Frankfurt, January 12, 2022 – Last year, the market capitalization of cryptocurrencies reached $3 trillion USD for the first time. At the beginning of the 2021, it was less than $800 billion USD. DeFi now has a total value locked (TVL) of $100 billion USD on Ethereum alone. But NFTs have been the most surprising, flanked by complementary areas like metaverse and GameFi. Who can claim to have foreseen these developments? Looking into the future is notoriously difficult. Nevertheless, we dare to make predictions for the year 2022. It will be exciting to see whether they come true. Authors: Prof. Dr. Philipp Sandner, Jong-Chan Chung
1. Bitcoin price reaches $100,000 USD and the crypto asset market grows in breadth and depth
Rising inflation rates make scarce assets like Bitcoins (BTCs) increasingly attractive. Bitcoin is not only the oldest, most decentralized, and best-known cryptocurrency – a distinctive feature compared to other cryptocurrencies is its limited supply of 21 million BTCs. Against the backdrop of Bitcoin’s institutional adoption and the greater demand that comes with it, it is very much within the realm of possibility that the BTC price will rise to more than $100,000 USD this year.
But the overall crypto asset market will also grow. Since the beginning of 2021, the USD prices of the largest 20 cryptocurrencies listed on CoinMarketCap by market cap have increased by triple digits. It is noticeable that many native cryptocurrencies from alternative Layer-1 blockchain protocols (Alt-L1s), which are traded as potential Ethereum killers (such as Solana, Binance Smart Chain, Cardano, Polkadot, Avalanche), are among the top 20. Of course, investments in the crypto asset market are riskier than traditional investment opportunities, partly due to higher price volatility. Nevertheless, it is fair to contrast the price performance of cryptocurrencies with those of well-known market indices. For example, the MSCI World Index is only 17% higher than it was at the beginning of 2021, and the gold price trend is currently negative. Also, the increasing number of wallet addresses, for example, measured by monthly active users of the MetaMask wallet (10 million active monthly users currently), indicate that demand for crypto investment opportunities will continue: DeFi offers double-digit interest rates through liquidity provision, lending, and staking, whereas banks in developed countries quite often offer less than 2% on savings.
2. Ethereum undergoes upgrade and remains the dominant smart contract platform
Ethereum is expected to complete the transition to the proof-of-stake consensus mechanism this summer. It is also likely that financial institutions from the TradFi sector will enter the staking business. Staking rewards could thus become a kind of “prime rate” of the crypto asset market, as one can rarely invest in this market in a more risk-free way than through ETH staking. Here, one has the option to set up one’s own staking infrastructure or to resort to staking services such as those of Coinbase or Blockdaemon, for example. In terms of price development, ETH continues to have great potential, as do other Alt-L1 tokens. Although the share of those protocols and tokens that are mapped to Ethereum-based DeFi and NFT is decreasing, Ethereum still carries the largest transaction volume.
3. Crypto investments become more sustainable
Issuers of ETPs, crypto exchanges, mining companies, and financial institutions are interested in offering green products and services to their customers. To date, many potential crypto investors have been reluctant to invest in Bitcoins due to the relatively high carbon footprint of Bitcoin mining. Often, interested companies are also subject to ESG regulations that they must follow.
However, there are models that calculate the required climate compensation for Bitcoin-based products for providers of crypto investments. For example, a recent study by the Frankfurt School Blockchain Center outlines how a Bitcoin transaction, as well as holding bitcoins, can be offset by the purchase of emission allowances from the European Emissions Trading System (ETS). In the former case, $18 USD is required to offset CO2 emissions. In the latter case, emissions allowances must be purchased for $100 USD assuming one holds a Bitcoin for a period of one year. It can be assumed that the prices for CO2 emissions will increase significantly in 2022.
Overall, the energy mix used for blockchain network operations is becoming increasingly green. Not only have mining companies pulled out of China after the crackdown on the country’s mining industry. Mining companies are increasingly tapping renewable energy sources, such as geothermal or solar energy, because of the cost structures such energy sources offer.
4. Web3 infrastructure paves the way for the decentralization of the internet
Web3 represents a novel approach to potentially delivering internet architecture in a decentralized and autonomous way using blockchain technology. At its core, it is about reducing dependency on large “big tech” networks and IT service providers, such as cloud or internet providers, as they often handle the collected data in a non-transparent manner, represent a “single point of failure” and can operate a partly arbitrary product and pricing policy due to an oligopolistic market environment.
