Unchained - Crypto 2022 Outlook: Where Will the Markets Go This Year? Plus DeFi and NFTs - Ep.305

Episode Date: January 4, 2022

Larry Cermak, VP of research at The Block, and Igor Igamberdiev, director of research and data at The Block, recap the most significant trends of 2021 (BTC mining, L1s, NFTs, DeFi, venture funding) and discuss what might happen in 2022. Show topics: why 2021 was so significant for the crypto industry why the crypto markets didn’t see a blow-off top at the end of the calendar year the way they typically do about a year after a Bitcoin halving what Larry thinks about whether the crypto market is in a supercycle how the state of BTC and ETH mining changed in the past year why Igor thinks multichain technology was key to a record-breaking year for venture capital entering the crypto space in 2021 how the layer 1 (L1) ecosystem wars played out in 2021 and what it could look like in 2022 what Larry and Igor think of Ethereum layer 2s (L2s) how Ethereum’s shift to 2.0 could affect the L1 race what Larry thinks about DeFi tokens going into 2022 how DeFi trends, like decentralized exchange volume and lending, played out in 2021 why Igor thinks KYC-DeFi (know-your-customer decentralized finance) is inevitable what Larry thinks about NFTs going in 2022 and why he thinks PFPs are dead Larry and Igor’s outlook on the metaverse going into the new year Thank you to our sponsors! Crypto.com: https://crypto.onelink.me/J9Lg/unconfirmedcardearnfeb2021        Episode Links Guests Larry Cermak: https://twitter.com/lawmaster  Igor Igamberdiev: https://twitter.com/FrankResearcher   The Block’s 2022 Digital Asset Outlook Report https://www.theblockcrypto.com/post/127723/the-block-research-2021-digital-asset-outlook-report Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey all, before we begin, a couple of announcements. First, Unchained has a new logo and website. You may have noticed the new podcast thumbnail in your podcast player or on YouTube. This change has been a long time coming, and I think the new redesign looks awesome. As we've done on YouTube and on the podcast platforms, we've also now retired the unconfirmed brand on the site. So now the Friday shows will also be branded Unchained. Be sure to check at the beautiful new redesign at Unchained Podcast.

com. Second, my book publishes in less than two months. I've been sending it to a few early readers to get blurbs and also for ideas for NFTs, and I just wanted to share with you one early reader's reaction. This person, quote, absolutely devoured the book in two days, which is pretty crazy because I wrote a really fat book. They also said they were enthralled, their word, and that they felt the book really brought to life the various players included in it. This is someone who's been involved in the space for years, but was not right in the middle of the action, and they could not put it down. So if you're looking for a good read that's all about crypto, pre-order the cryptopians, idealism, greed, lies, and the making of the first big cryptocurrency craze today at Bitley

slash cryptopians. That's B-I-T-L-Y-S-C-R-Y P-T-O-P-I-N-S. The book comes out to 22-22, and so you'll have it just in time for spring break. Again, pre-order the Cryptopians at Bitley slash Cryptopians. And now, onto the show. Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I'm your host, Laura Shin, a journalist with over two decades of experience. I started covering crypto six years ago, and as a senior editor at Forbes was the first mainstream meter reporter to cover cryptocurrency full-time. This is the January 4th, 2022 episode of Unchained. Happy New Year's, everyone! Buy, earn, and spend crypto on the crypto.com app. New users can enjoy zero credit card fees on crypto purchases in the

first 30 days. Download the crypto.com app and get $25 with the code Laura, link in the description. Today's topic is the 2022 crypto markets. Here to discuss are Larry Sirmak, VP of Research at the Block, and Igor Igamberdiv, Director of Research and Data at the Block. Welcome, Larry and Igor. Hey, Laura. Great to be here again. Hey.

So let's start by discussing what the state of the crypto markets was at the end of 2021. what would you say were the top line points from last year? Sure. So for 2021, I would say we saw crypto really reach mainstream for the first time or at least trying to attempt to reach mainstream. We saw obviously massive upkick of institutional adoption with the announcement of Tesla buying Bitcoin. Everything kicked off significantly.

Like you could see it even on our research business. The interest just went up like 100X on the institutional side. because with Tesla, it kind of breached people's mainstream. And then also it was the year of layer one networks outside of Ethereum, getting a lot of adoption. And then I would say last one, just NFTs completely going bananas and just reaching even the normal people that normally don't care about crypto, don't care about finance, don't care about changing money,

but they care about some like digital scarcity and they wanted to own a piece of something. And Igor, what do you think? So I also like sell a lot of adoption, even in terms of some like new tokens like sheep and some flucky tokens because a lot of people use like Coinbase wallet to trade all these tokens. And we also saw a lot of adoption in terms of talking like people and trying to like create some Dow for buying some NFTs or some like rare stuff. So yeah, we'll definitely see more adoption in the next year. So this was the first time after the most recent Bitcoin having where we didn't see a

blow off top near the end of the calendar year, like roughly kind of 18 months after. Why do you think we didn't see that? And I did see at least one person, Natasha Che, tweeting that she thought we'd entered the so-called super cycle in which we stopped going through these crazy bull markets and then have these long bear markets afterwards. And instead now the market will kind of go up in a more steady fashion. What do you think? Do you agree or what does this indicate to you?

Yeah, I would say I definitely roughly agree with that idea. I think in general, there's probably going to be still some bear markets. And as we saw, like crypto is still relatively correlated to what happens in macro. So there could be some bear markets. But I think they're going to be much shorter because the space has just matured so much. Like if we compare it to something like 20, 2018 and 2019, back then I think the market was still not 100% sure that crypto was something that was going to like stay and that was going to actually be used by people. And I think we've breached that now where, you know, there's a lot of people that use crypto. There's a lot of people that rely on crypto.

And I think it's become obvious to retail investors and institutional investors that this is something that's going to stay. And I think the biggest difference from what we saw, you know, 2017, 2018 is that there is now not. perfect relation of all the assets in crypto. It behaves much more as a more mature asset class where you have like different sub-sectors like NFTs like Defi 2.0, like Defi and a few other ones that behave almost like in its own cycles. And I think that by itself is really bullish because it shows that like I said, the crypto is just more accepted and more viewed as a mature asset class.

