Crypto Macro Intro 2022

Macro Trends within Crypto

This post presumes the reader to have basic crypto knowledge and a basic understanding of where and how crypto is traded; as well as an understanding of how users take self-custody. After the paywall goes up on 1/16/2022 a free post will be made for absolute crypto beginners.

To put my experience in context. I still consider myself to be an amateur in the crypto space, I have been the spectator on the sideline watching bitcoin for the better part of a decade until some good friends of mine that very well may be reading this convinced me to make my first purchases in spring/summer of 2020. While I do have a more mature and nuanced view of the global financial macro and how this will affect the crypto markets, I still wish to put my amateur crypto experience into perspective for readers.

Table of Contents

1. Historical Background

2. Trends in Hindsight

3. Present Day

4. Interoperability

5. Conclusion

1. Historical Background

The first thing people need to understand about crypto, is that it is a competing sector within the economy, and its uses are limited by our imagination and the proficiency, time, and dedication of the developers coding new projects. It is constantly evolving and new protocols are emerging all of the time. When crypto as we know it first emerged as bitcoin, it was programmable, but very few people understood just what they could do with it aside from using it as a simple means of payment. For instance, the stablecoin Tether, used to use the Omni layer of bitcoin, however now almost all Tether activity occurs on Ethereum and BSC (Binance Smart Chain). The first NFT’s were created on Bitcoin as far back as 2012. Much of what was done on bitcoin, has moved away from bitcoin to platforms that support these functions more efficiently.

The crypto market as it exists today is a snapshot within this moment in time. Any token in the top 20 today, can fall out of the top 100 next year. The visualization below can help you to conceptualize the potentially fleeting nature of any crypto protocol.

Please be mindful that what is true today can become meaningless in just a year or less. For now Bitcoin and Ethereum are the big dogs, and it will take a lot to displace them. You should not trade as if you know what will replace them or when, but you should be mindful and watch your assumptions about what will and won’t still be around 20 years from now. We are still very early.

2. Trends in Hindsight

It’s important then for us to always be forward looking when it comes to trends. There are several trends that can now be identified from viewing the past.

Centralized Exchanges

One big trend was the move for Bitcoin transactions to move away from pseudonymous P2P transactions between 2 individuals; and towards centralized exchanges. Mt. Gox was the first big centralized bitcoin exchange AFAIK, but taking my first hand experience into account, it’s possible that I am wrong about this and there may be another than can be considered the first big one. In the period from 2014-2018 we could say that forward thinking individuals at that time were creating such exchanges and getting them licensed with the expectation that trading volumes in this space would increase. Those people were right, and most became very rich.

The ICO Craze

The next big trend in my mind was the ICO craze that was born on the back of Ethereum ~2017. Ethereum as a smart contract platform offered far more functionality than Bitcoin which allowed for other tokens to be created on top of Ethereum, and forward thinking individuals at that time were trying to launch tokens with optimistic white-paper releases, some of these tokens went on to become legitimate projects, others tried and failed, and still others were scams from the start, this trend was probably exacerbated a bit by the simultaneous run up of BTC from ~$900 to ~$20,000, as many in thee space found themselves awash in liquidity and speculation on many different alt-coins was fueled by this liquidity.

The Launch of DeFi

The next trend, and one of the most important was DeFi (Decentralized Finance). This initially launched on Ethereum during the ICO craze, and the first protocol to launch was Makr (December 2017), which is the model that a lot of DeFi is based off of even today. Makr allowed users to deposit assets and then take a loan against it in a stablecoin (DAI). Unlike Tether and some other older stablecoins, DAI is not backed by US dollars in a bank account. DAI is backed by the assets that users are borrowing against, as those loans are over-collateralized. What this means is that if an example protocol requires 200% collateralization and you want to borrow $100, you have to deposit at least $200 worth of assets to the smart contract. And so long as those assets are worth $200 or more your loan stays open. If the value of your assets fall below $200, your assets are automatically sold to repay the loan until the collateralization ratio is above the limit. Through this method, you can guarantee that the stablecoin is backed by assets and sufficiently collateralized, while existing solely in code with no physical assets backing it. This note about how DAI and Algorithmic Stablecoins function is important for the trends I see coming in the future.

