2021 has been a good year for crypto. Perhaps one of the most memorable - seeing clear fundamental growth, all-time-highs for valuations, and DAOs raising capital to buy copies of the United States Constitution.
As we wrap up the year and look to the next, we breakdown 21 charts that helped define the year and what it all means. We look forward to seeing what 2022 brings.
Wishing you a happy holidays and a great new year!
- The Decentral Park Capital Team
#1 Bitcoin Hashrate Share By Country
Why It Was Defining
Chinese miners have historically accounted for over 70% of Bitcoin’s hashrate. China then clamped down on mining operations in Q2, crypto transactions, and businesses. Sichauan province was hit hard where many of the pool miners sauced its abundant hydroelectric power.
The high geographical dominance meant Bitcoin’s hashrate fell 53% in less than 2 months.
Where Do We Go From Here?
Bitcoin’s hashrate has recovered since. The removal of China has catalyzed the flourishing of mining operations elsewhere - namely North America. Incentives to reduce CapEx and ESG pressures will push mining operators to green energy further.
#2 Lightning Network Growth
Why It Was Defining
The Lightning Network is a payment protocol layered on top of Bitcoin. Lightning had it largest annual growth in node count, channels, and capacity in 2021. El-Salvador became the first country to formally adopt Bitcoin as legal tender, putting the ‘medium-of-exchange' narrative for the asset back to centre stage.
Where Do We Go From Here?
Metcalfe’s law is particularly salient for a network like Lightning. Users get greater value from a greater number of nodes (i.e. merchants) forming an exponentially larger number of channels.
We may see further nations follow suit, particularly those that pay a large percentage of cross-border remittances to financial intermediaries. But it will take time.
#3 The ETH/BTC Ratio
Why It Was Defining
The ETH/BTC ratio hit a 3-year high in December, with bids hitting as high as 0.0835 BTC on Coinbase.
The ratio was a key driver in fuelling the ‘ETH flippening BTC’ narrative.
BTC lost its credibility as a defensible asset, underperforming on the rallies as well as the drawdowns. Ethereum had a collection of narrative tailwinds in the hopper including the ETH2 merge,Altair upgrade, EIP-1559, and the L2 chain roll outs.
Where Do We Go From Here?
Ethereum faces a major event catalyst in 2022 - the ETH2 merge. While the exact timeline is not well defined, we should reasonably expect significant attention be drawn to its success or failure.
At the same time, Ethereum scaling initiatives will continue to be built out in parallel.
#4 Ethereum Gas Price vs. Polygon Network Utilization
Why It Was Defining
We witnessed clear spikes in median gas prices on the Ethereum base layer in early 2021. Retail users transacting smaller amounts continued to be priced out, mirroring the dynamics from summer 2020.
Polygon’s PoS sidechain was one of the first scaling solution in history to have adoption at scale by offering lower fee environments. As network utilization skyrocketed on Polygon, gas costs reduced dramatically on Ethereum L1.
Where Do We Go From Here?
We will see sidechains, L2s, and self-sovereign EVM-based blockchains provide even lower fee environments. A higher number of transactors will inevitably put pressure on fees as their network utilization increases.
#5 Polygon/Ethereum Token Deployments And DAUs Ratios
Why It Was Defining
It was the first time we saw a scaling solution at scale see a higher number of token deployments and daily active users (DAUs) than on the base layer. NFT market hype drove a large portion of polygon usage in October. Trader count multiplied by nearly 46x and NFTs sold by 17x.
Where Do We Go From Here?
Project founders will consider launching their projects natively on sidechains and L2s more over time. This will be the case for higher bandwidth application including derivatives. We writing is on the wall - Lyra was the first DeFi app to launch natively on Optimism in August.
#6 ETH Burned Via EIP-1559
Why It Was Defining
EIP-1559 made it easier to estimate transaction costs and introduced fee burning mechanisms for Ethereum in August.
