Crypto Industry Outlook 2022
Looking back at 2021
2021 was the next milestone year for all things crypto and blockchain and brought the industry one step closer to a broader adoption beyond the die-hard crypto fans. As the overall market size rocketed to over $3T in November of the past year, it did land back at ~ $2.2T on 12/31/21, which still has a sizable YoY growth of ~280% compared to 26.9% for the S&P 500 in 2021. More importantly, use cases are starting to materialize and users in the ecosystem have grown almost 7x to 2.7M unique wallets. Looking back, a few key trends materialized over 2021 that I believe are here to stay.
Going beyond Ethereum as L1s
While the majority of development and adoption has happened on Ethereum (e.g. 60% of market transactions for NFTs were on Ethereum), a few layer 1 platforms have established themselves as serious competitors against Ethereum and its (current) scalability issues (i.e., high gas fees). Binance Smart Chain (BSC), Solana (SOL), Avalanche (AVAX), Wax (WAXP), and Terra (LUNA) are only a few that we're able to rise from the masses and gain strong adoption within the still very small developer ecosystem compared to other platforms. My perspective is that in the foreseeable future we will continue with a multitude of layer 1 platforms. While the endgame of any platform wars in technology usually ends up in a duopoly (e.g., mobile: iOS / Android) or triopoly (e.g., gaming console: Nintendo, Playstation, Xbox), it’s still too early to tell who ultimately is going to win. Ethereum will remain a leading force in the space, particularly with Ethereum 2.0 coming to address its scalability issues and others will continue to grow their ecosystem.
NFT making a big entrance
While at the beginning of the year 2021 only the true early adopters understood what NFTs (Non-fungible Tokens) was, at the end of the year it was fully embraced by mass media and celebrities — ranging from Snoop Dogg holding an amazing portfolio of blue-chip NFTs to SNL’s Pete Davidson parodying Eminem on NFTs (funny to see Eminem then dropping 452K / 123.45ETH early 2022 on a Bored Ape). The overall NFT market skyrocketed to $23B in overall transaction volume in 2021, but more importantly, a set of core use cases have been established
- Digital Collectibles / Art: 90%+ of those $23B in transaction volume have gone into digital collectibles and digital art. Digital artist Beeple set the stage with his $69M / ~42K ETH sale of his collage “Everydays: the First 5000 Days” through Christie’s. Bored Ape Yacht Club (BAYC) has been the most powerful project of what NFT’s can do beyond just being a nice profile pic on social media. Going from 0.08ETH at the time of mint to a 50ETH floor at the end of 2021, the team at BAYC has done an amazing job building a highly exclusive community as a next-generation SoHo house with both digital/IRL events, merchandise, and more to come (E.g.. gaming). Who doesn’t want to hang out with cultural leaders such as Steve Aoki, Snoop, Mark Cuban, Jimmy Fallon or (at?) the notorious Miami nightclub E11EVEN.
- Gaming: Axie Infinity (AXIE) has taken the lead to showcase what crypto can do for next-gen gaming enabling new models such as Play-2-Earn (P2Y). For an old gamer like myself who is reliving his childhood playing Diablo 2 Resurrected right now, the concept of digital assets and the potential power blockchain can bring to gaming is tremendous. It feels very much like the early stages of mobile (gaming), where a set of indie developers are building the first wave of games on the very first iPhone. OG publishers and studios are starting to explore the space (e.g., TakeTwo, EA) and will need to move in so they don’t get behind like they missed out on mobile and the mobile publishers themselves are now the incumbents rather than the innovators.
- Metaverse: Decentraland (MANA) and SandBox (SAND) are only the hottest decentralized Metaverses so far that have received the most traction from the ecosystem. Buying digital real estate became a big thing for investors as well as for brands like Adidas. Adidas did not only launch its first NFT project in 2021 generating $22M in sales but also bought land in SandBox. With the whole tech world going crazy for a term that Neil Stephenson coined in his 1992’s SciFi book Snowcrash, it will be interesting to see who ultimately is going to win in creating the next generation of digital worlds. My bet is, it’s not going to be META/Facebook.
