How to Win Next Bull Run
As old trends in the market fade, new trends emerge. And you're going to want to be in on this one trend!
· Importance of Finding Trends During a Bear Market
· Out of Style: ETH Killers
· Trending: Protocol-Owned Liquidity
Another week of the bear market has passed. And with that, I want to give some more insight into some of the trends I’ve seen come about over the past couple years.
As I highlighted last week, the most important thing you can do during a bear market is figure out what’s most likely to lead during the next bull market.
For a quick update, watch the video below:
The returns that crypto has rewarded its users within bull markets is unmatched. And I want to make sure that all of us are setting ourselves up with a framework that’s most likely to result in extremely high payoffs in the next run.
For example, the 2020 bull market was ushered in by the emergence of decentralized finance (DeFi).
If you weren’t paying close enough attention (which was my case until halfway through 2020), it was easy to miss, as everyone was still talking about the resurgence of the 2017 incumbents.
However, a vast majority of the coins that led the 2017 rally haven’t made new highs since then — with the exception of a few coins like BNB and ADA.
Meanwhile, a tiny part of the market known as “DeFi'' was also around in the prior bull market, but it was easily overlooked and seen as a gimmick. Some examples of the earliest DeFi coins were ETHLend (now called Aave) and Havven (now called Synthetix).
During the 2018 to 2019 bear market, a ton of work was done to improve these apps and figure out how best to attract users going forward.
The idea of a more open — and less centralized — financial system is obviously something that people wanted. But onboarding a bunch of users isn’t easy, especially when they’d just watched their portfolios crumble for two years.
Eventually, the token releases of Compound Finance (COMP) and Uniswap (UNI) gave the crypto market a second wind. And the rest is history.
Lots of DeFi tokens went up thousands of percentage points in the first few months of 2021. My goal right now is to seek out the areas of the market that will see similar action when things begin to heat up once again.
Out of Style: ETH Killers
After DeFi successfully made crypto cool again, the amount of users on Ethereum drove transaction fees to never-before-seen heights.
This was a huge issue, and it priced a lot of people out of using its apps, such as Uniswap, Aave, and Synthetix.
As a result, people flocked to alternative blockchains (or “alt L1s”), which offered far lower fees and faster transactions.
Lots of people who were frustrated, short-sighted — or both — dubbed these alternatives “ETH killers,” as it was believed they’d permanently steal Ethereum’s user base and much-sought-after liquidity.
Of course, there was a catch with the ETH killers. While the transaction fees were much lower, the centralization was much higher, which was a tradeoff that many invested in crypto don’t want to make.
Here are some examples of the craziest returns that were made by the so-called ETH Killers:
Solana: 24,086% (from 12/23/2020 to 11/6/2021)
Fantom: 18,266% (from 1/11/2021 to 10/26/2021)
Harmony: 11,342% (from 1/2/2021 to 10/28/2021)
To me, it was obvious that this was a temporary solution, as Ethereum had already been planning multiple solutions to the high fees for several years.
Right now, the main solution is Layer 2 networks — such as Arbitrum and Optimism, which have already seen impressive adoption, especially for a bear market (I gave an overview of these in this article).
The problem with the alt L1 movement was that there were way too many. And just about all of them aren’t going to end up being good investments.
Rather, they were the product of a crazy bull market where people couldn’t get their hands on enough crypto. But there were two big issues with any use cases beyond the short term:
Now that fees are lower, a lot of people have either exited the market or come back to Ethereum — or its Layer 2s (Arbitrum, Optimism, etc.).
Ethereum now has Layer 2 solutions that people are using instead of using the alt L1s, where they get just about all of the benefits of Ethereum with lower fees.
Of course, it’s inevitable that some of these will end up doing well. I don’t think Ethereum is going to have a complete monopoly over the market.
However, I believe that the alt L1 surge as a whole — where all of them go up hundreds or thousands of percentage points in unison — began and ended in 2021.
P.S. Looking for more promising crypto picks for the next bull run? Subscribe to our Platinum Membership for crypto and stock picks! You’ll even get weekly video and written updates — all for $14.99!
Trending: Protocol-Owned Liquidity (POL) Tokens
One thing that I believe is going to be a huge trend in the next bull market is projects that feature protocol-owned liquidity (POL).
As the name suggests, this is when the creators of a project are able to generate money from investors to create a central “treasury” that’s owned by the protocol.
This is opposed to the standard model in DeFi right now, which is to use the liquidity provided/owned by users.
POL solves two huge issues…
First, it allows crypto projects to have their own diverse treasury accounts.
Second, it reduces reliance on outside sources of liquidity.
Diverse Treasury Accounts
The last bull market brought another facet to the crypto market: treasuries.
Behind a vast majority of crypto projects, there’s a decentralized autonomous organization (DAO) that keeps the project running.
A necessary part of any organization that wants to grow is a treasury account, which is used by DAOs in two primary ways: to fund or grow the project, or to incentivize people to use their project by paying out tokens.
The bear market exposed how poorly a lot of these treasuries are managed, with most of them only holding their protocol token.
The biggest example of treasury mismanagement is Uniswap, which currently holds more than $2.8 billion in its treasury, which is a lot. However, it’s 100% comprised of UNI tokens.
ENS (Ethereum Name Services), which generates and sells the popular “.eth” names you see all over twitter, is in a similar situation. Its liquid treasury holds over $214 million — 75% of which is its ENS token.
On top of that, it has another $1 billion or so of vested ENS tokens. These tokens are currently locked up and will be released into circulation later on.
(Side note: If you’re interested at looking into the treasuries of different DAOs, openorgs.info is a great source.)
