13 January 2022

Crypto Industry Outlook for 20227 min read

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Kicking off 2022, the Crypto Industry Report is taking a different approach for once. While the report normally looks at what has happened and what topics need to be given a special focus, this report engages in some fortune telling by giving an outlook of what might be coming this year. 

Based on how the experts at Bank Frick think the blockchain and crypto asset market is going to develop in 2022, they are bold enough to make some predictions. Obviously, these predictions do not constitute investment advice and should be taken for what it’s worth. At the end of 2022, Bank Frick’s blockchain expert team will then review and critically assess their own predictions to see whether they were spot-on, only partly right or completely off the mark.

Resurgence of DeFi?
The race to solve cross-chain interoperability is on
DAOs will keep on populating
Could 2022 be the year of CBDC?

Resurgence of DeFi?

After a meteoric rise in the summer of 2020, the DeFi sector had to give way to the NFTs and GameFi space that took the spot light in 2021. Also, Ethereum’s EIP-1559 upgrade changed the network’s supply and demand dynamics, implementing a burn mechanism that has hitherto burned almost 1.5 million ether. As predicted, DeFi token within Ethereum’s ecosystem significantly underperformed against ether last year.

For this year, we expect a resurgence of DeFi and its blue-chip tokens. New concepts like protocol owned liquidity – pioneered by protocols like OlympusDAO – will improve upon detrimental liquidity bootstrapping mechanisms like liquidity mining and retroactive airdrops. The developers behind OlympusDAO have just launched a new version of their liquidity bonding that will soon be used by other DeFi protocols through Olympus Pro. This will drive the sustainability of DeFi protocols as they get to manage their own liquidity.

Another puzzle piece that might fall into place in 2022 is decentralised identity. There are several projects working on this and their work might finally pay off. As the scope of on-chain ownership expands, users will increasingly have functional control over their identity and holdings in the digital world. This will also enable more and more verified, provable credit scores on-chain that will accelerate the move toward under-collateralised unsecured loans based on the credit-worthiness of the borrower.

Beyond these internal innovations, the emergence of “Institutional DeFi” will accelerate this year. Initiatives like Aave Arc, Compound Treasury or MetaMask Institutional are leading the way in opening up DeFi access to financial institutions. By making it possible to participate in permissioned lending and borrowing with whitelisted counterparties through “Know your Pool” modules, such endeavours will cater to the need of a financial institution’s more stringent regulatory requirements.

So, given the fact that DeFi is still less than 1% of the global bank’s total market cap, there is still a tremendous growth opportunity that is likely to get another boost this year. 


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The race to solve cross-chain interoperability is on

One of the defining narratives of 2021 was the rotation away from Ethereum to alternative layer 1 blockchains. The high flyers clearly were Solana and Avalanche. As of now, total value locked (TVL) across more than 80 chains is about $250 billion. Although we expect Ethereum 2.0 – that is planned to go live this year – to lower Ethereum’s transaction fees, some alternative layer 1 blockchains will continue to prosper.

With this growing multi-blockchain ecosystem, interoperability is ever more important less all these blockchains will stay siloed. We predict that interoperability will be a defining theme of 2022. As a cornerstone of cross-chain interoperability, various bridges like Avalanche Bridge, Solana’s Wormhole or Near’s Rainbow bridge are emerging. These connecting pieces between different blockchains will help further accelerate the growth of non-Ethereum ecosystems.

Besides bridges, the rise of so-called layer 0 and multichain ecosystems has begun as well. Projects such as Cosmos and Polkadot belong to this category and they have built an architecture that offer interoperability within their own ecosystem. Cosmos’ Inter-Blockchain Communication Protocol (IBC) connects Cosmos ecosystem SDK blockchains with one another, while Polkadot’s Relay Chain allows for communication between its ecosystem parachains.

Yet another approach is built out by Icon with their Blockchain Transmission Protocol (BTP) solution. Compared to other cross-chain interoperability solutions, BTP is touted to be chain-agnostic that will help with ease of integration and scalability. At the same time, BTP is entirely based on smart contracts, which makes into a highly secure and fully decentralised interoperability infrastructure that can easily be adopted by any smart contract based blockchain.

So, with all these different solutions being ready to make public blockchain interoperability a reality, their adoption and usage will most likely increase throughout this year.

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DAOs will keep on populating

2021 has also been a lift-off year for decentralised autonomous organisations, so-called DAOs. As on-chain bank accounts for digital communities, they have proven to be powerful mechanism for capital coordination and deployment. DAOs have also amassed vast amounts of money that they control. Last year, DAO treasuries have surged 40x and the two biggest DAOs (Uniswap and BitDAO) currently hold over $2.5 billion in liquid crypto assets.

This capital will surely have to be deployed somewhere. This is why we expect the DAO landscape to continuously grow in 2022. One area will surely be DAO tooling as this is currently underdeveloped. Better tools will make DAOs more transparent and deliver better decision-making among DAO members that will in turn boost the attractiveness of staring and operating a DAO.

Thus, we expect to see more DAOs emerge within the field of crowdfunding and capital allocation but also around social impact causes. Because DAOs allow for global coordination, they seemed to be suited for global challenges like tackling climate change. Out of this, the next iteration of DAOs we see emerge are quasi-nations. Early-stage examples are CityDAO, Praxis, Kong Land, Cabins, IslandDAO.

As more such initiatives will gain traction in 2022, the relevant question for law makers will be: How will DAOs actually work in the real world from a tax, contract law and compliance standpoint? Various ideas are already floating around that propose to create DAOs as legal entities that are unincorporated non-profit associations with flexible sub-structures. One jurisdiction that has taken a lead on this is Wyoming as they are legally recognising DAOs as a type of limited liability company. We anticipate more jurisdictions to follow over the course of this year.

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Could 2022 be the year of CBDC?

Central bank digital currencies – also called CBDCs – have been in the talks for quite some time. While many central banks around the world are exploring this new form of digital money most endeavours only exist on paper as of yet. It was only at the very end of 2021 that Nigeria has launched its CBDC called eNaira as one of the first countries (besides some Caribbean island nations).

The question is: Is this signalling a turning point? After all, countries like Thailand, Bhutan, Korea and Singapore have all revealed plans to start CBDC pilots during 2022. The beginning of 2022 also marked the launch of China’s CBDC wallet on the Android and Apple app stores. With this step, the PBOC seems to be going into full preparation mode for the Beijing Winter Olympics, which is planned to be the first major event where the digital yuan will be available to the public. This follows extensive field testing with pilots in major Chinese cities that have handled transactions up to $5.34 billion as of June last year.

In addition there is the Central bank of Brazil that is said to start a pilot program of a digital currency this year. No firm date has been announced yet. And Jamaica recently finished its pilot project and is expected to roll out an actual CBDC in the first quarter of this year.

So, while some CBDC are moving from being a pilot into becoming a real-world implementation, things – especially in major economic areas such as the United States or Europe – will continue to move slow. In Great Britain for example, the Bank of England only just revealed plans to launch a consultation to evaluate the case of a CBDC. When it comes to these established economies, actual CBDC implementation is still years away.

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Author(s)

Bank Frick

Bank Frick is a family-run enterprising bank serving intermediaries with a strong expertise in funds and emissions and a focus on blockchain banking.

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