2 Bullish Crypto Trends That People Are Missing
A Look On The Bright Side Of A Highly Chaotic 2022
As 2022 comes to a close, one question is top-of-mind for many crypto investors and enthusiasts: can it get any worse?
The ironic thing is that much of the damage done to the market this year came from centralized entities; exchanges, market makers, and hedge funds proved that they can’t be trusted.
But you know what can be trusted? On-chain data and, for the most part, code. That’s why DeFi is great – a lot of it is fully automated and runs on pre-determined parameters, which doesn’t allow for human behavior to get in the way.
Sure, DeFi has had its fair share of hacks this year as well, but a lot of them were either due to too much centralization (like the $650 million Ronin hack) or ways to exploit loopholes in the underlying code (the $190 million Nomad hack). That’s a ton of money, and I even lost a small amount in the Nomad hack, but these are growing pains of an industry that’s really only been functioning for 2-3 years.
Overall, when you look at DeFi, there are reasons to believe that crypto’s best years are still ahead, and one day 2022 will be seen as just another temporary dip in the market.
I want to get into two of those reasons in a minute, but first, let’s see how Ethereum has held up in terms of total value locked (TVL). As a reminder, TVL is the total amount of money that’s currently sitting in Ethereum apps (such as Aave, Uniswap, Compound, Curve, Yearn Finance, etc.).
In USD terms, TVL has fallen by more than 73% from about $131.7 billion to $34.81 billion:
However, this doesn’t necessarily capture the fact that people are mostly keeping their money within the Ethereum ecosystem. If crypto as a whole goes down, which is the case in 2022, of course TVL will go down with it.
So, while the chart above looks bad, if you put it in terms of ETH, it’s down considerably less. At the beginning of the year, the TVL was equivalent to about 35.1 million ETH, and during the year it’s fallen just 18.5% to 28.6 million:
I know that not everything in the Ethereum ecosystem is designated in ETH. However, considering how much everything has been down this year, it’s good to see people keeping their crypto in general on-chain.
Uniswap Adoption Holding Steady
Another metric that reveals that DeFi activity is holding up better than you might think is trading volume. While a lot of the lesser-known exchanges have dried up, the big ones like Uniswap continue to be extremely active.
In fact, Uniswap is almost outpacing their 2021 volume levels, which obviously were during much better market conditions.
Last year, traders amassed $634 billion worth of volume, or about $1.74 billion per day.
So far in 2022, total trading volume is currently about $586 billion, or $1.61 billion per day. Personally, I’m pleasantly surprised that Uniswap is almost on pace to break last year’s volume.
One reason that people generally have for increased volume during selloffs or bear markets is that all the panic selling inflates the volume numbers. While that might be the case in very short-term moves, we can see that big, centralized exchanges are seeing tremendous declines in total volume.
Using Coinbase as an example, we can see that the difference between their volume and Uniswap is night and day.
Here’s the data for total trading volume over the first three quarters of 2021:
Uniswap $404 billion
Coinbase $1.12 trillion
As you can see, Coinbase almost tripled Uniswap’s volume. However, 2022 has been a totally different story. Here’s the data through the first three quarters:
Uniswap $477 billion
Coinbase $685 billion
(All Uniswap volume data taken from tokenterminal.com; all Coinbase volume data taken from Q1 and Q3 Coinbase quarterly reports)
Sure, Coinbase still has more volume that Uniswap, but it’s only 44% more compared to 178% in 2021.
Through the first three quarters, Coinbase’s volume has declined by almost 61% this year, while Uniswap’s actually went up by over 18%! This is the type of adoption we need to see in order for DeFi to survive, and if that data isn’t a testament to its success thus far, nothing is.
Layer 2’s Quiet Breakout Year
One other trend that impresses me is the adoption of Ethereum “layer 2” solutions like Arbitrum and Optimism. I went into a little bit of the technical side of layer 2 platforms here, but I’ll spare everyone this time around.
Essentially, these are blockchains that use Ethereum, but enable faster and cheaper transactions. If you paid attention during the hype of 2021, you know that the fees to trade on Uniswap were consistently $50-70 or even more during the first half of the year, and in the second half, the cost to buy an NFT topped $200 at times!
Arbitrum and Optimism have been the two answers to this problem so far.
Before, we looked at the TVL on the Ethereum blockchain, which has steadily gone down this year. However, the TVL on both Arbitrum and Optimism has been relatively strong.
As you can see here, Arbitrum’s TVL is currently sitting at $1.49 billion, which is down about 34% for the year: less than half of Ethereum’s drawdown:
And here’s a closer look at Arbitrum’s vast and growing app ecosystem:
As for Optimism, TVL is just under $550 million, which is up by more than 57% for the year:
Here’s some more detail on Optimism’s TVL and a look at their app ecosystem:
Now, one thing that really helped Optimism this year is the fact that they launched a token ($OP) and have been steadily giving it out as a reward to use apps on their platform. Unsurprisingly, the launch of their rewards program coincides with the giant spike in TVL in July/August.
With that being said, it shouldn’t go unnoticed that Arbitrum has managed to achieve the 4th highest TVL for all blockchains despite the fact that they don’t have a token (behind Ethereum, BNB smart chain, and Tron). This means they have a legitimate, committed user base that didn’t flee to Optimism to take advantage of the OP rewards.
These TVL increases are confirmed by massive user growth on both layer 2 platforms. First, we can see that Arbitrum has been getting at least 50k users per day over the past couple months, as the momentums continues to get stronger despite a weak Q4 for the crypto market. This is up about 4-5x from typical daily activity in Q1:
Next, Optimism is also experiencing record-breaking usage in Q4, with consistent active users totaling at least 30k per day in November and December. This is up by more than 1,000% from Q1, where on average the platform would have about 2500 users per day
Overall, I believe that these layer 2 platforms will set the stage for the next bull market. And it doesn’t stop at just Arbitrum and Optimism; there are dozens more in development, and competition is always a good thing for a small and growing industry.
Disclaimer: Everything presented on my Substack is based on my personal research and opinions, and it should never be taken as investment advice. Just because I say good things about a stock or crypto or any investment doesn’t mean it’ll go up (although I wish that were the case). Any action that you take after reading anything on my Substack is your own responsibility.