0xSoros: Q2 2022 Industry Outlook and Portfolio Project Progress

Source: 0xSoros Substack

0xSoros March Portfolio (Not Investment Advice)

About DeFi Kingdom, Subnet and Cross-chain, Harmony, Future Forms of GameFi, AXS Killer

DeFi Kingdom (hereinafter referred to as DFK) is one of the first Subnet projects supported by Avalanche. DFK will deploy the DeFi Kingdom Crystalvale version on Avalanche in the form of DFK Chain (hereinafter referred to as DFK Crystal Palace).

DFK Crystal Palace will have its own token CRYSTAL, and after its release, liquidity mining incentives will be launched in the form of single and dual token LPs with AVAX/JEWEL/CRYSTAL. Avalanche will allocate $15 million worth of AVAX tokens to incentivize DFK Crystal Palace. JEWEL will serve as the universal Gas fee in the multi-chain ecosystem of DeFi Kingdom and will initiate a burning and deflationary model.

After the release of DFK Crystal Palace at the end of March, we will soon see the impact of the CRYSTAL launch on the price of JEWEL. The team's incentive design for the LP pool will affect the price of JEWEL to some extent. The team has established JEWEL as the core currency of the DFK ecosystem, so after the release of DFK Crystal Palace, it is highly likely that the price of JEWEL will experience an increase.

The DFK team is relatively conscientious; they had many opportunities to exploit users but chose to grow together with the community: the DFK project team rejected several exchange listing invitations (listing before the game is fully developed is a form of overdraft consumption).

Given that the team has not yet developed PVP and other competitive game modes, it cannot be denied that DFK is still a DeFi project disguised as GameFi. In the early stages, there were no institutional players entering the market, and without low-cost locked positions from institutions, there was no sustained selling pressure; importantly, in the past three months, the DFK team has persisted in developing their own Subnet and cross-chain despite user attrition. This strategic choice requires courage.

Currently, most of the JEWEL tokens are still locked (most of the LP reward tokens are locked) and will be gradually unlocked in July this year, with a linear unlocking period of two years.

Because the DFK game has not yet been developed, JEWEL still has considerable uncertainty. The deployment of DFK on Avalanche not only establishes the positioning of multi-chain GameFi, which is significant, but it also cannot be simply valued as a single game; rather, it is more appropriate to value it as part of the metaverse. Secondly, it buys time for the development team to continue developing the game, allowing DFK to gain breathing room to survive.

For the Harmony blockchain, its greatest achievement is the incubation of the DFK project. DFK is almost the only playable game in the Harmony town. However, due to Harmony's inherent performance issues, players who have used it know that Harmony is quite laggy. Since JEWEL has been established as the core currency of the DFK universe, will having the core currency on a poorly performing Harmony chain be a major concern for the future?

The future of GameFi will definitely be a further integration of multi-chain, DeFi, and gaming. DFK is undoubtedly a leader in this space. As the strongest competitor to AXS, I would give DFK 2-3 years to catch up with AXS in market capitalization.

About LUNA, Decentralized Stablecoins, Public Chain Trident, Appchain, Protocol Theory, and the Essence of Public Chains

In the past month, the strongest project in the public chain sector has undoubtedly been LUNA, which has seen a strong rebound of 100% back to its ATH and even new highs as the market briefly bottomed.

The previous speculation was that all projects in the LUNA ecosystem serve the stablecoin UST and LUNA, and that UST and LUNA would siphon off all ecosystem projects. One reason for this impression is that a portion of the tokens from LUNA ecosystem projects are airdropped to users who stake UST and LUNA.

From a strategic perspective, LUNA's core strategy revolves around the stablecoin UST, depicting a grand narrative of "Decentralized Stablecoin." The mechanism of burning LUNA to mint UST allows LUNA holders to benefit from the price increase as UST's market share grows, essentially letting players enjoy the dividends of increased market share for stablecoins.

We can glimpse from the experiments of algorithmic stablecoins like BASIS/ESD two years ago that although these generations of algorithmic stablecoins ultimately met a tragic end, the reason for the speculative frenzy at that time was that the market cap for stablecoins is enormous. Once a certain algorithmic stablecoin achieves strong consensus among a broad user base, the investment returns can be calculated in hundreds or thousands of times.

LUNA ultimately emerged victorious among a series of algorithmic stablecoins. At least for now, it has succeeded, but whether it can continue to grow its market share and maintain its leading position remains to be seen.