Over 1m ETH has now been burned since EIP-1559 went live with the number of ETH burned accounted for a larger percentage of ETH’s circulating supply (>1%). In other words, the net ETH emission has declined significantly.
Where Do We Go From Here?
Ethereum will burn over 3% of its supply by 2022 year-end at current rate (all else equal). With other L1 assets implementing their own burn mechanics, Bitcoin is unlikely to be the only target asset for investors during a potential inflation/hard asset narrative in 2022.
#7 ETH2 Staking
Why It Was Defining
We saw high, persistent levels of conviction by ETH holders to deposit their assets without having a clear withdrawal timeline.
Over 8.7m ETH (~$35.2B) has now been committed, with over 7% of the circulating supply now locked until the ETH2 merge. The more interesting aspect is the clear product-market-fit of liquid staking derivatives.
Lido Finance has facilitated over 18% of total ETH2 deposits, highlighting the preference for liquidity and overall risk appetite.
Where Do We Go From Here?
The jury is out if the ETH2 merge (where stake withdrawals enabled) will result in higher or lower commitments by holders.
We will see the rise of liquid staking protocols for other PoS chains that can service the growing $300B market.
#8 DeFi Market Cap And Dominance
Why It Was Defining
The DeFi sector started an exponential growth curve in market capitalization, climbing from $21B to over $148B in 12 months (7x).
DeFi’s market cap growth also outpaced wider market growth materially. DeFi’s ‘dominance’ made 3 new all-time-highs with the ratio now standing at 6.2%.
Where Do We Go From Here?
Continued roll out and adoption of applications across a growing number of ecosystems can help drive a continuation of an exponential growth curve. If so, we may see DeFi’s market dominance climb above 20% by year end.
#9 DEFIPERP/ETH And Alt ‘Core Asset’ Performances
Why It Was Defining
2021 was the year for core assets like L1s and sidechains like SOL, MATIC, and FTM which all gained significant ground with their ETH counterpart. What was clear was the value of these alternative ecosystems grows proportionally to the value committed to them.
FTX’s DEFI PERP index on its ETH ratio showed the underperformance of the DeFi sector at large relative to core assets.
Where Do We Go From Here?
Higher cap core assets getting bid up paves the way for capital rotation down the risk curve. This is particularly salient as we enter a time when DeFi producing valuable use cases across a growing range of primitives and ecosystems. On that note…
#10 DeFi Apps On Mainnet vs. DeFi TVL
Why It Was Defining
We saw exponential growth curves in DeFi that wasn’t pure valuation-based. We saw it for the number of applications launch on mainnet and the total value committed to DeFi applications in aggregate.
Where Do We Go From Here?
We have started to see number of application launching in the sector accelerate in recent weeks. But really…we have yet to get underway. More nascent DeFi ecosystems are far from being fully realized with ramped up production on a growing number of ecosystem results in exponential growth.
Macro dynamics is one thing but fundamentals are another.
Ask yourself: are you tech crypto or money crypto?
#11 DeFi TVL Market Shares
Why It Was Defining
It was the first time we saw the total-value of liquidity committed to ecosystems be significantly diversified. The launch of alternative ecosystems in the past year has resulted in Ethereum’s TVL dominance falling from >95% to 65% today.
2021 was the year DeFi truly became multi-chain.
Where Do We Go From Here?
Ethereum TVL dominance will likely continue to fall and lose its majority status.
One clear key driver will be the deployment of funds from ecosystem foundations to foster innovation, drive users and their liquidity to protocols, and attract talent.
#12 Ecosystem Fund Sizes
Why It Was Defining
We saw over $8.4B allocated in ecosystem funding with single foundations/councils contributing up to $5B. Teams clearly saw the need to compete for talent and users in an increasingly competitive landscape.
Funding was kept generalized targeting sectors from DeFi, NFTs, and CBDCs.
Where Do We Go From Here?
High levels of funding and incentives for developers as well as users. There is also nothing preventing these foundations from re-upping their contributions as has been the case with high cap chains like Avalanche.
