DeFi and Blockchain Trends to Watch in 2022
DeFi and blockchain technology had another bumper year in 2021, and 2022 is shaping up to deliver more of the same. It’s worth noting that while both receive outsized attention in the media, blockchain technology and in particular, DeFi, are still relatively nascent. If you’re not yet caught up, DeFi, or decentralised finance, refers to financial products like collateralized loans and derivatives that are offered via decentralised blockchain technology rather than the traditional, centralised systems of banks and exchanges. Here are the DeFi and blockchain trends to watch to ensure you stay abreast of what’s happening in this fast-moving space.
Decentralised Autonomous Organisations have a long and colourful history in the world of blockchain, the first emerging in 2016 following in the wake of Ethereum’s 2015 launch. A DAO is much like a corporate governance structure, albeit managed in decentralised fashion using blockchain technology and largely without the oversight of government regulation (for now). DAOs function by allowing holders of its tokens to vote on how funds within the DAO are directed.
2021 saw some big moves in the DAO space. Wyoming became the first state to formally recognise DAOs, granting them the same legal status as limited liability companies. ConstitutionDAO raised over $43 million to purchase an original copy of the American constitution at Sothebys. The DAO was outbid by billionaire hedge fund manager, Ken Griffin, but this episode clearly demonstrated the ability of DAOs to rapidly raise and deploy capital for a given purpose.
We can expect DAOs to soar to new highs in 2022, with many DeFi protocols now using DAOs to govern their future. Meanwhile, a host of new NFT DAOs are emerging to support collective investment in NFT art. Those looking to direct the future of DeFi or invest in a protocol’s future might consider investing in DAO tokens like Maker, UNI, AAVE or BitDAO. More interested in NFT art? Look into FingerprintsDAO, SquiggleDAO, and FlamingoDAO. Ownership of these DAO tokens will give the holder voting rights in the DAO.
An NFT, or non-fungible token, is a unique blockchain record managing ownership of a particular digital product like a piece of art and is sometimes also linked to a physical representation. 2021 saw an incredible boom in visual arts NFTs and this has been a serious boon for digital artists. The refrain of digital artists not being able to get a break in the pre-NFT, infinitely copyable world of digital art has been rapidly changed by NFT tech that makes these digital goods uniquely ownable and tradeable.
While NFTs for visual arts have been around in their current form since 2017 (with many early, archaic renditions that predate even this) music is emerging as another hot NFT phenomenon to watch. Artists like 3lau, Nas and Mike Shinoda have all launched music NFT projects in recent months to high acclaim. Expect more established musicians to follow in their wake as the major record labels seek to wade into the NFT space.
Existing major NFT marketplaces are not currently well placed for this new world of music-on-blockchain as their browsing experience and product offering is optimised for visual arts, not music. As such, we are beginning to see a new breed of NFT platforms emerge to service this space, like Catalog, Zora and Sound.xyz. Another such platform is TokenTraxx, which is introducing a marketplace and mint platform for music NFTs this year. TokenTraxx’s deep relationships with the major record labels and its team of music industry personalities mean that it is well-placed to capitalise on this trend.
Layer 2 Blockchains
A layer 1 blockchain is an independent, standalone blockchain in the vein of Bitcoin, Etherem or Solana. All of these face the blockchain trilemma, that a blockchain can only effectively deliver 2 of 3 qualities: security, decentralisation and scalability. Most early blockchains, such as Bitcoin and Ethereum, value security and decentralisation over scalability. More recent blockchains like Solana sacrifice decentralisation for scalability.
The new, faster L1 blockchains that sacrifice decentralisation for speed will have their work cut out for them to compete against L1 heavyweights Bitcoin and Ethereum, however, because a new breed of so-called layer 2 blockchains have emerged to vastly increase their scalability and speed. A layer 2 blockchain acts in conjunction with a layer 1 chain by allowing transactions to take place much more cheaply and quickly on the layer 2, with an update to the underlying L1 happening at some time in future. The L1 becomes a sort of slow, expensive but incredibly reliable settlement layer, with the L2 providing the speed and low expense required of a blockchain fit for consumers.
With Ethereum fees regularly hitting new highs and L2 solutions beginning to hit their stride, the stage has been set for Arbitrum, Optimism and other L2 solutions to take off in 2022. Rumours abound that these L2 solutions will be offering their own tokens to help support their development and let investors gain exposure to them.
It certainly causes concern when adverts for shady altcoins appear on public transport in major cities across the world. Many activities that have been illegal in public equity markets for decades, such as wash trades, pump-and-dumps schemes, and unqualified advertisement of high-risk investments, have yet to be regulated in the realm of DeFi and blockchain. Regulators the world over are looking to get a handle on this and 2022 may be the year when we see firm guidance come from the USA’s SEC, Britain’s FCA and other regulators on how financial regulation applies to blockchain.
Garry Gensler, chair of the SEC, has stated that while he has no plans to criminalise crypto, regulation is coming and that crypto markets “need more investor protection.”
Enforcement will doubtlessly become more robust and increasingly invasive scrutiny of blockchain participants can be expected. Blockfi’s $100m settlement with US regulators, the SEC’s first enforcement action against a crypto lender, will not be the last such action we see this year.
Stablecoins, privacy coins and DeFi products are the strongest candidates to find themselves within regulators’ crosshairs. Stablecoins are attracting attention because of the risk of them not being properly backed by liquid assets, or the risk of an algorithmic peg breaking. Privacy coins that mask the addresses of senders and recipients in financial transactions are a natural haven for criminals, making them a top regulatory target. With DeFi, the regulatory concern is that most investors are not sophisticated or tech-savvy enough to understand if promised returns are possible, and many DeFi protocols are not as decentralised as one might imagine, making them open to abuse by a bad actor.
While no one can tell for certain what 2022 will bring, it’s likely that DeFi and blockchain will continue to evolve at a breathtaking pace. The market remains young but rapidly growing, and as many millions of new users are on-boarded to DeFi and blockchain by new product offerings from major tech companies like Coinbase and Meta in 2022, this is a space that can be expected to continue to boom.