Original title: How Crazy is the Market and Whats Next
Original author: Ignas
Original compilation: Luccy, BlockBeats
Editors note: The Ethereum Dencun upgrade is approaching, and the Bitcoin halving is coming soon. The sentiment of the encryption market is also rising higher and higher as Bitcoin breaks through 60,000 US dollars. Against this background, crypto researcher Ignas writes an article that provides an in-depth analysis and observation of the current dynamics of the cryptocurrency market, and proposes future prospects for major blockchain projects such as Ethereum, Bitcoin, and Solana.
The article explores the technological upgrades, market performance, and potential risks of different blockchain projects, and expresses unique insights into the key trends and development directions in the cryptocurrency field. BlockBeats compiles the original text as follows:
Digital currencies are rising and airdrops are pouring in, but the joy of the market’s top is yet to come.
So, where are we now and what will happen in the next few months?
I believe there are some crypto-native catalysts to continue the bullish trend. But first, I want to share this week’s airdrop farm.
This week’s airdrop farm
Ethena: If you hold stablecoins, there is finally a farm that suits you. Ethenas USDe generates an annualized return of 27% through a triangular arbitrage strategy. You can earn points by converting to USDe and providing LP to the Curve pool. Ill share more thoughts about Ethena in this blog.
FlashTrade: Flash trade allows trading gold, silver, forex and cryptocurrencies. A low-development protocol on Solana. Their unique feature is a dynamic NFT based on the evolution of transaction history, for which there are currently no tokens.
Nostra: Lending and trading on Starknet. Im bullish on it because the Cairo development language limits the deployment of Aave and other major lending protocols on Starknet. This will make Nostra (or zkLend) the main liquidity hub on Starknet.
Merlin Chain: The new and popular BTC Layer 2 solution powered by OKx. Stake BTC, ETH, stablecoins or Bitcoin-native assets to earn points through farming. 20% of the total MERL supply will be distributed via airdrop.
This is my third cryptocurrency cycle, and every cycle the market seems to get crazier. Numbers no longer make sense as irrational panic buying attracts retail players who dont understand market cap or across the board dilute valuations.
I wrote an article in November 2023 aboutHow to navigate a crazy bull marketexperience sharing.
Were not there yet, and the meme proxies at the top of the market havent emerged yet: the Coinbase app hasnt topped the Apple Store, theres been no cryptocurrency advertising during the Super Bowl, retail FOMO hasnt happened yet.
How serious is inflation in the market right now?
In my personal experience, the second most importantarticleIt focuses on how we can get more tokens at a higher valuation by creating new stories.
In 2017-18, the entire cryptocurrency market was in a bubble that was exaggerated by ICO tokens. These tokens lack technological innovation and are supported only by white papers and compelling stories.
The 2020-21 bull market is more complicated.
In the DeFi and CeFi fields, leverage accumulates rapidly. Leverage on Grayscale’s “Widowmaker” trades accumulated rapidly, while centralized lending companies lent money to each other with little knowledge of where the funds were actually going.
DeFi has been bloated by innovations in liquidity mining (rewarding you with governance tokens for providing liquidity) and lending protocols like Aave and Maker, which enable on-chain leverage.
We also invented new token models like Olympus OHM (3, 3) Ponzi scheme and SNX (for minting sUSD) to leverage their ecosystem.
The problem is that with every bull market we make it easier to print coins. Before ERC 20, printing tokens was complicated. Bitcoin forks, such as Bitcoin Cash, SV, and Gold, require expensive POW machines.
So, where are we now in the 2024-25 bull market bubble?
Yes, there are always bubbles forming in cryptocurrencies.
Bitcoin funding rates across all CEXs have reached all-time highs, which is worrying. We have positive funding rates, which is bullish because traders are betting that the market will rise. As long as the market doesnt drop significantly and the longs arent liquidated.
On-chain DeFi data is healthier and more bullish as leverage appears to be lower (but growing).
