The year 2022 has been full of events for the cryptocurrency industry. At the same time, many of them had a negative impact on cryptocurrency prices and pushed the industry into a new crypto winter. However, every cloud has a silver lining. Lessons learned from challenging events can drive inclusive development towards better products, more sustainable models, and mass adoption. In this article, I would like to look at the five lessons of this year and how they may influence the further development of the cryptocurrency industry.
1. Market cycles are a major factor in the viability of many projects
Cryptocurrency winter is officially here in 2022. Bitcoin is down from its highs by more than 75%, while the prices of many altcoins are down 90%. The decline from the all-time high in November 2021 was gradual but ultimately expected. We have encountered this many times in the cryptocurrency industry, the most recent being crypto winters 2014/2015 and 2018/2019.
With the long-awaited arrival of institutions and large investments, the cyclical nature of the market has not changed. Only the scale increased. The current crypto winter is even tougher than in previous times: nobody is too big to fail right now (3AC, FTX, Luna), and those who are still afloat are drastically cutting their costs and promotional budgets and firing their staff.
The situation in the DeFi sector is even more complex: the decrease in closed liquidity eventually led to a slowdown in project development. As a result, we are once again seeing large companies trying to survive while small teams and oftentimes enthusiasts develop new technologies. A very familiar situation for the DeFi and NFT markets in the run-up to the hype of 2020, right?
2. The imperative to reimagine crypto products
The events of the past year have brought to light many problematic aspects of the industry. The fall of FTX has led us to a fundamental conclusion for cryptocurrency trading: a more transparent approach to their operations and services is a must. The first step in this direction was the proof-of-booking reports from several major exchanges. Next year, I expect this cryptocurrency trading balance transparency regime to create new audits for major crypto platforms.
However, centralized trading platforms are not the only players who need to find new approaches. In the DeFi sector, the whole concept of yield farming and locking tokens should also be reconsidered. Previously, you could lock your tokens for a period of time and, in return, receive the payout (including new tokens for the project). This approach to distributing tokens for the new project was not successful and fair: most of the tokens distributed in this way decreased by more than 90% in the last year.
Arithmetic stablecoins. NFT use cases? Security of DeFi projects? The cryptocurrency industry still has a lot to reimagine.
3. Technology development continues even during the cryptocurrency winter
The Ethereum Merge Upgrade was one of the key events of 2022. Moreover, at the end of the year, the project team published a detailed and updated roadmap for the coming years.
Meanwhile, ETH Layer 2 solutions are gaining popularity in 2022. Optimism and Decision/Arbitrum are showing significant growth across many metrics, pulling TVL away from other L1 solutions. I also expect zk rollup solutions such as Starknet and zkSync to launch and grow in popularity in the next year. The assumption is that we will see a battle between ETH L2 solutions and other blockchains in the future.
4. ESG is now a trend in the cryptocurrency industry as well
Many crypto projects are doing their best to adhere to ESG standards, as it becomes increasingly important to address global issues. This was one of the factors that led Ethereum to shift from a PoW consensus model to a Proof of Stake model. On the other hand, the impact of Bitcoin's proof-of-work on the environment is also a topic of ongoing debate.
As a result, ESG projects develop in three main vectors in 2022. First, it reduces energy consumption and emissions: Ethereum reduces consumption by 99.9%, and Polygon positions itself as carbon neutral. The second is ReFi, a new trend of regenerative finance that tests financial incentives to reduce carbon emissions. And the last is to support sustainable initiatives, such as ESG philanthropy, recycling and education.
The cryptocurrency industry continues to be affected by macroeconomic factors
This is a simple example. As I mentioned, the Merge upgrade of the Ethereum network was one of the most significant technological achievements of the year. But unfortunately, the macro events were too severe for the price of ETH to rise dangerously. The Federal Reserve's policies and interest rate decisions determine the market capitalization of the cryptocurrency industry more than many other factors at the moment.
Historically, the cryptocurrency industry has operated in 4-year cycles. Throughout 2022, we experienced one of the most challenging years in the history of the industry. However, each cryptocurrency winter fostered new technologies in the industry. For example, several well-known DeFi protocols and infrastructure were created during the recent bear market in 2018/2019, and even earlier in 2015, several BTC trading and storage infrastructure companies emerged. Therefore, further technological development should be the main focus in 2023 and beyond.