A summary of crypto’s most impactful events in 2022 and what to look out for in the year ahead. What do you reckon will be the dominant narratives in the next 12 months? Let us know via our social channels linked at the end of this article!
A Recap of Crypto’s Biggest Events in 2022
The year of 2022 will certainly be remembered as a near-apocalyptic year for crypto-assets. So much went wrong and very few had the foresight to anticipate the string of adverse events that investors have endured in the past 12 months.
There was a collapse of trust in the ecosystem, particularly amongst centralized entities following the fallout of BlockFi, Celsius, and FTX. The aftershocks will probably linger for a while and continue to weigh on the market, with the contagion recently affecting Digital Currency Group and Gemini Earn. Although crypto has in the past bounced back from worse, such as the Mt. Gox incident in 2014, the reputational damage to the entire sector will take some time to be undone.
Amongst the chaos of the past year, we also saw bridge hacks total more than $1.3 billion, drawdowns of 60% or more for major crypto-assets since the start of 2022, and the destruction of an entire blockchain ecosystem with the LUNA/UST death spiral. The LUNA collapse in turn induced a ripple effect, harming lenders such as Celsius and Genesis, as well as causing the downfall of Three Arrows Capital and stopping the ‘Zhupercycle’ in its tracks.
As well as internal shocks, there were also external factors that weighed on the market. In particular, the outbreak of war in Ukraine which has forced commodity prices higher and disrupted supply chains following the punitive sanctions placed on Russia.
As a result, elevated inflation has arrived on the shores of Europe and the US, burning a hole in the pockets of the average person in the street and severely depressing investor sentiment. In order to temper inflationary pressures, the Federal Reserve increased interest rates seven times in 2022, with most major central banks following suit.
For too long, monetary policy in Europe and the US was too easy, with interest rates near the zero lower bound. Since 2018, the refusal of central bankers to take away the punch bowl of easy monetary policy has intoxicated the market with artificially low interest rates and booming asset prices. But this was undone in 2022, with asset prices plummeting and the cost of borrowing now rising on the back of the most aggressive interest rate hikes in decades.
With the return on cash parked in the bank and safe haven assets like US Treasuries shooting up, this has fiercely diminished the appetite for risk-on assets, especially crypto-assets. Because of this negative macro development, one popular narrative has been sent to the emergency room: namely, that Bitcoin is an inflation hedge. Regulators have also shown no mercy to crypto investors, with an attack on both open source developers and privacy in the form of the Tornado Cash sanctions and the arrest of Alexey Pertsev, who is still being held without charge.
However, it’s not all doom and gloom!
A lot of positive developments also defined the crypto ecosystem in 2022. The Merge successfully transitioned Ethereum from Proof-of-Work to Proof-of-Stake after many years in the making. As a result, ETH is finally becoming ‘ultrasound money’, thanks to the reduction in the issuance of new tokens. Although with lower on-chain activity in recent times, we’d need to see more transactions that’ll burn more ETH as gas to penetrate the ultrasound barrier.
Source: ultrasound.money
While the failures of centralized entities and the Mango Markets exploit have cast dark clouds over digital assets, it also provided a silver lining: crypto users are placing more importance on decentralization, security and self-custody, embodying the true spirit of why crypto-assets were created in the first place. Despite the total value locked falling across the entire DeFi sector, the share of the volume on decentralized exchange relative to centralized exchanges has been on the rise ever since the fallout of FTX, a trend that’s likely to continue gathering momentum in 2023.
L222 also lived up to the hype, with optimistic rollups becoming an enormous success. Arbitrum and Optimism are leading the way and displaying encouraging user growth, with key metrics such as the number of active addresses and transactions rising throughout 2022. One interesting insight from the on-chain data is that the number of unique contracts deployed on these L2s diverged from other ecosystems: instead of falling or holding steady, there was a consistent increase throughout the year.
Source: Artemis
Stablecoins continue to be a killer app, providing a lifeboat for people in developing countries who have felt the brunt of global inflationary pressures and may have difficulty obtaining exposure to US Dollars. While some smaller stablecoins de-pegged, this sector of crypto enjoyed a record year, processing more than $7 trillion in transaction volume (up from around $6 trillion during 2021). We’re also seeing innovation in stablecoin designs from DeFi heavyweights Aave and Curve. Both projects unveiled their stablecoins (GHO and crvUSD) towards the end of the year and we’ll likely see these launch sometime during the first half of 2023.
