ZKX Twitter Spaces - State of the Market

In this ZKX Twitter Spaces which took place on May 9, 2024, Tanisha was joined by Edward, Ajeet, Anthony, and Tommy for an in-depth discussion on the current state of the crypto market, exploring topics like meme coins, the impact of airdrops, the role of RWAs, and the future of DeFi and Layer-2 technologies

Background

Tanisha (Host) – Content, PR & Marketing at ZKX Protocol

Eduard (Guest) – Founder at ZKX Protocol

Ajeet Khurana (Guest) – Founder at Reflexical

Tommy (Guest) – Venture Investor at Crypto.com

Anthony Wang (Guest) – Founding Partner at Serafund

ZKX Protocol – a perpetual futures DEX with self-custody on StarkNet

Market Conditions Analysis

Ajeet says that the current market conditions are fluctuating more compared to three years ago during the bull market when most people were making money. He points out that meme coins and airdrops have become more significant than in previous cycles, suggesting that the market is in an unusual state.
Tanisha asks about the prospects for market recovery and the future outlook, noting the negative sentiment influenced by regulatory concerns and token unlocks.
Tommy describes his role in venture investing at crypto.com capital and notes the lack of a dominant narrative in the current market, contrasting it with previous cycles that had clear trends like DeFi summer or NFT booms.
Tommy discusses the current interest in various narratives such as AI, regional enthusiasm for Bitcoin, and the ongoing popularity of meme coins among retail investors.
Tommy talks about the influx of traditional financial capital into Bitcoin via the BTC spot ETF and the scattered state of the market due to insufficient liquidity to support all emerging narratives. He is optimistic that a consensus on key narratives, combined with increased retail interest, could lead to a significant upturn in the market.

Market Macro Trends & Dynamics

Edward says that the macroeconomic environment remains stable with unchanged interest rates, suggesting a lack of immediate monetary stimulus that could influence the market significantly. He highlights that, unlike in previous years, there is no direct financial incentive from the government to consumers, which has driven up retail investment in crypto. He observes the slow but steady inflow of institutional funds, contrasting it with the absence of significant retail investment.
Ajeet asks Edward about the macroeconomic factors influencing Bitcoin’s price, noting the recovery of Bitcoin’s value despite high inflation and steady interest rates. He says that while an interest rate reduction is not imminent, it is inevitable, and speculates on the positive impact this could have on Bitcoin’s price starting from its current level.
Edward agrees with Ajeet, noting that the recovery in Bitcoin’s price has occurred without the typical signs of a bull run, such as retail frenzy and exuberance. He anticipates some adjustment in interest rates around the election period and points out the economic growth in countries like India and Indonesia, which could lead to increased disposable income and more significant investment in crypto.
Ajeet adds that apart from macroeconomic factors, market dynamics within crypto, especially among large-cap assets, are noteworthy. He discusses how the significant growth in market cap for coins like Polygon during the previous bull market creates a high base effect, limiting their potential for similar growth in the current market. He says that this phenomenon might explain why, despite potentially being in a bull market in terms of market capitalization, the gains are not widely felt among investors, with only isolated success stories.

Market Narratives

Tanisha asks Anthony to share his perspective on the narratives that will dominate throughout the year from an investment viewpoint.
Anthony introduces himself as a founding partner at Serafund, an early-stage VC focused on infrastructure, DeFi, and gaming. He acknowledges previous speakers’ points about the market cycle, noting that despite initially expecting a shorter cycle due to rapid price gains, the recent consolidation suggests a longer, healthier market cycle ahead. He believes that post-FTX and Luna, many assets were significantly undervalued, but the current consolidation positions the market for the next upward move.
While acknowledging the lack of retail inflows compared to previous cycles, Anthony remains optimistic due to positive catalysts such as potential interest rate reductions and the U.S. election year. He cites stablecoin inflows and Bitcoin’s current price amid global conflicts and economic uncertainty as positive indicators.
Anthony comments on the changing nature of this cycle compared to past ones, where holding a basket of altcoins would yield outperformance against Bitcoin. He notes that this cycle requires a more careful selection of narratives and assets, highlighting top-tier narratives like AI, RWAs, new Layer-1s, BRC-20s, liquid staking, and meme coins as strong contenders.
Eduard asks whether the new trends in restaking and recursive airdrops are genuinely helping to onboard new users or simply catering to existing degens.
Anthony agrees that airdrops have historically solved the cold-start problem for attracting users, but notes that recent drops like Parcl and Kamino were dumped heavily. He highlights that the best airdrops tend to fly under the radar, mentioning Jito as an example, and believes the most effective approach is launching products that remain sticky even without airdrops.

