The burgeoning of DeFi 2.0 and DAOs, the NFT mania, the pervasiveness of COVID-19, the approval of Bitcoin ETFs are just some of the highlights of an eventful year for our young industry. As the Lindy effect continues to take hold of our favorite protocols and assets, we expect 2022 to deliver just as many interesting developments as the previous year did. Below we’ve summarized some of the evolutions that we think will change the landscape of crypto in 2022 - enjoy the read.
1. Airdrops mechanics will change forever
2021 was full of airdrops that generously rewarded users of the protocols before the token generation event. DYDX, ENS, Ribbon Finance were one of the most rewarding airdrops this year that yielded thousands of dollars to the early participants. However, in large majority of these protocols there were no distinction between a user that interacted with 100 dollars worth tokens and 1 million worth of tokens, essentially incentivizing Sybil attacks that resulted in creation of multiple wallets from a single user that later on dumped the airdrop on the open market. We believe that the times of gaming airdrops have come to an end and that protocols will put much more effort into rewarding real users for their early contributions to the project.
2. Maven 11 x Maple Finance = new pool and continuation of explosive growth
Maple Finance is a decentralized corporate debt marketplace that targets undercollateralized lending in DeFi. In TradFi this market represents well over 10 trillion USD which Maple aims to revolutionize. In 2021 we became a Pool Delegate on the platform. Pool Delegates are standing in between liquidity providers and the borrowers. They need to assess the creditworthiness of the borrowers and set up appropriate terms such as collateralization ratio as well as the interest rates itself. We treat our role seriously, therefore we opened up a lending division within our fund and hired and/or dedicated a total of 4 FTEs for this purpose. We started our USDC pool in July with USD 21M initial liquidity. We scaled our pool really fast and ended the year with a total of USD 173.6M in originated loans. Our expectation is that Maple will position itself in the industry as a leader in undercollateralized lending which will lead our pool to close 2022 with over USD 1B in loans originated. We expect this capital to flow mainly from financial institutions and family offices that are looking for sustainable yield with relatively low risk and deep understanding of regulatory compliance. We are also on track to mark our pool as a go to solution for DAOs and their treasury diversification efforts which we proved already in 2021 securing USD 15M of funding from KeeperDAO, Merit Circle and Pickle Finance.
Alpha leak: keep your eyes peeled for a wETH pool in the early Q1 from us.
3. Recognition of modular design paradigm
We expect 2022 to be the first inning of a modular blockchain era. The modular design paradigm refers to splitting components of the tech stack, so optimization can take place at layers of the stack instead of trying to cram everything into one “monolithic” blockchain. We provided a rough and early outline of this in our initial investment announcement of Celestia. With the (full) launch of various L2 solutions coming in 2022 we expect this design paradigm to get more attention. This year we have seen various ways of validation of the modular design paradigm, the biggest being Buterin moving more and more towards this in his article “The Endgame”. We expect a lot of these layer-2 solutions, that are an even more essential piece of the stack in a modular world, to come to fruition in 2022. Putting a data point on the whole modular blockchain stack to become a reality is hard, especially as we believe this to be a multi-year process. However, some part of it is strong adoption by all the various layer-2 solutions out there. Therefore we predict that various L2 solutions will hold over 100 bln in TVL at the end of 2022.
4. Decentralized storage & computation to grow
This year decentralized storage and computation will start seeing significantly more traction. We have seen a wide range of projects tackling these issues over the past few years. The most successful without a doubt is Arweave, which has gained significant data storage traction. We are major believers in this ecosystem and expect a lot of growth in 2022 for Arweave and their broader ecosystem. This is not just a result of better technology at the base layer, but also because of a way smoother UX. Such as allowing for more scaling through layer two like solutions and enabling users to pay in other crypto assets. Because of this we expect Arweave to do over 120 terabyte of data volume in the next year. This is a YoY increase of over 300% compared to 2021.
Apart from continued decentralized storage adoption, a bit of a less consensus prediction is that we expect decentralized computation to start making a comeback this year. While this is definitely an area that is a bit further out then decentralized storage on the adoption curve it is something we foresee great potential for decentralized systems to make the product more efficient. Putting a data point on that might be too far fetched for now though.
5. The Play to Earn model will grow but lag behind that new gaming model
The play to earn model has gained significant traction in 2021 with successful projects such as Axie Infinity, Defi Kingdoms, Splinterlands and Illuvium. The dominant model has been described as Play to Earn, where users are incentivized to stay active in the game and farm in-game rewards. Often, these rewards can be sold on various markets for fiat, making the play to earn a popular pastime for degens but also for developing countries.
This model has enabled the rise of guilds in the metaverse, with a notable Maven investment in this space being Merit Circle. These guilds group together players and guide them through their journey of earning money while playing the games. Guilds have been proven successful in the traditional gaming world due to the obvious coordination benefits, and web3 only seems to be magnifying this for its members.
So what does 2022 bring? Well the play to earn model won’t fade away but will have to compete with games that focus much more on the entertainment aspect of the game. It’s a fact that the majority of gamers play games to have fun, not to have it feel like another job. We will see the number of gamers in the metaverse increase significantly because of this shift of focus while the Play to Earn category growth will lag behind the play for fun category.