DeFi Summer and Liquidity Mining

But back to the past… DeFi protocols launched in 2017-2018 on ETH, but didn’t really start to take off until 2020, which was called “DeFi Summer.” It can be said that DeFi didn’t really arrive on the scene until DeFi summer. In 2020 (and 2021) liquidity farming, and yield farming became the big trends for people to participate in. When new tokens launched, or new protocols launched, they wanted to attract liquidity to increase TVL (total value locked) on their platforms or in their liquidity pools. So they gave token awards to people who deposited liquidity and held it on the platform. And of course this resulted in an army of mercenary capital chasing yields on new tokens and getting in and out as quick as they could as this behavior created predictable price patterns for new token launches. This sort of reward strategy resulted in some insane APRs for participating often with 4 and 5 digit returns in the first 3 or 4 days, and as protocols got mature (5 or 6 months old) those returns might have dropped to 20-50%. Until these protocols hit levels that the markets consider reasonable these returns continue to drop. As a note, I currently believe that the reasonable APR for a mature DeFi protocol is probably 12-40%.

A meager 447.79% APR on a 5 week old DeFi platform (Arkadiko)

3. Present Day

So what trends should we look towards in the future now that we have roughly covered the trends of the past? (I’m sure I missed a few, please leave comments about other trends in crypto that occurred).

At risk of sounding too much like the anarchist that I am, I believe the next trend in crypto is going to be a mix of several things, but primarily, escaping the no fun police wishing to enact government regulation. One of the products that launched during the DeFi trend, were DExes (decentralized exchanges). A DEx is an exchange that exists purely in code on the blockchain. All you do is connect your wallet and you can buy and sell with the assets in your wallet. However they are limited to whichever chain they are written on. So a DEx like Uniswap, which was written on ETH, can easily list any ERC-20 tokens, but can’t list any BSC tokens (I know, they can now, I’ll explain that in a bit). The upside of a DEx, is that it is completely pseudonymous and no KYC requiring you to input a government ID to attach to your account, and since they exist wholly in code, have no bank accounts, nor any physical address; they find themselves completely out of reach of nearly all national governments. How can a regulating body attack a website based in the island nation of Mauritius that scarcely even has a bank account or address and merely pays web hosting costs? They can’t really, and even if the government gets the web hosting platform to go after the protocol, there already exists decentralized file hosting, and as these protocols improve, we may see DeFi and other blockchain activities hosted wholly and fully away from the reach of these entities.

The other regulatory push I’m seeing is centered around regulatory entities finally discovering stablecoins. These entities are mostly retarded and not up to date with the sector, so they are only targeting the most visible and centralized stablecoins. For now they are only able to target Tether in an attempt to restrict stablecoin issuance to only large banks and financial institutions to the detriment of Centralized Exchanges that don’t play ball. Governments have no ability to target algorithmic stablecoins, nor stablecoin minting in DeFi from users connecting pseudonymously with their wallets. This is for the same reason that governments cannot target DExes. When something is truly decentralized there is no neck to separate the head from the beast. We are the proverbial Hydra and poor Hercules has nothing but a sword.

Cointelegraph - story on Iron Finance

So there are two trends that we see here both driven by attempts to avoid regulation and hedge risk. One is a move away from CEXes (Centralized Exchanges) and towards DExes. The other is a move away from fiat backed stablecoins to algorithmic stablecoins.

The main problem is that one blockchain often cannot talk to another. If you have assets on BSC, and want to move them to AVAX, prior to this summer, you had no way to do that without sending them to a CEX, selling them and buying a token that was compatible and then sending those tokens along. A DEx cannot solve this problem on its own. Over this past year a few bridges were built between L1 blockchains to allow the limited transfer of assets, for example, here are instructions for using the AnySwap Bridge to send assets between BSC and AVAX. These bridges can be clunky, risky, expensive to use, time-consuming, and some of these bridges are centralized, etc. etc. etc. For instance, over the weekend I wanted to bridge FTM to ETH, and it took over 16 hours for the transaction to finalize using Multichain Swap. And no, I did not send a test amount first. These sorts of swap times are unnfortunately normal right now. You are either paying high fees, trusting a small number of centralized validators, giving up custody, or waiting for long swap times to use bridges. You have to pick your poison.

4. Interoperability

So, now you are starting to see the problem to be solved, and the incentive to solve it. The problem, in my mind is for a decentralized bridge that is simple to initialize, and allows for any blockchain that connects to this bridge to be able to connect to all other blockchains. There are a few in this sector that I am aware of, and probably more that I am not aware of. One of them is going to win this sphere and win big in 2022.

$DOT - Polkadot is one of the pre-eminent names in interoperability. I have a moderate understanding of their plans, but essentially, if an existing L1 creates a parachain on DOT, they can bridge to it fairly simply from their L1, and then are connected directly to all other L1s that have created parachains. DOT could be considered a L0 in that the projects built on top of it are L1’s and DOT is the mesh or net that connects them all together.

