The summer of 2021 was marked by a paradigm shift in entering the cryptocurrency market. The explosive resurgence and recognition of cryptographic art and game Collections (NFT) has given the industry a new face, and attracted a new audience of artists, musicians, game developers, photographers and 3D artists.
According to Coinmarketrate.com there were also interesting integrations and new trading platforms in the market, such as partial, democratizing access to the most expensive NFTs, allowing owners to sell some of their works of art at a lower price. TikTok published a creator-focused NFT collection on Immutable X, a marketplace where they can post their best videos to sell to their fans.
Thus, more than a billion users will be integrated into the world of NFT. Most of the proceeds go directly to the creators and the NFT artists involved and offer TikTok and NFT fans the opportunity to support the creators they love.
As for demand, the pressure in favor of buying Ether was unsurpassed, and caused by the fact that newcomers were dusting off NFT collections, which usually consist of avatars with profile images, such as Bored Apes, or to participate in games for earnings, such as Axie Infinity.
As a result, NFT trading platforms saw a whopping monthly increase in trading volume, increasing by more than 900 percent from July to August, reaching a record high of over $3 billion in August, compared to just over $300 million in July. The third quarter ended with the second largest dollar amount of $2.8 billion.
He was focused on the staggering growth of the Pokemon-like NFT gaming project called Axie Infinity, which has generated over $800 million in revenue over the past 90 days. This is three times more than Opensea’s turnover over the same period.
The next use case for NFT after art, media and games will undoubtedly be music. NFT music will break the ice between artists and their fans. 3LAU, an American DJ and producer of electronic dance music, has launched Royal, a platform where fans can invest in their favorite musicians and share their potential success by purchasing part of the songs at the expense of royalties.
This radically changes the rules of the game – the ownership is certified on the blockchain, intermediaries are removed, thereby reducing the rental cost for artists. So far, except for agents, only record companies have this privilege.
Ethereum Killers in the Spotlight
This high demand has made Ethereum a victim of its own unrivaled success, which is reflected in the relatively high gas fees, partly caused by increasingly sophisticated attacks and manipulation of market orders, known as maximum recoverable value (MEV).
In short, the MEV concept describes bots that try to get ahead of users by simulating profitable transactions and offering higher transaction fees. This makes it possible to obtain arbitration in the Ethereum network, the priority of which belongs to the miners. Such market frictions have created a strong momentum in favor of Ethereum’s competitors, and have prompted developers to learn from other networks and develop them.
The value proposition of Solana, Avalanche, Fantom & Co. primarily focused on higher throughput, and lower transaction costs than Ethereum. It is important to note that all these blockchains are more centralized and less secure than Ethereum, because they have fewer validators and less capital to protect the network.
While decentralization and security are a marathon, not a sprint, and therefore don’t happen overnight, Solana’s 17-hour glitch caused by trading bots was an archetype of how far these Ethereum competitors are at their development stage. This shows how important it is for these modern technologies to go through combat trials and redefine the theoretically superior computing capabilities of the blockchain, since 50,000 transactions per second is not enough if the goal is to reach the market share of platforms like Nasdaq and integration across a billion users.
Most of the services based on Ethereum killers are basically clones and variations of native Ethereum applications, such as decentralized exchanges, refund aggregators and credit platforms. They implemented the same scenario to stimulate capital inflows due to the high profitability of the liquidity extraction and AirDrop programs. Fantom, Avalanche and Celo have committed hundreds of millions of dollars to liquidity programs to attract Ethereum users.
Fantom and CELO were inspired by the announcement of incentive programs aimed at attracting users to the growing DeFi ecosystem, as we watch the deployment of the core network take place in the core networks. Fantom hopes to attract more than just users of the DeFi ecosystem, while Celo is focused on providing more access to DeFi tailored for mobile users. This will include liquidity mining programs that allow users to generate revenue when interacting with smart contracts – much like the $180 million Avalanche program.
To date, Terra has experienced the biggest network growth with the deployment of the Columbus 5 update, which, after a community vote, will introduce the Cosmos interblock communication standard. IBC ensures compatibility and transfer of assets between blockchains, which provides additional benefits for the LUNA token, since it can be used in far-reaching environments of DeFi ecosystems and creates additional value for token holders. Another aspect of the update concerns the LUNA tokenomics, since the token is now burned immediately after mining using UST, rather than being sent to the community pool.