Web3, on the other hand, is based on the idea of putting the users of the internet back in control of data and infrastructure. From decentralized data storage via blockchains such as Arweave or Filecoin, decentralized wireless networks such as the Helium network, tokenized platforms, and projects where all decisions are made by the community, to completely new ways of identity management – Web3 offers a wide range of possibilities. Cryptocurrencies are particularly important in this context because they can provide a sustainable incentive system that encourages network users to provide the required infrastructure over the long term.
5. NFTs and blockchain-based gaming become a source of income
The Metaverse is a virtual platform on which people can collaborate and trade economically. These digital economies are hard to imagine without NFTs and blockchain-based infrastructures. The year 2021 represented a turning point in “GameFi” with Axie Infinity and the launch of the Ronin sidechain, which enabled the throughput necessary to allow one million active players to participate in the Axie Infinity universe in August 2021. Especially in the Philippines, Axie Infinity, developed by Sky Mavis, has become a source of income for many.
Microsoft and Facebook have announced that they are setting up their own approaches to digital worlds, i.e., “metaverses”. It can be assumed that these internet giants will develop a largely centralized, partly closed system, so that value transfers to other digital ecosystems will be made more difficult or even impossible. However, this is diametrically opposed to the philosophy of Web3, which focuses on individuals with clearly defined property rights and freedom of action with the help of blockchain technologies.
It remains exciting to wait for the dawn of the multi-chain world. Once value transfers are seamless across different crypto-universes, this could spur a new wave of adoption, and the NFT and blockchain-based gaming economy, in particular, could receive a further boost. In emerging economies, the employment sector could undergo structural change. Such an interconnected economy could arguably be considered a “meta-metaverse.” What sounds like it is a long way off could become reality quite quickly, i.e., in 2022, especially in certain areas of gaming.
6. Emergence of a multi-chain world
The debate about which smart-contract-enabled blockchain ecosystem will prevail has slowly come to an end in 2021. The prevailing opinion is that we will live in a multi-chain world in which multiple blockchains can transfer information and value between each other. Thus, we will see the ratio between the TVL on Ethereum and the TVL of all blockchains steadily decrease. A year ago, this was 90%. Today, it is only 62%. Nevertheless, it is foreseeable that Bitcoin will remain the number 1 blockchain and Ethereum the number 2 blockchain in 2022. Another relevant development will be rollups (zero-knowledge and optimistic roll-ups) or Layer 2 protocols, which will enter into a competitive relationship with Layer 1 blockchains. They promise lower transaction fees and faster transactions while leveraging the security of the underlying base layer. In addition, interoperability between different blockchain ecosystems through bridges and cross-chain protocols is also being worked on diligently. Last but not least, with Polkadot and the Cosmos Inter-Blockchain Communication Protocol (IBC), there are efforts to establish a kind of Layer-0, which is a network of different blockchains capable of communicating with each other.
What is interesting and important here is that all these solutions are public blockchain solutions. Closed Blockchain infrastructures, which were expected to find application in an enterprise context just a few years ago (enterprise blockchains or permissioned blockchains) and to which significant importance had been attached, are playing a lesser role. This primarily affects platforms such as Hyperledger or R3 Corda. Of course, there will be applications developed on these access-restricted infrastructures. But it is already clear that public blockchains have won the race. This can be determined by metrics such as transaction throughput, transaction volume, market capitalization (of mapped assets), or even developer activity.
7. More legal clarity through regulation and through prohibitions
In 2022 many countries are expected to make a statement on how they will handle crypto assets. Whether they will tighten restrictions and introduce bans, like China, or whether they will take a crypto-friendly approach as seen in El Salvador which adopted Bitcoin as an official currency alongside the U.S. dollar in September 2021. Regulators will focus on issues such as AML, KYC, taxes, and stablecoins, and will explore the viability of DeFi regulation in exchanges with regulators from other jurisdictions. It is also worth mentioning that soon the Markets-in-Crypto Assets (MiCA) regulation will also come into effect, which will provide a unified legal framework at the European Union level and create more legal clarity for service providers and issuers of crypto assets. With this, it can be assumed that Europe and North America are heading down the fundamentally “crypto-friendly” path. Decentralized protocols such as Bitcoin and Ethereum will be tolerated, provided that rules such as money laundering prevention, identification of transaction partners, and taxes are observed.
