28 Dec 2021

2021 in review pt 5 of 5: Mining Controversy

2021 saw China ban mining, while bitcoin's energy consumption once again frequented in the media. Meanwhile, Lightning and layer-1s saw a breakthrough year.
Bitcoin's hashrate plunged more than 40% as Chinese miners turned off their machines after China banned bitcoin mining in early June. The removal of mining capacity from China created an unfulfilled gap in bitcoin mining, which suddenly made the activity much more profitable. The super-profits of bitcoin mining incentivized miners outside of China to increase their mining capacity as fast as possible.In early December, the hashrate had more than doubled from the bottom. What is the takeaway here? The Bitcoin Network lost almost half of its computing power without severely impacting functionality and security, showcasing the most resilient computing network globally. 2022 prediction: Bitcoin’s hashrate will reach 300 EH/s in 2022.
China bans bitcoin mining: The great mining migration
Source: Cambridge Centre for Alternative Finance
China's decision to ban bitcoin mining kicked off a massive geographical shift in the industry. Chinese miners, who produced more than 40% of the hashrate, suddenly had to switch off their machines. After the ban, the U.S. emerged as the new leading bitcoin mining country, with the U.S. share of the global hashrate growing from 11% in January to 35% in August. Canada, Kazakhstan and Russia have also increased their share of the global hashrate. The rapid geographical shift of bitcoin mining shows us that although it's a physical industry, it's highly mobile, and the geographic distribution of hashrate can change quickly. 2022 prediction: Hashrate will become even more geographically distributed in 2022, as miners set up operations in new places, like Latin America.
The bitcoin mining energy consumption debate
Source: Bitcoin Mining Council
During the Spring bull run, Bitcoin's energy consumption debate took off, and many attacked Bitcoin for its allegedly harmful impact on the environment. In response, Michael Saylor and some of the biggest bitcoin miners formed The Bitcoin Mining Council as a forum for bitcoin miners to report their energy usage and carbon intensity. The Bitcoin Mining Council's first report found the sustainable power mix* of bitcoin miners to be almost three times as high as the global average. 2022 prediction: Bitcoin’s energy consumption will continue to be a hot topic in 2022, leading certain jurisdictions to ban bitcoin mining – while other energy-rich jurisdictions will embrace the industry.
The Lightning Network’s breakthrough year
Source: Bitcoinvisuals
The public bitcoin capacity on the Lightning Network grew by 213% in what was a breakthrough year for the layer-2 bitcoin scaling solution. El Salvador adopted Bitcoin as legal tender, and several exchanges and Twitter integrated Lightning solutions to their offerings. 2022 prediction: The Lightning Network adoption will remain in 2022, pushing the public capacity above 5,000 BTC by year-end.
High transaction fees for Ethereum – but abnormally low for Bitcoin
Source: Coinmetrics
Transaction fees on Ethereum have been on extreme levels throughout most of 2021, while Bitcoin has seen abnormally low transaction fees for most of the year. Since June, Bitcoin's transaction fees have been only $3.5 on average. Bitcoin's low transaction fees highlight the low on-chain activity on Bitcoin in the second half of 2021 as crypto traders were more focused on altcoins. In the same period, Ethereum's transaction fees have exploded because of the surge in popularity of DeFi and NFTs. Because of the high transaction fees, there's currently no room for small transactions on Ethereum – giving rise to other, competing layer-1 platforms and layer-2 scaling solutions.2022 prediction: Ethereum’s scaling debate will increase in force, leading to increased adoption of layer-2 Ethereum scaling solutions and other layer-1 platforms.
Massive stablecoin growth in 2021
Source: CoinGecko
In 2021, the total market cap of stablecoins has increased 500% - growing more than twice as fast as the rest of the crypto market. Innovative lending products paying out high yields for stablecoin deposits have primarily been the drivers for stablecoin growth. Especially USD Coin has ridden the lending product wave, as the stablecoin has grown much faster than the biggest stablecoin, Tether. Binance USD has also had tremendous growth in 2021 as the Binance Smart Chain ecosystem has seen a surge in popularity. 2022 predictions: 1. The stablecoin supply will continue to balloon in 2022 – leading to increased regulatory scrutiny of stablecoins. 2. USD Coin will overtake Tether’s position as the biggest stablecoin.3. Increased regulatory scrutiny of centralized stablecoins will lead to a massive growth of algorithmic stablecoins in 2022.
Ethereum under pressure from other L1s as TVL climbs towards $250 billion
Source: DefiLlama
In 2021 DeFi spread its wings to other layer-1 protocols, as Ethereum fees remained continuously high. On Jan 1st, Ethereum-based DeFi accounted for 99% of the total value locked in the DeFi ecosystem. Now, Ethereum's market share has declined to 63%. Binance Smart Chain was the first alternative ecosystem to take market shares from Ethereum. Later on, Solana, Avalanche and Terra have seen a growing penetration with other layer-1 protocols lurking slightly behind. High throughput and low fees have contributed to the growth of alternative layer-1s. While these qualities to some extent are caused by more centralized structures, market participants don’t seem to care. Layer-2 scaling solutions are currently seeing growing adoption on Ethereum. These scaling solutions will be important for Ethereum to maintain its leading role in the ecosystem. 2022 prediction: Ethereum users will increasingly adopt layer-2 solutions.
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