CoinShares 2022 Digital Asset Outlook

CoinShares Research


We enter 2022 facing the highest inflation in four decades, while exiting one of the most economically disruptive periods in living memory. We explore the outlook for Bitcoin and how it may behave in this rate hiking cycle. Digital assets have faced rising interest rates before, as they do today, but not with the spectre of potentially much higher inflation. We believe we will see Bitcoin’s identity as a central bank policy error hedge and an inflation hedge establishing itself, while there may be some wobbles on the way, it will likely continue to outperform other asset classes.

At CoinShares we cover a wide depth of topics in the research team, consequently our outlook covers a selection of brief articles across the digital asset spectrum on what we believe is most pertinent to 2022, covering regulations, gaming, NFTs, blockchain equities and the Metaverse.

Key document viewpoints:

  • 2022 will likely see several further inclusions of bitcoin as legal tender among sovereign nations. We expect Lightning to continue gradual and organic growth as well as introduce applications that expand bitcoin’s usability.
  • We believe Bitcoin is likely to behave in a similar way to gold and other real assets during this interest rate hiking cycle. We have already seen in December 2021 and January so far this year that Bitcoin is extremely sensitive to the threat of interest rate hikes.
  • On the one hand the US Federal Reserve (FED) has a mandate to control inflation, but it also has a mandate of stable prices. It is very challenging to see how the FED can control both at present.
  • Consequently, we see there being a high risk of a FED policy error (waiting too long and then raising interest rates too aggressively), with the USD then selling off, both of which are likely to be supportive of Bitcoin and other real assets.
  • While the US regulators continue their turf wars; and the Chinese regulators continue their approach of banning crypto; the EU regulatory framework will be the largest consumer marketplace where it is possible to provide regulated crypto products and services.
  • We expect users to continue demanding faster and cheaper interactions with crypto native applications, as well as developers to expand cross-chain application development. We believe bridges will grow in their importance as infrastructure to support the broader layer-one ecosystem, and as a result, increase the reliance upon and value held in the programs by which they operate.
  • North American miners have had a good year in 2021 and the best run operations are set to continue to be successful in 2022, but we would not expect the same pace of rapid growth as we saw throughout the past year.

Content:

2021 Bitcoin Network Recap, and 2022 Outlook

Chris Bendiksen

Recap

2021 was yet another highly eventful year for the Bitcoin Network. It onboarded more users than any previous year, weathered a massive shift of hashrate without so much as a single block interrupted, became part of the national monetary infrastructure of the first sovereign nation, released its most sweeping software update since 2017, and settled a whopping $4.67tn.

While they are not perfect proxies for bitcoin usage, the number of blockchain.com wallet users and unique users of the Coinbase exchange grew from 98m at the end of 2020, to 153m at the end of 2021. This corresponds to a 56% increase in users, compared to a 31% increase during 2020. At the same time, El Salvador announced the introduction of bitcoin as legal tender, marking the first sovereign adoption of the Bitcoin Network as a national currency infrastructure.

Sources: Coinbase, blockchain.com

A sweeping ban on Bitcoin mining caused the hashrate to drop from a high of 166 EH/s in April of 2021, to a low of 96 EH/s as miners fled the Chinese crackdown. In a raw demonstration of resilience and design strength, this unprecedented drop did not cause a single second of network downtime, and before the end of the year, hashrate recovered to make new all-time-highs of 174 EH/s.

Source: CoinMetrics

Over the course of 2021, the Bitcoin Network settled $4.67tn, however, while settlement value exploded, the block space utilisation rate fell significantly, causing average fees per transaction to drop from 35,831 sats in H1 2021 to 6,381 sats in H2 2021. While this drop has been attributed by some analysts to be a reduction in usage, we believe it is mainly due to the introduction of more efficient block space usage tools by blockchain.com who is probably the single largest demand driver of Bitcoin block space in the world.

