It’s been some time since I updated my blog. Having to juggle my studies while working Full Time as an Analyst in crypto was pretty much keeping me busy with little spare time to do much. Not forgetting the craziness of crypto and managing a growing Axie Scholarship Guild.
Crypto move super fast, and that is because of the immense amount of mindshare and innovation that is happening in the space. It is basically the Internet in 1999 when everyone is coming up with revolutionary ideas and betting on which ones will actually become what we know today as the Big Tech FAANG stocks or MANGA since Facebook changed their names to Meta.
DeFi boom and Ethereum Scaling
In 2020, we saw the golden era of DeFi summer, where Decentralised Finance became a buzzword and a period where yield farming was super profitable after it was first introduced by Compound and its COMP token. We then saw the likes of Layer-1s like Ethereum, Binance Smart Chain, Polygon, Avalanche, Fantom, Terra, and Solana becoming the buzz word for DeFi and chain utilisation supremacy.
While everyone is criticising Ethereum for being un-usable and too expensive for retail users (which I agree), the Ethereum Foundation is already deep diving and experimenting with various Ethereum scaling solutions. Ethereum scaling was always in the works with Ethereum’s core upgrade being Ethereum 2.0, which will migrate the current legacy Proof-Of-Work chain to a Proof-Of-Stake blockchain that will drastically improve throughput (scalability) and reduce computational outputs that are energy efficient, which tends to be the main criticism for Bitcoin and its environmental concerns. Ethereum 2.0 will also introduce Sharding which essentially solves the blockchain trilemma of Decentralisation, Scalability and Security. You can catch up on Ethereum basics in no time in one my previous post here.
Ethereum is the main settlement layer of the space
Now, Ethereum 2.0 does offer tons of scaling benefits for Ethereum, and why always Ethereum?
Well, Ethereum is the most decentralised blockchain second only to Bitcoin, and why is this important? Simply put, Ethereum is the most decentralised and secure smart contracts blockchain out there.
The years of network effect and battle-testing from malicious attacks has proven to us that Ethereum will always remain as the most-used blockchain for DeFi/NFTs and other applications that will be developed in the future.
Newer blockchains today are merely complements to Ethereum in my opinion and it will always remain that way if you are talking about a true, permission-less and decentralised smart contracts platform. Volume and liquidity thrive the longest and are the deepest on Ethereum, other chains are lightyears away from the level of network effects Ethereum has attained since inception.
While ETH 2.0 offers massive scaling benefits, it is not enough to port over billions of new users that will come in and use it when mass adoption starts. This is also why the concept of Modular Blockchains are so important: Being able to have modules plucked on top of Ethereum, and serve specialised utilities to make sure the user experience remains world-class but at the same time enjoy the highest level of security across any blockchain on Ethereum.
Ethereum Layer-2 Scaling Solutions
Ethereum Layer-2 solutions are being worked on as the modules that will support the future of mass adoption blockchain on Ethereum. So you probably have seen things like Optimism and Arbitrum in the news lately as Layer-2s are finally making their way to mainstream crypto users. What exactly are Layer-2 solutions though?
In essence, we have 2 main Layer-2 scaling known as optimistic roll-ups and Zero-Knowledge (ZK) rollups. They differ in the mechanisms they work but to keep it simple, they essentially “roll up” multiple transactions from Ethereum’s base layer (Layer 1) and send it over to the Layer-2s to be executed, all the while enjoying the security of Ethereum.
To put it in layman terms, think of it as you having to buy groceries one by one which can be time-consuming and incur cost and time spent to make the purchases but if you bulk purchase them and let the deliveryman send you 1 week worth of groceries all at once, you save up tremendously in delivery cost and speed up your goal of buying the groceries.
There will be specific Layer-2s that serve as specialist for different applications.
For example, Optimism and Arbitrum are optimistic roll-up Layer-2 scaling solutions on Ethereum and their general purpose is to make DeFi transactions cheaper, faster and better on Ethereum. While not perfect, they do enjoy Ethereum’s Layer-1 security which is unbeatable if you compare to other chains like Solana, Binance Smart Chain, Avalanche or Fantom which are relatively less secure due to the low number of validators that are securing the network relative to Ethereum.
Immutable X is a ZK-roll up Layer-2 solution on Ethereum and they are specialising in NFTs. Their goal is to make NFT minting, buying and selling way faster with zero gas fees while still enjoying Ethereum’s Layer-1 security.
I hope you are getting the idea of what modular blockchains mean now. They are Lego blocks that can be attached to solve issues faced by Ethereum as we scale up and can be un-plugged if it is no longer needed. So we are no longer plagued by the initial base design of a blockchain and can scale accordingly, nipping the bud the moment they appear.
It is elementary understanding if you think other Layer-1 chains will become the next “Ethereum Killer” because unless the other Layer-1s can attain the level of security Ethereum has, all of these “Killer” narratives are merely marketing talks to give investors hope that they are investing in the next Ethereum.
