Is crypto entering its last market cycle before its mature era begins?
For today's column, David Hoffman makes the case that crypto will always have a Wild West, yet there are signs all around us that the ecosystem is trending toward being more dependable and safer. In other words? Crypto's growing up!
If you look closely, there a handful of signs pointing towards crypto entering its last market cycle, before finally exiting its developmental phase and entering into it’s long-term era of maturity, stability, and growth.
“The next cycle is going to be the last one” is kind of a meme-statement in crypto-land. It’s been stated before, and I don’t intend to make a clear convicted prediction about this. I am simply connecting some dots across the crypto landscape that point towards a new phase of crypto after this bear market is concluded.
Let’s dive in!
On regulation and institutional approval
Crypto is going through its largest regulatory battles ever. Indeed, this has always been inevitable. As an industry based around money and finance, we cannot just waltz into mainstream acceptance without going through the trails of regulatory acceptance. In order for the biggest players to be able to play in Web3, they need assurances that the Nation-State and its monopoly on violence actually allows them to do so.
“Becoming mainstream” means that crypto makes it through these regulatory trials.
Don’t be scared. Crypto wins no matter what. All we have to do is wait until the hazing is over. It can only last so long.
Crypto is an unstoppable force, and the Nation-State is not an immovable object. Gary Gensler will tell us to come in and register. Elizabeth Warren will stamp her feet. The banks will try and choke us.
And Ethereum will produce the next block.
History is ultimately defined by the arc of technology. Every blow that the anti-crypto regulators and legislators throw at us will ultimately be walked back by the power of the free market.
This current phase of crypto shouldn’t be considered as “the nation-state attack on crypto” but instead “the nation-state hazing of a disruptive technology”. Like every freshman in college or every pledge of a fraternity, we just have to make it to the other side.
Ripple just told Gary Gensler to sit down. Blackrock, Fidelity, and all the other big TradFi players have just signaled to the powers-that-be to cool their jets. Major brands, largely unconcerned with financial regulations, continue to explore crypto avenues.
Our court cases will be fought, bills will be drafted, voted on, rejected, and then voted on again. It will be frustrating and painful. But it will one day come to an end. The regulators will eventually sit down. All we have to do is wait. Time is on our side.
Once the regulatory trials are behind us, the cautious curiosity of mainstream interest in crypto will switch to a zealous goldrush, as they release that there is fertile ground out there, and the path to accessing these new frontiers are sufficiently clear and that the risk is acceptable.
Protocol maturity
At the same time that we can start to see the light of the regulatory tunnel, we can also see the endgame for many the protocols that this industry is built upon.
Also a large focus in my takeaways from ETH CC piece, many of the protocols that Web3 needs are evolving into their final form. We’re not there yet, but the endgame is viewable on the horizon.
Soon in Web3, we’ll have more data availability than we’ll know what to do with.
EIP4844 will commoditize access to the worlds most secure blockspace.
Thanks to zk-rollups, transactions will be instantaneous. Shared sequencing blurs the boundaries between chains. All of these technologies are pursing the same outcomes: to make blockchains invisible.
By the time the next bull market rolls around, the costs of Web3 compute will have found their theoretical minimums. High gas costs and slow blocktimes will not be a bottleneck for the adoption of decentralized protocols. The responsibility of innovation will shift to the application devs, who will be charged with making use of the ample supply of compute resources supplied by the protocols devs.
Next bull market will not be constrained by limits on scale. No one will cite “high costs” and “protocol immaturity” as a reason why they did not integrate with Web3 systems. Ethereum’s “rollup-centric roadmap” will be sufficiently expressive and customizable that proprietary chains can be spun up with ease to fit the use-cases needed by any curious player.
This will open up access to the long-tail of crypto use cases. When Web3 are slow and expensive, the only use-cases that are accessible are money, finance, and high-value assets. If things costs tens or hundreds of dollars to do, then the only rational activities that can be supported are things that are worth thousands of dollars or more.
When the costs to engage in Web3 approach sufficiently low numbers, it starts to become rational for platforms to just subsidize their own users. Once users transactions become subsidized by platforms competing for users, then the full scope of crypto use-cases finally becomes open to all.
