Trends don’t fit nicely on a calendar, but a new year is a good opportunity to reflect and think about the road ahead.
For the last week, my twitter feed has been full of 2022 predictions. Some were insightful, others were predictable, but they were all fun to read. I wouldn’t be doing my job as a commentator if I didn’t participate in the prediction game at least once a year and the first issue of 2022 is as good a time as any.
So…with varying levels of confidence and in no particular order, here are some of my predictions for 2022. If you disagree, or think I left out something major, reach out in the comments.
Let’s zoom in…
Institutional adoption. From 2018-2021, DeFi resembled a financial services app store directly serving a retail user. But for DeFi to really scale, it has to attract and support institutional liquidity. Both Compound and Aave, and presumably Uniswap, are building institutional-focused products on top of their protocols. If interest rates stay at historic lows, these new institutional-focused DeFi products could see a massive influx of capital.
A related trend is financial services companies integrating with DeFi protocols to offer their own products and services. We saw Coinbase integrate with Compound at the end of last year to provide a variable yield product to customers. Expect more of this. Here’s how the integration dominos will fall…
First, crypto-native exchanges and custodians (2021-2023)
Then Fintechs (est. 2023)
Then Banks (est. 2024/2025)
Undercollateralized loans. One knock on DeFi as a legitimate financial services ecosystem has been high collateral ratios. If you want to borrow $100 of crypto, you’ll need to lock up at least $150 of crypto. Because of volatility and fear of liquidations, actual ratios tend to be much higher, into the hundreds of percent. 2022 will be the year of undercollateralized loans. For these to work, you need an identity and a reputation, so expect them to be available to institutions and KYC’d individuals to start.
NFTs as collateral. There are billions in idle capital sitting in NFTs and a handful of projects raising money that want to unlock it. People want to borrow against their Crypto Punks, Bored Apes and virtual land just like they do against their home and stock portfolio today. Expect these new projects to support only the bluest of blue chips to start, and collateral ratios to be high. NFTs are less liquid than cryptocurrency, so liquidations are likely to be well below established floor prices to guarantee a quick sale.
Real world assets. In 2021 we saw a few examples of DeFi integrating with real world assets. A lot of this activity was driven by Centrifuge, who is onboarding real world borrowers and asset issuers and giving them access to DeFi liquidity and lenders. If you’re interested, check out their Tinlake marketplace. I’m optimistic about real world assets in DeFi long term, but it will continue to be a slow burn in 2022. The fact is, bridging real world assets onto blockchains is really hard.
TradFi buys into DeFi. It hasn’t happened yet, but I really want to see at least one major financial institution buy a nine figure stake stake in a large DeFi governance token. If I was hired as CEO of a major bank, this would be my first investment.
Governance becomes more centralized. DAOs are realizing that decentralized governance sounds good in theory, but isn’t very efficient in reality. Projects that fully decentralized operations in 2020 and 2021 will implement more committees, staffed with specialists that own specific functions (core development, security, treasury management). DAOs will also start outsourcing the more specialized functions (i.e. security/emergency response) to third parties. See Compound’s arrangement with OpenZeppelin, and MakerDAO’s arrangement with Immunefi.
The new influencers. DAOs are a new class of “influencer”. You’ve got a group of passionate coordinated people, often with a global footprint, working for a common mission. These communities make great partners for big brands, and I expect to see the most innovative consumer and entertainment brands aligning with popular/exclusive DAOs. These deals could start simple with NFT collaborations, branded-airdrops to DAO members and early access rights. But I can imagine things getting crazy pretty quick. The business mechanics of these deals will be interesting.
Strong communities will thrive, weak communities will die. NFTs with strong community components will retain/increase their value. NFTs with weak or no community component will die. The volume of new NFTs launching everyday is exhausting. The only way to separate yourself from the pack is to (a) be first, or (b) be stronger. A friend had a great line - he said “the dollar value of an NFT is the perceived value of being part of that community”. How do you define the value of being part of a community? Part of it could be social status, part of it could be access, part of it could be ownership and the right to future rewards. The point is, strong communities will be valued higher than weak communities, and the floor price of a particular NFT is the best litmus test for the strength of a community.