From the famous theory "Fat Protocol" proposed by USV to the "Thin Protocol, Fat Application" suggested by Placeholder, and then to the "App Chain" proposed by Cosmos, protocol theory has undergone seven to eight years of iteration.

LUNA is a very typical App Chain protocol. On the surface, LUNA appears to be a public chain, but in reality, it is an application centered around stablecoins. Some say the investment point for LUNA lies in the fact that it is both a public chain and an algorithmic stablecoin. So what is the priority between the narratives of public chains and stablecoins? Personally, I believe the core is the stablecoin, and the public chain is merely an outer shell narrative.

In other words, any application that gains a broad user base can later create its own public chain. A typical example is Axie in 2021, which, after becoming a leader in the GameFi space, chose to leave Ethereum and build its own Ronnie public chain to form a closed-loop ecosystem. This decision was partly due to Ethereum's high transaction fees and limited performance, and of course, building a public chain allows for greater benefits.

The reason public chains are grand narratives is also due to this. Anything can be a public chain as long as you have enough confidence and capital: users, funds, and cash reserves.

We can vaguely see that the APP Chain concept first proposed by Cosmos will lead to a future trend, namely APP Chain Protocol. As a public chain, it only needs 1-2 blockbuster applications to emerge within its ecosystem to gain immense value. Public chains align with the APP Chain narrative.

In terms of the components of public chains, stablecoins, DEX, and lending are the three pillars. For LUNA, stablecoins have already achieved unprecedented success, so following this line of thought, DEX and lending will be the two major investment opportunities in the LUNA ecosystem.

Astroport, as LUNA's first DEX, has recently made significant progress, with liquidity for core assets like LUNA/UST/ANC already added to Astroport, and trading volume continuously breaking new highs, currently ranking in the Top 5 for daily trading volume on DEXs. This is also thanks to LUNA's recent strong rebound.

Reflecting on the previous speculation about LUNA/UST siphoning off ecosystem projects, it seems a bit premature. The development of ecosystem projects is gradual, and the three pillars of public chains are a natural law of historical development, so we just need to give ecosystem projects more time. Astroport's daily trading volume is on par with that of DEX and Osmosis, while its FDV has a fivefold difference. Its emergence also allows non-LUNA native players to obtain liquidity for core assets in the LUNA ecosystem without going through centralized exchanges (by converting USD to UST via cross-chain bridges and then purchasing on Astroport). In summary, Astroport is undervalued. A $10 billion FDV is a reasonable valuation.

About the Continuous Tug-of-War Competition for Public Chain TVL, the Water Content of TVL, and the Prerequisites for Judging Projects

The competition among public chains is a continuous tug-of-war process, and the increase or decrease of public chain TVL is an intuitive data point.

Public chain TVL has an inherent upward spiral; most public chain native tokens are PoS assets, and a large portion of the native coins are staked, which constitutes a significant part of TVL. Therefore, as asset prices rise, TVL will also increase. However, this portion of TVL is inflated; after excluding this part, the net inflow of stablecoins outside the protocol is the real growth of public chain TVL.

In the past month, Terra's TVL increased by 70%, partly due to the inflow of TVL from Fantom (the reason for AC's exit) and partly due to the growth of the protocol itself, mainly thanks to ANC's annualized stablecoin deposit rate of 20%. The deposit rates of mainstream DeFi protocols are far below 20%, and of course, this requires a significant amount of UST subsidies, which can only be maintained for a little over a year. In terms of TVL, ANC has slightly surpassed AAVE, with both valuations at around $2.5 billion.

Fantom has had a bit of bad luck; the promotional hype around Solidly initially attracted the industry's attention, but AC's sudden announcement of withdrawal caused Fantom's price and TVL to plummet. The success or failure of a public chain heavily relies on its founder, and AC is an idealistic and emotional person (not a derogatory term), so this move is not surprising. It's just a bit unfortunate for Fantom, as they built up momentum for so long only to end with a whimper.

ETH's TVL has shown stable performance overall, but due to the steady growth of protocols like LUNA/AVAX, ETH's TVL share is trending downward. The continuous decline in Ethereum's TVL share is a strong proof of the gradual arrival of the multi-chain era.

LUNA's TVL has grown significantly despite the overall market downturn, and its price performance shows a certain negative correlation with the market, giving it a bit of a safe-haven flavor. Given the "Decentralized Stablecoin" market, which is worth billions of trillions of dollars, giving LUNA two to three years to catch up with ETH in TVL is not impossible.

