🟣 To PvE or Not To PvE

A make-or-break summer

Author

Hayden
June 25, 2024

Brought to you by:

Welcome back to 0xResearch. Here's what we’ve got for you today:

  • Solana introduced Blinks — “Use Solana, everywhere”

  • Arbitrum DAO weighing two notable proposals

  • ZKsync introduces '“elastic chain”

“PvE” — Player vs Environment

On one hand, BTC and ETH finally gaining access to American capital markets signals a huge positive shift toward crypto and heavily favors the long run outcome for the industry. On the other hand, at their last meeting, the FOMC raised both their interest rate and inflation forecasts in 2024 and 2025, potentially tempering the appetite for risky assets until further notice. Since the meeting, BTC is down about -10%.

Crypto is stuck with a dilemma. Will American capital markets embrace having access to BTC and ETH? Or will the chances of higher than anticipated interest rates at the end of this year and the next suppress short term appetite? Of course, without having a crystal ball, it is impossible to know. In the coming summer months, we’ll learn more more about the strength of the economy, which should affect TradFi’s appetite for BTC and ETH, and the degree to which we enter a PvE or not.

PvE market conditions are distinct from player versus player (PvP) market conditions because in a PvP, there are more frequent and compelling idiosyncratic opportunities. These have been DeFi yield farming opportunities, NFTs, and memecoins—they’re highlighted with returns in specific crypto-native niches and frequent rotations of capital within a prospering narrative to capture the opportunity. They are essentially market conditions in which net aggregate flows into crypto are muted, in which case crypto-native market participants have to compete with each other for positive returns. PvE conditions, on the other hand, are conditions in which the broader macro is flowing into crypto. In these periods, “a rising tide lifts all boats.”

However, these days (at least in the immediate term), returns have been heavily correlated with majors, all whilst participants are realizing we’re all building the same thing. In addition to the chance crypto becomes increasingly subject to macro shifts (i.e. interest rates and the economy), at current prices, I think ETF flows and incoming economic data are setting up to be the biggest determinants in the short term.

In the medium and long run, the implications of TradFi issuing crypto ETFs, given ongoing infrastructure developments throughout the ecosystem, maturation of both onchain participants and offchain regulatory policies, and upcoming catalysts across many L1s and their applications, we’re set up for a nice dip buying opportunity.

Arbitrum DAO and potential sequencer updates

The Arbitrum DAO is having discussions about a proposal that would distribute 50% of surplus sequencer fees to token holders that stake and delegate their ARB to active governance. However, we do not think it will pass because the assumptions laid out in the post do not accurately reflect Dencun’s effects on sequencer fees.

Separately, there is an ongoing discussion from a post by our friends at Entropy regarding increasing Arbitrum’s base fee to either 0.3 or 0.5 gwei from 0.1 gwei. The post is promising and highlights the economics of the DAO and how raising the base fee can meaningful contribute to the long term sustainability and security of ARB and the DAO.

These discussions come at a crucial time for the DAO and Ethereum’s rollup ecosystem, more broadly. Recently, blob market activity spiked which induced more latency for rollups submitting blobs. This activity foreshadows rollups having to implement more sophisticated and dynamic fee policies as blob markets continue to mature. Aside from keeping an eye on spot ETH ETF flows, which are expected to go live next week, market participants concerned with Ethereum might find an edge staying close to rollup developments.

— Hayden (X: @magicdhz | Farcaster: @magicdhz)

Thank you to our sponsor:

From modularity to restaking, to the intersection of AI and crypto, to the long-awaited consumer-facing apps to the most recent Bitcoin-related innovations.

We’ll be breaking down all of these and more with the help of a few of the thought leaders in crypto at Permissionless.

Lido Protocol Economics

In spite of market weakness across the board yesterday, LDO surged roughly 15%. Lido fundamentals are highly reflexive to ETH price, so seeing LDO strength during ETH weakness and the potential for an LDO/ETH bear trap setting up on a weekly chart is encouraging. Additionally, amongst a market that is weighing the risks of “low float, high FDV,” LDO is nearly fully diluted and is oftentimes referred to as one of the protocols on Ethereum with the best fundamentals.

Ever since moderating incentives spending, Lido economics have plateaued around breakeven, suggesting the DAOs fundamentals are improving. And without sizable adjustments to the budget for st2024 v2, it’s possible Lido DAO is net profitable at some point next year assuming spot ETH ETF participants eventually seek exposure to staked ETH via stETH.

Read more about why stETH > tradfiETH in a recent report highlighting stETH’s market structures, key properties, and growing adoption among institutions, both onchain and offchain.

A significant portion of the call was dedicated to discussing the proposed ZK-PoS Phase 1, which aims to connect Polygon PoS to the AggLayer using a ZK proof of consensus, in addition to a pessimistic proof. This upgrade is intended to generalize how chains settle while protecting chain health and asset integrity. The implementation will involve deploying new contracts for the LxLy unified bridge for token mapping and migrating existing tokens from the PoS portal to the new deployment.

Maple Finance has unveiled Syrup, a new composable lending product where users can deposit USDC to lend to whitelisted crypto entities and receive competitive yields. Syrup will open deposits on June 25, and run a “drip” incentive program that will be convertible to a token in Q4 2024.

The Merge was meant to turn ETH into ultra-sound money, but it’s turning out more ultra-elastic these days.

Colorado-based miner is still “completely committed to pursuing a transaction” with its Canadian competitor after deal rejection.

The insights, views and outlooks presented in the report are not to be taken as financial advice. Blockworks Research analysts are not registered broker/dealers or financial advisors. Blockworks Research analysts may hold assets mentioned in this report, further outlined in the Firm’s Financial Disclosures.