Macro Market Overview

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

At this stage of the technology wave associated with adoption of distributed ledgers 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 accounts for significant DeFi crypto investment liquidity, and when it unwinds dramatically (as the recent eco-scare/Chinese miner exodus Bitcoin price plunge demonstrated) huge price declines across the whole crypto asset class can result, deterring defensive-minded institutional and smaller investors at risk from liquidation from participating. Ethereum has developed the leading cluster of DeFI activity, but seemingly impressive staking/LP rewards offered to attract liquidity to nascent DeFi protocols, coupled with new types of social media-driven cult/meme slow-motion Ponzi activity has resulted in transaction volumes that frequently overwhelm Ethereum’s ability to scale and driving gas fees sky-high in times of stress compared to other competing Layer 1 (L1) chain technologies. In short, crypto as measured by asset values and Ethereum gas fess are too volatile.

The Ethereum L1 blockchain version is engaged in a truly epic, multi-year struggle to scale 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. Ethereum’s continuing scaling struggles are encouraging a plethora of pretender public ‘ETH-killer’ L1s and ETH-based L2-scaling solutions, plus (essentially private) forked side chains (xDAI, BSC) to be interconnected by multichain bridges, creating an environment where each L1/L2 layer is incubating numerous cut-paste-fork DeFi clone ‘villages’, all competing for liquidity and listings. 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.

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 will not reduce gas fees, creating a favorable future relatively volatile gas fee environment on Ethereum, 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.

It is possible that Ethereum will never be able to scale enough relative to effective demand to become sufficiently predictable in terms of fees for automated DeFi. As highway planners in Los Angeles eventually realised, building wider, faster freeways just encourages more people to drive more cars more often. The LA freeways can never be wide enough.

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 arbitrage bots is necessary to keep prices aligned across multiple sites. But 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 red-listed opportunity 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 layers and chains 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. This would recall the 2017 ICO boom, when all the money raised by minting shitcoin tokens for ICOs went to CEX’s for listing fees.

It is always like this...consider how many global internet search engines are there...less than 10 globally that matter, and that many survive only because Internet search algorithms are subject to differences (and firewalls) imposed by language and culture (especially China & India). In crypto DeFi, however, behind the multi-lingual UIs where DeFI protocols live, not even language and culture will provide a sufficient foothold niche for smaller players once (multi-chain) leaders can mature their coverage, algorithms and scaling costs. Some people believe that every (thriving?) L1 eco-system will also have thriving native DeFi ‘villages’ denominated in the chain’s native token. I personally will vote my own staked xCVP to say that local DeFi ‘villages’ will happen only in the short term (see Product Development), but fragmented, disparate liquidity pools distributed across L1 chains and discrete interoperable L2 groupings is NOT how DeFi will play out long term. This and many other thematic pool management challenges await active managment by the DAO.

PowerPool has already accomplished a lot as a DAO, and has many of the key elements in place to become the first, if not the leading, DAO-managed crypto hedge fund. Marketing the Power Universe family of pool tokens allowing astute, mature, (but perhaps not quite yet HNW) investors to club together and deploy advanced crypto wealth preservation strategies, (while their kids still living at home YOLO and ape, hoping for a cute dog-meme token to ‘moon’) is a proven niche that PowerPool could occupy successfully. When the ‘free’ mobile trading app RobinHood lists a zombie/ghost POW chain token with no conceivable bull case like ETC just because it is old enough not to be considered an illegal-to-market security, we know the time has come for a wealth-preservation mindset in crypto.

Privately-managed, off-chain TradFi-emulating crypto hedge funds are already operating in the crypto space. According to the 2020 PWC report on crypto hedge funds, some interesting findings are worth highlighting:

  • The vast majority of investors in crypto hedge funds (90%) are either family offices (48%) or high-net worth individuals (42%).
  • The median ticket size is US$0.3 million, while the average ticket size is US$3.1 million.
  • Almost two-thirds of crypto hedge funds have average ticket sizes below US$0.5 million.
  • Crypto hedge funds have a median of 28 investors.
  • About half of crypto hedge funds trade derivatives (56%) or are active short sellers (48%).
  • Crypto hedge funds are also involved in cryptocurrency staking (42%), lending (38%) and borrowing (27%).
  • The median of the best performing strategies in 2019 was discretionary long only (+40%) followed by discretionary long-short (+33%), quantitative (+30%) and multi-strategy (+15%).
  • About 65% of crypto hedge funds have either a hard or soft lock and 63% have either an investor level or fund level gate.

The most recent version of the report tells much the same story.

These data highlight the opportunity in the crypto community-owned retail-accessible hedge fund niche. Clearly, $300,000 typical investments pooling around 28 investors each are not very inclusive. These hedge funds may be well-managed, but PowerPool believe that valuable crypto knowledge is distributed far more evenly across a DAO with potentially thousands of members contributing information via data-driven Forum debate and sentiment weighting flash polls. There is as yet no evidence that off-chain privately managed funds are really worth 2+20% fees, especially for discretionary long-only (just buy DPI, or better PP-DEFI* WITH rewards and relax!). The 2-20% fee levels were just blindly imported from TradFi with no rationale. If PowerPool executes the crypto investment managemenmt new vision well, investors giving up 20% of their gains to an external hedge fund manager will become a thing of the past.

A very interesting opportunity/positioning for PowerPool would be to partner with existing TradFi hedge funds looking to enter the crypto space. There are many, more every day and they will not find a more attractive platform partner than PowerPool executing to this new vision at full speed.  For example, Point72, managed by Steve Cohen, is typical of prospective TradFi hedge fund partners looking to enter crypto, as are Millenium and Matrix. Legendary activist raider Carl Icahn has said he has about $1.5 billion waiting to go into crypto. He would get along very well with Gordon Gecko.

Why are hedge funds eager to move into crypto? “Performance remains strong in 2021 after the Hedge Fund Research Index returned 11.8% in the year ended Dec. 31, the best return in a decade, data from Hedge Fund Research Inc., Chicago, showed”.

But with or without TradFi hedge fund platform partner(s), the key product development skill for the PowerPool DAO will be the ability to focus community knowledge attention on shortlists of only the most interesting tokens, across multiple chains and layers, then invest in data analytics and focus the collective wisdom of the crowd to manage investment timing and limits. Widely-publicising this ‘New Vision’ as a first step should attract experts in this field to migrate towards the PowerPool community, and having joined (and staked 1000 xCVP) within the Community they should migrate towards the SparkProd product development team.