Reflection on Market Status: Don't Blame Participants for Strange Game Rules, Elections and Interest Rate Cuts Remain Catalysts

Author: Tommy

Compiled by: Shenchao TechFlow

During the @ EthCC conference, I spent a lot of time having one-on-one conversations with serious builders, venture capitalists (VCs), and market makers. Here are some of my reflections on the current state of the industry:

1. Blame the game rules, not the participants

"We love consumer applications, but 90% of the projects we've closed this year are infrastructure projects." Many builders and VCs believe that there are too many people building infrastructure and a lack of real consumer applications with users. Most VCs I spoke with expressed interest in consumer decentralized applications (dApps). However, looking at recent funding announcements, it's not hard to see that the market is still dominated by infrastructure projects.

This is a vicious cycle that is difficult to attribute to any single stakeholder:

• Projects and VCs want to list on large centralized exchanges (CEX) with good liquidity.
• Centralized exchanges want to list projects that offer good incentives through marketing activities (high fully diluted valuation, FDV) and top supporters.
• Infrastructure projects have a valuation premium due to the resources required for building, leading to more capital being funneled into these projects, creating a cycle.

2. Decreased VC interest in early rounds with high fully diluted valuations (FDV)

Since the fourth quarter of last year, project valuations have risen significantly. Many private financing or Series A projects have valuations exceeding $1 billion FDV, especially those related to AI.

On the other hand, most recently launched large-scale projects have performed poorly (e.g., $BLAST below $2 billion; $ZK and $W at $3 billion; $ZRO at $4 billion). The overall altcoin market is weak, and many VC-backed projects are trading at FDVs below their last round of private financing.

In the current market environment, the opportunity for VCs to achieve 50-100x returns is nearly impossible. Not to mention, VCs are also subject to lock-up restrictions (about 1 year lock-up + 2-3 years vesting). These projects may need to survive the next bear market and compete with more new projects that can quickly attract users due to the industry's short attention span.

As a result, more VCs are looking for liquidity strategies (if their investment strategies allow) or trading over-the-counter (OTC) at significant discounts relative to the last round valuation (or current FDV if the project is trading). For VCs with more resources, they are incubating projects founded by former employees to ensure they are early investors and have higher return potential.

Many VC analysts and research partners are turning to join emerging Layer 1 or Layer 2 blockchain ecosystems or starting their own projects. Compared to investing, direct involvement in project development seems to be a choice with higher expected value (EV). One advantage is that they can leverage their experience and networks to raise funds for the projects they are involved in, as they are well aware of VCs' focal points and needs.

Additionally, the overall poor performance of altcoins has led to lower distributed capital return rates (DPI) for limited partner (LP) funds. If a strong performance record cannot be provided, it is challenging to raise funds for new funds. Some of these funds have already spent most of their capital last year, and even if attractive investment opportunities arise now, they have no remaining funds available.

3. New wine in old bottles

Concepts that did not become as popular as expected are being repackaged in new forms. For example, Intent was once a hot topic but was quickly replaced by concepts like decentralized autonomous organizations (DAOs) and restaking.

Many projects are now rebranding themselves as "chain abstraction" or even "AI," especially those that have embedded some large language model (LLM) or algorithmic elements into their intent-driven projects.

Moreover, most decentralized IoT (DePin) projects have incorporated "AI" elements into their branding strategies to attract the attention of venture capitalists.

This phenomenon is similar to how security tokenization projects from the previous cycle have transformed into real-world assets (RWAs) in this cycle.

I believe there is nothing wrong with rebranding; finding a narrative recognized by the market is not easy. However, the market is still waiting for the next entirely new narrative rather than a repackaging of old concepts.

4. Not all narratives are "investable"

There is a distinction between popular narratives and hot verticals.

Account abstraction is a hot narrative that offers a better user experience. However, it is not a vertical; rather, it is a functionality embedded in different application scenarios, such as from wallets to games, from decentralized finance (DeFi) to social finance (SocialFi). You still need a specific product to sell; that is, there won't be a project that simply says, "We do account abstraction," but rather "We created a wallet that supports account abstraction" or "A game with account abstraction features," and so on.

Chasing popular narratives without analyzing the vertical (product) they belong to can be dangerous for venture capitalists, as you might end up investing in the hottest narrative in the wrong vertical.

5. Market makers are not resting easy

Market making can indeed be a profitable business, but due to some U.S. players exiting the market because of regulatory issues, new players are continuously entering, making this field more competitive.

Some market makers are engaging in price wars to win trades. In the options model (the preferred model for most market makers), market makers borrow tokens from project teams for sell orders while needing to put up stablecoins for buy orders. This either requires a large amount of capital (if using their own funds) or incurs high costs (if borrowing from elsewhere and paying interest). Therefore, the options model is not "cost-free" for market makers.

To win trades, market makers need to have the following: i) good relationships and reputation, ii) attractive proposals, iii) provide value-added services to clients.

Project teams are also becoming increasingly aware of different market makers, so the information asymmetry advantage that market makers once had in negotiations is diminishing, leading to more intense market competition.

6. Market catalysts (ETFs, elections, interest rates)

Most people are waiting for the ETH ETF to launch, hoping its price movement will rise like that of the BTC ETF after its launch.

Unlike the BTC ETF, people hope the ETH ETF can serve as a strong catalyst for Ethereum-related tokens.

There are also expectations that after ETH, more altcoin ETFs will be approved (could the next one be the SOL ETF?).

If more altcoin ETFs are approved, the ultimate goal for projects will be to obtain ETF approval rather than listing on top centralized exchanges (CEX). This would fundamentally change the market's perception of old tokens.

Another market catalyst is the U.S. elections, where people hope to elect a cryptocurrency-friendly regime and favorable policymakers.

A rate cut is expected this year, with more cuts likely in 2025. This will bring more liquidity to the cryptocurrency market.

Although the current market conditions are somewhat subdued, most people are optimistic about the outlook for the next 2-3 quarters. The sentiment is to stay calm, not to be overly impatient, but to remain confident and expectant.