Crypto is heading into the new year with more narratives than ever, with different teams solving distinct problems, all under the crypto umbrella.
In this edition, we’ve included what some of the top capital allocators in the crypto space think about the current key narratives.
Over and out ⬇
Background on Jason Choi
Jason Choi is the host of the blockcrunch podcast, one of the longest running long-form crypto podcasts.
Jason is an ex General Partner at Spartan Group, a multi-strategy crypto fund with $500M assets under management (AUM).
The fund consists of liquid DeFi, Gaming & Metaverse investments, and was the #1 performing fund in the APAC region in 2021.
Now, he is an angel investor at Tangent, and founding member of Contrary Capital.
Background on Sanat Kapur
Sanut Kapur is a junior partner at Dragon Capital, a top VC firm in the crypto space which once boasted an AUM of $3B+ at one point.
The company raised an additional $650M in 2022 for its third crypto fund.
Sanut was also previously an executive director at Spartan Group, with additional experience working as a data scientist at Uber as well.
Blur & their Layer-2, Blast
Jason thinks Blur decided not to engage in wash trading and instead focused on providing tokens only to liquidity makers.
This approach helped them become one of the most liquid NFT exchanges right from the start.
They dominated the volumes across all NFT exchanges and currently hold about 60% of the market volume.
While Blur dominates in terms of market volume, OpenSea has a larger number of traders.
Contrast in NFT Volume vs User Metrics; read more in our Blur Analyst Insight
OpenSea holds about 40% of the entire market, making it a significant player in the NFT market.
Blur is seen as a more innovative and speculative platform compared to OpenSea.
OpenSea is known for being compliant and following traditional practices, while Blur pushes boundaries and thinks of new ways for people to speculate.
Similar to how Binance took over Coinbase by offering new ways for speculation, Blur aims to do so with its upcoming layer-2 solution.
With their layer-2 launch, Blur plans to build a perp DEX for market makers to long and short NFTs.
This feature allows market makers to hedge their inventory without facing significant losses.
Previously, market makers faced challenges in understanding how they could hedge their inventory effectively on Blur.
Blur recognized the need for a structural shift in the NFT market to improve liquidity.
They aimed to make liquidity provision more advanced than what was offered on OpenSea.
The airdrop program of Blur's Blast layer-2 is similar to centralized exchanges' market maker rebate programs, incentivizing liquidity near the midpoint of the bid spread.
The Blast layer-2 attracted $342 million in TVL within just 48 hours, surpassing expectations.
Sanat notes that other EVM and layer-2 launches, such as Linea, have struggled to gain traction and liquidity.
Despite some ideological complaints about Blast layer-2, it has successfully captured user interest and capital.
He adds that the success of Blast layer-2 is expected to have a positive impact on Maker and Lido in the short to medium term. Both Maker and Lio will benefit from earning $ETH and stablecoin yield from the capital that has moved into Blast.
There is a significant amount of $ETH locked in layer-2 bridges like Arbitrum and Optimism that could potentially earn yield.
While some platforms have considered using user deposits to stake on ETH, they have deemed it too risky or not worth pursuing.
Aevo’s $aeUSD aims to make locked stablecoins on L2s more productive by earning a yield
Betting on L2s via DA layers
Rollups scale by executing transactions off-chain and posting the results onto Ethereum.
Vitalik Buterin's October 2020 post emphasizes the importance of rollups for Ethereum's scalability roadmap.
Ethereum's technical roadmap has shifted focus from execution sharding to becoming a base layer for rollups.
Sanat says that proto-danksharding will increase the space available for rollup data, while full danksharding is a few years away.
Rollup projects currently pay millions of dollars monthly to post data on Ethereum.
He adds that Celestia recently launched its token as a data availability layer for rollups.
The bullish case for Celestia is that it aligns with Ethereum's roadmap and has technical advantages over other solutions.
However, competition from other data availability layers like Polygon, EigenLayer, and Espresso Systems poses a challenge.
Celestia's token launch initially confused many users, but the price eventually doubled as the market recognized its potential.
The concept of data availability (DA) layers is gaining mindshare, although it took time for mainstream adoption.
Early investors like Spartan Group were aware of DA layers' importance before they gained wider attention.
Unlike layer-1 solutions, it is not clear what distinguishes one data availability layer from another.
Clear tradeoffs exist between more monolithic setups and more modular setups in layer one solutions.
Sanat says that execution layers lack traditional network effects present in Ethereum's composability and liquidity advantages.
Selling solely to developers on rollups may require building brand trust or integrating with rollup-as-a-service providers.
Uncertainty remains regarding the future landscape and competitiveness among execution layer projects.
Brand effects may play a role in the dApp space, but network effects are currently lacking.
Celestia is cited as an example of a project with a strong brand.
Sanat wonders if dApps will become commodities or maintain differentiation.
Jason says that the debate revolves around different philosophies for scaling blockchains.
Modular infrastructure involves using rollups to scale block space across multiple chains, e.g. Celestia.
Monolithic chains aim to increase block size or have full composability on one chain, e.g. Solana.
Alternative Layer-1s to Ethereum
Monad is an alternative layer-1 solution that employs parallel execution like Solana.
Sanut beleives the world is becoming increasingly EVM-centric, making Monad's approach valuable.
Monad's team is dedicated to enhancing EVM scalability and has attracted talented individuals.
Last week, our Founder & CEO, Nick Drakon, sat down with Monad’s Founder, Keone Hon, to discuss the Layer1’s approach to solving for high performance problem sets and the infrastructure choices they have made.
Jason adds that Sei Network, another Tangent portfolio company, also implements parallel execution for EVMs.
Sei initially built on the Cosmos SDK, but faced low adoption and user preference for Ethereum tools.
User-friendly toolings like Metamask and Etherscan contribute to Ethereum's popularity.
Jason says that the narrative has shifted towards building in solidity and using the EVM. The EVM is considered the greatest export of Ethereum.
What’s next for DeFi?
Jason mentions Ethena is a delta-neutral stablecoin that provides an internet-native yield.
Users stake $ETH as collateral and earn yields from shorting $ETH on centralized exchanges. This project offers fully crypto-native yield without relying on real-world assets.
He adds that funding rates for shorting ETH on exchanges like Binance and OKX are currently around 10% - 18% annually.
By combining Lido staking yield (around 3-4%) with positive funding rates, users can potentially earn yields of 15% to 20% on Ethen’s stablecoin.
Jason says that Ethena is the only project offering a fully crypto-native yield without artificial inflation or reliance on real-world assets.
Concerns exist regarding potential negative funding rates in bear markets.
There are also concerns about the centralized risk associated with relying on centralized exchanges for hedging.
New technology allows users to post collateral through custody providers for opening positions on exchanges without directly depositing collateral.
This approach resembles how TradFi works, separating custody, settlement, and execution into separate venues.
Sanat mentions Aevo as a DeFi project started by the team behind Ribbon Finance, combining options markets and perpetual markets.
Aevo has experienced increasing volumes, even during the bear market. It is considered a credible competitor to Deribit for decentralized options.
Deribit dominates the options space; read more in our Aevo Analyst Insight
Sanut adds that pre-launch futures for tokens with anticipated airdrops like $TIA and $PYTH have been launched by Aevo.
These achievements demonstrate the success of Aevo despite challenging market conditions.
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