been the most targeted, with BNB experiencing a higher number of hacks and larger losses compared to Ethereum. In total more than $1.578 billion were stolen through BNB Chain, while $1.02 billion got stolen through the Ethereum chain.

To sum up, scams and other illegal activities on the internet are a major concern that everyone should be aware of. Although the number of these attacks may be small, the harm they can cause is significant. Individuals and organizations need to be aware of these threats and take steps to better secure the crypto ecosystem.

Regulation

During the year 2022, lawmakers across the world focused on how to establish laws and guidelines to make cryptocurrency safer for investors and less appealing to bad actors in web 3.

A significant regulation was the Securities and Exchange Commission (SEC) issued guidance on the use of blockchain technology in the securities industry to establish regulatory requirements for companies that utilize the blockchain to issue and trade securities. This guidance was intended to safeguard investors and maintain fairness and order in markets.

The European Union introduced the Markets in Crypto-Assets (MiCA) regulation, which aimed to create a consistent regulatory framework for crypto assets across Europe. The regulation addressed various aspects, such as the licensing and registration needs for crypto asset service providers, investor protections, and the oversight of market participants.

A White House bill was introduced to create a complete set of rules for the regulation of cryptocurrencies and other digital assets. The bill included measures to prevent money laundering, fraud, and other illegal activities, as well as guidelines for registering and monitoring cryptocurrency exchanges and other market participants.

Future regulations will likely continue to aim at increasing the transparency and accountability of blockchain systems. This may involve additional measures to prevent money laundering and other illegal activities and increase collaboration among national and international regulators.

As the use of blockchain technology continues to develop and expand, new regulations may be needed to address emerging issues and opportunities, such as the use of blockchain for decentralized finance and non-fungible tokens, or to support the growth and innovation of the industry.

Conclusion

looking back at 2022, it was a year of both achievements and challenges in the cryptocurrency industry. We saw the successful transition of Ethereum to proof-of-stake through the Merge and new millstones on other blockchains. However, the market also faced difficult economic conditions, resulting in a decline in volumes and some high-profile bankruptcies. Overall, 2022 was a memorable year for the crypto industry.

Despite the fluctuations of the market or the state of the global economy, the crypto industry has continued to see progress and advancements. In 2022, developers have been focused on expanding layer-1 and layer-2 ecosystems, finding new applications for NFTs, and exploring ways to create digital identities. They have remained dedicated to their work as usual.

As we look ahead to 2023, we are hopeful that both retail and institutional adoption of cryptocurrency will continue to increase steadily. We are looking forward to the development of new infrastructures that will make blockchains more scalable, such as modular blockchains and the advancement of parallel processing. These developments have the potential to greatly improve the functionality of blockchains.

We are keeping an eye out for the development of DeFi projects that have practical uses, as well as the creation of high-quality blockchain games. We have a positive outlook on Web3 technology and are excited to see what new ideas will come out in the areas of digital identity and social networks.

In summary, the events of 2022 served as a reminder that maintaining strong security is crucial for the success of any business. We hope to see companies and projects continue to prioritize investing in and improving their security measures and educate users on how to make informed decisions about their security. By doing so, we can work together to build a more secure future for all.

Outlook & Suggestion

As looking ahead to 2023, we commit to constantly delivering high-quality research and insights that help clients and community members with a deeper understanding of the web 3 ecosystems. Regardless of what the future may bring, we are committed to supporting our community and clients via the provision of informative and interesting materials.

2023 is likely to be another year with uncertainty in the crypto market. We are now in the second decade of this industry, and it’s expected that more moguls from traditional industries are going to take part according to the development state of other instances. On the other hand, the regulation in loads of countries upon the crypto industry is accelerating since Q3 2022. The good side of the fact is crypto is on its way to a healthy and legitimate market condition meanwhile it is more likely to be a mainstream industry with massive adoption and participation from traditional institutions in near future.

However, opportunities always come with risks. More Ponzi schemes or hacking incidents are going to take place during 2023 if the market remains bearish. As a general user/investor, it’s suggested to keep eye on your crypto assets. Decentralized crypto wallets with 2FA or cold wallets with biological recognition are probably a safer way to guarantee all your valuable crypto assets are still there when the bull market returns.

Institutional Crypto Investments decreased by more than 90% in 2022 compared to 2021. Moreover, it is even the lowest annual amount shown since 2018. VCs and general investors now are getting more rational about every penny spent on early-stage projects. They focus more on real-life adoption instead of fancy-looking tokenomics or ecosystem. A fabulous pitch deck will no longer seize VCs’ attention and is unlikely to survive in 2023. As a DeFi, SocialFi, or GameFi project, it’s crucial to get the projects ready before talking to potential investors. As a Layer-1 or Infrastructure project, a complete and reasonable ecosystem / closed loop is preferable. As an NFT or Dapp project, it’s suggested to think over the problem/dilemma the project is solving.

Conclusively speaking, the market might remain similar in 2023. You could be disappointed if you have a strong belief in another bull market cycle is coming shortly. Taking good care of your crypto assets when the market volatility is unpredictable. Don’t make decisions too soon as an investor, if you haven’t carried out the background research or have some concerns about their feasibility. Be responsible for your own assets and investments and good luck in 2023.

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BTS Labs

BTS Labs mainly provides a wide range of consultancy services including Financing, Listing, and PR & Marketing.