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2022 In One Tweet and One Chart

Last quarter, the macroeconomic environment was more favorable for asset prices as rate expectations declined and inflation slowed. However, crypto news was dominated by the collapse of FTX and Alameda, which offset any benefit crypto assets would have had from a more favorable macroeconomic environment. The tweet below, while concise, essentially captures all of 2022’s carnage in the most succinct and apt way.

As a result of the events of the fourth quarter, regulation is a key priority. However, it will take time for the FTX case and DCG/Genesis situations to run their course, so investors should be prepared for an uncertain 2023.

A tweet summarizing 2022. Source

A chart comparing 2022 returns on assets by class. Source: Photovisualizer, NYDIG

Headlines

• Crypto lender Genesis considers filing for bankruptcy as the company fires 30% of its staff.
• Cameron Winklevoss claims Barry Silbert owes $900M to Gemini.
• Binance Experiences >$10bn of Net Withdrawals; Temporarily Suspends spot BNB Borrow
• Publicly-Traded Bitcoin Miner Core Scientific Files for Chapter 11
• Nexo to Phase Out US Offerings in Coming Months Due to Regulatory Pressure
• Fir Tree Sues Grayscale Over GBTC
• Kyle Davies of the infamous Three Arrows Capital was subpoenaed on Twitter.
• Alex Mashinsky, the former CEO of Celsius, is being sued by New York Attorney General Letitia James.
• Silvergate Capital was forced to cover $8.1B in withdrawals by selling assets at a loss.
• Mango Markets exploiter Avi Eisenberg arrested on market manipulation charges
• Sam Bankman-Fried (SBF) pleads not guilty to U.S. criminal charges.
• Uniswap patches a critical vulnerability found by Dedaub. All user funds are safe.
• PayPal partnering with Metamask to Offer an Easy Way to Buy Crypto
• MakerDAO relaunches 1% fixed yield for DAI holders

Bitcoin

Bitcoin Key Events in 2022

Despite some encouraging developments in the Bitcoin mining and Bitcoin payments industries (first chart below), 2022 was a down-only year for BTC and nearly all assets (second chart).

A timeline of developments in Bitcoin mining and payments shown over BTC market price. Source: Coinbase.

A chart comparing 2022 returns. Source: Arcane Research.

2022 will be remembered for the LUNA collapse, CeFi blowups, FTX fraud, and centralized lending contagion that nuked the entire industry. This continuous daisy chain of insolvencies resulted in ~50% of BTC holders to be holding at a net loss (chart below). This 50% threshold is only met during steep bear markets, including 2012, 2015, and 2019 bear markets.

A chart showing the percentage of underwater bitcoin holders, 1m rolling-average. Source: Coinbase.

However, when looking at the percentage drawdown from all-time high to lows, BTC is “only” down ~75% compared to 80%+ in previous bear markets (chart below). Does this mean that BTC has further to fall? Or is it a sign of a maturing asset class? Only time will tell.

Price drawdown from Bitcoin's all-time high. Source: Glassnode.

Ethereum

Key Ethereum Events in 2022

2022 in Ethereum will always be remembered as the year the Merge took place. Post-Merge, the ETH supply has only increased by ~4K, as opposed to the ~1.18M inflation that would have occurred under PoW consensus. That means almost $1.5 billion in sell pressure was removed thanks to the Merge. Total ETH staked continues to increase at a steady rate, with ~13% of the total supply staked yielding ~6% while the amount of ETH on CEXs continues to decline.

A chart showing Ethereum balance on all exchanges, Jan 2016–Jan 2023. Source: Glassnode.

However, there were also great strides made in scaling Ethereum with the proliferation of optimistic rollups like Optimism and Arbitrum, as well as the highly-competitive race taking place for zk-rollups like Starkware, zkSync, Polygon, Scroll, Aztec, and more. These improvements, along with the decline in alt-L1s, led to Ethereum cementing its lead as the premier smart contract protocol (chart 2).

A timeline of Ethereum ecosystem developments shown over ETH market price. Sources: Etherscan.io, Coinbase.

A chart comparing TVL by layer 1s and layer 2s. Source: DeFiLlama, Coinbase.

While the Merge was an inarguable success, there is still much work to be done on Ethereum! Staked ETH withdrawals are expected to be enabled in March 2023 with the Shanghai upgrade, followed by the implementation of proto-danksharding. The implementation of EIP-4844 (proto-danksharding) means L2s post "blobs" instead of calldata to Ethereum in order to minimize gas costs. Even beyond those 2023 upgrades, there remains years and years of upgrades on the Ethereum roadmap (table below), including account abstraction, full danksharding, stateless Ethereum, and more.

An infographic showing the roadmap to Ethereum's proof-of-stake transition. Source: Vitalik Buterin.

Solana

After FTX's demise, the Solana ecosystem witnessed a dramatic decline in TVL and activity. TVL fell ~95%, from $12B to less than $500M YTD.

A chart of Solana's TVL with Mango Market and FTX Alameda events denoted. Source: DeFiLlama.

After FTX withdrawals were halted, an adversary breached FTX's security and compromised its exchange wallets. Serum, the primary central limit order book for Solana, was at risk. The update key for the Serum program was not controlled by the SRM DAO but rather by a private key associated with FTX. Therefore, Serum developers are unable to update their own code, and the protocol is vulnerable to malicious malware. The Solana community chose to fork Serum into OpenBook, a new CLOB. DEXs, including Raydium and Jupiter have implemented OpenBook.

In tandem with the catastrophic deterioration of the ecosystem in the second half of 2022, the network experienced multiple performance-related disruptions. A major security issue on the Solana network surfaced in September of 2021. On September 14th, 2021, a large number of bots flooded the network and created a large number of transactions, effectively overflowing the network and causing validators to stall. This attack on the network made consensus impossible, effectively crippling the network.

A timeline of Solana network's outages between Sep 2021–May 2022. Source: Galaxy Digital Research.

While no funds were lost in the attack, the network went offline for 17 hours. To counteract the crash, the Solana community proposed a hard fork “upgrade-and-restart” of the network, a proposal requiring 80% of all validators to agree. Despite the network crash, the community was able to diagnose the problem, integrate a solution, and get Solana back online in under 24 hours.