5 Crypto Investment Trends for the Rest of 2022

Dear Bankless Nation,

2022 has kind of been a sh*tshow so far.

But as we approach the halfway mark of the year, that means it’s time to start looking forward.

While most eyes may be on macro instability right now, there’s a lot happening down on the protocol level that will make headlines later on this year.

Game-changing upgrades that you know and that you don’t, whole new token standards, meaningful competition, and the rise of new layers are all in play.

The second half of 2022 is shaping up to be even more interesting than the first. It’s time to get ahead.

Bankless Analyst Ben Giove has some alpha for you…

— Bankless

With prices plummeting, protocols imploding, and CeFi entities going under, crypto has experienced an incredibly tumultuous start to the year.

Don’t fear the chaos, anon.

There are a multitude of emerging trends and themes — both within the metaverse and meatspace — that are shaping up to define the remainder of 2022 and beyond.

Catch up on them first, and there’s major opportunity for generational wealth. Let’s dive in and see what investors should keep top of mind as the second of half of the year comes into play.

The Many Implications of The Merge

As far as Ethereum goes, the major theme to watch in H2' 22 is The Merge. The run-up, timing, and execution of it will dominate short-term action surrounding the event itself, but the real material impact will come after.

The long-awaited and fundamental Ethereum 2.0 upgrade will see the network transition from a PoW to a PoS consensus mechanism. This will have ramifications upon every facet of the Ethereum ecosystem.

To begin: the switch to PoS will result in drastic reduction in Ethereum’s energy consumption, alleviating concerns about the network’s environmental impact — particularly among ESG-conscious, institutional investors.

The change also paves the way for numerous protocol-level upgrades that will be far easier to implement in a PoS system. These includes improvements to scalability, such as danksharding, proto-danksharding, and Layer 2 call data cost reduction through EIP-4488.

This is in addition to changes that mitigate the negative externalities of MEV, such as PBS — proposer-builder separation — which will separate block production from validation.

The timeline to implement these changes will be accelerated post-merge as more core developer resources will be freed to focus on shipping these upgrades as opposed to heads-down sprinting towards the merge.

The Ethereum 2.0 upgrade is also a significant bullish catalyst for ETH the asset. The transition to PoS will drastically reduce the issuance required to secure the network. Coupled with the fee-burning implemented already via EIP-1559, this development is likely to lead to deflationary ETH.

The move off of PoW will also alleviate significant structural sell-pressure. PoS validators will be burdened with far lower operational costs than PoW miners, easing sell pressure in turn.

Finally, the merge will serve as a significant tailwind for Etheruem’s staking economy.

Currently, more than 12.97M ETH is already staked, which accounts for ~10.8% of the total supply of ETH. The completion of the merge is likely to lead to an influx of new stakers and restore confidence in liquid staking derivatives (LSDs).

Protocols such as Lido, RocketPool, and Stakewise — which have been trading at a material discount to ETH amidst heightened market volatility and a liquidity crunch — will balance out, and then rapidly take off.

Withdrawals from the Beacon Chain will not be activated until the Shanghai network upgrade.

How To Play This Trend:

• ETH itself
• Various liquid staking protocols

Layer-2 Scaling Goes Big

Layer-2 networks are poised to continue on a growth trajectory in the latter half of 2022.

L2s represent the present and future of Ethereum scaling. Optimistic and zero-knowledge (zk) rollups serve as execution layers that provide users with a fast and cheap transacting experience, while still maintaining the nation-state resistant security of the underlying Ethereum L1.

L2s continue to see steady uptick in adoption among users and developers, despite running into some growing pains. There is currently more than $3.81B in value locked across Ethereum L2s, with ETH-denominated TVL sitting near record highs.

Further, Many L2 native applications that leverage these networks' increased scalability have garnered significant usage. For example: perpetuals exchanges like dYdX, GMX, and Perpetual Protocol are currently facilitating billions in trading volumes.

Despite a general slowdown across the on-chain economy, L2 ecosystems continue to grow. Optimism is on pace to see 5.5.% Q/Q growth in network revenue in Q2, compared to a 46.3% decline for Ethereum L1.

This growth is likely attributable to the launch of Optimism's native token OP in May. It is the first of the “big four” L2s — which also includes Arbitrum, zkSync and Starkware — to release a token.

It’s highly likely at least one of these other networks will release a token in Q3 or Q4, serving as a significant catalyst for onboard developers, users, and applications to respective ecosystems.

How To Play This Trend

• Invest in or retroactively farm individual L2 tokens
• Invest in or retroactively farm the governance tokens of L2 native projects

The Rise of Cosmos and App-Chains

Another major theme to monitor in H2 is intensified growth of the Cosmos ecosystem.

Cosmos is aiming to create the “internet of blockchains.” Via the Cosmos SDK, developers can create sovereign, highly customizable blockchains that are specialized for individual applications — known as app-chains.

These networks can either bootstrap their own validator set or leverage shared security through interchain security, an impending upgrade which will allow chains to outsource their validator set to the Cosmos Hub.

