2021 was a spectacular year for blockchain. The cryptocurrency market surpassed $3 trillion in value. NFT’s grew in popularity, with over $23 billion in trading volume. The first U.S. futures-based bitcoin ETF launched. El Salvador adopted bitcoin as legal tender. Ethereum made a change to how it collects gas fees. Many new chains were introduced as a result of which, the total value locked (TVL) on DeFi increased seven times year-over-year, surpassing $200 billion. The number of blockchain wallet users grew to 70 million.
More recently we are seeing cryptocurrencies being used as a regulation resistant means of sending money across borders to support causes that people believe in. With the outbreak of the war in Ukraine, though the crypto market initially fell dramatically it is now back to its prewar levels and roughly $30 million worth of crypto donations have been raised for the Ukrainian military since the war began. With regards to the trucker protest in Canada, after being blocked by traditional funding outlets like GoFundMe, the protesters received around $900,000 worth of donations in cryptocurrencies. We will continue to see scenarios where people can financially contribute to causes using cryptocurrencies that would not have been possible using traditional financial infrastructure.
Fig 1: Different cryptocurrency donations to Ukraine as of 2/27/22
The massive increase in adoption has paved the way for developments in all aspects of the blockchain ecosystem such as improvements in the blockchain infrastructure, applications built on blockchain technology, adoption of more mainstream and developer friendly programming languages and increased emphasis on regulation and institutional adoption. This report analyzes the major blockchain trends to look out for in 2022.
Improvements in the blockchain space
In 2022 we expect to see further developments in the blockchain space with the introduction of new Layer 1 (L1) blockchains and improvements in consensus protocols, transaction costs, transaction times and tokenomics. We also expect advances in Layer 2 (L2) solutions that can further improve the scalability of existing L1 solutions and greater focus on the development of bridging solutions that will allow users to transfer funds from one chain to another more easily, thus enabling the move towards a multichain future. We believe that a focus on scalability, i.e. more transactions with faster speeds will determine the winners in the race of multiple L1 and L2 solutions.
1. Rise of Multichain Interoperability solutions
We saw the emergence of multiple L1 chains and L2 solutions in 2021 and the need for interchain liquidity became an obvious bottleneck for wider adoption but this has also provided an important opportunity for development.
From 2017-2021 several L1 and L2 solutions have launched aiming to improve transaction speeds and lower costs, with some of the most popular newer chains being Polygon, Avalanche, Optimism, Terra and Solana. Utilizing smart contract functionality, these chains have attracted developers to build multiple open-source financial applications, games and more.
Fig 2. Overview of the Total Value Locked (TVL) and the largest applications built on top of some of the newer blockchains (Snapshot taken 31.12.2021)
In order to take advantage of the unique features of different chains, such as transaction costs and wait times and to maximize one’s return on investment the ability to transfer funds from one chain to another is paramount.
We see a trend where decentralized exchange (DEX) aggregators, such as Paraswap, which allows users to get best prices by swapping across multiple DEX’s are starting to integrate with bridges to allow users to not only swap tokens that exist on the same chain but allow users to swap tokens across chains. For applications that have not been deployed on multiple chains there are cross-chain solutions such as Symbiosis Finance, Multichain or Atlasdex solving these issues. Multichain, one such cross-chain token transference protocol, has attracted over $7.7B in TVL across several chains in order to facilitate cross-chain transfers and native swaps.
Popular DeFi applications such as Aave, Curve, Uniswap etc. that were deployed originally only on the Ethereum blockchain have already gone multichain. This will lead to users not having to move liquidity across other blockchains in order to interact with a specific application.
2. Improvements in DEX user experience and capital allocation efficiency
This year, we’re likely to see the user experience of Decentralized Exchanges (DEXs) improve both in terms of ease of use and capital efficiency.
Under the hood, DEXs (exchanges where you can swap one token for another) will become much more complex. Uniswap followed a simple pricing algorithm of x * y = k (constant product formula). Where x and y are the respective amounts of the two tokens comprising the liquidity pool. While this was intuitive to understand, it has a relatively high price impact on trades of like-assets, leading to losses.