Aave’s TVL as the most liquid lending market is quietly rising. Typically, borrowers deposit ETH/BTC and other assets to lend out stablecoins, which can be used to purchase more ETH/BTC or use the stablecoins for other tax-deductible purposes.
DeFi’s TVL has reached $75 billion, which is still a 270% gap compared to the all-time high of $175 billion on November 11, 2022. However, in the DeFi space, lending rates are rising across the board. Ipors index shows that annual interest rates on borrowing can be as high as 10%.
Another important factor to watch is on-chain liquidation. Defillama has a dashboard, but it hasnt been updated in weeks.
Where does our current inflation mainly occur?
There are several focuses on market inflation and leverage.
The first inflation here is the issuance of new tokens. I can create 1 billion IGNAS tokens and sell 1 to you for $1, then the total market value of IGNAS will reach $1 billion.
See the thread below for more information on this.
The problem here is convincing you to buy my token. To do this, I will create a new Research 4 YouBaby protocol, launch points, and sell you a very beautiful story.
You will deposit ETH/SOL/stablecoins into my protocol to earn points because you want to receive airdrops, which you think are free money. Other speculators are doing the same. The higher the TVL, the more confident the market is that the protocol is the future of finance.
This is great news for my agreement because I just built a loyal community and I collect fees from all the TVL. Research 4 The YouBaby protocol found product market fit (PMF).
But I’m not the only smart protocol developer because everyone is handing out points and it’s a feast.
Of course, points are inflating at a crazy rate, but points are not tokens. My goal is to wait for the hype to peak and then launch my token. Jito timed the issuance of JTO very well, Jupiter did even better.
However, both coins are dumping.
The initial hype resulted in very high across-the-board inflated valuations (but low float rates) as people who missed out on the airdrop ended up buying from the secondary market. Continued unlocking will have a significant impact on price.
You probably bought JTO or JUP because there were some popular coins available for purchase. But in 2021-22, all coins are boring and no one wants to buy them.
But for every hot airdrop, someone needs to eat up the “this protocol is the future of finance” story and buy the tokens. If you bought JTO, JUP and are currently losing money, you may reconsider buying new popular tokens in the future.
Thankfully, rising BTC and ETH prices have provided momentum to the market as speculators can sell their BTC/ETH to buy crapcoins. But once BTC and ETH start falling, you can imagine what will happen.
A bit off topic, but protocols that issue tokens are becoming complacent.
They believe that the longer they hold points, the more users and TVL they will gain. But the more tokens are issued in the market, the less cash people have to buy their crapcoins, and timing the market is crucial.
So, we are issuing tokens.
You need to track the price movements of new tokens to determine the market demand for them. Currently, the market is sending mixed signals as JUP and JTO prices fell, but DYM, TIA and PYTH performed well.
The narrative of TIA, PYTH and DYM is stronger than that of JTO and JUP, because by holding TIA, PYTH and DYM, you believe that you will receive more junk coin airdrops. This may work for a time, but at some point airdrops will become less and less common, to the point where no one cares about getting a few dollars in airdrops, and people will dump TIA, PYTH, and DYM if they offer no other value proposition.
Simply put, with each new hot coin, the amount of money invested and user attention is diluted. At some point, we will reach a stage where the amount of money entering the market will not be enough to sustain the number of tokens being issued in the market, and at that point we will face a severe crash.
While we are not there yet, we are issuing new tokens at a rapid pace. Here are the two main categories that facilitate token issuance:
RaaS (Rollup as a service) allows to easily launch a chain or protocol in minutes. Dymension, AltLayer, Caldera, even Arbitrum L3 chains, etc. Dymension alone should have hundreds of RollAps. Think about who will buy these tokens?
Restaking is a multi-level token issuance machine:
AVS: dApps that use re-staking ETH to enhance their utility are called AVS. For example, AltLayer is also an AVS protocol. Several AVS will be launched soon, and more will be launched after the Eigenlayer mainnet is launched.
