2021 has been an extraordinary year for crypto. We saw decentralized finance (DeFi) swell to a $100 billion+ industry, bitcoin (BTC) reach a price peak of $69,000, massive ecosystem growth for companion blockchain networks (layer 2) such as Arbitrum and alternative chains like Solana, over $22 billion in sales for non-fungible tokens (NFT) and more mainstream and institutional interest than ever before.
Paul Veradittakit is a partner at Pantera Capital.
Here are six of my top predictions for how the sector will fare in 2022:
L2s and Rollups: Rollup scalability platforms built on Ethereum, such as Arbitrum and StarkEx, will continue to gather traction as an immediate and long-term solution for Ethereum’s increasing network congestion.Non-Ethereum/Bitcoin Chains: Decentralized application (dapp) ecosystems in alternative smart contract blockchains, such as Solana and Binance Smart Chain, will continue to grow as bridges increase cross-chain access to liquidity and developer platforms make it easier to launch dapps on other chains.Composability and Web 3: Projects will find new, powerful ways to integrate with one another to create a unified user experience across the online ecosystem. Mechanisms for digital ownership and data management will also expand, allowing for the development of a more robust, high-utility digital identity.Expansion of NFTs: NFTs will continue to soar in popularity as the digital art ecosystem grows. NFTs will also power several use cases in verticals besides pure images, including gaming, music and creator/influencer fanbases.DAOs: More decentralized autonomous organizations will launch around unique, fascinating use cases as people increasingly buy into the concept of digital collective action. Along with the growth of DAOs, we’ll see significant development in tooling for DAO management and operations as DAOs grow more complex in organization and function.DeFi Security: On the heels of several large DeFi exploits in 2021, security will be a bigger priority than ever for DeFi protocols in 2022. Projects emphasizing runtime security and insurance against smart contract attacks will help secure dapps on various blockchains, increasing mainstream users’ confidence and trust in DeFi as a financial ecosystem.
2021: The year of crypto fever
2021 may have been the most exciting, tumultuous year for crypto yet. We witnessed incredible growth and innovation, including Ethereum’s highly anticipated London hard fork, the explosive expansion of the Solana ecosystem over the summer, and bitcoin’s all-time high price of $69,000 in November. Simultaneously, we’ve seen crypto’s inefficiencies and vulnerabilities at full blast, from Ethereum’s ridiculous gas fees to the $600 million exploit of PolyNetwork’s smart contracts.
What is indisputable is that crypto has captured the public eye like never before. Each day, thousands of users are registering addresses on the blockchain, scouring NFT collections on OpenSea and investing more capital into DeFi and Web 3. As 2022 begins, I look forward to seeing how this mainstream attention guides the direction and speed of crypto innovation, extending the boundaries of what crypto can accomplish and helping achieve its vision of a decentralized, user-first financial system.
About last year’s predictions:
Here is a review of my predictions from last year. For each prediction I’ll summarize the key developments in that space in 2021 and provide an accuracy rating to benchmark how well my initial prediction held up, with 1 being the least accurate and 5 being the most accurate.
Growth of bitcoin: Bitcoin underwent explosive growth in 2021, reaching an all-time high of $69,000, more than double its 2020 all-time high of $28,000. At its peak, BTC hit a market cap of over $1 trillion – a feat that took Apple 42 years to accomplish, Amazon 24 years to accomplish and Google 21 years to accomplish; in contrast, BTC is barely 12 years old. Adoption grew significantly as well: the first bitcoin-linked exchange-traded fund (ETF) launched on Wall Street in October, institutional investors poured nearly $17 billion into the digital asset,and 34 public companies reported bitcoin on their balance sheet this year.
With these incredible gains, the asset still continues to experience considerable volatility, reaching a low of $29,807 in June and plummeting nearly 19% in a single day in December. Moreover, it’s important to note that other digital assets, like ether (ETH), have also grown immensely in 2021, reducing bitcoin’s share of the overall crypto market from 70% to 40%.
Nonetheless, it’s clear that bitcoin remains one of the world’s most valuable assets and continues to demonstrate the tangible value of digital scarcity and decentralization, helping pave the way for all digital assets.
Government exploration of CBDCs: In 2021, we saw interest from even more central banks around central bank digital currencies (CBDC). A survey by the Bank of International Settlements found that 86% of central banks are researching the potential for CBDCs, with 14% already launching pilot projects.
