RΞCAP 2022: The Year In Review

HAPPY NEW YEAR!

What better way to welcome in the new year than reflecting on 2022 and looking forward to what this year has in store. Reflecting on the past 12 months, we've seen some of the largest raises from VC funds, startups, and protocols - and at the same time, we've seen considerable downside, hacks, and a drop-off in sentiment. For many, 2022 was supposed to be the year that the industry would go from a niche internet community to one taking the first steps in getting global adoption. But it doesn't seem like we're quite there... yet.

In this Recap, I'll be exploring the broad trends we've seen over the past 12 months, the winners and the losers, as well as looking forward to what 2023 has in store, to see where we stand as an industry in light of all of this.

TLDR: Despite lots of bearish noise, the signal has been bullish.

Trends

Starting with the bearish trends:

Global crypto market capitalisation is down (bad) with it dropping from approximately $2.25 trillion to $760 billion (01/01/2022 - 31/12/2022). When considered in the context of the broader macro conditions across other markets, and the crypto market looking toppy at the end of 2021, this is relatively unsurprising.

Over $3 billion stolen in crypto exploits and hacks, including large-scale hacks:

• Ronin Bridge (cross-chain bridge) - $622 million
• FTX (centralised exchange) - $372 million
• Wormhole (cross-chain bridge) - $320 million
• Nomad (cross-chain bridge) - $190 million
• Wintermute (crypto market maker) - $160 million
• BSC Token Hub (cross-chain bridge) - $100 million (could have been $550 million)
• Horizon Bridge (cross-chain bridge) - $100 million

DeFi TVL (Total Value Locked - i.e. cumulative value of assets on a chain/protocol) has dropped from over $230 billion to below $50 billion.

With asset prices having significantly decreased, TVL and yields have also fallen as a result, with further uncertainty caused by contagion causing investors to be wary of where they deposit their assets and the opportunity cost at play across asset classes.

Contagion from two black-swan events has shaken confidence across the market. The culprits:

• Terra Luna: the de-pegging of the algorithmic stablecoin $UST and the collapse of $LUNA (timeline and explanation here). This incident caused the fall of multiple third parties due to their exposure to the ecosystem, including the likes of 3AC, Voyager Digital, and Celsius.
• FTX: The collapse of the FTX, one of the world's largest cryptocurrency exchanges, (explained here) further impacted the market following this creating further contagion for a number of funds and lenders, including the likes of BlockFi, Genesis Global Capital, and Multicoin Capital.

Having started the year with a record level of VC investments flowing into this space, unsurprisingly, this has dropped off considerably as the year has gone on:

But it wasn't all bad!

Whilst all of the above makes for some pretty bleak reading, there have been a number of encouraging trends across the industry that can be observed.

These bullish trends have included:

Ethereum's Merge was a success, unlocking the roadmap for scaling Ethereum and further cementing its position as the leading smart contract platform.

Not only does this transition from Proof of Work to Proof of Stake massively reduce the amount of energy required to sustain the network, but it also makes for more sustainable economics with a considerably reduced inflation rate - especially when the consequences of EIP-1559 are also considered (learn more here).

Building on this, the blossoming Layer-2 ecosystem has also been another noticeable trend originating within the Ethereum ecosystem, maintaining one of the strongest narratives throughout 2022 (and likely continuing into 2023).

Whilst many have existed for a while now as testnets, there was a noticeable increase in activity on mainnets and surrounding these ecosystems despite the bear market, with Arbitrum and Optimism both leading the way. A number of other Layer-2s have also increased their activity with Matter Labs (zkSync) and Starkware (StarkNet) making considerable progress on their zk-rollup solutions, with Polygon also exploring zk-rollups with their zkEVM blockchain - helping them become a true Layer-2 rather than simply a sidechain. A notable mention should also go to Aztec, after raising $100 million at Series B despite a challenging market, who are building the only zk-rollup that is privacy-enabling, meaning users' transactions are shielded giving them bank-grade privacy. The only caveat to all of the Layer-2 activity we're seeing is that it is likely that there is a large amount of mercenary capital moving around positioning for airdrops on these networks, as all of the above - with the exception being Polygon ($MATIC) - have not launched a token yet.

Whilst VC investing in startups may have slowed, there is a sizable amount of money that has been raised by Web3-focused funds this year leaving a lot of dry powder ready to be deployed. Some of the most significant fund raises of 2022 include:

• a16z - $4.5 billion
• Animoca - $2 billion
• Haun Ventures - $1.5 billion
• Huobi Global - $1 billion
• Northzone - $1 billion
• Electric Capital - $1 billion
• Dragonfly Capital - $650 million

And it's not just VCs that have raised a significant amount of capital - there have been large raises in the startup ecosystem as well, despite the reduced activities with the likes of Yuga Labs raising a $450 million Seed round.

Building on this, whilst Yuga is one of the most recognisable Web3 brands building 'in the metaverse' with their development of the Otherside, the broader Web3 gaming ecosystem has seen sustained growth throughout 2022, with the number of transactions exceeding the total from 2021. Although a lot of these metaverse and gaming projects won't survive this crypto winter, with projects built on hype and poor tokenomics struggling to sustain themselves, it's encouraging to see how much activity is taking place in this space. Whilst at face value, these criticisms could as be pointed towards Yuga and their NFT collections as well as ApeCoin, they have the brand appeal and a healthy treasury to sustain them as they build out the Otherside putting them in a privileged position to weather this crypto winter.

