Market Review & Perps
The Next Major DeFi Vertical
Market Outlook
If you read my previous newsletter the current price action shouldn’t surprise you. I also issued the following tweet a few weeks back.
In addition to monitoring net liquidity I also follow the tickers mentioned in the tweet above. I noticed a few weeks back that JNK was approaching resistance, VIX was nearing a key support level, DXY was reversing course, and the yields were rising.
The confluence of these pivots suggested to me the local top was near. I acknowledge the rally may have ended a bit prematurely due to the Jackson Hole (JH) event. However, I believe we would have seen a correction regardless heading into September.
JH provided the market much needed clarity. Prior to JH Powell remained ambiguous in his messaging. On Friday he made it clear that pain was coming to households. Fed members can’t say it explicitly but it’s clear they’re trying induce a shallow recession.
The market is too fixated on CPI and instead should focus on the unemployment number. Easter George (Kansas City fed president) said on Friday the current employment number is well below her target. The fed can only manage inflation through demand destruction. This means they have to loosen the labor market to reduce spending. Otherwise a tight labor market will cause wages to go up and make it difficult for the fed to address demand.
With the China real estate contagion unleashed, Europe’s energy crisis and monetary conditions tightening globally I don’t believe a soft landing is likely. In this setting I can’t see asset prices climbing sustainably. If we do see new highs it's because the market has lost faith in the Fed’s ability to combat inflation. This could result in a melt up in asset prices.
My bias still remains to the downside for the following reasons:
heightened geopolitical risks - Russia/Ukraine & China/Taiwan
Fed may over tighten causing a recession
The Fed is tightening at a record pace forcing pain on countries with dollar denominated debt - this slows the global economy
Something may break while the Fed is tightening
Forced liquidations due margin calls in tradfi - investors have borrowed against equities and real estate
Crypto
We’ve never seen crypto price action during a recession. Since BTC’s inception we’ve largely had accommodative policies with very brief periods of tightening. Given the nascent asset class has been categorized as high beta in most portfolios, I just don’t see it decoupling to the upside. A recession in tradfi is likely to bring crypto down with it. Although I do think crypto will be more resilient. I expect a faster and stronger recovery for crypto relative other assets classes.
Until we see new inflows it’ll remain PVP and we’ll observe pockets of strength highlighted in different rotations. For the last month we’ve had a few NFTs and tokens go up large multiples.
For example the newly launched token Dogechain(DC) quadrupled in less than a week despite the recent exploit.
Dust Protocol token has gone almost 4x due to the hype surrounding y00ts and DeGods.
This indicates the risk appetite remains strong with the surviving players. But retail for the most part has been absent.
European, Asian, and North American exchange volumes continue to trend down. The outliers are South American exchanges but they only represent a small fraction of aggregate global volume. If the Fed isn’t able to secure a soft landing I don’t see retail coming back anytime soon. In fact a recession could extend crypto winter. People will lose their jobs and they’ll be under pressure from inflation. Buying crypto will be the last thing on their mind.
I’m waiting for one more leg down before I begin accumulating. There are a few alts that I’ve started to DCA into with less than 1% of my portfolio. I’ve mentioned them in past videos and in my private discord. The current levels aren’t a bad place to begin building long term positions. You just have to be prepared for another 40-70% correction. Another option would be to focus strictly on large caps like BTC, ETH, SOL, and BNB. Once the macro landscape looks better one could rotate from majors into low to mid cap alts.
Perpetual Dive
Perpetual Exchanges have been seeing a lot of traffic in the past few months. More users are searching for ways to earn #RealYield and Arbitrum's L2 has a few avenue's to do so.
Fee's are generated from the influx of users that use the protocol and redistributed to those who stake the protocol’s governance token. Having exposure to platforms like these can help generate a stable cash flow along with other benefits. We will cover a few platforms that have been growing and are standing out amongst others..
