2021 was a wild year for the crypto industry, from regulatory attention, wild price swings, and technological advances. In this post, we will outline the most promising sectors in the crypto ecosystem in 2022.
A Look at the Crypto Industry in 2021
Even with the usual market volatility and China banning crypto in 2021, the overall cryptocurrency market cap has tripled. BTC and ETH are the main currencies leading this growth.
DeFi has seen similar growth, with over 10 times more value locked in DeFi protocols from the start of 2021 to now. The Ethereum network plays a large part in this and we will go deeper into its potential.
Overall, the growth of the entire crypto industry has attracted more institutional investors, with venture funding increasing significantly in 2021 compared to 2020.
1. The Rise of Crypto Derivatives
The advent of derivatives and other complex financial instruments is salient in the maturing crypto market. Rising market caps of dominant cryptocurrencies such as ETH and BTC raise the demand for more accessible and varied investment methods.
On any given day, crypto derivatives are traded at over five times the volume of its spot market aggregated across all exchanges. Busy trading days during May – June of 2021 saw derivative trading volumes of over $100 billion, 10x the derivative volume of the HKEX, and ~7% of the value of exchange-traded options across the global market.
Lucrative profits in crypto derivatives throughout 2021 have already attracted the attention of large financial players from the traditional market. In March, Goldman Sachs restarted their crypto trading desk; they released a new Bitcoin derivative product to investors by May.
The table here displays open option interest on the two most popular traded currencies in crypto, BTC and ETH. Derivative products have likely grown increasingly popular with retail investors due to their lower costs and accessibility compared to spot prices. BTC OI has near doubled from the start to the end of the year, and ETH nearly 10x.
2. DeFi Option Vaults – The Marriage of DeFi and Derivatives
DeFi Option Vaults pools together on-chain liquidity from various investors and deploy them in option trading strategies. While still nascent relative to the larger crypto trading ecosystem, DOVs have achieved consistent and sustainable yields of 10-40% for ETH, BTC and USDC since their inception.
Originated by Ribbon Finance, DOVs operate similar to many trading strategies employed by funds in traditional finance. The primary strategy of DOVs involves minting OTM (Out-of-The-Money) calls and puts and selling these options to the larger market while collecting premiums as the primary source of yield. This table shows the increase in total value locked of DOVs throughout 2021 and shows an example of the DOVs offered on Ribbon Finance’s platform.
Most DOVs currently require off-chain managers to determine the best strike prices and thus risk profile for their minted options. Many of these processes can be automated in the future, and therefore DOVs have enormous potential for growth in 2022.
3. ETH 2.0 – The Building Block of Web 3.0
The Ethereum network is an integral foundation in the current blockchain ecosystem. Compared to BTC, ETH has greater flexibility in integrating more complex projects, such as DeFi, dApps, and NFTs.
However, the current Ethereum is not without its issues. Due to high energy consumption on its “Proof-of-Work” system, building and transacting on ETH is getting more expensive by the day, stifling further innovation on the network.
Ethereum is updating to its much-anticipated protocol ETH 2.0 in 2022. ETH 2.0 will transition from its original energy-intensive “proof-of-work” method to “proof-of-stake,” allowing a near 99% reduction in energy consumption. This provides much-needed long-term stability for the entire network; lower costs allow more projects to set up on ETH efficiently and cost-effectively. It also opens avenues of previously unattainable upgrades for the network, further improving its scalability in the future.
4. Web 3.0 – The Next Iteration of the World Wide Web
This naturally brings us to Web 3.0. Web 3.0 is an increasingly popular buzzword heard throughout 2021. The current version of the world wide web (www), Web2, is centralized. Big tech companies monopolize most of the content and data available on the internet. Web3 is the idea of a new www built upon a decentralized blockchain.
Proponents of Web3 believe in a fully decentralized internet ecosystem to end data monopoly. Web3 will include DeFi, GameFi, and any dApps imaginable to replace traditional applications on the current Web2.
5. Non-Fungible Tokens – The Future of Digital Ownership
NFTs soared in popularity throughout 2021 but remain contentious even amongst crypto-enthusiasts. With a low barrier to entry in creating your digital art NFT, NFT marketplaces are saturated with art worth little value.
However, non-fungible token technology is versatile and holds great potential in modernizing dated practices. For instance, IPwe utilizes NFT technology to tokenize intellectual property and patents; its platform allows easy transaction of patents between parties, streamlining a previously inefficient and costly process.
After the initial excitement in 2021, in 2022, the NFT industry will likely gravitate towards only high-profile projects with established backing. The vast majority of indie NFT releases will likely be forgotten, while the top releases grab the attention of both investors and collectors.
6. GameFi & Play-2-Earn: When Videogames Meets DeFi
Virtual economies are commonplace in any modern video game released into the market. Yet fundamentally, all virtual assets in a traditional game are owned by its developers and under their sole discretion.
GameFi exists based on the blockchain: transactions, assets, or property rights are decentralized. Currency in a crypto game are tokens; Player assets are NFTs. Valuable NFTs and game tokens can be sold on open market platforms, with some possessing immense value. Thus, GameFi connects the virtual gaming world to real income through the blockchain.
An industry that has grown tremendously in 2021, crypto gaming tokens have already reached an aggregate market cap of $29.74b. Companies developing blockchain games are receiving record amounts of venture investment. Among them are Sorare with $680m (Series B), Dapper Laps with $555m (Series C + D), and Forte with $185m (Series A).
7. Gaming Guilds – The DAO Overlords of Blockchain Games
Monopolies naturally arose in the virtual economies of blockchain games in gaming guilds. Gaming guilds are player-led organizations with immense treasuries of tokens, NFTs, virtual assets spanning multiple blockchain games on different networks.
Gaming guilds have since become vital entities in the GameFi ecosystem. As virtual economies in blockchain games mature, new players find higher barriers to entry in the beginning to play-to-earn. Guilds have become a platform that lends talented upstart gamers (called scholars) initial in-game resources in return for a share from the player’s future earnings.
In many ways, guilds have surpassed the blockchain games they operate within. As their activities span across multiple games, gaming guilds continuously expand their yield earnings by moving onto newer and more profitable games as they are released. Large gaming guilds have since attracted significant institutional investment.
What Will the World Look Like in 10 Years?
We believe that these seven sectors will see the largest growth in 2022. We believe that there is a significant likelihood that the common technological innovations we take for granted in our current life may take on a very different form in the future. Blockchain technologies will be more integrated into our lives than ever before. However, you may wonder how the crypto ecosystem would look 5, 10 years down the line?
In the next ten years, we foresee three key trends on how blockchain will impact our lives.
- Talent: Much like how the dot-com boom of the 2000s brought a wave of software engineers. The continual growth of the crypto ecosystem will bring a new generation of tech-savvy, code-literate youth versed in blockchain technology.
- Integration: Blockchain will integrate into our everyday lives, modernizing archaic filing systems to revamp the internet. Web3, the metaverse, and its associated technologies will continue to grow and become the new norm.
- Investment: Cryptocurrencies already act as a stable store of value. Eventually, the public will see crypto assets as a suitable alternative asset investment; we believe we will see 10-30% of everyone’s assets invested in crypto or digital assets.