Many new DEXs have tinkered with the algorithm/curve, making it more complex but efficient. Some notable examples are:
Curve Finance v1:
These algorithms seek to reduce price impact on trades, i.e. the fluctuation in the relative value of token x with respect to token y as users are swapping one token for another. These new conversion algorithms allow the price to remain more stable (around 1) for relatively small trades, ensuring low price impact, and also allowing for the creation of smaller liquidity pools.
Many DEXs are adopting features of an order-book model. Uniswap v3 has already moved the classic Automated Market Maker (AMM) to a model that more closely resembles an order book (with Liquidity providers being able to restrict their liquidity to certain price ranges. This has been dubbed concentrated liquidity).
dYdX is a newer DEX that follows an order book model. dYdX is quickly rising in TVL ($1.1B in November, 2021), and already reaching similar trading volume compared to Uniswap (Uniswap daily volumes around $1.3B, whilst dYdX has around $950M). Revenues, however, remain significantly higher on Uniswap, reaching daily all time high (ATH) revenues of $17.7M, while dYdX daily ATH revenues reached $6.8M. Sushiswap aims to launch a similar product in the future and we'll likely see more players follow suit.
Fig 3. Uniswap & dYdX Daily Revenue chart taken on 3/3/22
Source: Token Terminal
Several other improvements are also happening in the DEX space that aim to improve the user experience such as single-sided liquidity deployment, impermanent loss insurance, batching and netting of trades, limit orders, leverage trading, and adoption of Layer 2 solutions.
3. Increased DeFi Adoption on Layer 2
As highlighted by the TVL’s in Figure 1, many dollar amounts have been deployed into various DeFi products across several chains and their respective applications (dApps). As of the 31st of December, 2021 there were over $241B assets across various dApps. Borrowing and lending protocols, such as MakerDAO, Aave, Curve and Anchor Protocol are leading the way, comprising almost 25% of the total value locked (TVL). Decentralized exchanges, such as Uniswap, PancakeSwap, Spookyswap, Serum have also marked an astonishing combined $13B in TVL as of the 31st of December, 2021.
In addition to growth in TVL on layer 1 blockchains there has also been a significant uptick in TVL on layer 2 solutions beginning in the first half of 2021 with Polygon leading the way- quickly rising from $100M in TVL to $8B at its peak, mainly driven by liquidity mining rewards. Arbitrum, Optimism & many more L2’s launched in the second half of 2021 and were able to gain a lot of attention from various DeFi players and developer communities.
Fig 4. An overview of different blockchains and their respective TVL and market caps
With more market participants entering the digital asset world and the development of new applications, the DeFi space is quickly becoming more crowded, leading to higher transaction costs and lower transaction speeds. As the blockchains get more participants, these problems will continue to get worse, with the major L1 chains quickly getting saturated. As a result, the gas prices will go up across most L1’s
Fig 5. Ethereum gas fees in gwei over the past one year queried on 3/3/22
High fluctuation in gas fees and latency lead to slippages (difference in the expected outcome at the time of making the trade, and the actual outcome once the trade is complete) in trades and can become an everlasting issue for Ethereum, hence more people are shifting large volume asset trading onto different layers.
With the advent of L2 solutions (and sidechains), which are scaling solutions that bundle transactions, increase transaction speeds, and save gas fees, the space seems to be evolving quite strongly. In 2022, we expect more DeFi applications to adopt L2 solutions. The rise in TVLs of L2 solutions such as Arbitrum, Optimism, and Boba are great indications that the community has been embracing rollups.
With the promise of faster transactions and lower fees plus innovations such as Optimism V2 (and subsequently Boba V2) that simplify the process of deploying L1 smart contracts onto L2 solutions, it is safe to assume that more DeFi protocols will also be making the jump if they haven’t already done so. Pretty soon, all major tokens will have their L2 versions and clones, and bridging will ensure that they can move between and among layers effectively.
In addition to the major developments in the blockchain infrastructure there are also a number of novel and existing blockchain applications that have seen a huge boom in 2021 and will continue to grow in 2022. These applications are elaborated on below.
4. ‘NFT-Fi’ will define 2022
More than $23B of NFT trading volume was generated across several platforms, with OpenSea taking on the lead. Q3, 2021 was a highlight with over $10B in trading volume, making up almost half of the total NFT trading volume in 2021.
