Cryptanalysis Analyst Q2 Industry Outlook: The Metaverse Will Be the Future Mainstream, Funds Will Be Allocated to Gaming and DeFi Blue Chips

Written by: Raymond Chng

Compiled by: TechFlow intern

Macro

The Russia-Ukraine war has been the headline news for the past few weeks, triggering significant portfolio changes for TradFi investors and bringing a local bottom to the cryptocurrency market. However, I believe this war may soon come to a close.

The Federal Reserve is raising interest rates in an environment of inflation trends and slowing growth, which could lead to some unfortunate events later this year. We may see a shift from inflation to stagflation as early as Q3 2022.

What does this mean for the world? -> It means a chronic death, which is unfavorable for most who are unprepared.

If digital assets are to decouple from the TradFi market, now would be a good time.

The world is currently in chaos, and in addition, there are insufficient pensions worldwide, compounded by stagflation, which is the root of disaster. Policymakers will need to consider how to navigate this issue. If things go poorly, will they: 1) let the ship sink—leading to a deep recession—making everyone unhappy; or 2) continue printing money—giving money to people, inflating everything, and allowing people to slowly die as purchasing power gradually declines?

Perhaps a parallel world could become Noah's Ark? Let the current world bleed to death slowly → enter the metaverse → the virtual/metaverse economy will eventually surpass the economy of the real world.

Cryptocurrency Market

Large TradFi funds are continuously entering the cryptocurrency space, investing in the infrastructure layer of the sector, such as Temasek (Singapore's government-linked fund) investing in IMX.

More and more funds are focusing on gaming and the metaverse.

Valuations in venture capital rounds are high, and for some funds, it may be better to buy liquid tokens (those already listed) as some are close to or even below seed valuations. As a retail investor, this is good news for me because I have the opportunity to buy reliable projects at a cheap price if I do my research.

The market is decentralized—some tokens are in a bear market while others are in a bull market; the key is to identify this and trade accordingly.

It’s a season of broad corrections—most coins have risen and then fallen, with almost no coins showing any directional trend in the past few weeks.

Old coins (EOS, WAVES, TRX) are making a comeback with the release of news, indicating how the market can create a hot topic, but the season of broad corrections also shows how PVP the market is.

Clearly, the current market conditions are most suitable for quant/swing traders rather than trend traders. Hopefully, this situation will change in Q2—I will share my thoughts on how to navigate this situation. However, I will focus on the situation in "May."

Q2 is expected to be a better quarter, and there may be risks for most sectors of the cryptocurrency market, believing that the market has already allocated and will continue to allocate funds to: 1. Gaming 2. Blue-chip DeFi coins.

Bitcoin

BTC started as collateral for TradFi, which may be the beginning of monetizing BTC as a bond-like asset, after all, there are about 5T (February 2022) of negative-yield bonds in Europe alone. The market cap of BTC is still below 1T USD (March 2022).

The Luna Foundation Guard (LFG) has triggered the current small bull market and may see a trend in the next 2-3 months. I believe the current price action (pa) is caused by people front-running the buy-in for LFG.

Other market participants are also buying in anticipation of stagflation, purchasing "the hardest money."

Interestingly, after Ray Dalio mentioned he had some BTC in 2021, Bridgewater recently indicated they would enter the cryptocurrency space. As you know, they are not the only ones seeking cryptocurrency exposure, and I believe they will also start allocating BTC.

ETH

The key lies in the merge; while most market participants are optimistic about this event, I am unsure how it will be considered a true end. Somehow, when most people (the herd) think something will happen, it tends to go the other way.

Due to strong liquidity, ETH remains one of the ways institutional funds are getting exposure to cryptocurrency. In the long run, it is a good asset to hold market Beta risk, but if you want to beat the market as a retail investor, it may be best to avoid ETH.

Most activities related to ETH may occur on future L2s.

Eth L2

Starknet

• The latest funding round has valued Starkware at $6 billion, led by Sequoia, with investors like Paradigm, 3AC, and Alameda participating.
• There is a lot of developer activity on Starknet, a vibrant community, and consistent ecosystem updates.
• There may be strong DeFi infrastructure, with MakerDAO and other blue-chip DeFi preparing to launch on Starknet.
• The gaming ecosystem will also be robust, with game expansions on Starknet under development, such as Loot Realms. There’s also Matchbox DAO, which aims to be a hub for game developers, designers, etc., on Starknet.

Arbitrum

• When Airdrop (rumored to be in 2022).
• Interestingly, the NFT market on Arb is more resilient compared to all others.
• The Magic ecosystem supports the on-chain NFT market, featuring entities like Seed of Life, Battlefly, and more, and I believe we will see new funds entering the ecosystem.
• Derivative tokens like Dopex and Vesta may continue to maintain sticky TVL on-chain.