And I don't think there's going to be another like two or three-year bear market. And Igor, what do you think? Yeah, so I totally agree with Larry Devinist because, yeah, in this cycle, we have a lot of, like, narratives like NFT, like gaming, all these things. And also another reason is we also saw a lot of, you know, like mainstream influence, like TikTokers, all people just trying to jump in various like cryptos. And this is a fresh money on this market. So I think, yeah, that's also one of the reason why we stay on the top. And crypto has just like become so so interesting to young people, I think. Like that, I mean, it was a little bit of a case like 2017, 2018, but now it's almost like a interesting thing to do.

And for a lot of people that I talk to, it's more interesting than like trading equities and being interested in that because this is just like much freer market. And I think that's also affecting like how people are viewing this. because younger people in general are just so much more inclined to be interested in this asset class. And I don't think that's going to go away anytime soon. All right. So, yeah, I kind of broadly agree with you both. And for that reason, I'm super excited to see what happens in 2022 because I think it'll be kind of just like something that we really haven't seen before in crypto. You know, I think before people kind of expected the cycles to happen a certain way.

And I think this year it will be something new and different. So at the end of 2021, you guys released this monster report on kind of all things across the whole entire sector. So I'm actually just going to now kind of go somewhat step by step through the report. And so why don't we start with the first topic in the report, which was actually one of the biggest shifts last year, which was the change in mining, particularly Bitcoin mining, because China banned mining in the country. So why don't we just talk a little bit about what it was that you guys were seeing in terms of the state of Bitcoin mining and basically what you think will happen going forward? Yeah.

So, I mean, obviously the biggest development last year was the China ban, which completely shifted dynamics. Like before Bitcoin was predominantly mine in China. I mean, even though the dominance was like slightly decreasing, it was super important. all mining machines are still made in China, or the vast majority. In China, there is a super cheap power as well. So it made a lot of sense. And when China stepped in,

it completely changed the dynamic of where mining happens now. And so we've gone from, I think, a little bit more than 50% in China to now zero. And a lot of that hash rate has moved to other countries like Kazakhstan. A lot of it has gone into the U.S. So now, you know, yesterday and I think, I mean, just like these days, Foundry USA, the U.S.-based mining pool that only mines in the U.S. is number one, which was not even close to being true before this happened in China. And mining is now more common in Kazakhstan, a little bit more in Russia as well, Malaysia. A lot of that has shifted. And I think what it

showed people is that despite that massive 50% hash rate drop, it was relatively fast how the hash rate relocated. And it was relatively kind of painless of what end up happening. I mean, there's obviously a bad price effect, but just in general, the hash rate has recovered in about like four or five months. Like if we look at hash rate today, it should be already a little bit higher than what it was prior to the crash. And that just shows that Bitcoin is more resilient than I think some people thought that it was almost like one of the things that people always brought up is that it's too relying on China in terms of mining. And now we saw that in three or four months that can be fixed. And nothing really bad.

ended up happening in that time. So I think it was just kind of a resilience test. And it's also probably to the benefit that a lot of more mining right now happens in the US, which is just much more predictable. China was always a risk where you had no idea what they would do. So to be honest, yeah, I'm not like an expert in the sphere of Bitcoin mining, but yeah, I could like say something about mining in Russia because yeah, you know, like in Russia, we have like a lot of cheap energy, mainly because of like electric stations on rivers, but also we don't have like any understanding of regulations in the future. So this is the reason why a couple of my friends who, yeah, who like were minors, which like rented some like space just moved to Georgia mainly

only because of the lack of regulation right now. And also like a lot of, like talks about regulation Russia right now is kind of negative. So, yeah, people just don't know what's the next move of like Russia governance. And do you guys want to say anything also about the state of Ethereum mining, particularly after the implementation of EIP-1559? Because obviously that did have an effect on transaction fees for Ethereum miners. Yeah, what I would say, What I think it was the most surprising to me in 2021 was that Ethereum miners actually end up making almost exactly the same of money in revenue as Bitcoin miners.

If you make the assumption that they sell right after mining it. And there are two reasons for that. I mean, one is that Ethereum interest and price obviously just increased significantly more at Bitcoins. But second, also that prior to EIP 1559, but even a little bit after that, Ethereum is used a lot and because of that, people are willing to pay really high fees. So if you look at the ratio between the fees and the total mine amount for Ethereum is obviously super, super high. For Bitcoin, it's quite low. So that was the most surprising to me.

But I would say just in general, after EIP 1559, revenues decreased a bit. Obviously, miners make a little bit less. But just generally, you know, there's now this expectation of the merch happening. some point in the future and Ethereum actually switching off mining. So I think miners are becoming a little bit more cautious of that. But just in general, generating $15 billion is a lot of money on a yearly basis. In this year, miners found a new revenue stream is MIV extraction. So, yeah, I don't think that right now like MIV could help miners to avoid all

drawbacks from EIP. Yeah, but anyway, it's like additional from 2 to, I think, 10% of revenue. Okay. All right. So now let's talk about venture funding. There was just a lot of news that you guys had in your report about that. So why don't we just discuss kind of in an overview what you found in terms of the state of venture funding in 2021 and where you think we're going for 2020?

too, and then we can talk a little bit about some of the specific trends. Yeah, absolutely. So I think, like, the one really quick summary would be that venture funding overall has just increased significantly. Like, when you look at the chart that we have in the report, kind of looking at the VC funding year over year, I mean, we've gone from about like $3 or $4 billion to about $25 billion just like year over year. And that in basically any charts, when you see something like that, you know,

just a complete outlier, it's very significant. And I mean, no one could miss all of the announcements that we saw from VC firms over the last like three or four months, raising billions of dollars of capital. And all that obviously ends up trickling into crypto. A lot of it ends up going into seed investments, not too much of it into like late stage opportunities. But just in general, you know, like two years ago, it was basically just crypto vCs and no one really interested, like all the traditional VCs just pulled out completely. And now you have

pretty much all the VC firms, like even the ones that are not really announced, they're all interested. A lot of them are our clients and they're like thinking about their strategy to enter crypto. And I think part of that is that it's just now like much more investable. You can make much, much more comparisons. They're closer to traditional finance. They can think about defy in a way, how they think about equity in some worlds. They can make much closer comparisons. So I would say, you know, just in summary, just venture funding overall exploded completely. The deal size also increased significantly. So before that, you know, it was obviously like four or five times smaller.

