GM PRO DOers!
Do you feel like crypto is dying?
I don’t blame you if you do!
If we only follow Crypto Twitter and the mainstream media, it certainly looks like this industry is on its last breath.
And thanks to the SEC crackdown on cryptocurrencies lately, it feels like that might be the final blow.
But let’s get out of the weeds. The truth is that we’ve been fighting regulation for years.
Ever since crypto has gained adoption and popularity, various governments and government agencies around the world have been trying to shut us down. They’ve always been unsuccessful.
As we talked about in Monday’s newsletter, referring to Gandhi, the common cycle is:
First, they ignore you
Then they laugh at you
Then they fight you
Then you win
They used to laugh at this industry, with Congressman Sherman calling Mongoose coin the next big thing:
Now they’re fighting us by going after the biggest players (Coinbase, Kraken, Binance, etc…)
But that’s okay. The reality is that nobody is able to stop permissionless and decentralized protocols, so long term, we’ll be just fine.
But what about the short term? Is it really as bad as it seems?
I wouldn’t say so… Sure, some centralized exchanges will be rekt, and so will a few cryptocurrencies that actually act as securities and don’t comply.
However, when you look deeper, aka onchain 👀🔛⛓️, things don’t seem too bad. I took a peek under the hood and I (as usual) became as bullish as ever.
I think that we’re nearing an inflection point of adoption, technological innovation and a macro set up which is creating an opportunity similar to that of early 2020.
In 2020 we had a macro backdrop of excess liquidity entering the system (good for risk assets), technological improvements across blockchain tech in the form of Defi applications and NFTs, which together set up a cycle of exponential adoption throughout 2020 and 2021.
Today, it feels like the same scenario is happening and it’s just a matter of time until everything comes together to spark another bull market like we’ve seen in previous cycles.
So, today, I want to present some onchain metrics that showcase a bullish overview on the state of adoption and tech innovation, all from building in the bear 🐻
I’ll hold off on the macro talk in the report as I will do a Market Watch deep dive in the PRO report coming out in 2 weeks from now, which I will also host a live event in the discord beforehand on June 27th at 12pm EST (set this to your calendar folks!)
By the way, speaking of live events, this report comes from the back of the PRO Eyes On Chain event we had on Tuesday in our Discord.
It was a great turnout of PRO members. If you couldn’t join, that’s okay! We recorded the meeting and made it available just for you.
The link is below the paywall (sorry free members, if you want to access these events + our weekly PRO reports, please go PRO here)
To wrap up this intro, I’m about to cover the top 5 themes I’m watching right now that lead me to believe we are reaching the inflection point. Those points are:
1. A look at liquidity on exchanges
2. A deep dive into how the industry is going bankless
3. A new onchain industry which is BOOMING
4. Some examples of real use cases gaining real adoption onchain
5. Blockchain tech that is primed for mass adoption
Now, let’s head onchain to explore what’s up ⏬
1. Is Crypto Liquidity Drying Up?
We often refer to how NFT volumes are getting rekt. That’s not the only thing that’s going downhill anymore.
Spot volumes on exchanges appear to be diminishing quickly.
Much of this is presumed to be due to regulations in the USA and litigation with crypto exchanges, forcing the largest market makers in the USA (Jane, Jump, etc) to pull back or pull out of their positions.
At the same time, the FUD around cryptocurrencies being securities, is encouraging retail investors to stay on the sidelines.
As a result, the last few months have seen significant drops in exchange volumes, particularly in North America.
Interestingly, however, volume on exchanges in South America have seen a significant increase during this entire bear market and regulatory fiasco.
Crypto solves some very real problems for those in developing countries who suffer from extremely high inflation and strict capital controls.
The product market fit for crypto in countries like Argentina is as clear as day. At Web3 Academy, we have 2 Argentinians on the team and they’re both paid in crypto because getting their FIAT out of banks is either impossible or very expensive.
Blockchain provides life-changing technology for many around the world, and regardless of the actions of power-hungry politicians and regulators, people will find a way to use technologies that improve their life.
This technology is here to stay. But, with that said, keep in mind that overall, exchange volumes are not looking great.
But just because exchange volumes are plummeting, it doesn't mean that everyone is leaving the space.
