2021 was a pivotal year for Digital Assets and the wider Crypto markets, as such I thought in light of recent developments it’d be worthwhile to take a look back over the year past to re-assess our perspectives, show how far the industry has come in such a short span of time, as well as identify some key themes that defined the year and may continue to define the space going forwards.
Bitcoin, Institutional adoption and Retail-pumped Meme coins
Despite recent bearishness across the market, 2021 was nonetheless a stellar year for adoption and investment in Bitcoin. The recent downturn, which arguably began with Bitcoin’s failure to achieve the $100k end-of-year highs predicted by the stock-to-flow model, was then further compounded in the new year with Fed interest rate news, the Kazakhstani Hashrate crash and general January hijincks. $BTC nonetheless had a mammoth past year, achieving almost a 100% return in 2021 compared to Gold’s 2.5%, S&P500’s 26% and NASDAQ’s 31%. Bitcoin hit its all time high (ATH) of $69,000 in early November and continues to be the market leader in cryptocurrencies in terms of total market capitalization. Whether you consider it exciting or not, Bitcoin continues to draw greater attention and credibility to the sector, as the value proposition of a decentralized and deflationary store-of-value makes sense in light of Covid related quantative easing and ‘transitory’ inflation.
Even with the growing institutional engagement in Crypto helping to shift the perception of the sector to a serious one emerging out of its infancy, of course the first thing that comes to many people’s minds when thinking about Crypto in 2021 are smiling dog coins…
Sadly/ funnily enough (depending on your perspective) the most news-worthy crypto phenomena of the past year was the meteoric rise of dog-oriented meme coins, like Dogecoin and Shiba Inu. Both of which went on unprecedented rallies off the back of retail enthusiasm fueled by the likes of Elon Musk and his sporadic tweeting sprees. The single largest pump to date, and some have argued greatest trade of all time, being $SHIB growing over 632,000 times in price this year. Meaning a $100 investment last January would have made you $63 million as of November… However, these type of retail-based price pumping investing crazes were not crypto-specific, but part of a wider cultural phenomena. In which cash-heavy retailers banded together and affected markets through coordinated investment in the like of Gamestop and Robinhood stock in order to pump the price up, but also in a stick-it-to-the-man type defiance of hedge funds who had shorted the dying enterprise.
On the opposite end of the spectrum, 2021 has been a significant year for meaningful institutional adoption of Crypto due to greater access opportunities flourishing alongside larger and larger sums of capital being allocated towards Digital Assets from Investment banks and the likes. This year saw the release of the first US sanctioned Bitcoin ETF, meaning that risk-averse institutions unable to touch the underlying Bitcoin could now access the volatility and price returns in a regulated manner via the ETF. Though its a futures-based ETF and not the spot ETF that has been desired by the community for so long, it still represents a step in the right direction.
2021 saw the regulatory space continue to open up, with more positive conversations occurring but also with some push-back and fervour from senior regulatory chairs in the US such as Gary Gensler and Elizabeth Warren. Despite this, progress is still being made and conversations between regulators and leading names in the crypto industry become increasingly more friendly, as they come to understand this as a technological shift and opportunity for wider development as opposed to a small scale adversarial revolution of fundamentalists and libertarians. Coinbase’s successful IPO and the continued high-end valuations of crypto companies, alongside huge early stage investments from the likes of Goldman Sachs, Citibank, Blackrock and more seems to slowly be shifting attitudes toward Crypto and Blockchain-based assets as a legitimate growth sector.
Validation of Crypto use-cases
Though many who bought into Bitcoin over the last few years are unlikely to be unhappy with their investment, if they’re astute investors looking at the returns of the wider market, they’d likely be surprised and a bit peeved to find that the majority of the top ten cryptocurrencies by market cap (excluding stablecoins) actually outperformed Bitcoin in 2021 by wide margins. This is because 2021 was arguably the first year in the history of Blockchains and Cryptocurrencies where use cases, outside of viewing Bitcoin as digital gold/ inflation hedge, moved beyond proof-of-concept and were validated via functionality and meaningful activity.
So what are these use-cases? Counter to what many would have believed in 2017, the majority of these use-cases that have seen meaningful engagement and activity are not peer-to-peer payment systems or currencies but applications and functions built on Ethereum and other smart contract or Layer 1 (L1) Blockchains. If defined by nothing else, 2021 has been the year for NFT’s, DeFi, Play-to-earn gaming and L1’s. Despite being functional for many years now, Ethereum’s world computer or general purpose blockchain has had to ward off two main criticism. The first being whether it can handle the necessary computational throughput needed to host multiple applications and functions to be a genuine ‘world computer’ and the second being whether the available applications or functionalities will actually be used and draw wider adoption to this new decentralised, permissionless, smart contract-based substructure to the internet.
The year of the NFT?
