2021: The Explosion of Web 3.0, Metaverse, and NFTs and the Subsequent Pullback.
An array of decentralised technologies such as Web 3.0, the Metaverse and the explosion in popularity of Non-fungible tokens (NFTs) continued the upward bullish trend of cryptocurrency and blockchain for much of 2021.
The vision of Web 3.0
Web 3.0 was first coined by Gavin Wood in 2014 (Polkadot founder and Ethereum co-founder) gaining momentum and popularity in late 2021, with large interest coming from high-profile tech individuals and companies, cryptocurrency and blockchain enthusiasts.
Web 3.0 refers to the third iteration of the web, succeeding Web 1.0 of the 1990s, and the current version of the internet, Web 2.0. Web 3.0 is based upon blockchain technology, utilising decentralisation and token-based economics, which will allow for the processing of information through technologies such as decentralised ledger technology, Big Data and machine learning. The ultimate goal is to interconnect the internet through decentralisation, which is the opposite of the current generation of internet (Web 2.0), whereby data is stored mostly in centralised repositories.
Decentralisation is the future of Web 3.0. As cryptocurrency and blockchain technology hinge on decentralised protocols, you can expect to see Web 3.0 create a strong connection with these technologies. With the Metaverse, NFTs and DeFi growing at an exponential rate, it is only inevitable that automation via smart contracts will completely change the way the Internet and Web will be used.
The introduction of the Metaverse
The Metaverse is a digital reality, a network of 3D virtual worlds that connects users through social connection via social media, virtual reality (VR), augmented reality (AR), online gaming and cryptocurrencies. The metaverse is essentially a real-world beyond the world we live in, only virtual. As the years go on, interest in the metaverse will increasingly grow amongst investors and companies who want to be a part of the next generation of technology.
Recently, companies such as Facebook have been talking about the metaverse, noting at a press conference on October 17th, 2021, that the metaverse is ‘a new phase of interconnected virtual experiences using technologies like virtual and augmented reality. At its heart is the idea that, by creating a greater sense of ‘virtual presence’, interacting online can become much closer to the experience of interacting in person’. Facebook went on to remodel its company to ‘Meta’, bringing together its apps and technologies under one new company brand, with a focus on bringing the metaverse to life and helping people connect, find communities and grow businesses.
Non-fungible tokens exploded
Non-fungible tokens also took off in 2021, growing immensely in popularity and having real world use. NFTs are unique, non-interchangeable cryptographic assets stored on a blockchain. NFTs are non-fungible in nature, as fungible tokens such as cryptocurrencies are able to be used as a medium of exchange, whereas NFTs cannot be traded or exchanged at equivalency. NFTs represent real-world items such as videos, music, artwork, real estate or even big sporting moments, that are cryptographically unique and cannot be replicated. Representing an individual’s property rights, identity and more, they can be bought, sold and traded.
In 2021, we saw a record-smashing NFT sale occur, with artist Mike Winkelmann (digital artist known as Beeple), selling an NFT of his work for $69 million, placing him among the top three most valuable living artists.
We have also begun to see a shift in the music and media world, with artists and musicians creating NFTs themselves to auction off various forms of digital media to their fans for cryptocurrencies. Artists have been able to store a rare collectible or collection of their music on a digital ledger, such as Ethereum’s blockchain, putting power back into the hands of artists who can now monetise their art or music in digital form. We have seen artists and musicians such as Grimes make $5.8 million, DJ Steven Aoko making $4.2 million and DJ and music producer 3LAU make $11.6 million selling music NFTs.
Today, there are also several infamous NFT projects that have become exclusive clubs.One of those is the Bored Ape Yacht Club (BAYC) which launched in April 2021, with influential people such as Eminem, DJ Khaled, Logan Paul and talk show host Jimmy Fallon investing in the project. The project produced a collection of 10,000 unique Bored Apes, with the highest price a BAYC NFT going for 769 ETH, or US $2.3 million at the time.