Now it's not that uncommon to see like $70 to $80 million in pre-product valuations for some crypto projects. And it's just a function of so much capital being on the sidelines, so much capital for, you know, that's competing for a fixed number of deals. And if there's a really good deal and really good company or protocol that's developing something new, it has a massive premium. And it's very common now to see like $80, 90 million in pre-product valuation. So it's a little bit crazy. But just in general, overall, just a massive explosion. One of the reason for this is that right now we have some, yeah, like this multi-chain world. So a lot of projects just trying to launch some forks from Ethereum, for example, and, you know,

And we see us love this because, for example, say, didn't invest in something like Kerf, for example. So for example, it's a good to invest in similar project on Solano, for example. And also, like, the second thing is with this like multi-chained world, a lot of projects, just something like polka dot barit chains, for example. And I think right now we just like in the start of the wave of this like our chain projects and some like cosmos new blockchains. So yeah, we'll see in the next year. Yeah. And speaking about the size of the deals that Larry mentioned, you know, not only has an increase, but also we've seen so many more crypto unicorns. And I just wondered like, do you think that the market is just kind of getting a little bit too frothing because there's.

just so much money pouring in and they're all competing. And so is it like just kind of irrationally bumping up the valuations or what's your take on that? I think for sure, like there's a lot of, there's a lot of examples I can think of where, you know, for example, you know, protocols that still haven't shipped are now basically trading on the secondary market like $2 billion valuation. That seems a little bit crazy. And yeah, now there's like, there's like 50 plus crypto unicorns. And it used to be just exchanges. like two years, two or three years ago, it was basically just exchanges that were super profitable. And now you have all these other companies like infrastructure, you know, like protocol development

companies. And it's just become almost like expected, right? Like when you see a fundraising round of a company that is generating significant amount of revenue, there's a big, there's a big premium on it being a crypto company and VC investors just in general and MNA. investors, they kind of priced this in and say, you know, this will likely become a much larger industry in the next few years. So probably there should be a big premium. And even like you look at something like Coinbase, which is obviously going public last year, it's still trading at like 40 or 50 billion dollars in market cap or maybe even larger or higher now. And when you make comparisons and basically all the metrics to like any other exchanges or any other, you know,

FX businesses, the difference is like five, five X or more high. than those businesses in the traditional world. So there's just a big premium on crypto overall. I think this will probably continue being this way, just because it's a very kind of interesting industry for people to allocate capital too. And there's not that many opportunities to allocate in equity markets.

And obviously with Coinbase kind of opening the floodgates to go in public, there is now an expectation for a lot of these exchanges to do the same or for these infrastructure companies or even something like OpenC, right? I mean, they're just really big, really big premium on all those companies. Yeah, I do wonder if it's one of those things where it's kind of like directionally correct, but then for individual bets, it won't be.

So it sort of like makes sense and then also doesn't make sense. So let's now maybe talk about some of the specific verticals within the venture investment space. just looking at the report, it looked to me like defy and NFTs were attracting a lot of VC money. But why don't you just talk a little bit about kind of trends within crypto in terms of what's attracting money and what you expect to continue to attract a significant proportion of investment? Yeah, I think the most interesting opportunities for investors are always the ones where they see some sort of liquid exit or where they see an opportunity to obviously make the most money. So early in the year 2021, it was defy and it probably continued until like summer or something. Then defy started underperforming a little bit. So then it was NFTs.

So there were a lot of investments into obviously something like OpenC, rareable investments that in some way give you exposure to the to the, to the. the NFT market. And towards the end of the year, we saw a complete shift to just like gaming companies, uh, NFT, you know, using NFTs and games, uh, that has sucked out so much capital, you know, so, so that includes games, includes gaming guilds. Uh, Axi Infinity really, uh, was, was the role model for the play to earn games. Uh, and now you constantly see these deals funded. And you also see again, like very traditional VC companies trying to get as much exposure as they can. to these gaming companies and just using crypto in general in gaming, because you look at something like Axi Infinity,

which has a very liquid governance token, and it's trading much higher than like the AA gaming studios. They're gaming studios, they're producing the games that are played by, you know, hundreds of millions of people, and they're trading overall, you know, that studio is trading at less than what Axi is doing. And it is trading in a very liquid form. So obviously that becomes,

becomes for investors, this is an opportunity where they see this is probably under monetized. So a lot of the games right now can be making orders of magnitude more money. And that's becoming very interesting now for them. What I would say just in general, like from the deals and some of the stuff that I've seen, it's almost embarrassing. Like look at the games that are raising $100 million valuations. And it's like click-based games that I used to play in 2002. And they're trading at a billion dollar plus valuations.

It's a little bit absurd right now. and I think that will definitely end up collapsing. But the trend will probably continue and some gaming studios will start implementing NFDs. I'm pretty sure about that. Igor, what about you? What other trends in VC investment do you see that you want to talk about? I saw a lot of interest in like D5 protocols on a new L1s,

not only like for example, something of uniswap, but also some protocols who try to to create some more sophisticated yearn opportunities using something like options and so on. And for sure because of Solana high TPS, we could see even more, like, better projects which we couldn't see on something like Ethereum or maybe even on the roll-ups, to be honest. Okay. There was also one other trend and there was not just funding defy on L1s, but also funding L1s and funding L2s. There was a lot of investment also in these areas where like now people are almost expecting the next year of 2022 becoming the year of finally some roll up adoption.