About Cosmos and Polkadot, Cosmos Ecosystem Projects OSMO/EVMOS, and the Advantages of Appchain Tokens

In the past four to five years, the reputation of Cosmos and Polkadot has been in a tug-of-war. During 2018-2019, one of the most frequently discussed topics in the circle was which of Cosmos and Polkadot was superior. That momentum inevitably led to a comparison between the two.

These two cross-chain projects have taught me that evaluating a project must be placed within a time dimension; things are always dynamically changing, and in the fast-developing crypto industry, the state of projects at different stages can be vastly different. After 2022, it is clear that Cosmos has gained the upper hand. The TVL data shows that Polkadot's TVL has dropped by 70% within a year, which is quite surprising.

The pros and cons of Cosmos and Polkadot have been discussed ad nauseam in the industry over the past few years, and it is worth mentioning that the dividends Cosmos provides to community users are substantial; the airdropped tokens from staking ATOM, such as OSMO/JUNO, are quite valuable. Meanwhile, most of Cosmos's ecosystem projects do not have private placement tokens, but rather a large proportion of airdropped shares, giving most of the benefits to community token holders. In terms of returning dividends to the community, Cosmos is clearly doing much better than Polkadot.

Although LUNA and Cosmos are both part of the larger Cosmos ecosystem, they have been relatively disconnected over the past few years. Since the introduction of UST on Osmosis this year, the relationship has become slightly closer. LUNA's founder, Do Kwon, has also increased his efforts to promote Cosmos ecosystem tokens this year.

Why has Cosmos's DEX Osmosis achieved success? Here, I directly quote the viewpoint of "Island Teacher":

"Compared to the design of traditional DeFi governance tokens, the Native Token of App Chain is itself a form of underlying asset, and it has greater design space and imagination for value capture. It can integrate some Ponzi designs while achieving two goals: 1. Enhance network security 2. Achieve value capture. The App Chain model is superior in terms of value capture."

I think several projects fit this narrative: LUNA, which needs no introduction, has the best Ponzi tokenomics, strong consensus, and financial backing. OSMO Stake, LP Bond, Superfluid Staking, plus every token is paired with OSMO trading. RUNE nodes with double staking + LP paired with RUNE + synthetic asset quality. These three have found their niche markets while also having excellent economic models.

Cosmos's three pillars are OSMO/EVMOS/ATOM (in my opinion). EVMOS has recently faced delays due to network upgrades, but I still expect it to spark a wave of "EVM Chain" hype after its launch. Moonbeam, as a competitor in the same space, lags behind EVMOS in terms of consensus, users, and community. Moreover, Moonbeam has too many private placement tokens, and its unlocking time is too short, leading to low costs.

About Avalanche and Subnet, the Possibility of Becoming a GameFi Chain

Avalanche will launch Subnet at the end of March and will allocate $300 million to incentivize the Subnet ecosystem. Subnet is similar to Cosmos's application chain, with an independent security model that allows for the creation of its own validation nodes. The launch of Subnet will further enhance the industry's consensus on the Appchain narrative. At the same time, Subnet will lead to a second wave of market activity on Avalanche, with Crabada and DFK being the first projects to receive incentives from the Subnet ecosystem and will benefit first. From Avalanche's classification of funding for Subnet ecosystem projects, it is clear that Avalanche is heavily betting on GameFi. Therefore, it is very likely that Avalanche will become a public chain specialized in GameFi in the future.

Personally, I have overlooked Avalanche as a significant public chain. Its attention is far lower than that of Cosmos/Polkadot/Solana, and initially, it could be said to rely solely on the aura of Professor Gun. However, in terms of underlying architecture design, Avalanche's architecture is very elegant and efficient, rivaling Cosmos and Polkadot. From the current performance, it is hard to distinguish it from Solana. Moreover, in terms of community, it is superior to Solana, indicating a desire to surpass Solana.

About Solana and Its Declining Defects, Derivatives DyDx and GMX, and Ways for Public Chains to Break Through

Solana has shown signs of decline after 2022, mainly because most of Solana's previous ecosystem projects were led by Alameda, and the token economic designs of these projects were often low liquidity and high valuation, leading to endless low-cost selling pressure after listing. This aligns with SBF's style. The dividends left for community players are almost nonexistent. Over time, this has gradually led to a loss of fresh traffic. The profit-sharing space for Solana ecosystem projects is far lower than that of Cosmos/Avalanche/LUNA. However, recently, a SocialFi project on Solana called Stephen has sparked an independent market with its unique application scenario.

