Crypto Macro DeFi Market Overview

“the scarcest commodity in crypto is long-term thinking”   @punk4156

TL/DR: The coming ‘liquidity wars’ competing to attract incentivised TVL on ETHL1 to move either to various ETHL2 layers/sidechains, or to alternative EVM and non-EVM compatible ALTL1s will create high rewards/yields in token terms, best exploited via broadly-diversified (hedgeable) thematic DeFi basket tokens with auto-harvesting of intrinsic yield, meta-governance-driven listings for extrinsic yield options, and actively-managed escrowed token vote basket re-balancing by DAOs like PowerPool.

State of the Market

At this stage of the technology wave associated with adoption of distributed ledgers/blockchains and cryptography-based digital assets, the crypto DeFi market is still relatively unconnected to financial flows relating to real world assets. The current crypto market is akin to a multiplayer virtual reality game where fiat ‘flight capital’ digitised as stable coins like USDT and USDC are flooding in, fleeing a savage, globally hyper-inflationary and politically hostile fiat currency investment environment. In a world of effectively zero interest rates for savers, this ‘hot money’ is trying to navigate the un-regulated and un-audited world of crypto DeFi in search of some kind of yield.

Thus far, Bitcoin has absorbed most of the value fleeing fiat, but BTC offers almost no native yield, encouraging (wrapped or proxy) value to flow towards Ethereum DeFi. Leveraging Bitcoin is a source for significant DeFi crypto investment liquidity, and when Bitcoin price unwinds dramatically (as the recent eco-scare/Chinese miner exodus and Kazakstan shutoff Bitcoin price plunges demonstrated) the liquidations of leveraged positions can cause huge price declines across the whole crypto asset class, deterring defensive-minded institutional and smaller investors at risk from liquidation from participating.

Although Ethereum has developed the leading cluster of DeFI activity, staking/LP rewards offered to attract liquidity to nascent DeFi protocols, coupled with new types of social media-driven cult/meme slow-motion Ponzi token activity like DOGE and minting of ‘staus symbol’ image-based NFT tokens has resulted in transaction volumes that frequently overwhelm Ethereum’s ability to scale, with surge pricing driving gas fees sky-high in times of stress compared to other emerging Layer 1 (L1) blockchain technologies. Persistent, long term high gas fees on Ethereum L1 are antithetical to DeFi for small retail transactions, so proven DeFi primitives sensitive to gas fee levels must now move towards lower-cost, faster execution environments, usually either alternative L1 chains (ALTL1s), especially those that are EVM compatible, and sidechains/roll-ups running alongside/on top of Ethereum, the so called L2 scaling chains/layers.

The Ethereum L1 blockchain developer community is engaged in a truly epic, multi-year struggle to scale Ethereum L1 relative to overwhelming demand, and to tame unpredictable runaway/surging gas costs due to the 'liquidity wars' rewards bonanza, rampant meme coin trading, gas-bidding ‘bot’ arbitrage wars and miner front-running in the public ‘dark forest’ mempools. There is no end in sight for high fees on Ethereum L1. Ethereum’s continuing scaling struggles are encouraging both a plethora of pretender ‘ETH-killer’ alternative (ALT)L1s and a number of different ETH-based L2-scaling solutions.

Ethereum’s L1 blockchain hit its capacity this year. As a result, other ALTL1s have exploded 50-100x in value as investors bet on crypto development to parallelize across new ecosystems and absorb the excess demand. . This and many other thematic multi-chain/layer thematic ‘baskets/indices are structured asset management challenges that await solutions and active management by structured asset management DAOs like PowerPool.

This volatile environment has encouraged proliferating chains and layers all trying to launch competing DeFi 'villages', creating exponentially-growing opportunities for large-value, low-risk automated arbitrageurs and professional market-makers, who are now able to participate not only in CEXs but also proliferating second-generation AMM-type DEXs using limit orders. Profit-seeking arbitrage bots can now continuously 'spam' not only Ethereum, but also other competing networks, keeping gas fees relatively high for average retail investor transactions for the foreseeable future. Ethereum Improvement Proposals like EIP 1559 have not reduced gas fees, creating a favorable future relatively volatile gas fee environment on Ethereum. The numbers of potentially interesting tokens and yield/hedging strategies is growing exponentially, overwhelming even full-time investors' ability to process, react and absorb the gas fees associated with an actively-managed, broadly diversified, rewards-rich and potentially hedge-able portfolio. These trends are encouraging smaller investors to seek pooled investment funds like PowerPool with gas-efficient families of broadly-diversified, actively-managed, rewards-rich and composable/hedge-able long, neutral yield and defensive offerings well worth the fees.

Scaling and Bridged Interoperability Solutions.

Liquidity flows like water, across chains and across layers. The biggest, deepest pools result from arbitrageurs/bots looking to trade complex strategies between multiple venues. Most of the trading between CEXes and especially DEXes are arbitrageurs and traders abusing AMM pool liquidity providers and time zone/geographic differences. Much of the volume on lending sites are usually ‘flash loans’ for arbitrage allowing bots to keep prices aligned across multiple sites. Effectively pooling liquidity across of these new ALTL1 blockchains AND Ethereum’s Layer 2 ETHL2 rollups will need to talk to each other, so the most acute pain point in DeFi crypto today may be the lack of bridges. If the future is multi-chain, then those who build better, (more automated) cross-chain connectors and help move assets fluidly across para-chains, zones, and rollups will inherit the (virtual) earth. Fragmented, disparate liquidity pools distributed across L1 chains and discrete interoperable L2 groupings is probably NOT how DeFi will play out long term

A key consequence of the increasingly arbitrage-driven multi-layer, multi-chain, multi-DeFi venues in this evolving crypto market is that coordinating the process of voting for selected DeFi tokens to become listed on multiple sites rapidly attracts the largest sources of liquidity. All of the DeFi sites that allow governance-driven listing decisions struggle to achieve quorums of their own token holders on listings beyond the initial tokens that every site lists. This is a potential opportunity for an activist Fund Manager like PowerPool, who can take stakes in DeFi sites sufficient to not only achieve a quorum, but also to carry the listing vote since most target protocol token holders are indifferent unless they too really want to trade the candidate token, in which case they will follow our lead.

At this stage of the crypto-adoption market cycle, there are already too many emerging cut-paste-fork copycat DeFi players on alt-chains chasing ‘hot’ liquidity with unsustainable token rewards. Coordinating listings of tokens across proliferating DeFi sites ‘primes the pump’ by attracting arbitrage and short-term cross-site trader activity. But coordinating the listing governance process across multiple DEXes, borrowing, synthetics and derivatives sites across multiple chains/layers is a governance challenge requiring size, coordination and a knowledgeable community like PowerPool xCVP stakers. If PowerPool execute this strategy really well, it could become so influential on listing decisions that cut-paste-fork copycat teams buy and stake xCVP in order to enlist PowerPool resources to drive their token listing programme.