Source: CoinMetrics

2022 Outlook

We believe most of the trends of late 2021 will continue into 2022: Barring any large-scale crackdowns by jurisdictions hosting large shares of the Bitcoin mining network, hashrate will continue to increase. At stable bitcoin prices, the current growth in hashrate should not cause the difficulty to put pressure on the mining profitability of most miners until the tail-end of 2022. If bitcoin prices keep rising and ASICs (mining hardware) remain available, hashrate growth will likely continue unabated throughout the entire year. The most likely threat to continued hashrate growth in 2022 is a major and sustained correction in the bitcoin price.

Simultaneously we expect a continued trend of hashrate flowing towards Western jurisdictions with stable governments and low costs of capital.

Usage growth has traditionally been sensitive to, but not entirely driven by price. If prices keep rising, we expect Bitcoin usage to keep increasing at rates similar to those seen in 2020 and 2021. If the price is stagnant or decreases, we expect usage to take a hit and likely be dominated by growth from the Lightning Network, where usage is mainly driven by utility and less affected by speculation.

Blockspace utilisation will likely only grow enough to raise fees back to H1 2021-levels or similar if there is robust growth in total Bitcoin usage. In our view, this would require continued increases in price. Barring a significant organic growth in on-chain transactions either from new HODLers or from Lightning users, the effectivisation potentials offered by SegWit, Taproot and simple batching techniques will likely keep pressure on blockspace low for still some time to come.

Finally, 2022 will likely see several further inclusions of bitcoin as legal tender among sovereign nations. Following the Salvadoran Ley Bitcoin, other comparably situated sovereigns are probably keeping a close eye on any economic benefits deemed to result from the adoption of the Bitcoin Network as monetary infrastructure. If the data coming out of El Salvador later this year show significant benefits from including bitcoin in the national currency selection, other countries will soon follow suit.

Bitcoin in an interest rate rising environment

James Butterfill

Investors have spent the last 10 years, following unprecedented levels of quantitative easing (QE), expecting to see inflation begin to kick-in, only for it not to happen. Perhaps one of the most plausible explanations is that the transmission mechanisms haven’t worked as expected, with QE often being used in an unproductive way, where companies have taken advantage of low bond yields for stock buybacks rather than growth initiatives. It has taken a world health crisis (COVID) to expose the threadbare global logistics network, highlighting significant supply bottlenecks that have helped push up inflation to levels not seen in the US since June 1982.

Bitcoin’s sensitivity to FED actions

We have seen in the most recent FOMC minutes that the US Federal Reserve is increasingly worried about the inflationary threat in the US, prompting them to consider ending the tapering of QE earlier than the markets expected while considering 4 interest rate hikes in 2022 rather than the consensus of only 2 around 6 months ago. This time it looks like the US Federal Reserve may well end tapering and hike interest rates again as they began to in 2015.

What will happen to Bitcoin in a rate rising environment? Bitcoin rose by 51% 6 months after the first rate hike in 2015, but we believe Bitcoin has matured significantly since then and is therefore likely to behave differently, and likely in line with other real (inflationary) assets. Therefore, analysis of how other real assets have behaved in previous rate hiking cycles are likely to give us some idea as to how Bitcoin may behave.

The anatomy of interest rate hikes

While every historical rate hike cycle is different in some way, similarities exist. To best represent today’s scenario we have identified five out of the potential nine periods post-Bretton Woods tightening cycles. The periods in December 1976, December 1986, February 1994 and June 2004 and 2015 are closest to today in that they represent periods where rates were either falling or relatively low for a long period of time beforehand. We are encouraged by the fact that the analysis highlights surprising consistency in each of the five periods observed.

Gold and Industrial commodities tend to appreciate during rate hikes

Gold is an example where performance hasn’t been consistent though: in 1976, 1986 and 2004 prices rose 22%, 25% and 11% respectively, whilst in 1994 prices fell by 2.6% one year after the first hike. Inflation was the likely culprit for the rises in 1976 and 1986 but not in 2004, where inflation was better controlled. A key differentiator in 1994 was that real interest rates rose by 3%, whilst in the other periods, it remained flat or negative, confirming that rising real interest rates tend to be negative for gold. Industrial commodities, another real asset, tend to behave in a similar way during rate-hiking cycles. The S&P500 is technically a real asset and tends to initially rally, but then begins to sell off, likely due to tightening credit conditions biting into corporate profitability.