What can Web3 do, when its effectively free to access?
In 2015, Ethereum laid out an ambitious roadmap for itself. As the years progressed, this roadmap would only increase in ambitiousness, much faster than it would increase in completeness. As it turns out, the aspirations that Ethereum had for itself were far more complex than originally thought.
Some time around 2019, something flipped. A mountain of R&D and a handful of critical egineering breakthroughs turned a new page on Ethereum. “Ethereum 2.0” or “Serentity” (now all just called “Ethereum”) had a clearly-defined roadmap where the only thing left was testing and writing code.
From 2019 to 2023, code was written, and code was shipped. Ethereum went from a monolithic PoW chain, to a modular, expressive PoS chain with networks upon networks spawning from its base.
Promises were made, and promises were kept.
The most amazing thing about this arc of Ethereum is the commitment to the original vision that was set in 2015. While the implementation details changed, and the path itself was uncharted, the original destination for what Ethereum would ultimately become never wavered.
Across its entire history, betting against Ethereum’s trajectory and Ethereum developers has never worked out. With EIP4844 shipping sometime late this year (probably, my estimation), Ethereum will have locked in a perfect track record of commitments.
Keeping promises and sticking to a vision shows the outside world that the things being built are being built with conviction, intent, and purpose. We’re not crazies – we’ve been building towards the same vision for 8 years now. You just didn’t understand it until now.
Before this point, it was possible for the outside world to look in at Ethereum and see a bunch of confused monkeys running around in chaos. But now, one would look back and see a beauty in the chaos, as Ethereum ultimately progressed into the thing that the world needed it to be – a decentralized internet compute layer for value. A network for networks.
ETH
Alongside the blossoming of Ethereum is the story-arc of ETH. Sufficiently a shitcoin in 2015, ETH the asset has made commensurate progress alongside the protocol it runs along. From the highly inflationary and arbitrary 5 ETH per block in 2015, ETH is now an natively yield bearing asset with algorithmic monetary policy. With real yield and no human intervention, it stands in sharp contrast to the monetary policy of the Dollar and the farce that is the Federal Reserve.
Other than MEV burn, which further adds to the monetary strength of ETH, there are no further upgrades to ETH’s monetary policy.
If there’s one thing that big money likes, it’s yield. And ETH’s yield stands head-and-shoulders above the rest. ETH stakers receive yield while ETH itself is simultaneously deflationary. Bond holders get positive nominal yields but negative real yields – “real” being the more important descriptor here! 😆
Compare that to the global understanding that the USD and US Treasuries must decline in value in real terms in order for the worlds financial system to hold itself together, and you have a story for ETH’s future that just writes itself.
The evolution of ETH towards its throne of ultra sound money shows the outside world that there is something uniquely new here in the crypto industry. Through cryptography and networks, we can create financial assets with never-before-seen properties. No, the story arc of crypto assets with strong value propositions does not stop at Bitcoin… we are not settling for “digital gold.” We’re carving new frontiers, and ETH the asset can neatly fit inside preexisting mental models for how assets are valued, while simultaneously being something completely different than all previous assets that have come before it.
The summary of these two sections, Ethereum and ETH maturity, can be summarized by both growing lindy and the successful navigating of uncharted waters. When it comes time for societies attention to turn back towards crypto, they will see a protocol and its asset with a long track record of coherent and directional progress towards a vision that hasn’t wavered since its inception.
The legitimacy that this earns the Ethereum ecosystem will propel it into a cryptoassets that is sufficiently “safe” for people to take career risk on, and start to recommend “looking into it” at high and higher levels.
This starts ETFs, a ball that’s already been rolling.
ETFs are here
The race for the ETF has begun. Like I said in the above regulatory section… all we have to do is wait. The arc of history is defined by technology. Gary can only hold the door closed against crypto ETFs for so long – eventually the power of the free market will get its way.
It appears that time is sooner rather than later. Once Bitcoin blasts open the doors of crypto-asset ETFs, it becomes harder to stop additional assets from finding their way into their own ETFs.