In fact, it appears that we might just be accelerating the migration from online to onchain.
2. The Industry Is Going Bankless…
Here’s a chart looking at the % of trading volume on centralized exchanges vs decentralized exchanges.
The last few months have seen a massive spike in onchain trading volume (June is not done yet so that’s why we see a drop on June)
And here, we can see a massive exodus of stablecoins moving off exchanges.
Similarly, Bitcoin on exchanges has seen a massive decline in the last few months…
And the same goes for ETH…
A big reason for assets moving onchain is likely from fear around exchanges shutting down or being forced to freeze funds.
Coinbase is being sued and the SEC wants to shut them down
Binance is being charged with serious allegations
Kraken was forced to shut down its staking program
Robinhood delisted tokens and will sell the holdings of users by end of June (if you don’t do it yourself)
And then there’s FTX, and we all know what happened there.
But we’re also seeing some onchain use cases really heating up, that’s incentivizing people to move their assets onchain.
3. The Staking Industry is BOOMING! (Introducing LSDfI)
ETH is moving off exchanges and being put to use to secure the network (and earn 5-7% APY while it’s at it!).
Since the Shapella upgrade, the number of validators (people who stake their $ETH) on Ethereum has skyrocketed to 712,000.
The amount of ETH staked is about to surpass 22 million, ∼18% of the total supply (up from <15% before the upgrade, which happened on April 12).
As a result, fresh interest is once again brewing in DeFi, with LSDs leading the charts.
Liquid Staking Derivatives (LSDs) such as Lido ($STETH) or Rocketpool ($RETH) serve as a solution to the limitations of staking ETH in the Ethereum network, allowing token holders to unlock liquidity and earn additional rewards.
Essentially, any $ETH holder can turn to an LSD to put their assets to work in DeFi.
And since LSDs are essentially an appreciating version of ETH itself, it’s an even more presentine collateral, creating a new form of finance, called LSDfi.
At the time of writing, there’s a whopping 9,676,846 ETH ($16.942 Billion) locked in LSDs (according to DefiLlama), with Rocketpool, Lido and Coinbase leading the charts in the hottest narrative of 2023 so far.
We wrote extensively about LSDs in one of our past reports here and we also wrote with Rocketpool under the microscope here.
4. Real Use Cases, Real Adoption, Real Teams
We’ve been building during the bear and now we have real use cases, with real adoption from real teams.
And PRO members who allocate properly are about to reap the benefits, with a bull market around the corner. 🚀
Let’s start with the poster boy of the tech world himself, Sam Altman, the founder of OpenAI and Chat GPT, who also founded Worldcoin out of necessity to solve digital identity — the problem he contributed to by creating AI.
If you want to learn about Worldcoin, check out our newsletter here.
Worldcoin is growing at over 150,000 new wallets per month currently, with a total of 1.4 Million since October 2022.
Then we have one of the largest tech platforms in the world continuing to onboard millions onchain.
Reddit brought in 431,828 unique wallets just last week, accruing a total of 11,418,000 unique wallets interacting with Reddit NFTs.
And finally, Nike, one of the biggest and most iconic brands in the world, has managed to activate 367,518 unique wallets to mint their new onchain identity system with .SWOOSH since November 2022.
.SWOOSH is still in beta and closed to most countries around the world, so this is just the beginning. That said, just 2 years ago we had never seen an onchain activation with NFTs larger than 50k!
Now we’re seeing it in beta!
Nike took it a step further recently and proved they could not just have users interact onchain for free, but also they could sell a digital good for $20 more than 97,000 times in a matter of weeks.
What’s interesting about Nike’s .SWOOSH (we wrote more about it here) is that they managed to convert 21% of their free ID holders into paid customers.
That’s a dream for any marketer and Nike managed this in a bear market, where volumes (especially NFT volumes) are dying.
The real adoption is happening right in front of our eyes, all at a time where most people are not noticing it because of the regulatory and macro environment. 🤷
Now, before we get too hyped up on adoption, it’s important to remember that this tech is still not ready for mass adoption.
If Facebook or YouTube flipped a switch and onboarded their billions of users onchain tomorrow, everything would break.