In the U.S., legislators began to discuss the concept of the digital dollar with the introduction of H.R. 2211 in March, while the Federal Reserve Bank of Boston will soon release a summary of its findings from its research into CBDCs. In Europe, the European Central Bank has launched a project to develop a digital Euro, with an expected timeline of two years.
Some countries have gone further with ongoing CBDC pilots. China has completed over $9.7 billion in transactions with the digital yuan, and is currently exploring how CBDCs can facilitate cross-border payments with Hong Kong, the United Arab Emirates and Thailand. Kazakhstan, Chile and Nigeria have also all launched pilot CBDCs. Globally, progress on CBDCs primarily remains in a research stage, but government interest in state-issued digital currencies is growing steadily.
Explosion of DeFi: 2021 was DeFi’s biggest year yet, with the total value locked (TVL) in the ecosystem growing from $27 billion at the start of the year to a peak of $110 billion in November. Lending, in particular, grew to a TVL of $47 billion in 2021, which is a near 560% increase from last year. Though most lending protocols remain overcollateralized, several newer projects are beginning to experiment with uncollateralized loans, including Alchemix (which uses yield-generating positions as collateral) and Goldfinch Finance (which uses a tranche loan structure to handle risk).
Automated market makers (AMM), which handled a peak monthly trading volume of $162.8 billion in March, also saw significant innovation, including the launches of Uniswap’s third version (v3) (allowing for more flexible liquidity provisioning) and protocols like Clipper Exchange (which are optimized for smaller trades).
Stablecoins, another cornerstone of DeFi, grew to a collective market cap of nearly $160 billion this year, with the top fouer stablecoins each having individual market caps over $200 million, reflecting significant diversity in usage and adoption. Stablecoins offer a critical fiat analog in crypto, which is particularly important given the long-standing difficulties with retail cash in and cash out services.
Widespread adoption: While crypto has yet to become part of the bread-and-butter of most people’s everyday lives, 2021 saw an enormous number of people enter the crypto space – or at least start to pay attention to it. Over 38 million new addresses were registered on Ethereum in 2021, which constitutes 22% of all addresses ever created. Also, 46% of Uniswap’s active users each month were new, indicating that people are tumbling down the DeFi rabbit hole at unprecedented speed.
Several big tech players also made major waves in crypto; Facebook rebranded as Meta, Square rebranded as Block and Stripe hired Paradigm’s Matt Huang to its board. Globally, crypto interest has grown remarkably as well; most notably, El Salvador made bitcoin a form of legal tender, and is planning to use bitcoin to fund several infrastructural projects in the country. All in all, crypto has captured the world’s interest like never before, and I am beyond excited to see how this attention shapes the direction of crypto innovation in the years to come.
Regulatory clarity: It would be inaccurate to say we’ve received more regulatory clarity around crypto this year, but we’ve certainly seen regulators pay more attention to crypto and digital assets than ever before. We’ve seen both positive and negative sentiments, from the U.S. Office of the Comptroller of the Currency’s announcement that banks can legally use stablecoin transactions to facilitate payments to the Securities and Exchange Commission’s rejection of VanEck’s proposal for an ETF that would directly hold bitcoin. Tax reporting was a particularly key focus for U.S. regulators, most notably through President Joe Biden’s $1.2 trillion infrastructure package in November, which included language requiring crypto exchanges to directly report all transactions to the Internal Revenue Service.
Globally, numerous governments have begun or continue to crack down on crypto. China has banned all activities related to bitcoin outright, while Nigeria, Turkey and Iran have also prohibited using cryptocurrencies for payments. Unfortunately, regulation surrounding cryptocurrencies remains imprecise and lacks nuance, and we still don’t have clear expectations around what most governments view as fair and legal.
Crypto M&A, unicorns and IPOs: As of this writing, at least 65 companies focusing on blockchain development or cryptocurrencies have achieved unicorn status (meaning a valuation of more than $1 billion), including NFT marketplace OpenSea, blockchain game development platform Dapper Labs and blockchain development suite Alchemy. Coinbase famously made the first crypto initial public offering (IPO) earlier this year, opening at $342 per share.
In M&A, volume surged to nearly $6.1 billion with more than 197 acquisitions, including Coinbase’s purchase of Bison Trails and Galaxy’s $1.2 billion purchase of BitGo. Many historically non-crypto fintech players are making crypto acquisitions as well, such as Mastercard and Robinhood. In sum, crypto has never been a hotter focus for larger businesses, and companies are clearly eager to introduce or expand their crypto capabilities.