So a lot of the roll up solutions raised a lot of money and also a lot of D5 solutions obviously building on these on these relapse solutions. So I think just overall, L2s obviously raised also a tremendous amount of capital. And we see it in Matter Labs, Starkware, all these development companies, they're raising at really high valuations. And it's because there's an expectation of them eventually having tokens and becoming liquid. And especially after what we saw with L1s this year, all of them basically popping off like crazy. If some of these L2 solutions end up getting some adoption similar to L1s, you can expect a, similar trend. A lot of the capital will end up going there. And I'm pretty convinced that that's going to be a trend of this year as well. Yeah. One other thing actually that I noticed was that

crypto financial services was also a popular sector for VC funding. And by that, you know, I mean things like payments and lending. But one thing that I wondered was, you know, obviously that sector is seeing a lot of uncertainty, at least here in the U.S., due to regulatory issues. And I wondered, do you feel like that's going to affect funding in that space? Or are you noticing hesitation on the parts of investors there? I would say there's definitely a lot of hesitation in terms of lending companies. But there's a lot of interest in companies like NIDIC that just facilitate institutional investment. And that I believe we also come into financial services.

So I would say overall, probably, I think even like companies like BlockFi, you know, Celsius as well, somewhat based in the US. They're definitely facing a lot of uncertainty, and the SEC has made it very clear that they don't like those businesses to be run in the US, and they don't give it their blessing. So I think in the lending side, absolutely, a lot of that will probably end up moving offshore as well. But just overall, I think financial services is a very logical way forward

where you try to extract some value and try to facilitate a lot of the institutional capital going into crypto. So I think investment overall will probably remain similar. But yeah, in terms of lending, there's a lot of uncertainty. Let's also talk about M&A, which was at a record high. How do you think we're going to see that trend go in 2022? Yeah, I think, you know, it was at a record high, but we almost expected it to be even higher last year.

With Coinbase going in public and them having a lot of capital, it still, there wasn't really any single like massive acquisition. that we've seen yet. There wasn't really much consolidation. And I think the reason for that was because none of the companies actually struggled. A lot of the companies, when they ran out of money, like, for example, when Blackfey had some issues with the GBTC trade, they just did this and raised money like that within a couple of days. Because why not, right? There's a lot of capital in the markets. And because of that, there wasn't much need of consolidation because there just wasn't a lot of companies struggling last year. This can definitely change next year.

year. But I think in general, we'll see a trend of company going public and then trying to acquire more companies. I mean, Coinbase has done it a little bit. None of the acquisitions were enormous, but I think this will continue being a trend. And financial services, probably data companies will consolidate a lot. Like, in data companies, you know, in data companies, you now have like probably 100 plus companies doing data in crypto. And it's a very commoditized market. And I think we'll see a lot of consolidation there. But just in general, because a lot of of a lot of money ends up going to tradable like token stuff because of that we haven't seen much and we've seen interestingly enough like some token mergers and MNA as well like the

polygon for example being one there are a few others that were really interesting so i think that will also be a trend in the coming years too Igor did you want to add me yeah maybe so yeah we just saw that like acquisitions between various DAO in crypto is not something special because even like two days ago I think we sell Rarik Capital and Fay Protocol acquisition before this we have a new chip network and a keep network and even like in the 2020 we sell a lot of projects was like acquired by a yearn so I think we will see just trend on this like Dow like Merge and Inquisition in like in the current year.

Yeah, I almost expect that to continue in a bigger way even maybe than in the traditional startup space. So in a moment, we're going to talk a little bit more about some of these trends, particularly layer one and D5, but first a quick word from the sponsors who make this show possible. Join over 10 million people using crypto.com, the easiest place to buy, earn, and spend over 150 cryptocurrencies. New users enjoy zero credit card fees on crypto purchases in their first 30 days. With crypto.com earn, you can get industry leading interest rates of up to 8.5% on over 40 coins, including Bitcoin, and earn up to 14% on stable coins. With the crypto.com visa card, you can spend your crypto anywhere. Enjoy up to 8% cash back instantly, plus 100% rebates for your

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Igor. So we've kind of briefly touched on this competition amongst the layer ones. And I'm sure we're all aware it was early on finance smart chain. Then briefly, very briefly, Cardano. And then Solana, obviously, was a big, was a big, you know, new layer one to emerge. And then at the end of the year, really avalanche and maybe even Tara. So how would you guys characterize this race at the layer one level. I would say just in general, there were so many new retail participants that wanted to try defy and couldn't. So even like for me, anecdotally, when a friend comes to me and they want to put in a few

thousand dollars, like obviously, I'm not going to tell them to go use Ethereum if they're going to end up paying like 10% of their investment in fees. And then so we ran into this issue where Ethereum was being used so much and was being pushed to its limits so much that it just wasn't appealing to a lot of the newcomers. That's what Binance really capitalizes on, obviously, with Binance Smart Chain. They were the first chain that really capitalized on EVM compatibility. So it allowed teams to basically just fork the projects that already existed on Ethereum and just make it a lot cheaper. So just in general, we ran into this trend of people wanting to use Defi but being unable to because they were just priced out completely.

And because of this, when you have something like Ethereum, it's almost like, like the goal, right? It's almost like something that those protocols aspire to be in terms of market cap. And all these L1 protocols, they always, they have almost, they promise unlimited upside. It's always like, you know, if everything works out well, like we're going to have this much usage, we're going to be at this market cap. And that attracted a lot of people like being interested in getting exposure to these. So I think like Solana as well was quite notable because it was the first one that was able to bootstrap its own development. and ecosystem without relying on Ethereum so much.

