jakiro
Author: Patrick Scott | Dynamo DeFi Translation: Shan Oppa, Bitcoin Vision
Cryptocurrency’s moment of reckoning has arrived.
For the past five years, tokens have been in a state of what I euphemistically call “speculative demand beyond fundamentals” – and to put it bluntly, their valuations have been grossly inflated.
The reason behind this is simple: there are not many liquid assets with good fundamentals in the cryptocurrency industry.As a result, investors are left with exposure through the only available assets, which are often Bitcoin or altcoins; this is further fueled by retail traders who have heard the myth that Bitcoin makes them rich and want to put money into newer, smaller tokens to replicate the gains.
This results in the purchase demand for altcoins far exceeding the supply of those altcoins with truly solid fundamentals.
The direct consequence is: no matter you buy any token when market sentiment is low, you can get amazing returns after a few years.
The indirect consequence is that most business models (if they can even be called models) in the industry revolve around selling their own tokens rather than actual revenue streams related to the product.
In the past two years, three major events have dealt a catastrophic blow to the altcoin market:
1. Pull-and-smash tools and various Launchpads commercialize new token issuance.This spreads financial attention across millions of assets, preventing the top thousands of tokens from receiving the concentrated inflows they normally would, while also breaking the wealth effect that Bitcoin halvings typically bring.
Earlier this year, the number of tokens issued on the Pump platform exceeded 50,000.
2. Some crypto assets have formed real fundamentals.This includes both tokens like HYPE and newly listed assets like CRCL.It is difficult for investors to bet on a white paper when there are other assets backed by fundamentals.
Hyperliquid Holders’ revenue regularly exceeds $100 million per month.
3. Tech stocks outperform cryptocurrencies.In many cases, stocks related to artificial intelligence, robotics, biotech and quantum computing have outperformed the cryptocurrency market.Retail investors may be wondering, why put money into altcoins when “real” companies can offer better returns with seemingly lower risk?Even the Nasdaq has outperformed Bitcoin and altcoins so far this year.
The result of all this is a graveyard of underperforming altcoins, project teams vying for an increasingly scarce pool of capital, and experienced cryptocurrency investors running around like headless chickens, unsure of how to invest in this new landscape.
At the end of the day, tokens either represent an ownership interest in a business or they are worthless.They are not some magical new thing that generates value simply by existing.
If you stop thinking of a token as something incomprehensible and instead think of it as an asset that represents the future cash flow of a business, everything becomes clearer.
You might argue that some tokens do not give you rights to future cash flows.Some are utility tokens, and some protocols have both tokens and equity.“This is exactly where you’re wrong. These tokens still represent future cash flows — it’s just that the cash flows associated with them are exactly zero.
At the end of the day, tokens either represent an ownership interest in a business or they are worthless.They are not magical new things that generate value simply by existing or, as many say, “community.”Note: This does not apply to network tokens such as Bitcoin, which have many commodity characteristics; I am talking about protocol tokens here.
In the near future, the only decentralized finance tokens with real value will be those that act as pseudo-equity, and they need to meet two conditions: (1) they have the right to receive protocol revenue; (2) the protocol revenue can constitute an attractive value proposition.
Retail investors bid farewell to cryptocurrencies for now
Leading opinion leaders promote the “guiltlessness of speculation” while pretending to be surprised when people don’t want to become potential victims – this contradictory attitude further erodes the trust of retail investors.
In the foreseeable future, retail investors will bid farewell to the vast majority of tokens.
In addition to the above reasons, a large part of the reason is that people are tired of losing money:
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Tokens get overhyped with promises they fail to deliver on
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Meme Coin Launchpad leads to oversaturation of tokens
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The predatory token economic model and the industry’s tolerance for inferior projects have made retail investors clearly realize that they are destined to lose money
The result is that people who would have previously bought cryptocurrencies have turned their speculation addiction to other channels: sports betting, prediction markets, stock options.These choices are not necessarily wise, but the same goes for buying most altcoins.In this regard, people’s choices are understandable.
Public apathy towards cryptocurrencies is reflected in market attention.Although fundamentals this year are better than ever and regulatory risks are lower than ever, market enthusiasm never reaches the heights of 2021.