Digitization of private assets: 2021 saw the launch of several projects to digitize private assets. A notable example is French bank Société Général’s proposal to the MakerDAO to take out a loan of $20 million in dai (DAI) against its newly developed bond tokens; institutions are becoming increasingly invested in opening crypto positions and integrating crypto with their real-world holdings.
While these launches are incredibly exciting, signals from longer-term projects suggest crypto’s overall movement to digitize real-world assets may be on the back burner. Synthetix and Mirror, two protocols that enable on-chain exposure to real world assets, saw their TVL decrease significantly over the course of the year.
Though there is more surface area to synergize real-world and digital assets than ever before, crypto’s key focus seems to be placed elsewhere, largely because of limited infrastructure for traditional finance (tradfi) integrations and uncertain regulations.
Here are six areas where I expect to see significant innovation and growth in 2022.
Layer 2s and Rollups: The biggest criticisms of Ethereum today involve its ridiculously high latency and gas fees, which inhibit the computational capacity of dapps and discourage users who lack substantial capital. Layer 2 systems have tackled this problem by executing transactions off-chain (reducing the amount of slow, expensive on-chain computation) and then posting batched transaction data (a rollup) on-chain.
Layer 2s have become incredibly popular in the last year. Arbitrum, an optimistic rollup solution that launched only in September, reached a peak TVL this year of $2.78 billion and has amassed over 50 dapps, including 1inch, Balancer, and Coinbase Wallet. Zero-knowledge rollups rose in TVL from $43.5 million to $1.9 billion, and are already being leveraged to scale transaction throughput for dapps like dYdX.
As mainstream adoption of crypto continues to grow, Ethereum’s network congestion will only become worse, exacerbating its problems with latency and fees. Rollups are critical to sustaining the growth of Ethereum by ensuring that compute infrastructure is highly scalable, allowing users to interact with dapps with similar or even better expectations around usability as with traditional web apps. Both optimistic and ZK rollups will gain even more traction in the coming year, with optimistic rollups likely to dominate in the short term while ZK rollups, which are much more technically complex, advance as a long-term scalability solution.
Non-Ethereum/Bitcoin chains: At the start of the year, 97% of DeFi’s aggregate TVL belonged to Ethereum; today, Ethereum possesses only 63% of that TVL. Competing layer one, or base, blockchains have grown explosively over the past year, largely thanks to their considerable expansion advantages and differentiated use cases from Ethereum. In particular Solana, which offers unparalleled transaction throughput, saw an incredible 2021, reaching a peak TVL of $15 billion and a peak price of nearly $260 in November. Recent activity in the Solana community, including the launches of massive funds for decentralized social media and gaming, suggest that the ecosystem will continue to grow immensely in the coming year.
Beyond specific blockchains, many technological developments from this year have set up 2022 to be a major year for the multi-chain universe. Bridges, such as NEAR’s Rainbow Bridge, will help accelerate the growth of non-Ethereum ecosystems by expanding access to liquidity and allowing easier composability of digital assets. Ethereum virtual machine (EVM) platforms, like Aurora on NEAR, are also making it easier than ever for Ethereum-based dapps to launch on other chains, enhancing cross-chain engagement within DeFi. Overall, these advancements in cross-chain infrastructure will accelerate the speed at which alternative layer one chains gain traction, fostering the development of a truly robust, diverse multi-chain crypto ecosystem.
Composability and Web 3: Web 3 was arguably one of the biggest buzzwords of 2021. The scope of Web 3 is incredibly broad, and it’s difficult to pinpoint what exactly it entails. Generally, however, the term refers to technologies that prioritize user ownership of data and/or assets and interoperability between distinct applications.
2021 was a massive year for digital ownership. NFTs now constitute a $7 billion industry, and continue to grow as more and more artists and consumers of art seek forms of verifiable ownership within the digital sphere. Beyond NFTs, digital ownership has grown through initiatives towards decentralized crowdfunding (such as Kickstarter’s announcement of decentralizing on Celo) and decentralized identity projects, which allow users to maintain full, more precise control over personal data and reputation, enabling use cases around un-collateralized loans, know your customer (KYC) rules and more. In 2022, we’ll see more projects expand the scope of on-chain ownership, allowing users to have full, functional control over their identity and holdings in the digital world.
