The blockchain and crypto-assets space has grown tremendously during the past 18 months due in part to the acceleration of the ongoing digital transformation. Many more consumers and business organizations are completing tasks online instead of visiting physical locations to avoid the further spread of COVID-19 and its deadly variants like Omicron.
Bitcoin (BTC), Ethereum (ETH) and other decentralized currencies are now valued at nearly $2.5 trillion, largely because they provide a viable alternative to the traditional financial system as they allow people to transact in a permissionless manner. Unlike PayPal (NASDAQ: PYPL) or other tightly-regulated platforms, users don’t have to clear time-consuming KYC/AML checks in order to exchange monetary value (on many platforms though most are now being regulated). Stablecoins like Tether (USDT) may be used to send “digital dollars” via user-friendly Fintech platforms like Paxful.
Tether (USDT) Market Cap Increases Over 12x Since COVID Outbreak
To put things into perspective, USDT market cap was only around $6.2 billion on March 31, 2020 – which was just a month after the COVID-19 outbreak that sent financial markets crashing in an unprecedented manner. USDT’s market capitalization is approaching $78 billion at the time of writing (as of December 24, 2021).
While Tether has been fined heavily by regulatory authorities in the US and its operations have been closely monitored in other jurisdictions (largely due to iFinex, Tether’s parent company, not being able to (allegedly) show/prove they have enough reserves to back the amount of USDT in circulation), the leading stablecoin is being supported by the majority of crypto exchanges and companies operating in the blockchain industry.
In addition to Tether, other more well-regulated stablecoin issuers such as Circle (USDC), Paxos (USDP), and many others have also seen huge increases in their market caps since last year and more so in 2021. The main reason behind this is that stablecoins really do provide a viable alternative to fiat currency transactions. Instead of having to meet extensive requirements to open and maintain a traditional bank account, consumers and businesses can more easily create digital wallets and send stablecoins seamlessly to anyone around the world.
Although sending USDT or other stablecoins via the Ethereum (ETH) network can be costly and it can take a long time for transactions to complete, there are many other great options like using the Tron (TRON) network to send out these transactions. In general, stablecoin transfers via the Tron blockchain are cheaper and may be completed a lot faster.
Decentralized Financial Protocols No Longer Seen As a “Bubble”
As stablecoins continue to gain global adoption, despite increased scrutiny from regulators, we are also witnessing the rise of decentralized finance (DeFi). This nascent sector seemed like a buzzword in 2018 but it has grown exponentially during the past few years. In mid-2019, the entire DeFi ecosystem market cap was well below $0.5 billion and then surged to $1 billion by February 2020. At present, the DeFi market is valued at over $100 billion according to DeFi Pulse data.
This growth is definitely real, sustainable, and not a bubble. That’s because DeFi platforms are making it easier for consumers and businesses to borrow, lend, and stake digital assets for competitive returns. As the world tries to cope with historically low interest rates offered by banking institutions and as we see our purchasing power decline more rapidly than ever (due to crippling inflation), DeFi offers much better returns but not without its risks.
Since decentralized finance protocols like Maker, Compound, Curve Finance, Aave, among many others, are implemented using smart contracts, they’re often exploited by malicious hackers. A bad actor may discover a vulnerability in smart contract code that may not have been audited properly. And, this can lead to large amounts of funds being drained from users’ accounts or those belonging to large digital currency platforms. This has become a major problem in the crypto space and companies like SlowMist are now sharply focused on addressing smart contract bugs and analyzing sophisticated exploits.
Other professional teams like the developers of the Astra Protocol have been working on a decentralized compliance layer for DeFi. In other words, they aim to provide a comprehensive legal technology solution for this sector with assistance from legal firms. The Astra team is also eager to work with regulators like the US Securities and Exchange (SEC) Commission to help service providers with performing relevant AML/KYC checks.
Most experts agree that for crypto and DeFi to grow in a responsible manner, we’ll need an extensive and effective regulatory framework. These clear guidelines will allow companies to operate in a compliant manner in order to ensure consumer/investor protection.
Blockchain Interoperability Protocols Are a Key Requirement
In addition to proper regulations, the crypto and distributed ledger technology (DLT) industry will need blockchain interoperability solutions. Projects like Cosmos (ATOM) and Polkadot (DOT) have been working on enabling greater interoperability across blockchains, along with protocols such as deBridge which aim to serve as a solution connecting multiple DLT platforms. Industry analysts agree that the future of crypto and DeFi will (and already does) have many different blockchains with their own specialized tokens (for example, utility tokens, governance tokens, stores of value, mediums of exchange, among other use-cases).
Due to thousands of crypto tokens now circulating in the digital assets market, we may be faced with an increasingly fragmented ecosystem. However, application developers have been quick to realize this requirement, which is why they’re creating appropriate DLT interoperability protocols so that different chains can communicate/interact with each other (by exchanging messages, tokens, other data types).