GMX
GMX is a decentralized perpetual exchange. They are currently leading the Arbitrum chain in TVL accounting for about $253M. This protocol offers low swap fees and zero price impact trades. They also have multi-asset pool that earns liquidity providers fees from market making, swap fees, leverage trading and asset rebalancing. The GMX token accrues 30% of the platform's fees which is distributed in $ETH, and then allocated to GMX stakers. GMX stakers also receive the benefit of earning Escrowed GMX.
Staking GMX earns about ~20% with an addition Multiplier Points APR of ~100%. Multiplier points are enabled when users compound their earnings instead of claiming. Claiming will transfer any pending Escrowed GMX rewards and ETH.
GMX has introduced an interesting token model for their $GLP token. This token is an index of assets used for swaps and leverage trading. Users can also stake this token for ~20%. It is minted using any index asset and burnt to redeem any index asset. The GLP token earns Escrowed GMX rewards and 70% of platform fees. This can be lucrative also taking into account how other platforms on Arbitrum are starting to introduce utility for $GLP which we will cover shortly.
GMX is currently a good cash flow opportunity. They continue to innovate and expand amongst the Arbitrum chain. Platforms like Plutus DAO and Vesta Finance are introducing ways to maximize yield.
Plutus DAO is adding a plsGLP vault that allows users to receive auto-compounding ETH yields on top of PLS yields. This will drive more liquidity to both platforms by offering 2-way incentives. Investors that are already on both platforms can use this to increase their earnings.
Vesta Finance currently has a vault that allows users stake their GMX to mint the $VST stable while also earning ~5% rewards paid in ETH.
Further integration and innovation of GMX amongst the ecosystem will make them continue to stand out and potentially become industry leader.
Mycelium - TracerDAO
Mycelium is another Perpetual Swap protocol ran by TracerDAO. They offer up to 30x leverage. There has been speculation that this protocol is a fork of GMX but they still have their own way of contributing value. This transition and launch has just taken place at the beginning of August so it will be interesting to see how they grow and perform.
LP'ers receive 70% of trading fees also converted to ETH. TracerDAO is a known protocol for derivatives. Since their launch, they have seen over $800M in volume. TracerDAO aims to be the "Uniswap of Derivatives" by introducing factory contracts that can include any derivative contract. TracerDAO also is the first DeFi protocol to deploy tokenized perpetual pools. They have a lot in store for their future and it will be interesting to see how they execute.
The $MLP token is equivalent to the $GLP token while M 0.00%↑ YC acts as the governance token. Users who buy $MLP will receive escrowed MYC and ETH as well. The targeted APR will be ~25% after they boost yields.
This project has potential considering TracerDAO's plan to expand and offer more opportunities such as options, lending and borrowing, prediction markets and futures.
Cap Finance
Cap Finance is an interesting perpetual exchange. They offer 0% fees on Arbitrum and up to 50x leverage. Users can stake $CAP to receive a share of protocol revenue or pool ETH or USDC to back trading profits and receive a share of losses. This protocol sets themselves apart by introducing 0% fees. Yes, low fees are still a benefit but why not use a protocol that doesn't have any fees at all?
Staking $CAP earns users a yield of 11% APY while pooling ETH or USDC nets between ~39-71%. This protocol has nice room to grow and would be interesting if they added more pools or also become interoperable with other protocols on Arbitrum.
Cap has a (DON) Dark Oracle Network that provisions liquidity which helps provide traders with the best possible execution. This is beneficial by helping protect LPs, restrain censorship, and dismiss front-running. This is a big deal because there has been ongoing conversations about the state of DeFi and censorship after the Tornado Cash sanctions. This oracle that they have is less likely to be taken down compared to other decentralized oracles. The fact they are focusing on censorship resistance and choosing "growth over profitability" really puts them in the right lane to achieve major accomplishments as we move forward in this space.
The section was written by AHK. Make sure to follow him on Twitter to get the early scoop on other Web 3 verticals. He’s also contributor on Mirror.