EthCC Chronicles: Market makers are not without worries, still optimistic about the future prospects of the next 2-3 quarters

Original author: Tommy

Original translation: Ismay, BlockBeats

Editor’s note: This article compiles insights into the current state of the industry, from the dominant position of infrastructure projects to the waning interest of venture capital in early-stage investments with high valuations, as well as changes in market narratives and intensified competition among market makers. It also provides a panoramic observation and analysis of future market catalysts such as ETH ETF, elections, and changes in Intrerest Rate, offering profound reflections and foresight not only revealing the current situation of the industry but also providing insightful thoughts and foresight for future development trends.

During @EthCC, I spent most of my time communicating one-on-one with developers, VC, and market makers. Here are my reflections on the current state of the industry:

Blaming the game, not the player

“We love consumers, but 90% of the transactions we completed this year are infrastructure.”

I heard long developers and VC say that we have too long people building infrastructure, but there are very few consumer applications that really have users.

Most of the VCs I’ve talked to are interested in consumer dApps, but recent financing announcements show that the financing market is still dominated by infrastructure transactions.

This is a vicious cycle that is difficult to blame any single stakeholder for:

Projects and VC hope to list on the largest CEX and achieve good Liquidity

CEX hopes that the listing can provide users with good incentives through marketing activities (high FDV) and top supporters.

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

VC loses interest in early rounds of investment in high FDV

Since the fourth quarter of last year, the valuation has risen significantly. Many private sale/A-round valuations exceed 10 billion USD FDV, especially in AI-related projects.

On the other hand, most of the recent significant releases have been disappointing ($BLAST at less than 2 billion dollars; $ZK and $W at 3 billion dollars; $ZRO at 4 billion dollars). The overall AltCoin market is weak, and the FDV of many projects supported by VC is lower than the last private sale round.

In the current market environment, it is almost impossible for VC to achieve a return of 50-100 times. Not to mention that VC also needs to face a lock-up period (about 1 year lock-up + 2-3 years vesting). These projects may need to survive in the next Bear Market and compete with many new projects, which will take market share due to the short-term follow of the industry.

Therefore, more long VC are looking for Liquidity strategies (if their orders allow), or OTC trades at a significant discount to the previous round valuation (or current FDV if in the transaction). For VCs with more long resources, they incubate projects founded by their former employees to ensure that they are the earliest investors with higher potential returns.

Many VC analysts/research partners are turning to become emerging L1/L2 ecosystems/BD, or founding their own projects. Compared to investment, the project side seems to have higher expected value. One advantage is leveraging their experience/relationships to raise funds for the projects they work for, as they know what VCs like to hear/care about.

In addition, the poor performance of AltCoin has led to a lower Distributed to Paid-In Capital (DPI) ratio for LP funds. If they cannot provide a strong track record, fundraising for new funds will become difficult. Some funds have already spent most of their capital in last year’s trades, and even if attractive investment opportunities arise now, they have no funds to deploy.

Old Wine in a New Bottle

The narrative that did not receive the expected follow is being repackaged as new, and Intent was once a hot topic, but was quickly replaced by DA, and other staking.

Many projects now label themselves as “chain abstractions”, or even as “AI” for Intent-based projects that embed some kind of LLM or Algorithm element.

In addition, most DePin projects have added ‘AI’ to their brand strategy to attract VC’s follow.

These security tokenization projects similar to the previous cycle have been transformed into RWA in this cycle.

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

Not all narratives are ‘investable’.

There is a difference between popular narratives and popular fields.

Account abstraction is a popular narrative and an excellent tool for providing a better user experience. But it is not a field; it is a feature that will be embedded in different use cases, from Wallets to games, from Decentralized Finance to SocialFi. You still need a product to sell, which means it is impossible for a project to claim that ‘we do account abstraction’ but rather ‘we created an AA Wallet’, ‘a game with AA functionality’, etc.

Simply chasing narratives without analyzing which area (product) is risky, for VC, you may invest in the hottest narrative in the wrong area.

Market makers are not worry-free

Obviously, market makers are a profitable business, but since some American players have exited the market due to regulatory issues, competition in this industry has become more intense, and new players are also entering the game.

Some market makers compete to lower prices in order to win trades. In the Options mode (the preferred mode for most MMs), MMs borrow Tokens from project teams for quoting, and they need to invest stable coins for Bidding. This is either capital intensive (if they use their own balance sheet) or costly (if they borrow from elsewhere and pay Interest). The Options mode is not ‘costless’ for MMs.

To win trades, you need: i) relationships and reputation, ii) the attractiveness of proposals, and iii) value-added services for customers.

The project team is also becoming more and more familiar with different market makers, so the transparency advantage of market makers in negotiations is disappearing, which is driving a more competitive market.

Market Catalysts (ETF, Elections, Interest Rate)

Most people are waiting for the ETH ETF to go online, hoping to see a price trend similar to that of the BTC ETF.

Unlike BTC ETF, some people hope that ETH ETF will become a stronger catalyst for Ethereum-related AltCoins (I refuse to use the word ‘alignment’).

Some are expecting a longer AltCoin ETF to be approved after ETH (the next one could be SOL ETF?)

If a longer AltCoin ETF is approved, the ultimate goal of the project will be to obtain ETF approval rather than listing on tier-one CEX, which can completely change the sentiment of old coins if they have the potential to become ETFs.

Another catalyst that people look forward to is the US election, hoping for a more friendly encryption policy maker.

It is expected that there will be one interest rate cut this year, and further interest rate cuts will be implemented in 2025, which will bring more liquidity to Cryptocurrency.

Despite the current market conditions being somewhat gloomy, most people are optimistic about the prospects for the next 2-3 quarters, maintaining a calm and not overly aggressive, yet optimistic, attitude.

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