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Don't remind me again today

Speculative coins are dead, equity coins should stand up.

Author: Patrick Scott | Dynamo Decentralized Finance

Compilation: Deep Tide TechFlow

The clearing day for the crypto industry has finally arrived.

Over the past five years, tokens have enjoyed a state that I would politely call “speculative demand far exceeding fundamentals.” Less politely, they have been severely overvalued.

The reason is actually quite simple: there are not many liquid assets with good fundamentals in the cryptocurrency industry. Therefore, investors can only gain exposure through the assets they have access to, which are typically Bitcoin or altcoins. Coupled with retail investors who have heard stories of “Bitcoin millionaires,” they hope to replicate such returns by investing in newer, smaller tokens.

This has led to a demand for altcoins that far exceeds the supply of those with solid fundamentals.

First-layer effect

When market sentiment hits rock bottom, you can freely buy any asset, and a few years later you can achieve astonishing returns.

Second Layer Effect

Most industries' business models (if you can call them business models) revolve around selling their own tokens, rather than relying on actual revenue sources linked to their products.

In the past two years, the altcoin market has experienced three events with disastrous effects:

The rise of “Pump fun” and other token issuance platforms

These platforms have “commoditized” the issuance of new tokens (i.e., made it too commonplace), leading to attention being diverted to millions of assets. This dispersal effect prevents the top few thousand tokens from continuing to attract concentrated capital inflows and disrupts the wealth effect that Bitcoin halvings usually bring.

Earlier this year, on many days, the Pump platform launched over 50,000 tokens daily.

Some cryptocurrencies are beginning to have real fundamentals.

Some tokens (such as HYPE) and new IPO projects (such as CRCL) are beginning to show real fundamentals. Once assets supported by fundamentals appear in the market, it becomes difficult to bet on tokens that rely solely on white papers.

Hyperliquid holders often earn over 100 million dollars a month.

At the same time, technology stocks have outperformed the crypto market. In many cases, stocks related to artificial intelligence, robotics, biotechnology, and quantum computing have yielded better returns than the crypto market. This has led retail investors to wonder: why take the risk of investing in altcoins when “real” companies offer higher returns and seem to carry lower risk? Even the NASDAQ's performance this year has surpassed that of Bitcoin and altcoins.

What is the result?

Poorly performing altcoins have become a “graveyard”;

Teams are fiercely competing in an increasingly scarce capital pool;

Experienced cryptocurrency investors are also becoming at a loss, wandering around like headless flies looking for investment direction.

Ultimately, tokens either represent an interest in a business or they are completely worthless. They are not some magical new thing that can gain value merely by existing.

If you stop viewing tokens as something difficult to understand and instead see them as assets representing the future cash flow of a business, everything will become much clearer.

But you might protest, saying: “Dynamo, some tokens do not grant the right to future cash flows! Some tokens are utility tokens! Some protocols have both tokens and equity!” But you are wrong. These tokens still represent future cash flows; it's just that the cash flows they are associated with happen to be 0 dollars.

Ultimately, tokens either provide rights in a business or are worthless. They do not automatically gain value simply by “existing” or having a “community” (as many believe).

It is important to note that this view does not apply to network currencies like Bitcoin (BTC), as they are closer to the characteristics of commodities; what is being discussed here are protocol tokens.

In the near future, the only DeFi tokens with actual value will be those that exist as pseudo-equity tokens and meet the following two conditions:

Claim rights to protocol income;

The protocol's revenue is sufficient to make it an attractive value proposition.

Retail investors “break up” with the crypto market

Retail investors have temporarily bid farewell to the crypto market.

Some leading KOLs shout “crime is legal,” yet they are surprised that people are unwilling to become victims of “crime.”

From the current perspective, retail investors have lost interest in the vast majority of tokens.

In addition to the reasons mentioned earlier, another important factor is: people are tired of losing money.

Overinflated Promises: The value of many tokens is built on promises that cannot be fulfilled.

Oversupply of Tokens: Due to the rise of memecoin issuance platforms, there is a serious oversupply of tokens in the market.

Predatory Token Economics: The industry's tolerance for worthless tokens leads retail investors to rightly believe they are destined to “pick up the pieces.”

What is the result? Those who would originally purchase crypto assets turn to seek other outlets to satisfy their “gambling desires,” such as: sports betting, prediction markets, and stock options. These choices may not be wise, but buying most altcoins cannot be considered a good idea either.

But can we blame these people?

Some KOLs discuss “crime is legal” while being surprised that people are unwilling to become victims.

This public indifference towards the cryptocurrency market is also reflected in the interest in the industry. This year's enthusiasm is far from reaching the heights of 2021, even though the current fundamentals are better than ever and the regulatory risks are lower than before.

