Analysis of Major Trends in the Blockchain Field in 2022

2021 was an important year for Blockchain. The market capitalization of cryptocurrencies surpassed 3 trillion USD, NFT trading volume exceeded 23 billion USD, the US launched its first Bitcoin futures ETF, El Salvador adopted Bitcoin as legal tender, Ethereum changed its fee mechanism, the total value locked in DeFi grew 7 times to over 200 billion USD, new public chains continuously emerged, and the number of Blockchain wallet users increased to 70 million.

Recently, cryptocurrency has become a cross-border payment tool that bypasses regulation. After the outbreak of the Ukraine conflict, although the crypto market was initially hit, it quickly rebounded. The Ukrainian army continues to receive crypto donations. During the Canadian truckers’ protest, after traditional crowdfunding channels were blocked, protesters also received crypto donations. In the future, people may use cryptocurrency more for charitable donations, which is something the traditional financial system cannot achieve.

The widespread adoption of cryptocurrencies has driven the development of various sectors within the Blockchain ecosystem, including infrastructure improvements, application development, a more mainstream adoption of development languages, and an increase in regulatory and institutional adoption. This report analyzes the main trends in Blockchain for the year 2022.

Improvement of Blockchain Infrastructure

In 2022, with the launch of new Layer 1 public chains and improvements in consensus mechanisms, transaction costs, transaction speeds, and token economics, blockchain infrastructure is expected to achieve further development. At the same time, Layer 2 solutions will also make progress, which will further enhance the scalability of existing L1s, with greater focus on the development of cross-chain bridges, making cross-chain transfers more convenient for users, thereby realizing a multi-chain future. The emphasis on scalability, which refers to the ability to process more transactions at a faster speed, will determine the competitive outcomes between L1 and L2 solutions.

1. The rise of multi-chain interoperability solutions

In 2021, multiple L1 public chains and L2 solutions emerged, and the demand for cross-chain liquidity has become a significant bottleneck for the widespread adoption of Blockchain, but this also provides important development opportunities.

Between 2017 and 2021, several L1 and L2 solutions aimed at improving transaction speed and reducing costs emerged one after another, among which the most well-known include Polygon, Avalanche, Optimism, Terra, and Solana. These public blockchains leverage the functionality of smart contracts to attract developers to build various open-source financial applications and games.

To take advantage of the unique benefits of different blockchains, such as transaction costs and waiting times, and to maximize investment returns, cross-chain transfer capability has become crucial.

Currently, the trend of DEX aggregators like Paraswap integrating with cross-chain bridges is on the rise, allowing users not only to swap tokens on the same chain but also to exchange tokens across chains. For applications not deployed on multiple chains, some cross-chain solutions can 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 chains, facilitating cross-chain transfers and local exchanges.

Some of the most well-known DeFi applications, such as Aave, Curve, and Uniswap, were initially deployed only on Ethereum, but are now deployed on multiple chains. This means users can interact with specific applications without having to move liquidity across different chains.

( 2. Improvement of DEX user experience and capital allocation efficiency

This year, the user experience of 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 pricing algorithm x * y = k( constant product formula ). Here, x and y are the respective quantities of the two tokens that make up the liquidity pool. While this is easy to understand, it has a significant price impact on trading similar assets, leading to losses.

Many new DEXs have improved algorithms/curves, making them more complex but also more efficient. Some notable examples include:

• Curve: AMM optimized for stablecoin trading
• Balancer: Allows multi-asset pools and custom weights for AMM
• Bancor: One-sided liquidity AMM, with impermanent loss protection.

These algorithms seek to reduce the price impact of transactions, meaning that when a user exchanges one token for another, the value fluctuations of Token X relative to Token Y are smaller. These new conversion algorithms allow the prices of small transactions to remain at a more stable level around 1, ensuring minimal price impact while allowing the creation of smaller liquidity pools.

Many DEXs have adopted an order book model. Uniswap v3 has transformed the classic automated market maker (AMM) model into a model that is closer to an order book, allowing liquidity providers to restrict their liquidity within a specific price range. This is called concentrated liquidity.

dYdX is a new type of DEX that adopts an order book model. The total locked value of dYdX ( TVL ) is rising rapidly (, reaching $1.1 billion in November 2021 ), and the trading volume is approaching the level of Uniswap (. Uniswap’s daily trading volume is about $1.3 billion, while dYdX’s daily trading volume is about $950 million ). However, Uniswap’s revenue is still far higher than that of dYdX, with a peak intraday revenue of $17.7 million, while dYdX’s peak intraday revenue is only $6.8 million. A certain DEX plans to launch a similar product in the future, and more DEXs are likely to follow suit.

To improve user experience, the DEX field has also made some other improvements, such as unilateral liquidity deployment, impermanent loss insurance, batching and trading net amounts, limit orders, leveraged trading, and the adoption of L2 solutions.

