2020 was a record year for the crypto and blockchain industry. Despite the global pandemic and various challenges along the way, the industry has persevered and came back stronger than ever. Increased attention to digital and decentralized solutions has pushed crypto assets to the top of many institutions’ agendas. On the back of the oldest cryptocurrency, Bitcoin, the whole industry has risen, developed, and gained strength throughout the whole year. The biggest winner was definitely decentralized finance (DeFi) with its numerous dApps facilitating financial inclusion, and the concept of growth at all costs brought fascinating developments to the blockchain industry, ending in a year of all-time high metrics.

But not only Bitcoin and DeFi saw immense growth. Concepts such as Central Bank Digital Currencies (CBDCs) were on the rise, non-fungible tokens (NFTs) saw more and more use cases, and a growing number of blockchain projects had increased development and adoption.


A year to remember

We can’t look back at what happened in the crypto industry in 2020 without talking about Bitcoin (BTC) first. It’s the oldest and most established cryptocurrency in the world, and 2020 showed us again that BTC is full of surprises. When at the beginning of the year the price of Bitcoin was hovering around $7k, over the course of 2020 it continued to rise. Especially, in Q4 the price surged amid positive market sentiment and reached one all-time high after another - ending at a staggering $27k at year-end.

Bitcoin (BTC) price evolution in 2020

Source: Coingecko, 2021

Bitcoin’s total market value crossed $500 billion, while its on-chain transaction volume increased by 42% in 2020 - from $672 billion to $960 billion. This sudden increase of key metrics reminded some of Bitcoin’s 2017 boom when the currency crashed hard after an initial surge. However, when in 2017 the rise was mostly due to retail investors, this time the increase was on the back of large corporations. Institutional interest created major headlines in 2020, with more and more publicly-traded companies announcing exposure to Bitcoin. MicroStrategy (70,470 BTC), Galaxy Digital (16,651 BTC), and Square (4,709 BTC) are just some examples.

At the beginning of 2020, however, it didn’t look all that well for the crypto industry - similar to most other industries around the world. Q1 was the quarter of market turmoil, with COVID-19 hitting the world hard. But despite, or maybe even because of, the global pandemic, the crypto industry had tremendous success from then on. Q2 saw the Bitcoin halving and Q3 the explosion of stablecoins and decentralized finance applications. And Q4, finally, was the quarter of institutional FOMO for BTC and of Ethereum launching the first phase of its ambitious migration to a proof-of-stake (PoS) blockchain.


DeFi’s mind-blowing rise

In the middle of March, the pandemic took full hold and traditional markets plus cryptocurrency values dropped significantly. However, the crypto industry celebrated a quick recovery, and increased attention was drawn to crypto and decentralized solutions. Decentralized finance (DeFi) was one of the hottest topics and became the driving force of the blockchain industry, especially in the second half of 2020. The DeFi space seemingly grew exponentially over the third quarter. Total value locked (TVL) in the decentralized finance space surged 400% from the end of Q2 2020 ($2 billion) to reach $10 billion by the end of the third quarter, and another 50% to reach $15 billion by year-end. Similarly, transaction volumes skyrocketed to surpass $100 billion, and multiple DeFi projects crossed the $1 billion mark in total value deposited to the protocols.

Total Value Locked (USD) in DeFi evolution in 2020

Source: DeFi Pulse, 2021

DeFi platforms opened up a whole range of new ways and business opportunities, and yield farming has become the cornerstone concept for DeFi in 2020. The craze was popularized by Compound’s COMP governance token, which was the first to initialize this investment mechanism. On June 15, Compound distributed its governance token on top of earning the usual cryptocurrency interest. This concept, as it seemed quite lucrative and effective, quickly spread to other applications, creating a yield farming and liquidity mining hype.

Another cornerstone of DeFi in 2020 has been the emergence of decentralized exchanges (DEX). Decentralized exchanges recorded an incredible performance in the past year. Most users gravitated towards DEXs rather than centralized exchanges, as they enabled a faster and more streamlined way to interact with DeFi. In 2019, DEXs registered $3 billion in total trade volume. In 2020, that number has jumped to over $104 billion. Uniswap was the unquestionable leader of the DEX category. However, its success story didn’t go without challenges on the way. The launch of the so-called vampire dApp SushiSwap dominated headlines in mid-2020 as SushiSwap incentivized users to move liquidity from Uniswap to their own project. The tactic was very successful for a couple of weeks but in the middle of September, Uniswap counter-attacked by airdropping their UNI governance token. While Uniswap recovered its leadership position, user retention proved to be fragile and bait driven in the DeFi industry.

Another major trend that emerged at the end of 2020 was mergers & acquisitions (M&As). The concept of M&As is nothing new to the traditional world of finance. However, in the DeFi industry, something like that didn’t really exist before five M&As were announced within only one week, all by a single market player - Yearn.finance. We have yet to find out how these partnerships work out but mergers might give other dApps a template and impetus to follow the trend in the coming year(s), as this may help to push the DeFi industry forward.


