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January 05, 2022

An In-Depth Overview of 2021 Crypto Markets

Dear Readers,

Thank you for reading and sharing with friends, we are now 100K+ strong. This is just the beginning, and we are excited to see what is in store for 2022. Hope to share more soon.

Without further ado, my take on some big themes for the year and what I found interesting. As always, for more content like this don't forget about our learn and earn program!

Nugget 1: DeFi in 2020 lit the match for 2021

Maker, AAVE, Compound, Curve, Uniswap, Yearn, and Sushiswap to name a few…all household blue-chip names today, but they were either very new or unproven in 2020. In May 2020, Compound’s token launch kicked off DeFi summer, followed by the launch of Yearn Protocol. Near the tail-end was Sushi’s vampire attack on Uniswap and subsequent launch. The total value locked on DeFi platforms exploded from ~$600M to $19B over the year. The pace of innovation within DeFi and expansion of crypto from ideas and concepts to live products with strong traction led to a shift in sentiment in both retail and institutional communities.

I still remember the inflection point, at least in my mind, when we saw companies like Square, Paypal and Tesla begin to talk about Bitcoin and the broader market. The culmination of hard work by the crypto community over the past decade led to a record 2021…with more to come.

Nugget 2:  High fees on Ethereum + DeFi liquidity wars ignited an explosion of growth on L1 protocols like Sol, Luna, and Avax

First a few data points from where they started to where they are today, limited to accessible data:

  • Price:

  • SOL: ~$2 -> $177

  • LUNA: $0.60 -> $86

  • AVAX: $3 -> $108

  • Total Value Locked (TVL):

  • SOL: NA -> $12B

  • LUNA: $53M -> $18B

  • AVAX: NA -> $12B

Average transaction fees rose on ETH from $4 to $24, and if you were minting NFTs, potentially into the thousands. Other chains were lucrative to many investors from both a usability standpoint and enticing liquidity rewards. Anchor, one of the biggest draws for Luna, has offered a 20% yield on the chain’s native stable token UST. Avalanche kicked off their ecosystem with a $180M incentive program - starting off with lucrative liquidity rewards on Trader Joe, BenQi, AAVE and Curve (to mention a few). Solana saw launches of Raydium, Saber, and others plus almost instant transaction settlement, low fees, and the backing of FTX & SBF that helped bring it into the mainstream. SOL saw an explosion of NFTs, especially after many were tired of the fees seen on Ethereum, but more on that later. But what does this all mean?

Well, Bitcoin and Ethereum will always be the originals, but it is unclear how the market shakes out and it is unlikely to be a winner take all market. So in our opinion, it is smart to diversify across the various L1 chains as the base foundation for whatever may be built. It is analogous to the cloud market where you have a few key players like Azure, AWS, and Google Cloud.

Nugget 3:  Ethereum had a great year too

Ethereum has troubled everyone with high mining fees and general network congestion, but it remains the de facto chain of choice. When it hit its previous all-time high in May, Ethereum saw a spike across the board in active addresses, miner revenue, transactions and adjusted on-chain value. This spike was primarily driven by DeFi with strength across DeFi 1.0 names (also when Ember Defi Index peaked). Since then, we have seen a pull back in activity but resilience in price, TVL growth, NFT summer, and significant upgrades to the network. Let’s talk about it broad strokes:

  • Price

    : The price appreciated from ~$700 to start the year to its current price of ~$3,700 (All Time High ~$4,900 seen in November). Ethereum’s first ATH in 2021 was around $4,200 before pulling back to ~$1,500s. The second catalyst was the London fork (which we have talked about in prior Nuggets). The anticipation led to strong price recovery and has helped Ethereum trade between $3,000 and $4,000. The 2nd and actual ATH for the year was seen in November when Ethereum hit $4,800 this also coincided with Bitcoin’s price recovery on the tails of continued government adoption and high inflation numbers. Furthermore, the London fork coupled with increased network utilization saw the chain have deflationary tokenomics on high usage days.

  • London Fork:

    The largest upgrade for Ethereum in 2021, and the first step towards getting a more efficient, scalable ETH 2.0 in 2022. Thus far, $5B worth of Ethereum have been burned since the upgrade. Ethereum still remains inflationary, but the burn mechanisms have lowered the net issuance rate for the token and led to some deflationary days dependent upon network usage.

  • Total Value Locked (TVL)

    : Ethereum remains king with 60%+ market share. The chain saw its TVL grow from $18B to $156B in 2021. According to DeFi llama, total TVL across chains is at $255B.

  • Other fun commentary / KPIs:

  • On-chain monthly volume has remained stable, growing slightly from $231B to $243B. However, this isn’t the full story, since there was a large spike in May which saw transaction volume peak at $666B.