LRT Protocol: There will be one token per liquidity re-staking protocol.
And then theres a second type of inflation and leverage in the system, which comes from token derivatives.
LRT (Liquidity Redemption Token)
LRT is the most obvious one, and I think it may pose some systemic risks.
If you don’t know what LRT is yet, please check out my previousPost。
Like KelpDAO’s rsETH, LRT ETH is a complex ETH derivative asset that is affected by:
Various ETH LSTs (such as ETHx, stETH, etc.). If a vulnerability occurs in a certain LST, rsETH will also be affected.
Multiple AVS protocols. ETH supporting rsETH will eventually be used to secure the AVS protocol. You may lose your ETH in a penalty event.
Eigenlayer itself. Hopefully Eigenlayer hasnt been hacked.
Now, we see LRT ETH being integrated into the DeFi 1.0 ecosystem. I believe that soon we will see Aave and multiple stablecoin protocols accepting LRT as they offer higher yields.
Re-staking + Liquidity Re-staking has entered the top ten TVLs, while Eigenlayer is not even fully online yet. May God bless us all.
But I dont think it poses any systemic risk at the moment. For more information about the risks, please read thisResearch。
Ethena - the new hot stablecoin
Second, there’s a new non-Ponzi scheme protocol in town: an old favorite, the stablecoin.
Ethena is backed by half of the crypto industry insiders, and you’ll probably see a lot of posts about it.
In fact, it is built on a simple yet powerful concept: deposit stETH to mint USDe stablecoins at a 1:1 ratio. Maintain a hedging position by shorting ETH on various DEX and CEX platforms to maintain the price anchor.
This USDe will generate stETH returns (approximately 4%) and provide different annualized returns based on the exchanges forward funding rate. Since the bias is to hold long positions, funding rates remain positive and longs pay shorts. If youre not sure how funding rates work, check out the post below which has a simple explanation.
The shorting part is tricky because some funds have to be deposited into CEXes, but there are also many decentralized perpetual futures exchanges.
What happens if one of the exchanges goes bankrupt? What happens if withdrawals are closed? What happens if the funding rate becomes negative? These are all problem points on X.
Ethena is currently relatively small, with 250 million USDe issued. However, with its cleverly designed points (called shards), a referral program that offers 10% rewards for referring others and using your referrals, and support from high-profile investors like Binance, it will Strengthen and develop.
It may even become too big to fail.
Currently, Ethena’s dominance of open interest on selected exchanges stands at 3.57%, but what happens when their dominance grows? The impact of this is significant, but its impact on markets will take time to unfold.
Regardless, this is a direct increase in market leverage through open interest, and increased reliance on stETH.
What problems might arise? I don’t know either, but my policy is to start the farm operation early. Plus, if you’re staying out of this market with stablecoins, this is a hot new opportunity for you. They will run the campaign for three months, or until the USDe supply reaches $1 billion.
Note that you cannot mint USDe yourself with stETH (as this also requires KYC), so you need to buy USDe and deposit it into one of the Curve pools to get 20x the points.
Rising risks, circular farms?
Finally, there may also be some risk of over-leveraging, whereby airdrop farmers rotate their positions on the lending protocol to maximize points. You can deposit SOL on MarginFi to borrow USDT, then exchange USDT for more SOL on Jupiter, and then deposit SOL into Kamino to borrow more USDT.
What happens next? For the three major blockchains, there are at least a few important drivers.
Ethereum
There are at least 4 positive factors for Ethereum.
First, with the arrival of Bitcoin ETF, market attention began to shift to Ethereum ETF.
Secondly, Ethereum will undergo an important Dencun upgrade in March or April, including 9 EIPs, of which EIP-4844 (proto-dansharding) is the most important.