#13 Road To $10B Ecosystem TVL
Why It Was Defining
We saw accelerated pace for ecosystem reaching unicorn status for total-value-locked. Solana took a quarter of the time to reach this threshold than Ethereum. This rapid growth can be attributed, in part, to growth in rapid asset appreciation like SOL and ecosystem funding mentioned above.
Where Do We Go From Here?
TVLs can create reflexivity in the value of ecosystems for users - regardless if that growth is attributed to appreciation of just a few assets (higher liquidity and lower slippage to name just two).
That said, the asset underlying TVL will also become more diversified over time. The proliferation of stablecoins being bridged over to ecosystem is just one recent example. Infra that makes it easier to bridge assets should accelerate the ‘road to $10B’ for chain even more.
#14 L2 TVL vs. L2/ETH L1 TVL Ratio
Why It Was Defining
2021 was the year where we first saw TVL on L2 scaling solutions hit over $5B, growing 34x YTD. This growth has also outpaced TVL growth on Ethereum 1 which printed an all-time-high of 4.5%.
The advent of optimistic-based solutions in 2021 were key growth drivers in Q2 with zk-based dYdX accelerating this more recently.
Where Do We Go From Here?
The genie is out of the bottle when it comes to L2 solutions. We are likely heading into a zk-Rollup narrative as users await for the full launch of Starknet and ZKSync 2.0,
Bringing EVM and smart contract functionality to zk-Rollups is only going to push the L2/L1 TVL ratio higher.
#15 Google Search Trends (DeFi, NFT, Metaverse)
Why It Was Defining
We saw interest in NFTs outweigh interest in DeFi throughout the entire year. 2021 marked a fundamental cultural shift in how curators across domains were able to distribute to their audience and monetize their curations.
Facebook’s decision to pivot to the Metaverse renewed global interest to the sector, also overtaking DeFi along the way.
Where Do We Go From Here?
NFTs may continue to gain momentum over 2022 but it’s important to zoom out. All of the above will be connected under the ‘Web3 macro framework’ - a new decentralized web.
Users will want to unlock certain utility, liquidity, and accessibility of their NFTs (yes, even within the Metaverse). At some point the demand for the financialization of NFTs will mean DeFi plays catch up. We are already seeing an explosion of solutions across various financial primitives including exchanges (e.g. OpenSea), indices (e.g. NFTX), and lending (e.g. NFTfi).
#16 NFT Total Sales vs. Sales By Market
Why It Was Defining
We saw daily global NFT sales surpass $1m, $10m, and $100m. Global volumes YTD are now 172x that of 2021 ($11.6B). Game-based NFTs were in vogue for most of 2019 and 2020 but 2021 was the year of collectibles which often accounted for >70% of volume.
New collectible ranges like Bored Ape Yacht Club saw huge demand, overtaking CryptoPunk price floors for the first time.
Where Do We Go From Here?
There will likely be huge innovation around how NFTs can be used in games, ecosystems, and communities. Examples include community-owned IP as well enhanced functionality within the Metaverse and meatspace.
#17 Olympus DAO’s “POL”
Why It Was Defining
Olympus DAO flipped the liquidity mining model on its head by innovating around ‘Protocol Owned Liquidity’. Rather than relying on 3rd party providers to continue their liquidity contributions to protocols, they can indefinitely secure its own liquidity by issuing discounted bonds.
Olympus now owns the vast majority of the Sushiswap OHM-DAI pair liquidity.
Where Do We Go From Here?
Protocols will look to launch their own Olypmus-style bond mechanisms to own their own liquidity as well as create a new revenue-streams for adopters of that respective protocol. These founders will have to pay careful attention in extrapolating the Olympus game theory mechanics within their own frameworks.
#18 LUNA Total Supply vs. UST Market Cap
Why It Was Defining
We saw one of the largest L1 token burnings in crypto - $3.5B. The Terra community voted in favour of burning LUNA in order to mint (back) $4.5B worth of stablecoin, UST. Terra’s UST has now become one of the fastest growing algorithmic stablecoins in the market
Where Do We Go From Here?
