Author: DeFi Education
Translation: Blockchain in Vernacular
After extensive research and interesting discussions within the team, we are excited to share our vision for the next phase of cryptocurrency and the future of DeFi education.
Since the early days of crypto, the market has been highly focused on blockchain technology. Initially, block space was very scarce. Bitcoin could only process about 7 transactions per second, and there were no other blockchains at the time. Developers and investors rushed to the market to try to build and support the "next Bitcoin", which led to the emergence of dozens of new chains.
The most successful new paradigm after blockchain is smart contracts. Ethereum pioneered the technology needed to build DeFi, but within less than a year of the launch of the first decentralized exchanges and lending apps, the fees for performing a token swap or arranging a small loan could be as high as $50.
While Ethereum processes a batch of transactions every 15 seconds (by comparison, Bitcoin processes one every 10 minutes), there is still not enough transaction capacity to meet the increased demand from DeFi and NFTs.
1. The basic laws of supply and demand work as expected
People looking to conduct profitable DeFi transactions drive up the price of block space (higher gas fees); at the same time, this price signal causes capital and talent to focus on increasing the supply of block space to meet demand (creating new blockchains).
The expansion of cryptocurrency trading capacity can be divided into horizontal and vertical:
Vertical scaling increases the number of transactions per second from dozens to tens of thousands by running powerful servers (such as Solana);
Horizontal expansion has created new Ethereum-based chains that are designed as independent blockchains (Layer 1: Avalanche, Fantom, Polygon) and rollup layers on Ethereum (Layer 2: Arbitrum, Base, Optimism, zkSync). Transaction fees have dropped from tens of dollars to a few cents. Improvements in software tools have made it easy for application developers to deploy applications on their own L1 blockchains (Appchain), and large companies are building rollups on Ethereum Layer 2.
Our conclusion is: Blockspace is now a commodity and is no longer scarce.
This shift requires a review of your long-term investment thesis. The crypto industry is booming, and we still expect significant growth to come. We need to ask: where will value accumulate?
While there are significant differences between blockchains (particularly in terms of decentralization and security), the “backend” of an application is not the first thing most users notice.
DeFi users will likely choose service providers based on the availability of the products and services they want to use, transaction costs, UI and UX , and trust/security/marketing. There are several secure and mature blockchains, and we think users, including institutional investors, will be relatively indifferent to which specific chain they use.
With many blockchains to choose from, market forces will compress fee profits to a reasonable percentage slightly above the cost of running a validator/sequencer/node hardware. Running a centralized L2 sequencer can be very profitable (if your user base has reasons other than decentralization to trust your chain). Fully decentralized chains have higher transaction costs, but with sufficient supply now and more efficient block space usage - these costs will remain within reasonable limits during mass adoption.
2. Argument: Value will flow to the application layer
Currently, the total market value of cryptocurrencies is $2.15 trillion. Among them, the total market value of the two major blockchains (Bitcoin and Ethereum) is $1.51 trillion, accounting for 70%. The top 12 crypto projects by market value (excluding stablecoins) are as follows:
Bitcoin: $1,202 billion
Ethereum: $304 billion
Binance BNB: $79.2 billion
Solana: $69.8 billion
Ripple XRP: $32.2 billion
Dogecoin: $14.5 billion
TRON TRX: $13.9 billion
Toncoin (Telegram): $13.7 billion
Cardano: $12.7 billion
Avalanche AVAX: $9.9 billion
These have a total market value of $175.19 billion, accounting for 81.5% of the total market value.
Stablecoins account for $0.17 trillion, or about 8%. This means that smaller Layer 1 blockchains, Layer 2 blockchains with tokens, and all the applications that make cryptocurrencies useful, together account for about 10% of the crypto market capitalization.
Without these applications, there would be nothing to do on the chain except sending/receiving tokens (not even token swaps).
As the next billion users join the cryptocurrency space, our view is that most of the value will be captured by the application layer. Therefore, the total value of DeFi applications should grow faster than the total value of Layer 1 chains, and excess returns will come from supporting the best applications.
3. Fees and revenues in various DeFi verticals over the past 30 days
1) Staking : Lido’s customers earned $77 million by staking ETH, of which $7.7 million went to the protocol as revenue. Solana’s Jito facilitated $42.6 million in staking rewards for users, earning $1.7 million in revenue.
