The Year in DeFi 2021

Updated: Dec 31, 2021

2021 has certainly flown by and it's been an amazing year of growth for those involved in DeFi. Whether you got in as an investor or you're working in the space, there is no denying that feeling of new opportunities that are on the horizon as we look towards 2022. Whilst for it has some hallmarks of the growth of the internet in the early 2000's, for many it is still worth being cautious.


For us, there is no hiding our optimism for where this space is heading in 2022 and we take a look at that along with some highlights of the year that was across the following topics.

  • Further advancements in blockchain platforms

  • Controversies despite the growth

  • Regulation - with growth comes increased scrutiny

  • Growth in awareness of Analytics tools

  • Growth in awareness of Risk Management tools

  • Data - What happened in 2021

  • Rise of Play-to-Earn gaming

  • Metaverse expansion

  • Expectations for DeFi going forward


Further advancements in blockchain platforms

2021 saw even more growth in blcockchain platforms to rival the main Ethereum blockchain. There was the growth of Avalanche after their launch in late 2020 and they rewarded investors with a 36x increase on their price from just under $3 at the start of the year to $110 as of 28 December 2021.


Additionally, there was Solana which saw continued user uptake and had its price grow 116x higher than where it was January 1, 2021. As the 5th biggest coin in the entire cryptocurrency market it's done it's investors well.


There were other new protocols coming to market, some of which are built with compatability with existing dApps (decentralised apps) such as what is provided by the NEAR blockchain which enables developer to port over code written in Ethereum's Solidity language.


Ethereum made further strides with their announcement of their 2.0 version which would reduce its highly complained about gas fees. In December 2021, Ethereum founder, Vitalik Buterin announced an Ethereum Improvement Plan (see Scaling Ethereum Without Trade-Offs: Inside EIP 4488) which will also help reduce gas fees by reducing calldata. Additionally, there was the announcement of the Kintsugi testnet for Ethereum which is a developers platform allowing them to test new capabilities on there. This looks like a solid sign that things are on track for Ethereum 2.0 coming out in its staged roll-out in 2022.


There was also work done to further the development of layer 2 protocols as well as interoperability between blockchains coming with Layer Zero (see The Defiant - ​

Interoperability the way it should be? LayerZero certainly thinks so). 2022 is set to see



Controversies despite the growth

DeFi was not without some controversy in 2021 and apart from the various talks to regulate blockchain and senate committee hearings, even within the protocols/DAOs (decentralised autonomous orgnanisation) there were dissenting voices. Examples of this can be seen in 2 of the most well-known DAOs, MakerDAO and OlympusDAO.


With MakerDAO, the issues arose late in the year around governance (Crypto Briefing - Governance Controversy Arises in MakerDAO Community). DAO governance is something that is still being perfected and its likely to continue into 2022 with the original 1 for 1 voting systems evolving in some cases to the use of quadratic voting and the various efforts to improve it (such as this piece from DoraHacks - What is Quadratic Voting/Funding? How did we improve it?).


For OlympusDAO, it suffered questions of being too centralised (over 99% in total value locked) and potential for being a ponzi with such high APY (promises of 7000%). However, it has managed to answer its critics with its unique bonding mechanism and its high level of ownership of its liquidity. See more at Chain DeBrief - Understanding (3,3) – Is OlympusDAO The Future Of Cryptocurrency, Or Just Another Ponzi?.


There was also the Polygon forking controversy (The Defiant - Polygon’s Surprise Code Change Triggers Questions and Controversy) which came up only a few weeks ago and caused questions around its centralisation.


DeFi is likely to court further controversy and critiques going into 2022 but this is to be expected from any new industry trying to work out the bugs in the system and improve. We won't be surprised at whatever comes out next but the continued growth of the communities and opportunities for further real-world applications help maintain the positivity in this space.



Regulation - with growth comes increased scrutiny

We saw further talk of regulation both here and overseas as DeFi and crypto markets grew in size leading to lawmakers across the globe looking for ways to get involved.


In the US we saw some senate hearings on cryptocurrencies and stablecoins as well as further reports such as this one from a consortium of the Presidential Working Group on Financial Markets. the FDIC (Federal Deposit Insurance Corporation) and Office of the Comptroller of the Currency on stablecoins and highlights of that can be found in the following video from The Defiant.