We’re simply not ready. Not only in terms of scalability (aka the ability to support billions of active users) but also in terms of UX, which can be very clunky at times, as we all are aware.
We’ve been shipping products, but there’s still some work to do. That said, we’re seeing signs of some serious improvements across the scalability of blockchains, particularly around the Ethereum layer 2 ecosystem.
So let’s talk about that…
5. Blockchain Technology is Growing Up
Layer 2 scaling solutions offer 50x cheaper fees than Ethereum’s Layer 1. And we’re noticing that across the board for many L2s.
However, paying 3 cents for a transaction is still a lot. Imagine that for every action taken in web3, you need to pay 3 cents (and approve transactions), when in web2, you can do it for free and with 0 friction.
This needs to change! In my opinion, the gas fees will be covered by the applications themselves, rather than the users (in most cases). You can think of it like a business expense similar to paying for cloud services or hosting. But for applications to be able to cover the gas, it will need to be lowered to fractions of a penny.
Once that happens, we can hide all transactions that are required from the user and provide a smooth UX.
The good thing is that we have more upgrades to come throughout this year, bringing L2 transaction fees significantly lower, even from current levels.
Just last week for example, Optimism upgraded their network and reduced its fees by an additional 33%.
We should see an additional 10x decrease on top of all this with EIP 4844 coming to Ethereum in Q4 of this year.
What’s even more exciting is to see the adoption and growth of ZK rollups, the most promising layer 2 technology in web3 in terms of scalability, but also privacy and UX.
Out of the top 11 Layer 2s on Ethereum, 8 of them are using ZK technology (ZK rollup & Validum).
Polygon also announced an upgrade of their protocol with plans to use ZK tech extensively.
Reply to yes to this email if you need a breakdown on ZK rollups and EIP-4844. If enough of you respond, we’ll do a couple of newsletters explaining those technologies in simple terms.
But, coming back, It’s also interesting to see that 4 Layer 2s on Ethereum now have a higher TVL than Solana, who is perceived to be the biggest competitor to Ethereum.
It’s becoming increasingly clear which scalability technologies will lead this industry to the masses, and the good news is, they’re beginning to break out!
Raul also had this prediction at the beginning of the year: A layer 1 blockchain will pivot to become a Layer 2 on Ethereum, giving up on securing its own network.
Wrapping Up
Adoption is coming my friends and it’s happening at a time where the technology appears to finally be maturing and ready to handle the next 10s to 100s of millions who migrate onchain in the next cycle.
To be clear, we’re still not ready for full mainstream adoption (billions of users). In this coming cycle things will still break and chains will get congested again.
So we might need to wait a few more cycles for your grandmother to join us onchain.
But that’s okay. These are the tests we need in order to fix the kinks and improve the technology once again.
Each cycle brings new adoption and that adoption brings new problems, which is exactly what bear markets are for (building to fix those problems!)
The current setup in terms of adoption and new use cases, combined with the technology improvements, in tandem with the improving macro environment for risk assets (more on this 2 weeks from now) is creating what I see as a perfect storm.
It looks and feels similar to early 2020 when liquidity was pumped into the markets at the same time as DeFi, and then NFTs were gaining momentum onchain.
The same will happen this time around. Once people join the space, we’ll see narratives and hype cycles left, right, and center. That’s when new people will join to pursue ‘generational wealth’, and that’s when we’ll discover new problems that need to be solved.
But this is all natural and the best thing about all of this is that you’re here! You’re early and ready to capitalize on the opportunity.
I’m excited for the upcoming couple of years. I’m super bullish on this space. And I’m most bullish on Web3 Academy, whose mission will be to keep you on the right track, away from hype cycles and fads, to ensure you too can capitalize on this opportunity.
Thanks for reading today’s report, friends! If you enjoyed it, please leave a like and leave a comment with any question that’s on your mind. I’ll be sure to answer.
See you next Thursday with another report and around Discord. ✌️
ABOUT THE AUTHOR
Kyle Reidhead
Founder of Web3 Academy and Impact3
Find him on Twitter
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Disclaimer: This article is for informational purposes only and not financial advice. Conduct your own research and consult a financial advisor before making investment decisions or taking any action based on the content.
