Development Trends in the Blockchain Field in 2022

2021 was an extraordinary year for the Blockchain industry. The market value of cryptocurrencies exceeded $3 trillion, NFT transaction volume surpassed $23 billion, the U.S. launched its first Bitcoin futures ETF, El Salvador adopted Bitcoin as legal tender, Ethereum changed its fee structure, the total locked value in DeFi exceeded $200 billion, a year-on-year increase of 7 times, multiple new public chains were born, and the number of Blockchain wallet users increased to 70 million.

Recently, cryptocurrencies have been used as a means of cross-border remittances. After the outbreak of the war in Ukraine, the cryptocurrency market was initially hit but has since rebounded. The Ukrainian army continues to receive cryptocurrency donations. During the truckers' protest in Canada, protesters received cryptocurrency donations after traditional channels were blocked. In the future, people may use cryptocurrencies more for charitable donations.

The increase in the adoption of encryption benefits the development of multiple areas within the Blockchain ecosystem, including infrastructure improvements, application development, more mainstream programming language adoption, and the increase in regulatory and institutional adoption. This report analyzes the main trends in Blockchain for 2022.

Improvements in the Blockchain Field

In 2022, with the introduction of new public chains, as well as improvements in consensus protocols, transaction costs, transaction times, and token economics, further development in the blockchain field is expected. Layer 2 solutions are also anticipated to make progress, enhancing the scalability of existing public chains, with greater focus on the development of cross-chain solutions, making cross-chain transfers more convenient for users and achieving a multi-chain future. The emphasis on scalability will determine the competition between public chains and Layer 2.

1. The Rise of Multi-Chain Interoperability Solutions

In 2021, multiple public chains and Layer 2 solutions emerged, and the demand for cross-chain liquidity became a widely adopted bottleneck, but it also presented important opportunities.

From 2017 to 2021, several public chains and Layer 2 solutions aimed at increasing transaction speed and reducing costs emerged, the most notable of which include Polygon, Avalanche, Optimism, Terra, and Solana. These blockchains leverage smart contract capabilities to attract developers to build various open-source financial applications and games.

In order to leverage the unique features of different blockchains, such as transaction costs and waiting times, and to maximize investment returns, cross-chain transfer capabilities have become crucial.

Currently, there is a trend of integrating DEX aggregators with cross-chain bridges, allowing users to swap tokens across chains. For applications not deployed on multiple chains, some cross-chain solutions can address these issues. Multichain is a cross-chain token transfer protocol that has attracted over $7.7 billion in total locked value, helping to facilitate cross-chain transfers and local swaps.

Some 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 that users do not have to move liquidity between different chains to interact with specific applications.

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 follows a simple pricing algorithm x * y = k. Although it is easy to understand, it has a significant price impact on trading similar assets, leading to losses.

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

• Curve: Uses a stable curve algorithm, best suited for stablecoin trading.
• Balancer: AMM that supports multiple asset combinations
• Bancor: Single-sided liquidity provision, no need for paired assets
• dYdX: Decentralized Derivatives Exchange

These algorithms seek to reduce the price impact of trades, keeping the prices of small transactions more stable, ensuring minimal price impact, while allowing for the creation of smaller liquidity pools.

Many DEXs have adopted an order book model. Uniswap v3 has transformed the classic AMM model into one that is closer to an order book model, allowing liquidity providers to restrict liquidity to specific price ranges. This is known as 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, and the trading volume is approaching Uniswap levels. However, Uniswap's revenue is still far higher than that of dYdX. Sushiswap plans to launch similar products in the future, and more DEXs may follow suit.

To improve user experience, the DEX sector has also made other enhancements, such as unilateral liquidity deployment, impermanent loss insurance, batching and net trading, limit orders, leveraged trading, and the adoption of Layer 2 solutions.