Further on this, users can read about the Senate Banking Committee hearings on Stablecoins in this Blockworks article Senators Can’t Agree on Path for Stablecoin Regulation During Hearing. There was certainly more of a negativ view towards crypto/stablecoins than the earlier House Financial Services Committee which saw 6 crypto firms fron the Senate (more in this Reuters piece Crypto executives urge light touch as Congress mulls new regulation).


Across the ocean we also saw a lot of crypto regulation news in Australia. This includes the 12 recommendations from The Senate Select Committee on Australia as a Technology and Financial Centre. The report, commissioned by Senator Andrew Bragg highlights the recommendation for DAOs (decentralised autonomous organisation) to be part of the corporations act and be provided with limited liability and many do not expect that such a change to the law will happen quickly.


There was also the mention of DAO regulation from Treasury (see this AFR article from Jessica Sier - New regime may force crypto assets to be held onshore). Whilst no regulation is set in that space yet, they do highlight they will open to public consultation in the new year.


We also saw the RBAs Project Atom findings which was a research piece by a consortium of banks, lawyers and others into the use of a central bank digital currency here in Australia. Whilst just a test, they listed their pros and cons in their findings and we highlight a few here in our article Australian Wholesale CBDC - Project Atom findings.


Finally, we saw a contrast in the view of our financial regulator (APRA) towards cryptocurrencies as an underlying asset for Exchange Traded Products versus what is going on in the US. APRA gave approval in November 2021 (see Investopedia article Australia Approves Long-Awaited Spot Bitcoin ETF) which paves the way for a crypto-backed ETF to launch on one of the major local exchanges (ASX or Chi-X). Whilst spot-crypto ETFs are not yet launched, there are other options for ETF investors looking at indirect crypto exposure via BetaShares CRYP, Cosmos Asset Management DIGA, or ETF Securities FTEC ETFs).



Growth in awareness of Analytics tools

Whilst already around in 2020, this year we saw a further rise in popularity of analytics tools from Nansen and Glassnode to help investors better understand what is going on in the crpypto markets.


We include these in our resources menu above as well as the likes of IntoTheBlock and Messario.io as some great tools for investors who want further insights into the DeFi/crypto markets as well as specific protocols.


Messari Dashboard


There was also some waves made by DuneAnalytics and their self-service approach to creating dashboards where people in the community get access to dashboard building tools and can create whatever they want to showcase. This really gets the decentralised concept into how it provides its analytics.


In the new year it is likely we'll see more coming in terms of new analytics products coming like the new terminal from The Defiant and Delphi Digital



Growth in awareness of Risk Management tools

Whilst crypto related crime is always something to be aware of, we do note that it is on its way down and according to this annual report from analytics firm Chainalaysis (The Chainalysis 2021 Crypto Crime Report), illicity activity only made up 0.34% of overall market activity in 2021. Despite this decrease, the term "rug pull" was certainly something that made its way into the collective crypto vernacular in 2021.


To combat this, 2021 saw the launch of a new service aimed at identifying where tokens/protocols are at risk of seeing these sorts of rug pulls and that came in the form of RugDoc.io. They highlight that they aim to make DeFi safer, one review at a time and highlight what they did to perform their reviews as well as a list of these on their website.

They showcase summaries of their findings and you can click to see more info as well to understand their approach to these reviews.


There are others that continue to build safeguards for investors including DeFi Watch and DeFi Safety. That said, there are auditors for protocols and it's considered a good sign if a protocol has been audited by the likes of QuantStamp or others in these lists from Hackernoon (4 Best Audit and KYC Solutions for DeFi Projects) or BoxMining (Top 10 Blockchain Security and Smart Contract Audit Companies).



Data - What happened in 2021

One of the best things about DeFi (and blockchain in general) is the sheer amount of data available. We list a few of the great apps out there in our resources list and below we highlight some of these data insights.


DeFi Protocol Growth

Seeing DeFi usage on the rise growth 90x since start of the year according to data on CoinGecko.


DeFi protocols on CoinGecko and Market Cap growth since beginning of 2021


It went from $1.75 billion as at 1 January 2021 to over $160 billion as at the time of writing *(28th December 2021). Interestingly, this seems like steady growth as it grew 88x up to May 2021 according to this article from Forbes. Steady growth is certainly a good sign.