DeFi Dynamics

Tommy adds to Anthony’s discussion about restaking, noting the recent hype around Ethereum and various protocols that allow leveraging restaking. He raises concerns about the risks associated with leveraging and DeFi, particularly the practice of using borrowed funds repeatedly, which amplifies exposure without necessarily having the underlying assets to back up these positions.
Tommy warns about the overestimation of APYs in staking and how these are likely to decrease over time. He points out that while protocols like EigenLayer aim to sustain higher APYs, truly high returns from staking are unsustainable and often bolstered only temporarily by airdrops pre-token generation events.
Tommy further discusses the broader context of airdrops, critiquing the antagonistic stance some projects take towards airdrop farmers. He argues that while it’s important to prevent airdrop abuse, vilifying airdrop farmers—who are often the most crypto-native users—is not productive. He advocates for a balance, suggesting that projects should use points systems or other mechanisms to both attract and retain genuine users by converting some airdrop farmers into long-term supporters of the platform.
Ajeet compares staking and restaking to traditional financial practices where companies and high-net-worth individuals leverage assets to generate more value. He highlights that while such practices are not new, their application in DeFi democratizes access to financial strategies that were previously only available to the wealthy or large corporations.
Ajeet cautions that with the newfound accessibility of these powerful tools, there is a potential risk of misuse, especially by those who are new to such strategies. He advises listeners to approach DeFi participation with caution, considering all potential outcomes, not just the most favorable scenarios.

Exploring Crypto Trends

Tanisha shifts the focus to meme coins and points system, noting that points are intriguing because they gamify on-chain activity and function as a marketing strategy.
Tanisha mentions that although projects like Blur, Friend.tech, and Jito have successfully used points, backlash often arises when expectations don’t align with reality, such as with the EigenLayer airdrop. Tanisha questions the effectiveness of point systems and whether this trend will continue or cause an imbalance between user expectations and protocol activity.
Eduard shares his controversial opinion that crypto operates on variations of ponzinomics, highlighting that all these concepts have existed before but are now accessible to DeFi traders.
Eduard acknowledges the complexity of strategies like recursive airdrops and points systems, which are advanced techniques that make it difficult for average centralized exchange users to participate.
Tanisha adds that the rewards from airdrops don’t always match the activities required, leading to backlash on Crypto Twitter. She asks the panel why Solana meme coins gained exponential popularity in Q1, 2024, and if attention fatigue has now set in.
Anthony responds by explaining that meme coins initially grew in popularity due to their potential for outsized returns, providing a way for people to achieve 50x to 100x outcomes. He contrasts this with infrastructure plays from previous cycles when coins like Solana and Ethereum could still be bought at low prices. He notes that many VC projects now have high FDV but low market caps, making it difficult to generate significant returns. Despite the appeal of meme coins, Anthony warns that they are a heavy gamble, and for every success story, there are many who lose money.

Towards Mass Adoption

Tanisha asks about the general interest in technology among users and suggests that DeFi might need a balance between technology and social aspects to achieve mass adoption.
Tommy agrees with Anthony’s points on meme coins and expands on the challenges faced by retail investors in the VC-dominated landscape. He explains that VCs, particularly those with large funds, are less valuation sensitive, which leads to inflated valuations of infrastructure projects, making them unattractive to retail investors who seek feasible investment returns. Meme coins, in contrast, appear more accessible and potentially profitable for retail investors, despite the risks and insider dynamics involved.
Tommy highlights that meme coins are more understandable and fun for newcomers, who might not grasp complex DeFi concepts but can relate to the simplistic, enjoyable nature of meme-themed tokens.
Tommy also discusses the role of DeFi in providing a trading platform for meme coins, highlighting its permissionless nature as a critical factor that allows anyone to participate, albeit with risks. He argues that DeFi could serve as a gateway for new users attracted by meme coins because it offers opportunities for both significant losses and gains, in contrast to centralized exchanges that have stringent listing processes and may not quickly adopt new meme coins.
Eduard says that integrating gamification and social features in DeFi can make the ecosystem more accessible to users. He shifts focus to the concept of distribution within blockchain networks, pondering the inherent distribution capabilities of different layers.
Eduard says that platforms like Coinbase and Binance provide native distribution for their associated blockchains, which is crucial for user adoption. He highlights Telegram’s significant user base as a massive distribution advantage for potential blockchain integration, suggesting that Layer-2 solutions lacking robust distribution channels might struggle to compete. Eduard believes that effective, native distribution channels are essential for the success of any infrastructure play in blockchain.