Gamification of the Cryptocurrency world
The rise of both the NFT and Metaverse has led to the gamification of the cryptocurrency world. Non-fungible tokens, cryptocurrency and blockchain gaming came together to push the Web 3.0 movement to heights that we hadn’t seen yet. Axie Infinity was the first successfully established play-to-earn game, combining both its native token (AXS) and in-game NFTs, becoming an extra source of income for users.
Coins such as MANA, the native token of Decentraland have been introduced to allow users to experience a world for buying virtual land, estates, assets and more. Sandbox is another virtual-reality platform designed for the Metaverse, built on the Ethereum blockchain, users build and monetise their virtual experiences. Both Metaverse projects surged 4,104% and 16,261% in 2021 respectively. Binance Smart Chain (BSC) is another perfect example of the metaverse meeting cryptocurrency, hosting many metaverse gaming projects such as role playing games.
We will explore the collision of gaming and cryptocurrency in more detail for 2022 and beyond, however, the current top gaming tokens by market capitalisation can be viewed here.
Growth of Decentralised Exchanges
Decentralised Exchanges also continued to thrive well into 2021, with more than $1 trillion in trading volumes according to The Block Research. That is an over 850% increase from 2020.
Uniswap appeared to continue its dominance in volume with over 75% of market share. However, with the explosive growth of the Binance Smart Chain (BSC), we saw PancakeSwap, another decentralised exchange, utilise an automated market making system. Being a fork of SushiSwap, it has the advantage of cheaper and faster transactions as it is built on BSC. This led to an exponential rise in the adoption rate of BSC by real investors looking for those to invest in deFi projects to avoid high gas-fees of the Ethereum network. As a result, PancakeSwap V2 became the decentralised exchange at the forefront of BSC, using algorithms to control its permissionless liquidity pools and create its ease of use. It provides standard and lucrative deFi opportunities such as numerous liquidity pools, yield farming and token swapping. See in the graph below the increased use of DEX’s across the 2021 calendar year:
PancakeSwap has a trading volume of roughly $600 million, clearly leading the way and distinguishing itself from every other decentralised exchange in regards to the Binance Smart Chain. It has dominated deFi in the BSC space, becoming far more used than Ethereum smart contracts, with the number of transactions exceeding $16 million at its peak, with Ethereum only achieving roughly 17.5 thousand.
It should be noted that despite the growth and emergence of decentralised exchange and deFi, centralised exchanges continue to dominate the volume and numbers, with an exchange such as Binance having over 171 million visitors in October, 2021 alone.
Airdrops began to become popularised by decentralised platforms
To drive growth to decentralised exchanges and services, some decentralised platforms followed UniSwap’s popularised airdrop in 2020, teaming up with decentralised exchanges to engage in airdrops as a creative way of engaging users to their platforms. Usually requirements are holding a certain amount of tokens, having a supporting wallet to the blockchain, or meeting other conditions such as promoting the project on social media, or being an active user of the platform by or from a certain date. As a result, decentralised platforms across the industry enjoyed greater promotion of their projects and services, creating incentivisation to not only use the services but increase awareness and help projects reach a broader audience. Usually this correlates with a handsome increase in price.
SpookySwap, a decentralised exchange for leveraging diversified funds across ecosystems, also completed their first outreach airdrop to commit to their long term plan to get more decentralised finance enthusiasts and developers interested and invested in Fantom. In doing so, AlchemixFinance was used for the airdrop due to being a platform familiar with decentralised exchanges, covering all users holding ALCX oralUSD in their wallets as well as Alchemix Farmers in certain pools.
