Divine Fish: Three Things to Watch in the Second Half of 2023

Author | Shen Yu Cobo Recent Internal Event Speech

A lot has happened in the first half of the year. However, looking back today, there aren't many major events.

Macro Events

First, the collapse of digital banks in the U.S. in March had a significant impact, as a very core channel for converting Crypto to fiat and fiat to Crypto, established over the past few years, disappeared. This channel accounted for more than 70% of the entire market's traffic.

In April, Ethereum completed the Shanghai upgrade. This was a major market upgrade, bringing a core change: the entire cryptocurrency space welcomed a very secure underlying yield-bearing asset. After the upgrade, a large amount of Ethereum began to be locked up, with nearly 20% of Ethereum currently locked in nodes. At the same time, many traditional enterprises also began to build strategies based on this.

For a long time, traditional funds entering the cryptocurrency world could only do one thing: buy mining machines for physical mining. Now, some traditional institutions are starting to create funds to buy Ethereum and enhance yields through Staking, which will become a very important native source of funds for cryptocurrencies for a long time to come. Over the past decade, the cryptocurrency space has revolved around two main activities: issuing assets and trading assets, with this change in the method of issuing assets being very significant.

In April, changes in cryptocurrency policies in Hong Kong led to a surge of activity, bringing in a lot of traffic. However, we are still observing whether Hong Kong can replace the U.S. as an important channel between the Crypto and fiat worlds. On June 1, new cryptocurrency policies in Hong Kong took effect, and we saw some movements, but they were still quite small.

In June, U.S. compliance tightened, with the SEC suing exchanges like Binance and Coinbase, leading to a period of extreme market sentiment and a significant drop. However, market sentiment quickly reversed as many traditional financial companies began applying for cryptocurrency ETFs.

ETFs are also a very important narrative logic for cryptocurrencies. In 2013, Bitcoin's rise from 1,000 RMB to 8,000 RMB was largely driven by the U.S. holding an ETF hearing. Therefore, the ETF narrative has been discussed for 10 years.

The price increases of cryptocurrencies in 2021 and 2022 were fundamentally driven by Grayscale. Grayscale is a very interesting innovation that used a good arbitrage model to lock many coins into its fund, but they could only enter and not exit, leading to a massive influx of USD and a surge in Bitcoin prices. An ETF could potentially be a larger version of Grayscale.

What is worth observing next is when a large number of ETFs will be approved. From the perspective of asset allocation or risk hedging, traditional funds buying ETFs directly from these brokerage banks would mean a significant amount of capital flowing into major assets like Bitcoin and Ethereum. This will also be a very critical event.

Industry Exploration

In terms of industry development, there are several noteworthy events.

One was in February and March, when the launch of the Move public chain brought a wave of speculation, but the bubble quickly burst. The second was the Blur airdrop, which led to a liquidity feast for NFTs, causing a rise in NFTs in January and February, especially blue-chip NFTs. However, as projects like Ape and Azuki failed to meet expectations, prices plummeted, and NFTs are currently in a state of bubble burst and narrative restructuring.

Next, NFTs need to find new narrative logic and landing scenarios beyond the PFP concept. Perhaps combining NFTs with offline elements, such as personal fans or membership rights, could bring in a large number of new users, which I personally see as very promising.

From late April to early May, there was a wave of speculation around MEME coins, causing many junk coins to rise significantly. Additionally, the combination of Ordinals NFTs on the BTC chain and BRC20 also contributed to this wave of MEME coin speculation. This indicates that the industry's narrative logic has reached a stage where there is almost no narrative logic left; with nothing else to speculate on, people resort to MEME coins.

The above summarizes the major events in the cryptocurrency industry over the past six months. The basic conclusion drawn from this analysis is: we are currently in a phase where the industry lacks narrative logic, and it is greatly influenced by macro and regulatory factors.

Three Key Focus Areas for the Second Half of the Year

The entire cryptocurrency industry is still in a state of seeking a new narrative logic. However, there are still several major events worth paying attention to. As for what the final narrative logic of cryptocurrencies will look like, which applications will succeed, and what scenarios will materialize, we will only be able to see this clearly in the second quarter of next year. These are all results that will be determined through trial and error, with everything decided by the market.

First, Ethereum will undergo an upgrade in the second half of the year to improve performance. Secondly, L2 networks are expected to go live on the mainnet within the next 6-12 months—most likely within 6 months—with a series of layer two networks like Scroll and ZKS competing to be the first, thus gaining a significant first-mover advantage. Once Ethereum is upgraded, the performance issues that have plagued the blockchain industry for the past decade may gradually be resolved, potentially achieving about a tenfold performance improvement, increasing from several hundred TPS to around a thousand TPS, and further through hardware acceleration and other means to reach tens of thousands of TPS. This will lead to a significant performance boost, allowing high daily active applications and low-cost transactions to finally run on the blockchain.

The second consensus is that keyless wallets based on MPC technology and on-chain AA smart wallets may gradually form a unified standard with the launch of L2, leading to large-scale promotion and application. Layer two networks have been designed from day one to provide users with an AA wallet. This could become the default configuration for users, greatly lowering the entry barrier.

Once the blockchain performance is initially resolved and the user entry barrier is further lowered, there may be a wave of application attempts and explosions, with a large influx of users, which is what we hope to see. I expect this timing to be after the second quarter of next year.

The third important issue is the applications for traditional institution ETFs. Starting in June of this year, many traditional financial institutions have begun applying for cryptocurrency spot ETFs, and it seems that the likelihood of approval is very high. A hard timeline is set for Q1 of next year, around the end of March, when the SEC must respond to whether to approve the ETFs. We hope to see one or two ETFs with large-scale liquidity from traditional financial institutions launched by the end of Q1 next year, reopening compliant funding channels in North America.

These are the three core issues that I believe will drive the industry over the next six months to a year.