Analysis of Major Trends in the Blockchain Industry in 2022

2021 was a milestone year for the development of the Blockchain industry. The market value of cryptocurrencies surpassed $3 trillion, NFT trading volume exceeded $23 billion, the United States launched its first Bitcoin futures ETF, El Salvador recognized Bitcoin as legal tender, Ethereum changed its fee mechanism, and the total locked value in DeFi reached $200 billion. Several new public chains emerged, and the number of Blockchain wallet users increased to 70 million.

Recently, cryptocurrency has become a new option for cross-border payments. After the outbreak of the Ukraine war, the crypto market initially fell and then rose. The Ukrainian army continues to receive crypto donations. During the protests by truck drivers in Canada, after traditional crowdfunding was blocked, protesters turned to accept crypto donations. In the future, cryptocurrency is expected to become a new channel for charitable donations.

The widespread adoption of cryptocurrencies has driven the development of multiple sectors within the Blockchain ecosystem, including infrastructure improvements, application development, the adoption of mainstream programming languages, and increased regulatory and institutional adoption. This report analyzes the main trends in Blockchain for 2022.

1. The Rise of Multi-Chain Interoperability Solutions

In 2021, multiple Layer 1 and Layer 2 solutions emerged, and the demand for cross-chain liquidity became a bottleneck for the widespread adoption of Blockchain, also bringing important development opportunities.

From 2017 to 2021, several L1 and L2 solutions aimed at increasing transaction speed and reducing costs were launched, such as Polygon, Avalanche, Optimism, Terra, and Solana. These blockchains have attracted developers to build financial applications and games, among others.

To leverage the characteristics of different Blockchains and maximize investment returns, cross-chain transfer capability has become crucial.

Currently, DEX aggregators such as Paraswap have started to integrate with cross-chain bridges, allowing users to swap tokens across chains. For applications not deployed on multiple chains, cross-chain solutions like Symbiosis Finance and Multichain can address these issues. Multichain is a cross-chain token transfer protocol that has attracted over $7.7 billion in total locked value, facilitating cross-chain transfers and local swaps.

Some well-known DeFi applications such as Aave, Curve, and Uniswap were initially deployed only on Ethereum and are now deployed on multiple chains. Users can use these applications without needing to transfer assets cross-chain.

2. Improvement of DEX User Experience and Capital Allocation Efficiency

In 2022, the decentralized exchange (DEX) will see improvements in usability and capital efficiency.

The underlying algorithm of DEX will become more complex. Uniswap uses a simple x * y = k pricing algorithm. This has a significant price impact on trading similar assets, leading to losses.

Many new DEXs have improved algorithms, such as:

• Curve: Use special algorithms to reduce slippage
• Balancer: allows multi-asset pools and custom weights
• Dodo: Using active market maker ( PMM ) algorithm

These algorithms reduce the price impact of transactions, allowing for the creation of smaller liquidity pools.

Many DEXs use an order book model. Uniswap v3 allows liquidity providers to restrict liquidity within a specific price range.

dYdX is a new type of DEX that uses an order book model, and its TVL and trading volume have rapidly increased. Sushiswap plans to launch a similar product, and more DEXs may follow suit.

There are other improvements in the DEX field, such as unilateral liquidity deployment, impermanent loss insurance, batch processing and trading net amounts, limit orders, leveraged trading, and the adoption of L2 solutions.

3. Increased Adoption of DeFi on L2

As of the end of 2021, the total locked value in DeFi exceeded $241 billion. Lending protocols such as MakerDAO, Aave, Curve, and Anchor Protocol accounted for about 25% of the total locked value. DEXs like Uniswap and PancakeSwap created $13 billion in TVL.

In addition to L1 public chains, the TVL of L2 solutions has also seen significant growth, with Polygon's TVL reaching as high as 8 billion USD. L2 solutions such as Arbitrum and Optimism were launched in the second half of 2021, attracting the attention of DeFi participants and developers.

As the number of participants increases, the DeFi space becomes crowded, leading to higher transaction costs and lower speeds. These issues will continue to worsen, with major L1 public chains quickly becoming saturated and gas fees rising.

High volatility and delays in Gas fees will lead to slippage in transactions, which is Ethereum's eternal dilemma, hence more and more assets are being transferred to different layers.

L2 solutions and sidechains improve transaction speed and reduce gas fees, leading to stronger DeFi development. In 2022, more DeFi applications are expected to adopt L2 solutions. The increase in L2 solutions' TVL proves that the community is starting to accept rollups.

With the improvement of transaction speed, reduction of fees, and innovations like Optimism V2, the process of deploying L1 smart contracts to L2 will be simplified. In the future, major tokens will launch L2 versions, and bridges will ensure they can move between different layers.

4. "NFT-Fi" will define 2022

In 2021, the NFT trading volume exceeded $23 billion, with OpenSea dominating the market. In the third quarter, the NFT trading volume surpassed $10 billion, accounting for nearly half of the annual total.

In 2022, NFT lending/collateralization technology will dominate the sector, competing with the token exchange market. NFTs entered the public eye in 2021, having a significant impact on the art world and gaining mainstream recognition. This trend may continue into 2022. Platforms like Swap.Kiwi allow direct exchanges of NFTs in custodial accounts. NFTs can not only represent tokenized assets but also tokenized positions. Large institutions can create tokens from existing positions in liquidity pools without needing to close them first, allowing for the exchange and subsequent trading of these assets. Protocols like Taker Protocol allow users to use NFTs as collateral for loans, providing liquidity to NFT holders.

