2022: Year in Blockchain

It’s been a big year, here’s a summary

This year has been a tough one for many. At the start of 2022, the overall cryptocurrency market cap sat at 2.1T, dropping around 66.4% to a tense 844B at time of writing. This market downturn wasn’t just isolated to crypto, though. Technology stocks were hit hard, with the NASDAQ Composite Index down around 32.97% YTD.

The general market climate was wracked by multiple external factors this year. Events such as the ongoing market impact of COVID-19, supply chain issues, surging inflation, and tensions between Russia and the wider community have been causing ripples through the global economy. 

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Total crypto market capitalisation has dropped 66.4% YTD Source: TradingView

NASDAQ Composite Index dropped 32.97% YTD Source: TradingView

More specifically to crypto, the entire ecosystem was plagued by significant hits throughout the year from protocol collapses, mismanaged risk and billions lost to fraud. A lot of these losses came from seemingly ‘safe’ investments, such as stablecoins, centralised yield providers, and FTX. As a result, coin prices dropped, companies closed their doors, and many left the space altogether. DEX and NFT marketplace transaction number and volume fell precipitously. Developer activity dropped overall, and many alternate layer one protocols suffered significant blows, including Solana, Near, Aptos, and Sui. Many market participants lost significant trust in the ecosystem this year due to bad actors, which spurred on negative attention from press, and lawmakers. The technically aware were eager to point out that these losses were mostly not due to faulty tech (CeFi broke, DeFi didn’t).

To its credit, the open blockchain industry managed to survive and continue to make progress throughout the year, shipping technological advances such as the Ethereum merge, and Ethereum L2 development, big brand adoption of NFT technology, further institutional adoption, increasing diversity in the space, and positive advances in regulation.

NFT Market Cap: ETH

NFT Market Cap: USD Source: NFTGo

Weekly DEX Volume dropped steadily throughout 2022 Source: Dune Analytics

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Positive Events of 2022

The Ethereum Merge

On the 15th of September this year, Ethereum moved from a proof-of-work chain, to a proof-of-stake chain. This means that the network is now secured through staked ethereum tokens, rather than energy-thirsty computations (proof-of-work). As a result, Ethereum is now about 99.95% more energy efficient.

The merge was the first of many upgrades to Ethereum, with the next steps progressing concurrently, named the Surge, Verge, Scourge, Purge and Splurge. These upgrades will improve Ethereum speed, scalability, energy-efficiency and affordability. On top of this, Ethereum Improvement Proposals (EIPs) continue to be written, and decided upon, daily. These ensure the core technology of the Ethereum chain is future-proof and future-ready.

Big Brand Adoption of NFTs

This year was a big year for NFTs, with massive market growth in the retail resale market in January, reaching a total market cap of $35 billion in March. Trade volume then proceeded to drop precipitously, and has been down only since April 2022 (as seen here with OpenSea, the largest NFT marketplace by market share).

OpenSea monthly USD volume shows the peak through ‘21-’22 and drop since April 2022 Source: Dune Analytics

The greatest progress in NFTs this year was the institutional recognition and onboarding of major brands. Starbucks, Instagram, Disney, Adidas, Nike, Reddit, Burberry, Gucci, Louis Vuitton, Dolce & Gabbana and Salvatore Ferragamo all entered the NFT world in 2022. 

The entry of luxury labels and Instagram may herald in a new wave of diversity in NFT interest and adoption. Which leads me into…

Increasing Diversity in Blockchain

In November 2022, 37% of crypto owners were women, up from 21% in 2021. And yet, less than 5% of crypto entrepreneurs and founders were women. With big brands and female-focused platforms like Instagram leaping into NFTs, women and people from diverse backgrounds are increasingly being presented with opportunities to be exposed to blockchain. As efforts to increase founder diversity continue, (such as the AirTree Pioneer program) I believe that a wave of female-focused and led companies will start to emerge.

It makes a lot of sense for people with diverse backgrounds to get into blockchain - DAO structuring and easy global payments can easily lend themselves to creating a flexible working environment. This is often very helpful to stay in the workforce during the process from trying to conceive, pregnancy, child rearing and flexible parenting. NFTs and digital payments allow an easy path to marketing and monetisation of microbusinesses and peer to peer trading.

