Web3 Rewind 2021
Crypto Investing Made Simple.
The world of Crypto in 2021 was ripe with changes, new trends, and headwinds. After disappearing from headlines for a few years, the space skyrocketed back both in price and in conversations – Don't be surprised if your grandparents are asking you to explain Crypto during the holidays or if your uncle asks you once again, "which meme coin will 10x next?!". What makes this year special from other bull markets is the innovation, products, and adoption we had yet seen previously – Our space isn't just Whitepapers and promises anymore, but real-world applications.
Attempting to cover every corner of this year's events would probably result in having to write a book the size of the Encyclopedia, so instead, we've opted into summarizing the trends and events that shook the space, both positively and negatively, since the new year.
Starting with the most visible (and arguably least interesting) topic of the year, we'll begin with price action. 2021 was a year of all-time highs, exceeding most expectations. While we didn't quite reach the $100K Bitcoin price target (at least, as I write this), we did get a high of $68.9K for Bitcoin (~70% YTD) and $4.8K for Ethereum (~440% YTD). Despite equities having a fantastic year (+26% YTD for the S&P500), Crypto outperformed while its market cap tripled, reaching close to $3T in value in mid-November. I'll spare you the boredom of outlining every coin that outperformed Bitcoin and Ethereum, but yes, there were many.
In 2021, the space went through a massive rebrand: a brand that focused on "crypto" and prices to "Web3" and what its technology enables.
It seems that even @Jack is confused about the meaning of "Web3" – don't worry, we don't blame you! Definitions vary depending on the person you're asking.
@Eshita from Messari summarized it best in her "Web3: in a nutshell" post:
In Eshita's own words: "Ownership is one of the biggest features of Web3 - participants have full ownership over their content, data, and assets. The bitcoin network was introduced in 2009, which offered up ethos that Web3 pioneers. Important to note that the internet has not reached what we consider Web3, but products and services are being built that are considered "Web3". This simply means that they adhere to the following principles to varying degrees: open, decentralized, censorship-resistant, immutable, trustless, and permissionless."
Non Fungible Tokens took the stage for the first time in 2021. For most, the acronym brings to mind a pixelated avatar, an ape, Cool Cats, World of Women, or Crypto Coven, but in 2021 NFTs showed us that they go far beyond avatars for your Twitter profile. We probably shouldn't sum up the amount of gas fees that went into flighting for NFT drops these past few months.
Opensea was the outstanding winner in the trend doing as much as $3.4B in volume in August of this year, clearing as many as 1.7M+ NFT sales the following month. Opensea could reach close to 1M traders on its platform by the end of the year. A quick snapshot of the top 5 blue chips ending this year includes CryptoPunks, Bored Apes, Decentraland, Art Blocks, and Mutant Apes, representing an aggregate ~1.6M in ETH volume for the platform.
We wouldn't do justice to NFTs if we stopped at Art & CryptoPunks.
In 2021, NFTs enabled:
We're even seeing trusted brands jumping in on the NFT craze with Nike's acquisition of Clone X by RTFKT, Adidas launching its own NFT, and Sotheby's selling over $100M in NFTs. We saw everything from Beeple selling Everydays: The First 5000 Days at Christie's for $69M to @Richerd.eth refusing an offer on his CryptoPunk for $9.5M. Even Visa – Yes, Visa – bought a Punk this year.
Let us hope for more drops on cheaper layer 2s next year and more creative ways people will be using the NFT format.
It's not all blue skies and "up only" for the space in 2021. As market interest picked back up, so did regulators, bans, and the SEC breathing over everyone's neck. On the flip side, we also saw other Governments and institutions embracing the promise of Web3.
We'll start by eating our frogs: regulation. In 2021, on the most extreme side of the spectrum, we got yet another China Ban, this time seemingly for real. China hasn't been historically friendly to Crypto, given its regulators have made crackdowns in 2013, 2017, 2019, and now 2021. While the news sent the market for a nosedive in the short term, the mining ban put an end to the narrative that China controlled Bitcoin mining: The U.S. now represents 35.4% of the hash rate (from 4.1% earlier this year), and China going from 75.5% to effectively zero. India seems to be going down a similar path, threatening jail for using Crypto in a recently proposed legislation.