Lending/borrowing/collateralizing NFT technologies will dominate the space and will rival token swapping marketplaces. 2021 brought NFT’s into the public eye. Notwithstanding their pro’s and con’s, they have since had a major impact on the art world and gained mainstream acceptance. NFTs are likely to continue this trajectory in 2022. Companies such as Swap.Kiwi allow you to directly swap NFTs with other parties in escrowed accounts, NFT’s also enable the tokenization of not only assets but also positions. For example large institutions could be able to create tokens of their existing positions in liquidity pools and swap them without having to first exit their position and then trade those assets. Furthermore, companies such as Taker Protocol are enabling users to use NFTs as collateral to borrow money, enabling NFT holders to receive liquidity for their highly valued assets.
In 2021, 75% of NFT trading volume was on Ethereum. In 2022 NFT trading volumes could potentially shift to other L1 & L2 chains, including Ronin, Flow, Immutable, and Solana. Multichain solutions that allow the transfer of NFT’s from one chain to another will redefine the space. Since the launch of Solana and their NFT marketplaces in the second half of 2021, Solana NFT marketplaces overall achieved a total NFT trading volume of over $1.3B with SolanArt leading the race. Comparatively, Polygon has achieved a total NFT trading volume of over $480M ($413M coming from OpenSea) with a majority of this coming from OpenSea’s implementation of users being able to issue NFTs through the OpenSea platform (OpenSea was initially solely on Ethereum) directly onto Polygon.
The utilization of NFT’s in gaming will be a focus. The ability to trade game based items will lead to several business models like on-chain analytics highlighting the item performance, rarity and utility.
A few notable examples of NFTs in DeFi include:
Liquidity provider positions in Uniswap V3 are represented by non-fungible tokens (NFTs) since they are no longer fungible.
Ubisoft Quartz, “an NFT initiative which allows people to buy artificially scarce digital items using cryptocurrency."
UC Berkeley auctioning NFTs for the patent disclosures for two Nobel Prize-winning inventions: CRISPR-Cas9 gene editing and cancer immunotherapy
NFTs as tickets for entry into exclusive events and groups
Artists selling music streaming rights to fans, allowing fans to partake in streaming royalties
5. Increased focus on Security
2021 highlighted another All-time-high (ATH) of total capital stolen by crypto scammers. An astonishing $14B was stolen, while a total of $2.2B stolen from DeFi platforms. The number is alarming and can dissuade institutions from interacting with on-chain protocols.
Both centralized marketplaces like Crypto.com and protocols like Wormhole have been the latest targets of hackers. In the case of Crypto.com, the company disclosed that on 17th January 2022 around $30 million worth of bitcoin and ethereum were stolen and roughly 500 users had their accounts compromised. The Wormhole protocol, a bridge allowing users to transfer assets across the ethereum and solana blockchains was hacked on February 2nd 2022 and lost around $320 million. These hacking attacks show that there is still work that has to be done to make digital asset platforms more to stimulate widespread adoption.
Due to the open-source nature of crypto projects whitehat hackers will play an important role in securing the ecosystem. At ETHDenver 2022 whitehat hacker Jay Freeman, who discovered a critical bug in the L2 solution Optimism’s code, highlighted the importance of bug-bounties to incentivize whitehat hackers and disincentivize malicious hackers, thus improving the overall system security. White-hat hackers were actively involved in finding vulnerabilities and publicly reaching out to the teams or hacking the platform and returning the funds. A notable hack was Poly Network’s $600M hack in August 2021. The white hat hacker returned the funds to the team. The victim of this hack thereafter reached out to the hacker and offered him a job.
As crypto gains adoption, it is inevitable that bad actors will try to scam others. For example, some Bored Ape Yacht Club (BAYC) holders got tricked into selling their BAYCs for cheap by using their old sell orders that were put when BAYC prices were much lower To counter this, there will be an increased focus on user education and awareness around cybersecurity and operational security related to blockchains.
