Like in years past, I spent 2021 with entrepreneurs building at the intersection of crypto and financial services. Keeping up with the pace of innovation has been exhilarating and overwhelming. My passion for this space is buoyed by the courage and talent of those creating this new frontier. I couldn’t be more excited to see what their audaciousness will bring in 2022.

As crypto adoption spreads beyond the “early adopters” to the “early majority,” here are some emerging themes I’m particularly interested in. These themes are some of the main blockers I see in growing the crypto “tech tree” as we look forward to 2022. Here’s to a prosperous and productive year ahead!

DeFi explodes and “disappears”

DeFi is undoubtedly one of the areas of crypto innovation that I and many others are most enthusiastic about. For all the growth we’ve seen, I’m most excited by the fact that only ~4M unique addresses have ever used DeFi protocols. By most estimates, there are somewhere between 200-300M crypto users worldwide, which would put DeFi penetration sub-2%!

Yields (i.e., financial returns) have been the primary acquisition hook for DeFi to date. The sustainability of DeFi yields is a hotly debated topic but I firmly believe DeFi does not die on the vine if yields compress. The promise of DeFi and its competitive advantage against TradFi has always been focused on lower operating costs by executing financial transactions through software, not humans and large branch networks; higher capital efficiency that creates the opportunity for a lower cost of capital; and a co-ownership model that aligns incentives for network participants. Here are some of the important trends I’m watching closely that will hopefully drive DeFi penetration in 2022 and beyond:

• “Financialization of NFTs” – NFTs have become a new on-ramp into crypto. With the boom of NFTs in 2021, we’re about to see the NFT landscape financialize beyond spot trading (i.e., buying and selling). Many crypto natives want to use their NFT portfolio as a means for further liquidity and yield. We’ve seen a host of companies begin to enable lending against one’s NFT collection, but this market is still nascent. I’m excited to see how both decentralized/AMM-style approaches and more peer-to-peer models bring further liquidity to this market in 2022. I’m also interested in seeing how projects can build transparency and stability in this ecosystem through more sophisticated appraisal/valuation primitives that will help make these markets more efficient. Beyond pure financial motivations, collectors have deep emotional connections to their NFTs due to the fact that they’re “non-fungible,” so developing a brand and system that collectors trust is critical. Lastly, while most projects are starting with lending/borrowing, there is a broader set of financial services that will blossom around NFTs over time, including rental, derivatives, insurance, and escrow services.
• On-chain credit – A critical blocker in DeFi is the current model of over-collateralized lending. The lack of an on-chain credit score and recourse make DeFi lending extremely prohibitive. It’s certainly helped us get to where we are today, but it’s not sufficient for DeFi to go mainstream. As @fintechjunkie points out, “over-collateralized lending is a niche form of lending. It isn’t a product meant to be a mass-market solution to a mass-market problem.” At a high level, there seems to be two different approaches to on-chain credit that projects like Spectral, Teller, and others are taking: i) creating a new risk scoring and underwriting system based entirely on one’s on-chain profile (wallet balances and activity, lending and repayment history, etc.); and ii) bringing one’s existing off-chain credit profile on-chain. These approaches have tradeoffs and I suspect some combination of the two will be important to achieve broad acceptance and the necessary technical/behavioral buy-in from distribution partners (e.g., lending protocols, wallets/dashboards, dApp developers).
• Abstraction and “DeFi-aaS” – It is entirely too painful for new users to onboard into DeFi. Massive opportunities exist to provide a seamless front-end for DeFi. We’ve seen innovation from companies like Donut and Meow, who are providing applications for consumers and businesses to connect to DeFi on the back-end while abstracting away all of the onboarding complexity. I’m excited to see continued innovation here as well as more infrastructure and developer tooling to offer DeFi products “as a Service.” As we’ve seen more broadly, “every SaaS company is slowly becoming a fintech company.” We will see a similar shift here—every fintech company will become a crypto company. As fintechs continue to re-bundle, companies like Conduit are enabling them to offer DeFi products to their end customers without building everything from the ground-up. The massive user bases of consumer fintechs (and at some point, traditional banks) will be using crypto without the user even knowing! DeFi will in many ways disappear.

Usability is “the name of the game”

Reducing friction is the key to unlocking the next wave of adoption in crypto. With the proliferation of multiple Layer 1 protocols (e.g., Ethereum, Solana, Terra, Avalanche), our current landscape has left crypto users managing their assets across a dazzling array of ecosystems and wallets. Interaction typically revolves around exchanging long strings of hexadecimal addresses (e.g., 0x1a8A9168853De0B1a53g73674C47CC6E92CccC31), which is cumbersome and annoying. This is not the future.

