Author: Arthur Hayes
Original compilation: Wu said blockchain
Original compilation: Wu said blockchainoriginal。
This article has been greatly deleted and compiled, please read the full text
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Assets with solid fundamentals can become very cheap during a market reckoning, and we need to distinguish between undervalued and perishable assets. The key determining factor is always cash flow, and now is the time to reassess the situation for DeFi projects as well as other dApps.
These undervalued projects have the following characteristics: 1. They are down 75% to 99% from their all-time highs in late 2021; 2. They have actual users who spend real money to access their services; 3. They are The first project to define how to provide key DeFi services.
Borrowing short-term funds to invest long-term has been at the root of nearly every banking-led financial crisis. Before the global financial crisis of 2008, Goldman Sachs, Morgan Stanley, Merrill Lynch, Bear Stearns, and Lehman Brothers were all real investment banks. They don't take retail deposits, which means they're freer to engage in riskier, more lucrative business.
By September 2008, every investment bank that had borrowed in the short-term debt market but lent long-term had either been bailed out by the government, bought out by commercial banks, or failed.
The cryptocurrency institution in 2022 is characterized by companies borrowing short-term funds from retail holders at high interest rates and locking them in DeFi earnings for a long time. When customers demand their money back, the maturity mismatch destroys the business models of these companies. There is nothing special about this business model. As this group of firms is forced to spit out any assets not locked in some long-term yield strategy, there will be more indiscriminate sales of all liquid assets on their lending books in the future, which may be returned to them by these lending firms of retail savers.
Earlier I laid out why I think the market bottomed shortly after the TerraUSD-led crypto market crash, and while I believe a bottom has been reached, that doesn't mean the market won't retest these levels anytime soon as the financial world Top brass wields the sword of rate hikes to cool rampant inflation.
Q2 has been disastrous for many crypto asset managers and I can only imagine that many funds are dealing with a flood of redemption requests as the quarter draws to a close. Compounding the problem is that, unlike many alternative assets, cryptocurrencies trade 24/7, meaning investors can watch their money evaporate in real time at any time, and there is no reason for fund managers to delay exiting any positions that still have value.
The weekend after TerraUSD imploded, I turned on my screen and was shocked to find that many of what I consider to be the best DeFi projects are down 50% from a few days ago. Many DeFi funds had such exposure to UST (by earning 20% on Anchor) and LUNA that they had to sell everything on their books.
By June 30 (the end of the second quarter), the Federal Reserve will implement a 75 basis point rate hike and start shrinking its balance sheet, and crypto funds must raise fiat currency to meet redemption requirements by continuing to sell any liquid crypto assets. June 30th to July 5th will be a wild drop, and my previous predictions of $25,000 to $27,000 for Bitcoin and $1,700 to $1,800 for Ethereum have been completely broken. How far will it fall? I'm sure we'll find out this fateful weekend.
The rest of this article examines why I have confidence in the small subset of protocols that actually have real use cases and users are willing to pay real money for DeFi financial services.
During the DeFi summer of 2020, there were some hot projects emerging in their respective verticals. As of today, these projects actually have users and strong protocol revenue. Unfortunately, financial services can easily fall into natural monopolies. In most of the major DeFi verticals, there are only three to five that are regularly used by real users and generate real revenue. Therefore, as the bear market continues, the challenger’s protocol value could quickly trend towards zero.
Underlying this analysis is a key assumption. Since every project analyzed is built on Ethereum, I assume that the number of Ethereum wallets will continue to grow exponentially over time. Therefore, I expect the Total Addressable Market where these DeFi services can be used will continue to grow. This leads me to believe that DeFi is not going to die, and that I can apply the mean reversion thought process to guide me in determining which projects look more attractive relative to their past performance.
Uniswap is the DEX with the largest daily trading volume. The design of the protocol is the most beautiful decentralized financial technology ever created. I believe DEX is the future of non-professional trading firm trading. I say this because the growth of centralized exchanges (CEXs) tends towards a market dominated by a handful of large high frequency trading (HFT) firms. Due to the huge volume of transactions, these companies determine the policies of the CEX. Over time, Crypto CEXs will increasingly resemble their TradFi counterparts. The market is no longer a race to discover prices based on the differing perspectives of profit-seeking human traders, but a race for supremacy in spending on technological infrastructure.
For the first time ever, retail traders can at least choose the type of platform they choose to trade on. CEXs will adopt policies that favor HFT firms at the expense of retail traders, and I predict DEXs will cater to policies that better attract retail traders due to their community ownership models backed by governance tokens and DAOs.
Curve - While this is a dominant platform, it is focused on stablecoin trading, I am more bullish on trading between altcoins. Plus, even at such a depressed price, Curve trades at 108 times earnings -- not cheap.
PancakeSwap - There is nothing wrong with Binance Smart Chain per se, but it is not decentralized. The current P/E ratio is hovering around 25 times.
Compared with the CEX giants, the average daily trading volume of derivatives DEX is quite low. In the derivative DEX space, dYdX dominates. I have a very pure objection to the dYdX model, which is that dYdX is not really a DEX. It is a centralized order book hosted on dYdX machines, and only settled trades are published on-chain to ensure finality. But more importantly, in terms of its price-to-earnings ratio, it is significantly higher than the protocol I am most impressed with, GMX. It is well known that derivatives trading volume should be several orders of magnitude higher than spot trading volume. From what I've seen so far, GMX is the best.
