From Messari by Peter Horton

Key Insights

Primer

Celo (CELO) is a carbon-negative, mobile-first, and EVM-compatible Layer-1 network in transition to an Ethereum Layer-2. Celo is focused on real-world blockchain use cases such as payments and regenerative finance (ReFi). After raising $36.5 million in two private fundraising rounds, Celo mainnet launched on Earth Day in 2020. Soon after, a public sale for Celo’s native token CELO raised $10 million on CoinList. In early 2021, Celo raised $20 million in another private round. The development and growth of Celo’s network and ecosystem were initially led by cLabs and the Celo Foundation. While these entities are still involved, Celo’s development and growth have become more decentralized and community-driven, with participation from a globally distributed group of projects and DAOs.

In 2023, Celo began its transition to an Ethereum Layer-2 (“CEL2”), which is estimated to launch in 2024. Developers are currently leveraging the OP Stack and EigenDA, although the final decisions on which stack to use have not yet been made. Modifications will be made to maintain several of Celo’s current properties, including a decentralized sequencer set powered by Celo’s existing validators, 1-block finality, reorg resistance, and low transaction fees.

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Key Metrics

Financial Analysis

As a whole, the crypto market rebounded in Q4’23. CELO was no exception – its circulating market cap increased 80% QoQ to $413 million. However, CELO was outpaced by other tokens, as its market cap rank fell from 115th to 130th QoQ.

Celo’s quarterly revenue (gas fees collected by the protocol) remained flat QoQ at 62,000 CELO. However, considering CELO’s price appreciation, its revenue in USD grew 16% QoQ to $35,000. In addition, Celo’s average transaction fee in Q4 was $0.0006. Transaction fees on Celo are designed to be low to support real-world use cases.

At the end of Q3, the Gingerbread Hardfork was implemented, introducing a new system for revenue distribution. Inspired by Ethereum’s “ultrasound money,” the system was dubbed “Ultragreen Money”.

Under the new system, 20% of the base fee is allocated to a new Green Fund. The Green Fund, initially controlled via a multi-sig, received the existing assets in the Celo Carbon Offset Fund. Its purpose is to turn assets into onchain regenerative finance (ReFi) initiatives, such as buying carbon credits.

The other 80% of each transaction’s base fee is now being burned. Tokens allocated to the burn accrue in a contract. Anyone can call a function to then actually burn the tokens at any time.

Note that gas fees can be paid in any ERC-20 token approved by onchain governance. Any fees paid in ERC-20s are transferred to the Green Fund as is but converted to CELO in order to be burned.

In Q4, almost 22,000 CELO was burned. For comparison, almost 2.5 million CELO was minted to distribute as staking rewards. Despite the minimal impact on CELO’s inflation rate, the burn still caused inflation to decrease by almost 1%, down to 1.42%. Note that this inflation rate measures the rate of staking rewards less the rate of tokens burned, relative to the genesis supply total of 700 million tokens. The rate of staking rewards is set to remain at 1.43% until 2035, when it will then begin decreasing and eventually go to zero.

Beyond epoch validator rewards, CELO also experiences inflationary pressure from genesis supply unlocks. At the end of Q4, 70.6% of CELO’s genesis supply was liquid. The genesis supply here excludes staking rewards and totals 700 million tokens. In Q1’24, another 1% of genesis supply will unlock across the team and advisors, as well as community and operational grants buckets.

Network Analysis

Usage

Average daily transactions grew 122% QoQ to 579,000. Transactions spiked in late November due to inscriptions. On November 23 and 24, Celo sustained over 10 million and 13 million transactions, respectively.

Average daily active addresses grew more steadily, up 104% QoQ and 3,062% YoY to 143,000. The increase in active addresses was largely driven by new addresses interacting with play-to-earn (P2E) game BLCR. GoodDollar also continued to account for a notable percentage of overall Celo daily active addresses.

Battle Left Center Right (BLCR) is a P2E card game on Celo and BNB Chain. After deploying to Celo in mid-September, it averaged almost 69,000 daily active addresses on Celo in Q4. Celo’s average daily active addresses itself increased by around 63,000 from Q3 to Q4. After the quarter ended, BLCR announced that it would be ceasing operations in February.

GoodDollar is an onchain universal basic income (UBI) experiment. The protocol mints and distributes the G$ token on a daily basis to verified global smartphone users. G$ is partially backed by a reserve pool, which lives on Ethereum. In mid-March, G$ distribution officially expanded to Celo, joining Ethereum sidechain Fuse. Near the end of April, GoodDollar’s native mobile wallet GoodWallet integrated with Celo, spurring usage of the protocol on the network.

At the end of October, GoodDollar governance passed a proposal to increase UBI distribution on Celo relative to Fuse. Previously, distribution was split 50/50 between the two networks, but now, there is a 90/10 split in favor of Celo. GoodDollar also announced a $75,000 Prosperity Grants Program in partnership with the Celo Foundation.

