Introduction
2021 was a huge year for crypto, both in terms of price action and adoption. There were multiple trending narratives throughout the year. Each sector had their own time to shine, bringing more interest, more capital and more people into the space. Many of us thought that DeFi would be the use case that brings millions of people into crypto, especially after the year DeFi had in 2020. While TVL did hit new highs, JPEGs of cartoon animals stole the show and brought in mainstream attention. Blockchain games like Axie Infinity introduced a new paradigm of gaming and showed strong product market fit with their high number of daily active users.
Let's take a look at some of the key highlights of 2021:
A multi-chain world
Over the past year, we saw the rise of many L1s and L2s. While Ethereum still remains the king, the spike in gas fees allowed many alternative chains to gain traction, most notably Binance Smart Chain (BSC) and Polygon. The promise of low fees and incentive programs propelled these chains to levels of activity that surpasses Ethereum. BSC and Polygon peaked at 1,345% and 760% the number of transactions on Ethereum respectively. The number of daily transactions have come down since their peaks and is currently at ~335% for Polygon and 550% for BSC. BSC is the most active L1 by daily active addresses.
Number of transactions on BSC vs ETH
Number of transactions on Polygon vs ETH
DeFi continues marching on
After a strong 2020, DeFi continued to ride on that momentum and showed no signs of slowing down in 2021. TVL grew by about 1,120% and stablecoins saw increased adoption, adding a total of $74B to their market caps during the year. Despite getting overshadowed by newer chains in terms of number of transactions, Ethereum continues to dominate the DeFi space in TVL. Ethereum has a higher TVL than all of the other chains combined, having roughly 70% of the total market share.
TVL on blockchains and dominant stablecoins
Uniswap and Aave both saw activity peaking during the first half of the year before cooling as the year progressed. Lido, a liquid staking protocol, had a massive year. Starting the year with just 16.9k ETH deposited, Lido would see the pool grow to 1.57m ETH by the end of the year, a whopping ~93x increase. While there are 23.1k unique depositors, the top 37 depositors are responsible for 50% of all ETH staked. This suggests that a few large whales are extremely bullish on Lido.
ETH staked in Lido
Smart money was actively trading on DEXes, with most trades being between WETH-Stable coins and WBTC-WETH. There was an interesting outlier amongst the trading pairs. Memecoin Shib ranked 9th in terms of smart money volume. One of them made an incredible 7,500x in 271 days!
Top 10 DEX pairs traded by Smart Money in 2021 (based on volume)
Top 3 SHIB earners tracked by Nansen
USDT faced increased regulatory scrutiny in 2021. While it’s still the largest stablecoin by market cap, USDC is closing the gap fast. USDT mcap grew by 2.9x while USDC grew by 8.3x.
Stablecoin Market Capitalization
NFTs took the world by storm
CryptoPunks and Bored Ape Yacht Club were the two key break-out projects. Famous celebrities such as Stephen Curry and Jay-Z started using NFTs as their Twitter profile pictures. Nansen became the first analytics platform to comprehensively track NFTs, building out dashboards for tracking high profile wallets, mints and bluechips.
The market saw 2 peaks during the year, one in May and one in late August. The single highest trading day by volume was on 29 August, with an unprecedented high of 132k ETH ($422M) in sales volume. The market ended the year off with over 4.6M ETH ($17B) in total sales volume.
Daily NFT trading volume
The rise of NFTs also gave rise to a new batch of smart money. Nansen tracks wallets making the most returns in the NFT space. The top 10 NFT traders made a total of 46,221 ETH ($185M) in profits, with one wallet topping the charts at a staggering 9,515% return on investment.
NFT traders profit leaderboard
Play to Earn: A new paradigm in gaming
Beyond being used for art and JPEGs, gaming offers a compelling use case for NFTs. Gamers are able to own their assets and extract monetary value from the hours they’ve spent in the game. The flow of value is more fluid and potentially more multi-dimensional if the in-game economy is crafted well.
Flow of value in traditional games vs blockchain games
Axie Infinity led the charge, bringing in $1.3B in annual revenue. The growth was made possible by the introduction of their own blockchain, Ronin. At its peak, the chain had 1.1M daily active addresses.
Axie Infinity cumulative revenue
Daily Active Addresses on Ronin
Conclusion
Crypto experienced tremendous growth in 2021. DeFi brought in the money and NFTs brought in the people. We will likely see similar themes continue to grow and develop in 2022. As user experience improves and blockchains become more scalable, high quality dApps will capitalize and take charge of those improvements.
Decentralized stablecoins such as UST may start to take center stage as users move away from centralized options that might fall under heavy regulatory scrutiny. Institutional adoption is expected to increase once regulations start to get worked out and companies follow in the footsteps of Tesla and Microstrategy. The NFT markets thrive on innovation that is unpredictable as it is fun and the best projects will start to emerge as clear winners.
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