However, Solana's underlying architecture is inherently suitable for derivative projects. A previous speculation was that one or two on-chain derivative projects comparable to DyDx would emerge on Solana. Derivative projects on Solana are among the most numerous in the public chain ecosystem, second only to Ethereum. However, it is awkward that derivatives have some inherent limitations. The user threshold for derivatives is particularly high, making them suitable only for niche professional traders. Therefore, existing derivative projects have had to settle for structured products to cater to the general public's simplistic operations. The downside of structured products is that they can lead to user losses in extreme market conditions, and once structured, it means players can only choose one-sided bets. Thus, the derivatives space still needs further exploration and breakthroughs.

Currently, the product-market fit is in order book-style on-chain contract products. Two typical projects are DyDx and GMX. GMX is a completely community-driven, non-institutional investment, fully on-chain derivative contract project. The approach of GMX is somewhat similar to DFK; both aim to acquire new users through deployment across multiple chains. In recent months, GMX's deployment on Avalanche has proven to be successful and effective, with increases in trading volume, user numbers, and income distribution across various data metrics.

However, GMX also faces some bottlenecks. First is the issue of user acquisition. Currently, GMX is in a reasonably valued state. User saturation has been reached, with daily active users on each chain stabilizing at 300-400. To further increase user numbers, new acquisition strategies will inevitably be needed. The team is already working hard on developing "user promotion acquisition" features. Secondly, how many contract players from CEX can be attracted is a challenge. Changing user habits is extremely difficult. Thirdly, the project's development iteration capability is currently optimistic, but the core developer and founder of the project is anonymous, which adds a layer of uncertainty risk.

In the future, an important standard for public chains to break through will be to grow strong in a specific niche. Simply copying Ethereum's public chain model will leave no room for survival. The development path of public chains has shifted from Ethereum's grand, all-encompassing blueprint to first breaking through in a single point to become a leader in a niche, then continuing to expand both horizontally and vertically. As previously mentioned, the essence of public chains is essentially a glamorous shell that can be applied to any project; everything can be a public chain. In short, the idea is "First APP Chain, Then Public Chain," meaning "first application, then public chain."

About the Web3 Middleware Protocol POKT

POKT has been a focus as a multi-chain infrastructure for Web3. POKT's data shows that its revenue exceeds that of many leading DeFi protocols, but there is some inflation as it counts the high inflation from staked nodes as protocol revenue. On the other hand, POKT's protocol does have practical use. Harmony, as an official partner of POKT, has consistently ranked first in the number of relays on POKT, which significantly alleviates the load on Harmony's official RPC. Recently, it has been surprising to see that Polygon's number of relays on POKT has surpassed Harmony within a month. The growth rate is astonishing. Polygon's actual adoption leads me to believe that POKT remains an important middleware protocol that cannot be ignored. The current flaw is how the team can modify POKT to further reduce inflation. As a competitor to Alchemy and Infra, this narrative makes POKT's odds incredibly enticing.

About APE Token Issuance, NFT Aggregators, Looksrare as a Competitor to Opensea, and the Third Wave of PFP

APE token issuance, BAYC acquiring Punk and Meetbit to form alliances, reignites the PFP market. A series of strong capital operations by BAYC has left other PFPs with no breathing room. APE's overall valuation upon listing is $10 billion, and in terms of valuation, there is little opportunity left in the secondary market. Yuga Labs' series of capital operations have allowed PUNK/Meetbits/BAYC holders/investors/parent companies to profit, while the ones ultimately losing money are some secondary market players who bought APE. However, if a certain proportion of the losses incurred by this group can flow back into the PFP market, it can be seen as injecting funds into the image market through token issuance. The recent increases in blue-chip projects like Auzki/Doodles/CloneX somewhat indicate this point. In summary, the issuance of APE tokens has led to more funds flowing into PFPs. We are likely to usher in the third wave of PFP.

It is worth mentioning the NFT aggregator Gem and Looksrare as a competitor to Opensea. The main function of NFT aggregators is to make sweeping NFT floors easier, facilitating large funds to buy images. The aggregator routes to both Opensea and Looksrare NFT exchanges. Therefore, both APE's token issuance and the NFT aggregator Gem have contributed to the trading volume of Looksrare. Additionally, Looksrare's product iterations have also been quite impressive.

Projects like Looksrare, which initially tout themselves as "community versions of XXX," face the challenge of developing reliable products. Everyone knows that leading projects in niche markets like Opensea/Metamask occupy 99% of the market share, making it incredibly difficult for competitors to gain market share. From an investment perspective, it is precisely because giants like Opensea and Metamask, valued at $20-30 billion, leave players with no profit space that people choose community versions of XXX to achieve high returns.