Making some assumptions here, but we’ll get the BTC ETF and the ETH ETF won’t be far behind. If these things pair with the incoming bull market, the pipes of capital between crypto and the outside world will be the largest they’ve ever been. This will pair with the above regulatory conversation. By the end of this incoming cycle, the ticker symbols B-T-C- and E-T-H will be commonplace next to APPL and AMZN, for every major brokerage in the world.
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Bitcoin returns over the years have always been suppressed. If you were insane enough to buy bitcoin in 2010, congrats because the rise to the 2011 was the steeping, sharpest increase in gains that Bitcoin ever had. Every subsequent cycle has taken more time for lower returns.
Obviously it works this way.
One of societies biggest talking points are that crypto-assets are too volatile. Well, every cycle, crypto assets become the least volatile they’ve ever been, while simultaneously the traditional equities and bond markets are the most volatile they’ve been in over 3 decades.
TradMarkets merely adopted the volatility. Cryptomarkets were born in it. Molded by it! And now, our markets are evolving into stability, while trad markets decay into volatility thanks to the hands-on nature of the Fed.
With the easing of regulatory pressures, and the attraction of sustainable, non-speculative adoption of crypto networks due to the maturity of network infrastructure, a lot of the volatility of crypto can be damped simply due to adoption. The larger the boats get, the harder they become to rock.
And, the conclusion of my above infrastructure sections is that our crypto boats are ready to scale to whatever size society needs them to be.
The arks are ready… its time to board them!
Crypto civilization grows
Crypto will always have its Wild West. There’s no putting the genie back in the bottle – once you give society permissionless finance, then the west-facing frontier cannot be stopped. Thanks to the ERC20, anyone can mint a memecoin, but now thanks to the OP Stack, this next market cycle anyone will be able to mint a meme-chain. Hold on to your butts with that one.
But now, with this cycle, we’re going to see the civilizations in the East establish. The safety and security of civilization. The East and West stand in opposition to each other. Those who seek freedom and adventure go west, in order to escape the tyranny and oppression of civilization. But some people want the safety and security of civilization! Mainstream adoption requires roads, plumbing, laws, and policemen. The margins of crypto will march west, but the body of crypto will evolve into a predictable, dependable, regulatory-approved environment where the less-adventurous feel safe exploring.
Parts of crypto will start to be considered sufficiently safe and secure that Web2 normies will feel safe living here. Smart contract wallets with account recovery, highly battle-tested apps, high-trafficked L2s, Base… these things will become the civilization of crypto and will be a place where the less adventurous can still feel safe participating in crypto society.
But for everyone reading this, being here will be a choice. We’ll know the secret paths to the more hidden corners of crypto… where tokens manifest and degens play. For better or for worse… we’ll always have the Wild West of crypto.
-David
MARKET MONDAY:
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*Data from 8/7 3:00 pm EST (DeFi Index = $DPI, NFT Index = $Blue-Chip-10)
We’re initiating coverage of GMX with a rating of neutral at a risk of medium
Catalyst Overview: The second iteration of the GMX protocol just deployed to Arbitrum and Avalanche alongside the existing V1 marketplace and features a variety of improvements for both traders and liquidity providers. New markets for non-Ethereum assets like Solana and XRP have been created and liquidity providers are able to isolate their risk to specific asset pools.
GMX HODLers are praying that these V2 upgrade will turn around the Protocol’s less-than-inspiring performance as of late. Open interest has declined by a staggering 56% since late March and GMX has seen a remarkable decrease in market share over this period, largely fueled by Synthetix’s resurgence. TVL peaked in May, but has since fallen by 23% in response to weak yields. GLP stakers currently receive 5.7% APR, scraps in comparison to the 30%+ yields GMX generated for LPs during its prime.
Price Impact: The GMX ecosystem has been in general decline since March, but it's possible V2 is the first in a series of events that could reverse the Protocol’s fortunes. With new exotic collaterals types now able to be onboarded to GMX and Synthetix’s OP token incentive programs set to expire in early September, the playing field is set to be leveled between GMX and its primary rivals.
Despite the bullish setup, we are rating GMX at neutral out of caution, stemming from concerns over the potential inability to successfully integrate a meaningful number of additional collateral markets or stymie usage bleed GMX is experiencing.
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