With more money being deployed to DeFi protocols, more attention has to be paid towards security audits. As more innovations happen around DeFi, these will lead to more vulnerabilities that get noticed which will in turn lead to innovations in security. As calls for regulation grow this will lead to a greater focus towards on-chain security. Hence we will likely see an increased focus on security measures.
6. Development of novel DeFi & Staking protocols
In 2021 Uniswap V3’s market makers earned $200M in fees and suffered an impermanent loss of $260M — a net loss of $60M or 30% of the fees earned. 2022 is all about finding solutions to the hefty impermanent loss (the loss caused due to the volatile nature of the tokens). Managing LP positions in Univ3 is a much more complex thing than UniV2 and we’ll see algorithms adjusting liquidity ranges according to various on-chain and off-chain data points. Herein, also highlighting the need for accurate indexing protocols. Protocols like Chainlink will also see more use and competition. Further solutions will be built for reduction in impermanent loss.
While there was a great deal of attention on NFTs and the Metaverse in 2021. In 2022, there will be a renewed interest in novel protocols in the DeFi space. More traditional financial applications like interest rate swaps, futures, hedge funds, and insurance will launch on the blockchain. Completely new protocols will emerge as well.
Many new projects will take inspiration from Curve’s tokenomics and the way it has helped the evolution of protocols such as Convex and Votium. Curve’s tokenomics allows users to vote on which pool gets CRV rewards (interest). This means if a person holds a lot of CRV tokens, they can earn a lot of CRV via incentivizing pools or by taking bribes from others to get their pool incentivized.
Based on current usage trends the Ethereum Mainnet will become unaffordable for even more users, creating an even higher barrier to entry for mainnet usage and L2 more favorable for first time on-chain participants. Eventually, only whales and professional players will be able to use Ethereum’s mainnet. Even the new DeFi protocols are more suited for professional use. For example, concentrated liquidity is really good for market makers but not so much for retail traders whose profit is substantially lowered due to extra transaction fees.
New liquid staking protocols will launch that will allow people to stake tokens across different blockchains and projects and then use derivatives of those staked tokens (called liquid staked tokens) to participate in DeFi. These liquid staked tokens will be backed by currently staked and locked tokens.
For example, in the case of the ETH-merge which will enable Proof-of-Staking (PoS) as a method to verify transactions on Ethereum, instead of holding and using ETH that earns no interest, people will start using liquid staked ETH like stETH from Lido that allows them to keep earning interest from their staked ETH. Currently around 4.4% APR.
7. Resurgence of DAO’s
Decentralized Autonomous Organizations (DAOs) are akin to traditional organizations except that the rules governing the organization are written and enforced by a smart contract and all the dealings of the DAO are publicly visible to anyone on the blockchain. DAOs have gained massive traction and hype for raising capital to collectively purchase high-cost goods, such as Football and Golf Clubs, or even one of the 13 original copies of the U.S. Constitution.
In 2022 DAO’s will prove that more business models can be built collectively, such as TreasureDAO. This is a successful NFT marketplace on Arbitrum, focusing on equal revenue share and community ownership. In this new year, DAO treasury management will become more important than ever with BitDAO having a liquid treasury of over $2.5B, eyes are focused on how this will be distributed. BitDAO moved into being a Master DAO, distributing and building communities, buying minority or majority stakes of various DAO’s around the world. An example of this kind is BitDAO partnering with the world's most prestigious universities forming eduDAO with the purpose of promoting research, giving out project grants, and developing new products. The use of DAOs to support global socio-political causes will continue to become more widespread, we have already seen a large amounts of donations raised by UkraineDAO aimed at supporting Ukraine and Assange DAO, a DAO aimed at raising money to help with the legal fees of Julian Assange that has raised over $7.5 million.
We will also be seeing more tech companies pivot to decentralized organizations — not only small ones but eventually also larger corporations. In the past, a successful shift has been seen in companies such as Shapeshift moving from a centralized entity to a decentralized approach, tokenizing the equity of previous shareholders and airdropping to over 1+ million Shapeshift users, the largest airdrop in crypto history.
DAOs have given protocols and platforms an opportunity to quickly raise their capital and TVL while including a growing community in decision making. This may lead to a resurgence in Initial Coin Offerings (ICOs) for new and existing protocols. Some examples are L2s such as Boba and DEXs such as Sushiswap and Uniswap and the introduction of BOBA, SUSHI, the UNI tokens.
