Author: 10 K Ventures
The annual report is divided into two parts.
This part shares our thoughts on 2024, and does not constitute investment advice.
This part mainly covers the following aspects of 2024:
(1) The impact of ETFs
(2) DEX vs CEX
(3) Application chains
(4) Stable vs on-chain asset management
(5) Has the industry entered a PE moment?
01. ETFs and giants dominate the market
1.1 BTC ETF sees a significant net inflow in a year, with pricing power shifting to North American institutional investors
After the launch of BTC ETFs this year, North American BTC ETFs have started to accumulate significantly. As of December 25th, North American ETFs hold around 1.19 million BTC, accounting for 5.66% of all BTC. When they were just launched, they held less than 670,000 BTC, a significant increase of 525,600 BTC in one year.
Observing the net inflows and outflows of BTC ETFs, it can be found that this year's BTC fluctuations are highly positively correlated with the net inflows and outflows of ETFs, and the pricing power is gradually shifting to North America.
This trend is further strengthened by the following factors: large CEXs have become more selective towards VC-backed teams (while also charging high listing fees), while on-chain liquidity is growing with the development of better tools (such as CLOBs, launchpads, Moonshot, etc.).
1.2 ETH ETF progress is relatively slow, currently in the stage of circulation from inside to outside the circle
Overall, the net inflow progress of ETH ETFs is relatively slower than that of BTC ETFs. November 29th was a turning point, when ETH ETFs saw a significant net inflow of $300 million, twice the cumulative net inflow of the previous 4 months. Subsequently, ETH ETFs have continued to see net inflows, but we have also observed that some crypto native old OGs like Justin Sun have started to sell Ethereum, currently showing a trend of selling within the circle and ETF accumulation outside the circle. As of December 26th, ETFs hold 3% of ETH.
We believe ETH will also gradually change hands, with pricing power shifting from crypto natives to North America, but this handover process may be relatively longer than BTC. If ETH can have new narratives from institutions next year, such as ETH ETFs being able to generate staking yields and not being considered securities, then that would be positive.
02. DEX Flip CEX?
2.1 The ceiling of on-chain spot trading may be gradually approaching its limit
From the beginning of 2024, in the new 4-year cycle, we can clearly see that the market share of on-chain spot/derivatives is constantly expanding.
However, the dex/cex trading volume may have a certain ceiling. This is because the large trading volume in the blockchain world still comes from mainstream coins like BTC/ETH/SOL/XRP, and the trading volume and best trading depth of these mainstream coins are still in CEXs. But as the answer to "why crypto" - the biggest use of crypto is to use tokens to incentivize mid-to-long-tail users/project parties. The recent large on-chain trading volume has been in memes, which are mid-to-long-tail projects compared to mainstream coins.
If BTC/ETH and other mainstream coins remain the market hotspot in the future (highly likely), and memes do not occupy the majority of the trading volume, then the ceiling of on-chain spot trading may soon be visible. Or, memes are eroding the trading volume of mid-to-tail VC coins on CEXs.
In terms of the market share of on-chain DEXs, thanks to the emergence of Pumpfun, Raydium's market share has grown tremendously, once accounting for 28% of the total on-chain DEX market share. Due to the relatively sluggish performance of the Ethereum ecosystem this year, Uni's market share has dropped from 42% at the beginning of the year to 33%. The biggest dark horse this year is Aerodrome, which has grown from 0% market share at the beginning of the year to 10% now, thanks to the active Base ecosystem (Long Aero=Long Base).
2.2 Hyperliquid stands out
Due to the relatively small market size of the original on-chain derivatives sector, Hyperliquid's surge in November has led to a significant increase in the dex/cex futures trading volume, single-handedly increasing its market share from 4% to 8%.