8. The digital euro will still not exist as a large-scale stablecoin
The digital euro can theoretically exist as a central bank digital currency (CBDC), as a trigger solution, or as a stablecoin. However, the European Central Bank (ECB) is not expected to issue a CBDC until 2026 at the earliest. CBDCs already exist in smaller countries such as the Bahamas or Nigeria. As a trigger solution, the digital euro will already exist this year for the first European commercial banks and will be made available for the industry and the financial sector. However, the initiative of commercial banks is crucial here because this type of digital euro virtually does not require the involvement of the ECB. The digital euro in the form of a stablecoin will still only exist as pilot projects in 2022. Significant volumes as with U.S. dollar stablecoins are not to be expected for euro stablecoins. The reasons for this are, on the one hand, that stablecoins are not interest-bearing and at the same time issuers would have to pay negative interest to the ECB. On the other hand, with MiCA regulation coming into force, financial regulators are expected to pay special attention to stablecoins and enforce strict requirements. Against this background, the significant further growth of U.S. dollar stablecoins is very likely. Consequently, this means a continuation of the “dollarization” of the crypto asset market.
9. Adoption by institutional investors and large corporations is progressing
Institutional investors and large companies have also made their interest in digital assets known over the course of the past year. These include hedge funds, asset managers, and family offices, but also pension funds or institutions such as the Sparkasse or Raiffeisen-Volksbank. In the wake of above-average inflation rates, a persistently low-interest rate environment, further fields of application and the consequent increase in demand, major banks such as JP Morgan or Goldman Sachs are beginning to develop a range of offerings around crypto investments. Tech companies such as Microstrategy and Tesla hold billions of dollars in Bitcoins to combat the expansion of the money supply, which has already led to relatively high inflation over the past year.
With regard to the adoption of large companies, Zuckerberg’s Meta even goes one step further by declaring itself one of the future key players of the metaverse. Furthermore, we will see increased M&A activity. For example, PayPal has acquired the startup Curv (custody and IT security technology in the field of crypto assets) and Coinbase has acquired the company Unbound Security (custody technology and focus on cryptography).
10. DAOs open up new ways of social and economic coordination
Decentralized Autonomous Organizations (DAOs) are blockchain-based, decentralized organizations that are collectively owned and managed by their members according to pre-defined rules via voting using tokens. These create exciting use cases, such as crowdfunding, social clubs, human resources, or collective investment projects. According to Consensys, there is $14 billion USD in the treasuries of the top 20 DAOs, trending upward. Examples of DAOs include Syndicate, MakerDAO, ClimateDAO, and ConstitutionDAO. In 2022, countless new DAOs will emerge. Conceivably, DAO builder tools enable anyone to create a DAO for any purpose. DAOs will also scale primarily if questions about the extent to which DAOs are affected by existing regulations and in which jurisdictions they have to answer in case of doubt can be clarified.
The metrics listed in the article are largely based on data available to the authors at the time of writing. Further, this article should not be considered investment advice, nor a solicitation to buy or sell any particular crypto asset. It does not constitute financial advice. As always, “do your own research” (DYOR) applies.
About the authors
Prof. Dr. Philipp Sandner founded the Frankfurt School Blockchain Center (FSBC). From 2018 to 2021, he was named one of the “Top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ). In addition, he was among the “Top 40 under 40” – a ranking by the business magazine Capital. Since 2017, he has been a member of the FinTech Council of the German Federal Ministry of Finance. He is also on the board of FiveT Fintech Fund, 21E6 Capital and Blockchain Founders Group – companies active in venture capital for blockchain startups and asset management of crypto assets.
Jong-Chan Chung is a research associate at the Frankfurt School Blockchain Center and a venture developer at Blockchain Founders Group (BFG). His areas of interest include applications of blockchain and DLT systems and decentralized finance. He holds a double master’s degree in Public Policy from the Hertie School and the University of Tokyo. You can contact him via email ([email protected]) or on LinkedIn.