No matter what the market conditions are, builders keep grinding and are continuing to build the future of finance. At least developer activity in Web3 has been up only! A non-exhaustive list of some of the most notable DeFi developments in 2022 includes:
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The launch of Compound v3,
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Silo Finance introduced its unique money market protocol,
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Frax entered the staking wars with their own liquid staking derivative frxETH and also introduced their own money market with FraxLend,
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Gearbox v2 introduced leveraged yield farming,
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Our introduction of a new tokenomic model with vote escrowed PERP (vePERP) and USDC fee sharing,
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The arrival of more exotic trading instruments, such as floor perpetuals for NFTs by nftperp,
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Liquity unveiled an innovative bonding mechanism for protocol owned liquidity with Chicken Bonds.
To learn more about our achievements in the past 12 months, check out the 2022 recap for Perpetual Protocol.
Adoption of crypto-assets and Non-Fungible Tokens (NFTs) by institutions and the corporate world respectively was also an encouraging sign for the longevity of the industry. BlackRock partnered with Coinbase to help their clients trade Bitcoin, BNY Mellon launched a crypto-asset custody platform and Fidelity also launched crypto trading for retail investors. On the NFT front, some of the biggest global brands jumped on the NFT wave, such as Adidas, Disney, Instagram, Nike, and Reddit, all taking the plunge.
7 Key Themes To Monitor in 2023
Listed below are 7 key narratives that will define crypto-assets in 2023.
1. DEXes & On-chain Derivatives to Steal the Spotlight
The collapse of FTX highlighted the importance of decentralization and self custody. Many big players got caught off guard and lost substantial sums. As a reaction to this failure, the share of DEX volume is set to increase in 2023 as crypto investors and traders move away from centralized exchanges (CEXes) and increasingly favor more decentralized and non-custodial alternatives. At the moment, approximately 50% of exchange inflows are now heading towards decentralized exchanges (DEXes) and we expect this trend to be amplified in 2023, as market participants will remain cautious.
One related narrative is ‘real yield’. Speculation and trading have been proven use cases for crypto-assets over the years, and on-chain derivatives are increasingly providing opportunities to cash in on this. For example, we launched fee sharing for vePERP holders at the end of 2022, giving token holders the opportunity to earn a ~20% yield in USDC during the depths of a bear market.
While trading volumes have fallen over the year, the herd will be back at some point, and this will kick off a massive increase in revenue growth for on-chain derivatives protocols and ultimately a lot of this value will flow to token holders.
2. A Return to Crypto’s Cypherpunk Roots
The internal pressures, such as the flurry of exploits and hacks, are forming the diamonds of the DeFi ecosystem, with only the cream of the crop in a position to withstand a potential crypto ‘ice age’. Others that are not as battle hardened and less secure will struggle to survive. As a result, there’ll be a concerted effort amongst these top protocols to make DeFi more resilient and secure, with a greater focus on censorship resistance, immutability, and security.
While USDC was the big stablecoin winner of 2022, decentralized stablecoins will be one area to monitor from now on, particularly Frax’s FRAX, Liquity’s LUSD and Reflexer Finance’s RAI.
Following the downfall of FTX, WBTC and other wrapped tokens experienced a loss in confidence, since Alameda Research was one of the main merchants. Merchants are allowed to redeem WBTC for BTC held by BitGo. However, BitGo refused to honor Alameda’s transaction when they burned WBTC (read more about the risks inherent to WBTC here). New designs, such as frxBTC, will offer a more decentralized and resilient way of using BTC on Ethereum. Also, Avalanche’s BTC.b saw significant uptake in the last few months of 2022 as an alternative to WBTC, more than doubling in supply since September 2022.
A lot of the utility historically provided by CEXes can now be accessed fully on-chain through a variety of different protocols: DEXes like CowSwap for trading, Mean Finance for crypto investors that seek a permissionless way to dollar cost average to get exposure, as well as on-chain derivatives like Perp that are gaining greater adoption as alternatives to centralized exchanges.
One of the biggest points of focus in 2022 was that Ethereum validators began to exclude addresses and transactions related to Tornado Cash. “The Scourge” on Ethereum’s roadmap will address the OFAC sanctions issue and bring more censorship resistance to the second largest blockchain by market cap by introducing Proposer Builder Separation, among other things.
3. Layer 2s to Capitalize on the Strong Momentum From L222
Building on the strong momentum in L222, one of the big stories for the year ahead is going to be the continued expansion of rollups, particularly for the current frontrunners Arbitrum and Optimism.