Cosmos chains can also be connected via the Inter-Blockchain Communication (IBC), a trust minimized bridging and communication protocol. IBC is currently enabled for more than 30 Cosmos chains, allowing users to frictionlessly transfer assets between enabled networks.

This novel tech stack has increasingly begun to attract mindshare and interest among developers. For instance, dYdX, the largest decentralized perpetuals exchange by volume, recently announced plans to develop V4 of their protocol as a Cosmos app-chain.

Given the protocol’s history of early adoption of new technologies — it was one of the first to deploy on Starkware — this is a high signal indicator that suggests more prominent apps may follow suit and begin to build on Cosmos.

Projects may be enticed by the possibility of creating bespoke app-chains due to the “L1 premium” native tokens may command via validation and staking.

Cosmos, like all Layer 1s, is experiencing growing pains of its own. The decentralized exchange Osmosis was recently halted due to an exploit. Onboarding into the ecosystem through traditional means like bridges or exchanges remains difficult.

An influx of users, capital and attention in the wake of dYdX’s crossing of the chasm should shelp catalyze and propel ecosystem growth in the remaining months of 2022 and beyond.

How To Play This Trend:

• Invest in the L1 tokens of Cosmos app-chains
• Invest in the governance tokens of native projects built on said chains

The ERC-4626 Revolution

DeFi yields have compressed considerably in 2022 as on-chain activity, demand to borrow, and desire to speculate have all plummeted. Despite this, yield farming is on the precipice of its next growth phase already. This is thanks to the adoption of ERC-4626.

Pioneered by a cohort of prominent EVM-developers, ERC-4626 is a new tokenized vault standard. Just as standards like ERC-20 and ERC-721 allow fungible and non-fungible assets on Ethereum to be easily created and integrated into applications, ERC-4626 promises to do the same for DeFi vaults by providing a template in which any developer can easily create their own.

ERC-4626 is an extension of ERC-20, meaning that these tokenized strategies are just as composable as assets like USDC, DAI, UNI, and others. The proliferation of this standard will have a considerable impact on risk-adjusted returns that can be earned in DeFi

4626 could light up the DeFi user experience by enhancing capital efficiency. Users will be able to trade, LP, and use these new types of tokens as collateral, earning a return from participation, while simultaneously earning yield from the underlying strategy being run in the vault itself.

Farmers will be able to save on gas costs and more easily manage risk, as 4626 strategies, like traditional DeFi vaults can automate position management and compound earnings. These factors should increase the attractiveness of deploying capital into DeFi by both reducing risk and increasing returns.

A variety of different protocols have begun to leverage the capabilities of 4626. For instance, structured products that tokenize the now infamous stETH/ETH recursive leverage strategy on Aave like icETH and ETHMAXY from Index Coop and Galleon DAO are 4626 compatible. Yield protocol Timeless Finance and the soon-to be launched NFT lending protocol Astaria — along with many others — will also leverage the standard.

Given the immense benefits of 4626-based products, the future of farming will see users mint or buy and then hold a diversified basket of these tokenized yield strategies rather than deposit into numerous individual protocols.

The protocols and DAOs who are early adopters of the standard should see outsized growth in their offerings as DeFi users wake-up to the benefits this new class of tokens offers.

How To Play This Trend:

• Invest in the governance tokens of asset management DAO’s creating 4626-based products
• Utilize 4626 vaults in farming strategies

Macro Uncertainty

The fire is raging front and center, and will remain there for the time being. Weakness in traditional markets has bled into crypto throughout the first half of 2022. Expect this dark cloud to hover over the market in Q3 and Q4.

As the Federal Reserve has been forced to dramatically hike interest rates and run off its balance sheet to fight out-of-control inflation, both the bond and stock market have experienced their worst starts to a year in decades.

The rise in rates, flattening yield curve, sky-high commodity prices and perpetual supply-chain issues — atop trillions in wealth destroyed as a result of falling asset prices — have begun to trigger fears beyond recession and into stagflation.

Crypto has been caught in the crossfire. Majors like BTC and ETH sit ~71.1% and 78.9% below their ATH’s, with many smaller-cap assets having drawn down more 85%+ from peaks.

This bloodbath has reinforced the notion that crypto no longer operates in isolation as there has been a strong correlation between BTC and the S&P 500. That figure currently sits at 0.85.

While it is likely to have little impact on the long-run adoption of blockchain and end game for Web3, the continued macro uncertainty will certainly weigh on crypto prices for the foreseeable future.

How To Play This Trend:

• Create a DCA or lump sum strategy to build out long-term positions
• Hedge downside risk via options, perps, or other derivative instruments (This is risky, be careful!)

Conclusion

The Ethereum merge, Layer-2 scaling, The rise of Cosmos, ERC-4626 , and more macro uncertainty — all poised to have a significant impact on the second half of 2022.

The kicker is that prices may take time to reflect the fundamental shifts brought about by the first four themes as a result of the fifth. That’s just how it goes sometimes.

Savvy investors willing to ride out the volatility may be handsomely rewarded for paying attention and — when the time is right — capitalizing on the opportunities they present.

Action steps

• 📺 Understand Ethereum 2.0 power structures with Matt Cutler
• 🧠 Clear your head with 7 Mental Health Tips for the Bear Market