by Martin Gaspar

Times flies, but especially so in crypto, and we can’t believe 2021 is almost over. And what a year for crypto it was, with all-time highs in many coins. Looking back, there were several themes that dominated:

Bitcoin Further Evolves Into Macro Asset

Bitcoin had a banner year, reaching an all-time high of nearly $69,000 in November. It saw further adoption from institutional investors, who increasingly view it as a credible store of value and inflation hedge. Bitcoin’s lightning network saw impressive growth, with capacity, nodes, and channels ending the year at or around all-time highs, indicating growing user interest in the scaling solution and the cheap, fast payments it offers. Bitcoin also received validation as an asset class with the SEC’s approval of the first Bitcoin futures ETF, which has AUM of $1.2 billion as of writing. Bitcoin was able to shake off many challenges throughout the year, such as doubts regarding Tether’s reserves, regulatory uncertainty, and China’s crypto mining crackdown. Today, Bitcoin’s hash rate has fully recovered and the network implemented Taproot in November, its first major upgrade since SegWit in 2017. The network is humming and Bitcoin continues to attract adoption in light of global factors, such as inflation and central bank money printing.

Layer 1 Blockchains Crowd Out Ethereum

In 2021, investors became fed up with Ethereum’s high fees due to network congestion, and sought out cheaper alternatives. This led to the rise of DeFi ecosystems on Binance Smart Chain, Polygon, Solana, Avalanche, and Terra, as well as significant appreciation in the chains’ respective native tokens. This is in stark contrast to 2020, in which Ethereum was the favored platform for many investors and DeFi participants. The rise of Layer 1 blockchains has validated a multichain thesis, but a lot remains unknown. Will monolithic blockchains prevail or will only those that pivot to become modular through Layer 2 scaling solutions succeed? 2022 may give us an indication. Highly anticipated optimistic rollups Optimism and Arbitrum failed to gain significant traction in 2021 and were seen as the best chance for traction to move back to Ethereum in the near-term. Progress with the adoption of optimistic rollups will be key to watch next year, as well as any major developments on the ZK rollup front, which some industry participants see as especially promising.

DeFi Triumphs And Tribulations

DeFi went from nearly $20 billion of total value locked (TVL) at the end of 2020 to over $250 billion as of late December 2021, according to DeFi Llama. Meanwhile, Ethereum saw its dominance shrink from over 95% of TVL to roughly 63% over the same period. 2021 was a huge year for DeFi as protocols went multichain, Uniswap launched concentrated liquidity pools, and DeFi 2.0 primitives came to fruition on the concept of protocol owned liquidity. While DeFi saw significant growth, this was not without its challenges, such as rug pulls and hacks. There were some major hacks in the news this year, including Poly Network ($600 million), Compound ($150 million), Cream Finance ($130 million), and Badger ($120 million). 2021 proved that even blue chip DeFi protocols, such as Yearn ($11 million) were not immune from exploits. The hacks that were prevented may be the larger story of DeFi this year, however. Polygon patched a vulnerability in October that could have placed $850 million of funds at risk. Moreover, a whitehat hacker helped SushiSwap’s MISO platform avoid a potential $350 million loss in August. Will we hit TVL of $1 trillion in 2022? We think it’s possible given where TVL sits today, as DeFi protocols continue to see strong demand despite the inherent risks.

NFT And Metaverse Go Mainstream

NFTs proved to be one of the largest winners of 2021, with generative art, historical NFT collections, and profile picture NFTs proving especially popular. NFTs saw two waves of interest (in Q1 and Q3), and demand for NFTs remains strong going into 2022. OpenSea, the most popular NFT marketplace, has posted NFT volumes of $2 to $3 billion the last several months, further highlighting robust NFT activity. NFTs also led to a surge in interest in the Metaverse, given they enable provenance via the blockchain. The Metaverse remains a popular investing theme at year end and investors are looking at how the closely-related blockchain gaming industry will shape up after play-to-earn crypto games like Axie took off during the year.

VC Funding Skyrockets And Crypto Funds Grow

Financing for cryptocurrency-related companies soared in 2021 to roughly $25.1 billion, according to The Block. Moreover, many Layer 1 blockchains announced venture funds equivalent to hundreds of millions of dollars to drive users and developers to their networks. It seemed that throughout the year new crypto funds in the hundreds of millions or billions would be announced every week or so. Recent examples of this include Paradigm unveiling a new $2.5 billion crypto venture fund and Hivemind launching a $1.5 billion crypto venture fund. The amount of money flowing into the space is truly staggering relative to recent years and indicates the growing conviction institutional investors have in crypto.

Looking Ahead

2022 is shortly upon us, and crypto investors are anxiously anticipating whether we’ll see the year kick off with strong inflows following profit taking into year-end. We’ll be eagerly watching how L1s and L2s develop, whether Ethereum’s merge occurs or is delayed again, and the progression of adoption with Bitcoin, DeFi, and NFTs.

The opinions expressed in the CrossTower Classroom are those of the author(s) and not necessarily that of CrossTower. We appreciate diverse perspectives of our employees and we thank them for having a voice.

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CrossTower Inc. provides this content for general information purposes, to better inform you on your digital asset investment journey. We do not provide investment recommendations or provide tax advice. Please consult your investment professional or tax advisor if you require assistance in these areas.

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