We often say that the competitive features of perp dex are:
1. Institutions prefer Orderbook, while retail/whales prefer Pool mode
2. Market maker/taker trading volume is greater than retail
3. In Orderbook mode, MM/Taker brings trading volume and liquidity from 0 to 1, while gameplay (airdrops + pumping) brings 1 to 10 for retail
4. While Pool has a low threshold, MM's gross profit is also low; Orderbook has a high threshold, but MM's gross profit is also high
GMX/Jupiter, representing the LP Pool model, represent the dydx derivatives 1.0 model. GMX/Jupiter allow retail to add liquidity pools to bet against traders, on one hand earning trading fees, and on the other hand earning liquidation fees, decentralizing the commercial model of CEX MMs and creating a new paradigm for on-chain perp dex.
However, after the bear-bull transition, institutions have rushed in again, and liquidity has become abundant again. The trading depth and profit margins represented by the Pool model can no longer meet the needs of institutions, and the derivatives trading sector has returned to the Orderbook 3.0 model. One might think that building a high-performance derivatives exchange is simple, but in reality it is not. Simply buying a trash trading engine from Chainup cannot meet the needs of high-performance trading. Hyperliquid has spent two years building its own trading engine, telling the story of an L1, using the Orderbook model to match trades, and using HLP to attract retail to provide liquidity. Hyper currently appears to be the perfect culmination of perp dex.
However, we also believe that perp dex still has room for improvement, and the improvement may be in licensing - top market makers still tend to MM in compliant/guaranteed perp dex.
3. Solana/Base/Ton - Contenders Vie for Supremacy
3.1 Pump.fun single-handedly contributes half of Solana's trading volume
Whenever we ask the top Infra/public chain companies what kind of ecosystem they want to build, we have always held that if a true Infra/public chain company wants to stand out, it must have a unique project/sector within its ecosystem.
DeFi/Ethereum, STEPN/Solana+BSC, GameFi/BSC, DePIN/Solana, Payments/TRON. This time, Pump, as the leading dapp, has once again saved the Solana ecosystem, generating $300 million in revenue this year. Solana's Payfi and DePIN stories appeal to traditional investors, who are willing to buy in. But retail may not recognize Payfi and DePIN, after all, APYs of a few percent on money market funds, supply chain finance, WiFi base stations, and map data collection are still too far from the pure gambling mentality of retail investors, who in the frenzy of the bull market prefer the excitement of big green/red candles that release dopamine.
Additionally, Pumpfun's website design is very addictive, with the flashing lights and pop-ups able to 200% amplify the greed in users' hearts - pure gambling, the ultimate thrill.
Solana's development path is now very clear.
Here is the English translation of the text, with the terms in <> retained as is:On the 2B end, Foundation is telling the story of being able to serve web2 enterprise clients, such as Payfi, after all, cross-border payments/payfi are currently happening gradually bottom-up in the enterprise sector. The service for enterprise clients by DePIN is not as sexy anymore, and the promotion speed of DePIN is not as satisfactory. After all, in such an efficient chain world, it needs to form a certain scale after the real industrial chain + supply chain + transportation to all over the world before it can serve the 2B end, and the speed will not be too fast.
On the 2C end, there is nothing better than a casino + lottery with an extremely low threshold to make money.
In addition, let me supplement a bit about the auxiliary trading tools of the "brokerage" products like GMGN. As the head product of the track, it has earned more than $20 million in revenue in the last 3 months. This provides a new entrepreneurial idea for web2 product managers entering the crypto world. Compared to the products like Dune and Tokenterminal seen in the previous cycle, the commercialization capability is at least two orders of magnitude stronger, thanks to these auxiliary trading products directly entering the trading.
We will also continue to observe similar equity investment opportunities and revenue sharing opportunities for these products. The financing model of such products is often equity financing + revenue sharing, but based on our observation, this investment model is not very cost-effective for investors (it's actually better to do it yourself). Usually the first round valuation is 10-20 m, with investors holding around 20% of the shares, which means that to recoup the investment through dividends, the company must achieve revenue of 10-20 m during its life cycle, which is very challenging, as the network effect of blockchain is too prominent, and the life cycle is usually very short.