Though DAOs that allow people to pool and invest their money are gaining popularity they are not new. ‘The DAO’ was one of the first DAOs that let users pool their capital, it was launched in 2016 and had raised more than $150 Million from around 11,000 investors, however due to a bug in the smart contract the funds were stolen. This event led to the hard-fork of Ethereum in 2017.
A common issue with DAOs is the community size and thus the communication level and transparency. Large communities can lead to slow processes and mismanagement of tasks. Service tools around the management of DAOs will become increasingly more important and a key factor in preventing the mismanagement of capital by a DAO community.
8. Massive investments in decentralized Gaming/Play-to-Earn Economy and the Metaverse
2021 gaming highlighted three big themes; play to earn (P2E), guilds (organized groups of gamers), and vetting (raising) of Axies. Blockchains for games, such as Flow, have been around for some time. However, there have been recent developments such as Axie Infinity creating its own ecosystem blockchain for all games that are going to be released in the future.
Developers choose to develop play to earn games on blockchains that offer their players low transaction costs, quick executions and settlements so that a vast audience can be reached with low barriers of entry. Many games are still being developed with Microsoft PlayFab. Currently only certain elements are deployed directly on-chain such as tokens and NFTs for their play-to-earn mechanism. Such developments are facilitated by infrastructure companies such as Stardust that outsource NFT management for users. In 2022 we might see more and more traditional games such as chess and backgammon turning towards P2E and being fully deployed on-chain, including the computation and graphics.
In 2022 we will see more games being deployed directly on-chain, with permanent storage and NFTs representing different levels that can be traded on a gaming marketplace. Companies like Animoca brands are leading the way in blockchain based gaming, they currently have 8 blockchain based games, including the virtual world, Sandbox which has garnered major investments from the likes of Softbank and has partnered with brands like Adidas and Atari. Animoca brands has also partnered with Formula 1 and football clubs like Bayern Munich and Manchester City for NFT collections. We will continue to see the rise of major blockchain native entertainment studios that work on gaming and NFT projects.
Furthermore, 2022 will bring more gaming developers into blockchain gaming from traditional gaming companies like EA, Activision Blizzard, and more. Having said this, many play-to-earn games highlight ambitious timelines and many games under development will have to face a trade-off between time to market and game quality.
2022 will show which blockchains are the most suitable for game development. Flow has shown suitability to deploy games, however other blockchains, such as Solana (which still has low transaction costs and high throughput) have the most flexibility.
Since blockchain based gaming requires the players to own NFTs that are native to that game, and then enables players earn tokens as they play, it also creates a situation where some players would be unable to afford the initial investment required to purchase the game’s NFTs. This has given rise to scholarship programs where owners of the NFTs loan them out to players, called scholars. These scholars then spend time on the game and earn rewards. The rewards are then split between the scholars and the owner of the game’s NFTs. This has given rise to gaming guilds. Yield Gaming Guild is a notable example of this, created in 2018, this gaming guild had 100,000 members, 18,500 Yield Guild Badge holders, 32 scholarship managers, and over 10,000 Axie Infinity scholars across Southeast Asia, India, Latin America, Brazil and Europe.
Guild managers need to ensure a steady membership thus allowing the guild to earn more tokens. However, guild management for NFTs that have a short spike and a quick fall in value leads to treasury management difficulties such as how to allocate funds accordingly. Software management systems around guild management will be an interesting topic for 2022.
Developing games that don’t quickly lose player interest is not yet explored in blockchain gaming. Axie Infinity’s daily revenue grew from $10,000 at the beginning of March, 2021 to a daily revenue of $17.5M at its peak. However, revenue has since fallen, highlighting how quickly interests shift in the blockchain ecosystem.
The rapid rise and fall of revenues can be to some extent attributed to shifting interests and new game releases on the blockchain. We will likely be seeing more of this in 2022 and therefore the focus turns to how to produce a blockchain-native game with play-to-earn mechanisms that can capture the long-term interest of players.