Other chains will definitely thrive alongside Ethereum, but competing against it in my opinion is futile, given modular blockchain is the future of Ethereum scaling and that basically defeats the purpose of having so many Layer-1s.
Metaverse and Gaming
Aside from Ethereum scaling, we are also seeing Metaverse and gaming becoming a huge topic within the crypto sphere. After Facebook’s announcement of their goals to pivot towards the Metaverse, which is an alternate, virtual reality that users can connect with their friends and loved ones at a deeper level without physically being beside them, or Ready Player One if you watched that movie. (please go watch it if you have not done so already)
I am personally invested in a few metaverse myself. These includes the likes of Axie Infinity, Embersword, The Sandbox Voxels and Star Atlas. The gaming narrative in my opinion, is going to make DeFi look small. Just look around us and how many of us play games?
Gaming is much more relatable to the masses than complicated jargons and strategies of DeFi yield farming and collaterals and lending and staking which requires the user to have a decent understanding of Finance and Economics.
In fact, if we look at Axie Infinity alone, which is the highest earning and most used application in the entire crypto space, users are interacting with DeFi without even knowing they are using it when they do things like bridging from Ethereum over to Ronin, staking AXS, using Katana DEX to provide liquidity and swap their SLP for AXS and more.
Crypto gaming will be the sector to onboard billions of users into the space, and these gamers will slowly use DeFi as they progress in the game and get introduced to DeFi eventually.
With a total addressable market size of over 2.5 billion gamers worldwide, I just don’t see how crypto gaming is not going to explode. Facebook and Microsoft entering the Metaverse means that the entire space is still super early as well. Wait till Google, Apple and many AAA rated gaming studios start jumping into the fray and that will be the explosive catalyst needed for mainstream adoption. We are literally just getting started.
State of NFTs
NFTs are in a state of bear market right now. After Ethereum’s massive rise from $3000+ USD to nearly $5000 USD at the point of writing, NFTs saw a massive bleed in ETH terms as speculative NFT traders fled for the liquid nature of ETH compared to NFTs.
Bluechip NFTs value in USD terms saw nearly no changes due to Ethereum’s value in USD appreciating, but in real ETH terms the entire NFT market took a dump, some collections are down nearly -60% or more and projects with little to no utility saw an even bigger dump of -80% or more.
The illiquid nature of NFTs means that you are essentially leveraging your ETH and shorting ETH if ETH is on a bullish momentum, something most NFT traders don’t realise when they ape into the next big thing that promise to become the next Bored Ape Yacht Club or CryptoPunk. Always do your own due diligence and thinking rationally is key.
For now, with 2021 coming to an end, there are many exciting narratives to look forward to in 2022. In particular, Polkadot’s parachain auctions are underway, and we will probably see Polkadot related projects start to suck up some of the liquidity away from other chains to take advantage of the mining incentives that will happen on these parachains.
Terra is also launching many of their TeFi projects with the inception of a proper money market in the form of Mars Protocol on the horizon and the core of every DeFi ecosystem, the AMM Astroport.
If you don’t yet know what drives volume and liquidity to a blockchain, it is always the presence of a money market (stablecoins) and AMM that will incentivise users to use the chain.
We also see many of the hottest play-to-earn games like Illuvium, Embersword and many others going live in 2022, so 2022 is going to be a huge P2E gaming boom for sure if you know where to look. Ethereum 2.0 is also coming in 2022, as well as metaverses, so it is going to be an exciting year ahead for crypto.
Shakeouts and Corrections Imminent
We are definitely seeing signs of froth in the market, especially since large-caps like Bitcoin and Ethereum hitting All-Time Highs after All-Time Highs, so it is possible that there will be multiple shakeouts in the market where early buyers start taking profit and spook out the greed and no-conviction buyers out of the market.
Markets don’t go up in a straight line, but if your point of entry offers a margin of safety and you have the conviction to hold or even buy dips when the opportunity arises, I don’t see a problem at all.
With the maturing of the crypto asset class, it is also inevitable that we see regulators start to pin down on this industry hard. But all these are temporary, and in fact healthy for the industry in the long run as this will further legitimise the viability of digital assets as an investable asset class.
Institutions and Big Players are just starting to understand DeFi and all the merits of crypto, and I don’t think we are near saturation point yet. Perhaps when the industry hits 10 Trillion Market Cap where we might see mass adoption start to happen. While the industry is still super early, scams are also prevalent, so always remain vigilant and remember security is critical in this market!
Crypto is the next industrial revolution and not many can see it. I am sure people will be flocking to blockchain-based companies in the future instead of traditional sectors. Time will tell eventually. In fact, talents are already moving from the traditional world into the crypto world.
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For those who are already into Crypto
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What is Bitcoin? Answers here
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What is Ethereum? Simple Guide Here
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What is Decentralised Finance (DeFi)?
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