Author: 0xCousin
Recently, there have been many voices of disappointment in the Ethereum ecosystem in the industry community, because the secondary market performance of Ethereum ecosystem projects in this cycle is not good enough, or it cannot meet the expectations of the community. The root cause may be dissatisfaction with the overall poor performance of altcoins.
I think there are several main factors that cause this phenomenon:
1. The fundamental reason is that there is no incremental capital entering the market
The incremental funds in this cycle are mainly in BTC ETF, but BTC ETF is traded on traditional stock exchanges such as Nasdaq, and the trustee then purchases BTC from Crypto exchanges. As of August 28, BTC spot ETF has accumulated a net inflow of US$17.85 billion, but ETH spot ETF is still in a state of net outflow of US$475 million.
The incremental funds of the ETF only entered the BTC single currency. This part of the buying belongs to the "buy and withdraw" model and has not really flowed into the market. These incremental funds have basically no spillover effect on other altcoins.
2. The existing funds on the market are not interested in the Ethereum ecosystem
The stock game of funds in the Crypto exchanges shows a phenomenon of no one taking over the orders.
The Eastern community does not accept the DePIN narrative of the Western community around the Solana ecosystem;
The Western community does not accept the Eastern communityâs Bitcoin Layer2 narrative around the Bitcoin ecosystem;
The secondary Liquid Fund does not take over the Ethereum Layer2 and ZK narrative of the primary Venture Capital around the Ethereum ecosystem.
Therefore, the secondary market performance of Ethereum ecosystem projects is particularly poor.
3. This cycle is obsessed with infrastructure and lacks application innovation
The phenomenon of obsession with infrastructure is not limited to the Ethereum ecosystem, but the entire Web3 is still at this stage. This situation is partly due to the limitations of Web3's value capture - fat protocols and thin applications.
Because most of the value is captured by the underlying chain, VCs are generally keen to invest in various layer 1 and layer 2. The rent collection logic of the protocol layer is relatively easier to obtain a high market value. Moreover, the technical narratives of various subdivided functional module projects are getting deeper and deeper. A project that may only be responsible for a very small link in the entire industry has already reached the ceiling in the primary market valuation because of the addition of more innovative technologies such as ZKP and FHE. The secondary market performance will naturally experience valuation repair. However, this type of project has basically made no contribution in attracting new users and mass adoption.
The hope for a breakthrough may still lie in the application layer.
Basic characteristics of Web3 applications with long-term value
Recently, Ethereum co-founder Vitalik Buterin talked about the type of Web3 applications he hopes to see on Twitter. They have two characteristics:
1. It can be continuously useful;
Second, principles will not be sacrificed (no permission required, decentralization, etc.).
From an investment perspective, I think we can add two more requirements - there must be a certain level of hematopoietic ability, and preferably some positive externalities.
For Web3 applications with these characteristics, Vitalik listed three specific directions: DEX, Decentralized Stablecoin, and Polymarket.
Vitalik mentioned very bluntly that the things he "does not respect" are basically those things whose attraction comes from some temporary sources that are not sustainable. He also cited the example of liquidity mining in 2021 (referring to the token incentive of liquidity mining as a temporary source of income that is not sustainable).
Exploration and Analysis of Web3 Applications
In the past few years, we have witnessed application exploration in many directions, some of which have been falsified, such as GameFi 1.0 in the X2Earn model; and some of which have been proven to have value, such as the application of stablecoins in the payment field.
1. DeFi: The protocol itself has long-term value, and the governance token does not capture value
DeFi is one of the most successful application scenarios in Web3, which attempts to reconstruct traditional financial services in a decentralized way. DeFi includes lending protocols, decentralized exchanges (DEX), derivatives trading, stablecoins, and asset management protocols.
After a complete bull-bear cycle, there are still some very high-quality top DeFi protocols left, such as lending protocols (AAVE, Compound, etc.), DEX (Uniswap, etc.), stablecoins (MakerDAO's DAI, etc.), and derivatives (dYdX, etc.).
However, the tokens of these DeFi protocols did not actually perform well in this cycle. This can be attributed to two key factors:
After ETH2.0, the narrative of Staking and Restaking has emerged. These new projects generally have token incentives for participating users, diverting most of the TVL. On the other hand, in the previous DeFi protocol, after the liquidity mining rewards were reduced or stopped, the income incentives of LPs were greatly reduced.
Governance tokens generally fail to capture the value of the protocol. The business volume of the DeFi protocol is still considerable, and the protocol revenue is also considerable, but a pure governance coin cannot support a higher FDV (for example: compared to BNB to Binance, UNI lacks value capture for Uniswap protocol revenue).
Although the Token market performance of the DeFi protocol is poor, the DeFi protocol actually has lasting usefulness, certain positive externalities, and also complies with the basic principles of Web3 (no permission required, decentralization, etc.).
2. Prediction Market: The Holy Grail of Cognitive Technology
Vitalik has mentioned the application prospects of prediction markets many times. He believes that prediction markets are the holy grail of cognitive technology.
The unique nature of prediction markets is a natural fit for Web3. Prediction markets provide a decentralized way to acquire knowledge and marketize information by allowing users to bet or predict future events (such as political elections, sports results, financial market trends, etc.). They are naturally suitable for leveraging the decentralization, censorship resistance, global participation, and automated execution of smart contracts of blockchain. These prediction market projects can be continuously useful, comply with the basic principles of Web3 (no permission required, decentralized), and have certain positive externalities.
Since people are willing to bet tens of billions of dollars on various sports events on traditional gambling platforms, there is reason to believe that Web3, a more transparent prediction market, has a certain future. Take Polymarket as an example: Due to Trump's repeated sharing of his leading winning rate data on Polymarket during the US presidential election, Polymarket has been very prosperous in the past six months, with a significant increase in various platform data (betting volume exceeded US$440 million in August, a record high, and monthly active users exceeded 60,000, a record high), and the latest B round successfully raised 45M.
Prior to this, the iteration of the prediction market had not reached this scale, because the events were scattered, and most ordinary users tended to bet on the events with a small risk, so the pools of each event were not very thick. Until the US presidential election, Polymarket had accumulated more than $550 million in unsettled prediction funds.
This track may be a Web3 application direction with good prospects, and the potential market size is also large enough.
3. DePIN: It is both an infrastructure network and a future application carrier
DePIN is a paradigm innovation in the deployment and maintenance of physical infrastructure. Through Crypto, Internet, Internet of Things and blockchain technology, a more efficient, decentralized and fair way of infrastructure deployment can be achieved.
The importance and necessity of DePIN infrastructure projects such as decentralized communication networks, distributed storage, and decentralized computing power networks have been discussed in previous articles.
DePIN may also be a future application carrier. In this cycle, Solana ecosystem launched Saga mobile phone, and recently Binance Labs invested and incubated CoralApp to launch CoralPhone. These hardware may become a new entrance to the Web3 world.
Further expansion, shared transportation networks (such as shared charging stations and electric vehicle networks), which are indispensable infrastructure in modern society, may also be able to be operated and expanded in the form of DePIN, giving full play to the accessibility, inclusiveness and positive externalities of DePIN.
Summarize
The growth point of the Web3 ecosystem may still need to achieve breakthroughs at the application layer, especially those innovative applications that have the opportunity to achieve large-scale user adoption. They must comply with the basic principles of Web3 such as decentralization and permissionlessness, while continuing to be useful, and preferably have some self-sustaining ability and positive externalities.