Shouldn't the world's decentralized computers help host a decentralized internet? This is the basic spirit of the Ethereum Name Service (ENS). The number of ENS created to date has grown exponentially. One reason more people with ETH addresses are deciding to create their own ".eth" domains is that this domain could become their identity. Sending money to "arthur.eth" is much easier than sending money to "0x...". Various online services, such as Twitter, may also use a ".eth" domain as your online identity to enable tipping and other payments. The Web2 counterpart of ENS is Verisign. Verisign is one of the major DNS providers for classic websites. It's been around since the dot.com bubble of 2000 and trades at a pretty astronomical P/E. In the 20 years after the initial frenzy, Internet penetration was much higher, as was the number of domain names.
Art consumes a lot of resources, creates many billionaires, and provides culture to the masses. Contrary to popular belief, NFTs — non-fungible tokens — are not art. They are really an object/data structure backing a public blockchain that allows for the digitization of culture. While popular culture synonymously uses NFTs with digital art, NFTs are simply objects that allow culture to be digitized, scarce, and traded.
The unfortunate (but also fortunate) fact that NFTs are ridiculed by mainstream financial institutions because people trade JPEG files that are easily copied speaks to a fundamental misunderstanding of what NFTs are and the activities they support. The first popular expression of using this new technology, considered vulgar by some, was the ugly pixelated profile picture generated algorithmically and traded as discrete digital objects. Where the NFT asset class will ultimately go in 5 or 10 years is completely unknown, and looks nothing like it does today.
Billions of dollars worth of these digital objects have been transferred back and forth between digital wallets since the summer of 2021, when OpenSea’s transaction volume first exploded. OpenSea is a centralized company that operates an exchange that allows non-custodial trading of NFTs. In exchange for nurturing the market, OpenSea charges a healthy commission.
Due to its first-mover advantage, OpenSea accounts for between 80% and 90% of the entire transaction volume of NFTs. It's a great business, but it's private. The technology supporting NFT trading methods does not require a centralized operator like OpenSea. LooksRare emerged and provided a community-owned decentralized marketplace for NFT trading. Transaction fees and royalties go to LOOKS DAO. LOOKS governance token holders can then vote on how best to distribute them. Therefore, holders of LOOKS can directly participate in and benefit from the explosive growth of cultural digitization, while users of OpenSea are only clients of a centralized entity.
Of all the tokens analyzed in this article, I am most interested in LOOKS. LOOKS was launched in January 2022 at a price of $2.6, and is now hovering around $0.17, a drop of about 95%; ATH is $6.87, which means it has fallen by 98% from its peak. While the price performance so far has been disastrous, the fundamentals of LOOKS are strong! It is the second largest NFT trading platform by trading volume. Its price-to-earnings ratio is very cheap.
The fact that trading volumes and prices have fallen has not dampened the enthusiasm of those in the cultural sales business for the impact of NFTs on human society. Anyone directly involved in or close to the arts is desperately trying to figure out what NFT technology means for their practice or business model. NFTs are not going to die, and their disruption to cultural economics will be profound.
Meanwhile, the media focuses on foolish individuals and businesses thinking they can get rich quick by flipping JPEG files. If this dampens investor enthusiasm for the exchange as the second-largest venue for trading digital culture, keep spraying the crap. I'm going to use my ape diamond paws there to buy cheap LOOKS and hold them for a long time. When the market narrative shifts downward, these top platforms will become the pinnacle of cultural trading methods, and the price-earnings multiple expansion will be brilliant.
I am sure that many readers can point to areas for improvement in the business model or technology. But in terms of natural monopoly, the global NFT market game is basically over. It will be very difficult to replace OpenSea or LooksRare. Liquidity begets liquidity. If the community owns trading platforms for most of the assets they deem valuable, why would the community have any reason to try new competitors?
As anyone who has actually tried to sell NFTs knows, there is currently a severe illiquidity. So it's better to sell on the first or second platform than on some new platform claiming to have lower fees or other shiny tech gizmos. Likewise, liquidity begets liquidity.
I have been wrong more times than I have been right when predicting the market. This is the difference between writing a thesis and investing. My bottom ranges of $25,000 to $27,000 for Bitcoin and $1,700 to $1,800 for Ethereum proved overly optimistic.
As I've been writing this for the past two weeks, I'm a little less convinced that my ETH will hold up in the face of my theory that hedge funds will continue to liquidate assets. I first bought an Ether put option expiring in September 2022 with a strike price of $1,500. For completeness, I also bought some Bitcoin put options with the same expiration and a strike price of $25,000.
US CPI rose 8.6% year-on-year in May, hitting a 40-year high. Politics dictates that the Fed must raise rates bigger and longer. I suspect that the perceived political pressure on the Fed to fight inflation will not abate until after the US mid-term elections in November. At that point, it becomes a fight for the 2024 presidential election, and all the political energy will be focused on which narratives are good for voters in 2024.
The number one concern of American voters is their personal finances. Better markets, including jobs and finance, would win votes. The easiest way to achieve both goals is to print money. While the long-term effects are detrimental, this is a question for the next administration. So watch for the speed of the Biden administration's shift in its messaging. From "The Fed must deal with inflation" to "The Fed must ease financial conditions so that American jobs can be created".
Crypto Valuation = Technology + Fiat Liquidity
The fiat liquidity situation will be brutal over the next 6-12 months.
A reward for brave investors that will ease the market-to-market pain experienced between now and the start of the next bull cycle. These tokens could drop another 50% or more, but I'd be even more excited to have a top-notch DEX, an exchange that enables human cultural tradability, and one of the backbones of the decentralized internet. As the market gets lower, as long as I believe usage of these services will continue and grow in the future, my average entry price will get lower and my effective yield (protocol revenue/fully diluted market cap) will be Falling more and more.
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