Next up on our list of frogs is the U.S., who's been taking a closer look given the space's increasing adoption. We can't mention American regulation without first mentioning the man leading the charge, Gary Gensler (the SEC's chairman), who has been moving aggressively to impose stricter restrictions on players in the space. The scrutiny mainly set sights on DeFi (probing Uniswap), crypto lending (blocking Coinbase's product), and stablecoins, with Gensler describing the space as "more like the Wild West." Beyond the SEC, another notable event was the controversial $1.2 trillion infrastructure bill taking partial aim at us, requiring brokers to notify the IRS of crypto transactions and creating tax reporting challenges for wallet developers and miners.
Switching back to more positive notes, 2021 also showed us that some companies, institutions, and even governments are warming up to the idea of embracing Web3. For one, Michael Saylor has been scooping up more Bitcoin than we can count through Microstrategy (at least 17,732 Bitcoin or $866M) and been the BTC maxi-evangelist some love and hate. Elon decided to buy $1.5B of Bitcoin on Tesla's balance sheet and briefly accepted Bitcoin as a form of payment for his electric cars, which was short-lived but may make a comeback. While some traditional firms hated Crypto with the passion, the sentiment changed with institutions like Goldman Sachs, J.P.Morgan, and Fidelity throwing their hats into the ring.
Public markets also got to see more of us than in previous years, with Coinbase going public with a nearly $100 billion valuation, described as a watershed moment for the industry. After a ridiculous amount of failed attempts, the SEC finally approved an ETF (exchange-traded fund) for Bitcoin futures, being the fastest to $1 billion in assets and $1.2 billion accumulated in just 3 days. We've yet to see a Bitcoin Spot ETF (despite Fidelity's best efforts in the U.S.), but maybe 2022 is the year it catches the light?
2021 is the year we saw governments ban crypto gain, but others welcome it with open arms: In June, El Salvador's President Nayib Bukele introduced a bill to make Bitcoin legal tender in his country. The bill was successfully passed, and rolled out the new crypto wallet, Chivo, letting individuals and businesses send & receive payments in Bitcoin or dollars from anywhere. The rollout included some tech hick-ups as some residents experienced problems using the app.
Elon Musk might have been named Time's person of the year, but he could have also been named Dogecoin's biggest supporter. Suffice to say, we had another year filled with dog coins, led by Dogecoin and Shiba Inu, which somehow breached the top 10 cryptocurrencies by market cap, driven by Elon memes, TikTok, and Reddit enthusiasts. Neither have reached their $1 price target yet, but Shiba turned a $2 investment into more than $1 million. One prediction I'm willing to make here is that I don't foresee Shiba making a run at $1 anytime soon, given it would need to reach a market cap of $549 trillion to get there. Lest we forget, Vitalik burned $6B of this same coin and donated a portion of it. What's for sure is that we'll hear more of the dogs in 2022.
Ethereum remained the second most valued Crypto through 2021, but with rising demand, block space became less available, and gas fees soared to record highs. As a result, its thrown is now being challenged by a rising tide of Layer 1s that most had discounted until now.
Solana was this year's biggest Ethereum contender (+11,729% YTD), followed by Fantom (+10,300% YTD), Avalanche (+3,950% YTD), and Terra's Luna (+1,530% YTD). For comparison, Ethereum is up +440% YTD.
Beyond focusing purely on price action, these other chains have developed vibrant communities of builders and users, beginning to push their own DeFi and NFT ecosystems. While some of these chains are noticeably faster and cheaper than Ethereum, it is often at the cost of decentralization.
We could begin to see a world of cross-chain interoperability between these chains, but as of now, we're limited to simple bridges for moving assets from one network to the other.
The community of builders within the Ethereum ecosystem fought back the rise of new Layer 1s with several Layer 2 solutions designed to help scale applications by handling transactions off the Ethereum Mainnet.
Without getting too in-depth on the specifics of the technology, some of the most successful Layer 2s included Polygon (~$5B in TVL) and Arbitrum (~$2B in TVL). Layer 2s have begun moving DeFi and NFT applications to lower transaction costs and better user experience, proving themselves as catalysts for another wave of growth and confidence within the Ethereum ecosystem. It's safe to say we'll hear more of these solutions in 2022.
Ethereum continued to grow consistently in 2021 with DeFi and NFTs, crossing 180M addresses and on pace to settle $8 trillion in transactions by the end of the year. With this success comes the anticipation of scaling Ethereum's mainnet network (beyond Layer 2s) to ensure the next billion users don't get priced out of leveraging the platform (notably through high gas fees).