6. DAO’s will face many issues, the major one will be themselves
Decentralized Autonomous Organizations or DAO’s have been called the best thing since sliced bread and rightly so, sliced bread is awesome and so are DAO’s. This new working structure empowers users that would like to contribute while getting rid of major issues within traditional companies such as discrimination based on gender, race, or education. DAO’s pride themselves on being fully transparent and as being governed by the community. But is this truly the case?
First, there are many DAOs out there that are calling themselves a DAO for regulatory reasons while still being governed by a centralized entity. A good example is the Uniswap controversies of the past year. Secondly, many DAO’s struggle to maintain passable governance participation by its users, while often only a handful of wallets are influencing the vote in the majority of proposals. A third aspect is the decentralized nature of true DAO’s. More often than not, no clear leadership is defined and creates situations where friction arises within the organization over topics such as compensation, vision, and hiring.
This last point is enforced if regulatory scrutiny is placed on DAO’s and their structure. We think 2022 will bring interesting regulatory challenges for DAO’s where we will see governments following Wyomings example to recognize DAO’s as LLC’s and the opposite approach with crackdowns and litigation.
7. Coinbase will roll out derivatives products. Options in DeFi will explode
Derivatives in DeFi had been rather a niche product in 2021. Major centralized exchanges such as Binance or Deribit have much lower fees and thicker liquidity on their derivatives products compared to their counterparties in decentralized finance. Onboarding is also a problem as centralized exchanges are characterized with widely available fiat on-ramps which is not the case for the large majority of the DeFi protocols. 2022 will make the competition even more difficult as we expect Coinbase to roll out their derivatives offering which will likely start with perpetual swaps in Europe with options following later on. We believe that while the perpetual swaps market will continuously stay dominated by centralized exchanges, some DeFi options protocols will start to emerge and grow the market share of this synthetic product offering. End of 2021 already showed a potential with new protocols offering options vaults with simple yield strategies that already attracted significant total value locked and generated impressive revenues. We believe that the options market in DeFi will explode in 2022 and the yield strategies will become a new normal for the protocols as a part of their treasury diversification strategies. Finally, we think that the winner will revolutionize the crypto options pricing model that still relies on the famous Black and Scholes model which is problematic to use as the existence of fat tails (extreme returns) in crypto leads to underpricing of the options itself. In essence, the protocol that will develop a superior model for the option pricing than B&S will be the winner in the DeFi options space.
8. NFTs. NFTs, NFTs - we will hear about them even more than in 2021
While 2021 was the year of the NFTs/Web3/metaverse and everything else that fits the umbrella term, most of the action happened in the art and collectibles NFT sector i.e. the well-known PFPs and P2E items. The vast majority of NFT marketplace volume is coming from those aforementioned typical digital (art) collectibles, yet the possible applications of NFTs go much further such as financial products (think Uni v3 LP positions) and intellectual property like music and royalty rights. Furthermore, robust NFT infrastructure has really only started emerging, allowing for the fractionalization and further financialization of NFTs, such as NFTfi’s NFT-collateralized loans. 2021 will be the year where all these underexplored and emerging utilities find some more of their footing. Although the non-art-related NFTs will likely take a bit longer to take off, we expect to see heavily financialized NFTs and use cases involving those types of NFTs taking off. We also (perhaps controversially) think OpenSea will lose a decent portion of their market dominance, both due to their one-size-fits-all approach being infeasible for all NFT applications, but also as we’re expecting a more community-owned and oriented competitor to start taking serious bites out of their market share.
9. Politics is too serious a matter to be left to the politicians, so what about crypto?
Football clubs, large tech companies, fashion brands and social media influencers have already discovered web3 in the past years, often with limited success. It’s not difficult to see blockchain applications further gaining traction in our day to day lives. Often these new entrants are met with a lot of skepticism from the existing crypto community and with good reason. Often, these projects feel like a low-effort money grab by a centralized entity, going firmly against the cryptopunk spirit of our industry.
We believe that this phenomenon will go one step further in 2022 with political parties using crypto as a way to fundraise, rally communities and engage grassroots operations. With the US midterm elections, the French presidential elections and the Brazilian elections around the corner, these could prove to be important catalysts for the use of web3 in this industry.
It will be interesting to see if these projects gain any traction, and if so what influence they can have on the outcome of an election. On top of this, how will the industry react? Maybe we will see a significant amount of speculation, a stablecoin backed by $BIDEN tokens or full-fledged DAO structure for grassroots operations. Only time will tell.
10. The king is dead, long live the king! Defi 2.0 is here to stay
In 2022, we predict that the new wave of DeFi protocols or Defi 2.0 will outperform Defi 1.0. The ‘blue-chip’ defi protocols can be seen as the first iteration of the tradfi model, but often also inherited their problems. With their rapid rise to fame, many organizational challenges arose, as well as having to fend off numerous forks offering the same functionality for lower fees. This constant battle along with an explosion of valuations brought complacency with regard to innovation.
Merely labeling Defi 2.0 as the evolution of Defi 1.0 does it injustice. Many Defi 2.0 protocols take a revolutionary approach rather than an iterative one. Think of self-repaying loans, 5 digit APY’s, Protocol owned Assets, large community allocations, bribes, ecosystems, and gauges.
We see Defi 2.0 overtaking Defi 1.0 in combined market cap. Catalysts we see are collaborations between these projects that may cause flywheel effects unseen in the industry (as we are already witnessing with the CRV/CVX wars), DAO structures and infrastructure improving and yield generating treasuries.