I also believe that ChatGPT and the ensuing wave of artificial intelligence have dampened people's enthusiasm for cryptocurrencies, as it has shown a new generation what a true “killer app” really is.

Over the past decade, crypto enthusiasts have been talking about the crypto industry as a new “Dot-Com Moment.” However, as people see artificial intelligence reshaping their world in more intuitive and obvious ways every day, this claim becomes harder to convince.

The gap between cryptocurrency and AI in terms of search engine attention is evident. The last time cryptocurrency surpassed AI in search interest on Google was during the FTX crash:

Will retail investors return to the crypto market?

The answer is: Yes.

It can be said that retail investors have returned to some form of prediction market today, but they are buying binary options on “when the government shutdown will end” instead of altcoins. If they want to buy altcoins in large numbers again, they need to feel that they have a reasonable chance of making a profit.

The core source of token value: protocol revenue

In a world where a token cannot rely on a continuous stream of buyers driven by speculation, it must stand firm on its intrinsic value.

After five years of experimentation, the painful truth has emerged: the only meaningful form of token value accumulation is the claim on protocol revenue (whether past, present, or future).

All these various forms of real value accumulation ultimately boil down to claims on protocol revenues or assets:

Dividends

Buybacks

Fee Burns

Treasury Control

This does not mean that a protocol must implement these measures today to be valuable. In the past, I have been criticized for expressing the hope that the protocols I favor would reinvest their income rather than use it for buybacks. However, protocols need to have the ability to initiate these value accumulation mechanisms in the future, ideally triggered by governance votes or by meeting clear standards. Vague commitments are no longer sufficient.

Fortunately, for savvy investors, this fundamental data is easily accessible on platforms like DefiLlama, covering thousands of protocols.

A quick glance at the top protocols ranked by revenue over the past 30 days reveals a clear pattern: stablecoin issuers and derivatives platforms dominate, while Launchpads, trading applications, CDPs, wallets, decentralized exchanges (DEXs), and lending protocols also show performance.

Key conclusions worth noting:

Stablecoins and perpetual contracts are the two most profitable businesses in the current cryptocurrency industry.

Trading-related businesses are still very profitable.

Overall, the business profits from trading are substantial. However, if the market enters a prolonged bear market, the revenue from trading-related activities may face significant risks, unless the protocol can shift to trading real-world assets (RWAs), as Hyperliquid attempts to do.

Controlling distribution channels is just as important as building underlying protocols.

I speculate that a segment of hardcore DeFi users may strongly oppose trading applications or wallets becoming top revenue sources, as users can directly use protocols to save costs. However, in reality, applications like Axiom and Phantom are extremely profitable.

Some crypto applications can generate tens of millions of dollars in revenue each month. If the protocol you are interested in hasn't reached this level yet, that's okay. As someone responsible for DefiLlama's revenue, I know that developing a product that the market is willing to pay for takes time. But the key is that there must be a path to profitability.

The era of fun is over.

Value-Oriented Crypto World: Analyzing Investment Frameworks

When searching for investment tokens in the coming years, strong-performing tokens must meet the following criteria:

Claim rights to protocol revenue or clear and transparent paths for revenue claims

Stable and sustainable income and returns

The market value is within a reasonable multiple range compared to past income.

Instead of talking about theory, let's look at a few concrete examples:

Curve Finance

Curve Finance has achieved stable and continuous revenue growth over the past three years, even though the fully diluted valuation (FDV) has decreased. Ultimately, its FDV has fallen to less than 8 times Curve's annualized revenue from the past month.

Due to the fact that holders of locked Curve tokens can receive bribe rewards, coupled with the long token release cycle, the actual yield of the tokens is much higher. The next point of concern is whether Curve can maintain its revenue levels in the coming months.

Jupiter

Jupiter has firmly become one of the main beneficiaries of the thriving Solana ecosystem. It is the most widely used DEX aggregator and perpetual decentralized exchange (perp DEX) on the Solana chain.

In addition, Jupiter has made several strategic acquisitions, which enable it to leverage its distribution channels to expand into markets on other chains.

It is worth noting that the annualized income distributed to token holders by Jupiter is quite substantial, amounting to approximately 25% of the circulating market value, and exceeds 10% of the FDV (Fully Diluted Valuation).

Other protocols that meet the standards: Hyperliquid, Sky, Aerodrome, and Pendle

Positive Signal: Ray of Hope

The good news is that teams who truly care about their survival are quickly realizing this. I expect that in the coming years, the pressure of not being able to sell tokens indefinitely will drive more DeFi projects to develop actual sources of income and tie their tokens to these revenue streams.

If you know where to look, the future will be full of hope.

BTC-0.34%
HYPE0.54%
CRV-2%
JUP2.06%
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