The USD usually sells off contrary to popular belief

The USD prior to rate hikes tends to remain flat or rise but then in every case has been volatile and fallen by an average of 7% within a year. This fact may be counter-intuitive as the constriction of money supply leads to fewer dollars in circulation. We believe the most likely explanation for this is that markets tend to fully price the prospect of a stronger economy and improving the jobs market before the event occurs. It looks like the USD is behaving in a similar way, since November 2021 the USD has been strengthening against a broad set of currencies, while Bitcoin, which trades inversely to the USD has been selling off.

The FED is behind the curve - increasing the risk of a policy error

Monetary policy should be proactive and as inflation is a lagging indicator of the state of the economy, it could be argued that the FED is already behind the curve. It must be kept in mind that monetary policy also has a lagged impact on the economy of between 1-2 years so the interest rate hikes starting today are unlikely to have an immediate impact.

The liquidity created by QE and exceptionally low interest rates has caused a high risk conundrum for the FED. As QE is progressively removed and interest rates begin to rise, it increases the risk of a disorderly correction to equity and bond markets that have become so reliant on this stimulus and been pushed to record levels. On the one hand the FED has a mandate to control inflation, but it also has a mandate of stable prices, it is therefore very challenging to see how the FED can control both at present.

The firepower (the amount interest rates can be raised) of the FED must also be taken into consideration and on the face of it, household debt service ratios look healthy, with an average of 9.1% of household debt being spent on servicing debt, the lowest point since records began. Corporations appear healthy too, with net debt to EBITDA at 1.3 years versus the long-term average of 1.7 years. This suggests that the FED has substantial firepower to raise interest rates before it begins to stress the economy.

Although there are some sectors of the economy where net debt to EBITDA do not look so healthy, particularly utilities, energy and healthcare, which are in a worse position now than just prior to the 2008 financial crisis. While technology net debt to EBITDA is at its highest since 1998, it still is low relative to other sectors. One of the unintended consequences of raising interest rates too aggressively could be a rise in defaults and unemployment in these crucial sectors of the economy, causing social unrest and greater political instability.

Real assets are likely to benefit

We believe Bitcoin is likely to behave in a similar way to gold and other real assets, being priced in US dollars and being of fixed supply. We have already seen in December 2021 and January so far this year that Bitcoin is extremely sensitive to the threat of interest rate hikes, having sold off by almost 30% from its highs in what we believe is a reaction to inflation and the increasing probability of a greater number of rate hikes in 2022. In the longer term, we see there being a high risk of a FED policy error (waiting too long and then raising interest rates too aggressively), with the USD then selling off, both of which are likely to be supportive of Bitcoin and other real assets.

Lightning Network - Organic Growth and Application Development

Matthew Kimmell

The Lightning Network operates as a second layer atop Bitcoin where users recognise the same native Bitcoin (BTC) unit and use it to make exchanges. It relies on a scaling concept called payment channels that operates similar to a pre-funded tab of sorts. Two entities continuously track a history of payments as they’re streamed back and forth, then, should they wish to conclude their trading partnership, they submit the final balance to the Bitcoin blockchain. As an extension to Bitcoin, Lightning doesn’t have or need its own blockchain, rather it relies on Bitcoin’s base layer mechanics for security and process to finalise transactions. If this concept is new to you, check out our in-depth primer of Lightning, here.

The principal purpose of Lightning is to enable bitcoin, the asset, to be more viable as a functioning currency. Specifically, it addresses tradeoffs in Bitcoin’s design that hinder its effectiveness to support a globally adopted medium of exchange. Lightning counteracts these inherent tradeoffs by enabling bitcoin payments at the speed of sending an email, globally, for fractions of a cent.