I also think the AI craze sparked by ChatGPT dampened enthusiasm for cryptocurrencies by showing a new generation what a real killer product would look like.For a decade, enthusiasts have been calling cryptocurrencies the new “dot-com era.”But it’s hard to convince people of that when they see AI reshaping the world every day in more intuitive and obvious ways.
Comparing the attention of cryptocurrencies and artificial intelligence on search engines, the last time cryptocurrency gained more attention on Google than artificial intelligence was during the collapse of FTX.
Will retail investors come back?
It will.
Arguably, they are now returning to prediction markets, but instead of altcoins, they are buying binary options on when the government shutdown will end.To get them to buy altcoins in large quantities again, they have to feel like they have a reasonable chance of making money.
All token value accumulation is derived from protocol revenue
In a world where tokens can no longer rely on a steady stream of speculative buyers, they must stand on their own merit.
After five years of experimentation, a painful truth has become clear: token value accrual essentially only comes in one meaningful form – a claim on protocol revenue (past, present and/or future).
All of these forms of real value accumulation are ultimately claims on the income or assets of the agreement:
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dividends
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repurchase
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Handling fee destroyed
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control of treasury
This does not mean that, to be valuable, an agreement must now do one of these things.I’ve received a lot of criticism in the past for stating that I want protocols I’m bullish on to reinvest funds rather than buy them back.But they must have mechanisms to initiate this accumulation of value in the future, ideally based on governance votes or clear compliance conditions.Vague promises are no longer enough.
Fortunately for savvy investors, this fundamental data for thousands of protocols is at your fingertips on platforms like DefiLlama.
A quick look at the top protocols by 30-day revenue reveals a clear pattern: stablecoin issuers and derivatives protocols dominate, along with Launchpads, trading apps, collateralized debt positions (CDPs), wallets, decentralized exchanges (DEX) and lending protocols.
Several conclusions can be drawn from this:
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Stablecoins and perpetual contracts are two of the most profitable businesses in the cryptocurrency industry today
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Overall, supporting transaction-related businesses is highly profitable.In my opinion, if the market enters a secular bear market, revenue from trading-related businesses will be at significant risk unless protocols can move to real-world asset (RWA) trading, like Hyperliquid is trying to do.
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Controlling distribution channels is just as important as building the underlying infrastructure.I suspect that a significant portion of core decentralized finance users will vehemently disagree that a trading app or wallet will never become one of the top revenue generating projects because users can save money by using the protocol directly.But in the real world, Axiom and Phantom are extremely profitable.
More importantly, I hope you understand that there are cryptocurrency apps that generate tens of millions of dollars in revenue every month.If your target agreement isn’t at this level yet, that’s okay.As the Head of Revenue at DefiLlama, I know all too well that building a product that the market is willing to pay for takes time.But there has to be a path to profitability.Game time is over.
An investment framework for a value-oriented cryptocurrency world
When looking for tokens worth investing in over the next few years, strong-performing projects will meet the following criteria:
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Have the right to claim the income from the agreement, or have a clear and transparent path to obtain the right to claim the income from the agreement
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Revenue and earnings continue to grow
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Market capitalization maintains a reasonable multiple relationship with past revenue
Rather than harping on theory, let’s give a few concrete examples:
Curve Finance
Over the past three years, Curve has delivered steady, consistent revenue growth despite falling fully diluted valuations (FDV).The result is a fully diluted valuation (FDV) of less than 8 times Curve’s trailing month annualized revenue.Due to the bribes available to stakers who lock up Curve tokens and the longer token release period, the actual yield on the token is much higher.It will be interesting to see if Curve can maintain its revenue levels in the coming months.
Jupiter
Jupiter has cemented itself as one of the main beneficiaries of the Solana ecosystem’s prosperity.It is the most widely used decentralized exchange (DEX) aggregator and perpetual contract decentralized exchange (DEX) on the chain.It has also made a number of strategic acquisitions, allowing it to leverage its distribution channels to expand into other on-chain markets.The annualized revenue attributable to token holders is actually quite high, approaching 25% of circulating market cap and over 10% of fully diluted valuation (FDV).
Other protocols that meet these standards include Hyperliquid, Sky, Aerodrome, and Pendle.
optimistic outlook
The good news is that project teams concerned about their own survival are quickly realizing this.I expect that in the coming years, the pressure to endlessly sell tokens will drive more decentralized finance projects to develop revenue streams and tie their tokens to those revenue streams.As long as you find the right direction, the future will be bright.