And that was mainly because of its kind of, you know, of Sam and FTX, just kind of incentivizing them as much as possible, almost like guaranteeing listings if those projects were interesting. So just in general, there were so many different L-1s that started getting some adoption. And because of that price, you usually followed and people wanted to get exposure to it because there's like unlimited upside compared to something like Defi, where you already know, like, you can make some comparisons to traditional finance or something else,

but with L1s, there really isn't a pricing metric. So no one knows what these tokens should be trading at. And because of that, everyone's, like, aspiring to be Ethereum. And because of that, like, I think it was just really an interesting sector for people to allocate capital too, because what we saw after Solana, like now people are just chasing these. Like, you know, basically this week and last week, like NIR is getting a lot of this attention. And it keeps going from one to another to another to another. And it's like this continuous hype and continuous like basically free competition of these L1s to try to get users, try to get developers,

try to make it interesting for users to start using their chain with like incentives and stuff. So I think we'll continue seeing this. But I do anticipate this morphic a little bit more into the L2s in this year. So yeah, I really also was impressed by like Solana in terms of like bootstriving of developers activity. Because right now we have some kind of technical depth, which is like EVM compatibility, because a lot of developer and developer tools right specifically for EVM. And a lot of like defy primitives like uniswap, like balancer like some lending protocols like compound or other also right and solidity.

And you just couldn't use them on something like Solana or even near. So this is the reason why we also have a trend for building some kind of like EVM environment on chains like Solana in nearer, which is like neon EVM and Aurora for sure. But yeah, I really want to see that in the next year we go see more like compatibility and interoperability between various chains. because even with like roll-ups right now, we also need to use like some new smart contract language, like Cairo, for example, for Starkware. And I know that, for example, StarCware spent a lot of effort and time of creating some like developer tools.

But yeah, anyway, right now, yeah, is an issue that if you want to bootstrap your blockchain, you definitely need some kind of like EVM compatibility. Yeah, well, I wonder, you know, once Ethereum shifts to Ethereum 2.0, probably sometime in the first half of next year, how do you think that's going to affect this race or competition at Layer 1? And do you feel that any of these chains that kind of benefited from the high fees on Ethereum this past year will have lasting traction? Or do you feel like once they're scaling on Ethereum, then we're going to see capital flow back to Ethereum? I personally think that there will continue to be multi-chain opportunities. I think, you know, everyone says like Ethereum 2.0, maybe start up next year,

I would challenge it a little bit. I think it's going to be much longer than that. I think what's going to be obviously more important in the short term is just the L2s and like scaling through roll-ups. I think for Ethereum 2.0, there's a lot of uncertainty and not just around timing, but also like how well will this actually end up working. How much will this fragment liquidity on these protocols? how compatible are they going to be across the board?

And I think my view has changed on this significantly over the last two years, because before we had basically like Neotron and these blockchings that basically made like, I don't want to say the dumbest, but the kind of the easiest compromises that they could to get as much adoption as they could. Now you see a little bit more sophistication.

You see L1s just in general compromising in ways it makes sense. So Solana, for example, is making the bet that this will all have to scale on chain in order not to fragment liquidity and in order to just retain users on this one layer. And I think these different approaches and these parameters that you're playing with

are going to be important. Like for example, for something like games, it's not too important to be as decentralized as possible. It's important that you have the ownership of the assets and it's important that you have some like regulatory arbitrage, basically. Whereas for financial services, you know, I keep going back to this,

but like I would not feel comfortable putting like tens of millions of dollars on Solana today because you just don't have the certainty of it like being constantly constantly up. And if something happens during that time and, you know, price moves too much, your capital can be at risk. So for that, for that sense, I would feel much more comfortable keeping it on something as decentralized and as with the highest uptime possible, which is basically Ethereum right now. So it just, to me, it always depends on like the use case that you're going for. And I think there are going to be some more. use case specific chains down the line.

And I don't think even if it's like Ethereum 2.0, and even with roll-ups, like I think a lot of the L-1s, obviously, will end up correcting. And the ones that don't end up getting adoption, don't end up getting developers will all trend to zero. But I think there will still be opportunities. And I think we will end up living in a multi-chain world

that has to cooperate with one another. Yeah. So I also think that even with this transition from like monolithic execution environment to something which like with like roll up centric vision we would have some like space for various like blockchains and even like side chains for example like running for axi infinity so you don't need to like store all data and execute all transactions uh in one chain anyway so yeah even something like personally for sure uh like cosmos vision is like much better.

For example, something like PolkaDot, because you would have like blockchain for every app, which you want. So if you want to like some lending protocol, you would have like lending protocol blockchain. You could like connect this blockchain from various bridges to like Ethereum to other cosmos blockchains or even to PolkaDOT.

So yeah, you definitely don't need to like execute all transactions. and all applications on one blockchain. Yeah, Larry, what's your opinion about which interoperability ecosystem will gain more traction? Yeah, I think just in general, I agree with Igor that Cosmos is the most interesting in terms of the goal and kind of the design of the protocol where we've seen the adoption that Terra was able to get. And then the more that happens and the more these apps can interact. operate with one another, the more interesting it's going to be. I think just in general, what's stopping Cosmos to become more talked about and become the

narrative is just that they don't have great token economics, and the token is not really connected to the performance of the apps that end up building on Cosmos. And because of that, a lot of the, you know, there just hasn't been too much, too much interest around Cosmos outside of the apps building on top of it, and Cosmos doesn't benefit too much from it. But in terms of design, I totally agree with Igor. I think it's just a superior design. But it's just one approach.

I think that's kind of what I would want to leave people with is no one really knows what will happen. No one knows if Ethereum 2.0 workout. No one knows if relaps will end up getting significant adoption. It's all experimenting right now and everyone's taking different approaches. And eventually over the long term, the best approach will end up taking the most market share. And I think that's one of the great things about this ecosystem is that, you know, maybe Tron did well over the short term, maybe EOS did okay over the short term, but over the long term, all of these solutions that don't take great approaches will trend to zero. And that's how it should

be, it should be perfect competition for these solutions. And that will end up pushing this to be more friendly for users and we'll end up, you know, onboarding as many customers as possible. All right. And so we're going to talk about Defi in a moment, but we did touch very briefly on layer two. I don't know if you wanted to kind of talk a little bit more about where you think that's going to go. Because clearly that space is sort of, yeah, at the ground level. And it's kind of up in the air where things are going to go with that. Yeah, you probably have more elaborate thoughts here. I'll just kind of summarize.

