Author: Patrick Scott | Dynamo DeFi Translator: Shan Ouba, Jinse Finance
The liquidation time for cryptocurrencies has arrived.
For the past five years, tokens have been in a state of what I euphemistically call "speculative demand beyond fundamentals"—to put it bluntly, their valuations have been severely inflated.
The reason behind this is simple: there are not many liquid assets with good fundamentals in the cryptocurrency industry. Therefore, investors can only gain exposure through the limited assets available, which are often Bitcoin or altcoins; coupled with retail traders hearing the myth of Bitcoin's wealth creation and wanting to invest in newer, smaller tokens to replicate the returns, this further drives up demand.
This has resulted in demand for altcoins far exceeding the supply of altcoins with truly solid fundamentals.
This has led to a situation where the demand for altcoins far exceeds the supply of those altcoins with truly solid fundamentals.
The direct consequence is that buying any token during a market downturn can yield astonishing returns years later. The indirect consequence is that most business models (if they can still be called models) in the industry revolve around selling their own tokens, rather than actual revenue streams related to the product. Over the past two years, three major events have dealt a catastrophic blow to the altcoin market: 1. Pump and dump tools and various Launchpads have commoditized new token issuance. This has scattered financial attention across millions of assets, preventing the top few thousand tokens from receiving the concentrated inflows of funds they usually receive, and also disrupting the wealth effect typically associated with Bitcoin halvings. Earlier this year, the number of tokens issued on the Pump platform exceeded 50,000. 2. Some crypto assets have developed genuine fundamentals. This includes tokens like HYPE as well as newly listed assets like CRCL. When other fundamentally supported assets exist, it becomes difficult for investors to bet on white papers alone. Hyperliquid Holders frequently earn over $100 million per month. 3. Tech stocks outperform cryptocurrencies. In many cases, stocks related to artificial intelligence, robotics, biotechnology, and quantum computing have outperformed the cryptocurrency market. Retail investors may wonder why invest in altcoins when “real” companies can offer better returns with seemingly lower risk? Even the Nasdaq has outperformed Bitcoin and altcoins year-to-date. The result of all this is that a large number of poorly performing altcoins have become "graveyards," project teams are vying for increasingly scarce liquidity pools, and experienced cryptocurrency investors are wandering around aimlessly, unsure how to invest in this new landscape. Ultimately, tokens either represent ownership of a business or are worthless. They are not some magical new thing that generates value simply by existing. If you stop viewing tokens as incomprehensible entities and instead see them as assets representing a business's future cash flow, everything becomes clear. You might argue that some tokens don't grant you the right to access future cash flows. Some are utility tokens, while some protocols combine tokens and equity. "That's exactly where you're wrong. These tokens still represent future cash flows—it's just that the cash flows associated with them are exactly zero. Ultimately, tokens either represent ownership of a business or have no value whatsoever. They are not magical new things that generate value simply by existing or, as many say, by having a 'community.' Note: This does not apply to network tokens like Bitcoin, which have many commodity characteristics; I'm talking about protocol tokens here. In the near future, the only decentralized finance tokens with real value will be those that act as pseudo-equity, meeting two conditions: (1) they have the right to receive protocol revenue; and (2) the protocol revenue constitutes an attractive value proposition. Retail investors temporarily bid farewell to cryptocurrencies. Top opinion leaders, while proclaiming 'speculation is innocent,' feign surprise when people are unwilling to become potential victims—this contradictory attitude further undermines retail investors' trust." In the foreseeable future, retail investors will abandon the vast majority of tokens. Besides the reasons mentioned above, a large part of the reason is that people are tired of losing: Tokens are overhyped due to unfulfilled promises; Memecoin Launchpad led to token oversaturation; Predatory token economic models and the industry's tolerance for inferior projects have made retail investors realize they are destined to lose money. The result is that those who previously bought cryptocurrencies have turned their speculative addiction to other channels: sports betting, prediction markets, and stock options. These choices are not necessarily wise, but the same is true for buying most altcoins. People's choices are understandable. The public's apathy towards cryptocurrencies is reflected in market attention. Despite better fundamentals and lower regulatory risks this year than ever before, market enthusiasm has never reached the levels of 2021. I also believe that the AI craze sparked by ChatGPT, showing a new generation what a true killer app looks like, has dampened enthusiasm for cryptocurrencies. For