L1 (Sol/Luna/Avax)

1. Solana

• Launching Opensea on Solana may kick off their NFT and gaming season.
• Game: Aurory may be the most anticipated upcoming game. Star Atlas is also highly anticipated but may take some time. One game I might closely watch is Meekolony, which may launch its TGE in Q2 2022.

2. Luna

• After observing the performance of ecosystem coins, I decided to stick with buying Luna and anchor UST during the hedging period.
• The ultimate goal for UST is > USDT, and Do Kwon and the team are building a complete ecosystem to continuously increase demand for UST.
• Gaming projects are coming to the Terra ecosystem soon.
• DeFi/FX is expected to help drive UST growth, thereby intensifying burns.
• It may soon break ATH and trend upwards.

3. Avax

• Subnets launching → cheaper transactions and more scalability.
• Game: DeFi Kingdoms (Jewel) and Crabada (Cra) will soon launch their subnets. Although there are some delays with Crabada's Swimmer network, it will eventually be completed. Avax is becoming a top industry chain for game developers, and I am very excited to follow their journey.
• DeFi: Most DeFi tokens on Avax have dropped 70-85% from their historical highs. I think this is a good place to pay attention to these tokens as Avax Summer is approaching.

DEFI

1. Badger Ecosystem

• Badger DAO is a DAO that allows Bitcoin to be used as collateral for DeFi applications.
• TLDR; it earns yield on your BTC.
• Previous discussions about the Badger hack have been organized, and I believe Badger has the potential to provide an important infrastructure for BTC holders to monetize their coins.

2. CitadelDao

• Citadel is a treasury DAO aimed at becoming the largest community holding BTC in the world.
• Citadel will grow into a Bitcoin whale for the people, with the goal of supporting the creation of Bitcoin-focused products, not just DeFi, but also severely underfunded Bitcoin core development.
• To ensure it can generate sustainable returns on its Bitcoin positions, it will hold not only Bitcoin but also yield-impacting assets across the DeFi space (like Convex and BADGER).

3. Tetra Roundtable

a. Convex Finance

• The story is well-known; essentially, CVX controls most of the voting power of the CRV, FXS, and other tokens they collaborate with. The CRV war has turned into the CVX war.
• Curve v2 is about to launch - it will bring substantial rewards to CVX holders.
• It remains one of the key projects in the DeFi portfolio.

b. Dopex

• rDPX new token economics.
• ve-DPX.
• c. Frax Finance.
• FPI airdrop.
• FraxSwap.
• As I mentioned in the Q1 outlook, Frax may be the top stablecoin, FPI is the CPI for cryptocurrencies, and Sam Kazemian is a faith indicator that gives us hope for a brighter future in the metaverse.
• It may be one of the few DeFi tokens that can be held in a wallet and return in price after holding for 5 years, but it is still speculative.

c. FeiRari

• Fast code updates.
• The new xTRIBE allows users to directly mint FEI or FEI LP tokens on the Fuse lending platform. All rewards are automatically compounded.
• It may be another DeFi token you can hold and return with a Ferrari in ten years. NFA.

d. Redacted Cartel

• Influencers of all DeFi votes.
• The puppet masters (check their documentation).
• It may be a way for retail to buy tokens as an ETF, as Redacted has a wide influence.
• I bought BTRFLY at auction and sold it for about $3,000. I plan to add it back to my portfolio in the near future.

AVAX DEFI

1. BenQi

• Liquid staking - sAVAX.
• Anchor asset.
• DeFi Kingdoms partner.
• Still the native lending platform for AVAX.

2. Joe

• The new token economics allows the protocol to also serve as a launchpad.
• sJOE, rJOE, and veJOE mean that buying pressure will be higher when demand rebounds.
• Despite funds continuously flowing out of DeFi in recent months, the team continues to build.
• It may be a good time to reassess. At recent lows, JOE was close to VC financing round prices, so as long as you believe VCs won't only invest 2x, there is significant upside potential.

3. GMX

• If you are not familiar with GMX, check out Blocmates' complete guide to GMX.
• It is a Perp protocol that many people are using, and whether in a bull or bear market, it remains a solid coin.

Other DeFi Projects to Watch

1. Aave v3 cross-chain, the price has already risen, and we may see the OG DeFi protocol make a comeback after a major overhaul.

2. A new decentralized forex protocol with a strong mature team, robust investors, a reliable roadmap, upcoming GLP token economics, MKR vault-type products, monetizing real-world assets, fiat on/off ramps partnerships, ensuring the team focuses on protocol profits rather than purely TVL growth in the DEFI protocol.

