The Weekly 251

Market

This week is the conference week, featuring Token2049 and Permissionless happening at the same time. DAppCon precedes them, and Mainnet follows. The joke goes that true builders go to DAppCon, while those with financial resources go to Token2049. Due to the overlap, Permissionless has fewer attendees than last year, but they are able to have high quality conversations. Token2049 is expansive and lively, coinciding with the F1 event in Singapore. The number of attendees, side events and parties truly overwhelmed me. It’s indeed a fantastic opportunity for investors to connect with founders.

The market opened lower at the beginning of the week, with BTC selling off by 3% and ETH selling off as much as 6% as the SEC’s appeal on the Ripple case put pressure on the crypto market. Gensler’s criticism of crypto and the CPI increase in August didn’t manage to set back the market further, BTC ended the week up 2.6% and ETH flat, encouraged by the news that another large TradFi asset manager, Franklin Tempton, joined the BTC spot ETF race. BTC seems to be converting the $26,000 level from resistance to support, with the new support level at around $25000 and testing the resistance level at $26500.

Although the YOY CPI rose to 3.7% from 3.2% a month earlier, it’s mainly driven by rising gas price. The core CPI – which strips out food and energy costs – fell to 4.3%, in line with economist forecasts and down from 4.7% in July. The futures market indicates only a 2% probability of rate raise in next week’s FOMC meeting.

On the ETF front, no news is good news, and Bitmex just started a prediction market on BTC ETF spot approval. The current probability for a spot ETF approval before October 18, 2023 is 25% as indicated by the price of the contract.

Token 2049 Takeaways

It’s my first time attending the Token 2049 conference in Singapore. Judging by the number of attendees, booths and side events, it’s comparable to the Consensus conference in the US during the bull market. Given the more favorable regulatory environment in Asia, the conference has attracted a much larger global audience compared to last year as I see many familiar faces from the US attending this conference for the first time. The conference offers a great opportunity to connect investors with founders, with numerous VCs hosting side events showcasing their portfolio companies. Although it’s not a developer-focused conference, there are many Hackathons hosted by L1 or L2 protocols. 

One sign that we are still in the bear market is the quality of swags - the majority of them are t-shirts! The best ones I have seen are handheld mini-fans, a must for Singapore’s weather. Some large exchanges are still able to host fancy parties at premier locations such as the CÉ LA VI with beautiful views below. Maybe we are not that far away from a bull market…

A few takeaways from the conference:

1. We are not out of the bear market yet; a bull market needs a supportive macro environment and continuing adoption of blockchain applications.

The mood of the conference is sober but optimistic. There is no illusion that BTC halving alone would drive a bull market in the next 1-2 years, and participants acknowledge that we still don’t have wide adoption of blockchain technology due to lack of killer apps and a poor UI experience.

2. Proliferation of payment and RWA projects in Asia

About a third of the projects at the booth are related to payment or RWAs. It is widely accepted that blockchain is a better solution for cross border payments and for emerging market countries that lack a good Web2 payment infrastructure. Finding a compliant way to get capital out is still the biggest pain point for many Asian users. 

RWA is also further developed in HK compared to the US, given their more friendly regulatory environment. Two exchanges have obtained licenses to offer selected digital assets to retail investors. Hong Kong’s SFC (equivalent of the SEC) is also revisiting the definition of Security Token Offering (STO) based on their underlying assets, with the potential to offer certain tokenized RWA to retail investors.

3. The bar for DeFi innovation is higher

DeFi is the most mature sector in blockchain applications. The DeFi summer in 2020 was driven by lucrative yield opportunities which no longer exist in the current market. Additionally, DeFi protocols face challenges in regulation and low trading volume in alt tokens. The next phase of DeFi innovation could come from the following areas:

• Make DEX experience as competitive as CEX: orderbook-based DEX, limit orders, liquidity aggregation and better UI design are all examples of this effort

• Expand into new markets or new chains: given the size of the derivative market is multiples higher than spot and the dominance from CEX players, there is room for derivative DEX to gain market share. Also many DeFi protocols are trying to build on L2s to leverage their growth momentum and ecosystem support.