Fig 6. Axie Infinity’s Revenue and Market Cap taken on 3/3/22
Source: Token Terminal
Also, more capital will be deployed into play-to-earn projects, to the extent that new VC funds are being created specifically focused on blockchain gaming. (e.g. Spartan raising $50M for its Metaverse & Gaming Fund). In recent news FTX made a $2B fund launch announcement where Amy Wu will lead investments as well as M&A for a FTX focus segment on gaming.
Building off the massive investments in gaming, 2021 also saw an increased focus on the creation of virtual worlds known as the Metaverse. In 2022, this trend will continue. Events being broadcast directly in the Metaverse or on virtual e-commerce platforms will provide attendees with merchandise from the event. Examples of this in 2022 include the Toronto Fashion Show being hosted in Decentraland. More NFT collections will be issued in the Metaverse, such as the Australian Open launching an NFT collection or Dolce & Gabbana collections being issued in the Metaverse. On the virtual experiences front, we will also see more developments in gaming, betting and banking experiences.Banks and insurance companies are also creating virtual offerings of their service in various metaverses. JP Morgan has opened a virtual lounge in Decentraland, IMA financial plans to start selling insurance in Decentraland. Sweden's Mecro Bank already announced that it is looking into launching a banking experience in the Metaverse.
9. Storage will continue to be dominated by centralized players
From a financial perspective data storage has become increasingly cheaper over the last couple of decades and continues to do so, especially with decentralized storage. Currently, over 80 zettabytes are currently stored worldwide, that is equivalent to approximately 2.4 trillion 4K movies or 4.8 trillion video games. Let’s assume Amazon could store all of this data and charges $0.0125/ GB for this per month. This would mean that Amazon could potentially earn $100B each month just by storing this data. This is data that people, corporations, institutions, etc. own. Storage is owned by big-tech and contributes to a majority of their revenues, especially with regards to Amazon (14.5% of their total revenue is made up of AWS revenues). Decentralized storage will continue to push down margins on big-tech and give the people around the world the option to gain back control of their data through solutions, such as Slik Photos.
From a privacy standpoint, decentralized storage allows one to store data not on a central server but through a distributed network of nodes where one's files are stored on multiple devices. Storage is available only to the uploader and to the respective parties that it is shared with, similar to Google Drive.
Some of the popular decentralized storage protocols are Arweave, Filecoin, Functionland. These are open-source, community governed decentralized storage solutions that allow users to store applications and files on a blockchain. You also have companies that do not have blockchain tokens but still leverage Web3 applications, for example Filebase that stores user data in an S3 compatible, encrypted fashion across multiple decentralized storage networks. We expect to see more business models being developed around storage, indexing, and identity. These will be prerequisites for any blockchain project. This will help to delineate a Web3 project from a blockchain/crypto project.
Fig 7. Transaction count history on the Arweave protocol taken till 3/22
10. Incentivization of blockchain developers
Web2 talent movement into Web3 hit all-time highs in 2021. In 2022 it is about retaining talent for projects and providing the developers with clear long and short-term goals for monetization.
Talented developers in blockchain are jumping from project to project, resulting in a high churn as highlighted in the 2021 Electric Capital developer report, only 25-30% of people who contributed to blockchain projects in their first year have remained either as part-time or full-time after the 3rd year. Blockchains such as Solana, NEAR and Polkadot are written using the popular programming language Rust in combination with C++. Programming in Rust is much more popular with developers than programming in Solidity (the language in which Ethereum was written). Reasons for Rust having picked up steam in smart contract development over time can be attributed to the fact that it is an older language that can be used for applications other than blockchain and the high incentives that blockchains, such as Solana are creating in order to attract developers into the ecosystem. Since it’s launch Solana has deployed a lot of capital in supporting projects being built on top of it. Solana and NEAR developers are amongst all blockchains that have had the steepest growth of developers in 2021, growing full-time devs over 4x, yet they only hold a fraction of total web3 developers. Solana, NEAR and Polkadot have a combined 2700 devs.
There will be an increased focus on how to retain talent for the long run. Long cliffs and vesting schedules can reduce developer churn, however, quick launches of tokens and decreasing token prices could lead to higher churn and movement into new projects. This will also be accelerated by hacking activities.
