1confirmation partners predict 2022 hotspots: vertical NFT markets, cross-chain bridges, investment DAOs.

Written by: Richard Chen, Partner at 1confirmation

Original Title: 《Under-the-radar product trends: 2021 recap and 2022 predictions》

Translated by: Deep Tide TechFlow

At the end of last year, I wrote an article predicting three major trends for under-the-radar products in 2021. Before making three predictions for 2022, let's review the previous predictions.

1. Crypto Art

Conclusion: Correct

Although there have been many articles about NFTs and crypto art this year, this chart perfectly summarizes the field.

I will reflect on two points I made in my 2021 predictions:

"Currently, the top DeFi leaders treat NFTs as toys, which reminds one of how the top BTC leaders were resistant to dApps in 2018." Those DeFi Twitter influencers who publicly expressed skepticism about NFTs a year ago have suddenly changed their tune; they are now paying in shillings, selling PFPs (Profile Picture NFTs), and even raising funds for NFTs.

"Currently, there are three artists whose artworks are valued over $1 million, and 43 whose works exceed $100,000, hoping for more than at the end of 2021." Today, four artists have artworks valued at over $100 million, 46 at over $10 million, 268 at over $1 million, and 1,283 at over $100,000.

2. Prediction Markets

Conclusion: Unclear

Polymarket saw a surge in sales during the January 2020 U.S. presidential election and inauguration. Supporters of Trump, believing in #stopthesteal, continuously bought Trump shares at $0.10 each, providing a 10% "arb" (arbitrage) opportunity for skeptics. However, aside from significant political events that occur once in reality, maintaining transaction volume in prediction markets has always been challenging. I know that prediction markets and decentralized social networks are two killer use cases for crypto, but the timing for product market entry is still further away than I initially imagined.

3. DeFi Derivatives

Conclusion: Correct

I mentioned in a trending Twitter topic that DeFi in 2021 has improved incremental features (e.g., better stablecoins replacing stablecoins) or imitating Ethereum on other L1s.

The few 0 to 1 innovations we saw in DeFi this year revolved around derivatives. Structured products built by Index Coop and Ribbon provided avenues for index and yield strategies; Notional allowed fixed-rate lending. More importantly, the two biggest innovations in DeFi this year are Uniswap v3 and Primitive.

Uniswap v3 redefined liquidity provision and reconsidered capital efficiency as a KPI for DeFi projects, rather than total value locked as a reference, and opened up a structured product ecosystem like Gamma on top of Uniswap, establishing market decision strategies based on Uniswap. Since the release of v3, Uniswap has increased its DEX market share from 45% to 75% (while Sushi decreased from 24% to 12%) as trading volume concentrated on AMM when fully executed.

Primitive is also the first project to implement replicating market makers. Given the expected returns of specific financial derivatives (like options and swaps), a bond curve function can be constructed to replicate such derivatives in the AMM spot market. This is a huge deal for DeFi options, as options are the last category in DeFi without a clear market leader—replicating tradfi options on-chain is challenging due to gas and liquidity issues.

Looking ahead, I believe Primitive will play a role for existing options projects similar to what Uniswap did for previous DEXs (like EtherDelta and Radar Relay).

Here are three predictions I have for under-the-radar product trends in 2022:

1. Vertical-Specific NFT Marketplaces

OpenSea is clearly the biggest winner in our portfolio. While it has always been a dominant player in the NFT secondary market with continuous updates, I believe that vertical-specific marketplaces will carve out a niche due to better UI/UX and search and discovery features. SuperRare is a successful example of high-end 1 of 1 crypto art, but there are other categories as well, such as photography (like Sloika), metaverse land (like Metahood), and music (like Catalog).

Breakdown of Craigslist infographic, which web2 VCs like to use to guide thoughts

Particularly noteworthy are music NFTs. Surprisingly, unlike other categories such as fine art, collectibles, and gaming, music NFTs have not seen explosive growth yet, but I feel that collectors' tastes are rapidly changing. The leading music NFT marketplace, Catalog, made a breakthrough in October, and its volume chart reminds me of SuperRare before the crypto art boom in early 2020. For music, it’s just a matter of time.

2. Trust-Minimized Cross-Chain Bridges

Currently, almost all cross-chain bridges are variants of trusted multisigs. Particularly, the Ethereum to Avalanche bridge is an EOA (!). Its private keys are shared among four trusted Intel SGX signers. It also holds over $6 billion of user funds. These bridges are highly profitable, and I predict that bridge hacks will become the new CEX and DeFi hacks. The $611M Poly Network hack is just the tip of the iceberg of what is to come.

Fortunately, more and more trust-minimized bridging products are entering the market. Hop is currently the largest trust-minimized bridge, using bonders and stableswap AMMs to rebalance funds on both sides of the bridge. So far, the focus of bridges has been on token transfers, while the holy grail and a currently active area of research is how to achieve trustless cross-chain messaging. This cross-chain composability will support many new use cases; smart contracts of DeFi projects on Ethereum L1 will be able to call smart contract functions on L2 or sidechains.

3. Investment DAOs

Rather than viewing investment DAOs as artworks, I prefer to see them as collectibles. The problem I see with fractional NFTs is that fractional tokens (ERC-20) do not trade based on the underlying NFTs (ERC-721s or ERC-1155s) because if their prices deviate significantly, arbitrage between the two becomes impossible; thus, holding fractional tokens as a cheap index exposure to specific blue-chip NFTs (like CryptoPunks) makes little sense.

FlamingoDAO is the most successful investment DAO to date, and we have also seen DAOs emerge in large group purchases, such as the U.S. Constitution and Ross Ulbricht's artwork. Nowadays, programs need to deploy a Gnosis Safe, but I hope to see better tools, like Koop, that can facilitate collective purchases of expensive NFTs. It’s an open secret that 99% of NFTs will not retain their value long-term, while expensive blue-chip NFTs (CryptoPunks, Bored Apes, etc.) will best maintain their value. Investment DAOs are the best way for the public to gain better access to high-end NFTs.