3.2 Solana Memecoin - One Succeeds, Thousands Perish
The most successful theme this year must be Meme coins. A large portion of the trading volume of Meme coins has sucked in the trading volume of the mid-to-low-end VC coins. The pump.fun in October-November has pushed the Meme frenzy to its peak, with dozens of new projects being launched on pumpfun every 10 seconds. This year, Meme coins like ai16z, bonk, bome, spx 6900 have also reached a market cap of over $100 million.
The Meme market provides huge price swings, with intraday fluctuations reaching thousands of times, but the extremely high returns come with extremely high risks, and many Meme coins can also instantly go to zero.
From the data below, we can see that 99% of Meme coins are unable to break through a $1M market cap. The Meme that can break out of the tens of thousands of Meme is truly "One Succeeds, Thousands Perish".
3.3 AI Agent Leads the Rise of Base
In our October monthly report, we had highlighted the rise of the Base ecosystem. Two months later, both DAU and TVL of Base are now significantly ahead of other Ethereum ecosystems.
In the current Base ecosystem, Virtual and Clanker are the most likely representative projects besides Aerodrome. Virtual is core product-driven, emphasizing the connection between AI and Web2 users, gradually building a set of "usable" tool system. Google's former CEO Eric Schmidt and Marc Andreessen have pointed out the unique advantages of the Virtual team in high-frequency trial and error. From PathDAO to Virtual Protocol, the team has crossed GameFi, AI+DApp in three years, completing the miracle of market cap growth from $10 million to $3 billion. In addition to the practicality of the AI Agent itself (e.g. Luna can interact with users), since Virtual has issued its Token, the gameplay will be more diverse than pumpfun. Virtual as the platform's only token usage, using Virtual to participate in new projects, replicating the pumpfun/sol approach.
Interestingly, many projects this year have had more or less innovation in Tokenomics, truly realizing the flywheel effect of business + token.
3.4 Apart from Ta p2Earn, where is Ton's breakthrough point?
We had released a research report on Ton earlier this year, in which we did not feel particularly Bullish about the Ton ecosystem. The main reason is that we are not optimistic about the acquisition model under the Ta p2Earn system. Ta p2Earn is different from the paid system of DePIN and GameFi. The story told by DePIN projects is that when there are more long-tail suppliers, the demand side will pay for the entire long-tail supply side and ecosystem, such as Render rendering, Mobile communication. GameFi's story is that the game is fun, and users will pay for the platform and gold farmers due to entertainment needs.
But the story of Ta p2Earn is that when I have enough users, there will be advertising business value. But the problem is that these ta p2earn users are pure wool party, with very low commercial value, or the existing commercial value is just being sold to the exchange once. After half a year, we believe that the business model of Ta p2Earn acquisition + advertising is difficult to exist in the long run. Rather than saying that Ta p2Earn is a business innovation, it is better to say that the new round of blockchain user acquisition mission has been completed by the hamsters/catizens/DOGE a few months ago.
So where will Ton's next breakthrough point be? For example, we have recently seen the alpha test data labeling product of sahara, which is mainly for long text. If a company can obtain actual orders and distribute them through TG for users to do the labeling, it may be a very sexy "web3 data Foxconn". But such companies need to seriously consider the quality issues after crowdsourcing distribution.
In addition, after detailed communication with friends from the Ton Foundation, we also deeply realized the problem of the Ton ecosystem - ecosystem projects usually see token issuance as a short-term opportunity, the cabal issues a wave of tokens and then ends, starting a new project, such as DOGE/Hamster. The exchanges have obtained the new users of these projects, and that's all they want. The past half year has proven that these users will not bring too much value to the exchanges, and will not bring higher TX to Ton (after all, they withdraw after finishing the wool, the on-chain penetration rate is too low). The TG team is basically indifferent to the token price. Therefore, we hold a cautious attitude towards the subsequent opportunities of Ton.
