2022 is about to wrap up, and what a year it’s been. There’s been so much packed into the last 12 months that we have hardly had time to catch our breath. In this article, we go over some of the biggest stories of 2022.
DeFi continues solidifying its foundation and withstands severe stress tests
In the beginning of 2022, decentralized finance (DeFi) was, like the rest of crypto markets, in a hyper-growth phase following the Bitcoin and Ether all-time highs of November 2021. That sentiment changed quickly in early 2022, as inflation and rising interest rate hikes drove investors away from risk-on assets.
DeFi token prices fell, and billions in value left or were lost in the space. However, this was also a perfect example of why being fixated solely on asset prices risks misses the bigger picture.
Despite the drop in Total Value Locked (TVL) in DeFi ecosystems, network and user activity increased over the same time period. A report by HashKey Capital, a leading cryptocurrency hedge fund, stated that DeFi user growth averaged 44% quarter over quarter in 2022, with DeFi users expected to reach a record 5.5 million by the end of the year. Moreover, the first half of 2022 saw over $14 billion in investment from venture capitalists (VCs) into cryptocurrency projects, many of which were DeFi-focused. (1)
The transparency and overcollateralization that have come to define the most-trusted DeFi protocols now seem to be particularly appealing for many investors left disenchanted by the failure of some of crypto’s largest centralized players. And VC money is following this segment of investor sentiment.
Not so terra firma
In May, rumors started circulating that the Terra Luna ecosystem and its algorithmic stablecoin, UST, which underpinned it, could not sustain its high-flying trajectory for long. Do Kwon, Terra Luna’s founder, denied these allegations even as evidence kept on mounting against the stability of the network.
Within days, LUNA, the native token of the Terra Luna blockchain had lost 96% of its value, while UST lost its peg to the US dollar and fell to as low as 35 cents. (2)
Billions of dollars evaporated. And the collapse set off a cascade of losses across the industry that started seriously highlighting the interconnectedness and high-risk business models of many of the top players in crypto.
A flight to transparent, asset-backed stablecoins followed. Circle’s USDC was the main beneficiary as it increased its market share by 13%, or $13 billion, over the course of a single month. (3)
Zero degrees Celsius
Celsius was supposed to be the people’s crypto bank. Their own website still reads: “Because we put our community first. Join us for military-grade security, next-level transparency, and a do-it-all app designed to help you reach your financial goals.”
It turned out, though, they operated much more like an opaque hedge fund that used highly risky investment strategies with naked exposure to crypto price fluctuations. (4)
Extreme market conditions brought on by the Terra Luna collapse ended up exposing Celsius’ $1.3 billion hole in their balance sheet and forced them to file for bankruptcy. (4)
The Merge: Ethereum’s move to proof of stake
One of the most exciting events of the past year was Ethereum’s successful transition from a proof-of-work to a proof-of-stake consensus mechanism. It was an incredibly impressive feat of computer engineering and cooperation—many experts likened successfully pulling off the Merge to changing a car’s wheels while it was driving at full speed.
So it was testament to the quality and strength of the developers and community behind Ethereum that when the Merge finally happened on September 15, more than seven years after it was first discussed, it did so smoothly and without a hitch. (5)
The immediate benefit of this event was a drastic reduction in the Ethereum network’s energy usage by as much as 99.95%. This has obvious positive implications for the environmentally conscious crypto investor already owning Ethereum. Looking long term, this new energy efficiency could also open the door to billions of dollars in capital that have been waiting on the sidelines due to Environmental, Social, and Governance concerns.
Even more consequentially, the Merge will allow Ethereum to increase scale and capacity. As outlined by Ethereum founder, Vitalik Buterin, the move to proof of stake will give Ethereum developers the ability to rollout further upgrades and capabilities to the network. The most talked about of these new capabilities is “sharding,” which over the course of several years, should drastically increase the throughput and transaction speed of the Ethereum blockchain. (6)
The Fall of FTX
The final big story of 2022 probably hit most the hardest. When CoinDesk published a story in November highlighting concerns surrounding the balance sheets of FTX and Alameda research, few could of foreseen how rapidly Sam Bankman-Fried’s (SBF) crypto empire would come undone. Within two weeks of the report, FTX and Alameda filed for bankruptcy. Within a little over a month, SBF was arrested and held in a Bahamian prison awaiting extradition to the United States. (7)
SBF had positioned himself and his companies as the darlings of crypto—naming stadiums, courting regulators, giving political donations, and even bailing out troubled crypto companies. His brand was rare in that it was viewed largely positively by the mainstream media and the broader crypto community alike, making this story of negligence and fraud particularly hard to stomach.
We have to acknowledge that 2022 was a difficult year for crypto. But in many ways the big stories that dominated headlines over the last 12 months have reaffirmed our belief in the asset class and entrenched our core thesis around crypto investing.
The infrastructure of the world’s leading cryptocurrencies, like Bitcoin and Ethereum, continued to work as designed despite market turmoil. On top of this, Ethereum developers managed to smoothly roll out one of the most important upgrades to its network ever, paving the way for a greener and more scalable future for the world’s second-most prominent blockchain.
Activity and community engagement around the leading DeFi protocols also increased this past year, giving more credence to the idea that the health of an asset class should not solely be determined by prices.
The negative news stories that dominated headlines last year were, on the whole, products of human negligence, fraud, and a lack of proper regulatory oversight. Products and services that operated transparently, responsibly, and with proper risk management carried on without major hiccups throughout the 2022 bear market. This fact has reinforced our belief that in order to stably and sustainably capitalize on the fundamentals inherent in blockchains like Bitcoin and Ethereum, it must be done in a safe and regulated way.
—Haan Palcu-Chang, Crypto Specialist
(1)“HashKey's Latest Report Highlights A DeFi Sector That's Poised For Institutional Adoption And Rapid Acceleration,” Yahoo Finance: https://uk.finance.yahoo.com/news/hashkeys-latest-report-highlights-defi-144502494.html
(2) “Crypto’s horrible, no good, very bad year,” Investopedia: https://www.investopedia.com/cryptos-horrible-no-good-very-bad-year-6835076
(3) “How Cryptoasset Markets Have Changed Since Terra Crash,” Blockworks: https://blockworks.co/news/how-cryptoasset-markets-have-changed-since-terra-crash
(4) “The Fall of Celsius Network: A Timeline of the Crypto Lender’s Descent Into Insolvency,” Yahoo Finance: https://ca.finance.yahoo.com/news/fall-celsius-network-timeline-crypto-162357244.html
(5) “The Merge,” Ethereum: https://ethereum.org/en/upgrades/merge/
(6) “‘Solving the scalability challenge’: Vitalik Buterin lays out Ethereum’s post-Merge road map,” Fortune: https://fortune.com/crypto/2022/10/04/vitalik-buterin-lays-out-ethereum-post-merge-roadmap/
(7) “FTX cryptocurrency exchange founder Sam Bankman-Fried arrested in Bahamas,” CBC: https://www.cbc.ca/news/business/ftx-bankman-fried-arrested-bahamas-1.6683507
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