For Arbitrum, some of the key things to look forward to are the resumption of the Arbitrum Odyssey campaign and a potential token drop. For Optimism, we’re currently preparing for the launch of Bedrock, which will lower the transaction costs even more and introduce alternative proof systems, such as zero knowledge proofs. We may also see a second round for the OP token airdrop.
More importantly, we’ll also witness the maturation of rollups as they become more decentralized and the training wheels are taken off. There’s also scope for a large reduction in fees on L2s with the upcoming EIP-4844 upgrade, potentially driving transaction costs way below 1 cent, spurring even further adoption and strengthening the narrative around rollups.
Apart from optimistic rollups, we’ll also see continued progress in the zero knowledge rollup space. Several zkEVM launches are anticipated for 2023, as well as the full public launch of zkSync’s alpha. Other scaling solutions to keep an eye on include: Polygon’s trifecta of zk-rollups (Hermez, Miden and Zero), Scroll, StarkNet, Taiko, and zkopru.
4. The Blossoming of PriFi (Private Finance)
Privacy will emerge as a major narrative in 2023, given the shortcomings in fungibility for BTC and ETH. These shortcomings were on full display with the events surrounding Tornado Cash in August and the seizure of the BTC donations made to Canadian truckers who were protesting at the start of the year. Also, with the control that will be handed over to governments with the rollout of Central Bank Digital Currencies, financial privacy could become a lot more difficult to attain in the near future.
Greater adoption of privacy-preserving solutions is on the horizon as a result of these tailwinds, such as Layer 2s that utilize zero knowledge proofs and smart contract wallets that enable anonymity. As mentioned in the previous section, other zero knowledge tech advancements are also anticipated in 2023, which will wrestle with decentralized identity solutions, improved transactional privacy and scaling.
As it stands, everything on the Ethereum blockchain is completely transparent, meaning the history of your wallet is available for all to see, including every transaction, every amount or token you’ve ever sent or received, the timing of these transfers, and so on. There’s no convenient way for DeFi users to capitalize on yield opportunities and, at the same time, preserve their privacy.
Therefore, crypto natives are faced with a difficult choice: earn yield in the Ethereum ecosystem and signal it to the entire world, or use a completely separate blockchain to ensure anonymity. Along with scaling, privacy is the other vital piece of the puzzle for the wider adoption of blockchains. To gain mainstream acceptance and strengthen ETH’s position as a medium of exchange, all types of transactions should be similar to (or better than) cash in terms of anonymity.
Some projects worth monitoring in 2023 that will help Ethereum to realize this vision are Aztec, Railgun and zkopru (although the last two only support simple swaps at the moment). Of these three projects, Aztec has gained the most traction so far after launching Aztec Connect in July 2022, going from $0 to almost $9.5 million in total value locked (TVL) at the time of writing. We expect daily users, the number of transactions and TVL to continue growing during 2023 as privacy remains at the forefront of the minds of crypto natives.
Source: Dune
Through the use of a zero knowledge PLONK proving system, users of Aztec’s zkRollup can access DeFi privately, with apps such as Aave, Element.fi and Lido directly integrating with the liquidity present on layer 1, avoiding issues of fragmentation. One interesting aspect is that there’s no need for developers to redeploy contracts that are already on Ethereum’s mainnet; they just need to implement an interface connecting to the Aztec L1 smart contract. The project is also awarding grants to fund the development of privacy-first wallets and alternative front ends.
When transacting on Aztec’s rollup, only the sender and receiver know the details of a transaction, such as the amounts and assets transferred. While internal L2 transfers provide privacy, it should be noted that deposits and withdrawals from Aztec Connect are visible on the blockchain. Users are required to follow best practices, such as depositing or withdrawing round numbers (such as 0.10 ETH, 0.50 ETH, 1 ETH, etc.) and using fresh addresses for each deposit or withdrawal.
As well as being one of the primary beneficiaries of a privacy narrative, speculation about an airdrop for Aztec users could also drive growth in the number of users, transactions and TVL in the next 12 months.
5. A Trip Through Shanghai with LSD (Liquid Staking Derivatives)
Ethereum’s Shanghai upgrade is due to take place in late March or early April 2023, building on the progress made since The Merge to enable withdrawals for staked ETH. As one of the most highly anticipated events for Ethereum and the staking industry in general, a successful upgrade should lead to increased confidence around ETH, as well as staking derivatives like stETH, rETH, frxETH, and so on.