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In 2021, Lightning’s efficacy was tested as it served as critical infrastructure for bitcoin’s status of legal tender in El Salvador and integration with online platforms Twitter and Substack. Functionally, it matured in both reliability and each of its core and publicly derivable metrics, as well as its broader ecosystem of businesses, applications, and wallets (see here).

Looking forward to 2022, we expect Lightning to continue gradual and organic growth in these metrics as well as introduce applications that expand bitcoin’s usability. We find this reasonable given adoption trends and the scripting enhancements packaged in Bitcoin’s recent Taproot upgrade. Although, as it enters only its fourth year of life, we also expect users to remain somewhat niche, representing hobbyists, entrepreneurs, and groups of necessity (the underbanked and politically dissident).

We are also keen to observe the expansion of Lightning use cases beyond a high-speed payment network for bitcoin. Specifically, ways where Lightning can serve as a similar communication infrastructure to the internet, but where payments are seamlessly integrated into the messaging of browsers, applications, and other. Some early examples of this include podcast streams, community forums, and marketplaces.

MiCA - Europeans leading the regulatory race

Nick du Cros

At CoinShares we expect 2022 to be the year when a number of important regulatory developments are finally published. This will largely be due to a significant number of countries where both politicians and regulators agree that blockchain and crypto assets are innovative technologies that require regulatory clarity bespoke to the asset class; within a framework that provides investor protection and addresses concerns around financial stability.

An important development that we will be keeping an eye on during 2022 is the EU’s proposed Markets in Cryptoassets (MiCA). The original draft proposal was published as part of the European Commission’s Digital Finance package in September 2020. A huge selling point of MiCA was that it would remove the need to comply with regulations in individual countries. If you meet the standards prescribed in MiCA, then there is a process to “passport” your crypto products and/or services into any European Economic Area country.

While the process for negotiating a piece of EU legislation can be complex and time-consuming, since it involves three parties (the Parliament, the Council and the Commission), we predict that the MiCA negotiations are completed by the middle of the year. This would mean that MiCA would officially commence around mid-2024 (allowing for a 2 year implementation period).

So while the US regulators continue their turf wars; and the Chinese regulators continue their approach of banning crypto; the EU regulatory framework will be the largest consumer marketplace where it is possible to provide regulated crypto products and services. In our view, by being the first mover, MiCA is likely to set a baseline for assessing future national regulatory proposals.

Whether to be aligned or to diverge from MiCA will be an important decision for countries like Switzerland (given its Crypto Valley) and the UK (given its number of FinTechs). Particularly the UK, where we are waiting for the final report on its consultation from January 2021 on regulating crypto assets and stablecoins.

While MiCA is unlikely to be perfect upon first implementation. For instance, will the finalised text still require a physical presence in Europe? A concept which doesn’t sit easily with the borderless nature of digital business. The publication of MiCA should mark a significant step forward in the BUIDLing of digital asset regulation.

A buoyant market for Play2earn

Luc Guillou

The intersection between gaming and crypto has been anticipated for a number of years, with early projects such as Wax protocol looking to capitalize on potential synergies, amidst a backdrop of a long gaming history of trading CS:GO in-game skins, farming gold in World of Warcraft and, more recently, Fortnite’s in-game currency VBucks bridging the gap between in-game currencies and assets with fiat currency in the traditional sense.

2021 saw an explosion of interest in the blockchain gaming sector following the success of ‘play-to-earn’ as epitomized by the growth of Axie Infinity, which has generated $3.6bn in NFT sales to date. The boom Axie Infinity enjoyed has been supported by its popularity in the Philippines, where players have been able to achieve daily earnings greater than the national nominal minimum wage of $6.76 - $11.17. Looking forward to 2022, there is the possibility that developing nations with low daily national wages and increasing adoption of the Internet, such as India (with >50% of the nation now connected and a National Floor Level Minimum Daily Wage of approximately $2.31), will continue to drive the success of play-to-earn, to complement a growing e-sports infrastructure in the west.