More NFT M&A. Nike quietly acquired design studio RTFKT, the team behind the popular Clonex avatars and a host of other limited edition NFTs. Not only did the RTFKT team have talent, but they have a growing portfolio of valuable IP and the royalty rights that go along with it, including 5% of all secondary Clonex sales. With roughly 56k ETH in trading volume, that’s over $7M in secondary market royalties in the month since Clonex dropped.
Non-Ethereum Layer 1s continue to grow. We saw explosive growth from new blockchains like Solana, Avalanche and Polygon in 2021. These ecosystems will continue to attract users and liquidity (especially net new users) that are priced out of Ethereum due to fees. Two things I’m watching that will determine the staying power of these alternative blockchains:
Developer Community. Developers drive everything. If these chains can attract a large and loyal developer base, good applications will come, and users will follow.
Net new innovation. It’s one thing to attract applications that already exist on Ethereum. It’s another thing to see net new innovation that doesn’t exist anywhere else. If a chain can accomplish this, it has a chance to leapfrog Ethereum.
Something to watch are privacy-first chains like Iron Fish. This is one “leapfrog” feature that is absolutely necessary in the long run.
EVM-compatible chains still dominate. The Ethereum ecosystem has the most engineers, the most mature open source contract libraries, more developer tools, security tools and governance tools. EVM compatible chains have a huge tool box at their disposal, and this creates a big competitive advantage.
Web 3 reputation tools. There are a lot of teams trying to crack this, from all angles. ARCx is working on DeFi credit scores, Rabbithole is training users and awarding them with skill-based credentials, Karma is building resumes for DAO contributors, and Ceramic is building a protocol teams can use to manage all this user data. Cracking Web 3 reputation will improve the user experience dramatically.
Valuations will stay outrageously high. VCs pumped an estimated $33B into crypto projects in 2021. We’ve also seen top tier firms like a16z and Paradigm raise new multi-billion dollar crypto/Web 3 funds, and that capital must be deployed. A surplus of capital combined with a highly competitive market for deals = founder friendly valuations. One of my predictions was going to be more “angel-only” or “community” rounds, but VCs may pump valuations so high that founders don’t have a choice but to take their money.
Talent exodus from Web2 to Web3. Web 2 tech market caps have been the winners during the pandemic. The best move those employees could make is to exercise their options and jump into Web3. Exit at the peak and double down on the next wave. Web3 is flush with cash and short on talent. You’re already seeing a wave of top tier talent migrate from Web2 and finance. This will continue until we hit an equilibrium or a prolonged bear market, neither of which look likely in the short term.
Bitcoin and Nuclear Power become BFFs. Bitcoin took it on the chin last year for its energy footprint. Yes, operating cryptocurrency networks consumes a lot of energy, but not all energy is bad energy. A lot of bitcoin mining runs on hydro power, for example. Nevertheless, the industry committed to greener forms of energy, including nuclear, and I honestly can’t think of a better match - two things grossly misunderstood by the media and general public. I’m just thinking how ironic it would be if Bitcoin mining turns out to be the thing responsible for changing the perception of nuclear power…
Private transactions. This will happen eventually, I’m just not sure it’s in 2022. There’s a few things preventing blockchains from going to the next level - a lack of identity/reputation systems and a lack of transaction privacy. The industry has experimented with privacy mechanisms like zero knowledge proofs for years, but we’re finally seeing solutions hit the market. Iron Fish and Aztec are building L1 and L2 privacy solutions, respectively, and Polygon announced it’s Polygon Nightfall project in collaboration with EY. Still, this is going to take time.
Stablecoin and DeFi regulation. The pandemic and the economy are going to dominate legislators’ attention this year, so I’m not optimistic we see any real progress with stablecoin or DeFi regulation. However, if I have to choose one to tackle this year, it’s stablecoins. Should they be backed 1:1 with dollars, or is a basket of higher yield generating assets ok? This one is much more straightforward.
I was generally happy with the quality of my content last year, but I did catch my self repeating certain themes. This year, I want to make sure I am delivering a unique perspective every week, and sometimes that means passing the pen to someone else. So starting next week and occasionally throughout the year, I will feature a guest writer I think has a unique perspective on an interesting topic. I’m confident we’ll both learn something.
Thanks for reading.
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