Cryptocurrencies have certainly gone in and out of favor during the past few years. And as with any emerging technology, there's a ton of speculation in the industry, causing major price swings and attracting lots of investors seeking high returns. At the end of the day, however, regardless of what prices do, there are many interesting developments happening in the crypto world.
The more I learn about the cryptocurrency industry, the more I'm convinced that it's not going away. There's so much talent, from traditional finance firms to the tech sector, that is migrating to the crypto space, making it hard to believe that digital assets aren't going to become a bigger part of our lives in the years ahead.
In 2021, the total market value of the crypto industry went from $774 billion to more than $2.2 trillion. While I can't predict what the market will be worth in the future, I'm sure it will be higher than the $1.7 trillion it is now.
That said, here are my top three crypto predictions for 2022.
Image source: Getty Images.
Ethereum's competition intensifies
Ethereum (ETH +2.16%), the world's second-most-valuable cryptocurrency with a market cap of about $300 billion, has a scaling problem. As things stand today, Ethereum's blockchain can only process a maximum of 30 transactions per second (TPS). Thanks to the burgeoning market for decentralized applications (dApps), activity on Ethereum's network has been surging, resulting in exorbitant gas fees (the cost to process a transaction) of as much as $148.
Achieving decentralization, security, and scalability in the crypto world is known as the "blockchain trilemma," a difficult problem that has planted the seeds for competing blockchains. Ethereum's ETH2 upgrade, set to release this year, will lead to a transition from energy hungry proof-of-work to more environmentally friendly proof-of-stake, significantly reducing transaction costs. The addition of shard chains, which spread the blockchain's load between 64 new chains, will boost throughput and lower costs.
This hasn't prevented new entrants from stepping in. Cardano (ADA +2.43%) and Solana (SOL +1.62%) are two promising blockchains that compete directly with Ethereum by attacking the scalability issue head-on. Both already utilize proprietary forms of the proof-of-stake consensus mechanism. Cardano's current market value is $34 billion, while Solana's is $29 billion.
Expect these smaller blockchains to continue their serious momentum in 2022 as developers flock to them. I wouldn't be surprised if ADA and SOL, Cardano's and Solana's native tokens, respectively, rise more than Ether this year.
DeFi becomes appealing for institutions
Decentralized finance (DeFi) protocols allow customers to engage in traditional financial services, like lending and borrowing, without the need for a centralized authority. Projects like Aave (AAVE +0.16%) and Compound (COMP +2.93%) are two popular ones that let customers deposit crypto as collateral and borrow against that balance. Aave has about $11 billion in total value locked, and Compound has just under $8 billion. These figures measure the amount being staked in each protocol, an indication of the supply being secured.
Even though there are regulatory question marks, I think institutions will find the DeFi market very intriguing. Because there is no intermediary, these applications can offer better rates and lower costs. However, institutions would need to ensure that proper know-your-client and anti-money-laundering systems are in place to comply with banking regulatory requirements.
It will be interesting to watch. Just as Bitcoin is now starting to gain a sizable foothold among larger institutions after first appealing to individuals, I believe DeFi will follow the same path.
The booming DeFi ecosystem supports demand for Ethereum's programmable blockchain, but as I mentioned above, other networks want a piece of the growing pie.
More brands will enter the NFT and metaverse world
Last year brought non-fungible tokens (NFTs) and the metaverse front and center. Collections from Bored Ape Yacht Club and CryptoPunks attracted a lot of attention and dollars to NFTs. And Meta Platforms (formerly Facebook) is positioning its entire business to function in a new virtual world. This forward thinking will spill over to other industries.
Walmart recently announced that it plans to create its own cryptocurrency and NFTs to sell virtual goods -- talk about an omnichannel shopping experience! Nike, already known for its exclusive sneaker drops, also plans to offer customers virtual Nike-branded sneakers and apparel. Even Gucci is getting in on the action. The luxury fashion house is set to launch a collection of 250 NFTs that come with a physical ceramic sculpture made in Italy.
In a world that's becoming increasingly digital, riding the current trends in NFTs and the metaverse -- instead of fighting them -- will give certain brands a leg up when it comes to connecting and engaging with consumers. As a result, expect many more businesses to dabble in this space.