The Layer 2 derivatives exchange dYdX launched its DYDX token, becoming one of the largest airdrops of 2021, with dYdX being a decentralised exchange that allows the trading of perpetual contracts with low fees, deep liquidity, and up to 25 times more buying power. Airdropped on September 8th 2021, users had their amount of tokens received determined by their historic trading activity on the exchange, causing a flurry of activity on the exchange as yield farmers sought out the platform to capitalise on the free tokens. This led many holders of the DYDX token to make significant profits, as the increased engagement surged the price from $12 to as high as $21. The decentralised exchange saw fundamental growth throughout the year, outpaced leading U.S. spot exchange Coinbase for daily volume at one point.
The growth of Yield Farming
Increasing activity and engagement of decentralised platforms has led cryptocurrency investors to diversify away from Bitcoin to alt-coins, with deFi tokens mainly being run on the Ethereum blockchain. This allows users to earn interest, allows them to borrow, lend, buy insurance, or to trade as a speculative investment. Increasing its growth from 2020, yield farming is the reward scheme that has taken hold of the decentralised finance industry throughout 2021.
Just as a bank would take a deposit and then pay a low % interest rate and then loan the same amount to another user with a higher % interest rate, decentralised yield farming does the same, but with a smart contract in place to reduce fees and enhance efficiency by bridging the gap between users’ cash and the funds. Essentially, users lend out cryptocurrency as a way of earning rewards such as higher returns in interest, incentives, or additional cryptocurrency. A common measurement of annual returns is annual percentage yield (APY), with traditional rewards being between 5-14%.
Although yield farming is the most profitable passive investment option and most certainly the most lucrative, users must consider the inherent risks. ETH gas fees have the potential to wipe out the APY rates users have earned, additionally, if markets crash or become bearish, rates of profitability will plummet, potentially causing bad losses.
Some of the most popular yield farming protocols include Uniswap, SushiSwap, Aeve, Yearn.finance, Curve Finance and Compound. The total cryptocurrency yield farming rankings and associated AYPs can be found here.
The continued growth of Bitcoin, Ethereum and Decentralised Platforms
Off the back of these crazes, 2021 as a whole was a well-performing year for cryptocurrency assets. As mentioned, coming out of 2020, Bitcoin started with a bang, reaching new highs, with more institutional money pouring in due to it becoming a speculative asset, or a hedge against continuing rising consumer prices. Bitcoin almost doubled again, going from $29,000 on January 1st, 2021, to $46,000 by December 31st, with an all time high of $69,000 odd in early November.
Additionally, with increased growth in decentralised applications, the Metaverse and NFTs, Ethereum once again outperformed Bitcoin in 2021. ETH was as low as $730 on the 1st of January, 2021, reaching roughly $3,700 by December 31st, an estimated 500% increase across the calendar year. ETH was as high as $4,800 in November.
This growth extends to other decentralised platforms. Cardano (ADA), as a proof-of-stake blockchain platform, began trading at $0.17 at the start of the calendar year, finishing off the year with a price of $1.31, a 770% increase in price across the year.
Polkadot (DOT) continued its impressive growth as another decentralised platform, providing a foundation to support a decentralised web, controlled by its users, and to simplify the creation of new dApps, services and organisations. It was able to jump from $8.31 to $26.72 by year’s end. It began 2021 with a market capitalisation of $7.4 billion, growing to over $24 billion by the 31st of December 2021.
Solana (SOL) was also another open source project that provided a range of decentralised finance solutions. It was designed to facilitate dApp creation as well as improve scalability by combining both proof-of-stake consensus mechanisms with proof-of-history consensus. SOL was able to follow the other decentralised platforms and enjoy huge growth throughout 2021 as the market for decentralised finance continued to grow. Solana was just $1.84 to begin the year, with a market capitalisation of $85 million, ranking as the 120th largest cryptocurrency in the market. By year’s end, it had grown to a whopping $170 and a $52 billion dollar market cap, finishing the year as the fifth largest cryptocurrency. This is a growth of 115 spots in the ranking and over 600x. See the table below for a summary.
