1/ Back to basics: self-custody and privacy

As recent events have proven, it is not enough to claim to be "crypto" or "Web3" to be better than traditional financial players. Far from it! The collapse of the Terra/Luna ecosystem led to the bankruptcy of the crypto lending company Celsius and the Three Arrows fund, which in turn accelerated the fall of FTX in November, revealing a completely sclerotic system.

While we wait to find out if the worst is over (more on that below in Big Focus), this debacle of centralized finance (CeFi) has put the focus on a hot topic: keeping one's cryptocurrencies in one's own possession.

The only way to avoid losing your funds remains to keep your cryptos yourself 💡

This is the philosophy of Web3 based on decentralization and taking back control of our data and our money. This is partly what led to the creation of a certain... Bitcoin.

There are not 36 solutions to ensure yourself the conservation of your cryptos: either with non-custodial wallets (MetaMask, Spot, Rabby, etc.) or hardware wallets (Ledger). A sign that does not deceive, all these players have seen their activity climb in recent months.

"We've reached historic numbers," confirms Ledger's boss, Pascal Gauthier. The same goes for Spot; in an interview, the start-up's co-founder, Édouard Steegmann, told us he had exceeded 500,000 downloads.

Obviously, you shouldn't be naive. Keeping your cryptocurrencies clean is not simple and there are risks: a bad manipulation can make you lose everything 😒

Privacy, which has been somewhat forgotten lately, should also be an important issue. The reactions to the conviction of one of the developers of Tornado Cash (a tool that anonymizes transactions) and the change in the terms of use of MetaMask (which collects the IP addresses of its users) have shown how sensitive the subject is.

The return of cryptos specialized in anonymous transactions is also an indicator. Monero (XMR) is currently making a noticeable comeback in the sector's largest capitalization rankings.

2/ The interest of DeFi is no longer to be proven

The FTX scandal is probably the best publicity that decentralized finance (DeFi) could have dreamed of. If everything is obviously not perfect, it brings transparency where centralized finance (CeFi) is particularly opaque.

One thinks of course of decentralized exchanges such as Uniswap, whose monthly volumes regularly oscillate between 30 and 50 billion dollars despite the fall in prices.

Proof that Uniswap is on a roll, its activity was momentarily higher than Coinbase's after the FTX episode. And on some large pairs, its liquidity is also higher than on Binance.

Let's be clear, Uniswap won't be used by tens of millions of people tomorrow, but the protocol has made progress in terms of simplicity. Since December, it is possible to buy cryptos directly on Uniswap by credit card or wire transfer (via a provider). Uniswap has also opened up to the exchange of NFTs, which could attract more users.

"The post-FTX environment is favorable for DeFi and we should continue to see innovations with more efficient decentralized players, more products using Ethereum's secondary layers (see part #7) and even options (financial products that allow you to hedge against volatility risks)," explains Stanislas Barthélémi, crypto expert for KPMG.

This evolution should allow the emergence of decentralized exchanges with an order book and futures contracts. The DYDX and GMX projects seem to be the most advanced in this respect.

We will also be watching closely as MakerDAO changes its strategy and invests a very large portion of its reserve in real-world assets, including US sovereign bonds.

This may seem like a surprising choice for a DeFi player, but it proves to be quite interesting when it comes to offering returns in an environment where cryptos don't offer much anymore.

MakerDAO's decentralized stablecoin, DAI, should soon see a major competitor in the form of GHO, the upcoming over-collateralized stablecoin of the Aave lending protocol. Its launch date is still unknown, but it could provide a boost to its ecosystem by strengthening Aave's business model.

3/ Restoring confidence in the BeCeFi

The goal for centralized exchange platforms will be to restore trust.

Many clients were burned by the brutal fall of FTX and the - catastrophic - episode around the proofs of reserve did not convince many people... Several platforms presented as an audit of their accounts, what was only an internal document concerning a part of their reserve. There were not even the liabilities...

The most symbolic case is that of Binance. The firm Mazars, which was working with the global leader in the sector, decided to suspend its contract. Another player in the sector, Armanino LLP (auditor of the US branch of FTX), meanwhile, has decided to withdraw from cryptos.

Not everyone has jumped ship, of course. Several members of the so-called "Big 4" (Deloitte, EY, KPMG and PWC) are working on crypto and Web3 topics.