Axie Infinity’s success has led to AXS token currently holding a market cap of ~$4.8bn at the time of writing, which is greater than that of Ubisoft, ($4.6bn) creator of titles such as Assassin’s Creed and Far Cry. The Block’s 2022 Digital Asset Outlook highlighted the NFT/Gaming vertical as receiving the third most in private funding with raises at significant valuations which looks set to continue into 2022.

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The success of blockchain-based gaming NFTs (and therefore price appreciation of tokens and NFTs respectively), however, poses a barrier to entry to players in developing nations. This will be somewhat mitigated by the rise in gaming guilds, with notable potential solutions in the form of Avocadoguild, for example, whereby in-game assets can be pooled and lent to others, with profits generated being distributed across the guild.

With a number of high-profile fund-raises in 2021, such as Patron’s $90m crypto-gaming fund and, maybe Binance Smart Chain and ANIMOCA Brands’ $200m investment program for blockchain games, we expect 2022 to provide a buoyant market for capital inflows into the sector.

North American mining: is there still room to expand?

Alexandre Schmidt

2021 was a stellar year for operations in the US and Canada with operations ramping up across the board and the region benefiting from the great migration out of China. Between January and August 2021, the North American hashrate increased three-fold, from 17 EH/s to 54 EH/s, and now accounts for 45% of the total global hashrate. Despite this incredible recovery there are reasons for caution.

Companies such as Marathon Digital, Riot Blockchain and Bitfarms added the bulk of hashrate between listed players, with funding chiefly obtained via equity capital, usually at the expense of diluting existing shareholders.

Dwindling liquidity could play a role in dampening expansion projects, as investors could become more cautious with placing capital into risky and capital intensive operations. In addition, the bitcoin network hashrate is not as depressed as during summer, with the lofty profits from 2021 likely becoming a thing of the past.

Finally, despite North America having abundant power supplies, energy regulators could impose further pressure on mining operations, especially as they grow larger and become hungrier for power.

On the other hand, existing management teams are more experienced and have weathered previous crypto winters well. Mining hardware continues to improve and become more efficient and, with the subsiding pressures on semiconductor supply chains, machines are likely to become cheaper and easier to acquire.

In summary, North American miners have had a good year in 2021 and the best run operations are set to continue to be successful in 2022, but we would not expect the same pace of rapid growth as we saw throughout the past year.

Have we reached peak NFT hype?

James Butterfill

NFTs are a compelling tool that allows artists and content creators to more effectively monetise their work. Smart contracts have been the enabler, opening up the possibility for creative to own the future royalties in anything they “mint”, minting being the process by which an NFT is created and becomes part of the blockchain protocol. In 2021 approximately US$45bn of NFT were traded according to Chainalysis.

The true power of NFTs, which can be seen as a form of digital provenance, is that its transactions and ownership are recorded on the blockchain making the records immutable. NFTs allow artists to profit when the initial auction takes place, but importantly, whenever the NFT is traded in the secondary market, the artist will continue to receive royalties. This can be written into the smart contract itself or via an arrangement with the exchange, which is often not the case for real world art. At present artists are preferring royalties via exchanges due to the current increased transaction costs of it being written into the smart contract.

It's such a compelling concept that a huge amount of media hype has arisen, along with many major brands and financial institutions minting or purchasing NFTs. Google trends data suggests, despite being around since 2014, we reached peak NFT hype at the beginning of December 2021. This is backed up by data from theblock which highlights the number of NFTs sold peaked in November 2021. The peak for art and collectibles was much earlier in May 2021, with much of the slack in this NFT sector being taken up by the gaming sector where gaming collectibles on platforms such as AxieInfinity have grown dramatically. We see the gaming subsector of NFTs being quite different from the art & collectible sector, where most of the media hype is focussed.

Furthermore, the average price of an NFT has fallen too. It may be that there are such a plethora of NFT copycats now that NFT collectors are beginning to get overly saturated with choice. Data from Chainalysis highlights that the number of active NFT collections has risen by 560% since July to 3,264.