The explosion of the Memecoin Market
Another sector of the market that exploded in 2021 was the “memecoin” market. Even though Bitcoin, Ethereum and other stablecoins remained the go-to for investors investing into cryptocurrency, the new market of memecoins thrived, with Dogecoin (DOGE) leading the pack.
Dogecoin was originally founded and launched in December 2013 by software engineers Jackson Palmer and Billy Markus. Originally formed as a ‘joke’ and based upon the infamous DOGE meme (Shiba Inu Dog as its logo), DOGE was initially designed as a payment system to make fun of global cryptocurrency affairs at the time, becoming the first “memecoin” in existence.
Although created as a “joke”, DOGE blockchain and underlying technology has integrity and merit. The blockchain itself works as a distributed ledger that allows peer-to-peer networking, very similar to that of Bitcoin and Ethereum. Initially, Dogecoin was a version of Luckycoin (which no longer exists), which in itself is a fork of Litecoin. It uses a POW consensus algorithm called Auxiliary Proof of Work, meaning those who mine other POW cryptocurrencies, can simultaneously mine DOGE with no additional costs (merged mining). Dogecoin is primarily used as a means of currency for tipping users on both Reddit and Twitter, but is also accepted as a method of payment for food, household supplies and many other things. The blockchain itself can process transactions faster than Bitcoin, processing around 30 transactions per second.
As seen in the graph above, Dogecoin was able to soar over 12,000% throughout 2021 to an all time high in May of $0.68 from $0.0057 in early January. It did eventually slump 80% by mid-December, however it paved the way for a new popularity of tokens such as memecoins.
Shiba Inu (SHIBA), which references the same breed of Japanese canine as DOGE, was able to establish itself as a top 2 memecoin and top 15 cryptocurrency throughout 2021. As of January 2021, Shiba did not even appear in the top 200 cryptocurrencies by market capitalisation and had a price of as low as $0.00000001 for much of the first half of 2021. By the end of October, it had a price of $0.00008, $39 billion in trading volume, and market capitalisation of over $31 billion, ranking as the 11th largest cryptocurrency in the entire market. That’s how big memecoins had become.
Increased attention from mainstream media, influential figures & social media
The growth of such memecoins was actually off the back of increased attention from the mainstream media, the influential figures such as Elon Musk and the use of social media.
It was the first time since the all-time highs of the bull run in 2017 that the mainstream media decided to hone in on the cryptocurrency market once again. Although the attention was not entirely positive, the media found much to report on throughout 2021, seemingly showing its cyclical nature in correlation with the cryptocurrency market activity and influx of mainstream financial institutions.
There was also increasing coverage of the regulatory environment as the market activity encouraged increased oversight from governments and regulatory bodies regarding tax and infrastructure. As they always say, any publicity is good publicity. With the cryptocurrency market going well past $1 trillion in market value for the first time, a huge influx of institutional investors, the explosion of memecoins, NFTs becoming popularised and the increasing growth of both decentralised finance and web 3.0, meant that it was inevitable that the media would cyclically follow.
Elon’s influence was so great that even a single tweet from the Tesla and SpaceX founder would send prices of DOGE as high as 50%. When Elon announced that Tesla would accept DOGE for Tesla merchandise, the memecoin soared over 43%. This extended to BTC in which even for a specific amount of time, the price action seemingly relied on any tweet or opinion of his. On February 8th of 2021, Tesla would announce its purchase of $1.5 billion in BTC, sending its price from $38.850 to $46,400 within a single day, climbing 19.5%.
Additionally, when Musk announced that “you can now buy a Tesla with bitcoin”, within a month of the tweet, BTC would reach $65,000 and all time highs.
Throughout 2021 as cryptocurrency continued to become popularised, social media played a huge role in producing content, boosting engagement, conversions and increasing ROI. Although created for social networking, Twitter, Facebook, Youtube, Tik Tok and other platforms were increasingly harnessed throughout 2021 to spread information on blockchain projects, as well as creating more enthusiasm. It allowed more individuals around the globe to not only acknowledge and learn about cryptocurrency, but to increase engagement for all different types of cryptocurrency platforms, businesses and projects, which inadvertently created more investment and thus, healthier prices.