Reduces Reliance of Outside Sources of Liquidity
As I covered last week, there was a lot of money that suddenly rushed into crypto in 2020 and 2021. And it had some pretty bad effects on DeFi as a whole.
However, mistakes are often the causes of great solutions and innovations. And that’s definitely been the case with DeFi during this bear market.
One important lesson learned was that investors during a hype cycle are very fickle. This may sound obvious, but when billions of dollars are flying around everywhere, it’s easy to incentivize people to put their money into your project — especially when you offer laughably high APYs for doing so.
Now, instead of relying on fair-weather crypto money for liquidity, protocols have taken the matter into their own hands with protocol-owned liquidity. DAOs have gotten pretty creative with how they raise this liquidity, and the most popular method so far is “bonding.”
Bonding is when a DAO sells you its token at a discount in order to raise capital.
For example, say Uniswap wants to offer discounted UNI tokens, which you can pay for in USDC. When you buy the discounted UNI tokens, the USDC that you pay with is then added to Uniswap’s treasury. It’s as simple as that!
You can also think of this as a hedge fund. You need money to fund your operations, and you get the money by cutting investors a deal to invest in your business. In DeFi’s case, investors buy your token and get a cut of your revenue.
When a DAO has POL, it turns liquidity from a liability (since it can leave any time) into a source of revenue, which it can then pass on to investors.
And today, we’re going to take a look at the protocol that was the pioneer of POL in DeFi: Olympus DAO.
Olympus DAO
Right off the bat, Olympus DAO set its sights on a very lofty goal: become the reserve currency of crypto. Here’s how the founding team explained its objective:
“In contrast to the incumbent fiat system that’s declining in value due to inflation, our goal is to build and retain real purchasing power that withstands the test of time. Olympus DAO’s efforts in Treasury management, development of on-chain governance structures and prudent use of Olympus’ liquidity and Treasury assets will help to strengthen OHM’s stability.”
Essentially, Olympus DAO wanted to build a treasury that had two main priorities: to be relatively risk-free, as well as generate revenue.
However, building a treasury of any magnitude isn’t easy, and the way Olympus did it made it one of the most polarizing experiments in crypto history.
In order to attract people to fund its treasury, Olympus DAO released its token (OHM) and made it possible to stake it for insanely high interest rates.
For example, if you bought its OHM token in the early days and staked it in its app, you could earn interest north of 10,000%!
Everyone knew — or at least should’ve known — that the rates wouldn’t stay high for anywhere near a year. So, it was more of a nominal rate than anything, but the ability to compound your holdings at such a fast rate did the job and went viral in the crypto world.
The downside of this is that it’s a great way to hyperinflate the supply of your token. And you may be thinking that this sounds exactly like the liquidity farming scams that I described last week.
However, Olympus is different. What initially separated it from the pack was the creation of the “bonding” mechanism (described above) to earn POL.
Bonding gets relatively technical, so I’ll avoid the details for now.
The thing to focus on here is that the high APY was used to draw people in. And even though it was controversial, it worked. As a result, Olympus is now sitting on one of the biggest treasuries in crypto, worth more than $229 million overall:
Source: Olympus DAO
In the chart, you can see that there are three categories of assets: stablecoins, volatile assets, and protocol-owned liquidity. These three things combined can also be called Protocol Controlled Value (PCV).
The $33.1 million of protocol-owned liquidity is the section of the treasury that earns money for OHM stakers as well as creates a liquid market to buy and sell OHM.
As you may have noticed, this is one way that projects are sharing revenue, which was the general theme for last week’s article.
The stablecoins in Olympus DAO’s treasury are another thing that really distinguishes Olympus DAO.
Unlike most cryptos, OHM is backed by a treasury that contains a massive amount of stablecoins, which is much less risky than one that holds more volatile cryptos.
After all, if there’s going to be a reserve currency of crypto, it needs to be backed by something stable!
This creates more confidence for OHM holders, as it essentially sets a solid level at which OHM is trading at a premium or discount.
The idea is that if Olympus DAO were to liquidate its holdings, it would pay out all of its treasury assets to OHM holders. So, if the total market cap of OHM is less than the total liquid backing — or especially less than the stablecoin value — it’s safe to say it’s trading at a good level to buy.
In late 2021, the Olympus DAO team decided to tone down the APY, as they’d gotten sufficient liquidity to sustain their operations. This caused a lot of people who were only in it for the high APY to sell, as is commonly seen in less legitimate liquidity farming projects. The nasty bear market that 2022 has been thus far only made the selling worse, as you can see here:
Source: CoinGecko
With OHM’s total value still hovering around $275 million, it’s still a relatively big project and ranked No. 133 overall by market cap.
While Olympus surely has its benefits — and is an important pioneer in the world of DeFi — it still carries the stigma of being a “rug pull” project due to the cult-like behavior of the so-called “OHMies” on Twitter (which is pretty entertaining if you ask me), as well as the sharp decline of its market cap earlier this year.
Despite the negativity surrounding the project, the truth is that Olympus is a very promising project. It has created one of the most foundational business models in all of crypto. There have been hundreds of “OHM forks,” which means that projects essentially copy what Olympus has done.
As you can imagine, most of these are quick money grabs and end up being useless. But there are a few, such as Redacted Cartel, that I’ll write about in future Substacks.
As is usually the case from Ian, this is to wordy, not straight forward and hard to follow. Maybe a pointed summary should always be included.
Very hard to follow for those of us not immersed in the world of crypto. A layman’s explanation would be much better for understanding the concepts.