$ATOM - Cosmos is another interoperability protocol that is similar to $DOT. ATOM’s protocol is called IBC (Inter Blockchain Communications), Cosmos acts like a service provider between all of the chains connected to it. Of note, an EVM hub and a Hub linked to CRO (Crypto.com - called Cronos), are both coming on the Cosmos network very soon. Once connected to ATOM, you are connected to all other hubs connecting to ATOM.

$ICX - Icon is another interoperability protocol. It is different from both ATOM and DOT in that it is a Level 1 protocol and the solution being implemented by them is called BTP (Blockchain Transmission Protocol). It is probably the simplest solution, in that it is simply a smart contract to be implemented on the the chain that wants to connect. Once the contract is in place, anyone from that chain can connect to any other chain that has also implemented the smart contract. This is the simplest to implement from a developer resource standpoint, but is currently not implemented and is supposed to be live by the end of the year.

$Link - Chainlink is known as an oracle, however they are expanding their operations to create an interoperability protocol using LINK called CCIP. CCIP is still under development, and it is unclear of when it is slated to launch.

There are probably even more protocols than this working on interoperability, and I am sure that some of you following me can run circles around me when it comes to the technical explanations about the pros and cons of each of these protocols or the others working on interoperability. I leave the bulk of that conversation and research to you.

5. Conclusion

So, as we follow the trends in crypto, we see that the continued push for decentralization and escape from regulation will lead to more adoption of Decentralized Exchanges with algorithmic stablecoins, and for interoperability to allow cross-chain assets to be deployed to these DExes. Some basic investment advice following this macro trend would be to place a small speculative play on the interoperable sphere, and to find DExes that are adapting to cross chain assets. Currently interoperability is limited to strict 2 way bridges, and mainly connecting ETH and EVM compatible blockchains to Binance and a few others. The main thing that this allows for is for liquidity on ETH to flow out and participate in DeFi on other blockchains without forcing users to sell their ETH to do it. This should be telling you something about how this bull market ends. We are removing sell incentives for ETH, while the incentives to hold ETH continue to increase. When the bull market is over, who is going to be selling ETH besides non-participatory speculators?

2022 should be the year when we move away from bridges and towards interoperability protocols. Most people that use bridges will have one of the complaints I listed above, price, time, centralization, convenience. Interoperability will allow for all of those complaints to be answered, and as such, I believe that we will see one or more of these protocols benefit in a big way. $ATOM has made the most pending big connections. $DOT has first mover advantage. $ICX has the most technically complete proposal. And $LINK is bringing big money behind its push.

Beyond the interoperability protocols, the DExes, and DeFi platforms that allow for cross-chain collateral first, and list the most cross-chain assets will stand to benefit from this trend the most. And if any of those platforms have a profit share with their token holders, then we can expect to see a significant increase in value as they connect and list cross-chain assets to invite significant liquidity and volume to be on-boarded. The beautiful thing about crypto is that the space is so new that you as a simple user often have direct access to the developers through Discord or Telegram, and when the dApps are governed by a DAO you also have voting rights and a say in the governance of the project. Speak out to protocols you are a part of once a solid bridge or interoperability link is formed. If they can’t, or won’t list cross-chain collateral; leave. Sell your position, and find one that is forward looking and invest there. You have far more power to impact this ecosystem now than you have probably ever had. This is a once in a 1,000 year opportunity to be participating in the rise of a parallel financial system. You can make the rules, literally, there is no reason to sit back and wait for someone to make what you want or need.

Ask, make the case, or hell, even learn to code a little bit. With so many EVM compatible chains launching, you can literally copy the code of a successful dApp from Eth, start a site, and host the code on AWS after launching a token on an EVM chain. Might cost you less than $10,000 depending on the chain you launch on, and you can start your own DeFi protocol. Now I don’t recommend doing this, because keeping a protocol like this running involves a lot more than just copying the code and paying server fees. But the fact that this is possible should be whetting your whistle. This is reminiscent of Rockefeller buying his first oil refinery in the 1800’s with money he made being an assistant bookeeper and then selling produce over the course of 8 years. Think, an oil giant started from the investment of an average income at the time. If todays DeFi protocols become tomorrows banks of the internet within this parrallel financial system, the Rockefeller of tomorrow could be walking among us today, and his Standard Oil of DeFi might have been launched with little more than the savings from running the cash register at Mcdonalds for a few years in the 2010’s.

Right Clicked and Saved from Opensea