This resonated… found here:
We’re in the first inning of this market cycle. Some things I’m seeing that suggest this:
Rumors of more crypto ETFs (ETH/XRP/SOL) are circulating.
Interest rates are lowering.
The election cycle encourages the US Office to stimulate the economy.
The Bitcoin halving is coming up in May.
Retail hasn’t even entered the market yet (the new capital is institutional due to BTC ETF).
We’re still in the Meme Coin season with many new Airdrops on the near-term horizon.
In the last post I mentioned the technologies driving innovation and momentum in this cycle. I failed to mention how capital typically flows within the crypto economy. Generally, value moves from BTC into smaller cap, higher upside opportunities. Last cycle it went something like this:
BTC (the king of all crypto) reaches All Time High (ATH).
Liquidity flows from BTC into ETH and subsequently other smaller blockchains (SOL, MATIC, etc…).
Liquidity then flows into decentralized application protocols built on top of these blockchains (mainly Defi).
Finally liquidity reached the NFT space, which is largely socially driven (we saw this in 2021).
Memecoins drive various narratives as well throughout the cycle. They generally represent the most “degenerate” opportunities in the space. With memecoins you can make 10,000% one week and lose everything the following. Some people play this game well, and seem to have their system down to a science when analyzing communities and growth potential, but I honestly can’t do it. Following the movements there takes too much time and attention, and feels a little more like playing craps than executing an investment thesis.
Currently we’re in the first phase of the cycle described above. BTC has yet to push past ATH. ALT Season (which surmises points 2 & 3 above) has yet to fully form. Memecoins are on a tear at the moment… I’m honestly not sure how to place those because I don’t participate, but at minimum it indicates that people within the space are deploying capital.
OK, so let’s think about the opportunities for a sec. Last post I mentioned Real Yield, Liquid Restaking Tokens, and Airdrops.
Note 1: I don’t include memecoins in part because I don’t understand them (LOL). Maybe will co-write a post in the future with a friend who does.
Note 2: All smart contracts or Defi applications carry some amount of risk. They’er kinda like a digital vault securing gold that clever hackers do their best to acquire. As the crypto industry matures, so does development of stronger systems to prevent these types of attacks. Ultimately, we’re still early and learning. There’s a few ways to tell if a contract is water-tight. One good indicator is if it has been audited by 2-3 auditing teams. THE BEST indicator of a safe smart contract comes from the amount of value held over time. The formula isn’t exact, but essentially, if something has held hundreds of millions of dollars over a long period of time, you can assume that every hacker in the world has tried to crack the safe. A strong audit + value held over time = battle tested smart contracts.
Real Yield
This type of yield is distinct from the Defi summer of 2020 where people were incentivized to add liquidity to smart contracts via protocol tokens that were minted at will. Projects like YFI, Olympus DAO, and (most notoriously) Terra Luna, led the charge in this yield offering. When Terra collapsed in 2022, much of the bloat that entered the ecosystem seeking these synthetic yields also fell. Many of these projects (at the time considered cutting edge leaders) are shells of their peak standing, both socially and technology-wise.
Today, Real Yield indicates yield generated by protocol fees. Tokens aren’t just being minted and handed out. As users participate in decentralized marketplaces, they pay a fee. A portion of that fee is given to the liquidity providers of the platform. These fees are generally distributed in ETH, because the grand majority of Defi apps live on Ethereum or adjacent networks. The first protocol I saw doing this was GMX (I think Curve also offered something like this to their LPs earlier).
When considering deploying liquidity to these protocols there are a few risks to consider. For instance, if you deploy into a decentralized exchange, understanding the impermanent loss of your position is critical. It’s also important to note how the yield fluctuates over time (it may offer 20% today, but is that just due to a spike in usage?). Lastly, the smart contract itself should be battle tested before deploying liquidity (see above). If you want more specific thoughts about particular market opportunities welcome to join my telegram group here.
Liquid Restaking Tokens
This is the newest and arguably most impactful technology available in the ecosystem. A few concepts to understand at a high level:
PoS: Ethereum runs on a “Proof of Stake” consensus, meaning the network is secured by economic staking, no longer by GPUs running an algorithm like in Proof of Work.
Liquid Staked Tokens: typically staking in Proof of Stake means you need to lock your ETH to earn the yield provided by the network. Protocols like Lido changed this in 2020 when the network switched to proof of stake. Lido provides a Liquid Staked Token, so, rather than just locking your ETH, you are able to earn protocol fees from securing the network AND put that liquid staked token to work somewhere in the ecosystem, earning additional yield.
Liquid Re-Staking Tokens: Rather than securing the ETH blockchain LRTs are used to provide economic security to other applications, rollups, etc that leverage a proof of stake type consensus system.
This section deserves its own deep dive. I am learning about the tech at the moment and honestly haven’t put everything together myself. Eigenlayer provides the fundamental backbone of the LRT space.
If you want to get deeper into understanding how this all works I’d suggest starting from this podcast and this article.
Airdrops
Uniswap is the leading Defi decentralized exchange. They launched in 2018 and quickly captured the majority of global liquidity facilitating decentralized transactions. In fall of 2020 Uniswap changed the game by airdropping their token to all users of the platform. This amounted to a minimum of 400 UNI tokens ($2000 at the time). The most significant users though (determined by a combination of contributed liquidity as well as trading volume) were rewarded millions of dollars of the token.
Airdrops like this have happened throughout the past few years, but 2024 is gearing up to be a very significant “airdrop season”. In early 2022 Blur (an NFT trading platform) created a game to show users their place on a leaderboard using a “points” system. Ultimately these points correlated to an airdrop they launched in the fall of the same year.
Today, POINTS are everywhere. Nearly every crypto application has a points system. Will they all airdrop a token? Will the token be worth anything? Both questions are uncertain, but I think it’s safe to assume the larger protocols that raised hundreds of millions of dollars will do something significant for the users who bootstrap their network.
OK that’s all for now… will try to keep this going in a semi consistent way (maybe bi-weekly, or more). There’s a lot happening and it’s fun to force myself to share in this way.
If you want more consistent updates or want to get deeper in the crypto-native world, join my telegram group here.
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