L1 Recovery, Gearbox Strategic Raise, Searching for Market Bottoms

Chart of The Day: Avalanche and Cosmos Lead L1 Recovery

• The crypto markets experienced a tumultuous June as lenders faced liquidations with various large institutions becoming insolvent.
• This, along with increased macroeconomic uncertainty, caused BTC and ETH to drop to a low of $17.7k and $897 in recent weeks. Since their peaks in 2021, BTC and ETH have dropped -74.3%  and -81.6%, respectively. This, of course, had a knock-on effect on the rest of the market, including other L1s.
• Over the past ten days, AVAX and ATOM have grown 30% and 28%, respectively, peaking at over 40% growth on the 25th of June. ATOM’s outperformance can be attributed to dYdX’s announcement of dYdX V4 being developed as a standalone blockchain built on Cosmos-SDK. dYdX is the largest decentralized derivatives exchange built on StarkEx.
• SOL also rallied following the announcement of Solana Mobile Stack (SMS), a Web 3.0 mobile toolkit. SMS will be released first on Saga, Solana Mobile’s flagship phone.
• For more on L1s, you can read more on our Delphi Pro report on L1s vs L2s here. Paywall removed!

Gearbox Gears Up to Raise, and Gnosis Moves on Maker

[Excerpt from a Delphi Insights Report]

• Intro: Gearbox contributor Ivangbi has put forth the idea to do a small strategic raise for Gearbox. He initially proposed raising $5m through selling 3.766% of the GEAR supply at 150m FDV. Tokens sold this way will have a 1-year vest and come from the existing DAO allocation. The funds will be used for continued operations. Additionally, Ivangbi proposes to allow certain organizations and angels in the round at the same terms. As a reminder, the GEAR token is live but not currently trading, so there is no price attached to it.
• Pro arguments: Many in the forum are supportive, with a few commenters even offering funds for the raise as well. If a DAO with no cash flow needs operational funds, the only real choice is to initiate a raise. Otherwise, the DAO would be forced to cease operations.
• Con arguments: There was some pushback in the forum regarding this raise, mostly around the terms and the prospect of accepting VC money. Gearbox’s prior raise was fairly unique and involved credit account mining [CAM], where users paid ETH to create credit accounts and deploy their core contracts. The FDV of the CAM raise was around 150m. Users wanted to ensure that the FDV remained similar to that raise, regardless of market conditions. There were also some concerns about VCs coming to dominate the protocol and future governance. Finally, numerous users felt that the 1-year vest was far too short and advocated for a long 2-4 year vest.
• Our opinion: It almost goes without saying that we think this is a good proposal. If a DAO needs funds to continue operations, it will have to use its treasury or sell governance tokens. As Gearbox is still working on their product and presumably has little in the way of cash flows, they have to sell tokens to raise capital. However, this does highlight a lot of the challenges of a DAO raising funds with a liquid token. Namely, you have a community of token holders that may have bought in at different market conditions or different terms. This group of holders will always want the terms of any future raises to be at a higher valuation than when they initially bought in. To the credit of Gearbox and their community, the criticisms and debate are reasonable, and there is little vitriol in the forum. But even with an untradeable token, GEAR holders have voiced concerns that they want this raise at the same FDV they had. It is hard to imagine their community greenlighting a raise at a lesser val. It’s a little easier to imagine how a more distressed community or one whose token price has plummeted would be much more combative regarding the terms of future raises.
• For more information, Delphi members can see the full DAO Insights here.

Searching for Market Bottoms

[Excerpt from a Delphi Pro Report]

• The crypto market is one of the most leveraged bets on global liquidity and accommodative market conditions. Since we’d argue most of the value crypto and web3 technologies will create is still ahead of us, what we’re investing in today is the potential growth that such a future will bring.
• When asset prices are going up, and market conditions favor risk-taking, BTC and crypto have and will continue to outperform. But when market conditions deteriorate and sentiment shifts away from growth-at-all-costs towards capital preservation and risk management, this market has to take an outsize hit because crypto is filled with growth assets.
• At the start of the year, we talked about BTC as the canary in the coal mine for worse things to come for risk assets. The logic was straightforward – crypto and conventional risk assets (e.g. stocks) were both facing similar macro headwinds, and those headwinds were significant. We highlighted how bitcoin tends to do poorly when financial conditions are tightening and how USD strength was one of BTC’s biggest threats (chart below is from that January report).

• Since then we’ve seen financial conditions tighten at a record pace.

• Even as CPI started to accelerate, many were still holding onto the narrative that BTC was an inflation hedge, which is why we explained that consumer price inflation and currency debasement are two sides of the same coin, but their impact on asset prices can differ. At a certain point, higher levels of the former (as measured by indicators like CPI) can have an adverse impact on asset prices as rising consumer prices start to curb spending and eat into savings (let alone speculative investments like crypto). So higher CPI readings wouldn’t necessarily equate to higher asset prices.
• Fast forward and we’re seeing this exact dynamic play out. Consumers are feeling the pressure of higher prices, forcing them to dip into their savings to keep up. Retail sales are weaker than expected while the average household is paying over 50% more at the pump compared to this time last year. Transportation is the second-largest expense for U.S. households behind housing, so real people are really hurting. And higher energy costs increase the cost to transport everything, which is feeding into higher prices. All this contributes to the growing pressures on consumers, and there’s little end in sight.
• Regardless of how bullish we are on crypto long-term, we have to recognize that external macro headwinds are in the driver’s seat right now. We can’t lean on decades of historical data but if this shakes out anything like the 2017-2019 tightening cycle, we are bound to see at least one more big move to the downside.
• For more information, Delphi members can see the full Delphi Pro Report here.

Notable Tweets

DOT Held Most by Funds

Messari Fund Analysis H1’22

@Polkadot
is once again the most commonly held asset of the 82 funds we’ve tracked. In second is
@OasisProtocol
followed by
@NervosNetwork
. Tied for fourth are
@dYdX
and
@radicle
.
@NEARProtocol
takes fifth place.

— Kaushik Guduru 👽 (@kaushikvg) June 27, 2022

Paolo Reaffirms Tether’s Position

1/
I have been open about the attempts from some hedge funds that were trying to cause further panic on the market after TERRA/LUNA collapse.
It really seemed from the beginning a coordinated attack, with a new wave of FUD, troll armies, clowns etc.

— Paolo Ardoino (@paoloardoino) June 27, 2022

Having Faith in Your Theses

the most important organ is the stomach, not the brain

the amount of bad news you could hear is almost infinite

the question is: can you take that? do you have faith that 1 year, 2 years, 3 years from now, crypto is the place to be?

if so, then you should have money in crypto

— 찌 G 跻 じ Goblin 𝙎𝙚𝙣𝙥𝙖𝙞 of the 𝙃𝙚𝙣𝙩𝙖𝙞 (@DegenSpartan) June 27, 2022