With more people embracing blockchain and realizing its use cases, there will be an influx of developers that will jump to Web3. Soon, blockchain will move from being a buzzword and a unique selling proposition of a product to being fully integrated within the product.
Rust will continue to dominate as the choice of language for new projects outside the Ethereum ecosystem. Rust is a systems programming language that is being developed with safety and speed as its primary goals. Developer surveys such as “Stack Overflow Developer Survey” — where Rust has been voted “the most loved language” for six years in a row — show growing support for Rust. Developers looking to learn a new language should seriously consider Rust. “New” blockchains, such as Solana (launched in 2021), Polkadot (launched in 2020 but Parachains only in 2021) and NEAR (founded in 2017 but launched in 2020) adopted Rust as a programming language and in 2022 we could potentially see more new L1 blockchains adopting Rust.
11. Increased calls for regulation
In order to gain significant institutional adoption, more on-chain regulation, legal technology frameworks and identity innovation need to happen. Governments’ focus will shift towards more measurements around on-chain activity such as KYC measurements for decentralized applications that let regulators track on-chain verified identities. One of the services aiming to let users create digital identities is Ethereum Name Service (ENS) which provides names for wallets and websites. It allows users to own their username and profile data and use it across multiple services on the ethereum blockchain. Hence you can then receive crypto on your custom wallet name instead of requiring the longer wallet address.
Furthermore, legal-tech innovation involves collaboration with governments and strong legal teams, slowing time-to-market. Solving the legal problem, implementing security measures, and insuring transactions in case of on-chain failures can enable the growth of on-chain liquidity. There are already protocols like the Astra Protocol equip smart contracts with a decentralized compliance layer to satisfy dispute resolution and KYC issues. We can expect blockchains to integrate third party apps that enable identity verification into their smart contracts. We already have applications on chains like Polygon and Terra that use digital identity verification applications like Synaps that link users’ verified ID’s to their wallets and store them in a decentralized manner.
Yields are high on-chain but so are the costs. As security and insurance coverage is increased, costs for institutional investors might also increase.
Regulation around privacy protocols might not happen in 2022. However, money laundering is an increasing concern that needs to be fixed before institutions can deploy capital on-chain without having the public follow their trades in a private manner.
The topic of decentralized identity is far bigger than on the KYC side of an on-chain identity. Identities on-chain can already be claimed as we’ve seen with arcx.money DeFi passport where an on-chain user can claim it and earn reputation rewards which will make a specific individual or entity eligible for better borrowing/lending rates.
In 2022 there are good chances that this will increase as some market participants should be eligible for higher Loan-to-Value (LTV’s) than others. This can be solved through reputation scores and adjusted for each individual based on their previous on-chain performance.
As cryptocurrency adoption increases more countries are introducing regulations targeted towards this space. On the one hand, countries like the United Arab Emirates are looking to attract crypto-based businesses through the creation of dedicated zones for virtual assets - including digital assets, products, operators and exchanges. In September 2021, the UAE Securities and Commodities Authority and Dubai World Trade Center Authority (DWTCA) agreed on a framework that would allow DWTCA to approve and license financial activities related to crypto assets. In October 2021, another Dubai free zone DIFC, Dubai's state-owned financial free zone (places where non-citizens and non-residents can easily incorporate wholly owned companies to receive visas and trade licenses) released the first part of the regulatory framework for digital tokens. Dubai is the headquarters of many crypto companies, including exchange BitOasis and the DWTCA recently signed a memorandum of cooperation with Binance to help set up their regulatory framework.
However, there are also countries and institutions that are taking steps to effectively disincentivize cryptocurrencies. Starting from April 1st 2022 India will tax all virtual digital assets at 30% without any exemptions, this places the tax on income from cryptocurrencies on par with taxes on lottery winnings and gambling. Meanwhile El-Salvador’s decision to accept cryptocurrencies as legal tender was met with backlash from the IMF and a drop in its credit rating by major rating agency Fitch Ratings. The USA and UK tax crypto earnings on par with taxes on stock trading, while in Germany for the crypto that you have owned for more than a year, the sale is tax-free regardless of the profit.