- Sports: Professional sports leagues, teams, and athletes have been leading the way in finding new ways to engage with their fans through NFTs. The NBA has successfully partnered with Dapper Labs to launch NBA Top Shot, a video version of collectible cards, that has seen over 1M in users with more than $750M in transaction volume since its inception. Socios.com has partnered with seemingly half of the European elite soccer clubs (e.g., PSG, FC Barcelona, Juventus, Inter) to launch fan tokens. As a die-hard Bayern Munich fan that is paying for the club’s annual membership just to feel I belong, I reckon the potential power of how fan tokens can drive the next level of participation of fans with their beloved sports clubs (or any other form of entertainment).
- Utility (e.g., insurance, licenses): While still in its infancy, new utility models are emerging that are leveraging NFTs for specific use cases usually providing the owner some sort of functional or monetary rights, such as in the case of insurance (e.g., YInsurance), internet domains (ENS) or licensing (e.g., IP, music, etc) This field will become more and more relevant and interesting, as corporations are entering the blockchain space.
DeFi (Decentralized Finance) continue to rise exponentially
DeFi continues to explode in usage and it’s doing it in a sneaky way as the mainstream awareness has been so much centered around NFTs. Total Value Locked (TVL), a key metric in DeFi describing the total assets locked in DeFi contracts, rose to over $250B in November 2021 with Ethereum being the market leader (65–70% of that TVL).
When it comes to use cases, the first generation of DeFi (or DeFi 1.0) laid the foundation with decentralized exchanges (DEx), automated market makers (AMM) and stablecoins. DeFi took on full steam ahead in 2021 expanding existing use cases with improved capabilities or expanding into new ones. Key trends in 2021 included
- Decentralized Exchange / AMM: DEx (e.g., UniSwap, SushiSwap, PancakeSwap, Trader Joe) have continued to grow exponentially — in 2021 trading volume exceeded over $1T with Uniswap leading the way at ~ 70% share of overall transaction volume. AMM’s, who provide liquidity pools to the market allowing for a 24/7 market with trustless transactions, have equally grown with CurveDAO leading the way with ~$20B in TVL. Investors can stake their assets to earn a passive income through yield farming.
- Stablecoins: Stablecoins rose to over $160B in market cap in 2021. While USDT’s is still leading the charge with a market cap of over $77B, its previously dominant market share has been reduced. Circle ($USDC, ~$42B), Binance ($BUSD, ~$14B), and Terra ($UST, ~$10B) have captured market share and even overtaken previous stronghold MakerDAO ($DAI, ~$10B). Given the uncertain regulatory situation and unclarity on Tether’s funding position, the diversification in the stablecoin market has been a sign of strength and validation of the use case.
- DeFi Lending: DeFi lending is allowing investors to put their crypto assets into a liquidity pool to earn passive income through interests in their assets. Borrowers on the other side have a smoother way to get access to loans bypassing the traditional financial system. All-time highs were also reached in 2021 for DeFi lending services, hitting over $25B in outstanding loan volume at one point in 2021. Key players here have been Aave (decentralized lending platform), MakerDAO (Stablecoin DAI provider), UniSwap (largest DEx), and Compound (decentralized lending platform). Nonetheless, it has not been without risks e.g, through impermanent loss through drastic price changes in asset pairs or through attacks and hacks (e.g., flash loan attacks).
- Cross-chain: Cross-chain interoperability is the future of DeFi (and crypto as a whole) — in particular the ability to move assets across chains smoothly and without high costs will be a key driver for wider adoptions. 2021 has seen strong improvements across both layer 1 and layer 2 applications. For instance, Polkadot, a layer 1 that has built-in functionality allowing for the cross-blockchain transfer of tokens and other assets went live its first set of five parachains in late 2021 SushiSwap, a DeFi exchange, initially build on Ethereum, is working on cross-chain support across the leading platforms such as AVAX, Moonriver or Palm.
Outlook towards 2022
While the overall industry has matured by quite a bit, it will remain volatile and exciting going into 2022. 2021 has been very promising as it was not only about hype like in 2017 or 2018, it’s been mostly about use cases with signs of product-market fit and strong user adoption.
