Recently, there are many voices in the industry community that are disappointed with the Ethereum ecosystem, because the secondary market performance of Ethereum ecosystem projects in this cycle is not good enough, or it cannot meet the expectations of the community. The root cause may be dissatisfaction with the overall poor performance of altcoins.
There are several main factors that cause this phenomenon:
1. The fundamental reason is that there is no incremental capital entering the market
The incremental capital in this cycle is mainly in BTC ETF, but BTC ETF is traded on traditional stock exchanges such as Nasdaq, and then the trustee purchases BTC from Crypto exchanges. As of August 28, the BTC spot ETF has a cumulative net inflow of US$17.85 billion, but the ETH spot ETF is still in a state of net outflow of US$475 million.
The incremental funds of ETF only entered the single currency BTC. This part of the buying belongs to the "buy and withdraw" mode, and has not really flowed into the market. These incremental funds have basically no spillover effect on other altcoins.
2. The existing funds on the market are not interested in the Ethereum ecosystem
The stock game of funds on the Crypto exchange market shows a phenomenon of not accepting each other.
The Eastern community does not accept the DePIN narrative of the Western community around the Solana ecosystem;
The Western community does not accept the Bitcoin Layer2 narrative of the Eastern community around the Bitcoin ecosystem;
The second-level Liquid Fund does not accept the Ethereum Layer2 and ZK narrative of the first-level Venture Capital around the Ethereum ecosystem.
Therefore, the secondary market performance of Ethereum ecosystem projects is particularly poor.
3. This cycle is obsessed with infrastructure and lacks application innovation
The phenomenon of obsession with infrastructure is not limited to the Ethereum ecosystem, and basically the entire Web3 is still at this stage. This situation is partly due to the limitations of Web3 value capture - fat protocols and thin applications.
Because most of the value is captured by the underlying chain, VCs are generally keen to invest in various layer1 and layer2, and the rent collection logic of the protocol layer is relatively easier to obtain a high market value. Moreover, the technical narratives of various subdivided functional module projects are getting deeper and deeper. Projects that may only be responsible for a very small link in the entire industry may have reached the ceiling in the primary market valuation because of the addition of more innovative technologies such as ZKP and FHE, and the secondary market performance will naturally experience valuation repair. However, such projects have basically made no contribution in attracting new users and Mass Adoption.
The hope of breaking through may still lie in the application layer.
Basic characteristics of Web3 applications with long-term value
Recently, Ethereum co-founder Vitalik Buterin talked about the type of Web3 applications he hopes to see on Twitter, which must have two characteristics:
First, it can be continuously useful;
Second, it will not sacrifice principles (no permission required, decentralization, etc.).
From an investment perspective, I think we can add two more - it must have a certain hematopoietic ability, and it is best to have some positive externalities.
For Web3 applications with these characteristics, Vitalik listed three specific directions: DEX, Decentralized Stablecoin, and Polymarket.
Vitalik mentioned very bluntly that the things he "does not respect" are basically those things whose attraction comes from some temporary sources that are not sustainable. He also gave the example of liquidity mining in 2021 (referring to the token incentives of liquidity mining as a temporary source of income that is not sustainable).
Exploration and Analysis of Web3 Applications
In the past few years, we have witnessed application exploration in many directions, some of which have been falsified, such as: GameFi 1.0 in the X2Earn model; and some of the value has been proven, such as: the application of stablecoins in the payment field.
1. DeFi: The protocol itself has long-term value, and the governance token does not capture value
DeFi is one of the most successful application scenarios in Web3. It attempts to reconstruct traditional financial services in a decentralized way. DeFi includes lending protocols, decentralized exchanges (DEX), derivatives trading, stablecoins, and asset management protocols.
After a complete bull-bear cycle, there are still some very high-quality head DeFi protocols left. For example, lending protocols (AAVE, Compound, etc.), DEX (Uniswap, etc.), stablecoins (MakerDAO's DAI, etc.), and derivatives (dYdX, etc.).
But the tokens of these DeFi protocols did not actually perform well in this cycle. It can be mainly attributed to two key factors:
After ETH2.0, the narrative of Staking and Restaking has emerged. These new projects generally have token incentives for participating users, diverting most of the TVL; while on the previous DeFi protocol side, after the liquidity mining rewards were reduced or stopped, the income incentives of LPs were greatly reduced;
Governance tokens generally do not capture the value of the protocol. The business volume of DeFi protocols is still considerable, and the protocol revenue is also considerable, but pure governance coins cannot support higher FDV (for example: compared with BNB to Binance, UNI lacks value capture for Uniswap protocol revenue).
Although the Token market performance of DeFi protocols is poor, DeFi protocols actually have continuous usefulness, certain positive externalities, and also comply with the basic principles of Web3 (no permission required, decentralization, etc.).
2. Prediction Market: The Holy Grail of Cognitive Technology
Vitalik has mentioned the application prospects of prediction markets many times. He believes that prediction markets are the holy grail of cognitive technology.
The unique nature of prediction markets is a natural fit with Web3. Prediction markets provide a decentralized way to acquire knowledge and marketize information by allowing users to bet or predict future events (such as political elections, sports event results, financial market trends, etc.). It is naturally suitable to take advantage of the decentralization, anti-censorship, global participation, and automated execution of smart contracts of blockchain. These prediction market projects can be continuously useful, comply with the basic principles of Web3 (no permission required, decentralized), and have certain positive externalities.
Since people are willing to bet tens of billions of dollars on various sports events on traditional gambling platforms, there is reason to believe that more transparent prediction markets such as Web3 have certain prospects. Take Polymarket as an example: Due to Trump's sharing of Polymarket's leading data on his winning rate during the US presidential election, Polymarket has been very prosperous in the past six months. The platform's data has increased significantly (the betting volume in August exceeded 440 million US dollars, a new high, and the monthly active users exceeded 60,000, a new high), and the latest B round successfully raised 45M.
Before this, the iteration of the prediction market did not reach this scale, because the events were very scattered, and most ordinary users tended to bet on the events with small risks, so the pools of each event were not very thick. Until the US presidential election, Polymarket had accumulated more than 550 million US dollars in unsettled prediction funds.
This track may be a promising Web3 application direction, and the potential market size is also large enough.
3. DePIN: It is both an infrastructure network and a future application carrier
DePIN is a paradigm innovation in the deployment and maintenance of physical infrastructure. Through Crypto, Internet, Internet of Things and blockchain technology, a more efficient, decentralized and fair infrastructure deployment method can be achieved.
The importance and necessity of DePIN infrastructure projects such as decentralized communication networks, distributed storage, and decentralized computing power networks have been mentioned in previous articles.
DePIN may also be a future application carrier. In this cycle, Solana Ecosystem launched the Saga mobile phone, and CoralApp, which was recently invested and incubated by Binance Labs, is also going to launch CoralPhone. These hardware may become a new entrance to the Web3 world.
Further expansion, shared transportation networks (such as shared charging piles, electric vehicle networks) and other indispensable infrastructure in modern society may also be operated and expanded in the form of DePIN, giving full play to the inclusiveness, positive externalities of DePIN.
Summary
The growth point of the Web3 ecosystem may still need to achieve breakthroughs at the application layer, especially those innovative applications that have the opportunity to achieve large-scale user adoption. They must comply with the basic principles of Web3 such as decentralization and permissionlessness, while continuing to be useful, and preferably have some self-sustaining ability and positive externalities.
JinseFinance
Edmund
Huang Bo
Brian
Sanya
Hui Xin
Coindesk
Cointelegraph
Bitcoinist