Someone asked me on Twitter on how I’d approach a bull market.
Allocate for your long-term plays. Now’s a good time to buy, or DCA if you want. Be more aggressive early in the bull and more conservative towards the end of the cycle.
Look for new narratives and be biased towards the market leaders. Cut the losers fast. Know when to take profits.
Also, be flexible. Each cycle brings new strategies. Not sure what kind of craziness the next cycle brings, but you can count on me to share my unbiased thoughts.
Here’s what we got today:
- The Ethereum Takeover. Three more L2s are here.
- How to evaluate tokens? A framework from Outlier Ventures.
- Is Arbitrum losing dominance? And two responses from Arbitrum.
- Around the Web. Unibot integrated Friend.tech keys, Velodrome introduced Slipstream, Base introduced pessimism, and more.
Here’s your Edge 🗡️!
The Ethereum Takeover
Ethereum is cementing its dominance.
Last week, we saw three new Layer2 announcements. And guess what? Each of these new L2s are coming from other chains.
Announcement #1: Eclipse introduced Eclipse mainnet, an L2 on Ethereum. It uses Solana Virtual Machine for execution. (And Celestia for DA.) So, Solana devs? You can now easily slide your dApps onto an Ethereum L2.
Ethereum now has Solana VM as an L2. Many say Solana has the best execution environment. Now, Ethereum has that too.
Announcement #2: Canto, a cosmos chain, plans to become an L2 on Ethereum. It was known for its “public goods” narrative.
- Sharing gas fee with devs.
- Community-owned financial primitives (such as DEXs, Lending market, and stablecoin).
Announcement #3: Astar is creating a rollup: Astar zkEVM. It is a leading parachain on Polkadot. (Note: Astar will stay in Polkadot; they are just expanding to Ethereum.)
Both Canto and Aster are going to use Polygon Chain Development Kit (CDK) for their zk-rollups.
Polygon CDK is a tool for building zk-chains that are part of the Polygon L2 ecosystem. From the user’s perspective, the entire ecosystem will feel like a single chain. Kinda like the Superchain from OP Stack.
The competition b/w L2-as-service is intensifying. The CDK was released on August 30th only. Big names are already joining. With Polygon’s famous BizDev team, they can become a serious competition to OP stack.
The L2s are increasing at an insane rate. They seem a much better choice than Alt-L1s. The Ethereum ecosystem is attracting all other chains. (dYdX is the only counter-example.)
Edgy’s Take: I’d be hesitant to invest in any Alt Layer 1s for the long term.
A DeFi Operating System
DeFi moves fast. It is impossible to keep up with all the mooncoins and games popping up daily.
We are constantly overwhelmed by the sheer amount of information coming at us. We feel that we need more time to research. We can’t keep up with anything. And by the end, we end up FOMOing into some influencer’s exit liquidity.
But time isn’t the enemy. Your systems are.
You probably don’t have any knowledge management system. You don’t have any system for evaluating protocols. Your information is scattered everywhere – notes on paper, +20 Google Chrome tabs open, bookmarks in browsers, notes in various apps, thoughts lost in the chaos. And so on.
The solution is to create a knowledge-management system. DeFi 2nd Brain is an all-in-one system for managing the A-Z of DeFi investing.
We promise you three outcomes:
- Save hours each week in time spent organizing and researching.
- Manage all your reading material, alpha, tasks, and research in one place.
- 2x Your Potential by using proven strategies, frameworks, & tactics that elite researchers use to stay on top of Crypto.
You can install my entire DeFi Research System into your Notion in a few clicks. It will be your operating system for everything related to DeFi.
(For DeFi 2nd Brain students, I’m doing a 90-minute live Q&A on September 29th. So, make sure to buy fast.)
A VC’s Blueprint for Evaluating Tokens
Valuing tokens might be the most challenging task in DeFi investing. This is still a relatively new field.
Outlier Ventures dropped some wisdom bombs with a series of articles. They shared a framework for token evaluation. Here’s the nutshell version.
Price = Supply x Demand. The supply can be understood pretty easily. It’ll be shared in the tokenomics section of every project.
Evaluating demand is more complicated. OV shared several demand indicators for a token.
Narrative: DeFi markets are controlled by narratives. They are beliefs about a particular project/sector/technology – anything related to crypto. Projects that can tap into successful narratives will be valued much higher.
Community Size: When a community is fired up, they’ll pump their crypto projects to the moon. Here are three areas to analyze.
- Participation in community tools such as Discord & Telegram.
- Engagement on social media tools such as Twitter & Instagram.
- Quality of posts on publication platforms such as Substack & Medium.
Unique Token Holders: You can see them via onchain analysis. More unique holders means more adoption and decentralization. More is better.
