Bankless: 5 hot spots worth paying attention to in the second half of the crypto market

Original title: "5 Crypto Investment Trends for the Rest of 2022"

Original author: Ben Giove

Original translation: TechFlow intern

With prices plummeting, protocols collapsing, and CeFi going bankrupt, cryptocurrencies have experienced incredible turbulence to start the year. There are many emerging trends and themes taking shape in the metaverse and the real world to define the rest of 2022 and beyond. Catch them first, this is a major opportunity to gain wealth in this generation, let's take a deep dive into what investors should keep in mind as the second half of the year approaches.  

The Many Impacts of ETH Merger

As far as Ethereum is concerned, the theme worth paying attention to in the second half of the year is The Merge. Its launch, timing, and execution will have some impact in the short term, but substantive impacts will follow.

The long-awaited Ethereum 2.0 upgrade will transition the network from a PoW to a PoS consensus mechanism—which will have an impact on every aspect of the Ethereum ecosystem.

First: the shift to PoS will lead to a significant reduction in Ethereum's energy consumption, alleviating concerns about the network's environmental impact—especially those of ESG-conscious investors.

Note: ESG investing: refers to the integration of ESG concepts into investment research practices. Based on traditional financial analysis, it examines the medium- and long-term development potential of companies through the three dimensions of E (environment), S (society), and G (governance), hoping to find investment targets that create both shareholder value and social value and have sustainable growth capabilities.

This change also paves the way for many protocols to be more easily implemented in PoS networks. These include improvements to scalability such as Danksharding, Proto-danksharding, and lowering layer 2 call data costs via EIP-4488.

This is in addition to changes that mitigate the negative externalities of MEV, such as PBS (Proposer-Builder Separation), which separates block production from validation.

After the merge, these upgrade changes will all accelerate as more core developer resources will be freed up to focus on delivering these upgrades rather than working on the merge.

The Ethereum 2.0 upgrade is also a significant bullish catalyst for the ETH asset, the transition to PoS will significantly reduce the issuance required to secure the network, and combined with the fee burning already implemented via EIP-1559, it is likely to lead to deflation in ETH.

The removal of PoW will also alleviate severe structural selling pressure, and the operating costs of PoS validators will be much lower than PoW miners.

Finally, the merger will be a significant driver of the Ethereum staking economy. With over 12.97 million ETH already staked, or about 10.8% of the total ETH supply, the completion of the merger could lead to an influx of new stakers and restore confidence in Liquid Staking Derivatives (LSD).

Protocols such as Lido, RocketPool, and Stakewise — which have been trading at a discount to ETH amid heightened market volatility and tight liquidity — will strike a balance and then take off quickly. Withdrawals from the beacon chain will not be activated until ETH’s Shanghai upgrade.

How to participate:

Ethereum itself;

Multiple liquid staking protocols.

More prosperous L2

L2 is expected to continue to grow in the second half of 2022, and L2 represents the present and future of Ethereum expansion. Optimistic and zero-knowledge (ZK) Rollup are used as the execution layer to provide users with a fast and cheap transaction experience while still maintaining the security of the underlying Ethereum L1.

Despite some growing pains, L2 adoption continues to rise steadily by users and developers. Currently, Ethereum L2 has over $3.81B in value locked, with TVL in ETH near all-time highs.

In addition, many L2 native applications have taken advantage of its strong scalability and have seen significant adoption, with perpetual exchanges such as dYdX, GMX, and Perpetual Protocol currently heading towards billions in transaction volume.

Despite a general slowdown in the on-chain economy, the L2 ecosystem continues to grow. Optimism is on track to see a 5.5.% quarter-over-quarter increase in network revenue in Q2, while Ethereum L1 is down 46.3%.

This growth may be attributed to Optimism’s native Token OP, which launched in May. It is the first of the “Big Four” L2s (which also include Arbitrum, zkSync, and Starkware) to issue a Token .

At least one of the “Big Four” L2s will likely issue a Token in Q3 or Q4, serving as an important catalyst for developers, users, and applications in the corresponding ecosystems.

How to participate:

Invest in or take part in an airdrop of a single L2 Token ;

Invest in or take part in an airdrop of an L2 native project governance Token .

The rise of Cosmos and AppChains

Another theme to watch in the second half of the year is the Cosmos ecosystem. Cosmos aims to create the "Internet of Blockchains," and through the Cosmos SDK, developers can create sovereign, highly customizable blockchains dedicated to a single application - called AppChains.