( 3. L2 DeFi adoption increases

As of December 31, 2021, the assets of various decentralized applications )dApp( have exceeded $241 billion. Lending protocols such as MakerDAO, Aave, Curve, and Anchor Protocol lead the way, accounting for about 25% of the total locked value )TVL###. As of December 31, 2021, decentralized exchanges also created $13 billion in TVL.

In addition to the rapid growth of TVL in L1 public chains, thanks to the high yields of liquidity mining, the TVL of L2 solutions has also increased significantly since the first half of 2021, with Polygon being the standout, as its TVL quickly rose from 100 million USD to a peak of 8 billion USD. Arbitrum, Optimism, and more L2 solutions were launched in the second half of 2021, attracting significant attention from DeFi participants and the developer community.

As more and more market participants enter the world of digital assets and engage in the development of new applications, the DeFi space is rapidly becoming crowded, leading to increased transaction costs and reduced transaction speeds. As the number of participants in the Blockchain continues to grow, these issues will only worsen, and major L1 public chains will quickly become saturated. Therefore, the gas fees for most L1 public chains will rise.

The high volatility and delays of gas fees will lead to transaction slippage, which will also become an eternal problem for Ethereum; therefore, more and more people are transferring large amounts of assets to different layers.

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

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 fully believed that in the near future, all major tokens will launch L2 versions, and bridging will ensure that they can effectively move between different layers.

In addition to the main development of blockchain infrastructure, multiple blockchain applications also showed tremendous 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 one trading platform taking the lead. In the third quarter of 2021, the trading volume of NFTs surpassed $10 billion, accounting for nearly half of the total NFT trading volume in 2021.

Lending/collateral NFT technology will dominate this field and compete with the token exchange market. In 2021, NFTs entered the public eye and had a significant impact on the art world, gaining mainstream recognition. By 2022, NFTs may continue this trend. Some companies allow direct exchanges of NFTs with other parties in custodial accounts. NFTs can not only tokenize assets but also tokenize positions. For example, large institutions can create tokens from their existing positions in liquidity pools, allowing swaps without having to close positions first, and then trade these assets. Moreover, some companies are allowing users to use NFTs as collateral to borrow money, enabling NFT holders to gain liquidity.

In 2021, 75% of NFT transactions occurred on Ethereum. By 2022, NFT transactions may shift to other L1 and L2 chains, including Ronin, Flow, Immutable, and Solana. Multi-chain solutions that allow for cross-chain transfer of NFTs will redefine the space. Since Solana and its NFT marketplace launched in the second half of 2021, the total transaction volume of NFTs on Solana has exceeded $1.3 billion. Meanwhile, Polygon has completed over $480 million in NFT transactions, of which $413 million came from a certain trading platform, largely due to users being able to mint NFTs directly on Polygon through that platform.

The application of NFTs in gaming 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, as they are non-fungible.
• The NFT platform Ubisoft Quartz allows people to purchase scarce digital products using cryptocurrency.
• The University of California, Berkeley auctioned two Nobel Prize invention patents as NFTs: CRISPR-Cas9 gene editing and cancer immunotherapy.
• NFT as a ticket to participate in exclusive events
• Artists sell music streaming rights to fans and allow fans to share the streaming rights.

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) 5. Strengthen focus on security

In 2021, a total of $14 billion in cryptocurrency was stolen, setting a new historical record. Meanwhile, DeFi platforms were collectively hacked for $2.2 billion. This figure is concerning and may deter institutions from participating in on-chain protocols.

Centralized exchanges and cross-chain protocols have become the latest targets for hackers. According to a certain exchange, on January 17, 2022, approximately $30 million worth of Bitcoin and Ethereum was stolen, affecting about 500 user accounts. A certain cross-chain protocol that allows users to transfer assets between the Ethereum and Solana blockchains was hacked on February 2, 2022, resulting in a loss of about $320 million. These hacking incidents indicate that digital asset platforms have a lot of work to do before they can be more widely adopted.

Due to the open-source nature of cryptocurrency projects, white hat hackers will play an important role in protecting the ecosystem. At the ETHDenver 2022 conference, white hat hacker Jay Freeman discovered a critical vulnerability in the code of the L2 solution Optimism, emphasizing the importance of vulnerability rewards in incentivizing white hat hackers and deterring malicious hackers, which is beneficial for enhancing the overall security of the system. White hat hackers actively participate in finding vulnerabilities, publicly contacting teams, or attacking platforms and returning funds. In an August 2021 hack involving $600 million from a cross-chain protocol, white hat hackers returned the funds to the project team and subsequently accepted a job offer from the project.

With the popularity of cryptocurrencies, scams are inevitable. For example, some NFT holders have been deceived into selling their held NFTs at a low price.