Progress in Institutional Adoption

• Visa proposed the enabling of auto-payments for recurring bills, via Ethereum-enabled, self-custodied crypto wallets - this is a new possibility, as an EIP was recently passed allowing ‘account abstraction’ (or delegation of your keys, while still self-custodying)

• Blackrock signed a large deal with Coinbase allowing institutional access to crypto. Their CEO stated that crypto's blockchain technology will usher in "the next generation for markets."

• Fidelity launched a crypto service for investors

• Goldman Sachs CEO David Solomon published an op-ed in the Wall Street Journal headlined “Blockchain Is Much More Than Crypto” - the sentiment many blockchain community members would be echoing around the holidays to their querying relatives

• Goldman Sachs building ‘Dataonomy’ - a data service that will classify digital coins and tokens (similar to an exercise currently in progress by the Australian Department of the Treasury), and suggesting they may spend tens of millions on crypto companies caught in the FTX fallout

Tech Advances

• Ethereum Layer2 Development

2022 really has been the year of Ethereum L2 protocols. As you can see below, transactions and TVL has been fairly steadily growing all year. Transaction volume on L2 protocols has been largely higher than mainnet Ethereum since October 2022.

Total Value Locked on Ethereum L2 protocols increased throughout the year, as measured in ETH, but dropped in USD value Source: L2Beat

L2 developer activity increased throughout the year, ending the year with higher transactions per second than mainnet developers  (red: L2, blue: mainnet ETH) Source: L2Beat

• Zero Knowledge Technology

Zero knowledge technology (zk-tech) is a type of cryptography that allows two people to share information without revealing their private details. It maintains data privacy and security, while still allowing the parties involved to access the information they need for the transaction. The rapid and widespread L2 development has also meant great advances in zero-knowledge technology used in chains and protocols alike.

As protocols are increasingly marketed to a wider, non-technical audience, with real world credentials, the importance of privacy has never been greater. Developers, investors and the wider ecosystem have been speculating on emerging technologies and privacy coins throughout the year - especially how they will interact with legacy systems and emerging tech such as soulbound tokens. One concern around zero-knowledge technology is how protocols will continue to provide transparency and traceability without negating the benefits of anonymity.

• Soulbound Tokens

This year, Vitalik Buterin published his blogpost ‘Soulbound’. A soulbound token (SBT), is a digital asset that is tethered to one wallet (‘soul’). Vitalik discussed how these tokens may be non-transferable, or transferable under pre-assigned conditions. This kind of token may be used to represent an individual or entity’s identity and can also be used to store or transmit identity-linked value such as earned qualifications, or gaming reputation. Vitalik was also a co-author on ‘Decentralised Society: Finding web3’s Soul’, further discussing how these on-chain tokens may be the key to encoding core tenants of our off-chain economy - social trust and reputation. This technology is still very new, and multiple methods of validation, transferability and governance have been suggested. (If you’re hoping to get involved, Blockchain Governance Initiative Network’s SBT Report is currently in public review).

Regulation

Regulation of crypto and digital assets, and blockchain technologies has been a hot topic of 2022. Over in the US, President Biden has also put crypto regulation and policy on the agenda, with an Executive Order on March 9 2022. The EO stated six priorities, focused on consumer protection, application of regulatory standards, risk mitigation of illicit activity, reinforcing US competitiveness in digital asset development, promotion of safe and affordable financial services and support of responsible design, development and implementation.

Pressure grows to regulate cryptocurrencies internationally (including from the US and in Australia). Research and development into central bank digital currencies continues, with the Reserve Bank of Australia’s CBDC pilot which began in August 2022, to be completed in 2023. The Department of Treasury’s token mapping exercise continues, with a consultation paper to be released in early 2023. Review of other considerations around digital assets is also continuing, such as custody and licensing frameworks, and taxation.

Honourable Mentions:

• The Australian cryptotwitter community took over Twitter, with the “AussiesFollowAussies” movement

• Communities such as Blockchain Australia, Aus Defi Association continue to grow, connecting developer and founder communities, educating and advocating for blockchain advancement

• Continued VC investment in blockchain companies (watch this space!)