In Q4, GoodDollar averaged almost 54,000 daily active addresses on Celo, a 16% QoQ increase.  GoodDollar’s daily active addresses dipped on December 17 and 18. Unfortunately, the drop was due to an exploit on December 17.

A malicious actor withdrew over 627,000 cDAI from the GoodDollar reserve and minted 14 billion G$ tokens, increasing supply by around 233%. The malicious actor sold around 1 billion G$ on Celo and Fuse DEXs, causing its price to decrease by 95%. The GoodDAO paused core protocol contracts, and the Good Labs Foundation temporarily disabled the GoodWallet and GoodDapp. Functionality was restored on December 18, with functionality for claiming being restored on December 19. A working group is currently exploring strategies to improve GoodDollar liquidity and restore its reserve, with more details expected in January 2024..

Average daily new addresses increased by 39% QoQ to almost 13,000. Total monthly new addresses reached a yearly high in December 2023 of over 565,000 new addresses. Even with the increase in new addresses, the weighted average one-month retention rate remained relatively flat QoQ. That said, the October 2023 cohort of new addresses had the highest one-month retention rate of any 2023 cohort at almost 44%. This cohort also had an over 42% two-month retention rate. The majority of addresses from this cohort interacted with BLCR.

Security and Decentralization

CELO staked decreased by 4% QoQ to 260 million, representing 46.1% of the supply eligible to be staked. However, with CELO’s price appreciation, total staked in USD increased 70% QoQ to $205 million. Meanwhile, the number of active validators on Celo remained at 110 in Q4. Several validator operators run more than one validator node on the Celo network. At the end of the quarter, there were around 66 unique validator operators.

In Celo’s upcoming transition to an Ethereum L2 (discussed in further detail below), Celo’s validator set will become a decentralized sequencer set. In addition to running an updated client, validator operators will need to run an Ethereum node or have access to a trusted one. The sequencers will enable Celo to maintain its 1-block finality secured by CELO stake, while also leveraging a data availability layer and Ethereum for stronger, albeit less frequent, finality guarantees. If validators share divergent blocks on the Celo and data availability layer, they’ll be slashed in order to avoid sequencer-caused block reorgs. The Celo team is exploring the exact design details to mitigate Ethereum reorgs which would result in Celo reorgs.

Upgrades and Roadmap

In mid-July, cLabs posted a forum proposal to transition Celo to an Ethereum L2 (“CEL2”). The post proposes to initially leverage the OP Stack and EigenDA for data availability. Modifications would be made to maintain several of Celo’s current properties, including 1-block finality, reorg resistance, and low transaction fees. As noted above, Celo validators will transform into sequencers, becoming one of the first L2s with a decentralized sequencer set. At the end of July, the proposal passed a temperature check. Then, at the end of the Q3, the Gingerbread Hardfork was completed. For more details on the original proposal and the Gingerbread Hardfork, refer to the Q3 2023 report.

CEL2 discussions and development continued in Q4. At the end of October, cLabs posted an updated CEL2 roadmap. The first item on the roadmap was the creation of a framework for selecting an L2 stack. After posting the original proposal, several other teams developing Layer-2 stacks proposed for Celo to use their stack instead of the OP Stack, including the Polygon CDK, zkSync’s ZK Stack, and Arbitrum Orbit.

cLabs has begun development using the OP Stack and EigenDA, including launching a private testnet which then integrated EigenDA within two days. However, it is still an open question about which stack will be selected. Even so, much of the ongoing development work will be reusable if another stack besides OP Stack is chosen.

The framework for selecting an L2 stack was released at the end of November. The core criteria of the proposed framework include:

In the updated CEL2 roadmap, cLabs stated that it hopes mainnet will launch by the end of 2024, although noting that the timeline is subject to change.

Ecosystem Analysis

DeFi

Celo’s DeFi TVL increased by 49% QoQ to $136 million. Stablecoin protocol Mento’s TVL grew by 80% QoQ to $82 million. It ended the year with a 60% market share of Celo’s DeFi TVL, up 21% QoQ. Mento mints the stablecoins cUSD, cEUR, and cREAL, which are backed by a reserve featuring CELO, DAI, USDC, and other digital assets. With the majority of its reserve (and thus TVL) in CELO, Mento’s TVL increase was largely driven by CELO’s 76% QoQ price appreciation. In mid-December, a proposal was passed to deprecate Mento V1 and fully transition to V2.

After growing 84% in Q3, Uniswap’s TVL on Celo increased again by 43% QoQ. Its Celo V3 instance surpassed Curve’s Celo deployment as the second-highest Celo DeFi protocol by TVL. In early November, Double, a DeFi protocol that aims to optimize rewards earned by AMM LPs, integrated with Uniswap V3 on Celo.