2) Lending: Decentralized money market Aave earned $4.67 million in revenue; stablecoin issuer MakerDAO earned $6.97 million in revenue.
3) Trading Platforms: BSC’s PancakeSwap earned $4.67 million in trading fees; Base’s Aerodrome earned $16.7 million. Uniswap Labs earned $7.13 million in fees from its web interface. GMX (derivatives trading platform) earned $1.44 million from trading fees.
4) Tools: Telegram bots provide a better trading experience than website interactions. Their added value is so high that they can charge significant fees, usually 1% or more of the transaction value. The highest-earning bots are Photon ($14.6 million), Trojan ($8.65 million), Maestro ($3.8 million), and Banana Gun ($3.52 million).
5) Automation: The most successful sub-field so far is Launchpads, which automate the process of generating token smart contracts, raising initial liquidity from the public, and deploying liquidity pools on decentralized trading platforms. The market leader Pump Fun achieved $23.53 million in revenue.
There are dozens of protocols in the above areas that consistently generate more than $1 million in revenue per month. Users are willing to pay for applications that add value. However, most users cannot tell you the backend technical details of the application, including how its blockchain works.
4. What does this mean for “mainstream coins”
DeFi Education was founded on the idea that cryptocurrency’s censorship-resistant, globally accessible, permissionless financial transactions, and open platform for everyone to build on will create unique and exciting use cases that will change the way we live.
As we invest more and more time in this industry, we start to get closer to actual projects, markets, and gradually develop our own "edges". Therefore, DeFi Education's newsletter has become more and more focused on trading and markets over time.
We are now pressing the reset button.
We focus on learning how to build, use, and profit from DeFi protocols and other crypto applications (e.g., mining, buying tokens). While investors used to express their views on the growth of the crypto industry by investing in Bitcoin, Ethereum, or Solana, whether this strategy will continue to perform well in the future remains to be discussed.
The main thing to consider is that the majors are essentially the " beta " of the market, and unless you are a completely passive participant in the crypto space, you probably need to understand the Altcoin market. The "beta" of the market is available to everyone, including those who know nothing about crypto.
Anyone can buy and hold Bitcoin or Ethereum. Even the pension funds of the older generation can now buy them through ETFs. If you want to continuously improve and excel in the cryptocurrency field, you need to stay ahead of the major trends in the crypto field, especially at the application and protocol level.
Crypto Twitter is far from reality.
The future of cryptocurrency is not about exchanging worthless tokens back and forth between the same group of people (although that may be fun).
We also don’t want to live a life where we have to wait for “exit liquidity” every four years without making any progress in the meantime.
Even though we once traded MemeCoin, we feel they have become too dominant in the public eye. The future can only be built by those who are reading this and believe in a crypto-centric future. Why is that future worthwhile, you ask?
5. A crypto-centric future
A recent tweet from Brian Armstrong sheds light on the unexpected twists and turns that can occur in the process of technology adoption.
Payments (and remittances) are an obvious use case for cryptocurrencies — it’s what many of us use when transacting online! Coinbase could potentially bring USDC payments into the real world.
Coinbase partially owns the issuer of USDC, and its widespread adoption will generate huge revenue for Coinbase through the earnings they earn from Base Capital. This means they have a huge incentive to drive growth in this business, bringing millions of people on-chain. Based on this initiative and other factors, we believe Coinbase will build one of the most successful on-chain businesses in history through Base .
Coinbase's success with Base should serve as a proof of concept, creating institutional-grade demand for ecosystem building. Why wouldn't a large company with an existing brand want its users to transact on a network that generates revenue for it? For a smart contract chain to have sustainable long-term demand, there must be growing value creation that is worth the time investment of founders, executives, and other business people.
Sony is one of the first brands to try it out, launching a testnet of their Ethereum L2 “Sonium” this week. We plan to test it out. What we hope to see is Sony using its unique value proposition as a company to bring people into the crypto space, rather than simply competing with other L2s for the attention of existing crypto-native users. There are many enterprise projects from big brands that haven’t done much for the industry. Can an L2 break that curse?