• Tech Council of Australia released their ‘Digital Assets in Australia’ report

Source: Tech Council of Australia

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2022 Events We’d Rather Forget

TerraLuna Collapse

On May 7 this year, the UST stablecoin began depegging (losing its ‘peg’ to $1 USD equivalent value), falling from $1 to 35 cents by May 9. UST was an algorithmic stablecoin, which balanced its value against a co-token, LUNA. Therefore, this depegging of UST caused LUNA to also devalue, causing further devaluation of UST, creating a sell-off event leading to the LUNA and UST tokens falling from $80 and $1 respectively to a fraction of a cent each. They were both subsequently delisted from exchanges. 

It’s been speculated that there was a $200 billion fallout from this event, with losses of 45B within 72 hours from the LUNA and UST alone, causing the start of a contagion event through the entire ecosystem that has lasted this year and will continue into 2023. This loss predominantly came from people and companies who had their funds sitting or staked in UST, presuming it would retain its value 1:1 with USD.

While there was a lot of speculation at the time on the reason of the TerraLuna crash, from single party hackers, to coordinated attacks, the market came to learn that in fact, it really came down to faulty tokenomics and protocol design. The TerraLuna contracts denoted that the on-chain redemption capacity (i.e. minting) of UST was hardcoded around $20 million at 2% spreads, which was insufficient to absorb the cascading sell pressure from LUNA in this instance of extremely high sell pressure and volatility. To put it simply, the balance maintained by the $1 burned LUNA for every UST minted (and vice versa) failed in times of high demand.

Source: Twitter

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Three Arrows Capital Collapse

Following the TerraLuna collapse, blockchain hedge fund, Three Arrows Capital (3AC), also collapsed. With the sharp market downturn, 3AC’s excessive use of leveraged long positions meant that they were unable to service their loans. This propagated contagion effects throughout the space, as they defaulted on these loans, including loans to Voyager. By July 2022, liquidators estimated 1B in equities and 3B in liabilities.

FTX: Alameda Research Collapse

Crypto exchange, FTX, collapsed this year after it was found that hedge fund, Alameda Research, had been using FTX customer assets to cover trading losses. The FTX scandal rocked the cryptocurrency, blockchain, political, entertainment sectors as well as the pockets of mum and dad investors. FTX had positioned itself as a safe, trusted haven for those wanting to dip their toes into crypto, but also had high volume, high delta coins that drew pro traders, including margin and leveraged token offering that was less regulated than large counterparts. While the UX was never as friendly as Binance or Crypto.com or Coinbase, the draw of FTX really came from the marketing - including the allure of now- infamous founder, SBF. SBF was well known for his cameos with movie stars, association with the effective altruism movement, vocal opinions on DeFI, and donations and collaboration with US lawmakers and elected officials.

This behemoth of a company was widely celebrated and trusted by people on all levels of the crypto noob to expert spectrum. The Alameda Research team - as it turned out - was unable to be liquidated on FTX, and were actually trading with the deposits customers themselves had deposited onto the FTX platform. Assets were therefore not backed 1:1 as previously stated by FTX, so all this time FTX traders were paper trading against their own capital and didn’t know it.

Alameda Research had also bailed out (now bankrupt) crypto broker, Voyager Digital post-3AC collapse, with an initial $200 million and revolving line of BTC credit. This led some to suggest that the failure of Alameda Research was an extension of contagion earlier in the year, fuelled by FTX customer funds.

SBF has been released on bail in the US after extradition from the Bahamas, with Gary Wang (FTX co-founder) and Caroline Ellison (Alameda Research) cooperating with US authorities after pleading guilty to fraud.

Dishonourable Mentions:

• Alternate L1 challenges: after FTX collapse, the Solana ecosystem suffered an exodus of developers and companies. A lot of these companies were unable to continue operating due to FTX contagion and fallout (including situations where treasuries were held on FTX rather than cold storage). Other L1 blockchains and protocols are also struggling to build following this challenging year, with Near, Aptos, and Sui developers also leaving en masse

• Centralised DeFi (CeDeFi) Platforms: the community learned this year the dangers of trusting centralised protocols claiming to be DeFi (such as Celcius) - as always, ‘not your keys, not your coins’

• Hacks: Ronin, Wormhole, Nomad hacks were the largest this year, enhancing the calls for regular code audits and improved operational security. Losses were in the billions.

