Under-the-radar product trends: 2021 recap and 2022 predictions
At the end of last year I wrote about three under-the-radar product trends for 2021. Let’s recap to see how well I did before making my three predictions for 2022.
1. Cryptoart
Verdict: Correct.
While so much has already been written about NFTs and cryptoart this year, this graph summarizes this space perfectly.
I’ll reflect on two sentences I wrote in my 2021 prediction:
- “DeFi maximalists currently dismiss NFTs as a toy, reminiscent of how BTC maximalists dismissed dApps back in 2018.” — Those same DeFi Twitter influencers who were publicly very bearish NFTs a year ago suddenly did a 180 degree turn and started shilling and flipping PFPs and even raising NFT funds.
- “Currently three artists have over $1M in total artwork value and 43 artists have over $100k; I expect to see way more than that end of 2021.” — Today, four artists have over $100M in total artwork value, 46 have over $10M, 268 have over $1M, and 1283 have over $100k.
2. Prediction markets
Verdict: Unclear.
Polymarket saw a surge in volume in January between the 2020 U.S. presidential election and the inauguration. Trump supporters who believed in #stopthesteal continued to buy Trump shares at 10 cents on the dollar, giving those who believed otherwise a 10% “arb” opportunity. But other than one-off events like major real-world politics, it’s been challenging for prediction markets to sustain volume. I believe prediction markets and decentralized social networks are two killer use cases of crypto, but the product-market timing continues to be farther out than I initially thought.
3. DeFi derivatives
Verdict: Correct.
I tweeted my hot take that 2021 DeFi has reached the point of either incremental feature improvements (e.g. better stablecoin instead of stablecoin) or copycats of what’s working on Ethereum onto other L1s.
The few 0 to 1 innovations we saw in DeFi this year were all centered around derivatives. Index Coop and Ribbon built structured products giving exposure to indices and yield strategies; Notional enabled fixed-rate borrowing and lending. But more importantly, the two biggest bombshell innovations in DeFi this year were Uniswap v3 and Primitive.
Uniswap v3 redefined what it meant to be a liquidity provider, reconsidered capital efficiency not total value locked as the KPI for DeFi projects, and started an ecosystem of structured products like Gamma building market making strategies on top of Uniswap. From the v3 launch, Uniswap increased its DEX market share from 45% to 75% (and Sushi likewise decreased from 24% to 12%), as trading volume aggregated to the AMM with the best execution.
Primitive was also the first project to implement replicating market makers. Given the desired payoff of a particular financial derivative (e.g. options, swaps), it’s possible to construct a bonding curve function that replicates such derivative with an AMM spot market. This is a huge deal for DeFi options as options is the last category in DeFi without a clear market leader — it’s difficult to replicate tradfi options on-chain for reasons like gas and liquidity fragmentation. Looking forward I believe Primitive will do to existing options projects what Uniswap did to prior order book DEXs like EtherDelta and Radar Relay.
With that, here are my three under-the-radar product trends for 2022.
1. Vertical specific NFT marketplaces
OpenSea is obviously the biggest winner in our portfolio. While it will continue to be a generational company and the dominant NFT secondary marketplace, I believe vertical specific marketplaces will carve out niches due to better UI/UX and search and discovery features. SuperRare is a successful example for high-end 1 of 1 cryptoart, but there will be others for categories like photography (e.g. Sloika), metaverse land (e.g. Metahood), and music (e.g. Catalog).
I’ll highlight music NFTs in particular. Music NFTs surprisingly have not exploded yet unlike other categories like fine art, collectibles, and gaming, but I feel that collector tastes are quickly changing. Catalog, the leading music NFT marketplace, had a breakout month in October and the volume graphs are very reminiscent of what I saw in SuperRare early 2020 before cryptoart exploded. For music it’s only a question of when not if.
2. Trust-minimized cross-chain bridges
Almost all cross-chain bridges right now are variations of trusted multisigs. The Ethereum to Avalanche bridge, in particular, is an EOA (!) whose private key is sharded among four trusted Intel SGX signers. And it holds over $6B in users’ funds.
These bridges are massive honeypots and I predict bridge hacks will be the new CEX and DeFi hacks. The $611M Poly Network hack is just the tip of the iceberg of what’s to come.
Fortunately, more trust-minimized bridging products are coming to market. Hop is the leading trust-minimized bridge by volume right now and uses bonders and stableswap AMMs to rebalance funds on both sides of the bridge. While the focus of bridges to date has been on token transfers, the holy grail and an active area of research right now is on how to do cross-chain message passing trustlessly. This cross-chain composability will enable a plethora of new use cases; a DeFi project’s smart contract on Ethereum L1 will be able to call a smart contract function on an L2 or sidechain.
3. Investment DAOs
I like to think of investment DAOs as fractionalizing the collector rather than the artwork. The issue I’ve seen with fractionalizing NFTs is that the fractionalized tokens (ERC-20s) don’t trade based on the underlying NFT (ERC-721s or ERC-1155s) since there’s no way to arbitrage the two if their prices deviate significantly; thus it doesn’t make sense to hold the fractionalized token as a cheap index exposure to a particular blue chip NFT like CryptoPunks.
FlamingoDAO has been the most successful investment DAO to date and we’ve also seen DAOs spin up for large group purchases like the U.S. constitution and Ross Ulbricht’s artwork. The process today involves deploying a Gnosis Safe but I expect to see better tooling like Koop that facilitate easier group purchases of expensive NFTs. It’s an open secret that 99% of NFTs won’t hold their value long-term and that expensive blue chip NFTs (CryptoPunks, Bored Apes, etc.) will hold their value the best. Investment DAOs are the cleanest way to give the masses better exposure to high-end NFTs.