Challenges that Crypto industry is still facing
Nonetheless, I believe there are still a set of challenges that the crypto industry is facing:
- Regulation: while we have seen regulators across the world taking the topic way more seriously than before, there is still a lot of uncertainty. So far we have seen a wide spectrum of smaller countries seeing an opportunity to rise to the front of the next wave of innovation to full-on bans from other parts of the world. With the appointment of SEC Chair Gary Gensler, the US now has someone that understands the topic well enough to have taught the topic at renowned MIT. Nonetheless, it’s been slower than most people hoped for, and for 2022 two key topics will be if (most) tokens will fall under SEC’s regulation as well as how stablecoins will be regulated. China executed a ban against crypto trading, crypto mining, and NFT trading mostly targeted against foreign platforms and projects. On the other side, China launched their own CBDC (Central-Bank Digital Currency) Digital Yuan, and Chinese Tech juggernauts like JD.com, Tencent, and Alibaba are exploring NFTs as “digital collectibles”. Europe is one step closer than the US with providing the first view through its Markets-in Crypto Assets (MiCA) framework that would create an EU-level licensing framework for crypto issues and service providers. There is still a lot of work ahead across all these major markets to bring clarity for innovators in the industry. Leaders such as Singapore, Australia and Switzerland have created a crypto-friendly environment that led to a strong influx of talent and companies to these countries to build out their ecosystems.
- Security: One reason why regulators want and need to step up their game is that the industry often still feels like the Wild Wild West. From rug-pulls, scams to hacks and ransom requests, security is still a big issue for the whole crypto industry. Blockchain is supposed to be more secure than legacy technologies — nonetheless there has been $7.7B lost through scams and $1.4B lost through hacks in 2021. While most scams come down to human error and can be addressed through better education of the market, it just shows that the industry might just not be ready for a full mass market adoption. There is a lot of opportunity out there for developers and innovators to build better security solutions that will create tremendous amounts of value for the whole ecosystem.
- User Experience: Onboarding onto most dApps so far has been extremely painful. While the strong rise of active wallets in 2021 is a positive sign, I strongly believe the next wave of crypto products needs better UX. Even the successful ones like OpenSea, have really poor user experiences compared to what most mainstream users have been accustomed to. Here lies the potential for new products to come out to convince the next wave of adopters to join the crypto world. While you can argue about the centralization aspects of NBA Top Shot (e.g., holding custody of your NFTs), Dapper Labs did a good job of making the user experience smooth enough that for most of its users it really wasn’t about crypto but more about the fan experience of collecting NBA highlights.
Key macro crypto trends going into 2022
On a high level I believe these are some of the macro trends we will see in 2022:
- Markets will remain volatile: There are a lot of people in the industry that are expecting another crypto winter in 2022 similar to 2018. As laid out before, the adoption of core use cases gives me at least reasons that even if there will be a downturn, it won’t be as hard and long as before. In addition, it will be interesting to see if and when the first spot Bitcoin ETF will be allowed in the US and if that will change the consumer and corporate investor’s mindset in terms of stronger adoption of crypto in their portfolios. Overall, I think it should be pretty clear that Crypto will remain a high-risk asset and continue to be extremely volatile going forward.
- Standardization / Interoperability / Scalability will continue to rise: Building on the trends of 2021, cross-chain solutions will continue to rise and become more and more important. Despite recent market downturns in early January 2022, key projects such as Cosmos ($ATOM) or newer projects such as Phantasma ($SOUL), layer 1 protocol dedicated for rich NFTs, have remained steady. Most people are expecting that ETH 2.0 will address at least some of the scalability issues for Ethereum, but it’s still to be determined when ETH 2.0 will come. Some solutions such as Polygon ($MATIC) are already alleviating some of the pain, and a lot of people are extremely high on Zero-Knowledge Rollup solutions, which essentially aggregates hundreds of transactions off the main blockchain and bundles them into a single transaction. Key projects include Loopring, zKSync or ImmutableX (IMX).