In terms of interoperability, bridges, as mentioned earlier, have enabled significantly more composability within DeFi, effectively allowing users to transact assets between chains and utilize DeFi protocols across different blockchains. Beyond just DeFi, projects like login.xyz, which offers a Sign-In with Ethereum service, show how the blockchain might enable composability between apps more generally, allowing users to maintain a single login across all services. Altogether, applications and services are seeking tighter integrations with one another, and I expect to see more projects tackle the fragmented nature of how we interact with the web.
Expansion of NFTs: NFTs were undoubtedly one of the hottest crypto trends of 2021. Digital asset marketplace OpenSea went from $1 billion to over $10 billion in trading volume in just three months, showcasing the viral wave of adoption that NFTs have kicked off. Other projects, like NBA Top Shot and Bored Ape Yacht Club, have given NFTs a remarkable platform in popular culture, so much so that “NFT” was one of Google’s top search queries this year.
Looking ahead, it’s important to note that physical art represents a whopping $1.7 trillion asset class, meaning that NFTs are barely beginning to scratch the surface. As digital art continues to grow in popularity and physical art becomes increasingly tokenized, to facilitate better verifiability and more liquid markets, NFTs will continue to grow immensely in popularity through the coming year.
Beyond the classical use case of images, NFTs are making significant headway in other verticals, namely gaming and music. Games like Decentraland and Axie Infinity have demonstrated the value of offering in-game assets as tradable NFTs, allowing players to have full, versatile ownership of their assets and state within the game. In music, projects like Audius and Royal are building mechanisms to help fans directly support projects by their favorite artists, and to share in their artists’ success through royalties. NFT projects in 2022 will show substantially more diversity in use cases and will reconfigure how we interact with and think about ownership of digital media more broadly.
DAOs: DAOs were also one of the hottest crypto trends of 2021, garnering mass attention with the promise of being a vehicle for equitable, decentralized collective action. We’ve seen DAOs launch around a shared digital cultural identity (e.g., FWB and pleasrDAO), around crowdfunding and capital allocation (e.g., BitDAO and ConstitutionDAO), and even around social impact causes as well (e.g., the KlimaDAO tackling climate change). Given their heightened prominence, I expect to see DAOs become a mainstream vehicle for online organizing and collective action, helping individuals across the globe get actionably involved with causes they care about.
Beyond the rising number of DAOs, the crypto space has also begun to recognize (and tackle!) several gaps within DAO tooling, operations, and onboarding. Platforms like Syndicate, which simplify the process for establishing DAOs for collaborative investing, and Station, which helps onboard users onto DAOs, are making it easier than ever for folks to get functional DAOs up and running in record time. As DAO operations grow in complexity, I expect to see even more projects building out DAO tooling and infrastructure in 2022.
DeFi security: 2021 has arguably cast more doubt into the security of DeFi than any year yet. More than $610 million were stolen through DeFi exploits in 2021 (a staggering eightfold increase from $77 million in 2020), and an additional $704 million in funds were stolen and then later returned by white hat hackers, like those behind the $600 million PolyNetwork exploit. These incidents are an inevitable, but unfortunate consequence of the growing prominence of DeFi; still, they highlight several major vulnerabilities in the technical infrastructure powering DeFi, which may ultimately limit DeFi’s potential to capture more financial use cases.
To maintain DeFi’s pace of adoption, it’s absolutely critical that we develop even more protocols and tooling to ensure that users are interacting with safe financial products in crypto. Projects like Forta, which enables dapps to monitor runtime security, and Nexus Mutual, which offers dapp users insurance against smart contract exploits, have already made significant headway in securing the crypto financial ecosystem. Still, there remain a great many vulnerabilities in the smart contracts powering DeFi, the majority of which we still don’t know. In 2022, I expect to see security become a tremendous focus for DeFi projects, and expect to see several more projects launch around better smart contract auditing, precise runtime monitoring, and consumer protections.
In sum, 2021 saw massive growth and an incredible number of innovations in the crypto sphere, ranging from blockchain infrastructure to DeFi to NFTs and more. Crypto has definitively asserted itself as one of the most powerful technologies of our time, offering unparalleled privacy, trustlessness, composability and decentralization, while the traditional web remains highly exploitative, monopolistic and fragmented.
The public has never been as fixated on crypto as it is today, and crypto’s growing mainstream adoption is likely to shape and accelerate the speed of innovation in the coming year. With this newfound attention, I’m incredibly excited to see how crypto captures more of the mainstream financial and digital sphere and becomes an even more robust, secure platform for powering how we interact with the web in 2022.