Round Tripping
as always, thanks for reading and follow me here
tl;dr: Jackson Hole inflation selloff, the fat app thesis, few more liquidations then up only, cbETH, RUNE’s native DEX, MKR’s RWA’s are live, & ETH merge overhyped?
BTC dominance 38% | ETH dominance 18% | DeFi TVL $59.4B |
Total Crypto Market Cap $1.02T | Stablecoin Supply $153B |
Market Overview
An asset class with ambitions to permisionlessly democratize access to finance and empower people across the globe worth $185B two and a half years ago exploding to greater than $3T will garner the imagination and attention of institutions worldwide. Capital flows, arbitraging inefficiencies, and general risk appetite correlations follow attention and result in anons (and institutions) across the world trading crypto based on the macro correlations surrounding the interpretation of the words spoken by a 69 year old man in Jackson Hole, Wyoming.
JPow’s remarks were short and deliberate as he reiterated the FED’s commitment to fighting inflation by saying the FED will continue, “maintaining restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy…sustained period of below-trend growth and softness in the labor market as these are the unfortunate costs of reducing inflation.”
Speaking of unfortunate, I’m writing about one man’s words in a crypto newsletter where I would never larp as a macroeconomic expert. With that being said, and no matter how unfortunate, macro correlations, their impacts, and the U.S. dollar index (DXY) strength have outsized influence on the past, current, and future of crypto markets. We play the cards we’re dealt. Last week I wrote, “The merge and bid for ETH will have a difficult competition with macro uncertainty that should gain some clarity next week as Powell speaks at Jackson Hole on August 26th.”
Whew boy did clarity come in the worst possible way as the above screenshot (and market reaction) shows. Another Friday, another round of liquidations following the $562M in long liquidations that contributed to the market selloff last week. The excitement and narrative formation around ETH’s upcoming merge (~September 15th) is continually overshadowed by a lack of liquidity and flows entering the crypto ecosystem. Flows to one of the riskiest, highest beta asset classes available are hard to justify in the current global macro environment and specifically on day’s like Friday that saw the collective valuation of the U.S. stock market fall $1.25T, greater than the entire total crypto market cap.
As for what’s next, it’s difficult to see sustained flows entering the crypto ecosystem with extreme macro uncertainty. With that being said, the flows that do enter the space should be largely concentrated around ETH, the coming Cosmos ecosystem upgrades, and L2s, specifically with the coming rollout of Arbitrum Nitro and the resumption of Arbitrum Odyssey. Reiterating what I wrote last week, any semblance of profits should be taken with haste as we continue to monitor our macro overlords and wait for the DXY to display some weakness as it’s currently a one-way flows blackhole. Ideally, a successful merge entices risk-averse sidelined capital to reenter the ecosystem but the weeks leading up to, and after the merge, will remain turbulent.
Fat Apps & Protocols
As we’re all aware, protocols, namely L1s, have largely accrued and retained the most value across cycles in crypto (returns of BTC, ETH, SOL, MATIC etc.) In 2016, Joel Monegro wrote “Fat Protocols” where he conclude that, “value concentrates at the shared protocol layer and only a fraction of that value is distributed along at the applications layer. It’s a stack with ‘fat’ protocols and ‘thin’ applications.”
Recently, the “real-yield” narrative has taken off across crypto ecosystem as protocols iterate to find product market fit and accumulate users, fees, and longevity. Screenshots of cryptofees.info have flooded TLs in recent weeks admiring the cash flows of protocols such as GMX, SNX, UNI, etc. while proclaiming the new era of the “Fat App Thesis”. Owning and capturing a user’s value is the pinnacle of protocol or company success across both web2 (data) and web3 (fees).
Providing further evidence to the Fat App Thesis, is the flash in the pan success of STEPN and AXIE. While yield was abundant and “free” money was flowing, users were flocking by the hundreds of thousands to earn through breeding Axie’s and exercising. The short-term success of both Axie and STEPN provided useful examples aiding the Fat App Thesis as both of the protocols developed in-app DEXs and marketplaces to increase their revenue through fee capture. Why allow UNI or ORCA to capture swaps from AXIE/SLP/GMT/GST to USDT/USDC/ETH/SOL when you can build your own DEX?