We do not want to detract from the incredible opportunities in the NFT world as there are some fascinating communities being built in the space. If we have reached “peak hype” then it is possible we could see a crash in prices similar to what was seen during the crypto price declines in 2018, where there were substantial price divergences from the good and bad projects. It is quite possible we are beginning to see this trend of price divergence between the good and bad NFT projects - what has value in the art world is very subjective and personal. The price divergences are most likely to be the greatest in NFT work that is implicitly or explicitly mimicking originals or first to market.

Are crypto proxy equities still a good investment idea?

Alexandre Schmidt

Up to 2021, US-based institutional investors had little means to gain direct exposure to cryptocurrencies in regulated markets. Some crypto-enthusiast CEOs jumped in and transformed traditional businesses into bitcoin investment trusts which eventually started performing in tandem with bitcoin and other cryptocurrencies.

Mining companies also joined the bandwagon and implemented ‘HODL’ policies so investors could see them as crypto proxy equities as well. Although unorthodox, these policies delivered, and businesses such as MicroStrategy saw a significant liquidity and share price boost.

However, these investments are not entirely correlated with bitcoin or other cryptocurrency prices and provide additional interference and risks. Management teams at these companies are not originally hedge fund managers and funding requirements for side businesses could prove burdensome. Additionally, many miners are using equity and debt raises to fund their operations, diluting shareholders just so they can continue to hold as much cryptocurrency as possible.

With the advent of US-listed, SEC approved bitcoin futures ETFs, investors now have alternatives to gain direct exposure to bitcoin without these additional risks, albeit at some additional cost. Going into 2022, investor appetite for crypto exposure via the equity market should remain strong, but with the advent of instruments better suited for this purpose, crypto proxy companies could not see as good a performance in 2022 as they did in 2021.

Cross-Chain Bridges - Growing in Importance and Size

Matthew Kimmell

In 2021, we saw increased excitement and experimentation on crypto networks that enable flexible programming for application developers (often called layer-one or L1 networks). It led to growth and somewhat of a craze in many sectors oftentimes bundled in the term ‘Web3’, including Decentralised Finance (DeFi), Non-Fungible Tokens (NFTs), Decentralised Autonomous Organisations (DAOs), and the Metaverse.

The added functionality in these systems attracted new users and businesses that ultimately increased active addresses on Ethereum, the earliest and most adopted layer-one network, nearly 30%. However, design decisions in the mechanics of Ethereum, similar to most other blockchain systems, warrant tradeoffs that sacrifice the ability to effectively scale to unlimited usage levels. Increasing network activity pushed Ethereum to its capacity limits, causing relatively high transaction fees and a flow of demand toward other networks of comparable functionality. Specifically, users sought similar applications and features of Ethereum, but where throughput was greater, processing was faster, and transaction costs were lower.

Name

Transactions per Second (TPS)

Average Transaction Fee (USD)**

Total USD Value Locked (billions)

Ethereum

15

21

153

Terra

10,000

N/A

18

Binance Smart Chain

55-220

1.20

16

Avalanche

4,500

0.94

12

Solana

50,000

< .01

11

Polygon

7,000

0.25

5

Arbitrum

390

2.51

2

Optimism

50-200

2.86

0.3

** Transaction fee estimates are based on daily gas used, transaction count, and close price in the year 2021. Different types of transactions are subject to different fee levels based on their gas requirements. The figures provided are meant to approximate the average cost of all transaction types based on transactions in 2021.

Sources: Galaxy Digital, Etherscan, BSCscan, Snowtrace, SolanaBeach, DeFiLlama, L2fees

As value and development spread to alternative layer-one networks and Ethereum scaling projects, demand rose for the infrastructure and tooling necessary for these systems to communicate and carry out operations between each other. This demand seemed to be rooted in the desire to utilise assets issued on Ethereum in applications deployed on faster, cheaper networks.