Web3 Gaming Summer

Thoughts on the Gaming Sector

• In January 2022, I decided to pivot to GameFi because I believe the future of the metaverse will require reliable games that people want to spend a lot of time playing. So I decided to dive deep into the gaming space. I wrote more insights about this on my Twitter, so you can see more of my thoughts.
• Jason Choi mentioned that GameFi feels like DeFi in 2020, which means we are about to enter a GameFi bull market, and we are still early.
• Wangarian mentioned that the next 100x potential is in GameFi, and I tend to believe him; in fact, this has been a topic of discussion with my partners.

Transformation of Gaming Guilds

• Recently, a guild sold all their Pegaxy assets, leaving scholars without work, and with recent changes in SLP, guilds focusing solely on scholarship models may not survive in the long term.
• Therefore, guilds need to reassess what their primary roles are. I wrote a post about 12 areas guilds can get involved in, and I believe some guilds may move in this direction.
• I believe some guilds will pivot to game centers or studios as their primary model. Merit Circle started with cooperation/investment in selected games, and I believe GuildFi will also shift to this model; I heard they are developing and will have announcements to share their plans in the future.

Games to Watch

• Game Ecosystem - Treasure DAO (MAGIC).
• MMORPG - Ragnarok / Treeverse / Meekolony / Ember Sword.
• RPG - Crypto Raiders (RAIDER).
• FPS - AFAR / Blast Royal.

Metaverse

• The upcoming land sale of BAYC may trigger the next metaverse bull market.
• Currently, The Sandbox (SAND) remains the most interesting project and is the leading virtual world project.
• NFT Worlds (WRLD) is definitely a project to watch, leveraging Minecraft design, allowing developers to easily build virtual worlds, with various NFT projects continuously buying land and developing it into their own metaverse (i.e., Floki Verse)—there seems to be great potential for NFT Worlds, and I will write an in-depth exploration about it in the future.
• As Jason Choi pointed out, winning metaverse underlying projects like The Sandbox will become the main winners in this space, somewhat like fat protocols in L1.

Q2 2022 Portfolio Allocation

Overall thought—what happens in the market will naturally express itself in my portfolio allocation, so…

1. What are the potential benefits of a long-term bear market?

• A bear market is unlikely to extend, as those I have spoken to working in TradFi institutions have consistently told me they are preparing to allocate to cryptocurrency, and purchasing power will soon arrive.
• The market is maturing, and market participants know that BTC/ETH/Crypto will continue to exist; what we may have are just frequent corrections.
• If a bear market does occur, I am prepared to primarily enter stablecoins and only trade the market.

2. Which segments are currently not being discussed and will become more popular in the coming months/year? (This is a question I often ask myself)

• Personally, I believe the metaverse will be mainstream in the coming years, but not many people are talking about it. Perhaps this will be a space worth watching.
• I do know that Facebook (Meta) supports Realy, and a standalone Web 3 protocol called MONA has been overlooked.

3. Offense or defense?

• Defense, while looking for strong coins.

4. Based on the above questions, how will I better manage my risk?

• Leaning towards more liquidity while also sticking to good R/R plays.

My Portfolio (NFA)

1. (30%) Gaming

Crypto Raiders (RAIDER)

• I recently wrote about my views on this game project in an article, but to make a long story short; the Raider team has a long-term vision and is sacrificing short-term profitability for the game's long-term sustainability.
• This is a game that even some game designers are playing.

TreasureDAO (MAGIC)

• One of the most vibrant communities out there.
• Treasure DAO is building a decentralized Nintendo, where their games can interoperate, and items from Game A can be used in Game B.

Other Games

There are other games I am currently getting whitelisted for and/or starting to purchase their game NFTs, and I will share more information in the coming days.

2. (20%) Productive Assets

Benqi (QI)

• For the reasons mentioned earlier in the article.

Convex Finance ($CVX)

• Accumulating more CVX before the Tetra roundtable and CitadelDao.

Badger DAO (BADGER)

• I have an initial position and will increase my holdings in the future.

3. (40%) Stablecoins / Mainstream Coins or L1 / Coin-Perps

• Due to the current market conditions, a fragmented market, I find it difficult to buy and hold; it feels more like a trader's market.
• My strategy has shifted from holding productive assets to doing more trading, whether it's T trading or swing trading, basically anything that keeps my portfolio liquid while also capitalizing on market movements.
• This part of the portfolio will be where I spend the most time, from stablecoins to holding Avax/Luna or trading the market.

4. (10%) Alpha Speculation

• There is always such a configuration for very low market cap projects that may require a holding period of over 6 months, essentially the kind of projects that are heavily invested in and easily forgotten; currently, this part of the portfolio includes the DeFX coin I mentioned earlier.
• I will not disclose the tokens here for now, as they are low market cap and high risk.