So like right now we already have optimistic roll-ups in production. You have arbitrium and optimism. They've progressed quite a bit since they launch. But I would say almost everyone would say that the adoption has been. completely underwhelming so far compared to like what it was hyped up to be even what like i expected i think eager as well in general it's because you have all these like cheap alternatives that make different tradeoffs uh which normally users don't really care about that much like you know most people don't want to wait seven days for for withdrawing their tokens most users

don't want to pay three or four dollar fees if they can pay few cents on salana and and because of that i think they got very little adoption so far uh you know there are solutions that are trying to tackle that there are solutions that will make withdrawals much faster if you pay higher fees. And also, I believe that arbitrament optimism will eventually do a token that will start a massive interest. I mean, it's always what starts all of this. You look at interest in Compon or interest in Alvay prior to the token dropping basically for compound and then more tokens.

There was almost no interest. And after that, you know, you can build the incentives in a way where, for example, if people that end up bridging over or if people just end up using the DAPs on these chains somehow get rewarded, you get some wider distribution that I think can start another wave. And then the second part of L2s is obviously the ZK relaps. To me, that's the more long-term oriented solution. I mean, there are a lot of people that disagree. A lot of people think that optimistic relaps are also the optimal solution.

I personally think that something like Starknet and ZKSync will end up being a significant significant narrative of this year. And both of them are definitely planning tokens as well. And I think it's just a more logical and a more pragmatic approach. And I think it will end up getting quite a bit of interest this year. So yeah, I also think that optimistic collapse is only like short term solution. Yeah, but as Larry said, right now, they're like already in production. And people really use them even with this long withdrawal time

because of some new protocols like Hague Exchange who helped people with instant swabs because I think operators of this exchange just like verify all roll-up transactions. But yeah, anyway, like optimistic flowlops is a good way only because of EVM compatibility right now. So people could just reuse existing Ethereum instruments like Heartcat, Web3js, and anything else. And also they could just redeploy uniswap or, yeah, or other, yeah, or anything.

Yeah, but Zika role apps are definitely like better alternative to optimistic role apps. but the main reason which this is like I think not a good solution for like the next half a year or something is not only that they're not in production right now but also because of like the lack of

like general like EVM execution because you need to use some like new specific smart contract language to do all this ZK magic. So you need like some like toolbox for this contracts. You need some like some framework and some like basic contracts like something like open Zeppelin contracts, which we already use for like EIRC 20 tokens on Ethereum. Also like this Zichiro laps are kind of like more expensive term in terms of executions. I don't think that we could see. like more like decentralizations in terms of like relayers who would like execute all transactions and generate all this mathematical proofs.

But I don't think that we need decentralization in this terms because anyway we have like Matt and also we have Ethereum security for this transaction. So yeah, I think it can relaps a definitely like long term solution for scaling and not only for Ethereum. Yeah, so I agree with Igor for that, and I think for Zika-Rubov specifically, the lack of EVM compatibility will be something that will end up basically delaying that because exactly like Igor said, there's not enough code that can be forked. And because of that, you'll have to go through the exact same process as Solana did,

basically finding new developers, incentivizing these new developers to develop there. And because of that, it will take longer. But what I think, like, listeners should realize is that actually, there are limitations to EVM as well. So like going through your own language, and in most cases, is the optimal solution if you're going for full scalability, but it's the more painful one. And Solana has seen exactly the same issue. So I think it will end up happening this year. It will be slower than people realize, but it will end up being the breakthrough, I believe, of 2022. All right. So let's now talk about defy. How would you say that that sector overall, like defy tokens,

how did they perform versus Bitcoin and Ether? And then we can go into specific Defi. So yeah, we saw DeFi doing really well in Q1 and Q2 of last year. You know, AVE, Compound, Uniswap, all these protocols perform incredibly well in the first half of the year. And then we ran into a massive slump in Q3 and Q4, where if you basically chart Defi or any sort of defy token over Ethereum, it's basically a straight line down. And I think the main reason for that has basically been dilution of capital. So, you know, you have multiple different A1s, and there are obviously early-stage opportunities to invest in these primitives on them.

So if there is even a 5% chance that something like Solana will end up taking over Ethereum, those primitives obviously are more interesting to you if they're at much small evaluations than something like uniswap or compound on Ethereum. So I think we ran into that issue where capital just got diluted into other protocols and people started chasing Defi protocols in these ecosystems. And then the second issue was that just, you know, there were just new narratives, basically. We saw it a little bit of a DeFi 2.0 narrative and just in general with NFTs as well,

where Defi was almost like exhausted. And in my opinion, it was also difficult to justify investing in it in super high valuations. So if you see Uniswop trading at like $25 billion, you know, you're looking at like 3 or 4X upside maximum, at least in my opinion. Whereas if you look at other like earlier stage opportunities or different, different layer one ecosystems, you can justify much easier to invest in them. And because of that, we've just seen a massive slump and narratives moving in different directions. Yeah, and I just like really just like really, yeah. Okay. So let's, why don't we move quickly through some of these different defy sectors?

One thing, you know, that was interesting to me is Dex volume peaked in May and hasn't really recovered. What's your sense of why that is occurring? In May, I did one of research about like dex volumes. And I find that a lot of dex volumes are created by some kind of like average trash bots, which mainly use like sushi swap and uninswap version too. And also in May we see this like ship mania with a lot of like retail attention. But after this, we also sell listing of ship on main exchange like Coinbase and Binance. So I just think that most of this Dex volume just moved to centralized exchange because, you know, like even because of like Ethereum high fees, people, centralized exchange and more like friendly for like retail users.

So I think it's definitely like one of the reasons. Yeah, I think Igor is totally right. It was like it completely corresponds with the Shiba mania. And initially it wasn't listed on many exchanges, then listed on FTCS, finance and a few other larger ones that people can just could just easily go to to trade it. And obviously when you're dealing with like, you know, $100 fees versus just going on an exchange, especially for these guys who are buying, you know, $200, 300, 300, it just makes a lot more sense. So I totally agree with you. It was just like a massive retail main. on that side of things.

