DeFi and Blockchain Trends to Watch in 2022 – Finance Monthly

DAOs

Decentralized autonomous organizations have a long and colorful history in the world of blockchain, first emerging in 2016 in the wake of Ethereum’s 2015 launch. A DAO is much like a corporate governance structure, although it is run in a decentralized fashion using blockchain technology and largely without the oversight of government regulation (for now). DAOs function by allowing holders of its tokens to vote on how funds within the DAO are directed.

2021 saw some big moves in the DAO space. Wyoming became the first state to formally recognize DAOs, granting them the same legal status as limited liability companies. ConstitutionDAO raised more than $43 million to buy an original copy of the US Constitution from Sothebys. The DAO was surpassed by billionaire hedge fund manager Ken Griffin, but this episode clearly demonstrated the ability of DAOs to quickly raise and deploy capital for a given purpose.

We can expect DAOs to rise to new highs in 2022, with many DeFi protocols now using DAOs to manage their future. Meanwhile, a host of new NFT DAOs are emerging to support collective investment in NFT art. Those who want to direct the future of DeFi or invest in a protocol’s future can consider investing in DAO tokens such as Maker, UNI, AAVE or BitDAO. More interested in NFT art? Check out FingerprintsDAO, SquiggleDAO and FlamingoDAO. Ownership of these DAO tokens will give the holder voting rights in the DAO.

Music NFTs

An NFT, or non-fungible token, is a unique blockchain record that manages ownership of a particular digital product such as a work of art and is sometimes also linked to a physical representation. 2021 saw an incredible boom in visual arts NFTs and it was a serious boon for digital artists. The refrain of digital artists not being able to get a break in the pre-NFT, infinitely copyable world of digital art has been quickly changed by NFT technology that makes these digital goods uniquely ownable and tradable.

While visual arts NFTs have been around in their current form since 2017 (with many early, archaic versions predating even that), music is emerging as another hot NFT phenomenon to watch. Artists like 3lau, Nas, and Mike Shinoda have all launched music NFT projects to great acclaim in recent months. Expect more established musicians to follow in their wake as the major labels try to enter the NFT space.

Existing major NFT marketplaces are currently not well placed for this new world of music-on-blockchain, as their browsing experience and product offering are optimized for visual arts, not music. As such, we are starting to see a new breed of NFT platforms emerge to serve this space, such as Catalog, Zora and Sound.xyz. Another such platform is TokenTraxx, which is launching a market and coin platform for music NFTs this year. TokenTraxx’s deep relationships with the major record labels and its team of music industry personalities means it is well placed to capitalize on this trend.

Layer 2 Blockchains

A Layer 1 blockchain is an independent, self-contained blockchain in the vein of Bitcoin, Ethereum, or Solana. All of these face the blockchain trilemma, that a blockchain can only effectively deliver 2 of 3 properties: security, decentralization, and scalability. Most early blockchains, such as Bitcoin and Ethereum, value security and decentralization over scalability. More recent blockchains like Solana sacrifice decentralization for scalability.

However, the new, faster L1 blockchains that sacrifice decentralization for speed will have their work cut out for them to compete against L1 heavyweights Bitcoin and Ethereum, as a new breed of so-called layer 2 blockchains has emerged to improve their scalability and increase speed significantly. A layer 2 blockchain acts alongside a layer 1 chain by allowing transactions to occur much cheaper and faster on layer 2, with an update to the underlying L1 occurring at some point in the future. The L1 becomes a sort of slow, expensive but incredibly reliable settlement layer, with the L2 providing the speed and low expenses required of a consumer-friendly blockchain.

With Ethereum fees regularly reaching new highs and L2 solutions starting to hit their stride, the stage is set for Arbitrum, Optimism and other L2 solutions to take off in 2022. Rumors abound that these L2 solutions will offer their own tokens to help support their development and allow investors to gain exposure to them.

Increased regulation

It certainly raises concerns when ads for shady altcoins appear on public transportation in major cities around the world. Many activities that have been illegal in public stock markets for decades, such as launderers, pump-and-dump schemes, and unqualified advertising of high-risk investments, have yet to be regulated in the realm of DeFi and blockchain. Regulators around the world are trying to get a handle on this and 2022 could be the year we see firm guidance come from the US’s SEC, Britain’s FCA and other regulators on how financial regulation applies to blockchain.

SEC Chairman Garry Gensler stated that while he has no plans to criminalize crypto, regulation is coming and that crypto markets “need more investor protection.”

Enforcement will undoubtedly become more robust and increasingly intrusive scrutiny of blockchain participants can be expected. Blockfi’s $100 million settlement with US regulators, the SEC’s first enforcement action against a crypto lender, won’t be the last such action we see this year.

Stablecoins, privacy coins and DeFi products are the strongest candidates to find themselves in the crosshairs of regulators. Stablecoins attract attention because of the risk of not being properly backed by liquid assets, or the risk of an algorithmic peg breaking. Privacy coins that hide the addresses of senders and receivers in financial transactions are a natural haven for criminals, making them a top regulatory target. With DeFi, the regulatory concern is that most investors are not sophisticated or tech-savvy enough to understand whether promised returns are possible, and many DeFi protocols are not as decentralized as one might think, leaving them open to abused by a bad actor.

Closure

While no one can say for sure what 2022 will bring, it is likely that DeFi and blockchain will continue to develop at a breathtaking pace. The market remains young but growing rapidly, and as many millions of new users are enrolled in DeFi and blockchain in 2022 through new product offerings from major tech companies such as Coinbase and Meta, this is a space that can be expected to continue to grow.