A Year of Lessons: How Crypto Was Shaped in 2022
Coming through 2022, it matters not only how much you earned (or lost), but also how much you learned. It's natural if you ever felt disappointed or doubtful, but please remember that setbacks are just a normal part of the process. Looking back, so many things have become turning points for the industry. It's important that we take the lessons and keep them in mind in 2023 and beyond.
Here, TokenInsight presents you our year end review of 2022. Everything changes so fast in the crypto world, so we release it specially on the very last day of the year, in case something significant happens today and we can't include it. It's also our way to say goodbye to 2022. Hope it helps you with your new year resolutions.
Collapses, Collapses Everywhere
How bearish is 2022? Just look at the $BTC price change. On the first day of the year, it was $46,320, and now it's $16,551. In the first four months, the $BTC price kept bouncing back, but since May, it suffered several slumps coinciding with hit after hit, and was never able to recover.
We all know what happened in May. It was the first major collapse of the year, the one that started everything. Do Kwon probably had chosen the worst time to remove the 150m $UST from Curve, which gave the whales an opportunity to strike down Terra, which was behind only Ethereum in terms of TVL at the time, within days. $UST quickly lost its peg, and its design flaw caused a death spiral, bringing down $LUNA to worthless.
What's horrible about the collapse of Terra is that it not only destroyed one ecosystem, but dragged the entire industry into trouble. Almost every bad thing that happened since then had something to do with it.
Had Terra not made the move that day, would everything be different? Well, the collapse might have been delayed, but... The whole thing looks more like a gray rhino, rather than a black swan, as people knew that Terra+Anchor was a Ponzi, but many were still enthusiastic about it.
Among those who believed in Terra, there were Su Zhu and Kyle Davies, co-founders of Three Arrows Capital (3AC). It was one of the finest crypto hedge fund in the world. However, people didn't know what was under the surface until it was too late. 3AC lost big on Terra, and had huge debts that it didn't have enough liquidity to repay eventually. There was no transparency or risk control in the first place.
The collapse of 3AC quickly implicated lending institutions like Celsius, which had been willing to release high risk loans to the likes of 3AC. It filed for bankruptcy soon after 3AC. Since then, here and there, many CeFi companies have fallen into trouble, going bankrupt or cutting their workforce.
When people thought 2022 couldn't get any worse, SBF said, hold my beer.
Not many would have expected that. FTX was a top 3 exchange, and SBF was the darling child of crypto. He liked to play the role of a savior, and he did invest a lot to help companies in desperate — turns out it was not his money. He also embraced regulations, and was close with regulators — who failed to notice his misbehaving.
A report by CoinDesk and a "fight" on Twitter were all it needed to kill the crypto giant. This time, the impact was even far bigger than Terra's and 3AC's. Although he's been charged by the US DOJ, and awaits his trial, the damage he did to the industry will need a long time to recover.
It's funny that no matter Do Kwon, Su Zhu or SBF, they all claimed they were fine until they couldn't hide the truth anymore. One positive thing is, the serial collapse alerted people to pay more attention to transparency and risk management of the big players. Now, exchanges have to release Proof-of-Reserve to prove they are fine. However, it's just a small step towards transparency. Will they learn their lesson? We should keep watching in 2023.
DeFi Is the Future? Probably Yes, But...
When CeFi is in trouble, many people start to be bullish on DeFi. It's interesting that multiple companies, like Alameda, chose to repay their DeFi debts first, instead of CeFi ones. In DeFi lending, you interact with smart contracts, which will automatically liquidate your collateral if you don't repay debts. In addition, in most cases, your loan is over-collaterlized. In CeFi, however, it's a different story.
The question is, does it make DeFi absolutely reliable?
According to Slowmist, there were 301 blockchain related hacks in 2022, resulting in around $3.77b in losses. Compared with last year, 2022 has 61% less money hacked, but 27% more incidents. Over 60% of the attacks were against DeFi protocols or cross-chain bridges. In short, DeFi, along with its users, is frequently targeted by hackers, and the increase in number of cases means that we probably have bigger chances of losing money.
The biggest security incident was the Ronin Bridge hack. The attacker compromised five validator private keys out of nine, and was able to transfer an eye watering amount of $620m into its own pocket. The second one is Wormhole, also a cross-chain bridge, which lost $326m due to contract exploit.
According to SlowMist, in 2022, over 40% of the hacks are because of the projects' own design flaws or contract exploits. Not all the protocols are alert enough. Not to mention there are lots of rug pulls intended by the projects themselves. At least for now, it's not really wise to fully trust DeFi.
Another thing that affected DeFi heavily happened on August 8th, when the Office of Foreign Asset Control (OFAC) under the US Treasury Department added Tornado Cash and all of its Ethereum addresses to a sanction list. The reason is that the government claimed over $7b had been laundered via Tornado Cash since its launch in 2019. Yet the scammers who laundered the money are still out there.