Proto-danksharding aims to reduce L2 transaction fees and reduce data availability costs by introducing a new segmentation space called blobs. It will reduce transaction fees on L2 by 10x, which may increase network activity on L2 and potentially boost the price of L2 tokens.
Not only that. Soon after the upgrade (maybe not that soon), Uniswap v4 will be launched. V4 requires EIP-1153: Temporary Storage, which is crucial for Uniswap v4 to reduce network costs.
Uniswap v4 introduced “hooks,” which are programmable contracts that operate at different stages of the liquidity pool’s life cycle. It transforms Uniswap from a protocol into a platform that developers can build on.
For more information about Uniswap v4 and other exciting releases, please refer to my previous blogarticle.
The launch of V4 is likely to drive UNI price (in the short term, as the token is difficult to hold long-term).
Third, Eigenlayer will be launched on the mainnet in the first half of 2024.
The APY of ETH will rise, attracting more people to pay attention to Eth. Its clear that as riskier assets start to fall out of favor and as crazy players turn their attention back to ETH, I believe that bringing more tokens to the market will further increase the bullish sentiment towards ETH, as these tokens Profits earned from the coins will eventually flow into ETH and BTC.
Thanks to LRT, we can get Ethereum staking income (about 5%) + Eigenlayer re-staking rewards (about 10%) + LRT protocol token issuance (about 10% or more). When Eigenlayer is fully online, we can expect around 25% APY on ETH. On Pendle, you can already get 40% APY, refer to Re-staking continues to be hot, LRT war panorama and participation guide》。
Finally, the amount of ETH staked is increasing. This is a key metric as ETH stakers demonstrate confidence in long-term ETH price growth.
I believe tracking the dynamics of withdrawals versus deposits is a useful indicator if you want to time market tops.
Bitcoin Halving
Having is both a fun meme and a serious business.
The meme aspect is evident as Bitcoin’s value rises around the halving event. However, it also has a serious side that encompasses multiple aspects.
First, the block reward will be reduced from 6.25 Bitcoins to 3.125 Bitcoins, reducing the “selling” capacity by approximately $225 million per month. Second, the halving will elevate the narrative of the Bitcoin ecosystem, and its effects are already being felt.
Stack’s STX is up 75% in a week as the team prepares for the Nakamoto upgrade. This will reduce the block time from an unusable 10 minutes to 5 seconds. This is a major upgrade that makes Stacks finally fun. I expect there will be more dApps and airdrops in the Stacks ecosystem.
Stacks is not the only (but probably the primary) Bitcoin L2 solution. The Bitcoin L2 narrative is becoming more and more interesting, especially with multiple L2s, especially Merlin, scheduled to launch around the halving event.
But these L2s are complicated, so please do your own research.
Finally, at halving block 840,000, the founders of Ordinals Theory will launch the Runes protocol. It will usher in a new era of currency trading that even Solana players will envy.
Overall, the future of Bitcoin looks promising, with institutional investment flowing into Bitcoin ETFs and the high level of enthusiasm generated by BTCFi.
Solana
I have to admit, Solana disappointed me and actually made me feel pretty sad.
It has been producing blocks without interruption for almost a year. Bullish sentiment around Solana has declined as a result, but Solana Firedancer has a significant catalyst that could restore market confidence. Solana Firedancer aims to make Solana faster and more secure while improving its decentralization. This is a new version of the software used by validators (nodes that process transactions) on the Solana network.
This is important because it helps Solana process more transactions at once, with the goal of reaching 1 million transactions per second. This may make Solana faster than many traditional payment systems such as Visa.
Firedancer is also focused on making networks more secure by changing how parts of the network interact, which may help prevent hackers and make it more stable. Firedancer is developed by Jump Crypto and is scheduled to be fully launched in the summer of 2024.
Overall, Merts strategy seems to work here: Ethereum will likely steal the limelight from Solana until Firedancer comes online.
But this is not a 100% guarantee. It is not impossible if Solana continues to malfunction even after the Firedancer upgrade.
IOS
Android