Get ready for a shift in the blockchain landscape, as ETH and ETH L2s take center stage forcing other chains to fall by the wayside. The current macro has given rise to exciting new narratives around real yield and on-chain derivatives, but only a few permanent winners will emerge in the long term. The SEC's push for regulation continues but may prove futile as ETH 2.0 validators and nodes relocate to more blockchain-friendly jurisdictions. And the anticipated ETH 2.0 shanghai upgrade launch at the end of the month may fuel this shift. Read on to learn what this means for ETH prices within the current macro as well as find out which other chains may survive alongside ETH and BTC.
This will be a 2 part post as it was getting awfully long (this section is over 5,000 words). The section on interoperability will come out in the middle of next week as it is less urgent than the updates on ETH and DeFi.
This is a quarterly update on the Crypto Macro series. The last post was from October 2023 and can be found here.
Table of Contents
Trends and Developments
Bull Trap and Craptos
ETH Layer Two Chain
Which Chains Could Survive?
ETH 2.0 updates
Trends in DeFi
dYdX
GMX
GNS
Other GMX Clones
Upcoming Derivatives Platforms
Regulatory Update
Gensler and the SEC
OFAC Sanction Update
Conclusion
Internal References
1. Trends and Developments
Bull Trap and Craptos
As you’ve probably already noticed, we’re in a bull trap currently. The market is pushing upward while the long-term trend is still bearish. It’s a few months of fun, and number go up while remembering that there is still another move downward awaiting us.
Because of that, we’re seeing a number of projects catching bids and some narratives emerging. You’ll remember in our last update I discussed Aptos.
If you did participate, and you didn’t sell the airdrop within the first second, I would actually recommend sitting on it, maybe participating in the DeFi on chain, growing your bag, etc. and exiting in September or October 2023 before the VC unlocks begin.
While my opinion, tone, and outlook on the token were negative long-term, I did provide some short-term considerations for the token. Please remember that the VC unlocks begin in the fall of 2023. Until then, the VCs have a vested interest in pumping their token. I repeat this phrase often here for a reason, “being early, looks the same as being wrong.” Trade with the VCs for now if you’re interested in touching this, don’t trade against them.
You can see that the most profitable possible exit, for now, was during the airdrop itself. But if you missed that exit, waiting was the next most ideal move. The VCs behind Aptos are absolutely going to be pumping their token, and the CExes that listed it are likely going to be doing regular token buy-backs to add liquidity. If you’re in already you can certainly ride this alongside the big dogs until this Fall. But if you’re not in Aptos, there are far better things to do with your money.
Let’s talk about those better things to do with your money…
ETH Layer Two Chains
This is the main narrative that is emerging right now.
The ETH 2.0 update has so far been successful on its road to becoming a chain that can process far more transactions per second than it previously could. And as these updates continue to roll out, the narrative for ETH killers and Alt L1s is shrinking.
What’s replacing them are ETH L2s. Layer twos are essentially blockchains that are built on top of another chain. In this case, they exist in order to maximize the number of transactions that can be rolled up into one transaction on ETH. The L2 chain does all of its transactions and then submits just one transaction to ETH to change the L2 starting state and end state. The ETH L1 is the finality layer that is securing the L2. This allows for an L2 to complete thousands of transactions in one single ETH transaction.
As ETH is moving further forward as a PoS chain as compared to previously being a PoW chain, these L2s are growing alongside ETH as well.
Chains like Arbitrum and Optimism are ETH L2s that have more daily volume than many other L1 chains. You’ll note in the chart below from DeFiLlama that many of the ETH-killers of last year are nowhere to be found or far below ETH L2s.
This is just the beginning as more ETH L2s are launching this year. As an example, zkSync is an ETH L2 that will be launching in March. It is another L2 using zero-knowledge proofs to provide additional value for DeFi users. ZkSync is currently in a closed testnet for new dApps and selected users to test its functioning. Coinbase has just launched its own ETH L2 called Base today, they intend this to allow users of the Coinbase wallet to engage in permissionless DeFi through the non-custodial Coinbase wallet. And they’re giving out a free NFT… might as well.
As we see more ETH L2s launch we will be seeing more of them clustering near the top of the daily volume chart for DeFi. As that is happening the same question will be asked of the EVM-compatible chains that don’t really have a niche of their own. Why are you here? Polygon is establishing its identity as the chain for mobile gaming, and its spending grant money attracting games to its chain. In fact, a game I’ve been involved with for the last 18 months is moving to Polygon in 4 days with their Gen 2 mint occurring on ETH and bridging to Polygon. Polygon will likely survive. Avalanche is fighting and using its budget to attract and hold DeFi projects, but can it fight the tide? Solana is dead in the water. The Cosmos (ATOM) ecosystem will likely be able to hold its own, so Cosmos and maybe Canto will be able to hold on to their volume.
So long as BSC can continue to make its users and token holders money, it will manage to stay in the top 10. But we’re going to watch the shift of capital towards ETH, ETH L2s, and the few chains that can maintain an identity in the face of an Ethereum ecosystem that continues to get leaner and faster every day.
Can Fantom really survive in this world? If we’re being real, the answer is no, unless they genuinely rebrand themselves to establish an identity that makes them special. ETH isn’t slow and expensive anymore, and it will only get cheaper with each passing month. One reason I struggled to write a review of Fantom was because of this very risk and the ability to appropriately put a value on hype in the face of doom.
Volumes on these side-chains that can’t establish their own identity will dry up and disappear. That’s the narrative that you need to understand moving forward for this year.
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