As we move forward and eventually progress to another crypto cycle, applications (that aren’t competing as any form of money) that capitalize on capturing the user will likely appreciate the most. The Fat App Thesis and appchain capture will be one of the most important things to monitor moving forward. Specifically interesting to me, is the coming appchain/L2 value capture as tokens, such as Optimism’s proposal, transition their token to the primary beneficiary of each developing L2/appchain ecosystem. The implications and second order effects of applications, such as ETH L2s and the progression of the Cosmos ecosystem to integrate value accrual to ATOM will be worth watching develop in the coming months.
funding:
Animoca Brands Japan raises $45M @ $500M pre-money valuation
Orange DAO, Y Combinator alumni crypto venture fund, raises $80M
Ready Player Me, metaverse avatar platform, raises $56M series B
Symbolic Capital launches with $50M fund for early-stage crypto investments
Thirdweb, web3 developer support & infrastructure, raises $24M series A
Spectral, on-chain credit risk assessment platform, raises $23M
Mural, DAO treasury management, raises $5.6M
Comm, crypto native messaging service (“web3 Discord”), raises $5M seed
news:
SEC once again delays decision on VanEck BTC ETF
Bitcoin Depot, crypto ATM company, to go public in SPAC with $885M valuation
Crypto media company The Block to transition parts of consumer paywall exclusively to token model in Q4 through partnership with Access Protocol
Nike’s NFT revenue reaches $185M+; $93.1M primary sales, $92.2M secondary
Dune Analytics dashboards tracking important metrics regarding the merge
ETH foundation confirms Bellatrix upgrade on September 6th enabling merge to commence when TTD threshold reached, projected on September 15th
Tether (USDT) has yet to freeze OFAC sanctioned Tornado Cash related wallets saying, “so far, OFAC has not indicated that a stablecoin issuer is expected to freeze secondary market addresses that are published on OFAC’s SDN List or that are operated by persons & entities that have been sanctioned by OFAC.”
tokens:
Coinbase announces liquid staking token cbETH ahead of merge
THORSwap (RUNE) launches full-featured ETH DEX aggregator allowing transfer of native BTC to any Uniswap supported ERC-20 and vice versa
MakerDAO’s vault and real world asset integration is live — “Huntingdon Valley Bank and Maker pioneer the first commercial loan participation between a U.S. Regulated Financial Institution and a decentralized digital currency”
dYdX Chain (DYDX), standalone Cosmos SDK chain, 55% complete
Ribbon Finance (RBN) announces Ribbon Earn — USDC principal protected yield strategies using combination of lending and options
Compound (COMP) officially launches Compound III
Synthetix (SYN) to end token inflation, cap supply at 300M through SIP-276
Uniswap’s (UNI) proposal to create the Uniswap Foundation passes
LlamaPay launches streamlined automated withdrawals and address redirects
Dogechain launches native token (DC)
Defi Kingdoms (DFK) leaving Harmony for Klyton (KLAY) blockchain
reading:
“Is the Merge Overhyped?” — Jordi Alexander
“Fees are falling off a cliff for structural reasons, and locking ETH into staking derivatives will do little to help the situation. Checks have been written that won’t be able to be cashed — from predictions of deflation to internet bonds with attractive yields…ultimately, the focus should instead go towards better-designed apps, novel use-cases for blockspace, and friendlier user experiences on-chain.”
The merge is undoubtedly one of the most important events in the history of crypto, but Jordi presents a data-driven, compelling argument against the merge’s short to mid-term impact. Mainly, historical projections for staked ETH yield and the impacts of EIP-1559 are misrepresented as users, transactions, efficiency improvements in gas costs and L2s gaining adoption significantly limit future yield and ETH’s potential to become deflationary. While I’m bullish ETH mid-to-long term (and Jordi is as well), the narrative hopium has been in full swing over the past few months, and opposing views should always be heard and examined. Few people present the other side of an argument as well as Jordi does, and I’d highly recommend reading his thoughts.
around the ecosystem:
all things Arbitrum ecosystem ahead of Nitro, Odyssey, & token from blocmates
0xHamz with a great thread on frameworks for currencies and the Euro
Eric Wall’s “The Case for Social Slashing” on ETH’s response ongoing pressure
Jason Kan on “The Future of Web3 Social Media”
tweets:
Mate, your newsletters are incredible and they seriously deserve more recognition. Keep it up lad!