An annual outlook on what will happen in the crypto markets in 2022 enriched with institutional research on the most important topics in the industry in collaboration with the Swiss digital asset specialist 21Shares AG.
While 2020 has been called the year of institutional and entrepreneurial engagement and the beginnings of DeFi, the unprecedented interest in cryptocurrencies in 2021 brought a whole new wave of entrepreneurs and investors on board like never before. Many of them skipped Bitcoin and even Ethereum to develop and use the first generation of Web 3 applications. Where will the next year take us?
Ethereum and PoW mining
The Ether vs. Bitcoin (ETH/BTC) market-value indicator crossed the 50% mark for the first time in 3 years. In other words, Ethereum takes up over 50% of Bitcoin’s market capitalization. The uptick started this past summer, predominantly fueled by the rise of non-fungible tokens (NFTs). It is too early to tell whether Ethereum will flip Bitcoin’s market value in the near future but the pace of innovation to solve Ethereum's current issues such as high transaction fees are under significant progress.
PoW miners might face more friction outside China. There’s a rising concern from some politicians over the energy consumption of PoW networks like Bitcoin. Countries could try to curb mining by shutting access to miners or attempting to completely ban these practices. Politicians in Norway and Sweden would prefer the latter despite the fact that miners leverage renewable assets, while Iran and Kazakhstan chose the former. After three major coal-fired power stations suffered shutdowns on October 14, the Kazakh government decided to limit power supply to some consumers including Kazakhstan's crypto miners, which accounted for 18% of the global Bitcoin hash rate.
Investment inflows to the space
One of the other reasons we are optimistic about the future of this space, compared to the last cycles, is the pace of innovation and the financial support entrepreneurs receive not just from venture capitalist (VC) firms but also from a crowdsourced network of talents and resources with initiatives such as Braintrust. A good indication of this new era is the amount of VC investments made in this industry, which increased by more than 300% YoY.
VCs will need to reinvent themselves to stay relevant and attract as many entrepreneurs as possible this decade. They will need to provide non-monetary value to the community and teams, many started such as Paradigm solving major vulnerabilities in DeFi.
Decentralized Finance (DeFi)
The rate of adoption of user-friendly DeFi applications will pick up speed in 2022 with the new wave of Chinese users left out by centralized exchanges. The most dominant DeFi applications will contemplate integrations into Layer 2s such as StarkNet, Aribitrum, and Optimism to improve user experience. Nonetheless, Polygon PoS will be the biggest beneficiary for the first half of 2022 unless Layer 2s launch their own tokens and find relevant partnerships and marketing initiatives to sustainably incentivize developers to migrate rapidly to bootstrap usage.
Uniswap and ParaSwap have already launched on Polygon. Many crypto and DeFi projects based in the US could either opt for crypto-friendlier environments in order to grow without regulatory friction or prevent US customers from interacting with their interface like dYdX.
Regulatory developments
Major crypto firms will start lobbying en masse to gain more regulatory clarity. The Crypto Council for Innovation launched earlier this year. It will lobby policymakers, take up research projects and serve as the burgeoning industry’s voice in championing the economic benefits of digital currencies and related technologies. FTX.US will become one of the most important companies on the lobbying front, thanks to its CEO’s large donations to Joe Biden’s campaign.
Binance limited the leverage level to 20x instead of over 100x and ceased margin trading on various fiat currencies such as the Euro, Australian dollar, and the British Pound. As such, we should anticipate derivative trading to diverge to crypto-native products in DeFi such as Dydx and Perpetual Protocol, Ribbon, etc. Regulatory scrutiny could grow in light of the comment of SEC Chair Gary Gensler on the requirement for both centralized and decentralized crypto services to comply with US securities laws. Therefore, restrictions or delisting of crypto assets deemed unregistered securities might prevail in the US.
Uniswap, the leading decentralized exchange within DeFi, removed such security tokens from their interface (not the protocol itself) owned by Uniswap Labs, their company registered in the US. Uniswap also employed TRM, a blockchain analytics firm for compliance reasons. Other DeFi applications might follow suit. Investors have become a lot more knowledgeable over the past year and will be participating in DeFi and Web 3 more than ever. Many protocols have started to develop institutional-grade options to serve this cohort of investors such as Aave, MetaMask, Hashflow, Compound, etc.