Beyond simply creating elegant user interfaces, scaling adoption across multiple participants in the crypto ecosystem (e.g., developers, consumers, merchants, employers, institutions) is critical, such that new use cases can emerge and flourish. Here are some specific themes I continue to be excited by:

• Identity management – Onboarding the next billion crypto users will necessitate a far better UX around identity that serves as the gateway to the rest of an individual’s Web3 presence. Web3 domains (e.g., mgiampapa.eth, mgiampapa.crypto) will allow users to log-in to dApps, launch decentralized websites, send/receive payments, communicate with others, and much more, all from one simple and personalized address. These domains will help close the usability gap with Web2—interactions will begin to resemble our experience messaging someone on Twitter or sending a friend a payment on Venmo. Decentralized naming services like ENS and Unstoppable Domains will become foundational infrastructure for developers to authenticate end users and to offer a broader suite of products, from social networks to financial services.
• Multi-chain & multi-purpose wallets – Managing our decentralized lives across a variety of wallets and dashboards like MetaMask, Phantom, Rainbow, Step, Zapper, Zerion is prohibitive. There is tremendous fragmentation across use cases (trading, DeFi, NFTs) and the functionality and usability of these products are far from optimal. Products will emerge that provide broader coverage and simpler onboarding experiences. The access layer in crypto will also become smarter. Wallets will move beyond providing mere visibility (i.e., read-only) to offer read-write functionality, as well as tools for discovery to help users immerse themselves deeper into the decentralized web. Innovation at the interface layer is in its infancy—we’re still waiting for our “Netscape Moment.”
• Merchant/employer acceptance – While many of the peer-to-peer use cases of crypto have been deeply explored, we’re still waiting on broader acceptance from businesses. This has stalled usability for a variety of use cases, most notably, payments. Two of the critical technical blockers, volatility and scalability, have been reduced with the growth of stablecoins and higher throughput blockchains (Layer 1s like Solana and Layer 2s like Polygon & Lightning). As consumer adoption continues to grow, I expect business adoption to expand meaningfully, unlocking the opportunity for consumer-to-business payments (e.g., ecommerce) and business-to-consumer payments (e.g., payroll). Beyond broader acceptance, I believe it will take a novel payments primitive, such as streaming payments, to spark adoption. Imagine continuously paying creators micro amounts of crypto/stablecoin as you view content instead of the suboptimal ad-driven models we’re saddled with today. Imagine getting paid from your employer in real-time as you work instead of waiting for the standard bi-weekly pay cycle. This simply cannot be done today using fiat currencies and our current payment systems.

New vectors for institutional adoption

Yes, institutional adoption of crypto is here, but we haven’t been hit yet by the tidal wave of capital that is still sitting on the sidelines. Every person goes through their own journey getting up the crypto learning curve. It’s a process. Institutions are amalgamations of individuals who are similarly coming up the learning curve, but unsurprisingly at a slower pace. People like to make out institutional adoption as waiting on a singular watershed moment, where a 1,700-foot wave crashes on the crypto shores. I believe it will instead be a continued gradual acceptance and understanding—a series of small but meaningful waves—that will grow steadily over time.

Beyond education, there are blockers to broad institutional adoption such as regulatory uncertainty, the lack of enterprise-grade infrastructure/tooling, and the nonexistence of some traditional Web2/TradFi primitives. Similar to the progression of institutional acceptance, there will continue to be small but meaningful waves of new innovation to support institutional adoption. I’ve been impressed with the continued entrepreneurial activity across custody, asset management, trading infrastructure, compliance & risk management, tax, data/analytics, to name a few. Looking forward, here are some of the additional themes I’m most interested in:

• The institutional customer journey – Bitcoin has served as the predominant entry point for institutions to date. I see this continuing but also find myself wondering “for how long” and “what’s next.” As the Ethereum network continues to grow and finally merges in 2022, will ETH unseat BTC for the top spot? Will NFTs start to see institutional adoption? Will institutions begin tapping into the world of DeFi with permissioned liquidity pools like Aave Arc? Institutional adoption is not binary, it’s a journey.
• “Bloomberg for crypto” – Technology vendors are constantly battling for the “screen space” of institutional traders. Crypto has created an opportunity for new best-of-breed vendors including Talos, Coin Metrics, Nansen, and TheTie to wedge themselves into the daily workflows of traders, but the fragmentation today is overwhelming. À la Bloomberg, there is a massive opportunity to aggregate functionality across trade execution, market and blockchain data, news, and chat. Executing on this playbook will be critical to differentiate and to contend with incumbent players who are looking to fight back by bundling in crypto products of their own.
• Derivatives – Institutional traders are accustomed to trading a variety of instruments including futures, options, swaps, etc. in order to get leverage on their positions, manage risk, and improve capital efficiency. Derivatives markets are typically many times larger than spot markets, but crypto derivatives are only a small percentage of the spot markets today. The current institutional-grade solutions are inadequate—they lack liquidity, are prohibitively expensive, and contain slow manual processes. There is a huge opportunity for both centralized and decentralized derivatives exchanges to aggregate liquidity, standardize workflows, and give institutional traders the same experience they’re used to while trading other asset classes.

2022 will continue to drive crypto up the S-Curve

I can’t wait to see how these trends and the market more broadly evolve in 2022 and beyond. If you are starting/building a company along any of these themes, I’d love to hear from you. Say hi at mgiampapa@bvp.com or @mgiampapa!

-Mike

Special thanks to Charles Birnbaum and Chia Jeng Yang for contributing their perspectives to this post.