The Road to Ethereum 2.0 and Web 3.0
As most crypto enthusiasts would know, the road to Ethereum 2.0, which involves a transition from proof-of-work (PoW)-based consensus to proof-of-stake (PoS), hasn’t exactly been a smooth one. But that’s understandable, because the developers of Ethereum are attempting to do something which hasn’t been done before. Surely, we should have all expected arguments and challenges due to ETH miners not being able to resume their jobs since ETH 2.0 will be based on a staking model.
But that’s also one of the reasons why other PoW chains, namely Ethereum Classic (ETC), should continue to maintain and increase their market share as ETH miners have started to shift their operations to other chains.
Scalability Solutions Expected to Continue Rapid Development
Due to scalability challenges faced by Ethereum, we’ve also seen the rise of a large number of scalability solutions like those being developed by the creators of SKALE Network, and of course Polygon (POLY). In addition to ETH scaling protocols, crypto industry participants have seen the emergence of other more viable blockchains like Solana (SOL) and the ongoing development of Cardano (ADA) – which seems quite promising considering its market cap has surged from merely $0.03 around March 2020 to currently around $1.45, according to CoinMarketCap data.
Other blockchains like Telos (TLOS) have also continued to maintain and increase their market share in 2021, because consumers are looking for a wide range of options when interacting with web-based platforms. Telos offers much faster transaction times and transfers can be performed within a fraction of the cost it takes on larger chains like Ethereum.
Telos is also a viable option because their platform has addressed issues related to frontrunning. This happens when users may unfairly try to get ahead in the transaction processing queue because they may have much larger transactions and can afford to pay really high (priority) fees. According to the Telos team, they have made a conscious effort to resolve these problems.
Meanwhile, the Metis team recently launched the platform’s Mainnet Andromeda, a move that confirms a commitment to greater decentralization of Internet-based services.
Metis got its start as a “hard fork of Optimism.” The platform’s founders really appreciate the effectiveness and simplicity of roll-up tech, which allowed Optimistic Rollups to bring together large numbers of transactions in order to create a significantly faster, affordable, as well as scalable user experience (UX).
The Metis team added that they appreciated how Optimistic Rollups could be developed as Layer 2 Ethereum scaling solutions, “meaning they benefit from all the security and decentralization of the Ethereum blockchain.”
The update also noted that the upcoming OVM 2.0 release, and the literature that the Optimism team has published regarding it, “confirm a major change in plans: Optimism will no longer offer the same level of decentralization that it originally envisioned.”
Projects Not Willing to Compromise on Decentralization
Metis still plans to follow most of Optimism’s overall architecture. However, they also “refuse to compromise when it comes to decentralization,” the developers clarified. Their future plans will thus reflect their commitment to providing “maximum scalability, without skimping on decentralization.”
Optimism proposed the concept of “EVM Equivalence” to “replace its original vision of “EVM Compatibility.” Optimism described how EVM Compatibility would be a major hurdle for existing Ethereum dApps (or decentralized applications) migrating to Layer 2, as “settling for mere compatibility means that you are forced to modify, or even completely reimplement, lower-level code that Ethereum’s supporting infrastructure also relies on.”
Metis confirms that this is, in fact, true. And their team has “received painful feedback from developers regarding these compatibility issues.” As a result, they understand the “desire to switch to EVM Equivalence, since doing so could enable some Ethereum projects to experience an easier process as they migrate their DApps onto Layer 2 networks.”
But everything comes at a certain price. When they looked deeper into the design of OVM 2.0, they learned that switching to EVM Equivalence (without making any other adjustments) “means compromising much of the decentralization originally proposed through OVM.”
Metis also noted that choosing to commit to EVM Equivalence and decentralization is “certainly the more challenging path to code.”
“We have committed to building a network that meets the highest standards of scalability, decentralization, and security (also known as the Blockchain Trilemma). That’s the network we plan to deliver to our wonderful community of partners and users, and the blockchain world as a whole.”
Metis is also joining the Ethereum Layer 2 race with a $100 million Ecosystem Fund.
Metis is joining the fray, where Arbitrum and Optimism have “so far ruled.” The fund is described by Metis as a “decentralized autonomous company” (DAC), called Genesi, to “support projects which join its ecosystem.” Genesi will be allocated across “a wide range of high-potential projects in all major crypto verticals including, DeFi, gaming, and DAOs.”
Open-Source Software Development Set to Continue its Steady Pace in 2022
These developments clearly suggest that open-source software development has continued to accelerate during 2021 and will most likely maintain or considerably exceed its current pace. This may be due to many more crypto projects acquiring large amounts of funding and companies attracting talented crypto and blockchain developers, entrepreneurs, and highly-experienced financial industry executives.
One of the most notable developments this year has been the dramatic rise of non-fungible tokens or NFTs. These digital collectibles have attracted people from all walks of life and companies operating in almost every industry segment have issued or at least thought about developing their own NFTs.
Although many people have dismissed this movement as a fad or bubble, it has become clear that NFT technology is truly useful because it allows artists, music lovers, and other creative individuals to prove the authenticity of their work. These one-of-a-kind items can then be marketed to a digitally-native audience including Millennials and Gen Z consumers.
According to an update from GlobalData, the NFT-powered Metaverse growth in 2022 should be driven by the enterprise and gaming markets.