In 2021, the Ethereum core dev community successfully released EIP-1559, which changed the fee market mechanism and introduced a base fee burn (adding deflationary pressure on ETH), inching the network closer to "Ultra Sound Money." Consensys' post is an excellent resource if you'd like a more in-depth description of this change.
ETH's shift from Proof of Work to Proof of Stake is even more anticipated, expected to release in mid-2022. Well defined by Amartpreet Singh, "Ethereum 2.0 is an upgrade to the already existing Ethereum blockchain. It aims to increase the speed, efficiency, and scalability of the Ethereum network, enabling it to address the bottlenecks and increase the number of transactions. The pseudo names for Ethereum 2.0 are Eth2 or Serenity. In a proof of stake consensus mechanism, there are validators instead of miners. Their major role is to propose new blocks, provide computing power, storage, and the bandwidth to validate transactions. The validators are given periodic payouts in ETH."
If you haven't read this yet, don't miss Packy McCormick's Own the Internet post on the bull case for Ethereum – it's a must-read.
If there's a new shiny object in 2021, it's definitely the "Metaverse." So much so that web2 giant Facebook felt compelled to rename itself to "Meta," essentially claiming the title as its own. The rebrand marks a shift in a general consensus to go conquer the next frontier: a digital one – Metaverse was initially traced back to Neal Stephenson's 1992 cyberpunk novel Snow Crash, but has evolved to describe a world where we can create a new reality, sometimes aided by VR and AR, or sometimes simply on a screen, like when Chipotle opened a virtual restaurant in the popular game Roblox. From Second Life (now 20 years old) to Decentraland and Facebook's Meta, we can expect new worlds (some maybe a little dystopian) for us to discover in 2022.
2021 was also the year of DAOs. Decentralized autonomous organizations, or in simple terms, communities with a token component and no central leadership. DAOs are internet-native organizations that are pushing the next frontier of Web3 initiatives. While the concept of DAOs has been around for years, this year marked an inflection point in their popularity. We wouldn't do DAOs justice by summarizing them in a small paragraph, and luckily our friends at Orca Protocol summarized them best in their DAOs Wrapped 2021 mirror article.
Some of our favorite DAO experiments this year included ConstitutionDAO (which attempted to buy the constitution during a Sotheby's auction for $47M in a matter of days), FreeRossDAO (a movement to protest injustice in the American prison system in solidarity for Silk Road's Ross Ulbricht), PleasrDAO (a collective acquiring culturally significant pieces), and Loot.
DAOs today no longer define a specific set of initiatives within Web3, but instead have become a vehicle to unite people around one joint mission or set of values. Today DAOs span across Culture, DeFi, Investing, Art, Gaming, Design, Crowdsourcing, Music, Content – the list goes on.
A subset of DAOs in 2021 gave birth to the concept of Social Tokens – a tokenized community – best defined by Linda Xie in her beginner's guide to NFTs, "Social tokens are a broad category of tokens issued by individuals and communities." Communities today can benefit from launching social tokens to gate and regulate participation inside the member base.
The most established and popular token-gated community in 2021 is Friends with Benefits, self described as "Where Crypto Meets Culture: the ultimate cultural membership powered by a community of our favorite Web3 artists, operators, and thinkers bound together by shared values and shared incentives ($FWB)." The tokens ensure buy-in to the community's success and sometimes are used in decision making as governance tokens are to DAOs.
Today, there are roughly 5,000+ holders of the token (which doesn't necessarily translate to 5,000 members as anyone can buy the token on a decentralized exchange), a $75M market cap, and investments from the likes of a16z.
We should continue to expect more token-gated communities to thrive and emerge in 2022, as uniting people around shared incentives is what makes the web3 world go round.
Historically, we used to think of Crypto as centered around DeFi, traders, and dog coins – in 2021, the borders were pushed to include gaming, or a phrase coined "Play to Earn," with games like Axie Infinity taking the lion's share in the new trend.