  • Transactions have hovered between 32M - 45M per a month over the course of the year.

  • Average transaction cost has grown from $4.24 to $27.22, peaking at around $50. This does not appropriately represent more complex transactions that are often seen on the network like AMM trading, liquidity mining, minting and other contract interactions that have seen fees in the $100s and $1000s. Transaction fees have increased the barrier to entry for many users, especially, low-income and one predominant reason for scaling and growth in other L1 chains. With the London fork and planned upgrades in 2022, ETH hopes to solve these issues in the near future.

  • The Top Gas Consuming Contracts: OpenSea (NFT marketplace), Uniswap (top DEX on ETH), and USDC (top ERC-20 stable available in the US, behind USDT which is not readily available in all countries).

We are excited to see what Ethereum has in store for us in 2022. The chain has the most protocols, TVL, and community/institutional support. The biggest thing to watch will be the network upgrades that help increase transaction speeds and lower costs.

Nugget 4:  Regulations have been all over the place, and the industry is still confused

China’s crackdown led to a major shift of Bitcoin mining operations out of the country to surrounding regions and the US (now a leader in Bitcoin mining). The SEC approved a Bitcoin Futures ETF but continues to reject a spot version, which has been approved by many other major economies. SEC Chair Gary Gensler's position seems to be at odds with the crypto community, having taken regulatory action against Celsius, Uniswap, Ripple & others. The SEC also shutdown Coinbase’s attempt to launch an interest product on stablecoins like USDC.

Congress’ Infrastructure Bill lit a fire within the crypto community to get organized and lobby on Capitol Hill. The poorly written legislation created concern within the community and how it may limit innovation and business within the sector. One thing is clear, the US remains a difficult place for crypto businesses to build, held back by archaic finance laws. Furthermore, Congress’ stance remains unclear with many leaders all over the spectrum on their stance regarding crypto. One thing is clear, they lack the education and objectivity to appropriately evaluate the sector and set up guardrails to ensure that the US remains the center of crypto innovation.

A glimmer of hope though, as the congressional hearing on crypto later in the year surprised many of us as a large majority of representatives were very knowledgeable, forward thinking and accepting of crypto.

What’s next? 2022 will hopefully provide clarity on regulators' plan on handling crypto businesses in the US with less sensational headlines and more concrete action that provide clarity….fingers crossed.

Nugget 5:  Regardless of regulations, institutions are pouring into crypto

The VC’s were hungry in the crypto space investing in 1,700+ deals and record $25B+ in financing (up from $3.7B last year), and more than all the past few years combined. Later stage deals saw slightly more capital inflow than early stage deals, highlighting maturation in the sector. Over the course of the year, valuations continued to rise as well, especially for revenue generating companies. As the year progressed, we saw valuation multiple skyrocket, capital became a commodity, and then focus turned towards quality of capital and the strategic value they could provide. All in all, some may relate 2021 crypto with the 90s dot-com bubble. It will be interesting to see how companies that raised rounds in 2021 progress in 2021.

On the public institutional side, we saw large companies put Bitcoin on their balance sheet, retailers accept crypto as a form of payment, and plans from many traditional financial institutions to increase the exposure in the asset class over the next 5 years. Phase 1 began earlier this year, when hedge funds started exploring methods to add tokens to their balance sheet, investments into Coinbase (the first crypto-focused company to go public in the US), and launching of Bitcoin futures ETFs. There are reports that funds hope to increase their allocation into crypto to 5%, which is a lot for the crypto which has a market cap that hovers around $2.3T today.

With M&A activity in the custodial space, fundraisings for infrastructure plays, and reorganizations for funds, we see an easier path for funds to bring on assets in 2022 and beyond. The beginning of the year many traditional financial institutions had no plans for crypto. But now, everyone from Goldman to Fidelity have announced plans to offer the asset class to the broader market. Now let’s wait and see how the Web 2.0 world embraces Web 3.0.

Nugget 6:  Did you think we forgot about NFTs???

2017 was the year of Bitcoin, Ethereum and ICOs. 2020 was the year of DeFi. Then 2021 was the year for NFTs. A year when the sector went from zero to one (as Peter Thiel may call it). From Beeple’s $69M drop to NBA Top Shots, the ambitions for NFTs got larger and larger. Auction houses like Sotheby’s and Christie’s began working with NFT projects like BAYC, traditional companies like Paypal and Visa began buying CryptoPunks. And most recently, Nike’s acquisition of RTFKT shows the embrace between traditional Web 2.0 companies and native Web 3.0 players. Let's briefly mention Facebook’s rebrand to Meta, which was a boon for my metaverse names. SandBox and Decentraland are two names that focused on digital real-estate in the metaverse, where we have seen digital assets moon and their token prices jump astronomically (146x and 46x, respectively).