In many cases, we’ve observed that the solution for cross-chain connectivity relies upon bridging, where assets on one chain can be used on another. These bridges assume the transfer of assets between chains by locking tokens on an origin chain and issuing an equivalent amount of new, ‘wrapped’ tokens on a destination chain. The bridge facilitates transactions bidirectionally, both locking and issuing from an origin chain as well as redeeming and unlocking back to an origin chain.

As we look forward to 2022, we at CoinShares Research expect users to continue demanding faster and cheaper interactions with crypto native applications, as well as developers to expand cross-chain application development. In due course, we find it reasonable to believe bridges will grow in their importance as infrastructure to support the broader layer-one ecosystem, and as a result, increase the reliance upon and value held in the programs by which they operate.

Metaverse - hype versus reality

Max Shannon

The Metaverse allows people to do everything they do in real life but in the virtual world. The Metaverse has transcended fiction to reality, originating from Neal Stephenson's Snowcrash and Earnest Cline’s Ready Player One to emerging digital-physical realities, economies and communities. People work, transact, create, socialise and play within a framework of hardware and on top of a base layer of programming languages and smart contract platforms.

Ownership, decentralisation, interoperability and the open-source and virtual nature of the Metaverse are all key features and characteristics, also central to Web3 and the digital revolution. Processes to scale the Metaverse into a more personal, persistent and immersive experience are being spearheaded by key players that enable improved infrastructure across the Metaverse “stack”.

The virtual world hosting the Metaverse is largely influenced by Decentraland and The Sandbox, with a combined number of 200,000 ‘items’ alone on OpenSea which equates to approximately $1.3bn. Identity software, imperative for verification, security, accessibility and avatars for businesses and people, is mostly driven by ENS, an Ethereum-based naming system. ENS saw around a 2018% increase in the number of registrations from 5158 in December 2020 to 109,280 in December 2021, highlighting its increasing popularity.

Metaverse marketplaces are largely influenced by the NFT trading platforms, specifically, OpenSea. Since launch, a comparison between the top two Ethereum (ETH) NFT platforms OpenSea and Rarible show a combined number of approximately 80.5m NFTs and $10.3bn in total sales volume with OpenSea commanding 99% of minted NFTs and 97% of total sales revenue. Whilst this comparison shows OpenSea dominates the ETH NFT trading market, Rarible launched over two years after. From a more macro standpoint across the ETH NFT market alone, sales have increased YoY by around 31,027% to $3.1bn in December 2021. Across the whole NFT market, daily transactions increased by 3,192% YoY to just under 520,000 transactions per day. Among other Metaverse industries, the top five GameFi organisations incurred around $90m in total sales volume out of $121bn of gaming industry revenue in 2021, with 161,000 users aiming to satisfy 3.2bn gamers around the world.

Despite these exciting adoption statistics on the Metaverse there remain problems of interoperability, cost, and walled gardens (a closed and restricted ecosystem, dictated by the centralised service provider in relation to applications, technology, information, media and content). Clear and concise regulation and technological advancement is needed. The onboarding of the masses will only occur by providing confidence to businesses and encouraging a shift in consumer behaviour. One example would be in providing a clear and concise blockchain-based, open-source “Know Your Customer” (KYC) model, which would lower the cost and improve the effectiveness and efficiency of verifying identities and activities. Technological advancements should decrease the cost of hardware to affordable levels; and oracles, sidechains, application-layer adaptors and blockchain-agnostic smart contracts need to further reduce gas fees and improve security, decentralisation, throughput and convenience.

These advancements and policy changes will take time, and more time than the current hype around Metaverses would imply. It is therefore likely that we may see Metaverse exhaustion this year, when investors and consumers realise this hype doesn't live up to reality.

Disclosure

The information contained in this document is for general information only. Nothing in this document should be interpreted as constituting an offer of (or any solicitation in connection with) any investment products or services by any member of the CoinShares Group where it may be illegal to do so. Access to any investment products or services of the CoinShares Group is in all cases subject to the applicable laws and regulations relating thereto.

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