The adoption of DeFi on Layer 2 is increasing

As of the end of 2021, the assets of various decentralized applications ( dApp ) have exceeded $241 billion. Lending protocols such as MakerDAO, Aave, Curve, and Anchor Protocol are leading, accounting for about 25% of the total locked value ( TVL ). Decentralized exchanges such as Uniswap, PancakeSwap, spookswap, and Serum have created $13 billion in TVL.

In addition to the rapid growth of TVL in public chains, benefiting from the high yields of liquidity mining, the TVL of Layer 2 solutions has also significantly increased since the first half of 2021, with Polygon being a standout, as its TVL quickly rose from 100 million dollars to a peak of 8 billion dollars. Arbitrum, Optimism, and more Layer 2 solutions were launched in the second half of 2021, garnering a lot of 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 decreased transaction speeds. With more blockchain participants, these issues will continue to worsen, and major public chains will quickly become saturated. Therefore, the gas fees for most public chains will rise.

The high volatility and delays in gas fees will lead to transaction slippage, which will also become an eternal dilemma for Ethereum. As a result, more and more people are transferring large amounts of assets to different layers.

The emergence of Layer 2 solutions and sidechains not only improves transaction speed but also saves gas fees, leading to stronger development in the DeFi sector. By 2022, more DeFi applications are expected to adopt Layer 2 solutions. The increase in TVL of Layer 2 solutions ( such as Arbitrum, Optimism, and Boba ) strongly proves that the community has begun to accept rollups.

With the improvement of transaction speed, reduction of fees, and innovations like Optimism V2, the process of deploying public chain smart contracts to Layer 2 will be simplified. Therefore, it can be confidently believed that in the near future, all major tokens will launch Layer 2 versions, and bridges will ensure that they can effectively move between different layers.

In addition to the main development of blockchain infrastructure, several blockchain applications also experienced 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 OpenSea taking the lead. In the third quarter of 2021, the NFT trading volume surpassed $10 billion, accounting for almost half of the total trading volume for 2021.

Lending/collateral NFT technology will dominate the 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. 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 of their existing positions in liquidity pools without having to close their positions first, enabling swaps and trading of these assets. Additionally, companies like Taker Protocol are allowing users to borrow money using NFTs as collateral, enabling NFT holders to gain liquidity.

In 2021, 75% of NFT transactions occurred on Ethereum. By 2022, NFT transactions may shift to other public chains and Layer 2 chains, including Ronin, Flow, Immutable, and Solana. Multi-chain solutions that allow NFT cross-chain transfers will redefine the field. Since Solana and its NFT marketplace launched in the second half of 2021, the total NFT transaction volume on Solana has exceeded $1.3 billion, with SolanArt leading the way. Meanwhile, Polygon has completed over $480 million in NFT transactions, of which $413 million came from OpenSea, mainly due to users being able to publish NFTs directly on Polygon through the OpenSea platform.

The application of NFTs in games 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.

5. Strengthen focus on security

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

Centralized exchange Crypto.com and cross-chain protocol Wormhole have become the latest targets of hackers. According to Crypto.com, on January 17, 2022, approximately $30 million worth of Bitcoin and Ethereum was stolen, and around 500 users' accounts were compromised. The Wormhole protocol allows users to transfer assets between the Ethereum and Solana Blockchains, and the protocol 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 being 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 Layer 2 solution Optimism. He emphasized 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, openly contacting teams, or attacking platforms and returning funds. In the $600 million hacking incident of Poly Network in August 2021, white hat hackers returned the funds to the project team and subsequently accepted a job offered by the project.

With the popularity of cryptocurrencies, scams are inevitable. For example, some bored ape ( BAYC ) holders were deceived into selling their BAYC at a low price, making it crucial to strengthen user education on cybersecurity and Blockchain operation safety.

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

6. Development of innovative DeFi and staking protocols

DeFi

In 2021, Uniswap V3 market makers earned $200 million in commissions and suffered a temporary loss of $260 million, with a net loss of $60 million, accounting for 30% of commission income. The enormous temporary loss ( was caused by the volatility of the tokens, resulting in a loss ).