4. Stable ❌ On-chain Asset Management ☑️
Stablecoin company revenue = AUM * Interest Rate.
The underlying interest rate of the stablecoin industry is usually pegged to government bonds. The new on-chain stablecoins that have emerged this cycle are mainly USDE and USD 0. Two approaches, one is to expand AUM, and the other is to expand Interest Rate. Ethena and USUAL have taken two completely different approaches.
4.1 Ethena - Maximize Yield
Ethena expands TVL by maximizing delta neutral + eth native staking + governance token-based subsidies to increase risk-adjusted yields. We have already analyzed Ethena's business model too much, so I won't go into too much detail here. But it's worth mentioning that the ETH OI has started to grow significantly recently, increasing by 2.5 times compared to September, gradually opening up the ceiling for ENA. ENA is probably the token that rises the most and falls the most under the trend.
Things that may further open up the ceiling of ENA in the future: 1. Changes in ENA Token utility, such as revenue sharing, buyback, etc., but this may be strongly related to macro policies; 2. Start doing BTC (already collaborating with solv)/Solana/Aptos/Sui/Ton short operations.
4.2 Usual - Decentralized Fiat-Collateralized Stablecoin
Usual can be seen as the web3 version of the revenue-sharing fiat-collateralized stablecoin. By decentralizing a portion of the government bond income to the community + Token subsidies, it ensures the stablecoin's yield rate. The team's approach is very much in the style of the old-school DeFi.
First, let's briefly explain the difference between APY and APR. Simply put, APR is the annual yield without considering the impact of compounding. APY is the yield considering the impact of compounding, which is usually much higher than APR. The formula is as follows - APY = (1+APR/n)^n-1.
On December 19th, Usual's token-based APY reached an astonishing 22037%, which, in the context of daily compounding, translates to an APR of 543.65% and a daily rate of less than 1.5%. Considering that Usual's emissions and protocol growth are negatively correlated to avoid excessive token dilution, with the current TVL growth from $0 to $1.7 billion, the protocol's annualized revenue is $68.94 million, with a circulating supply of $500 million and an FDV of $4.5 billion. The FDV/Revenue ratio (65) is absurdly high compared to the typical 5-20 range for DeFi projects, and there are also large amounts of Usual tokens subsidizing Usualx staking, USD 0++ staking, and the USD 0/USD 0++ pool, so we believe Usual is relatively overvalued at this price. This model is very similar to the DeFi summer of 2020-2021, where governance tokens were used to subsidize TVL. However, Usual's token utility is better than ENA, at least with revenue sharing.
The team is selling Usual tokens at a 2x discount to drive up the price.
5. Has the Industry Entered a PE Moment?
In 2023, a larger-scale OTC model has emerged. Project teams are OTCing team/advisor/ecosystem tokens to investors, and the OTC money will be used to prop up the price or build the ecosystem. After all, without propping up the price, there's no ecosystem :). Stable long-term price manipulation is the best marketing expense, as it not only attracts retail investors but also developers. Furthermore, as public chain tokens are rising, TVL is also increasing. This will lead to the upward spiral of retail/developer/TVL growth, which are the three most important elements for a public chain.
The most successful and starting to see exits OTC Deals might be Pendle/Ton/Solana, with Solana being an exception, as it was to clean up the mess for FTX. Looking back, OTC deals are usually profitable (of course, there are also losing trades). But at the time of decision-making, it is usually extremely painful. Due to the relatively poor fundamentals, poor business performance, high valuations, and potentially unfriendly unlocking, the decision-making process is relatively difficult. Our best performance this year was the Solana OTC (very optimistic about the fundamentals + the numbers work out), and our regret was mainly the ENA OTC (not optimistic about ENA's utility as a mining token).