Product & Token: Ultimately, everything comes down to having a good product. And, importantly, a good token that can capture value from that product. Here are some ways to capture value.
- Revenue share.
- Token buybacks.
- Governance rights.
- In-app utilities like discounts
- Amount of Users: It can calculate adoption rates and Product / Market Fit (PMF).
- Revenue: It is the fees generated and then captured by the protocol. The fee paid to the L1 or LPs won’t be included in this.
- Total Value Locked: It refers to the value of tokens in a protocol. It generally indicates product-market fit. Projects with high usage will get more TVL.
- Price/Sales (P/S): This ratio shows how a project is valued relative to its revenues generated, which can then be compared to other web3 companies. It is calculated by dividing the fully diluted market cap by the annualized revenues.
- Price/Fees (P/F): It is calculated by dividing the fully diluted market cap by the annualized fees generated by that company.
- Discounted Cash Flow: This is a valuation method used in TradFi. But it isn’t common in DeFi. With the increasing sophistication of DeFi investing, it’ll be more common.
- Fully Diluted Valuation/TVL: It’s obtained by dividing Fully Diluted Valuation by TVL. You can use this number to compare different protocols.
Generally, a lower value indicates the asset is undervalued but can also mean the project is qualitatively inferior.
Don’t use any of these indicators in isolation. The real skill is bringing all together and adapting them to the market conditions.
This simplified summary doesn’t cover the nuances of using these indicators.
Check out the full article series below.
- Why are tokens valuable?
- A Qualitative Analysis
- Quantitative Components of Token Value
- Measuring Token Value – A Case Study
Arbitrum is Pumping Money into their Chain
The chart shows the percentage share of the 7-day moving average of transactions on three L2s.
What’s happening? Arbitrum was completely dominating the game. On May 6th, Arbitrum had 86.5%. But from there, it was all downhill. Currently, it only has 22%.
What’s Arbitrum’s response? They just approved a 50 million $ARB incentive program. Eligible Protocol DAOs on Arbitrum can apply for a piece of the pie. They have to provide a detailed plan for using the grant.
They are also relaunching the “Arbitrum Odyssey” on September 26th.
What’s next? Projects are applying for grants. Those who manage to use it effectively are going to be the winners. So, keep an eye out for applications from Arbitrum DAOs.
Study their plans. Maybe even take positions in good ones.
Edgy’s Take: These are great news for Arbitrum projects and we should see some increased activity. Will this result in Arbitrum season 2? I don’t think so.
1. There are far more Layer 2s now compared to before. People like bright shiny objects and will gravitate more towards the newer chains like Base.
2. Barely anyone’s trading these days. The markets are quite choppy.
🚀 DeFi Catalysts
Unibot enabled trading of Friend.tech keys without creating a Friend.tech account.
Raft Finance teased mobile support for their dApp. Good mobile apps can drive adoption for web3 dApps.
Polygon started Phase 0 of its transition to Polygon 2.0. Phase 0 includes the upgrade of $MATIC to $POL tokens.
Origin DeFi has decided to deploy most of OETH’s ETH holdings into liquid staking tokens. This will give the protocol more native yield.
Metis announced the Metis Journey, a $5 million DeFi Incentive Program for boosting DeFi applications on the Metis 2.
Velodrome introduced its new AMM, Velodrome Slipstream. It will add support for concentrated liquidity pools as an additional option.
Lybra Finance is partnering with Silent Protocol to add privacy options to the Lybra Protocol in a compliant manner.
Convex DAO decided to direct all $vlCVX rewards to staked $CVX. The goal was to allow further utility, such as new wrappers and lending, for staked $CVX.
Notional Finance will kick off their v3 Beta on Arbitrum. It is the #1 fixed rate lending protocol with $700M+ volume.
Jito, Solana’s Liquid Staking Protocol, began their points program. It is meant to quantify and reward contributions to the ecosystem.
📰 Industry News
Balancer‘s front end is under attack. Users are redirected to a malicious page. Attacker has already stolen over $200k.
OpenSea introduced Creator Studio. It’ll be a hub that will house expansive tools for creating, managing, and analyzing your projects.
Base introduced Pessimism, an open-source monitoring system designed to enhance security of Base (as well as the broader OP Stack ecosystem.)
Swift, the global financial messaging network, said that three central banks are now beta testing its CBDC interoperability project.
Optimism announced OP Airdrop #3. It is being directly disbursed to addresses that have delegated the voting power of their OP tokens between January 20th – July 20th of 2023.
🧠 Twitter Alpha
- Don’t over-allocate to old projects.
- Friend.tech isn’t as safe as you think.
- The Different types of characters in crypto.
- Why does everyone only talk about infrastructure and not dApps?