Stablecoins
Government officials around the world have raised concerns over USD-pegged stablecoins, including Chairman Powell of the Federal Reserve. On that note, more stringent regulations could be applied on US-based stablecoin issuers; either regulators could impose a bank charter or require issuers to hold government debt instruments.
Traditional service providers are already embracing technologies coming from the crypto industry. Visa will eventually enable its network of consumers, businesses, banks, and governments to use USDC. This endeavour is a testament to the fact that conventional finance seeks to tap into the innovation behind the crypto infrastructure.
Given the fact that stablecoins enhance the US dollar dominance around the world, many countries such as Russia and China de-dollarising parts of their financial system could prevent their local banks from accepting stablecoin deposits as they attempt to build their own central bank digital currency (CBDC). Russia for example cut the dollar share of its foreign exchange reserves down to 24% from 45%.
Algorithmic stablecoins will be an important vertical to keep an eye on. UST could become the de facto medium of exchange in DeFi as the Terra ecosystem interacts with other chains through IBC. Other investors will feel more comfortable still using USDC or USDT to benefit from blacklists of wallet addresses in case of a hack.
Non-fungible tokens (NFTs)
AAA crypto-native games will take more time to develop than expected and might even fail to deliver or raise another round of financing to meet expectations. Games that will receive a lot of traction will be the ones easier and faster to ship or from projects who have been building in silence over the past few years.
Music NFTs will be one of the most engaging verticals where artists will take control over their fate. It is challenging to overstate how big an innovation it is. According to Mikel Jollett: “1,000,000 streams on Spotify nets $3,000. Of this, 84% goes to the label (if the artist is on a major, 50% if indie) and a whopping $480 goes to the artist”. With music NFTs, fans will be able to own songs through royalty-backed NFTs, musicians can upload songs on censorship-free platforms like Audius or tokenize their videos on Glass Protocol. The fanbase can even support artists through decentralized record-label such as Good Karma DAO.
Solana will attract more NFT artists and celebrities like Stephen Curry through the FTX NFT marketplace. Opensea will potentially lose market share as it faces more competition with Coinbase, FTX, Rarible, Zora, SupeRare, Nifty Gateway, etc. Cloud storage solutions such as Arweave and IPFSs have the chance to become more en vogue as the concern over outage of centralized web hosting services like AWS will emerge.
We predicted earlier last year that many NFT avatars would become music bands, movie and cartoon characters such as Crypto Punks, Bored Apes, and MetaHero. PUNKS Comic and Universal Music Group are great examples. In 2022, more brands, especially shoe manufacturers and apparel companies will leverage the metaverse and NFTs to display items and physically deliver pieces to NFT members. Adidas and Nike are the leading brands on that front. NFT projects and promoters won’t be immune to regulatory oversight, especially NFTs that could be classified as unregistered securities and outright scams like pyramid schemes advertised on social media channels like TikTok or Instagram.
DAOs and crypto infrastructure
The use cases likely to gain momentum will be 1) quadratic funding with Gitcoin 2) and crowdfunding with Syndicate Protocol. Those use cases will expand the pie to investing in crypto, support overlooked R&D initiatives to solve real-world problems and provide a universal basic income for people in need with ImpactMarket.
Cosmos and Polkadot will be ecosystems to closely monitor over the coming year. They will need to attract projects and networks with the most user traction to get quick wins. Terra joined Cosmos in October, as such Cosmos might continue to be miles ahead of Polkadot on the interoperability vertical from a usage perspective. Interoperability solutions will be an important component to improve liquidity provision, composability, and efficiency in DeFi.
Helium Network is becoming an important part of the web 3 infrastructure with a mission to make the world a more connected place through a ubiquitous, global wireless network. The partnership with FreedomFi, a connectivity company that manufactures open source 5G devices could gain more adoption in 2022.
Layer 2s will become chain-agnostic, Optimism and StarkWare already signaled this endeavor. The years of research and development of L2s will benefit non-ETH blockchains like Avalanche, Solana, Fantom and NEAR to scale as settlement layers for the Internet of Value (Web 3).