Overall Blockchain Startup Trends

What I’ve seen in 2022

• Advertising

• Portfolio Management

• DEXes

• On-chain liquidity protocols

• Yield Products

• NFT marketplaces and community management

• Niche metaverses

• Wallet improvements, including multi-sig capabilities

What I expect to see in 2023

• Advertising

• Privacy, Identity and reputation

• Social media and community management

• Interconnected Metaverse Products

• AI/ Blockchain Plays

• Security and auditing systems

• Function-rich, secure, customisable wallet solutions

Learnings of 2022 and looking forward…

They say that those who don’t remember the past are doomed to repeat it, and I believe that to be a very important lesson in this growing space. 2022 has afforded a number of great lessons for founders wanting to build companies in the blockchain space.

Not Your Keys, Not Your Coins

2022 saw increased demand for education on, and access to, self-custodied assets. This increased respect and understanding of decentralised finance (DeFi) and decentralisation in general was a positive shift towards the ‘code is law’ and ‘encoded trust’ principles, and away from the risks that exist in our current systems. While it must be stated that there are definitely risks associated with self-custody, such as asset recovery and useability, it’s important to remember we’re still in the infancy of decentralisation development. Protocols are improving every day.

Patience, Transparency and the Value of Good Advice

There has been a trend for blockchain startups and companies to develop by the Silicon Valley framework of ‘build fast, break things’. We’re learning, however, that the unforgiving nature of smart contracts, and retail access to crypto assets may mean that this model isn’t quite right for blockchain.

My recommendation would be for emerging companies to seek the advice of true crypto-native advisors, along with people with solid backgrounds in cybersecurity, and technology. If you’re looking for funding, seek out investors that will advise from the wealth of knowledge gained from a solid track record. Wunderkind culture is great in some ways, but neglects the value of experience - which leads me into…

Sustainable Building

A lot of this year was a lesson in removing protocols that weren’t built sustainably, either technologically (TerraLuna) or operationally (FTX). As horrible as it is to say, the pruning exercises we’ve seen throughout 2022 may hopefully pave the way for capital to be directed towards companies growing in the right way - with ethical business practices and solid, resilient technology.

Light-Touch Regulation is Best

There’s no doubt that regulation of blockchain technology is coming in 2023. Recent protocol and company collapses has meant there has been a call for improved standards and regulations around these asset classes, particularly exchanges. While positive regulation is required in order for positive growth to scale, we must be cautious not to overregulate, or regulate prematurely before the ecosystem has a chance to develop defined structures and purposes for this new technology. Check out the TCA’s Digital Assets in Australia Report for a great overview.

Accessibility, Audience and Responsive Tokenomics

Tokenomics is the word used to define economic incentivisation in blockchain systems. Ideally, a blockchain protocol’s token will have some ‘utility’ - meaning, that the token will be tied to the use of a protocol. For NFTs, it may ‘unlock’ features or communities (and more). Ideally, the value of a traded token should be linked to the popularity and/or use of its protocol. (And not all blockchain companies need tokens).

I believe that the blockchain ecosystem may have been more resilient to this year’s market movement if:

1. The token values were truly linked to protocol use, and

2. Protocols were more accessible to non-technical, web2 users

We need to make blockchain products more accessible to the wider world if we want to be able to share the benefits of this technology, and we do this by building useful products that integrate into the wider community. The next wave of sustainable growth in the blockchain industry comes from building technology with good UX / UI, that seamlessly integrates the uses of blockchain into products that serve a wide audience. 

I believe 2023 is the year for this, as we see the development of privacy, identity and reputation products. These will enable integration of real world, identifiable data safely on-chain - in a way that preserves data autonomy and functionality.

2022 has been a big year, with a lot of reasons to lose hope. But regardless of economic position, 2023 looks bright for the development of blockchain systems.

I’ve been so grateful for the opportunity to meet so many of you this year. I’m looking forward to much more in 2023!

As always, my door is always open if you think I can be of help!

Happy New Year!