Google Trends

Searches for terms bitcoin, crypto went higher as the price of bitcoin hit yearly lows towards the end of May 2021 https://trends.google.com/trends/explore?geo=AU&q=bitcoin,crypto,DeFi


Shows DeFi still low on the radar of people even though it has had an amazing period of growth. Is more on the way in 2022?


Google Trends search terms for Bitcoin, Crypto, DeFi


Glassnode

Each week this year, the folks at Glassnode shared their Onchain analysis. In this last episode for the year they look at price action, supply and demand dynamics as well as exchange balances and futures markets. In this review they see that the market has seen a 78% price increase since beginning of year (24% lower than the all-time highs in November though).


Other blockchain analytics firms also made headlines throughout the year and whilst there's great capabilities that can come from being able to track blockchain transactions, it can be a double edged sword (although any mass change like this is always a see saw between the incumbents and the new technologies coming in).


It wasn't all just about new protocols and data. We also had some fun and games too.



Rise of Play-to-Earn gaming

It was a great year for gamers with the rise of play-to-earn gaming as a key and inevitable highlight for DeFi in 2021. Given the recent years of complaints from players of traditonal video games about the continual increase of in-game purchases necessary to properly play it is no surprise about the fanfare for games like Axie Infinity. If you've not heard of Axie, a Pokemon-like game, then a great documentary from the team at Emfarsis (a crypto consultant themselves) can be seen below.


The availablity of games like this has led to increased interest around new and upcoming games like Illuvium, built on Unreal Engine 4, and founded by Kieran and Aaron Warwick (brothers of Kain Warwick of Synthetix fame). Illuvium is due to release in the new year and there are already various gaming guilds (such as Polemos.io) set to educate the community and provide assets to help further grow the GameFi community.


Be on the lookout for more of these sorts of games in the new year and check out these reviews from the Paul Barron Network.



Metaverse expansion

Whilst many moves were made to pave the way for the metaverse by companies and individuals jumping into the space, arguable the biggest move was made by Facebook, who changed their name to Meta (CNBC - Facebook changes company name to Meta) to highlight where their future focus is going.


Metaverse becoming more mainstream with concerts such as those being setup by the group at Animal Concerts (see this CoinTelegraph article Concerts in the Metaverse could lead to a new wave of adoption). They've already announced they'll have superstars like Alicia Keys performing next year and with performers like Zara Larsson, Travis Scott and Future already having metaverse concerts this year, we are bound to see more in 2022. Whilst metaverse concerts date back to seeing electronic artist Marshmello perform on Fortnite in 2019, its certainly got the chance to become a lot more mainstream.


Zara Larsson concert in Roblox


As well as new formats for existing shows like America's Got Talent having a format specifically designed to take advantage of avatars just like the metaverse. Whilst not strictly following metaverse protocols here, it does highlight the crossover into traditional culture that we'll see from metaverse type assets going forwad.


In addition the the above we see the likes of Roblox also getting into the Metaverse (MorningBrew - Roblox’s metaverse is already here, and it’s wildly popular) as well as the The Sandbox which originally came out in 2012 but was re-released as a blockchain game in 2018. With huge land sales and the chance to live next to Snoop Dogg on the cards for The Sandbox metaverse, it's no wonder it's getting attention and adding to overall the overall metaverse fanfare.


Lots more to come in 2022 from this space.



Expectations for DeFi going forward

We reckon we've only scratched the surface of what's been going on in DeFi over the last 12 months but we believe there is a lot more growth on the way in the new year. Some things that we will be on the lookout for include:

  • Seeing more done on Layer 2 protocols and Ethereum 2.0 released in full during 2nd half of the year

  • Increased interoperability across layers and protocols with Layer Zero paving the way

  • An uptake in the awareness of DeFi across traditional commerce as various organisations realise the benefits for their customers and themselves when they become more decentralised.

  • Further conversations on DAO regulation being held both locally and across the globe with governments being in positions of wanting to work with organisations rather than impose regulation that may stifle innovation

Finally, we're not alone in doing these recaps with others like The Defiant also showcasing some 2021 highlights.


Well done if you've made it this far. We look forward to what comes in 2022 as we say goodbye to the year that was and we leave you with the following, an awesome follow up to the initial bitcoin/history of banking film by award winning producer Torsten Hoffman. This one is called Cryptopia and updates where the state of blockchain technology is right now.



Contributors

Thanks to the contributors to this article including


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