US President Biden is expected to issue an executive order directing agencies across the government to study cryptocurrencies and a central bank digital currency (CBDC), and come up with a government-wide strategy to regulate digital assets.
Increased regulation can be beneficial for the crypto ecosystem because measures to protect consumers, investors and businesses can lead to increased adoption. Also setting up global standards can take away some of the friction in buying and selling cryptocurrencies. However, regulations may also lead to some countries becoming unfavorable for crypto trading, depending on governmental policies we will see some nations turning into crypto-havens, attracting both talent and capital to their dedicated crypto zones.
12. Increased Institutional Adoption
Favorable regulation can provide clarity for institutions to develop crypto products. Coinbase scrapped it’s USDC lending program after pushback from regulators, however regulatory clarity could lead to the reintroduction of such programmes.
There already exists a crypto futures ETF and in 2022 we could see the introduction of a crypto spot ETF as well. Currently proceedings are ongoing with the SEC for an introduction of a crypto spot ETF on the Arca exchange, a subsidiary of the NYSE. Major players like Charles Schwab and Grayscale Investments are also in talks of launching a crypto ETF in 2022.
The popularity of cryptocurrency adoption has led to a renewed interest in central bank digital currencies (CBDCs) however most of the CBDCs are still in the research phase with countries like Britain still evaluating the advantages of adopting a CBDC. Thus it is unlikely we will see major CBDCs being introduced before 2025-2026. China plans to increase public adoption of its CBDC this year and their roll out will serve to bring to light the advantages and challenges associated with CBDC adoption.
As blockchain research matures we expect to see increased blockchain adoption in other governmental functions. For example, Estonia is using it to enforce the integrity of its tax and business registration systems as well as electronic health records and the hospitals in the U.K. using blockchains to track the storage and supply of covid-19 vaccines.
Clarity surrounding regulations will also incentivize financial institutions to enter into crypto products. We expect to see an increasing number of financial institutions entering into crypto-staking as a relatively safe way of earning interest on their crypto portfolio, already companies such as Foundry Digital and Sygnum offer staking services to its clients.
13. Consolidation of Stablecoins
2021 was a year of algorithmic stablecoin (coins whose price is maintained constant using an algorithm that monitors supply and demand) projects. However, most failed. We’re now seeing more algorithmic stablecoin projects trying to find a sweet spot between collateralized and algorithmic.
As a result of volatile market movements, UST (Terra stablecoin) had two hiccups in 2021. Eventually, the team at Terra was able to collect enough liquidity by connecting with blockchains such as Solana and Cosmos.
In 2022, we’ll get more collateralized stablecoins like DAI and MIM. They will come with bells and whistles such as free borrowing to promote growth. With more interoperability and interconnectivity between different blockchains, some stablecoins will potentially die out as they are overshadowed by the much more widespread stablecoins existing on the connecting blockchains.
China’s digital currency is being adopted by tech giants of the likes of Tencent and Alibaba, and driving growth for financial conglomerates. WeChat is also adopting the currency and offering client access. The question will likely be on how China’s digital currency can be integrated with decentralized applications or whether it will never be.
Stablecoins can enable the use of cryptocurrencies as a mainstream medium of everyday transactions, as well as for other applications like trading goods and services, issuing decentralized insurance solutions, derivatives contracts and financial applications like consumer loans. In order to serve the functions correctly it is essential for the stablecoins to maintain their stability. The volatility of stablecoins has decreased significantly over the years as shown in the figure below.
Fig 8. The volatility of stablecoins has significantly decreased over the last 3 years
Finally we would like to conclude by stating that Web 3.0 Blockchain Infrastructure is key for a long-lasting, sustainable growth of innovation on-chain
2021 sparked the first debates about what the difference is between a Web3 project and a blockchain project/program/ protocol. A blockchain company should interact at least with one blockchain, in order to be considered blockchain-native. However, a Web3 project needs to have a fully decentralized technological solution from an open-source project that is community governed to decentralised storage, identity, privacy solutions as a part of basic infrastructure. Development around blockchain infrastructure has been extensive and many business models have originated out of it and we believe there is significant growth yet to come in the global blockchain infrastructure.