2022 Blockchain Trends Outlook: cross-chain interoperability, Layer2 development, and DAO rise

2021 was an important year for the development of the Blockchain industry. The market capitalization of Crypto Assets exceeded $3 trillion, NFT volume surpassed $23 billion, Bitcoin futures ETF was launched, El Salvador adopted Bitcoin as legal tender, Ethereum changed its fee mechanism, and the total value of DeFi Lock-up Position exceeded $200 billion. Several new public chains were born, and the number of Blockchain Wallet users reached 70 million.

Crypto Assets are becoming a means of cross-border payment. After the outbreak of the war in Ukraine, the crypto market briefly fell before quickly rebounding. The Ukrainian military continues to receive crypto donations. During the protests by truck drivers in Canada, protesters also received crypto donations after traditional crowdfunding channels were shut down. In the future, crypto assets may become an important channel for charitable donations.

The adoption of Crypto Assets has driven the development of multiple areas in the Blockchain ecosystem, including infrastructure improvements, application development, mainstream programming language adoption, and increased regulatory and institutional adoption. This report analyzes the major trends in Blockchain for the year 2022.

Improvements in the Blockchain Field

In 2022, with the launch of new Layer 1 public chains, improvements in consensus mechanisms, transaction costs, transaction speeds, and token economics, the blockchain field will further develop. Layer 2 solutions will also make progress, enhancing the scalability of Layer 1. The development of cross-chain solutions will accelerate, realizing a multi-chain future. Scalability will determine the competitive outcomes between Layer 1 and Layer 2.

1. The rise of cross-chain interoperability solutions

In 2021, multiple Layer 1 and Layer 2 solutions emerged, the demand for cross-chain liquidity became a bottleneck, but it also brought development opportunities.

Between 2017 and 2021, multiple Layer 1 and Layer 2 solutions were introduced to improve transaction speed and reduce costs, such as Polygon, Avalanche, Optimism, Terra, and Solana. These public chains attracted developers to build open-source financial applications and games.

To leverage the characteristics of different public chains and maximize investment returns, cross-chain transfer capabilities have become important.

Decentralized exchange aggregators like Paraswap have started integrating with cross-chain bridges, supporting not only token swaps within the same chain but also cross-chain exchanges. For applications not deployed on multiple chains, some cross-chain solutions like Symbiosis Finance, Multichain, or Atlasdex can address the issues. Multichain is a cross-chain token transfer protocol that has attracted over $7.7 billion in Lock-up Position, facilitating cross-chain transfers and native swaps.

Some well-known DeFi applications such as Aave, Curve, and Uniswap were initially deployed only on Ethereum and are now deployed on multiple chains. Users can use these applications without needing to transfer liquidity across 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 DEX will become more complex. Uniswap uses a simple x * y = k pricing algorithm, which has a significant impact on the trading prices of similar assets.

Many new DEXs have improved algorithms/curves, which are more complex but more efficient. Notable examples include:

These algorithms reduce the impact of trading prices, keeping the prices of small transactions stable while allowing the creation of smaller liquidity pools.

Multiple DEXs adopt an order book model. Uniswap v3 transforms the classic AMM model into one that is closer to an order book model, allowing liquidity providers to restrict liquidity to a specific price range.

dYdX is a new type of DEX that uses an order book model. The lock-up position of dYdX has risen rapidly to (, reaching 1.1 billion USD in November 2021, while the volume is close to Uniswap ). Uniswap's daily trading volume is about 1.3 billion USD, while dYdX is about 950 million USD (. However, Uniswap's revenue is still much higher than dYdX, with a daily peak revenue of 17.7 million USD, while dYdX only has 6.8 million USD. Sushiswap plans to launch similar products, and more DEXs may follow suit.

There are other improvements in the DEX field, such as unilateral liquidity deployment, impermanent loss insurance, batching and net trading, limit orders, leveraged trading, and the adoption of Layer 2 solutions.

3. Layer 2 DeFi adoption increases

As of December 31, 2021, the locked-up assets in decentralized applications exceeded $241 billion. Lending protocols such as MakerDAO, Aave, Curve, and Anchor Protocol lead the way, accounting for about 25% of the total locked volume. As of December 31, 2021, DEXs like Uniswap, PancakeSwap, spookswap, and Serum have locked up $13 billion.

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In addition to the rapid growth of Layer 1 lock-up positions, the high yields from liquidity mining contributed to a significant increase in Layer 2 lock-up positions in the first half of 2021, with Polygon rising from $100 million to a peak of $8 billion. Layer 2 solutions such as Arbitrum and Optimism were launched in the second half of 2021, attracting the attention of DeFi participants and developers.

As more participants enter the world of digital assets and develop new applications, the DeFi sector has become crowded, leading to increased transaction costs and reduced speeds. With the increase in participants, these issues will worsen, and major Layer 1 public chains will quickly become saturated. Therefore, gas fees for most Layer 1 public chains will rise.

High volatility and delays in gas fees will lead to trading slippage, which will become an eternal problem for Ethereum; therefore, more and more assets will be transferred to different layers.

Layer 2 solutions and sidechains improve transaction speed and save gas fees, leading to stronger DeFi development. It is expected that more DeFi applications will adopt Layer 2 solutions in 2022. The increase in Lock-up Position for Layer 2 solutions such as Arbitrum, Optimism, and Boba proves that the community has begun to accept rollups.

