2021 was an amazing year for crypto. The total market capitalization grew more than 190% year-to-date reaching a high of $3T in November. The covid outbreak, stay at home policies and the FED printing fueled a truly awesome bull run. Weâre straying further away from the old conceptual thought, of all âcrypto are nothing but currenciesâ. The institutional buying finally happened - we needed someone to buy our bags. The China crypto mining ban and BTCâs energy consumption FUD were not enough to stop all majors from hitting new ATH over and over again this year. All in all, it felt like an up-only summer season that lasted all year long. But after every summer, a winter must be followed with its somewhat gloomier days.
Figure 1 - Returns of all majors during 2021. TradFi believes in mean-reversion and so do we, TheBlock
Letâs be real, we are not early anymore. Itâs rather easy to debunk any contradictory claim - look around yourself and find me any person who hasnât heard of Bitcoin or crypto - well, you canât. The usefulness of crypto to the layman is slowly getting built, but this new technology is on everyoneâs radar. Expecting the past performance seen on all majors to be representative of future returns is a bet against tail events - and thatâs something no one should do. The mainstreaminization of crypto is dampening its volatility, no abrupt moves will become the new reality. ETFs, ETPs, physically settled futures, options, legal tender status, regulation & taxation are the main contributors. ESG concerns for POW tokens will continue to make headlines in 2022 but will remain as unresolved and unattended as the likes seen on the industrial setor.
The good âol shiny, not so shiny, digital scarce pet rock called Bitcoin saw nearly 2% of its total circulating supply wrapped on Ethereum, a growth of 100% from the year before. DeFi composability became a reality and now everyone wants to own productive assets. This strong narrative coupled with the ever-increasing transaction fees pave the escape route for BTC holders. This ecosystem migration will be hard felt and reflected on the price ratio of Bitcoin and Ethereum. Entering - The Flippening
This next year might be the year we see the moment that Ethereum overthrows Bitcoin as the biggest cryptocurrency. The Ethereumâs expected move from Proof-of-Work to Proof-of-Stake can be the rippling effect needed to double its market capitalization and achieve the #1 spot. Now thereâs currencies, fat protocols, DeFi apps, distributed computing platforms, NFTs, work-to-earn markets... why evangelize the oldest where there are several new kids in town? The future is multi-chain and interoperable.
Alternative Layer-1s were the main event of 2021. This new wave of altcoin surgence enjoyed billions of fresh capital inflows to scoop all the liquidity mining programs. Ethereum Virtual Machine compatibility became the standard and MEV the new cool acronym. All thanks to the OG smart contract platform.
It has become clear that Ethereum is developing a modular design architecture whilst remaining the backbone of the infrastructure**.** The properties that make a blockchain âa blockchainâ are being differentiated and compartmentalized in order to allow each to become individually maximized. Itâs a work in progress though.
$$ \textrm{EVM} \Leftrightarrow \textrm{Ethereum} $$
Monolithic blockchains are a thing from the past. Ethereum is a bundle of computations, proofs and data storage - sure itâs a Swiss Army knife, you can play and build all you want but its dull points and butter sharpness make it not good enough. Gas fees in the hundreds is troublesome to say the least. Isnât DeFi supposed to bank the unbanked? Insât the Internet of Money supposed to cost less than 5 cents?
Chain agnosticism is the perfect approach. The future needs to have more application-specific blockchains with good means of communication. Rollups are key. Scalability through mass transfer processing rolled into a single transaction is how DeFi and web3 give the next step. Even the ultra super hyper mega fast blockchains with incredibly high throughput and low latency will inevitably suffer bottlenecks - yes Solana, Iâm talking to you. But fret not, it will also have its own rollups, so moon landing is not yet cancelled.
Figure 2 - The trade-offs between three important DLT properties: decentralization, scalability, and security.