The lack of new business stories has led to a significant reduction in the inflow of entrepreneurs, industry investment, users and funds. More importantly, this situation has suppressed investors' overall expectations for the development of the industry. When the market has not seen stories such as "Defi will devour traditional finance", "ICO is a new innovation and financing paradigm" and "NFT subverts the content industry ecosystem" for a long time, investors will naturally vote with their feet and move towards places with new stories, such as AI.
Of course, we should not be too pessimistic. Although we have not seen any attractive innovations in this round, the infrastructure is constantly improving. Block space fees are decreasing, both for L1 and L2; cross-chain communication solutions are gradually becoming complete, and there is a rich list of options; the wallet experience is upgraded, such as Coinbase's smart wallet supports fast creation and recovery without private keys, direct adjustment of cex balances, and no need to recharge gas, etc., allowing users to get close to the product experience of web2. The above infrastructure is like water, electricity, coal and roads in the real world. They are not the result of innovation, but they are the soil for innovation.
The limited decline in the total market value of altcoins is based on the substantial expansion of the total amount of newly added altcoins and their market value. The growth trend of the number of tokens in this round is the fastest in history. In addition to the new coin market, there are also a large number of tokens that have been listed and unlocked, but their common characteristics are low circulation ratio, high FDV, and early institutional round financing, and the cost of institutional round tokens is very low.
This round of weakness in demand and narrative, coupled with over-issuance on the asset supply side, is the first time in the crypto cycle. Although project parties are trying to maintain valuations by further reducing the token circulation ratio at the time of listing and gradually selling them to secondary investors, the resonance of the two finally led to an overall downward shift in the valuation center of these crypto projects. In 2024, only a few sectors such as Meme, Cex, and Depin will maintain positive returns.
However, in my opinion, the collapse of the valuation center of high-market-value VC coins is the market's normal response to crypto anomalies: the mass creation of ghost town Rollups, with only TVL and robots but no users; financing through refurbished terms, but actually providing similar solutions, such as a large number of cross-chain communication services; starting businesses for hot spots rather than actual user needs, such as a large number of AI+Web3 projects; failing to find or simply not finding a profit model, and the tokens have no value capture. Most VC coins are not completely worthless, they are just too expensive, and the market eventually puts them back to where they should be.
Since 2020, Defi has officially become a category in the altcoin cluster. In the first half of 2021, the most popular projects in the Top 100 Crypto Market Capitalization Rankings were Defi projects. At that time, there were so many categories that it was dizzying, vowing to redo all existing business models in traditional finance on the chain.
In that year, Defi was the infrastructure of the public chain. DEX, lending, stablecoins, and derivatives were the four must-haves after the new public chain went online.
However, with the over-issuance of homogeneous projects and a large amount of embezzlement, the TVL obtained by relying on the Ponzi model of stepping on the left foot with the right foot collapsed rapidly, and the price of the spiraling tokens spiraled back to zero.
Entering this round of bull market cycle, the price performance of most Defi projects that have survived to this day is not satisfactory, and primary investment in the Defi field is getting less and less. As at the beginning of any bull market, investors like the new stories that emerge in this cycle the most, and Defi does not belong to this category.
But it is also because of this that Defi projects that have emerged from the bubble have begun to appear more attractive than other altcoin projects. The business has a mature business model and profit model, and the leading projects have a moat. DEX and derivatives earn transaction fees, lending collects interest spread income, stablecoin projects collect interest, and Staking services collect pledge service fees. The profit model is clear. The user demand of the leading projects in each track is organic, and they have basically passed the user subsidy stage. Some projects still achieve positive cash flow after deducting token emissions.
As I said above, one of the main reasons for the continued collapse of altcoin valuations in this round is the high emissions of a large number of projects based on high valuations, as well as the negative expectations brought about by the current huge amount of unblocked tokens entering the market.
As the leading Defi projects were launched earlier, most of them have passed the peak period of token emission, and the tokens of institutions have basically been released, so the selling pressure in the future is extremely low. For example, the current circulation ratio of Aave tokens is 91%, the circulation ratio of Lido tokens is 89%, the circulation ratio of Uniswap tokens is 75.3%, the circulation ratio of MakerDAO is 95%, and the circulation ratio of Convex is 81.9%.
On the one hand, this shows that there will be little selling pressure in the future, but it also means that whoever wants to gain control of these projects can basically only purchase tokens from the market.
Compared with new concepts such as Meme, AI, Depin, Restaking, and Rollup services, the attention paid to Defi in this round of bull market has been very thin, and the price performance has been mediocre. On the other hand, the core business data of each leading Defi, such as transaction volume, lending scale, and profit level, have continued to grow, forming a divergence between price and business. Specifically, the valuation level of some leading Defi has reached a historical low.
Taking the lending protocol Aave as an example, while its quarterly revenue has surpassed the peak of the previous cycle and set a new historical high, its market capitalization/annualized revenue has hit a new historical low, currently only 17.4 times.
Although MakerDAO is still the leader of decentralized stablecoins and has a large number of "natural holders" who hold DAI just like they hold USDC and USDT, the scale of its stablecoins has always stagnated, and its market value is only about half of the previous peak. Its collateral is largely based on off-chain US dollar assets, which is also gradually damaging the decentralized credit of its tokens.
In sharp contrast to MakerDAO's DAI, Ethena's stablecoin USDe has grown rapidly, from 0 to 3.6 billion US dollars in about half a year. However, Ethena's business model still has an obvious ceiling. The large-scale expansion of its stablecoin is based on the premise that secondary market users are willing to take over the token ENA at a high price and provide high income subsidies for USDe. This slightly Ponzi-like design can easily lead to a negative spiral in business and coin prices when market sentiment is bad.
After the Defi era, Link is welcoming a wave of hidden and yet-to-be-launched narratives, the RWA narrative promoted by financial giants such as BlackRock, which have gradually actively embraced Web3 in recent years. In addition to promoting the listing of BTC and ETH ETFs, BlackRock's most noteworthy move this year is the issuance of a US Treasury bond fund with the code Build on Ethereum, and its fund size exceeded US$380 million in 6 weeks. Link is quite advanced in this exploration. For example, in May this year, Chainlink completed the "Smart Net Asset Value" pilot project with the Depository Trust and Clearing Corporation and several major financial institutions in the United States.
Just like the development process of many revolutionary products, Defi also experienced the narrative fermentation in the first year of 2020, the rapid bubble of asset prices in 2021, and the disillusionment stage after the bear market bubble burst in 2022. At present, with the full verification of product PMF, it is coming out of the trough of narrative disillusionment and building its intrinsic value with actual business data.