The incident reminded us that, as much as we crypto nerds like it, DeFi is still far away from being recognized. In a world where sanctioning a code is OK, there's a ceiling that stops it from growing. It's not DeFi's fault by any means, but it needs everyone in the industry to work together to break it.
A few days ago, Brian Armstrong, CEO of Coinbase, published a blog regarding crypto regulations. He said, "It's best to create regulatory clarity first around centralized actors in crypto (stablecoin issuers, exchanges, and custodians) because this is where we've seen the most risk of consumer harm, and pretty much everyone can agree it should be done. Decentralized arrangements (DAOs, DeFi, etc), on the other hand, do not involve intermediaries, and have their own, in some ways superior, set of protections."
"We need to preserve the innovation potential of this technology. Creating decentralized protocols or hosting a website on IPFS should be equivalent to publishing open source code, which is protected by freedom of speech in the U.S. People may send money through a web browser or over internet protocols, but we don't regulate these as financial service businesses, and the same concept applies here."
Well said. And it could be a good start.
Lastly, we can't ignore the fact that the TVL in DeFi currently is only around $38.87b, compared to around $170b in January (according to DefiLlama). Through the year, we saw some big protocols decreasing yields, and some small ones shutting down. When you hear that SushiSwap needed to stop distributing protocol fees to stakers to maintain operation, you know there might be a problem.
The last DeFi summer was driven not only by the pursuit of decentralization, but also by the innovation of technology and finance. In the coming year, DeFi may need to do something more to prove it's the future.
NFT Is in Downturn, Yet It's Still Hot
I know it's a bit confusing, but let me explain.
According to NFTGo, the NFT trading volume in the past year is $22.09b, with a 44.27% increase over the previous year. Yet it doesn't mean the NFT market is hot in 2022, at least not hot for the whole year. From the charts below, you can see that most of the sales were made before May. After the sale of Yuga Labs' Otherdeed, the NFT market was also heavily affected by the collapse of Terra, and never returned to its peak.
But it's just one side of the coin. In 2022, more brands outside the Web3 world are coming to dip their toes in the water of NFTs. Meta supported NFTs on Facebook and Instagram, Reddit launched Collectible Avatars, Starbucks' NFT based loyalty program launched beta version, Porsche announced upcoming NFT collection... The list goes on and on.
The crossover surely helps the mass majority get to know what NFT is. When people like Donald Trump started to launch his NFT collection, you know the little JPEG is getting some popularity.
In addition to becoming better known, NFT also caused lots of debates among enthusiasts. The discussion about creator roylties between different marketplaces, between buyers and creators, has been an ongoing topic in the second half of 2022. Sudoswap was the first one to announce zero royalties, and the decision really changed the NFT landscape. Marketplaces join different camps. Magic Eden, LooksRare, X2Y2 chose to have optional royalties, while OpenSea and Immutable X stood firm with royalties enforcement. It's still early to say which way will eventually attract more users and creators, so it's safe to say the discussion will go on in 2023.
When You Feel Lost, Think About Ethereum
No matter how many bad things happened in 2022, there's one thing that we can be happy about: the completion of Ethereum Merge. The bear market is for building, and Ethereum proved it. On September 15th, the long waited Merge was achieved, and Ethereum transitioned from PoW to PoS.
PoS reduced the energy consumption of Ethereum by 99.95%, and significantly brought down the $ETH inflation rate. According to Ultra Sound Money, as of December 31st, the amount of $ETH issued by PoS Ethereum since Merge is more than 1.26m less than the amount PoW Ethereum would issue.
What's exciting in 2023 is that the next milestone for Ethereum is in sight. The Shanghai upgrade is scheduled for March. By then, the withdrawal of staked $ETH will be possible.
In terms of TVL, Ethereum continues to be the biggest chain, by a huge margin, as it's always been. Currently, TVL on Ethereum accounts for over 59% of the totality.
As for the broader Ethereum ecosystem, Layer2s had a relatively good year in 2022. Arbitrum has the fourth largest TVL among all chains, following Ethereum, Tron and BNB Chain. Optimism sits seventh. Many of the major Layer2s stood out with their own innovations. Arbitrum migrated to Nitro, and Optimism launched OP Stack as well as its governance token $OP. Polygon Hermez, zkSync and Scroll are competing for the first zkEVM mainnet launch, and the race will be more intense in the coming year.
We experienced many historical events in 2022, and we're likely to witness some more in 2023. What's inspiring about crypto is that there're always people buidling. Even if you're not a developer, with all the lessons you learned in the past year, you can still buidl your mind to be a better crypto geek. Finally, everyone at TokenInsight wishes you a happy and promising 2023.