In 2021, 75% of NFT transactions took place on Ethereum. In 2022, NFT transactions may shift to other L1 and L2 chains, including Ronin, Flow, Immutable, and Solana. Multi-chain solutions that allow cross-chain transfer of NFTs will redefine the space. The total transaction volume of Solana NFTs has exceeded $1.3 billion, with SolanArt leading the way. Polygon has completed over $480 million in NFT transactions, of which $413 million came from OpenSea.

The application of NFTs in games will be another focus. The trading of in-game items will give rise to various business models, such as on-chain analysis that emphasizes item performance, scarcity, and utility.

Some examples of NFT applications in DeFi include:

• In Uniswap V3, liquidity provider positions are represented by NFTs.
• Ubisoft Quartz allows the purchase of scarce digital products with cryptocurrency.
• University of California, Berkeley auctions Nobel Prize invention patent NFT
• NFT as a ticket to participate in exclusive events
• Artists sell music streaming rights to fans

5. Strengthen focus on security

In 2021, approximately $14 billion worth of cryptocurrency was stolen, setting a new historical record. A total of $2.2 billion was stolen from DeFi platforms. This may deter institutions from participating in on-chain protocols.

Crypto.com and the Wormhole protocol were recently attacked by hackers. Approximately $30 million worth of Bitcoin and Ethereum was stolen from Crypto.com, affecting 500 user accounts. The Wormhole protocol suffered a loss of about $320 million. This indicates that digital asset platforms need to improve before widespread adoption.

White hat hackers will play an important role in protecting the ecosystem. Jay Freeman discovered a critical vulnerability in the Optimism code at the ETHDenver 2022 conference, emphasizing the importance of vulnerability rewards. White hat hackers actively search for vulnerabilities, openly contact teams, or attack platforms and return funds. In the Poly Network $600 million hacking incident, white hat hackers returned the funds to the project team and accepted job offers.

With the popularity of cryptocurrencies, scams are inevitable. Some BAYC holders have been tricked into selling at low prices, making it crucial to strengthen user network security and Blockchain operation security education.

As more funds are deployed to DeFi protocols, security audits must be prioritized. More DeFi innovations will lead to more vulnerabilities being discovered, driving security innovations. As regulations tighten, on-chain security will attract greater attention.

6. Development of Innovative DeFi and Staking Protocols

DeFi

In 2021, Uniswap V3 market makers earned $200 million in commissions but suffered a temporary loss of $260 million, resulting in a net loss of $60 million, which accounted for 30% of commission revenue. Finding solutions to address temporary losses will be a key focus in 2022. Managing LP positions in Univ3 is more complex than in UniV2, as the algorithm will adjust the liquidity range based on on-chain and off-chain data. The demand for precise indexing protocols will increase. Protocols like Chainlink will be used more and face competition. More solutions will be established to reduce temporary losses.

In 2022, the market's interest in new DeFi protocols will be reignited. Traditional financial applications such as interest rate swaps, futures, hedge funds, and insurance will be launched on the Blockchain. New protocols will also emerge.

Many new projects will draw inspiration from Curve's tokenomics and how it helps protocols like Convex and Votium evolve. Curve's tokenomics allows users to vote on which pool receives CRV rewards.

According to current usage trends, the Ethereum mainnet will become more expensive, further raising the usage threshold, making L2 more advantageous for newcomers. Ultimately, only whales and professional traders will be able to use the Ethereum mainnet. New DeFi protocols are also more suited for professional users. Centralized liquidity benefits market makers but is unfriendly to retail investors, as additional trading fees lead to a significant decrease in profits.

Staking

A new liquidity staking protocol will be launched, allowing tokens to be staked across different Blockchains and projects, and then using derivatives of these staked tokens ( called liquidity staking tokens ) to participate in DeFi. These liquidity staking tokens are backed by the currently held and locked tokens.

For example, ETH-merge will use PoS to validate Ethereum transactions. People will start using liquid staking tokens like stETH to continuously earn interest, with the current annualized yield at about 4.4%.

7. The Rise of DAO

Decentralized Autonomous Organization ( DAO ) is similar to traditional organizations, but the difference is that DAO management rules are written and executed by smart contracts, and all transactions are publicly visible on the Blockchain to anyone. DAOs have gained significant attention by financing the purchase of high-value items, such as football and golf clubs, and even the original copy of the U.S. Constitution.

In 2022, DAOs will prove capable of collectively building more business models, such as TreasureDAO. This is a successful NFT marketplace on Arbitrum, focusing on equal distribution of earnings and community ownership. DAO fund management will become increasingly important. BitDAO will transform into Master DAO, building a community and purchasing equity in multiple DAOs around the world. BitDAO collaborates with renowned universities to form eduDAO, promoting research, granting project funding, and developing new products. DAOs will also be used for political donations, with UkraineDAO and Assange DAO receiving significant contributions.

More tech companies will turn to decentralized organizations, including large companies. Companies like Shapeshift have successfully transitioned from centralized entities to decentralized entities, tokenizing shareholder equity and airdropping it to users.

DAOs provide protocols and platforms with rapid fundraising and opportunities, allowing more community members to participate in decision-making. This may prompt new protocols and existing ones to conduct ICOs, such as L2(Boba) and DEX(Sushiswap, Uniswap) to launch tokens.

DAOs face issues such as slow decision-making and poor task management. Service tools related to DAO management will become important, serving as key factors to prevent mismanagement of capital within DAO communities.

8. Large-scale Investment in Decentralized Games/P2E Economy and Metaverse

The three main themes in the gaming field in 2021 are "Play-to-Earn" ( P2E ), and gaming public