2022 Blockchain Industry Trend Analysis

The year 2021 was an extraordinary year for the blockchain industry. The market capitalization of cryptocurrencies surpassed $3 trillion, NFT trading volume exceeded $23 billion, the United States launched its first Bitcoin futures ETF, El Salvador adopted Bitcoin as legal tender, Ethereum changed its fee mechanism, and the total locked value of DeFi, (TVL), broke through $200 billion, a year-on-year increase of 7 times. Many new public chains emerged, and the number of blockchain wallet users increased to 70 million.

Recently, cryptocurrencies have been used as an alternative for cross-border remittances. After the outbreak of the war in Ukraine, the crypto market briefly fell but has since rebounded. The Ukrainian military continues to receive crypto donations. During the Canadian truck driver protests, after traditional crowdfunding channels were shut down, protesters also received crypto donations. In the future, people may use cryptocurrencies more for charitable donations.

The increase in cryptocurrency adoption benefits the development of various fields within the Blockchain ecosystem, including infrastructure improvements, application development, mainstream programming language adoption, as well as an increase in regulation and institutional adoption. The following analyzes the major trends in the Blockchain industry for 2022.

Improvement of Blockchain Infrastructure

In 2022, with the launch of new Layer 1 public chains, as well as improvements in consensus mechanisms, transaction costs, transaction speeds, and token economics, it is expected that Blockchain infrastructure will further develop. At the same time, Layer 2 solutions are also expected to make progress, enhancing the scalability of existing L1s, focusing more on the development of cross-chain bridges, simplifying users' cross-chain operations, and achieving multi-chain interoperability. The emphasis on scalability will determine the winners among L1 and L2 solutions.

1. The rise of multi-chain interoperability solutions

In 2021, multiple L1 and L2 solutions emerged, and the demand for cross-chain liquidity became a bottleneck for the large-scale adoption of Blockchain, but it also provided important development opportunities.

From 2017 to 2021, several L1 and L2 solutions aimed at increasing transaction speed and reducing costs emerged one after another, including Polygon, Avalanche, Optimism, Terra, and Solana. These public blockchains attract developers to build various applications using smart contracts.

In order to leverage the unique advantages of different blockchains, such as low transaction costs and high speed, and to optimize investment returns, cross-chain transfer capabilities have become crucial.

Currently, a trend is that DEX aggregators ( like Paraswap ) are starting to integrate with cross-chain bridges, allowing users to exchange tokens not only on the same public chain but also supporting cross-chain token exchanges. For applications that are not deployed on multiple chains, there are also some cross-chain solutions available to address these issues, such as Symbiosis Finance, Multichain, or Atlasdex. Multichain is a cross-chain token transfer protocol that has attracted over $7.7 billion in total locked value across multiple public chains, facilitating cross-chain transfers and local exchanges.

Some well-known DeFi applications such as Aave, Curve, and Uniswap were initially deployed only on Ethereum, but have now expanded to multiple public chains. This means that users can use these applications without having to transfer assets between different public chains.

2. Improvement of DEX user experience and capital allocation efficiency

In 2022, the decentralized exchange (DEX) will improve in terms of usability and capital efficiency.

The underlying algorithm of the DEX will become more complex. Uniswap follows a simple x * y = k pricing formula, which, although easy to understand, has a significant price impact on trading similar assets, resulting in slippage loss.

Many new DEXs have improved the algorithms, making them more complex yet more efficient, such as:

• Curve: Stablecoin Trading Optimization
• Balancer: Multi-Asset Liquidity Pool
• Bancor: Unilateral Liquidity
• dYdX: Perpetual Contract Trading

These algorithms aim to reduce the price impact of transactions, making the prices of small transactions more stable, and allowing the creation of smaller liquidity pools.

Many DEXs have also adopted an order book model. Uniswap v3 transforms the classic AMM model into a model closer to an order book, allowing liquidity providers to restrict liquidity within a specific price range.

dYdX is a new type of DEX that adopts an order book model, and its TVL is rapidly growing. In November 2021, it reached $1.1 billion, and the trading volume is approaching Uniswap levels. However, Uniswap's revenue is still much higher than that of dYdX. More DEXs may follow this model.

To improve user experience, there are other improvements in the DEX field, such as unilateral liquidity deployment, impermanent loss insurance, batch processing and net settlement of transactions, limit orders, leveraged trading, and the adoption of L2 solutions.

( 3. The adoption of DeFi on L2 is increasing

As of the end of 2021, DeFi locked assets exceeded $241 billion. Lending protocols like MakerDAO, Aave, Curve, and Anchor Protocol are in the lead, accounting for about 25% of the TVL. DEXs such as Uniswap, PancakeSwap, Spookyswap, and Serum generated $13 billion in TVL.

In addition to the rapid growth of L1 public chain TVL, driven by high-yield mining, the TVL of L2 solutions also significantly increased in the first half of 2021, with Polygon soaring from 100 million USD to a peak of 8 billion USD. L2 solutions such as Arbitrum and Optimism were launched in the second half of 2021, gaining widespread attention from DeFi participants and developers.

As more and more participants enter the crypto world and develop new applications, the DeFi sector has become crowded, leading to increased transaction costs and slower speeds. As the number of participants increases, these issues will continue to worsen, major L1 public chains will quickly saturate, and gas fees will rise.