In its report, titled, “Tech, Media, & Telecom Predictions 2022,” the data and analytics firm notes that gaming and commercial uses should accelerate growth, however, concerns regarding data privacy and regulatory crackdowns in China may act as a “brake.”
Gaming Companies Expected to Invest Considerably in Metaverse
Emma Taylor, Thematic Analyst at GlobalData, believes that in 2022, gaming companies will “invest in the metaverse to expand their already substantial user base to create even wider communities.”
Niantic, known for augmented reality (AR) game Pokemon Go, and Fortnite developer Epic Games will introduce initial versions of their Metaverse platforms, while other game publishers like EA and Tencent are expected to begin working on their own, Taylor revealed while pointing out that these are “likely to not be that dissimilar to the worlds developed in games already, but may offer higher levels of emersion and interoperability.”
Bitcoin (BTC) Decisively Remains the King
If NFTs are not your thing, then you may appreciate the great value proposition that Bitcoin (BTC) offers. Although 2021 saw many new decentralized protocols emerge, which mainly aim to compete with Ethereum and other Web 3.0 technology stacks, Bitcoin decisively remains the king. Companies like MicroStrategy (NASDAQ: MSTR) have added billions of dollars in BTC to their corporate treasuries. Even entire countries like El Salvador have made serious attempts to make BTC legal tender and promote its use throughout the country.
While El Salvador’s government has faced serious challenges (politically and otherwise) as they tried to get consumers and businesses to use Bitcoin for transactions, their leadership and ruling party has shown that they are determined and focused on making this initiative work. More than likely, we will continue to see many more merchants accept Bitcoin and countries across the globe may consider becoming more tolerant towards Bitcoin-focused businesses.
This year also saw the Bitcoin protocol complete one of its most highly-anticipated upgrades in years (Taproot). Overall, Taproot activation should make BTC transactions a lot more seamless and increase the digital currency’s fungibility. It’s probably a sure bet that 2022 will see even greater BTC adoption across the globe. As we get ready to close out 2021, Bitcoin price has surged above $50,000 again after falling below $45,000 recently.
While 2021 will most likely end with BTC well below its all-time high of nearly $69,000, the careful observer will always look at the bigger picture. After crashing to around $3,000 in March 2020, BTC surged to close 2020 at around $30,000. The flagship cryptocurrency is now trading at above $50,000 and looks set to end the year at above this mark.
Clearly, BTC has proven itself to be an excellent long-term store-of-value (SoV) and investment. Meanwhile, Ethereum (ETH) is trading at $4,000 after exchanging hands for a few hundred dollars just a few years back.
While BTC and ETH can’t compete with the price appreciation/performance of meme coins like DogeCoin (DOGE), Shiba Inu (SHIB) and other crypto tokens, these investments aren’t really based on any sound, fundamental use-cases. Since meme coins and other less mature projects don’t have a strong investment thesis or proven utility/roadmap, it’s mostly speculation, curiosity, and a little help from influencers like Elon Musk that are driving the prices of certain cryptos through the roof.
Diversification in Crypto Is Now Possible
It may be a good idea to allocate just a small amount to these altcoins, but a more sensible approach might be to gain more exposure to major cryptos like BTC and ETH. Digital asset manager CoinShares appears to have a more balanced perspective and strategy when it comes to introducing clients to the fast-growing cryptocurrency sector. Digital asset fund flows reports from CoinShares have confirmed that institutions are not only interested in Bitcoin and Ethereum, but they’re also gaining an appetite for alternative coins such as Cardano (ADA), Polkadot (DOT), and Solana (SOL).
With all these developments in mind, it’s evident that the future of finance will be a lot more decentralized, open, and definitely multi-chain. As long as a project has legitimate use-cases, a solid technology foundation, committed developers, and an engaged community (like those supporting XRP, Decred, among many others), then chances are that the initiative will survive – despite the enormous amount of regulatory scrutiny from the US SEC and other global regulators.
Central bank digital currencies (CBDCs) are maturing quite quickly as well and that may be due to increased competition from decentralized cryptocurrency platforms. China has decisively taken the lead when it comes to CBDCs, with billions of dollars in transactions taking place via digital wallets maintained by Chinese consumers. Neighboring countries like India have also been focused on their digital currency (or Rupee) projects.
Crypto Adoption Is Inevitable Because It’s Unstoppable
Even though the banking sector and regulators have been critical about crypto investments and transactions, largely because it’s a threat to their operations, authorities have been forced to develop appropriate regulations for crypto-assets. They’re also attempting to develop their own digital currencies, but these centralized monetary instruments don’t have the same great value proposition that Bitcoin and other permissionless currencies offer.
For example, you can’t stop someone from participating on the BTC network. It can also be quite challenging to confiscate crypto-assets, whereas, it can be quite easy to freeze funds in a traditional bank account. Moreover, cryptocurrencies offer more flexibility as they aren’t governed by a rigid regulatory framework.
In 2022, we can expect even greater Bitcoin, Ethereum, and stablecoin adoption. The DeFi and NFT industry are set for even more growth and the pace of innovation is on track to accelerate further as we enter the new year.