With the improvement of transaction speed, reduction of fees, and innovations like Optimism V2, deploying Layer 1 smart contracts to Layer 2 will be simplified. It is believed that soon all major tokens will launch Layer 2 versions, and bridging will ensure they can effectively move between different layers.

In addition to the main development of blockchain infrastructure, multiple blockchain applications flourished in 2021 and will continue to grow in 2022. The following details these applications.

4. "NFT-Fi" will define 2022

The NFT trading volume across multiple platforms exceeded $23 billion, with OpenSea leading. In the third quarter of 2021, the NFT trading volume surpassed $10 billion, accounting for nearly half of the total trading volume in 2021.

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Lending/collateral NFT technology will dominate this field, competing with the token exchange market. In 2021, NFTs entered the public eye, having a significant impact on the art world and gaining mainstream recognition. This trend may continue in 2022. Companies like Swap.Kiwi 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 existing positions in their liquidity pools without having to close them first, and then trade these assets. In addition, companies like Taker Protocol allow users to use NFTs as collateral to borrow money, providing liquidity to NFT holders.

In 2021, 75% of NFT transactions were conducted on Ethereum. In 2022, NFT transactions may shift to other Layer 1 and Layer 2 chains, including Ronin, Flow, Immutable, and Solana. Multi-chain solutions that allow for cross-chain transfer of NFTs will redefine the field. Since the launch of Solana and its NFT marketplace in the second half of 2021, the total transaction volume of Solana NFTs has exceeded $1.3 billion, with SolanArt leading the way. Meanwhile, Polygon has completed over $480 million in NFT transactions, with $413 million coming from OpenSea, primarily benefiting from users being able to directly launch NFTs on Polygon through OpenSea.

The application of NFT in games will be another focus. The trading of 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 Decentralized Finance include:

• In Uniswap V3, liquidity provider positions are represented by NFTs, as they are non-fungible.
• The NFT platform Ubisoft Quartz allows people to purchase scarce digital products using Crypto Assets.
• 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 streaming rights.

5. Strengthen the focus on security

In 2021, a total of 14 billion USD in Crypto Assets was stolen, setting a new record. A total of 2.2 billion USD was stolen from DeFi platforms. This figure is concerning and may deter institutions from participating in on-chain protocols.

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Centralized market Crypto.com and Wormhole protocol have become the latest targets of hackers. According to Crypto.com, approximately $30 million in Bitcoin and Ethereum was stolen on January 17, 2022, affecting about 500 user accounts. The Wormhole protocol allows users to transfer assets between Ethereum and Solana, and it was hacked on February 2, 2022, resulting in a loss of about $320 million. These incidents indicate that digital asset platforms have a lot of work to do before being more widely adopted.

Due to the open-source nature of crypto 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 Layer 2 solution Optimism. He emphasized the importance of vulnerability rewards in incentivizing white-hat hackers and deterring malicious hackers, which is beneficial for improving the overall security of the system. White-hat hackers actively participate in finding vulnerabilities, publicly contact teams, or attack platforms and return funds. In the August 2021 Poly Network $600 million hacking incident, white-hat hackers returned the funds to the project team and subsequently accepted a job offered by the project.

As the adoption of crypto assets increases, scams will inevitably arise. For example, some bored ape )BAYC( holders were deceived into selling their BAYC at a low price, making it crucial to enhance user network security and blockchain operation security education.

As more funds are deployed into DeFi protocols, security audits must be given attention. As more DeFi innovations emerge, more vulnerabilities will be discovered, which in turn will drive security innovations. With regulatory requirements tightening, on-chain security will attract greater attention.

6. Innovative DeFi and Staking Protocol Development

DeFi

In 2021, Uniswap V3 market makers earned $200 million in commissions, suffered a temporary loss of $260 million, and had a net loss of $60 million, accounting for 30% of commission revenue. Finding solutions for the huge temporary loss ) caused by token volatility ( will be a key focus in 2022. Managing LP positions in Univ3 is much more complex than in UniV2, as the algorithm adjusts the liquidity range based on various on-chain and off-chain data points. The demand for precise indexing protocols will also increase. Protocols like Chainlink will be used more and face more competition. More solutions will be established to reduce temporary losses.

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Although NFTs and the metaverse received a lot of attention in 2021, in 2022, the market's interest in new protocols in the DeFi sector will be reignited. More traditional financial applications, such as interest rate swaps, futures, hedge funds, and insurance will be launched on the Blockchain. New protocols will also emerge.

Many new projects will draw inspiration from the Curve token economy and the way it helps protocols like Convex and Votium evolve. The Curve token economy allows users to vote on which pool receives CRV rewards ) interest (.

According to current usage trends, the Ethereum mainnet will become more expensive, which will further raise the usage threshold of the mainnet, while Layer 2 is more favorable for newcomers. Ultimately, only whales and professional traders will be able to use the Ethereum mainnet. Even new DeFi protocols are more suitable for professionals. For example, concentrated liquidity benefits market makers but is unfriendly to retail traders, as their profits will significantly decrease due to additional trading fees.

Staking

A new liquid staking protocol will be launched, allowing people to stake tokens across different Blockchains and projects, and then use derivatives of these staked tokens ) known as liquid staking tokens ( to participate in DeFi. These liquid staking tokens will be supported by currently held and Lock-up Position tokens.

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