1) What about decentralization?
One of the biggest challenges since we first got involved in the crypto industry has been trying to convince people of the importance of decentralization. If a network is not decentralized, it is vulnerable to attack. This in turn puts all other functions of the blockchain and everything built on it at risk of censorship and, in extreme cases, theft or failure.
At the same time, coordinating human activity in a decentralized way has proven difficult and inefficient. Most “decentralized autonomous organizations” (DAOs) have petered out, with governance processes that hinder fast business operations and lack of engagement from those who should be involved in governance. This makes a strong case for letting centralized organizations build decentralized technology — if they can actually do it (because once the money comes in, it’s hard to get people to decentralize).
The trustless, permissionless, and censorship-resistant nature of cryptocurrencies relies on decentralization. From a technical perspective, this fundamental problem has been solved (Ethereum), but centralized organizations have proven effective when it comes to building startups and applications. Therefore, large companies as well as individuals and small anonymous teams should be welcome to build in crypto. However, they should leave behind traditional ideas about what people can do, say, or publish on-chain, and embrace the open-source, open-world culture of cryptocurrencies.
2) Crypto is for the masses
Regardless of how much value businesses add, cryptocurrencies are truly meant for regular people.
You can start learning programming today and deploy something you think should exist on-chain. You can easily acquire some users by private messaging or posting information on Twitter. If your product is really good and you can crack the distribution channels, you may get a lot of users. Even if this doesn't happen, you will have made valuable connections and improved your skills.
There is nothing stopping you from doing this anywhere in the world, at any time. You don’t have to go through any of the typical red tape. That’s the power of the economic freedom that crypto networks give us.
3) What should you focus on? — Opportunities and challenges
The opportunity is basically a bell curve. On one end, the best opportunities are consumer-facing applications; on the other end, institutional-facing applications and ultra-high net worth individuals (UHNW). The barriers to entry for institutional business are higher, but it's clearly a larger market for financial use cases.
The key is how to get consumers on-chain, rather than just having them become "exit liquidity" for crypto traders. In other words, simply guiding them to buy tokens instead of using applications and products will not create the most long-term value for cryptocurrencies. This approach can only generate immediate value by generating revenue for crypto protocols (which is important), but it does not solve the industry's "closed loop" problem in the long run.
The biggest challenge today is not building applications (although we always welcome more developers), but getting people to use these applications . As L2 becomes extremely fast and cheap to use, the ability to build real businesses and applications has increased exponentially. At the same time, Ethereum as L1 remains decentralized. Solana has also done a great job serving active crypto-native users.
4) What value are you creating to earn rewards?
This question should be at the forefront of the mind of those looking to succeed in the crypto space.
As an investor or trader, you earn rewards by buying undervalued assets and selling overvalued assets. The alpha gained from research helps prices converge to fundamental values, providing a service to other market participants. In the short term, successful efforts such as moving liquidity to chains with higher demand (arbitrage) or providing fees for clearing orders are also worth being paid.
Creating a company or agreement is a legal path.
The same is true for starting a career in crypto in a technical role, sales/marketing, etc. We are optimistic about careers in crypto and believe that having crypto knowledge can make you more competitive in related fields.
If you have the time, skills, and capital to invest, you can absolutely move beyond passive holdings by allocating capital wisely based on knowledge and research. This is our current focus.
We didn't set out to create a letter of investment advice, but rather to teach how to deeply understand and use the technology, and to create a framework for people to develop their own investment process. Over time, we've become known for some excellent (and somewhat contrarian!) market predictions. While market context is important, we can tell you firsthand that having a deep understanding of the industry will improve your investment/trading performance because you'll learn how the protocols work and how the stakeholders in the crypto space think.
A key point is that blockchains (L1 and L2) have historically captured the majority of value in cryptocurrencies. As block space becomes commoditized, a higher percentage of value can flow to the application layer (under friendlier regulatory environments), and the most profitable crypto applications are in DeFi ! These are the opportunities we hope to capture in the future.
Link to this article: https://www.hellobtc.com/kp/du/08/5385.html
Source: https://defieducation.substack.com/p/the-next-phase-of-crypto?utm_source=%2Finbox&utm_medium=reader2