• Develop innovative ways to earn higher yield: just LPing or borrowing and lending do not provide enough yield for investors. DeFi protocols are implementing sophisticated yield strategies or re-engineering how risk is distributed to satisfy different needs.

• Bring RWA on chain: Given real-world yield is more attractive, getting those yields on-chain through RWA-based lending would open up new yield opportunities.

4. Gaming is a long-term investment

There are a lot of hopes and investments in Web3 gaming as the next potential driver for blockchain adoption. However, unlike DeFi, where projects can start implementing parts of their product in months, game development typically takes 2 to 4 years, sometimes even 6 to 7 years. According to ImmutableX’s Robbie Ferguson, 90% of the games that will go live next year may fail. However, the successful 10% or 5% will completely redefine the entire industry, generating transaction volumes surpassing the total of other games.

If picking the right games is hard, picking gaming infrastructure is not necessarily easier. Speed and cost are important factors but big games have bargain power over what chain they choose. For example, Axie Infinity ultimately built their own chain Ronin to support the game. Emerging games value ease of development, ecosystem support and user onboard experience. We also see regional preferences play a role, with Klaytn, the blockchain developed by Korean Web2 giant KaKao, and Astar, a blockchain developed by Japan-based team gaining traction among local gaming developers.

5. Stablecoin is still the killer app

Stablecoin remains the killer app in crypto as they serve as a gateway into crypto and they are the “currency” of choice in blockchain based payment applications. The fact that US regulation doesn’t allow stablecoin to pay interest may hinder adoption but we see efforts such as Mountain protocol finding ways to issue permissionless and yield bearing stablecoin in other jurisdictions. This may increase the market share of yield bearing stablecoins to 30% in two years, according to Nic Carter. As blockchain-based payment use cases continue to grow, we see continuous expansion in the size of the total stablecoin market.

6. Infrastructure need dApps more than they need infrastructure

About one third of the booths in Token2049 are infrastructure related projects. All the major L1, L2, DA and interoperability solutions are there. Newer chains/roll up solutions look up to Base as a successful example to grow the ecosystem. They are all trying to find their own product market fit by optimizing speed, cost and user experience for their target user base and use case. Some chains take the regional approach by partnering with local large institutional clients (e.g., Astar with Sony), some chains leverage strong treasury to support ecosystem growth (e.g, Mantle), some chains optimize specific use case to bootstrap growth (e.g. Celo on payment). Just as investors expect faster and cheaper blockchain to drive dApp growth, the proliferation of infrastructure developments also requires a killer app to help them demonstrate product-market fit. 

7. Leverage gateways to onboard the next billion users

With Bitcoin starting in 2009 and Ethereum in 2015, we have seen tremendous growth in blockchain and dApp developments fueled by VC investments in the space. Now we have many chains, many scalability solutions and many apps serving similar functions on top of all these infrastructure. We have created much fragmentation in the system while mainstream users are still stuck at the first step of how to onboard from Web2 to Web3. The endgame is to have users enjoy the benefit of Web3 without knowing they are using it. Not only do users want smooth access across multiple chains, but they also prefer to have the flexibility to customize how they want to interact with those chains. While we see Web2 companies trying to be the gateway for their customer base to onboard Web3, such as payment companies incorporating Web3 payment option or GooglePlay and AppleStore enabling dApps, we see wallet level integration and account abstraction as the ultimate solution to the UX problem. Metamask’s snap launch is a good step in the right direction to give users access to multiple chains and gain insights to their transactions.

Top Gainers and Losers

Toncoin had an impressive rally after Telegram’s endorsement, elevating its status from a standalone bot to Telegram’s choice of Web3 infrastructure. Thorchain also saw a rally after news broke that they are integrated with the newly launched Metamask snap via Shapeshift.

Top 100 MCAP Winners

1. Toncoin (+35.89%)

2. RUNE (+22.99%)

3. VeChain (+13.18%)

4. Maker (+12.66%)

5. Bitcoin Cash (+12.05%)

Top 100 MCAP Losers

1. ApeCoin (-16.89%)

2. Astar (-13.57%)

3. Flare (-11.53%)

4. IOTA (-11.39%)

5. Klaytn (-9.62%)

About Decentral Park

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