- DAO (Decentralized Autonomous Organization): DAOs are the crypto answer to what the next generation of organizations should look like — fully decentralized and ideally also autonomous driven by full or partial automation through smart contracts. Governance is ultimately written into the smart contracts and members use governance tokens to make decisions. It’s been particularly effective for fundraising for specific purposes. While it ultimately failed, ConstitutionDAO was able to raise ~$47M in ETH within a week to attempt buying a rare first-edition copy of the US constitution, highlighting the potential power and speed of such organizations. EBITDA is the largest DAO-directed treasury with over $2.5B in the treasury to manage. PleasrDAO is an art collective centered around leading crypto artist pplpleasr. These are just some examples and going into 2022, DAOs will be the main form of organizations for many crypto/Web3 projects and it will stretch the imagination of how organizations will be formed in the future.
- Green blockchain initiatives: Elon Musk and Tesla stirred up the pot last year by first accepting Bitcoin as a form of payment and then taking it down due to environmental concerns. This sparked a bigger discussion around the environmental impact of crypto mining. According to one study, an average bitcoin transaction can consume over 1,700 kWh of electricity, which is almost twice the monthly amount used by the average U.S. home. There are multiple paths and attempts towards making crypto more green, in particular towards using renewable energy sources to power mining. The Crypto Climate Accord CCA was created by over 200+ supporters out of the crypto industry to cut carbon emissions generated from electricity usage to net-zero by 2030. With an ever-growing stronger awareness around sustainability and environmental impact, it will be interesting to follow how the crypto industry is going to continue to address these concerns.
Deep Dive: Key NFT projects will stay and use cases will expand in 2022
I strongly believe that NFTs are here to stay. Yes, there might be a crash coming where all of the ape or random wild animal copycats get flushed out, but the current blue-chip projects and core NFT use cases will remain and continue to grow in 2022.
- More and more established brands across consumer / retail categories (fashion, sports, entertainment, cars, luxury, etc.) will follow some of the leaders such as Nike and Adidas into the promised land of NFTs. As Metaverses are going beyond Alpha’s and tests, brands want to own that space through either exclusive spaces/communities or digital twins. As the year has just started you see a big influx of announcements of established brands participating in NFT projects, ranging from Ferrari to Boing.
- NFTs will go beyond PFP (profile picture) and collectibles to more sophisticated, richer NFTs
- Physical / Digital Twin: the combination of physical and digital will continue to grow in 2022. Adidas’ NFT drop will allow owners to participate in both digital and physical drops. Projects such as ORIGYN on Internet Computer (ICP) are building technologies to create digital twins of physical goods (e.g., luxury watches, fine art pieces) as NFTs to disrupt the very manual-labor intensive industry of certifications and allow for additional use cases on top of the NFTs.
- Music: NFT and blockchain technologies have the potential to disrupt the music industry and circumvent the incumbent middleman in the industry. Band King of Leon has dropped their album “When You See Yourself” as NFT in 2021. Nas just dropped some of his previous award-winning music as NFTs for investors and fans to own and participate from the royalties the music is generating. Blockchain-based music streaming platforms such as Opus are trying to cut out disrupt the current gatekeepers and offer artists a bigger share of the pie. On the other side of the spectrum, it will be interesting to see what BLOCK will come up with its Tidal acquisition and now having their CEO Jack full-time.
- 3D / Video / Augmented Reality: Most NFTs so far have been 2D art, also given the constraint of Ethereum. There have been some successful examples of richer media and that will only expand in 2022. Dapper Labs is going to expand into the NFL after successfully launching video highlights as NFTs for the NBA and TikTok has already launched its first NFT collection back in 2021. As scalability of the underlying platforms will be addressed the next wave of NFTs will not just be 2D JPEGs, but rather unlock different forms of media, such as video or Augmented Reality.
- Ticketing: As some NFTs already provide exclusivity/access to specific digital and real-life events, the concept of NFTs in ticketing will continue to grow. Gary Vaynerchuk (Gary Vee), successful entrepreneur and leading voice in the NFT space will host its VeeCon Conference in May 2022 for its VeeFriends Token holders. The ticketing industry right now is dominated by incumbent marketplaces that take a large chunk of the profit in the industry. With blockchain and NFT there is a lot of potentials to allow the artists and entertainers to participate in the profits of every secondary transaction rather than leaving it on the table for the existing players.