Coinbase is audited by Deloitte while Bitfarms is audited by PWC. What do these two groups have in common? They are both listed on the stock exchange and subject to important regulatory constraints such as the obligation to publish their accounts every quarter. This makes a difference, because Binance or Cryptocom have set the framework for their "proof of reserve" themselves.

Platforms have all the more interest in changing gear as some brokers (Bitpanda, Trade Republic, etc.) could steal market share from them: although they are more expensive in terms of commissions, they have the advantage of offering more guarantees; many of them are audited and subject to more restrictive regulations. This is an important point, because according to our information, Binance's organization has been judged "far too complex" by several firms.

4/ Binance in a quasi-monopolistic situation

The collapse of FTX did not only cause huge losses. It also took out one of Binance's main competitors, if not THE main one.

To give you an idea, Changpeng Zhao's group is now over 75% market share (in volumes processed in January), a level it has never reached! 😳

To date, Binance's most serious competitor is also the one that offers the most different model, namely Coinbase. The U.S.-based company has been listed on Wall Street since April 2021, which makes it much safer for accounting purposes, but is not without consequences. Since FTX's bankruptcy and the market downturn, the rate on some of Coinbase's bonds has soared above 12%!

Its share price has also been divided by 10 (yes 10!) since its introduction. Brian Armstrong's group is currently worth "only" 8 billion dollars - its lowest historical value, which makes some say that the American company has become a "prey" for others. "What about a hostile takeover of Coinbase by JP Morgan? It's all possible, it's not finance fiction," says Jean-Marie Mognetti, CEO and co-founder of CoinShares, which is one of the largest crypto asset managers in Europe.

Coinbase's stability is crucial to the crypto universe, as the company maintains 10% of the bitcoins in circulation.

In Europe, platforms are expected to take the lead in a "MiCA-compatible" organization, as the future European regulation is called.

One such platform could be Kraken. The company's efforts in terms of transparency have not gone unnoticed by the regulators. According to our information, the American platform (which is a pioneer in the sector) would be on track to be one of the first giants to obtain European approval.

Platforms of European origin (Bitstamp, Paymium, etc.) remain in ambush, but show much more modest volumes.

5/ Implementation of MiCA in Europe

After a year of intense negotiations between the various members of the European Union, the MiCA regulation, which will provide a framework for cryptos for its 27 member countries, will finally get a final vote. The vote is scheduled for February 🗓️

From this vote, the exchange platforms - which are the first to be affected by this new framework - will be able to start the big work. The goal is to get into battle to obtain the "mandatory" approval that will allow them to operate throughout Europe.

MiCA is scheduled to take effect in 2024, but all companies will have 12 months to comply, with an 18-month allowance for those already registered locally.

There is still one unknown about this timetable, as the political fallout from the FTX affair could force players to comply earlier than expected. In France, an amendment is currently under discussion in Parliament to make approval mandatory as early as October 2023 (see the indiscretion above).

The approval is much more restrictive for the platforms, especially regarding the protection of investors. Those with more than 15 million users (mainly Binance) will have to present a relatively high equity ratio.

6/ The outcome of the Ripple trial in the US

The coming year will be the year of deliberation in the case that pits Ripple against the SEC, the U.S. financial watchdog, which has accused it since 2020 of illegally selling financial securities by issuing its own cryptocurrency: the XRP.

The reason we're talking to you about this is that beyond the case of Ripple, this lawsuit could have an impact on the entire industry. "In case of a favorable decision for the SEC, most of the tokens that exist on the market would be treated the same way," explains lawyer Victor Charpiat. In plain English: all those who had "pre-mined" tokens could become illegal on American soil. This excludes Bitcoin and probably Ethereum... but that's about it.

The concrete consequences of such a decision would be significant: "If these projects did not comply (by paying heavy fines and accepting the SEC's trusteeship, editor's note), the purchase and sale of their tokens would be prohibited on all platforms targeting the American public," insists Victor Charpiat.

The conclusion of the case is expected in the first half of the year. Ripple has already stated that the company will move to another country in the event of a conviction. An opportunity for Europe?

7/ The advent of Ethereum's secondary layers

If the year 2021 may have cast doubt on Ethereum's dominance as the leading smart contract platform, the last few months have clarified things quite a bit.

