With 2023 in the rear view mirror, we take a look at a selection of trends that will continue to drive the space through its next phase of development.
Though 2023 started with digital assets markets still very much in recovery mode and licking their wounds from the ravages of 2022's structural failures, it ended with a confirmed trend reversal and one of the most bullish setups to a year – both technical and fundamental.
From the upcoming Bitcoin halving in Q2 2024 and the imminent spot bitcoin ETF approvals to changes to financial accounting rules incentivising corporates to hold digital assets, it isn’t difficult to make a bullish case for 2024.
But what can we expect to drive the space forward into this exciting new phase of development in 2024? In this first part of a two-part series, we look at some of the biggest trends that will continue to build out the digital assets space in 2024 and beyond.
Trend #1: Layer 1 & Layer 2 wars
While it's true that this not a new trend per se, it’s also true that this is the battleground whose unfinished business holds the key to the future viability of the entire industry.
The previous bull market saw an explosion in the number of L1 chains and L2 protocols. For the Ethereum network, the dominant L1 apart from Bitcoin, there was the launch of Optimism allowing for greater scalability for EVM-equivalent architectures as well as evolutions to established L2s such as Polygon that announced its zkEVM validium as part of its aims to establish itself as the 'Value Layer' of the Internet. Then there were non-EVM compatible chains all vying for position such as Solana, Fantom, Avalanche, and Cardano, the last of which appears to be only just hitting its stride in terms of tech innovation.
But the bottom line is that we have yet to see the L1/L2 development race play out and this will continue to be the case until the Web3 equivalents of Netscape and AoL definitively fall by the wayside. A key part of this evolution will be an increase in L1 specialisation, where particular blockchains try to tailor their features and decision-making towards specific use cases. For example, Ethereum could continue to dominate DeFi while chains such as Solana may emerge as dominant in gaming. Indeed, the fact that Solana is making the case for being Ethereum’s biggest competitor is a far cry from its position twelve months ago (when around 74% of users agree that Solana should join Cardano instead of remaining an independent chain) shows how quickly things can change in the blockchain wars.
Trend #2: NFTs
For all of their potential, it is unfortunate but not surprising that NFTs have acquired the reputation of being one of the ‘scammiest’ corners in digital assets, where those in the know were and still are able to take advantage of the unsuspecting who hope to cash in on the hype. The fact that growing numbers of defrauded US investors have initiated civil litigation over rug pulls in 2023 only serves to highlight this point, and data showing a marked decline in NFT trading volume across all major changes confirms this (Figure 1).
Figure 1: Weekly NFT trading volumes, all marketplaces, Dec 2021-2023
But let’s not forget that NFTs do have utility, and this utility is multifaceted beyond inscribing jpegs on a blockchain. While NFTs will remain emblematic of the broader digital shift in our cultural consciousness, their utility in protecting against the rapid rise of AI-driven content, addressing the provenance of our social/digital identities (see soul bound tokens), as well as being a viable mechanism for representing ownership in digital land, music, and other forms of physical and intellectual property, cannot be ignored.
And even though we have yet to see some of these use cases achieve a breakthrough in terms of adoption, one only needs to look at the continued buzz around Bitcoin ordinals to understand that the NFTs space remains a hotbed of momentum.
Trend #3: Real asset tokenization
Real world asset (RWA) tokenization is currently one of the top trending narratives in digital assets. It is a multi-step process that involves creating the tokenomics for the selected asset type, building smart contracts to issue the tokens, and establishing trading and operations frameworks for tokenized assets which can include precious metals, equities, bonds, carbon offsets, real estate, and others.
Its benefits are well documented, chief among them being improved transactional efficiency and liquidity. The potential growth of the market is estimated at anywhere between $4 – $16 trillion through to 2030 (Figure 3), which underscores the significant growth this potential 'killer app' is perceived to have.
Figure 2: Asset tokenization estimates to 2030 by asset class
Despite this obvious potential, the RWA segment has failed to deliver on the hype so far. This is due to a combination of regulatory uncertainty, a lack of interoperability, as well as trust and security concerns, and many observers have dismissed it as another over-hyped fad whose utility is wildly overstated.
However there are now a growing number of tokenization applications being implemented globally. Just recently, for example, a major bond issuer in Germany, Cashlink, published a report in conjunction with FinPlanet quantifying the cost savings from tokenized bonds. It estimated the cost savings on an eight-year bond could be 120 basis points or 1.2% of the value of the bond, the equivalent of an 85% reduction in middle and back office costs. This represents 15 basis points per year or €15 million on every €10 billion in assets under custody.
As the market continues to mature, more TradFi market participants will be stepping into the space as a greater measure of technological and regulatory standardisation allows for real scalability of tokenization applications.
Trend #4 : Institutional investment post-ETF approval
The eventual approval of a US-based spot Bitcoin ETF has been one of the most anticipated events in digital assets for some time, with many believing that it holds the key to providing that critical impetus for a sustained bullish trend through large-scale and long-term institutional capital deployment. And indeed, with Blackrock having just revealed the authorised participants and announced plans to seed its Bitcoin ETF with $10 million on January 3rd, the likelihood of the SEC approval happening in January is very high.
While it is true that Europe already has a highly developed market for crypto ETPs and Canada has had several Bitcoin ETFs for over two years, regional differences in capital markets by value go some way to explain the fundamental differences in the impact an eventual US-based ETF could have.
For example, the EU makes up 11.1% of global equity markets, while Australia and Canada make up 1.5% and 2.7%, respectively. All these markets combined are dwarfed by the United States, which comprises 42.5% of all global equity markets, according to SIFMA estimates. Additionally, ETFs in the US represent a greater proportion of total assets than other regions, coming in at 7% of equity and fixed income assets versus 4% in Europe and 2% in Asia-Pacific. Therefore while there is an argument to be made that the Bitcoin ETF approval is priced in in the short-term, these numbers do not support the argument over the medium to long term.
Figure 3: ETF market size (%) by region and class
The other point is that, although the ETF is highly awaited by individuals in the digital assets field, traditional finance is mostly unaware of it. While they don't anticipate an impending launch, they also aren't expected to respond quickly when the SEC ultimately approves it. This is especially true for ultra-conservative institutions like pension funds.
But irrespective of one's view on whether these developments sully Bitcoin's original mission, participatory vehicles for institutional investors will ultimately be a key element of the long-term stability and viability of the asset class, making this a critical trend to watch even post-approval.
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