There are two core themes that, in my opinion, led to large scale adoption of NFTs. First, the authentic ownership that NFTs provide, where the jokes of “right click, and saving” grew old. Second, the ability for communities to build in a digital world, be autonomous, and have digital identities. The NFTs that saw success not only had utility but also a strong community element behind them. For us, that poster child was BAYC in 2021.

The NFT sector can be divided into two broad categories - Art and Gaming. Art saw success with projects like CryptoPunks, BAYC, ArtBlocks, and renowned artists like Damien Hirst or Web 3.0 native artists like Pak selling out in minutes. The Gaming sector exploded as people saw the value leveraging decentralization and blockchain tech to build a truly community oriented platform to hang out and game. It is very early, since most games (looking at you Wolf Game and Axie) look like they were made in the 1980s. But, the sun may be setting on closed garden ecosystems and developers like EA (really, no one likes them). NFT Gamings offer the flexibility to do world-building, community engagement, and create an continuously engaging experience that is controlled by the community / DAO.

The biggest NFT game of the year: Axie Infinity. The game launched the entire concept of play-to-earn, by proving to critics, at least thus far, that you could have seemingly sustainable economics for players. So much so, that there is an entire sector of companies that have raised to support play-to-earn ecosystems with players, where they can game and earn a living wage (e.g. Yield Guild Games). With the success of Axie, which saw peak valuations and revenues in July/August 2021, we have seen crazy speculation in other projects in the space like Loot, Illivium and UFO. While traditional PFP (“Picture for Proof” or “Profile Picture”) projects like BAYC have launched plans to enter the space.

Another unique project that I would like to call out is RTFKT, a hybrid between the digital and physical world. The project released NFTs that if held would allow you to get physical representations, like sneakers. Recently, RTFKT launched the CloneX project with artist Murakami and there is speculation that there will be more in store both in the real world and the metaverse. And now they have the backing of Nike.

So those were a few scrambled thoughts on NFTs that don’t do the space justice, but call out some notable projects that I have followed or found interesting. My hope for 2022 - watching the BAYC Universal Band play at the SuperBowl with an after party that requires CryptoPunks to get in. Now that was a mouthful, and a year ago, I would be called crazy…but seriously can someone make a DAO, buy StarWars, and build an open-world game, that would be wonderful.

Nugget 7:  There is too much to write about and not enough time…rapid fire

  • DAOs became more prevalent and influential, my favorite, ConstitutionDAO, where an anon community was able to raise $40M+ in a few days to bid on an original copy of the US constitution. Sadly, they lost to Hedge Fund billionaire Ken Griffin of Citadel, but the feat was remarkable.

  • El Salvador adopted Bitcoin as a legal tender and now the leader trolls social media by buying the dips.

  • LATAM countries are exploring bitcoin-backed bonds, will be interesting for the fixed income marketplace.

  • Anchor Protocol as $6B+ in TVL and still finds ways to offer 20% yield on UST, I would check this out. Better than keeping money in a traditional bank earning less than 1%, especially when inflation is at a 39 year high of 6.8%.

  • Meme communities remain strong: look at Doge in the first half of the year followed by Shiba in the second half of the year

  • China banned Bitcoin again…but Bitcoin remains strong. I think people have stopped caring about what China does in relation to digital currencies.

  • GPU shortage, in part, because mining was very profitable in Q2’21. Main reason is supply shortages and logistical issues of COVID-19.

  • Elon flip flopped on Bitcoin, seems to like Doge, and who knows what else is in store for 2022. My guess, solar-powered bitcoin mining rigs on Mars…

  • Jack Dorsey has stepped down from Twitter, rebranded Square to the Block, and is expected to focus on building within the crypto space.

I likely missed some big headlines…but I think you got the essence of what I was trying to communicate. 2021 was a big year for crypto, sorry I mean Web 3.0 (great re-brand btw) and there is a lot of expectation for what is in store for 2022.

What does that mean? The overall market will continue to grow with many projects outpacing market growth, while others will fail and disappear. Let’s be realistic, there is a lot of froth in the market and I expect a few bubbles to pop. So be reasonable, diversify, don’t chase moons, and hedge your downside.

Thank you for reading!

Harsharn Singh
Investment Associate | Ember Fund

What are Ember Nuggets?


Ember Nuggets are a weekly update with commentary from the investment team on what’s happening within the crypto market - news, developments, market trends, and more.



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