2021 is the year in which at least the latter of these two concer
ns has been put to rest. NFT’s have reached widespread adoption and have become a cultural phenomena with more than a few jokes being levelled about the ability to right click and save a blow-your-face-off priced JPEG. Visa have bought a Cryptopunk, Adidas have bought a Bored Ape and issued their own NFT’s and NFT’s have become a wider cultural meme, whether they’re properly understood or not. Whilst the scale of adoption and speed of proliferation through society has shocked everyone, fundamentally the value proposition for NFT’s has been around since before 2018. That being that; as we increasingly live out more of our lives online, it makes sense that private property (which is the core foundation of our social contract with one another) is extended to the digital realm. Without it our digital lives will always be at the whim of those that control the platforms, a phenomena that has also continued to draw attention throughout 2021 as those with differing opinions continue to be de-platformed on twitter and Instagram, pointing to the fact that on these platforms we have no ‘right’ to our digital identity.
However, of course this isn’t what made NFT’s infamous or important — it was the laughable amounts people bid and paid for pixelated art and black squares with words on them… While you can certainly make the case for the value proposition of these too, now is not the time.
The rise of Layer 1’s
Alongside NFT’s, 2021 has also seen a continued boom in DeFi on Ethereum and other L1’s as well as the emergence of a budding crypto-gaming or play-to-earn ecosystem on various chains. All these developments wrapped together have led to a rise across the board in valuation, activity/throughput and total value locked (TVL) in smart contracts not only in Ethereum but also spread across the many other L1 blockchains. The fact that the tide rises for all L1’s and not just Ethereum is in part due to the first objection levelled against Ethereum — that it wont be able to scale effectively enough to handle the high computational throughput required to reach mass adoption.
As activity in DeFi and NFT’s exploded on Ethereum so too did the gas fees, which are paid to maintain network security and process transactions. Every time you want to move ETH to a different wallet it requires gas, every time you mint a new NFT you pay gas, every time you want to exchange ETH for another token, that too costs gas! When everything you could do on a chain ends up costing you a sizeable percentage of your portfolio, the chain becomes no longer viable for newcomers with lesser capital and know-how. All this is only intensified and made worse by large spikes in activity triggered by cultural waves like NFT mania and DeFi summer, which push ETH gas prices to ludicrous and unbearable heights.
As a result what we’ve seen over the last year is a proliferation in activity and valuation across a number of different Layer 1 Blockchains. Solana led the rally, with an explosive 100x rise in value that offered the highest year-long return in 2021, followed by other L1’s such as Avalanche, Binance’s BNB chain, Terra (LUNA) as well as Cardano (ADA) all outperforming ETH in yearly % returns. As fee’s continue to proliferate on the Ethereum ecosystem individuals with less capital continue to get priced out and look for alternatives, with projects too looking to capture this flow by offering the same tools and functions on different chains, which is why 2021 saw Solana NFT’s and gaming explode from nothing as well as DeFi across Avalanche and the Binance smart chain too.
Wrapping it up
So what does this mean for the future of Ethereum and other Layer 1’s? Back in 2018 and even more recently, many speculators as well as founders of these alternate L1’s labelled their projects as ‘Ethereum-killers’, as they argued that they’re new and improved smart contract general-purpose blockchain would supersede Ethereum and render it pointless. Well, thats almost certainly not going to be the case. In terms of total value locked (TVL) in smart contracts, Ethereum has roughly $153 Billion TVL at the time of writing. However its not only in terms of capital allocation that it’s significantly ahead but also in terms of brand equity as well as cultural capital and IP — meaning that almost all of the most valuable and sought after NFT art, collectibles, games and artefacts all sit in the Ethereum ecosystem.
Despite this, its become clear that in order for Crypto to successfully scale to reach mass-adoption, a multi-chain future is necessary. One where people can jump seamlessly from a play-to-earn game on Solana to a decentralised social media platform on Ethereum before checking on your APY over an Avalanche-based DeFi protocol without having to pay huge fees and wait minutes for transactions to go through. In the final iteration of ‘Web 3.0’ these moves will be genuinely seamless and all cross-chain bridging, token wraps and transfers will be instantaneously done in the back-end and people will have no idea that’s even happening. However, we’re not there yet. Moving value and assets across chain is arduous and confusing right now, even for those ‘in the know’.
So for the minute different applications, functions and asset types will continue to emerge across different chains and ecosystems in segregated pools until overtime these chains and pools of liquidity are bridged into one wider interconnected system that makes up Web 3.0. However, like what happened with Operating Systems (OS) in the late 90’s/2000’s rather than multiple OS’s surviving and thriving alongside one another, its more likely that as certain chains begin to differentiate themselves and attract developers and projects, all throughput and capital will aggregate and settle on just 3/4 chains. With each likely claiming different segments of the market based on their own specific capabilities and niches, connected via adjoining bridges and Layer 2 solutions that will continue being built to lend towards faster transaction times and greater interoperability.
2021 is just the start of this emerging interconnected digital infrastructure layer that is leading to the creation of Web 3.0 and the first iterations of what the Metaverse could be. There’s still a long way to go and many problems to be solved before we reach anywhere near mass adoption, however I think the future is bright and is likely going to get a whole lot weirder.