In the run-up to the Merge, we saw the LSD narrative take off with tokens like LDO and RPL reacting and moving higher. But with the introduction of withdrawals from the Beacon Chain, this can spur staking participation and boost the revenues of liquid staking projects. So far, the peg between staked ETH derivatives and native ETH has been mainly incentivized by token emissions.
But once withdrawals are activated, an arbitrage play finally becomes possible to help maintain the peg. In turn, these projects will see an improvement in their tokenomics and will no longer have to rely on token emissions to maintain their pegs.
LSD related tokens have had a great start to the year so far and we expect this trend to continue. Some of the crypto-assets that stand to gain from the ‘LSD’ narrative are listed below:
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LDO: LDO finished the final investor unlocks in December 2022. Lido also recently became the largest DeFi project by TVL, overtaking MakerDAO, a project that has held the top spot for years! Lido’s stETH is also the most highly adopted LSD, integrated with Aave and Euler, which provides more utility for this LSD, letting users borrow against their staking position.
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RPL: RocketPool’s rETH is the Etherian’s favorite flavor of LSD, since it promotes decentralization and allows anyone to stake with just 16 ETH. RocketPool will eventually lower the staking requirement to 8 ETH, which should stimulate further demand for RPL (since 10% of the stake is required in RPL to be put up as a bond). The bull case for rETH (and in turn RPL) is laid out in more detail in this article.
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COIN: Coinbase’s stock is another potential liquid staking play, given that cbETH has captured a significant slice of the market and the CEX has a large number of ETH tokens in its custody, which could be staked.
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SWISE: StakeWise will be one of the first platforms to support Distributed Validator Technology and will launch its v3 soon. The token may also benefit from the protocol revenue sharing narrative, as anyone will be able to stake the token to receive a portion of the revenues generated.
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FXS: frxETH is currently the highest yielding LSD with an APR of ~8% due to its unique design, compared to around 4% for other alternatives. After the Shanghai fork, a v2 of frxETH is expected to be released, which will be more decentralized.
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SSV: Operators charge stakers a fee to manage their validators, receiving SSV tokens in return for generating ETH rewards for stakers. As demand for staking rises, this should benefit the price of the SSV token.
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SD: Stader Labs is the second biggest liquid staking project on BSC and Polygon, with almost $100M in TVL across 6 chains. Stader is expected to launch their own LSD for Ethereum (called ETHx) in February 2023.
6. Big Brands to Continue Exploring NFT Opportunities
Big-name brands such as Nike, Dolce & Gabbana, Tiffany, Gucci and Adidas each made more than $10 million in NFT revenue during 2022. Expect more of the same in 2023, but which big brands will be next? It’s hard to tell, but we imagine that other luxury goods brands are likely to be the next big adopters.
Source: Dune
Similar to how banks wanted nothing to do with Bitcoin or other cryptocurrencies many years ago, the gaming sector has taken a similar stance against NFTs, although this could soften in 2023. The upcoming 12 months should reveal the true potential of Web3 gaming with a release of playable demos and full blown gaming experiences, instead of just fancy-looking teasers that we’ve seen so far.
Keep close watch of projects like Chainmonsters, Ember Sword, Illuvium, Otherside, Star Atlas, and Shrapnel, all of which are expected to deliver blockchain games that are of a much higher quality than what’s currently on the market.
7. A Bleak Macro Environment Shows No Signs of Fading
The macroeconomic environment shows no signs of improvement and could be a drag on crypto-assets in 2023. Interest rates are likely to rise until real interest rates (the base rate minus inflation) become positive once more.
The low growth, high inflation environment is probably going to persist for several years or more, with Fed officials ruling out any rate cuts in 2023. Historically, it has taken around 24 months for inflation to peak and then return to the 2% target, so it seems like we are still some way away from a normalization of macro conditions.
Source: Federal Reserve
Therefore, it looks like there could be more pain ahead for crypto markets until the tightening phase is complete and rates have plateaued. The Fed’s meetings and interest rate decisions will therefore continue to be high-impact events for the crypto market. And according to the Fed’s dot plot above, which shows the target range for the years ahead, the US could see rates remain at around 4%-5% until 2025.
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Disclaimer: Any mention of a project in this article is not an endorsement or recommendation to buy. The content presented here is purely for educational purposes and is not intended to be financial advice. Crypto-asset prices can be highly volatile, so ensure you do your own research, implement appropriate risk management techniques and seek professional advice before investing.