The high volatility and delays in gas fees will lead to transaction slippage, which will become a persistent challenge for Ethereum, prompting more and more assets to migrate to different layers.

The emergence of L2 solutions and sidechains not only improves transaction speed but also saves gas fees, leading to a stronger development in the DeFi sector. It is expected that more DeFi applications will adopt L2 solutions in 2022. The increase in TVL of L2 solutions ) such as Arbitrum, Optimism, and Boba ### proves that the community has begun to accept rollup technology.

With the increase in transaction speed, reduction in fees, and innovations such as Optimism V2, the process of deploying L1 smart contracts to L2 will be simplified. Therefore, it can be expected that in the near future, all major tokens will launch L2 versions, and cross-chain bridges will ensure that they can flow efficiently between different layers.

In addition to the major development of blockchain infrastructure, multiple blockchain applications experienced significant prosperity in 2021 and will continue to grow in 2022. The following will elaborate on these applications.

( 4. "NFT-Fi" will define 2022

The NFT trading volume across multiple platforms has exceeded $23 billion, with OpenSea holding a leading position. In the third quarter of 2021, the NFT trading volume surpassed $10 billion, accounting for about half of the total annual trading volume.

NFT lending/collateral technology will dominate the field and compete with the token exchange market. In 2021, NFTs entered the public eye, having a significant impact on the art world and gaining mainstream recognition. This trend may continue in 2022. Platforms like Swap.Kiwi allow direct exchanges of NFTs with others in a custodial account. NFTs can not only tokenize assets but also tokenize positions. For example, large institutions can create tokens for their existing positions in liquidity pools, allowing for swaps without the need to close the position first, and then trade these assets. Additionally, platforms like Taker Protocol allow users to borrow against NFTs as collateral, providing liquidity for NFT holders.

In 2021, 75% of NFT transactions were conducted on Ethereum. In 2022, NFT transactions may shift to other L1 and L2 public chains, including Ronin, Flow, Immutable, and Solana. Multi-chain solutions supporting cross-chain transfer of NFTs will redefine the field. Since Solana and its NFT market launched in the second half of 2021, the total transaction volume of NFTs on Solana has exceeded $1.3 billion, with SolanArt leading the way. Meanwhile, Polygon has completed over $480 million in NFT transactions, with $413 million coming from OpenSea, largely thanks to users being able to publish NFTs directly on Polygon through 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:

• The liquidity provider positions in Uniswap V3 are represented by NFTs.
• Ubisoft Quartz allows the purchase of scarce digital products using cryptocurrency.
• The University of California, Berkeley auctioned two Nobel Prize invention patents as NFTs.
• NFT as a ticket to participate in exclusive events
• Artists sell music streaming rights to fans and allow fans to share royalties.

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( 5. Strengthen focus on security

In 2021, a total of $14 billion worth of cryptocurrency was stolen, setting a new historical record. DeFi platforms accounted for $2.2 billion of that theft. These figures are concerning and may hinder institutional participation in on-chain protocols.

Centralized exchange Crypto.com and the cross-chain protocol Wormhole have both become the latest targets of hackers. According to Crypto.com, approximately $30 million worth of Bitcoin and Ethereum was stolen on January 17, 2022, affecting around 500 user accounts. The Wormhole protocol was attacked on February 2, 2022, resulting in a loss of approximately $320 million. These incidents indicate that digital asset platforms have a lot of work to do before being more widely adopted.

Due to the open-source nature of crypto projects, white-hat hackers will play an important role in safeguarding the ecosystem. At the ETHDenver 2022 conference, white-hat hacker Jay Freeman discovered a critical vulnerability in the code of the L2 solution Optimism. He emphasized the importance of bug bounties in incentivizing white-hat hackers and deterring malicious hackers, which helps enhance the overall security of the system. White-hat hackers actively participate in finding vulnerabilities, openly contact teams, or attack platforms and return funds. In the $600 million hacking incident of Poly Network in August 2021, white-hat hackers returned the funds to the project team and subsequently accepted a job offered by the project.

With the popularity of cryptocurrencies, scams are inevitable. For example, some Bored Ape Yacht Club )BAYC### holders were deceived into selling their NFTs at a low price, making it crucial to strengthen user education on cybersecurity and Blockchain operational safety.

As more funds are deployed to DeFi protocols, security audits must be taken seriously. With more DeFi innovations emerging, more vulnerabilities will be discovered, which in turn will drive innovation in security. As regulatory requirements 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 $260 million in impermanent loss, resulting in a net loss of $60 million, which accounted for 30% of commission income. Finding solutions for the huge impermanent loss due to token volatility ) will be a focus in 2022. Managing LP positions in Uniswap V3 is much more complex than in V2, as the algorithm adjusts the liquidity range based on various on-chain and off-chain data points. The demand for precise indexing protocols will also increase. Oracle protocols like Chainlink will see more usage and face more competition. More solutions will be established to reduce impermanent loss.

Although NFTs and the metaverse received a lot of attention in 2021, by 2022, interest in new protocols in the DeFi space will be reignited. More traditional financial applications, such as interest rate swaps, futures, hedge funds, and insurance will be launched on the Blockchain. Brand new protocols will also emerge.

Many new projects will draw inspiration from Curve's token economics and how it has helped protocols like Convex and Votium evolve. Curve's token economics allows users to vote on which pool receives CRV rewards ### interest (.

According to the current usage trend