Other application fields in the crypto space gained importance

The development in the DeFi ecosystem created a blueprint for other application fields to evolve. Notable were non-fungible tokens (NFTs) which found a growing number of use cases in 2020. Popularized by CryptoKitties, these collectible tokens enable application providers to manage digital scarcity and rarity through a new form of token which can carry unique metadata. NFTs are unique but tradeable blockchain assets, which can be used to represent all types of virtual and real-world goods. They are increasingly becoming popular for tokenizing markets as diverse as video game items, digital art, and fantasy sports. They have been intensively exchanged over the past year as volumes on peer-to-peer marketplaces surged.

Non-fungible tokens trading volume evolution in 2020

Further, Central Bank Digital Currencies (CBDCs) have been a hot topic, with a number of countries expressing interest in the concept. 2020 set the pace for new CBDC conversation, research, partnerships, and advanced stages of pilots. Projects such as China’s DC/EP (Digital Currency Electronic Payment system) are in advanced stages of piloting a CBDC in several cities in China. However, the implementation of a CBDC involves political, economic, technological, and societal considerations which leads to some countries lagging behind and slowing down the adoption of government-backed digital currencies.

While public initiatives are still in consideration and research phase, the private stablecoin market grew exponentially in 2020. Global institutions understood that stablecoins provide a perfect bridge between the new and old financial systems, as well as acting as facilitators for users and investors to enter the market. In 2020, the total stablecoin supply grew 350% from $5.9 billion to over $27 billion. Transaction volume grew 316% from $248 billion to more than one trillion dollars. And the daily number of transactions grew 343% from 98k to 436k.


Crypto means nothing without the networks behind it

While the crypto industry saw tremendous growth, the technology behind it had its own success story in 2020. Ethereum, the world's largest smart contract platform, prepared its transition from proof-of-work (PoW) to proof-of-stake (PoS). After years of research and development, 2020 saw the so-called Phase 0 of Ethereum 2.0 (Eth2) launch in December. The arrival of a revamped network has become even more crucial not only to ensure Ethereum’s leadership position but also survival. With increasing transactions - on-chain transaction volume increased by 190% in 2020, from $132 billion to $386 billion - and increased activity, the network faced scalability issues. Gas prices, a blockchain’s transaction fees, skyrocketed several times throughout the months.

Ethereum Gas Price evolution in 2020

Source: DappRadar, 2021

The move away from PoW to PoS was designed to improve upon Ethereum's scalability issues. So far, more than 2 million ETH (worth about $1.4 billion) has been staked in the Eth2 contract. The high deposits reflect ETH holders' commitment towards Eth2, which is still years away from being fully developed. But now the launch is successfully done and developers can focus their efforts on onboarding more validators onto the network. The goal is to have a minimum number of 262,144 validators securing Ethereum 2.0 before advancing to the next phase of development, phase 1.

On the sidelines of Ethereum’s development, contender projects have quickly risen to prominence. It’s clear that the Ethereum blockchain is dominating the industry around decentralized applications. But a lot of projects, investors, and users are diversifying their adoption, investing in challenger protocols that could potentially compete with the Ethereum network. In the same way that Ethereum is transitioning to PoS, most of these networks are using PoS approaches and attracting more and more dApps, users and investors.


Challenges are still blocking the industry

Despite a year full of records and surprises, there were major challenges which seemed to shatter the industry at times. Smart contract hacks and exploits once more proved that the industry is still very experimental giving rise to insurance products, which may become a critical component necessary to allow the sector to scale healthily. The overall increase in dApp usage during 2020 resulted in a rising number of attacks. The total value of exploits equated to more than $120 million - there were numerous cases where users and investors lost considerable amounts of money through plain exit scams and fraud.

Moreover, with an increasing interest of large corporations, governments and public institutions tried to get ahold of the crypto industry. While in the past years not much has been done in terms of regulations, 2020 saw somewhat rash proposals being forwarded by decision-makers. While 2020 has not seen regulations being officially passed, 2021 will see an increase of rules and laws to crypto which highlights the risk of operating in an industry that’s developing in a regulatory gray area.

It will be interesting to see how the crypto and blockchain industry plays out in 2021, and what lies ahead of investors, users, and projects within this realm. Without a doubt, the next year(s) will see major developments, investments, and further adoption of the financial and non-financial sectors, and there is no more time for actors to stay behind.


Sources:

2020 Dapp Industry Report - DappRadar ; December 17, 2020 [1]

DeFi Pulse, 2021 [2]

2020 Year In Review - The Block ; January, 2021 [3]

Bitcoin Goes Institutional, Ethereum Spreads Its Wings: CoinDesk Q4 2020 Review - CoinDesk ; January 7, 2021 [4]

Nyctale blog - Nyctale ; January, 2020 [5]