For example, Shiba Inu, according to a study conducted by Global Data, revealed that social media engagement on Shiba increased by a whopping 16,000% in 2021, which was the largest growth rate compared to the other top 10 cryptocurrencies in the same year, and “social media conversations around cryptocurrency as a topic surged year-on-year by more than 400% in 2021”.
Furthermore, we saw a rise in the number of social media influencers, particularly on Twitter, YouTube and Tik Tok rise to stardom. An example would be ‘BitBoy’ (Ben Armstrong), a YouTuber, podcaster, and cryptocurrency enthusiast, with over 5 million followers across all of his social media channels, being the most popular and one of the most recognised news sources for the latest updates on Bitcoin amongst other cryptocurrencies. As an investor and cryptocurrency influencer, individuals like BitBoy have only increased the attention from retail investors and the younger generation towards blockchain technology, and being pivotal in the rise of cryptocurrencies in 2021.
The downfalls of 2021
Like prior years, 2021 did suffer some setbacks. Hackings of exchanges and wallets were still prevalent in 2021. Although cryptocurrency is paving the way for the next generation of financial services through decentralisation, the same risks from prior years still apply. In 2021 alone, over $4 billion dollars worth of funds was either stolen or hacked. The growth of decentralised finance protocols, being new technology, has led it to become the fastest growing way to steal cryptocurrency.
For example, late in December 2021, close to $200 million was stolen from BitMart, a trusted cryptocurrency trading platform. Hackers were able to easily bypass security, successfully breaching two of BitMart’s hot wallets through a stolen private key. Additionally, over $610 million worth of cryptocurrencies was stolen from the Poly Network, a decentralised finance platform that allows users to lend, borrow and trade cryptocurrencies.
Scamming was still prevalent in 2021. Named after the popular South Korean show, Squid Game, the Squid Game token was yet another infamous rug pull in the world of cryptocurrency. A rug pull is when developers suddenly and unexpectedly pull out of a project, disappearing into thin air with investors’ funds. This occurred with the Squid Game token which at one point exceeded $2,800 per coin, before falling completely to nil, with developers running off with over $3 million of investors’ money. However, this wasn’t the only rug pull to occur throughout 2021, with Chainalysis suggesting that rug pulls accounted for roughly 37% of cryptocurrency cyber crime revenue in 2021. Over $2.8 billion was stolen. NFTs have also been a major concern for scams, with criminals seeking to push investors into purchasing fake digital assets, or digital assets that are worthless.
Volatility was also still a huge issue in the cryptocurrency world in 2021. In May, a broad crash caused over $1 trillion in market value to be wiped off the market, with Bitcoin leading the way, nosediving over 30% in a short time frame. On May 12 alone, BTC fell over 12% as a result of Elon Musk deciding to retreat on his promise of Tesla accepting BTC as a form of payment, blaming concerns over BTC’s poor carbon footprint. Moreover, Chinese officials continued to crack down on cryptocurrency use in their country, with the central bank warning Chinese businesses and institutions to refuse cryptocurrencies as a form of payment for goods or services.
As a result of these separate issues, the market subsequently tanked heavily with BTC plunging from as high as $58,000 to $34,000, Ethereum falling over 40% and Dogecoin falling 30%, proving that the market is still highly volatile.
Irrespective, the market capitalisation of the entire cryptocurrency market increased from $767 billion at the start of 2021 to over $2.4 trillion. Cryptocurrency as an entire market made huge steps towards further decentralisation of finance, with ETH, SOL, ADA, amongst other decentralised platforms, growing vastly in popularity, creating pathways for NFTs, the Metaverse and Web 3.0 to prosper. We saw more widespread media involvement, regulatory oversight and growth in both institutional and retail investors.