Meme Coins and DEXs

Ajeet says that he doesn’t blame early retail investors for buying into meme coins but expresses concern when large Layer-1 blockchains rely on meme coins to stimulate growth. He worries that this reliance suggests these blockchains can’t deliver on their promised business cases and have to rely on narratives like memes to demonstrate transactions and growth.
Tanisha notes that users see meme coins as a utility for quick gains and ties this sentiment to Edward’s earlier point about user distribution. She compares blockchain strategies to Web2 companies like Instagram or Facebook, which build new products for existing users.
Tanisha asks whether DEXs can close the gap with centralized exchanges and whether mass adoption through memes and NFTs will reduce this gap.
Anthony acknowledges the growing popularity of DEXs due to the importance of self-custody following recent market events. He believes this trend will continue, especially as user experience improves and liquidity increases. He notes that with Layer-2s and reduced gas fees, the trading experience has become more seamless.
Anthony also touches on Edward’s point about distribution, highlighting that Layer-2s like Blast and Base are becoming crowded but have incentivized ecosystems that attract users. He says that DeFi is maturing and that the overall trend will favor decentralized financial applications.

Future of Layer-2 and Layer-3 Technologies

Tanisha talks about the increasing number of Layer-2s and introduces the concept of Layer-3s, or appchains, designed specifically for decentralized applications’ needs.
Tommy highlights the importance of distinguishing between Layer-2s and Layer-3s, noting that some Layer-2s closely resemble Layer-1s. He predicts continued competition within the Layer-2 ecosystem as they build interconnected networks with Layer-3s on top.
Tommy believes that the Layer-2 space, like the Layer-1 space, will not have a single winner but will host multiple successful players offering diverse paths and innovations. He mentions that it’s too early to judge which Layer-2 or Layer-3 will stand out, especially since the dynamics often shift once token launches drive transaction and activity levels.
Tommy highlights the strategies of various Layer-2s, like Arbitrum‘s focus on gaming and other platforms pushing ZK stacks, indicating a vibrant and competitive market that requires careful observation from an investment perspective.
Anthony says that the Layer-2 market is diverse and not winner-takes-all. He points out that certain Layer-2s are emerging as leaders in specific areas, such as Arbitrum in DeFi and others in gaming or RWA.
Anthony highlights the importance of distribution strategies, mentioning Coinbase’s Layer-2 as having a significant advantage due to its existing user base. He discusses the varied approaches and specialized purposes of different Layer-2s, indicating a dynamic and evolving sector with many opportunities for innovation and investment.
Anthony says that despite the crowded space, there is still much potential for growth and development in the Layer-2 arena.

Real World Assets and NFTs

Tanisha asks why RWAs might lead the narrative in crypto and explores the potential growth beyond stablecoins in the RWA space, such as in commodities.
Anthony discusses the significance of RWAs in crypto, highlighting their role as one of the biggest use cases today. He highlights the success of initiatives like Ondo in tokenizing treasuries and the profitable outcomes for those who paid attention to such projects.
Anthony notes that his firm has been actively looking for opportunities in RWA and DePIN, seeing them as a key area of interest. He mentions the balance required between tokenizing products and capturing community interest, stressing the importance of combining crypto nativeness with practical applications.
Ajeet reflects on the role of narratives in providing hope and attracting new participants to crypto. He recalls how certain DeFi elements, like stablecoin yields, drew non-crypto individuals during the 2020-21 period due to attractive interest rates compared to traditional banking.
Ajeet says that while many current narratives, including those around decentralized social media and AI on blockchain, hold promise, they are still largely futuristic. He draws parallels to the internet boom of the 1990s, which was also driven by future-oriented promises.
Ajeet highlights the importance of distinguishing between those who are genuinely building solutions based on these narratives and those merely capitalizing on narrative hype. He remains optimistic about entities that are genuinely committed to developing practical and adaptable solutions.

Closing Thoughts

Ajeet expresses optimism about the market but cautions listeners about distinguishing between signal and noise during a bull market. He advises against assuming that coins that fell in value during the last bear market will recover fully in the next bull market.
Ajeet asks listeners to look beyond the hype and assess the underlying substance of each project. He highlights his positive outlook for the industry as a whole while remaining cautious about individual assets.
Anthony appreciates ZKX’s progress and looks forward to the upcoming $ZKX token launch. Anthony remains optimistic about the crypto market, anticipating more excitement ahead.
Tommy mentions that ZKX is one of crypto.com capital’s portfolio companies and appreciates the team’s execution and the upcoming token launch.

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Show Information

Medium: Twitter (Audio)
Show: ZKX Twitter Space
Show Title: Open Mic – State of the Market
Show Date: May 9, 2024