The Blockchain year in review

The Blockchain year in review

Our previous blog post, titled Crypto 2022: The Year In Review, took in the highs and lows of the last 12 months for the digital asset sector. While the markets and wider ecosystem have been rocked by bankruptcies and scandals, including the collapse of Terra and the fall of FTX, blockchain as a technology has gone from strength to strength. Here are some of the trends and highlights from the past year.

Blockchain Overview For 2022

As is the case with every bubble cycle in crypto, cooling hype and falling markets have filtered the blockchain space and weeded out many of the worst actors. Individuals and organisations who were in it only for a fast buck, or who practised poor risk management, have largely been flushed out. Meanwhile, those who are committed to the technology and believe in the long-term future of blockchain have continued to build out their protocols and platforms, away from the spotlight of mainstream attention. 

Many blockchain platforms have celebrated significant milestones, including new features and major upgrades. While these have paved the way for further growth and adoption in the coming months and years, they have gained far less attention than they would have done a year or two ago. Nonetheless, blockchain as a technology ends the year in a better position than it began it.

Five Blockchain Milestones

Bitcoin’s hash rate continued to rise over the course of the year, hitting an all-time high of 273 million TH/s at the beginning of November – coincidentally, almost exactly a year since the all-time price high of $69,000. The relationship between price and hash rate is not straightforward, but we can say that despite crashing by around 75%, Bitcoin is more secure than ever before.

Ethereum’s successful Merge saw the network take an important step towards greater security, scalability, and decentralisation. The shift from proof-of-work to proof-of-stake cut its energy use by 95%, and paved the way for important upgrades in the future, including sharding.

Polygon’s NFT ecosystem exploded, as the Ethereum L2 solution became the go-to platform for major partners – including Starbucks, Disney, Meta, and Reddit – to build out their metaverse applications.

Cardano’s Vasil Upgrade significantly increased network capacity and decreased transaction fees. The updates were described by platform developers Input Output Global (IOG) as the most ambitious upgrade to date due to their complexity, and will prepare the blockchain for a flood of new dApps.

Solana made the news for all the wrong reasons. With close links to Alameda, FTX and Sam Bankman-Fried, the price of SOL was badly hit as traders lost confidence. Separately, Solana has suffered multiple outages over the course of the year, caused by code bugs and high traffic.

Major Developments And Blockchain Use Cases

Advances in blockchain technology saw a number of new use cases, as large corporations sought to leverage the functionality that became available in 2022. 

While Ethereum’s Merge laid the foundations for future scaling upgrades, it did not in itself increase the network’s capacity – and, in any case, even a fully-sharded Ethereum would need additional scaling solutions. Significant progress has been made on these over the course of the year, with new L2 platforms coming online, and existing ones gaining traction.

Polygon, Arbitrum and Optimism all stand out as popular L2 solutions, with Polygon alone processing 3 million transactions per day. This not only removes a huge burden from Ethereum mainnet, but enables businesses to launch use cases that require low fees and high throughput.

NFTs were one of the beneficiaries of this new technology. NFTs and the metaverse have caught the attention of many large tech corporations, as well as celebrities and retail users. Polygon was the chief beneficiary of this trend, with companies including Disney, Starbucks, Meta, Nike, Coca-Cola and Reddit announcing they were building NFT projects on the platform.

As calling cards go, perhaps the most garish was provided by Donald Trump, who released a collection of 45,000 NFTs (themed on himself) on Polygon, for $99 each. Widely criticised within the crypto community as a cash grab that relied on stock footage lifted from Shutterstock, the collection has nonetheless racked up over 7,000 ETH in volume, bringing in over a million dollars in mint fees and royalties.

The ability to mint and trade NFTs without the gas costs associated with Ethereum L1 also drove another significant source of adoption. Social media platforms fell over themselves to integrate NFTs in various ways. At the beginning of the year, Twitter enabled some users to link their wallets and display NFTs as PFPs. Several months later, Meta enabled users to do the same on Facebook and Instagram by linking their Coinbase or Dapper wallets. Instagram also began to test direct minting and trading of NFTs on Polygon. 

In Q3, Telegram launched its own NFT marketplace for usernames, built on the TON blockchain. Twitter rounded out the year by launching NFT trading on multiple blockchain marketplaces, just before the platform was bought out by Elon Musk – raising the prospect of a Dogecoin integration. His controversial style of leadership led to a backlash from users and advertisers. After less than two months, Musk ran a poll asking whether he should step down as CEO, to which a majority of respondents voted ‘yes’. He committed to resigning ‘as soon as I find someone foolish enough to take the job’.

While L2s did take the strain off Ethereum mainnet, allowing fees to fall to more affordable levels, the Merge gave Ethereum L1 a new use case beyond acting as an execution layer for transactions and the settlement layer for the growing number of scaling solutions. The reduction in block rewards associated with the Merge, alongside EIP-1559, which activated in August last year, meant that the supply of new ETH plummeted. EIP-1559 sees a portion of transaction fees burned for every block. When transaction volumes and gas are high enough, the amount of ETH burned is greater than the amount issued when new blocks are created.

Ethereum now has the potential to become ‘ultra sound money’. Since the Merge, the supply of ETH has barely increased at all, and has at times dropped below the supply of ETH at the point of the Merge itself. Had Ethereum continued under PoW consensus, supply would have increased by over 1 million ETH. When transaction volumes pick up again, Ethereum will likely have strongly deflationary properties.

What To Expect In 2023

It has been a rocky 2022, but several themes have emerged that give a sense of the direction of travel for the coming year.

  • Social media and NFTs. Expect more moves from social media companies into the blockchain space, especially in the area of NFTs, which have proven extremely popular this year. More platforms are likely to support the ability to mint and trade NFTs on more blockchains and marketplaces.

  • GameFi and the metaverse. There’s been a tremendous amount of interest in blockchain gaming and the metaverse, and we’re set to see more games and applications ready for release next year. Alongside P2E token models, P&E and other approaches are likely to gain popularity – and help drive NFT adoption in the process.

  • Stablecoins will stay the course. While Terra was bad for the prospects of algorithmic stablecoins, regulated and fiat-backed stablecoins have gained popularity as a result. The use cases for payments and remittance are now clear, with new corporations and partners supporting USDC, and humanitarian use cases being explored.

  • Regulation is only heading in one direction. The collapse of Terra and the fall of FTX will undoubtedly bring more regulation to the blockchain space. Regulators are particularly concerned to ensure that exchanges are bound by many of the same rules that banks are, in terms of ensuring customer funds are ring-fenced and safe, and cannot be lent out without permission.

  • Consolidation is still required. If previous crypto bubbles and crashes are anything to go by, there will be a period of calm in the markets (assuming the bottom is in, which is by no means a given). During that time, investors will accumulate coins, prices will consolidate, new projects will quietly be planned, companies will build – and eventually the new cycle will begin with new software and new use cases. This could take at least several months, and potentially longer depending on the situation for the wider global markets.

  • Institutional interest hasn’t disappeared. Despite BTC crashing and a wave of bankruptcies, institutions have not given up on crypto, even if retail traders are still staying away. A survey of over 1,000 institutional investors made by Fidelity showed that over half of firms invested in crypto in the first half of 2022, and three-quarters planned to do so in the future. The majority of institutional investors with exposure to crypto increased their allocation in 2022.

Overall, the future for blockchain looks bright, as forward-thinking users, developers, companies and investors position for a new wave of adoption in the coming months.