RF Capital
Published in

RF Capital

Crypto in 2022: What’s Coming Next?

2021 was a great year to those who rotated alt Layer ones specifically Solana, Luna, and Avax, or SoLunAvax for short. The main idea for this year will be that value will be returning to Eth in the form of new users on scaling L2 solutions. The main issue behind this is that there isn’t much to do on layer 2s compared to an alt L1. Alternative layer ones like Avalanche and Fantom offer ecosystems that can rival those of Ethereum while offering incredibly low gas fees and fast transactions. But once developers see the benefits that come with building on Eth, from not only a security level but a monetary level as well, the users will follow with them. This leads me to my actual thesis for 2022, return to value.

Return To Value

Return to value is a simple way of describing my outlook for 2022. What it really means is that due to things like the supply shock and scaling from Eth 2.0, as well as layer twos starting to become mainstream, alternate layer ones (Avax, Sol, Luna, etc) will bleed some of their users and value back to the Ethereum network.

Eth 2.0 + Supply Shock

The first big part of Eth 2.0 that is set to launch soon is the move to Proof-of-Stake or PoS. Proof-of-Stake is a consensus mechanism for processing transactions and creating new blocks in a blockchain without the need for heavy computational power/cost, allowing for faster and cheaper transactions. According to Consensys, the move to PoS should take place in Q1/Q2 of this year. This move will allow Eth to scale by magnitudes of 10, allowing for even more scaling alongside layer 2s.

The move to PoS, as well as the introduction of EIP-1559, brings forth the idea that there will be a huge supply shock for Eth. EIP-1559 was the London Hard Fork Update and its main change introduced the burning of Eth, creating deflationary pressure on the asset.

ETH burned since EIP-1559. Source: https://watchtheburn.com/

Not only is Eth getting burned daily, resulting in a net reduction of almost 70% less Eth, but the move to PoS also puts even more pressure on the supply of Eth. This is because of staking in order to secure the network. Since more users start to stake their Eth, essentially locking their Eth into the network until the merge completes, the overall supply of Ethereum will experience a significant drop and it's something that can be seen on exchanges now.

Ethereum reserves versus ETH/USD price-performance YoY. Source: CryptoQuant

Layer 2s

The main way alternate L1s will bleed value is layer two scaling solutions that are built on top of Eth start to get more mainstream. For right now Polygon and Arbitrum are dominating the space. Polygon is a side chain and has its own native token MATIC and offers incredibly speedy and cheap transactions. Polygon suffered a widespread hack and the security of the protocol leaves users wanting more.

Arbitrum is an optimistic roll-up and therefore benefits from the Ethereum network’s security. Arbitrum has its downsides to be fair, things like a 7 day waiting period to bridge your funds back to the L1 network and low liquidity are two of the main setbacks for the protocol. But, Arbitrum offers an experience that is very similar to the normal Eth ecosystem at a fraction of the price and faster speeds.

Optimists of Ethereum can see that while the options aren't perfect right now, the interest is there. The Total Value Locked on both of these layer 2s is pretty high, even compared to alternate layer ones. Both Polygon and Arbitrum fall into the top 10 on DefiLlama and show there is room for growth compared to the DeFi king, Eth.

Top 10 Blockchains by TVL. Source: https://defillama.com/chains

Building and Innovation

The main way that layer twos are going to get traction is if there are builders willing to go to them. The Arbitrum network is leading in layer two innovation in terms of what is being built on it. There are the OGs that have ported over like Curve and Sushiswap as well as some of the newer Dapps like Dopex, Abracadabra, and GMX. Protocols like Dopex have even incentivized their users who believed in the Arbitrum switch early by giving some of their early users the option to mint NFTs, which currently has a floor price of 7 Eth.

Top 10 protocols on Arbitrum by TVL. Source:https://defillama.com/chain/Arbitrum

It is always smart to bet on innovation in this space, and innovation itself is what made SoLunAvax such a good rotation last year. They were fresh blockchains offering their take on scaling and fees and it was very exciting to see. While those blockchains got the limelight networks like Arbitrum and Optimism were building optimistic rollups and they are closer than users think. Betting against Eth this year is betting against optimistic and ZK rollups and the core Eth team. This team built the framework for this space and It wouldn’t be surprising if they were able to change it again.

Crypto Cycles

Over the course of the lifespan of cryptocurrencies, investors have experienced a “boom-bust” style of market cycles. This is commonly used to describe alternating phases of economic growth and decline. Since Bitcoin is the oldest crypto it's easy to see this cycle pattern over the lifespan of the asset.

Bitcoins Boom-Bust Cycles. Source: Tradingview

With each new cycle, we are seeing less boom and less bust though. Some investors believe that these types of market cycles are a thing of the past, welcoming the idea of a supercycle. The supercycle doesn't suggest that the market will only go up, just that we won't see large 60–90% drawdowns as the market has previously done. I tend to agree with this but believe we have one more boom-bust cycle before experiencing a supercycle.

In May 2021 the market experienced a heavy drawdown, around 50–70% depending on the asset. The market did however bounce back and put in new all-time highs for most cryptos. We currently are experiencing another drawdown of around 40–60% but the bottom is relatively close to being in and we should see a large move as we did in July-November of 2021. Giving an accurate timespan on when this move will occur is incredibly hard, but we will see a relatively large move in the next 8–10 months and go into the boom part of the cycle one last time. After that expect the bust, where most protocols or networks will lose 60–90% of their value.

Bitcoins Drawbacks 2011–2017. Source: Fox Business

All hope is not lost, and navigating a bear market with a clear and concise mind can put you in the position to experience the most growth once the cycle turns around. And if we do experience the supercycle after this, you’d better have positioned your chips correctly in the bear market, because there’s a chance we never experience large corrections in this market again. There’s a saying about bear/bull markets; the bull markets make you feel good, but bear markets will make you rich.

Conclusion

2021 was a great year for investors that saw Ethereums scaling problem and recognized the need for alternate layer ones like Avalanche, Solana, and Luna. But, while these blockchains got all the spotlight, Ethereum was working away at fixing this issue with things like EIP-1559 and working on switching to Proof-of-Stake, as well as other aspects of Eth 2.0. Not only do these innovations help solve Ethereums scaling problem, but they are also contributing to the upcoming supply shock that will occur when Ethereum makes the switch to 2.0. This supply shock, as well as the innovation of roll-ups or Layer 2s like Arbitrum and Optimism, are reasons to bet big on Ethereum taking some of their users and value back from alternate L1s. Also, expect another boom-bust type of cycle and be ready to take profits towards the end of the bull market, and make clear and concise bets on your network of choice in the bear market.

*Special thanks to R.F. Capital for the opportunity to intern under their leadership*

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store