a decade, enthusiasts have called cryptocurrencies the new "dot-com bubble." But when people see AI reshaping the world in more intuitive and obvious ways every day, it's hard to convince them of that anymore. Comparing the search engine rankings for cryptocurrencies and artificial intelligence, the last time cryptocurrencies received more attention than AI on Google was during the FTX collapse. Will retail investors return? Yes. They are essentially returning to prediction markets, but they are buying binary options about when the government shutdown will end, not altcoins. For them to buy altcoins in large quantities again, they must feel they have a legitimate opportunity to make money. All token value accumulation stems from protocol revenue. In a world where tokens can no longer rely on a constant stream of speculative buyers, they must stand on their own value. After five years of experimentation, a painful truth has become clear: token value accumulation essentially takes only one meaningful form—a claim to protocol revenue (past, present, and/or future). All these forms of real value accumulation ultimately boil down to claims to protocol revenue or assets: dividends, buybacks, fee burning, and control of the treasury. This doesn't mean that protocols must now adopt one of the aforementioned methods to possess value. In the past, I've faced considerable criticism for expressing my desire for protocols I favored to reinvest rather than buy back funds. However, they must have mechanisms in place to initiate this value accumulation in the future, ideally based on governance votes or explicit achievement criteria. Vague promises are no longer sufficient. Fortunately for savvy investors, these fundamental data points for thousands of protocols are readily available on platforms like DefiLlama. A quick overview of 30 A clear pattern emerges from the top-grossing protocols: stablecoin issuers and derivatives protocols dominate, along with Launchpad, trading apps, Collateralized Debt Positions (CDPs), wallets, decentralized exchanges (DEXs), and lending protocols. Several conclusions can be drawn from this: Stablecoins and perpetual contracts are currently the two most profitable businesses in the cryptocurrency industry. Overall, supporting trading-related businesses is highly lucrative. In my opinion, if the market enters a prolonged bear market, revenue from trading-related businesses will face significant risks unless protocols can shift to real-world asset (RWA) trading, as Hyperliquid is attempting. Controlling the distribution channels is just as important as building the underlying infrastructure. I suspect a significant portion of core decentralized finance users will strongly object, arguing that trading apps or wallets will never be among the highest-grossing projects because users can save money by directly using the protocol. However, in the real world, Axiom and Phantom are extremely profitable. More importantly, I want you to understand that some cryptocurrency applications generate tens of millions of dollars in revenue per month. If your target protocol hasn't reached that level yet, that's okay. As the head of revenue at DefiLlama, I know very well that building a product the market is willing to pay for takes time. But there must be a path to profitability. The game is over. A Value-Driven Investment Framework for the Crypto World In the coming years, when looking for tokens worth investing in, strong-performing projects will meet the following criteria: Having a claim to protocol revenue, or having a clear and transparent path to obtain such a claim. Revenue and earnings are consistently growing. Market capitalization maintains a reasonable multiple relationship with past revenue. Instead of endless theoretical discussions, let's look at some concrete examples: Curve Finance. Over the past three years, despite a decline in fully diluted valuation (FDV), Curve has achieved stable and consistent revenue growth. As a result, its fully diluted valuation (FDV) is less than 8 times Curve's annualized revenue over the past month. Because stakers who lock Curve tokens receive bribes and the token release period is relatively long, the actual yield of the token is much higher. It's worth watching whether Curve can maintain its revenue level in the coming months. Jupiter has solidified its position as one of the major beneficiaries of the Solana ecosystem's prosperity. It is the most widely used decentralized exchange (DEX) aggregator and perpetual contract DEX on the chain. It has also made several strategic acquisitions, enabling it to leverage its own distribution channels to expand into other on-chain markets. The annualized return attributable to token holders is actually quite high, approaching 25% of the circulating market capitalization, exceeding 10% of the fully diluted valuation (FDV). [Image of a PNG file] Other protocols that meet these criteria include Hyperliquid, Sky, Aerodrome, and Pendle. The good news is that project teams concerned with their own survival are quickly realizing this. I anticipate that in the coming years, the pressure to avoid endlessly dumping tokens will drive more decentralized finance projects to develop revenue streams and peg their tokens to these streams. The future is bright as long as the right direction is chosen.
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