Reflecting on the year as a whole, here are a few of my personal picks for groups that have done well and those who may have had a slightly harder time:

Tom's 2022 Winners

• DeFi: With trust in CeFi platforms at an all-time low, DeFi has proven itself to be resilient and offer what CEXs can't with radical transparency and immutability. From AMMs to lending protocols, the benefits of DeFi have been highlighted by the FTX collapse.
• Polygon: Without question, Polygon has had one of the most successful years across the Web3 industry with impressive integrations with Web2 platforms such as Instagram and Reddit, as well as business such as Starbucks. This is before even considering the technical progress they have made with zkEVM on the horizon, making for a very exciting 2023.
• Yuga Labs: As a holder of a few NFTs from different Yuga Labs collections, this may seem as if I'm shilling my own bags but, if we look at what Yuga has achieved this year, it should be fair to say that with the acquisition of CryptoPunks and Meebits, as well as the development of the Otherside, Yuga has dominated the NFT landscape with 4 out of the top 5 projects by volume on OpenSea falling under their brand. This seems unlikely to change anytime soon, with their growing ecosystem and partnerships.

Tom's 2022 Losers

• CeFi: With the collapse of FTX, Celsius, and other centralised players, it has been made very clear the flaws inherent within these systems: having to rely on trust, lack of transparency, and the lack of beneficial regulation that can sufficiently protect customers. This will likely change in 2023 as regulation evolves and CeFi institutions are regulated more closely.
• Cross-Chain Bridges: Although fingers can be pointed at CeFi for a lot of the negative sentiment in crypto in 2022, there was one category of DeFi that can be seen to have struggled throughout the year: cross-chain bridges. Unfortunately, with large amounts of capital being locked into these smart contracts (acting as an escrow) they were always going to be targeted by bad actors looking to exploit the protocol to access these funds. As a result, it has to be asked: do cross-chain bridges have a future? They are a useful tool in helping blockchains scale and move assets between blockchains but 2022 has proven that benefit doesn't come without risk - something that Vitalik Buterin had brought attention to at the beginning of the year.
• Regulators: Although regulators are starting to educate themselves more on crypto and related technologies, they are still playing catch-up. Arguably, the lack of good regulation in this space is partly responsible for the failings of centralised actors and supporting the growth of crypto startups (America being the main target of this criticism c.f. FTX). Given the turmoil we've seen recently and the growing adoption of these platforms and protocols, I expect regulators to clarify their positions throughout 2023.
• Alt Layer-1 Chains: With chain after chain looking to challenge Ethereum's status as the go-to smart contract protocol/ecosystem, there is an ever-growing list of Layer-1 blockchains claiming to be faster or cheaper. Whilst some chains are beginning to target particular markets and use cases - which is a reasonable approach to capturing market share - given Ethereum's headstart and scale this will continue to be a challenge for these chains, particularly with Layer-2s capturing the narrative and coming online, inheriting Ethereum's security but providing scalability. Alt Layer-1s need to be more strategic and learn from the way Layer-2s are rapidly capturing market share and focusing on business development. VCs should be wary of investing in new Layer-1s and expecting them to follow the same trajectory as Ethereum given the current market dominance of Ethereum and the saturation of other chains.

Concluding Thoughts

2022 has been a year that has been defined by FUD (fear, uncertainty, and doubt). Whilst this is often a term that is thrown around in communities when a project is being criticised, it's an apt term for describing what we've seen over the past 12 months. There has been a real sense of fear and uncertainty as a result of large funds blowing up and the risk of contagion - the secondary effects of this have meant doubt has been cast over centralised exchanges and lenders. Despite this impacting market sentiment, there is a silver-lining in that it is forcing regulators to educate themselves and move more quickly in providing meaningful regulation that can provide certainty. It has also had a positive impact in helping realise the benefits of blockchain technology and what it can facilitate as despite the turmoil we have seen in CeFi, DeFi has continued to operate 24/7/365. Users have become more aware of the importance of self-custody and how they ensure the safe storage of their digital assets.

Looking forward to 2023, as with this year, I would expect the market to continue to crab sideways as it recovers from this year's volatility and as investors regain their confidence. As this is likely to be set against the background narrative of global recession this sentiment is unlikely to change any time soon. Given DeFi's resilience this year and its merits being evident (with the exception of cross-chain bridges), I would expect to see increasing adoption by both retail and institutional investors, particularly as regulators provide more clarity.

But as with every bear market, this gives startups and projects the time and space to focus on delivering great products, so long as they have the runway to sustain themselves. Although there are large amounts of VC capital sitting on the sidelines, the best form of financing is always revenue, so teams should be focused on understanding not only how they create value, but how they also capture it! This will be one of the leading factors in determining the winners over the next 12-18 months.

There are hundreds of other things that I could have mentioned in this newsletter, but it's already pretty long as it is, so I'll save these topics for other articles.

Think I've missed something important? Want to dive into more detail?

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All comments within this newsletter represent my own opinions and not my employer's. Nothing within this newsletter constitutes financial advice.