Consequently, this migration to networks outside of Ethereum has led to unprecedented adoption and growth of total blocked value (TVL) or assets under management (AUM) held by applications of decentralized financial services based on alternatives to Ethereum.
On the other hand, these liquidity schemes do not lead to sustainable user engagement. Forensic research conducted by Nansen shows that almost 60 percent of users spend their capital on other investment opportunities, within 48 hours after the reward drops. This creates pressure to sell newly issued tokens, for which in most cases there is no transition schedule to encourage long-term participation.
In the third quarter, the largest hacking in the history of DeFi occurred
The DeFi sector is not immune from hacking, especially when it comes to unverified code. The third quarter represents the largest number of hacks in history totaling $886 million.
This is evidence that we are at a very early lifecycle of implementing DeFi protocols, just like in the early years of crypto trading in 2011. It is important that projects improve their security measures by introducing rewards for errors or testing in extreme and real-world conditions.
That’s a staggering 2.7 times higher than last year’s high of $319 million in the second quarter. According to Rekt, in 2021, 1.3 billion dollars of users and funds of crypto exchanges have been stolen to date. The largest hack in history to date, worth more than $600 million, occurred in the Poly Network, an interaction network for trading assets.
The positive point is that the flow of money is easy to track, since blockchains are open source and easily verifiable, which allows you to identify intruders and contact them together with law enforcement agencies. In addition, the crypto community has done everything possible to support these protocols, and most hackers have returned some or most of the stolen funds.
The next generation of crypto services should not be so much a copy of Ethereum-based applications as financial inclusion, mission-oriented products and services, honest project launch, fraud protection, hacking and MEV. At the application level, we have not yet bridged the gap in which people use crypto services because of their usefulness, but the pace of innovation is unprecedented.
Ban in China as the largest commodity market for DeFi
On September 24, the leadership of the People’s Bank of China (PBOC) issued a circular stating that cryptocurrency-related transactions are considered illegal activities in mainland China, and foreign crypto services are prohibited for users from China. Several crypto exchanges and other services have taken drastic measures in response to this news.
- The StarkPool mining pool service will stop working.
- Crypto exchanges Binance and Huobi will ban access to Chinese users.
- E-commerce giant Alibaba will ban the sale of cryptocurrency mining machines on its website.
As expected, and TheBlock reported that crypto services such as CoinMarketCap, Coingecko and TradingView were blocked by the Chinese Internet firewall.
These tough measures against cryptocurrency platforms are the main advertisement for second-level DeFi solutions and scalability, which provide users with a better user experience in terms of transaction costs. We are already seeing an influx of capital into DeFi applications, some of which are reaching record high daily trading volume, for example, the StarkEX-based derivatives platform, which offers futures contracts with no expiration date, the so-called perpetual swaps developed by BitMEX.
Polkadot and Cosmos lag behind in the top 15 by market capitalization. Both protocols are protocols of interaction, the investment scenario of which has not been fully accepted by investors. However, everything will change, as Ethereum’s competitors will continue to grow, and the need for blockchain interaction will increase, especially if Polkadot with Parachains is expected to be fully functional by November 11.
In short, L2 combine transactions and calculate them on the Ethereum network at a later point in time. This method eliminates calculations and storage in Ethereum, and as such, helps to increase throughput to 20,000 transactions per second for a penny on transaction fees, compared to more than $30 for a simple token transfer to Ethereum.
Currently, Ethereum’s bandwidth for complex transactions in DeFi is limited to 15 transactions per second. By analogy, Ethereum is similar to Fedwire, which processes commercial banking transactions, and L2 are commercial banks that provide consumer-oriented services.
Overall, this is great news for the entire crypto industry, as the crypto infrastructure is moving in the right direction. This will mean that in the coming year we will finally see greater interoperability between blockchains and improve user interaction by orders of magnitude. This will unlock the full potential of the next generation of Internet services that we already see in the following sectors: financial services (DeFi) and media, art and games (NFT).