These networks can either bootstrap their own validator sets or leverage shared security through interchain security, and upcoming upgrades will allow chains to outsource their validator sets to the Cosmos Hub.

Cosmos chains can also be connected via Inter-Blockchain Communication (IBC) — a trust-minimized bridging and communication protocol. IBC is currently enabled for over 30 Cosmos chains, allowing users to frictionlessly transfer assets between enabled networks.

This novel technology stack has attracted the attention and interest of a growing number of developers. For example, dYdX, the largest decentralized perpetual exchange by trading volume, recently announced plans to develop V4 of its protocol as a Cosmos AppChain.

Given the protocol’s history of early adoption of new technologies — it was one of the first to be deployed on Starkware — this is a signal indicator that more high-profile applications may follow suit and begin building on Cosmos. Projects may be more interested in AppChains, as the native Token can earn a “L1 premium” through validation and staking.

Cosmos, like all Layer 1s, is going through its own growing pains. Decentralized exchange Osmosis recently shut down due to a bug, and entering the ecosystem through traditional means such as cross-chain bridges or exchanges remains difficult.

The influx of users, capital, and attention after dYdX crossed the chasm should help catalyze and drive ecosystem growth in the remaining months of 2022 and beyond.

How to participate:

Invest in the L1 token of the Cosmos application chain;

Invest in the governance token of the native project built on the chain.

ERC-4626 Revolution

DeFi returns have compressed significantly in 2022 as on-chain activity, lending demand, and speculative appetite have all dropped significantly.Nevertheless, single-coin staking is already on the verge of its next growth phase, thanks to the adoption of ERC-4626.

ERC-4626, pioneered by a group of prominent EVM developers, is a new standard for tokenized vaults. Just as standards such as ERC-20 and ERC-721 allow for the easy creation of fungible and non-fungible assets on Ethereum and integration into applications, ERC-4626 promises to make it easy for developers to create their own treasuries by providing a DeFi template.

ERC-4626 is an extension of ERC-20, which means that these Tokenized strategies are as composable as assets such as USDC, DAI, UNI, and the popularity of this standard will have a huge impact on DeFi's risk-adjusted returns.

4626 can light up the DeFi user experience by improving capital efficiency. Users will be able to trade, LP and use these new Tokens as collateral, earning rewards from participation while earning returns from the underlying strategies run by the treasury itself.

Miners will be able to save on gas costs and manage risk more easily because 4626 strategies (like traditional DeFi vaults) can automate position management and compound returns. These factors should increase the attractiveness of deploying funds to DeFi by reducing risks and amplifying returns.

Various different protocols have begun to leverage the capabilities of 4626. For example:

The structured product of the stETH/ETH recursive leverage strategy on Aave,

Index Coop and Galleon DAO's icETH and ETHMAXY are both compatible with 4626.

Yield protocol Timeless Finance and upcoming NFT lending protocol Astaria, along with many others, will also leverage the standard.

Given the huge benefits of 4626 products, future staking will see users mint or purchase, and hold these tokenized yield strategies, rather than just depositing in numerous separate protocols.

Protocols and DAOs that adopt the standard early should see huge growth in users of their products as DeFi users realize the benefits this new type of Token provides.

How to participate:

Invest in the governance of a DAO based on 4626 managed assets Token;

Use ERC-4626 in your staking strategy.

Macro Uncertainty

Traditional market weakness has seeped into the cryptocurrency space throughout the first half of 2022, and this dark cloud is expected to hover over the market in the third and fourth quarters. Both bond and stock markets have had their worst start to a year in decades as the Federal Reserve has been forced to raise interest rates sharply and shrink its balance sheet to fight runaway inflation.

Rising interest rates, a flattening yield curve, soaring commodity prices and persistent supply chain issues – with trillions of wealth destroyed as asset prices fall – have begun to stoke fears of recession and stagflation.

Cryptocurrencies have also been caught in the crossfire, with major assets like BTC and ETH down about 71.1% and 78.9% from their ATHs, and many small-cap assets down more than 85% from their peaks.

The big crash has reinforced the notion that crypto no longer operates in isolation, as there is a strong correlation between BTC and the S&P 500, a figure that currently stands at 0.85.

While it may have little impact on long-term blockchain adoption and the ultimate Web3, continued macro uncertainty will certainly weigh on crypto prices for the foreseeable future.

How to participate:

Create a DCA or one-time strategy to build a long-term position;

Hedge downside risk through options, perpetual contracts, or other derivatives (it’s risky, be careful!).