And then also we keep going back to this, but a lot of that end up moving to L-O-1s as well. So, you know, pancake swap, for example, its volume has gone up significantly. I mean, initially it was barely competing with the uniswap, and then at some point it had larger volumes than you had swapped it. And a lot of that was just kind of like chasing some questionable project, like some of it's like basically a Ponzi-based.

But just overall, I think it was mainly the fee issue. And like you gore mentioned, and just people moving to centralized exchanges and centralized exchanges having enough liquidity. Lending has always been a really big draw on DFI. What trends did you see there and where do you think that will go in 2022? I would say in terms of DFI, like there weren't any like trends that stood out too much. I would say just in general, you know, the more these tokens are traded and the more these tokens are interested to people, the higher the demand for lending against them will be.

In this case, we saw exactly that. It's kind of like a lending is a very agnostic thing to agnostic instrumental markets. It's not like too interesting, but it's a very important, very important primitive for people to have access to in order to, you know, be able to borrow against these assets. So in general, like I didn't see any trends that stood out too much in terms of lending. Outside of some of them, obviously, again, like move into other loans. But maybe Igor has something. So yeah, we also saw a lot of new like defy 2.0 like protocols use some, you know, like stable coins like USDC, some like fracks thing. Yeah. And yeah, when I said like about like this protocol, I mean something like OHM forks and or something like she was well because I was kind of shocked when I found it.

like all unit tokens from compound were like borrowed only for some like Shibaswap farm. So we will definitely see in this year like more use cases for using tokens from like compound and now in some like new like crazy farms like yeah, like in the last year. Okay. So we're running out of time. So what, Which trends in Defi do you feel like were the most notable and are things that you're going to be looking out for in 2022? I would say from my side, obviously, you know, recently D52.0 was the most noticeable trend by far. Like Olympus Dow kind of change how Defy protocols think about liquidity. And I would say in general, and we saw this a couple of weeks ago with EURN, DFI like 1.0 protocols or whatever you want to call them, the original D5 protocols, revamping their token economics to be just,

more easier to control. So in this case, you try to decrease emissions and try to make it more compelling for people to buy. I think that's going to become the new standard in the coming months, where a lot of the earlier DeFi protocols will just revamp their token economics. So it's more, again,

so there's some reason for people to get excited by them again and for them to actually hold them. We started with this trend, obviously, with compound, like just doing liquidity mining, and because of that, you have high emissions. And it turns out that if you give people free money, They tend to sell it and they tend to use it to buy stuff in real life as well. And that obviously has negative effects on the price and investment interest in these assets.

So I think we'll see a lot of that. I think we'll see a lot less liquidity mining, a lot less emissions. Like Uniswap kind of paved the way by stopping that on the base layer, like Sushi Swaps still does a lot of emissions. So I think we'll see that stop soon and a lot of token economics revamps. Yeah. Yeah, and I'm really interested in more like protocols which create new wild opportunities. Like as I said, something like with options or structured products like Rebound, for example.

Because this is like a new way to earn wild and not something like lending or like liquidity providing. So we will definitely see more products and yeah, for sure on like other chains than Ethereum. All right. So one trend that I definitely want to draw out is there were just so many exploits in defy this year. What's your take on that? Is that just like something people will have to put up with? Or what do you think the industry is going to do about that, if anything? Yeah, I think Igor should just talk here because that's his area of specialty. So, yeah, we saw a lot of defy exploits. But yeah, like the root cause of like most of Ziphy exploits. But yeah, like the root cause of like most of them is just like Oracle misuse, which is like bad practice even like from something like 2018. And also right now we saw only exploits on EVM chains or EVM compatible chains for sure or something like multi-chain protocols. and we didn't see something hacks for example on Solana and even like a week ago like one of the best

like our digital companies on Solana Neodyme just found some like vulnerability in one of the main defy primitive for Solana and I think that we will definitely see hacks or exploits on this new chains, but the main reason why we didn't see something like this in the last year is just the absence of like source code, open source. Because competition, new protocols on new L1s just didn't want to share their public card, yeah, to like, sort of like market share right now. But yeah, in terms of even competitive chains, we will definitely see a lot more defy exploit and I think even like more sophisticated than in the last year. All right. One other thing about defy that I wanted to bring up was in your report, you said that

you felt that bifurcation of defy would be inevitable. And by that, what you seem to be saying was that there would be a sort of non-KYC defy and then a KYC defy for institutions. And so, I'm just curious for your thoughts on why you see that as inevitable. Yeah, I think it's becoming very obvious based on what Avey is doing, what compound is doing. And when we talk to institutional clients, they're just unable to trade a lot of these things on DFI. They're just unable to touch it without proper KIC. And because of that, these protocols are missing on billions of dollars of potential inflows, billions of dollars of capital that they can get it, you know, if they slightly change their protocols.

So the way I see this is that compound AVE, even UNISWAP, will create products on top of these protocols that will be more friendly to institutional investors overall and eventually will allow them to interact with it in some sort of a KYC way. And on top of that sourcing liquid in DFI in general and just giving them better yield opportunities. I mean, we constantly talk to institutional investors that ask us like, what's the way that we can actually get. access to this like 8% yields that we normally can't get anywhere else. I mean, they're used to getting like 0.1.2% under capital. And all of a sudden, they see that, you know, there's billions of dollars like earning relatively high amounts in APIs. And that's appealing to them.

But unfortunately, like because of regulations in the US, like it's just very difficult for them to get access to it. And because of that compound and Alvair and UNISOP will create protocols or maybe not even protocols, but more so like just just vehicles for them to use. this way. But I think, like, for retail investors, this will obviously be very unappealing. All right. So let's now turn to NFTs because we're running out of time. And obviously, this is going to be probably a huge trend in 2022. Something that's interesting, though, of course, is that we did see there was a spike in activity of NFT trading in August and then volumes have

really fallen. So where do you think the market's going to go in 2022? Yeah, it's a really good question. I think we've now seen basically like two hype cycles in NFTE. One was basically around March. And then NFTs crashed by like 70 or 80%. And I remember thinking, okay, this is over. Like this trend was just super short. It's done. And then all of a sudden, you know, we saw like another like 10x going from there.

