EthCC News: Market makers are not resting on their laurels, but are still optimistic about the prospects for the next 2-3 quarters

Original author: Tommy

Original translation: Ismay, BlockBeats

Editors Note: This article summarizes insights into the current state of the industry, from the dominance of infrastructure projects, to the waning interest of venture capital in high-valuation early-stage rounds, to changes in market narratives and intensified competition among market makers, as well as future market catalysts such as ETH ETFs, elections, and interest rate changes, providing a panoramic observation and analysis. These insights not only reveal the current state of the industry, but also provide profound thinking and foresight for future development trends.

During @EthCC, I spent most of my time in 1:1 discussions with developers, VCs, and market makers. Here are my reflections on the current state of the industry:

Blame the game, not the players

“We love consumers, but 90% of the deals we’ve done this year have been infrastructure.”

I hear a lot of developers and VCs say that we have too many people building infrastructure, but too few consumer applications that actually have users.

Most VCs I’ve spoken with have expressed interest in consumer dApps, but recent funding announcements show that the funding market is still dominated by infrastructure deals.

It’s a vicious cycle that’s hard to blame any single stakeholder on:

Projects and VCs hope to be listed on the largest CEX and obtain good liquidity

CEXs want to list projects that can provide good incentives to users through marketing activities (high FDV) and top backers

Infrastructure projects have a higher valuation premium due to the resources required for construction, so more capital flows into infrastructure projects, forming this cycle.

VCs lose interest in high FDV early-stage rounds

Valuations have risen significantly since the fourth quarter of last year, with many private equity/Series A valuations exceeding $1 billion FDV, especially for AI-related projects.

On the other hand, most recent major launches have been disappointing ($BLAST at <$2bn; $ZK and $W at $3bn; $ZRO at $4bn). The overall altcoin market is weak, and many VC-backed projects have FDVs below their last private round.

In the current market environment, the chances of VCs getting 50-100x returns are almost impossible. Not to mention that VCs also have to face a lock-up period (about 1 year lock-up + 2-3 years vesting). These projects may need to survive the next bear market and compete with many new projects that will grab market share due to the short-term attention of the industry.

As a result, more VCs are looking for liquidity strategies (if their mandates allow), or OTC deals at significant discounts to last round valuations (or current FDV if trading). For VCs with more resources, they are incubating projects started by their former employees, ensuring they are the earliest investors with higher potential returns.

Many VC analysts/research partners are moving to become emerging L1/L2 ecosystem/BD, or starting their own projects. Project work seems to have a higher expected value compared to investing. One advantage is to use their experience/relationships to raise funds for the projects they work on, because they know what VCs like to hear/care about.

In addition, the poor performance of altcoins has led to a low Distributed to Paid-In Capital (DPI) ratio for LP funds, and it will be difficult to raise new funds if a strong performance record cannot be provided. Some funds have already spent most of their capital on transactions last year, and even if attractive investment opportunities appear now, they have no funds to deploy.

Old wine in new bottles

Narratives that did not gain as much traction as expected were repackaged into new ones, with Intent being a hot topic for a while but quickly replaced by DA, re-pledge, and so on.

Many projects now label themselves as chain abstractions or even AI based projects with intent to embed some kind of LLM or algorithmic elements.

In addition, most DePin projects added “AI” to their branding strategies to attract VC attention.

These security tokenization projects similar to the previous cycle became RWAs in this cycle.

I think there is nothing wrong with repackaging, and it is not easy to find a narrative that the market accepts. However, the market is still waiting for the next new narrative that is not repackaged from the old narrative.

Not all narratives are “investable”

There’s a difference between a hot narrative and a hot sector.

Account abstraction is a hot narrative, it is an excellent tool to provide a better user experience. But this is not a field, it is a feature that will be embedded in different use cases (from wallets to games, from DeFi to SocialFi). You still need a product to sell, that is, it is impossible for a project to claim we do account abstraction, but we created an AA wallet, a game with AA functions, etc.

Simply chasing narratives without analyzing which space (product) is dangerous, and for VCs, you may invest in the hottest narratives in the wrong space.

Market makers are not safe

Clearly, market making is a lucrative business, but ever since some US players exited the market due to regulatory issues, the industry has become more competitive and new players are entering the game.

Some market makers race to lower prices to win trades. In the options model (which most MMs prefer), MMs get token loans from project teams for quotes, and they need to put in stablecoins for bidding. This is either capital intensive (if they use their own balance sheet) or costly (if they borrow from somewhere else and pay interest). The options model is not “cost-free” for MMs.

Winning deals requires: i) relationships and reputation, ii) attractiveness of the proposal, and iii) providing value-added services to the client.

Project teams are also becoming more aware of different market makers, so the transparency advantage that market makers have in negotiations is disappearing, driving a more competitive market.

Market Catalysts (ETFs, Elections, Interest Rates)

Most people are waiting for the ETH ETF to go live, hoping to see price action similar to that seen after the BTC ETF.

Unlike the BTC ETF, some hope that the ETH ETF will be a stronger catalyst for Ethereum-related (I refuse to use the word “aligned”) altcoins.

There is also the expectation that after ETH, we will have more altcoin ETFs approved (maybe the SOL ETF is next?)

If more altcoin ETFs are approved, the ultimate goal of the project will be to get ETF approval rather than landing a Tier 1 CEX listing, which can completely change the sentiment of the old coins if they have the potential to become ETFs.

Another catalyst that people are looking forward to is the US election, which will hopefully result in a more crypto-friendly policy makers.

One rate cut is expected this year and further cuts are expected in 2025, which will bring more liquidity to cryptocurrencies.

Although the current market conditions are somewhat bleak, most people are optimistic about the prospects for the next 2-3 quarters. The mood is to remain calm, not too aggressive, but full of optimism.

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