Play to Earn was best described by Packy McCormick (who we quote once again – thanks Packy!). "One of the main criticisms of Crypto so far is that it has no real-world value or application, but Axie makes you reconsider what real-world value is. In Axie's case, the value comes from directly providing meaning, income, and opportunity to the players. A typical game would spend millions of dollars on marketing and keep the majority of profits to itself; Axie spends nothing on marketing but lets players keep most of the value created. That should lead to a stickier game and more expansion opportunities." If you haven't read his piece on Axie Infinity, we highly recommend it (Infinity Revenue, Infinity Possibilities).
The P2E trend is set to continue gaining steam (with Axie doing $1.2 billion in annualized revenue), and is likely to force the gaming industry to innovate their models. Despite the success of some native Web3 games, most incumbent gaming companies who attempted dipping their toes in NFTs and play to earn were met with furor from their communities. Examples like Stalker 2 backtracking their NFT plans following criticism or Discord starting nothing short of a riot for teasing an Ethereum integration shows we still have a long way to go before we can win the hearts of gamers internationally.
Web3 is about aligning incentives, and what better way to align your users with the platform than by rewarding them for learning to use your products? In 2021, we saw the emergence of platforms like Rabbithole paving the way to making the next billion crypto native users. Through Rabbithole, users can complete quests (like learning to use Avalanche), develop skills, and follow projects, which earn them rewards in the form of tokens or NFTs. Rabbithole is building the on-chain resume, pushing the thesis that the best way to prove your abilities in crypto is by showing you've used the tech itself. Plus, sometimes it pays (even more!) to follow their quests – like that time thousands of users received the ENS airdrop for following the Rabbithole quest on their site.
In a similar vein, Layer3 is rewarding contributors for doing sh*t (in their own terms). Users can complete bounties, like writing threads on Twitter and driving awareness to the project, earning them rewards in return.
We're recently seeing initiatives like OdysseyDAO, a learning DAO creating high-quality, 100% free Web3 education. In 2021, there was a clear intent to begin onboarding the next billion users by lowering barriers to entry into the space.
While DeFi visibility peaked in DeFi Summer 2020, this year came with a whole lot of innovation in the DeFi space, coined "DeFi 2.0" (worth mentioning that the term doesn't quite yet have a general consensus on its adoption). DeFi's first wave of "money legos" enabled the next generation of emerging protocols, building on top of previous initiatives, namely in yield farming, protocol liquidity, lending, and beyond.
A key trend in the DeFi 2.0 ecosystem has undoubtedly been OlympusDAO, building a "community-owned decentralized financial infrastructure to bring more stability and transparency for the world."
First introduced in February, OlympusDAO enables users to earn rewards through two mechanisms, called Staking and Bonding. In staking, users buy $OHM (the currency) on a DEX, staking the tokens on the Olympus platform, receiving generous yields in return (in the thousands of percents). In bonding, users bring LP tokens or other crypto assest (like DAI, wETH, or FRAX) to receive discounted $OHM tokens. These mechanisms enable OlympusDAO to be the owner of its own liquidity, compared to DeFi 1.0 where rewards are distributed to farmers to sustain liquidity. OlympusDAO's mechanism has now been forked a thousand times, giving life to $KLIMA, $TIME, $SDOG, and too many other similar protocols to count. Defi 2.0 doesn't stop at Olympus, but in the interest of keeping this short and less technical, let me point you to Abracadabra Money, and Chainlink's extensive review on the topic.
It's no secret that Venture Capital was hard at work during the last 12 months. According to recent reports, investors poured a record $30 billion into crypto in 2021, more than in all previous years combined. According to Axios, even a16z has already fully deployed the $2.2B fund it raised in June. Multiple crypto companies like MoonPay, Sky Mavis, and Dapper Labs all scored multi-billion valuations during the year. If anything, the space has officially gained traction in the big ring, with the world's best investors setting their sights on emerging companies. From Social DAOs (like $FWB) to NFTs (Opensea), to Gaming (Axie), to DeFi, 2021 was by far the most competitive year for VCs fighting to get an allocation in hot cap tables.
2021 was one of the most eventful years since the creation of our industry. From investments growing, to prices skyrocketing, NFTs taking the stage, and communities forming, we're seeing innovation happening before our eyes at increasing speeds. Finally, in 2021, we introduced Alongside to the community, and we're so excited for what's to come for next year. We're on a mission to make this space more accessible to the next billion users, starting by building indexes that make it easy for anyone to diversify in a few clicks. Join thousands of others on the waitlist at www.alongside.finance, and get a first look at what we have in store for you in 2022!