And now if you look at the March period, it like barely shows on the chart because the other one was just so much larger. And now we're seeing a similar thing that's just a complete cool down. And I think just in general, I mean, it's there was. obviously massive hype, massive hype around PFP projects, massive hype around regenerative art. And, you know, people just were trading that. They had massive FOMO.

They saw a lot of people just making a lot of money out of nothing, right? And that's always just encouraging a lot of interest from retail investors too. I think my prediction would be that PFP projects will not, you know, they will not end up making infinite amount of money anymore. There'll only be a few. That will be still viewed as important by people. I think a lot of this will end up going in this direction of just blockchain gaming overall. NFTs actually being used for a specific purpose.

NFTs being used in financial products more. And one-on-one art as well, I think, is going to be cool. But just overall, I mean, you know, something the infrastructure needs to get better. I mean, we keep going back to it. but issuing an NFT and trading NFT on Ethereum is just completely financially unfeasible. And because of that, like almost no retail investors were like super interested. But because of that, then we saw something like Flow and NBA Top Shop, which is free to trade, like just get a ton of attention from people.

So to me, there's a very clear mainstream appeal to NFTs. And I think that's going to continue being the case. And it's going to continue being popular in the future. But it's going to be more refined and it's going to be more focused on, I think, higher quality projects down the line. Yeah, and I think that like non-cryptop people don't really like NFTs. We just saw this, for example, like even like a month ago or something when like Ubisoft, which is like AAA game company launched some NFT marketplace and gamers just like try to cancel company because of this.

So, yeah, and even in we even saw this case with like StarCard 2. It's also like a game when people just also try to cancel a company because of plan of like integrating NFTs in triple A game. Yeah, and also like all these like integrations between NFTs and brands. We also see a lot of hate because, like, crypto advanced people just trying to use some, like, strategies to mint, like, a lot of NFTs in one transactions and, like, just non-crypto. People didn't even have any opportunity to mint. And for them, I think this is just like, looks like a scam. So we definitely need to do something if we want to have adoption in like an FT sector.

Yeah, that backlash is very fascinating to watch. And it's also fascinating to watch how the different brands handle that because some of them just cancel their plans and others kind of go forward but quietly. And yeah, we'll see what happens. And especially after the merge on Ethereum and Ethereum's proof of. mistake, then, you know, the kind of objection that we see from mainstream people, at least when it comes to NFTs on Ethereum, it won't exist anymore. So, you know, what will that do for adoption? Will they still hate it anyway? Or, okay, so we're definitely over time, but there's just a couple more big things I really want to cover quickly. So obviously, gaming has been another big area of NFTs. I, you

I don't know if this is like exactly the same thing, but clearly there was a lot of hype around the metaverse earlier this year. So I was curious what you thought was going to happen in terms of games and maybe the Metaverse too, which is sort of related. Yeah, I would say on Metaverse, like, you know, there was obviously a lot of hype and it all started with Facebook just changing his name. And a lot of companies now all of a sudden are interested to allocate to it. But when you actually look at like the projects,

that exists today, like Decentraland or Sand, it's not a very complete solution. Like if you actually try to use it and I encourage people to try, it's not that great, right? Like it's buggy, it doesn't really work. You know, it's very overpriced because of the hype. It seems like we're in very early innings of that. I can see this trend becoming much large in the future, but my guess would be it's like two, three years. at least away from like getting any significant interest and any significant adoption. In terms of NFTs in games, I think we're probably closer to that.

You know, like seeing Axi Infinity trade that high and I already mentioned this, but just in general, it's appealing to gaming studios, even if they're getting backlash because they just think that they can monetize it much better. They believe that a lot of their games are now under-monetized. Like if you're selling a lot of money, if you're selling a lot of stuff in your games, and then have the opportunity to sell it as NFTs and then collect commission on it as it gets resolved as well, that will end up being very appealing to people to a point

where it's going to be difficult for these companies to just say no, we're not going to do this for ideological reasons because the mispricing can be like, you know, in billions of dollars. And so I think we'll see a few like AAA gaming studios introduce some NFTs in games this year. I would not be surprised. But just in general, like, you know, I already mentioned this as,

again, but the trend of like now super bad and super low quality games, just raising a lot of money just because they have a token and they're similar to X-D infinity, that trend will absolutely die. And hopefully it will turn to higher quality and it will turn to games you actually want to play and not just a click farm that, you know, a bunch of like people in China just just click like this on a bunch of phones and get it down. It should be a little bit more interesting than that. And I've yet to play a single game that makes it interesting enough where I want to actually spend time on it, not because I want to make money, but because I actually want to play it.

And I think that will hopefully happen. Yeah, and I just totally agree with a lot of it because we are really so early for any mention of Metaverse. So there were so many other topics that we could have covered, but we're going to leave it there because these were, I think, all the main, I mean, there's really so many. But it's been so fun chatting with both of you. Where can people learn more about each of you and your work at The Block? Yeah, so for me, you can find me on Twitter at Lawmaster. You can reach out to me at Larry at theblockCrypto.com if you have some questions. Or even for people that are interested in working crypto, we're still hiring a lot, so you can definitely reach out.

And, yeah, I lead the research team at The Block. So my Twitter handle is Frank Researcher. And I think you know that I read it. I read about various defy hacks. So if you want to join to my data team and help us to create and build new data products or have any suggestions for our data dashboard, just let me know. Okay, perfect. Well, thank you both so much for coming on Unchained.

Appreciate it, Laura. Thank you. Appreciate it. Thanks so much for joining us today. To learn more about Larry, Igor, and The Block, check out the show notes for this episode. Unchained is produced by me, Laura, with help from Anthony Yoon, Daniel Nuss, and Mark Murdoch. Thanks for listening.