This evolving trend is interesting for 3 reasons:
- It’s a clear case of an L1s becoming deflationary proportional to their underlying ecosystem usage (e.g. UST demand necessitating LUNA burn)
- Terra’s model limits the drawbacks of burning capital by simultaneously injecting liquidity for protocol bootstrapping initiatives
- It simultaneously boosts rewards for stakers from LUNA-UST swap fees
Terra applications looking to boostrap their own liquidity may be served via similar mechanics. It remains to be see if other blockchains take a lead out of Terra’s book.
#19 Pocket Network Relay Count vs. Revenue
Why It Was Defining
Pocket Network became the first decentralized node relay network to operate at scale. To date, there has been a lack of relay node incentives for blockchains and reliance on Infura has translated to security and single points of failure risk for dApp developers.
These pressures have now translated to clear measurable growth for decentralised relay node infra like Pocket Network which generated $28.7m in revenue for November and is forecast to generate $532m annualized revenue in December - of which 89% is directed to service nodes staking POKT.
Where Do We Go From Here?
Decentralized relay node networks like Pocket are only servicing a fraction of relays serviced by centralized competitors (ATH of 2.2B/day). Network outages and redundancy issue will lead to protocols rerouting their requests via decentralized networks like Pocket.
#20 Stablecoin Market Caps (Market Shares)
Why It Was Defining
We saw the emergence of new USD-pegged algorithmic stablecoins like UST, MIM, and FRAX take meaningful market share from their collateralized counterparts (~10%).
It shouldn’t come as a surprise that this market shift comes at a time when regulation around stablecoin issuers has intensified.
After a largely failed algorithmic stablecoin season in 2020, these new entrants are challenging the incumbents through mutualistic relationships.
Where Do We Go From Here?
The decentralized issuers have the ability to achieve rapid growth over 2022 by over-indexing on DeFi composability (including cross-chain).
The next iteration of stablecoins may revolve around derivative-supported stablecoins like Lemma Finance and Angle (e.g. delta-neutral strategies). Oh, and expect to see major FX-pegged stablecoins like EUR and GPB make headway.
#21 dYdX vs. Uniswap Daily Trading Volume
Why It Was Defining
Perpetual swap markets popularized in 2016 by BitMex can trade anywhere between 2-10x more than spot every day. With liquidation and high transaction count being economically unfeasible on Ethereum L1, the launch dYdX on the performant StarkEx engine gave us a glimpse into the future relationship between spot and perpetual DEXs - albeit briefly.
dYdX daily trading volume grew from <$100m to over $5B, overtaking Uniswap’s total volume throughout September.
Where Do We Go From Here?
Perpetual swap DEXs will account for a growing share of global DEX volume in 2022 as more networks go live on performant foundations.
DEXs are already eating CEX’s lunch. DEX to CEX spot trade volume ratio has now climbed to 12% and perpetual venues in DeFi can drive this above 20% before too long.
BONUS Avg. DeFi Exploit Amount vs. % of DeFi Covered
Why It Was Defining
It illustrates how developers were tested like never before by increasingly sophisticated attacks. We saw over $1.6B worth of funds stolen in DeFi from attackers in 2021 with the average exploit amount climbing to new all-time-highs ($60m).
The percentage of DeFi covered by insurance protocols like Nexus Mutual remains low but it appears the saliency of recent high-value exploits is driving covered value higher in recent months.
Where Do We Go From Here?
Exploits will not be eliminated entirely and risk management has become an urgent challenge. The $4.3 trillion insurance industry has yet to develop maturely within the multi-chain DeFi ecosystem. ‘Horizontal’ insurance networks like Nexus Mutual are positioned to benefit from this dynamic in 2022 and beyond.
The information above does not constitute an offer to sell digital assets or a solicitation of an offer to buy digital assets. None of the information here is a recommendation to invest in any securities.