- NFT and DeFi will collide: there are interesting use cases such as fractionalization of high-value NFTs or NFT backed loans that have started to emerge in 2021 and 2022 that will prove if there is validity behind those use cases. For instance, Fractional.art allows NFT holders to fractionalize and sell fungible tokens of the NFT (e.g., PleasrDAO fractionalized the doge meme NFT), and leading crypto trading platform Kraken announced that when they launch their NFT marketplaces, they will have a feature that allows people to use their NFTs as collateral for loans.
- Blockchain Gaming has just started: There has not been any true AAA blockchain game out yet, which will change in 2022. Crypto native game developers will go first and it will be interesting to see how high flying projects such as Star Atlas, Sisus Heroes Illuvium, or Auory Project will play out. Some incumbent game publishers are expected to release the first version of their crypto games in 2022, such as JamCity with Champions Ascension. In addition to the launch of some blockbuster games, most of these games have or will launch their own tokenomics to incentivize the players. One key trend to observe for 2022 will be GameFI — taking DeFi concerts into gaming. Imagine you could use the digital resources you are able to find or build in the game and put them into a liquidity pool to earn interest or loan out specific weapons through smart contracts that will yield your passive income?
- Metaverse: The hype around metaverse will continue in 2022. Sandbox will go beyond its Alpha stage into Beta and hopefully to a full release. Digital real estate has just started to take off in late 2021 and it will be interesting to see where it will take us in 2022 with more and more traditional retail experiences going digital and crypto. Celebrities such as Deadmau5, Paris Hilton and Travis Scott are already giving concerts in crypto (e.g., Decentraland) and non-crypto universes (e.g., Fortnite). I think going beyond the hype, it will be most important to see what the actual use cases are for the metaverses and if they can stick around. A lot of these projects do feel like early versions of Second Life. Creating truly new experiences that will be specific for the Metaverse and leverage both crypto and also other new technologies such as AR and VR will be important to ensure that Metaverses won’t fade out in 2022.
Deep Dive: DeFi will continue to grow and expand with regulation incoming in 2022
In 2022, existing trends from 2021 will continue to rise. DEX, DeFi lending, etc will continue to grow. In addition to existing trends, 2022 will bring additionally
- Stronger regulation: across a wide array of topics from CBDC vs. stablecoins, KYC, AML, cross-border compliance, tax, etc. there are a lot of topics that the crypto industry is expected to see more regulation across the world coming into 2022. After a pretty disappointing 2021 in terms of regulation, the whole industry is awaiting an answer from regulators across the world.
- Institution-ready solutions drive institutional adoption: There is a strong desire from the traditional finance and institution investor side to participate in DeFi — the question for most of them is how they can do it in a compliant way. Aave has just launched Aave Arc, its permissioned lending and liquidity services that fulfills regulatory compliance and allows institutional investors to participate in DeFi. In its first wave, Aave has whitelisted 30 institutional entities to access their permissioned pool partnering with Fireblocks, the institutional digital asset custodian. The more permissioned solutions will be in the market, the more it will open the world of institutional investors from the traditional finance world into DeFi.
- The derivative market will grow: The current derivative market in DeFi is still fairly small with only <4% of the total DeFi markets. As more sophisticated investors enter the space, the market for complex products will grow. For instance, Synthetix is a derivatives liquidity protocol allowing for the creation of synthetic assets such as futures with $565M locked in TVL.
- Additional use cases and asset classes: It will be interesting to see if additional use cases and asset classes will find their way into DeFi. DeFi insurance it’s in its inception and players such as Armor and Nexus Mutual offer decentralized insurance against hacks and smart contract failure. Tokenizing real estate assets could unlock liquidity, and improve market transparency, similar to what REITs have done previously. Real estate tokenization company RealT for instance partnered with Swiss FinTech Mt Pelerin Player to tokenize 75 of its real estate buildings so far.
This write-up is my personal way of condensing my recent research and learnings about the crypto space. In no way I am an expert, but rather someone that is extremely excited and interested in the industry. Also, from my previous experiences, I am sure there are a lot of mistakes and areas missing, so I would love to hear your feedback and your views to help me continue to learn in this space.