Market
The Fed decided to keep the interest rate stable for a second time in a row at the November FOMC meeting last week. This decision, together with resilient growth and job market data in Q3, has sent risky assets into a rally. SPY (+5.84%) and QQQ (+6.49%) had one of their best weekly gains this year.
The Fed has acknowledged the tightening of financial conditions in recent months driven by long-term bond yields but has also indicated that they need to see slower growth and softening in the labor market to bring down inflation. Both the 10Y and 30Y treasuries have come down approximately 25 bps this week, indicating that the market is expecting lower interest rates in the future. The futures market has priced in more than a 50% chance of a rate decrease in May 2024, a month earlier than what was indicated last week.
As the October PMI slipped below both consensus estimates and last month’s reported number, and with the cooling down of PCE inflation, we see the macro market supporting a trajectory of loosening financial conditions in the future, which is beneficial for the crypto market.
BTC has held well above the $34,000 level this week, briefly touching $36,000 on November 1st. The narrative supporting a BTC spot ETF remains strong, with more players such as Bernstein and Microstrategy making optimistic BTC price projections supported by mainstream allocation once a spot ETF becomes available. In fact, based on the flow information below, mainstream investors have already increased their adoption:
A surge in CME BTC futures open interest has made it the second largest futures exchange just after Binance.
The surge in CME BTC futures trading volume has outpaced the surge in perps futures exchanges, indicating increased institutional demand.
Large inflows into BTC ETP and trust products globally
BTC products registered $296 million in inflows in the week of October 27, accounting for almost half of the YTD inflows.
Furthermore, the option data shows bullish sentiment on BTC, as the 25-delta skew is at its most negative point since June 2022, indicating that the market is willing to pay more for a call option than a put option.
ETH has slightly outperformed BTC by ~30bps this week. While there isn’t a significant rise in OI on CME ETH futures, we do see the options market exhibiting even more negative skews than BTC options, indicating bullish positioning from option traders. According to theAllCore Developers Consensus Call last week, the much-anticipated Dencun upgrade is not going to happen by the end of 2023 but is more likely to occur in Q1 2024. While this is not surprising, it did cause some disappointment. In the meantime, the total fees paid by users on Ethereum surged 30% last week as the market warms up to more trading volumes. Ethereum briefly became deflationary again on November 3.
Source: Token Terminal
Solana continues to deliver impressive weekly returns, up 27% last week, coinciding with its Breakpoint conference. MNDE, the largest liquid staking protocol on Solana, experienced a nearly +100% rally, demonstrating an increased risk appetite for tokens within the Solana ecosystem, as the market has recognized Solana’s potential as a competitor to the Ethereum ecosystem.
DeFi Trends
Since Uniswap has turned on the fee switch for their frontend, they have earned ~$650K in two weeks, indicating an annual fee of ~$17M. Unfortunately, UNI token holders are not benefiting from this due to UNI’s status as a pure governance token. There is hope that voting power could be converted into equity ownership once there is regulatory clarity, but it’s by no means guaranteed. In the meantime, there are protocols with attractive tokenomics designs that enable value accrual to the token while aligning long term incentives. Immutable is a great example.
Immutable is a Layer 2 on Ethereum designed to support gaming and NFTs using Zero-Knowledge roll-up technology. Unlike other L2s that earn revenue from transaction gas fees, Immutable currently subsidizes gas costs but charges a 2% fee on any NFT primary and secondary transactions, for games developed on their platform. Given that one of the biggest advantages of Web3 games over Web2 is the in-game asset ownership, we think Immutable’s revenue model is well-positioned to capture the growth in Web3 games. Furthermore, Immutable has a clever tokenomics design such that:
The NFT transaction fee is written in the smart contract, so the fee is paid to Immutable regardless of where the NFT is traded.
Unlike Uniswap, where the transaction fees are passed on to the market maker and charged by the application front end, the NFT trading fee is written into the smart contract for any game developed on the Immutable platform. Therefore, Immutable will earn the fee for any NFT transaction, whether it’s traded on Immutable’s own marketplace or other NFT trading platforms. IMX also allows games and NFT marketplaces to set their own fees in addition to the default 2% fee earned by the protocol.
20% of the translation fee must be paid in the IMX token and the fee goes directly to reward IMX stakers.
Requiring a portion of the transaction fee in IMX gives the IMX token utility and increases demand for IMX as more games are developed on the Immutable platform. It’s important to note that users do not need to own IMX to pay for the fee, as a portion of their chosen cryptocurrency for payment will be converted to IMX to cover the 20%. This eliminates any clunky UI issues that would require users to source IMX tokens on their own.
IMX stakers need to trade a NFT to qualify for earning rewards for every staking cycle (which is 14 days).
The staking reward for IMX depends on the total transaction fee generated by the protocol, the number of stakers, the time staked and a hard requirement that a staker has to trade at least one NFT in one of the games developed on the Immutable network to qualify. This creates a positive feedback loop where token holders are incentivized to hold the token for the long term and contribute to the platform’s usage to grow the ecosystem.
Considering that over $15B has been invested in the Web3 gaming space over the past two years, and given that games typically take 2-3 years to develop, we anticipate an influx of new Web3 games entering the market in the next 12-18 months. Immutable has led the way in funded projects, second only to Ethereum. Their recent partnership with Polygon zkEVM could leverage the combined brandpower and business development efforts of both teams to attract more game developers to the Immutable platform. We believe in the growth potential of Web3 gaming, and Immutable’s expanding network effect and attractive tokenomics position it well for success as the crypto market recovers.
Top 7d Gainers and Losers
Top 100 MCAP Winners
PancakeSwap (+52.57%)
Oasis Network (+35.21%)
Thorchain A (+35.08%)
Solana (+31.56%)
Trust Wallet Token (+23.98%)
Top 100 MCAP Losers
Maker (-7.76%)
Quant (-5.29%)
Pepe (-3.91%)
Render (-3.69%)
Bitcoin Cash (-3.65%)
About Decentral Park
Decentral Park is a founder-led cryptoasset investment firm comprised of team members who’ve honed their skills as technology entrepreneurs, operators, venture capitalists, researchers, and advisors.
Decentral Park applies a principled digital asset investment strategy and partners with founders to enable their token-based decentralized networks to scale globally.
The information above does not constitute an offer to sell digital assets or a solicitation of an offer to buy digital assets. None of the information here is a recommendation to invest in any securities.