2022 was full of events for the cryptocurrency industry. At the same time, many of them had a negative impact on cryptocurrency prices and pushed the industry into a new crypto winter. However, every cloud has a silver lining. The lessons from difficult events can move overall development toward better products, more sustainable models, and mass adoption. In this article, I want to look at the five lessons of the year and how they can affect the further development of the cryptocurrency industry.
1. Market cycles are a major factor in the viability of many projects
Cryptocurrency winter in 2022 has officially come. Bitcoin has fallen from its highs by more than 75%, while the prices of many altcoins are down by 90%. The fall from all-time highs of November 2021 was gradual but ultimately expected. We have faced this many times in the cryptocurrency industry, with the most recent crypto winters being 2014-2015 and 2018-2019.
With the long-awaited arrival of institutions and significant investments, the market's cyclical nature has not changed. Only the scale has increased. The current cryptocurrency winter is more challenging than in previous times: no one is too big to fail right now (3AC, FTX, Luna), and those who are afloat are significantly cutting their costs, promotion budgets, and firing their employees.
The situation in the DeFi sector is even more complicated: the reduced locked liquidity eventually led to a slowdown in project development. As a result, we once again see large companies trying to survive while small teams and enthusiasts often develop new technologies. The situation is very familiar for the DeFi and NFT markets in the period before the hype of 2020, right?
2. The inevitability of reimagining crypto products
The past year's events have highlighted many of the problematic sides of the industry. The fall of FTX led us to an essential outcome for crypto exchanges: a more transparent approach to their operations and services should be a must. The first move in this direction was Proof-of-Reserve reports from many top exchanges. In the coming year, I expect this crypto exchange balance transparency system to establish new audits of major crypto platforms.
However, centralized exchanges are not the only players that need to find new approaches. In the DeFi sector, the whole concept of yield farming and locking tokens also needs to be reconsidered. Previously, you could lock your tokens for a period of time and, in return, receive yield (including new project tokens). This approach of distributing new project tokens has not been the successful and fair one: most of the tokens distributed this way have fallen by more than 90% in the past year.
Algorithmic stablecoins? NFT use cases? The security of DeFi projects? The cryptocurrency industry still has a lot to reimagine.
3. Technology development continues even during the crypto winter
The Ethereum Merge upgrade was one of the main events of 2022. Moreover, at the end of the year, the project team published an updated detailed roadmap for the coming years.
Meanwhile, ETH Layer 2 solutions gained popularity in 2022. Optimism and Arbitrum showed significant growth in many metrics and lured TVL away from other L1 solutions. I also expect zk rollup solutions such as Starknet and zkSync to release and grow in popularity in the coming year. The assumption is that we will see a battle between ETH L2 solutions and other blockchains in the future.
4. ESG is now a trend in the cryptocurrency industry as well
Many crypto projects are doing their best to stick to ESG, as the importance of addressing global issues is only growing. This was one of the factors that prompted Ethereum to switch from the Proof-of-Work consensus model to the Proof-of-Stake model. On the other hand, bitcoin's Proof-of-Work impact on the environment is also an ongoing topic of discussion.
As a result, ESG projects developed in three main vectors in 2022. First, they reduce energy consumption and emissions: Ethereum reduces consumption by 99.9%, and Polygon is positioning itself as carbon-neutral. The second is ReFi, a new regenerative finance trend that experiments with financial incentives to reduce carbon emissions. And the last is support for sustainable initiatives, such as philanthropy for ESG projects, recycling, and education.
The cryptocurrency industry is still affected by macroeconomic factors
Here's a simple example. As I mentioned, the Merge upgrade of the Ethereum network was one of the most significant technological breakthroughs of the year. But unfortunately, the macro events were too severe for the price of ETH to rise seriously. The Fed's policies and interest rate decisions determine the market capitalization of the cryptocurrency industry more than many other factors at the moment.
Historically, the cryptocurrency industry operates in 4-year cycles. Throughout 2022, we have experienced one of the most challenging years in the history of the industry. However, each cryptocurrency winter boosted new technologies in the industry. For example, many well-known DeFi and infrastructure protocols were created during the last bear market in 2018-2019, and even earlier in 2015, many BTC trading and storage infrastructure companies emerged. Therefore, it is a further technological development that should be the main focus in 2023 and beyond.