In mid-November, Prime Protocol added support for Celo. Prime Protocol is a protocol that enables cross-chain deposits and borrows. It ended the year with over $13,000 in TVL from Celo.

In Q4, several infrastructure protocols added support for Celo, including oracle Chronice Labs, RPC and API provider Lava, and multisig Coinshift.

Stablecoins and Payments

Unlike many other networks, Celo users can pay gas fees in approved stablecoins, enhancing user experience, especially in real-world use cases. Furthermore, Celo’s stablecoin market cap is largely made up of native stablecoins like cUSD and cEUR rather than USDT or USDC, as seen in other top networks.

Celo’s stablecoin market cap decreased by 19% QoQ to $56 million. The decrease was largely driven by a cUSD supply reduction of over 25%. cUSD still retained its majority market share among Celo stablecoins, followed by cEUR and USDC, which also decreased by 10% and 8%, respectively.

In mid-October, a proposal was passed to launch the eXOF stablecoin via Mento. eXOF is a stablecoin tied to the CFA franc, a currency used in 14 African countries. Payments platform Dunia is serving as the stablecoin’s primary on/off-ramp provider. Dunia’s infrastructure also leverages the Valora wallet and the on/off-ramp API standard FiatConnect released by cLabs.

In mid-September, web browser Opera launched stablecoin wallet MiniPay, powered by FiatConnect and payments SDK SocialConnect. MiniPay is natively integrated into Opera’s mobile web browser Opera Mini, one of the more popular mobile browsers in Africa with an 11% market share. In mid-October, MiniPay became available to all Opera Mini users in Nigeria, followed by launches in Kenya and Ghana. In mid-December, a proposal was passed to allocate $568,000 per quarter from Celo’s Community Fund to Opera Mini in order to accelerate the growth of the Celo ecosystem in Africa and the adoption of MiniPay.

Near the end of August, Glo Dollar launched on Celo. Glo Dollar is a stablecoin backed by a reserve of cash and U.S. Treasuries. A portion of the revenue earned from the U.S. Treasuries yield is donated to GiveDirectly, a non-profit that distributes basic incomes to people in extreme poverty. In mid-October, GoodDollar announced that it joined Glo Dollar’s Glo Consortium. As part of the partnership, Glo Dollar formed a G$ <> USDGLO pool on Uniswap, initially depositing $25,000. Glo Dollar’s circulating market cap on Celo at the end of Q3 was around $160,000, a 60% QoQ increase.

In early December, impactMarket also joined the Glo Consortium, launching a PACT <> USDGLO pool and a learn-and-earn program.

Other payments-related events from Q4 include the HaloFi Save feature and support for Celo assets on Pretium.

ReFi

Regenerative finance (ReFi) merges DeFi with regenerative economic principles, aiming to solve environmental and social issues with blockchain technology. Since its launch, Celo has been committed to creating a positive social impact. As such, Celo is one of the leading ecosystems for ReFi projects, including GoodDollar, impactMarket, Toucan, Kolektivo, and more.

In Q4, several ReFi and RWA-related projects launched on Celo, including:

At the beginning of the Q3, the Celo Foundation commissioned carbon offsetting NFT Celosapien from Ecosapiens. The NFT is dynamic, evolving to reflect Celo’s carbon offset progress. The Celosapien upgraded three times in Q4, reaching level six. The Celosapien Open Edition NFT has so far been minted by over 42,000 addresses. At the end of Q4, Celo’s lifetime net carbon footprint stood at -5,872 tons of CO2, with offsets largely facilitated by Toucan and Wren.

Other ReFi-related events from the quarter include Toucan’s OffsetHelper and Kolektivo joining UNICEF Venture Fund Climate Cohort.

Development and Growth

Ecosystem development and growth are driven by the Celo Foundation and cLabs, as well as other organizations and coalitions. Notable events from Q4 include:

Closing Summary

Q4 wrapped up a turning point year for Celo as it began migrating to an L2 (“CEL2”). cLabs has begun CEL2 development using the OP Stack and EigenDA. However, the community has not made a final decision about which stack to ultimately leverage, with Polygon CDK, zkSync’s ZK Stack, and Arbitrum Orbit also in consideration. To that end, a framework for selecting an L2 stack was proposed to guide the community’s decision.

As CEL2 work continued, Celo’s ecosystem also grew in Q4. Average daily active addresses increased by 104% QoQ and 3,062% YoY to 143,000. Growth was driven by P2E game BLCR and universal basic income protocol GoodDollar. Unfortunately, the GoodDollar Reserve suffered an exploit in mid-December. Other notable ecosystem events from Q4 included MiniPay’s launch in Nigeria, Kenya, and Ghana and the launch of the GENZERO climate action campaign with TIME. Development interest in Celo is at an all-time high, with its ETHGlobal India hackathon featuring a record number of 118 submissions for a Celo hackathon. Altogether, the continued growth efforts and the potential L2 migration should serve as strong catalysts in 2024.