Without FTX-Alameda's financial backing, it will be very complicated for the Solana ecosystem to catch up to the leader. Ethereum currently concentrates 60% of the value locked up in decentralized finance, and its September switch to proof-of-stake (which dropped its energy expenditure by more than 99%) eliminated its main problem in the eyes of institutional players. "The success of the merge and the arrival of the "Shanghai update" (we'll talk about it below) will establish Ethereum's dominance," emphasizes Jean-Marie Mognetti.

For retail users, Ethereum's transaction fees are still a major obstacle, but layer 2 solutions have seen a dramatic breakthrough in recent months.

Whether it's with Polygon (used for The Big Whale's NFT 🐳), Arbitrum or Optimism, it's now possible to access the entire Ethereum universe at low fees. The year 2023 could well be theirs as several projects have planned to issue their own token, which should attract a huge amount of liquidity. The most anticipated is undoubtedly that of StarkNet.

"Layer 2s will continue to improve and decentralize their governance. We should gradually see their use take precedence over other layers 1", says Stanislas Bathélémi of KPMG.

"Their room for improvement is significant as the Ethereum EIP-4844 update, which is not expected until 2024, should further reduce their fees," he adds. Sounds promising!

8/ The real start of the GameFi ?

Not everything has been easy for the players of blockchain games. One of the best known, Axie Infinity, has not managed to create a truly sustainable and fun game (its system relies almost solely on token buying and speculation), but new attempts are expected in the coming months.

"Some experiences like Illivium, Ember Sword and Treeverse are promising and far from the hype of Axie Infinity," says Stanislas Barthélémi.

The example to follow is probably Sorare, which has managed to create a really fun game that players can enjoy without necessarily investing money. Let's not forget that a game is first and foremost about... having fun!

If Ubisoft had failed to unleash the crowds after the introduction of NFTs in its Ghost Recon game, other major publishers, perhaps more compatible with the subject (we'll publish something about this next week 👀), are already in the starting blocks.

9/ The emergence of decentralized social networks

At The Big Whale, we're not going to hide it from you, we're very excited to see decentralized social networks develop 🔥

Several attempts had already met a small success in recent years (Mastodon in particular), but the arrival of Lens Protocol could give a real boost to the sector. The latter, designed by teams close to Aave, brings the technological brick that allows the development of social tools in the Web3 sauce.

The principle is quite simple: when you register, you get an NFT that replaces the traditional login and password. It is your digital identity card and it "improves" with your use.

An example: the people who follow you are not linked to the social platform, but to your NFT. The advantage of this system is that you can't lose your community and your content.

To date, Lenster, a kind of decentralized Twitter built on Lens, offers one of the best experiences and allows us to glimpse new business models for content creators. Lenster allows users to receive rewards in cryptos by publishing posts or sharing those of others. 

This system opens up a lot of perspectives and possible associations between DeFi and "DeSo" (decentralized social networks). "I am a great believer in the combination of these two infrastructures," says Stanislas Barthélémi of KPMG.

The DeSo ecosystem is still in its infancy and is structured around three main categories: applications that are part of the user interface (such as Lenster or Phaver), those that manage the infrastructure of relationships and publications (such as Lens) and finally those that ensure the storage of photos or videos (Arweave, Infura IPFS).

10/ How can I not mention Bitcoin?

Despite the cyclical downturn in prices, Bitcoin continues to grow. The reasons for this "success" vary by geography. In some countries, it is an investment and even speculation product, in others it provides access to financial services or fights inflation, as highlighted in the latest Chainalysis report.

Bitcoin could gain additional appeal in the coming months as central bank digital currency projects take shape (the ECB is expected to deliver its findings by this summer). It is interesting to note that in many countries where similar initiatives have been launched (Nigeria in particular), Bitcoin has benefited from the "anti-cash" wave.

However, we must remain vigilant about the mining industry, which is the heart of the system, whose financial difficulties are mounting due to falling prices and rising energy rates around the world ⚡️

Rest assured, however, that the computing power protecting the grid is 40% more than it was two years ago. The advent of a world where electricity is sustainably more expensive could push miners to turn more to renewable sources that have the advantage of being more affordable, even if they are sometimes more difficult to control. According to the University of Cambridge, miners were using about 25% renewables in their mix in 2022.