Hacking, Crackdowns, and FOMO: Paradox Politics’ 2022 Crypto Predictions

2021 was the year crypto went mainstream.

NFTs minted Beeple and Bored Apes into cultural reference points. Mark Zuckerberg renamed Facebook ‘Meta‘ to reflect plans to dominate the Metaverse. And El Salvador recognized Bitcoin as legal tender.

On the institutional side, there was Coinbase’s IPO, the Bitcoin Spot ETF, and a FOMO from Fidelity and other financial juggernauts into Ethereum.

Whether you’re a Bitcoin maximalist or a Nouriel Roubini doomsayer, crypto is here to stay. The emerging asset class’s imprint on the public consciousness is too great to ignore; sports stadiums are emblazoned with it, rappers are rolling in it, and hedge funds can’t get enough of it.

With a landmark year for crypto closed, Paradox lays out the following predictions for 2022.

New Billionaires Will Enter the Picture 

The crypto explosion of the past two years created billionaires the general public doesn’t even know exist. Some struggle to cash out tokens without tanking the underlying fundamentals of what their net worth is tied to, while others are coasting off Bitcoin they bought during the Silk Road era.

According to Karl Marx, the bourgeoisie are always subject to renewal, and we’re likely to see this notion play out as more engineering nerds become top dogs like Michael Saylor, Brock Pierce, and the Winklevoss Twins. Inflation is running rampant and speculative cryptocurrencies are mooning into trillion dollar evaluations—best believe some whales want to establish patrimony and lay cultural inroads.

Regulation Will Formalize 

The cliché goes that crypto’s ‘Wild West’ days are coming to an end as lawmakers and regulators eye DeFi as a trove of taxable revenue.

Two SEC investigations in-particular will serve as a blueprint for regulation.

  1. The SEC’s investigation into Uniswap
  2. The SEC’s lawsuit with Ripple

In the first case, regulators are pursuing action against developers who built one of the most widely used decentralized exchanges. Uniswap offers blockchain projects a low hurdle for releasing tokens to retail, and is often an investor’s first point of entry into the DeFi ecosystem after buying tokens from centralized exchanges like CoinBase. The investigation will formalize not only the regulatory framework for building decentralized infrastructure, but also the protocols for how individuals are allowed to navigate these payment rails.

The SEC’s lawsuit against Ripple Labs is equally significant. Even though the company’s XRP token has become a running joke among industry insiders, whether or not it was released as an unregistered security will be a landmark ruling affecting the 8,000 plus cryptocurrencies currently in circulation, and the teams behind them.

Third Party Lenders Face a Reckoning 

If it’s one thing the SEC dislikes right now, it’s crypto lending.

Multiple state attorney generals have moved to ban third party lenders like Celsius from operating in their jurisdictions, while demanding explanation for how they’re not releasing unregistered securities. When Coinbase prepared to debut its LEND service this fall, the SEC retaliated by threatening a lawsuit.

Third party lenders collect users’ cryptocurrencies, and lend them out to other parties while generating high interest payouts. It’s similar to a high net worth individual with a high appetite for risk parking their capital in a Zimbabwe bank account for higher interest returns than what is available in the United States: They’re basically hoping to withdraw their money before a regional oil dispute threatens to tank the entire economy.

It’s a similar setup with third party crypto lenders. No one in the industry knows how these companies calculate these astronomically high rates. Every week, new funds just magically appear in users’ accounts, that aren’t FDIC insured, via some hidden conversion process kept from public view. There’s no way to tell if an individual’s funds are in fact being lent out to institutional investors, rather than marketing… or an executive’s yacht.

The industry is quick to point fingers at Tether’s reserves as the black swan of crypto, but if enough retail investors take these companies at face value, and deposit their entire crypto holdings here rather than cold storage or one of the platforms that does (hopefully soon) get a green light from regulators, Bernie Madoff will have found his successor in a labyrinth of shell companies running through the Seychelles and Tel Aviv, the CEO reciting tired cliches of giving the unbanked access to advanced financial instruments.

The Transition to Web3 Will Be Accelerated 

Just as the coronavirus pandemic accelerated economic trends like automation and SaaS, several cataclysmic failings will force companies to adopt the emerging technology driving the Internet’s transition into Web3.

The recent Log4j exploitation is what happens when billions of devices are rooted in the same architectural components clumsily assembled on top of one another. Oracle’s claims that over 13 billion devices run on Java software is no longer a selling point, but a warning to world leaders and governments: When a foundational problem underpinning a chunk of the global economy is discovered, bad actors and criminal enterprises immediately exploit at-scale.

As ransomware attacks continue proliferating, there will likely be more systemic Web2 failings like the Log4J vulnerability which will force companies to adopt secure blockchain solutions.

The NFT Frenzy Subsides and Some Interesting Use Cases Emerge

NFTs as collectibles are just one use case, and the mania surrounding them will subside. NFTs real value lies in upgrading antiquated infrastructure and organizational systems: Digitizing property deeds so each document has a corresponding NFT identifier which can transmitted from owner-to-owner. Or a Florentine museum creating NFTs out of iconic artworks for cataloguing purposes so several centuries worth of human civilization aren’t just haphazardly dumped into the middle of a room without any context.

Cross-Chain DeFi Ecosystem Becomes the Norm  

Despite narratives about “Ethereum killers” like Solana, Polkadot, and Cardano, Ethereum remains the number two market cap project behind Bitcoin. Ether is the cryptocurrency institutional investors are flocking toward, and the backbone for DeFi.

That being said, the blockchain has faced growing pains in scaling, as evident by its stomach churning gas fees which can sometimes be as high as several hundred dollars for a single transaction. For most of DeFi, Ethereum will remain the dominant player, especially as Ethereum 2.0 prepares for its long-awaited debut. But for minting and transactions requiring faster processing, other chains will emerge as the more suitable alternatives.

**this article should be treated as research material and not financial advice. Do your own research and assess your appetite for risk accordingly** 

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( mm / dd )