The growth of Looksrare's trading share gives me a glimmer of possibility, and the incentives from trading mining may allow it to enter the next positive spiral. Imagine if trading mining were not implemented, it would have no competitive edge at all; even with trading mining, success is not guaranteed. Therefore, we should not criticize trading mining blindly; from a competitive standpoint, trading mining is indeed a necessary measure.

About Changes in Positions

Increased positions in XDEFI, established positions in LUNA/ASTRO, with ASTRO being LUNA's Alpha Bet, and LUNA as a foundational position (similar to ETH), which will continue to increase. DFK position remains unchanged, with a long-term bet covering Avalanche Subnet hotspots and the multi-chain GameFi ecosystem (targeting to catch up with AXS in 1-2 years). No increase in POKT position, with the original position down 75%, further observation is needed. GMX position remains unchanged, with a staking annual return of 35%, continuing to hold. Cleared positions in APE and Stephen for a short-term trade. Established a position in LOOKS. Cleared positions in BTRFLY/RBN/GEL.

About BTC/ETH Large Cap Returns, Short-term Market Trends, and Changes in Market Structure

Simply holding BTC and ETH long-term will greatly reduce returns over the next 5-10 years. This reduction refers to comparing future returns with the returns of the previous two cycles. Although I am quite amateur in macro judgment, I dare to make a prediction. The future trend of the market will be characterized by high volatility at mid to high levels in the short term, along with a long-term spiral upward. This is a prerequisite for the flourishing of the industry, stabilizing the market, and then allowing the rest to flourish. To some extent, this also reflects fairness, as "lying flat cannot yield excessive returns."

The change in market structure lies in the excessive idle funds/speculative capital within the market, which can be mobilized at any time, ignoring the overall market. This is a distinction from the previous cycle. In the last cycle, most profit-taking capital exited the market, whereas in this cycle, most profit-taking capital remains in the market, allowing for actions to be taken at any moment.

About Web3 Projects, Cross-chain Bridges, and the Final Form of Cross-chain

Various Web3 projects are also hotly discussed, but without exception, the biggest problem with these tool-type projects is value capture. I personally believe that a good project consists of intuitive stable growth data + points that can trigger FOMO + a good token economic model. A typical example is LUNA, where the data growth of UST is very intuitive, and the story potential of decentralized stablecoins is indeed very high, coupled with a Ponzi economic model.

However, the myriad of Web3 projects today essentially cannot form an economic flywheel or Ponzi; they are like a single tree unable to support a forest. I think this sector still needs some time. There are no bad projects, only projects at the wrong time.

Previously, I had high hopes for cross-chain bridges, but recently my views have changed. I believe that cross-chain bridges cannot capture maximum value, while cross-chain DApps may be the final form and beneficiaries of cross-chain bridges. Simply put, a multi-chain AAVE already encompasses cross-chain bridges. Cross-chain bridges themselves are like DeFi derivative projects, which have long sought to gain traction but have not succeeded, fundamentally remaining tool-like and unable to form effective Ponzi or flywheel effects.

As for the fees of cross-chain bridges, they are predictable. In plain terms, no matter how large the transaction volume, how much can the fees really be? Predictable income means a lack of imagination. This is the drawback of tool-type projects. I believe that future projects like Hop/Connnext, including the recent Stargate, will face such dilemmas. Not to mention that cross-chain bridges are the most frequent targets of hacks. Wealthy projects like Wormhole can afford full compensation, as they have the financial backing. However, less wealthy cross-chain bridges face death after a single hack. Therefore, under the current considerations, I will not consider buying any cross-chain bridge projects.

About Ethereum, Excessive Returns, and Personal Expectations

I personally will not hold too much Ethereum, as Ethereum has grown into a major asset class, and in terms of cost-effectiveness, it is not as high as new altcoins, while its stability is not as strong as USD. From the perspective of asset appreciation, Ethereum is a poor asset. This means that Ethereum can no longer achieve super high Alpha, emphasizing here the term "super high," for example, a 100-fold return. However, holding Ethereum long-term is undoubtedly the correct choice.

For society as a whole, having a substantial principal to hold large-cap stocks like BTC and ETH can allow one to live a comfortable life akin to a small bourgeois, without needing to make further efforts or struggles. For most people, being able to hold BTC/ETH and lie flat is a dream that most will never achieve in their lifetime. The saying goes, "Your life, my dream." Therefore, this is entirely a personal choice based on individual circumstances.

Regardless, please remember: within the 100 years of this century, players in the Crypto industry are undoubtedly the luckiest generation.