The market has not recovered, only frankly: The re-pricing of encryption in the post-market maker era.

Author: Zuo Ye

Network effects are not limited to the internet.

Water and electricity networks have strong exclusivity, making them very suitable for “monopolistic” collective management, which can either benefit or harm society as a whole. However, the network of relationships between people is naturally distributed and decentralized; even a super social butterfly can hardly know everyone.

Is crypto ultimately a web of funds or an interaction space between people?

Satoshi Nakamoto obviously believes in the latter, a peer-to-peer trading model. From this starting point, the history of the cryptocurrency world is a journey of appreciation and expansion of funds, fully embracing the connection of capital while reducing direct interaction between people.

The only reasonable follow-up question is, how long will the density of this funding network last before it collapses?

Why is the market recovering?

Many people are still trapped in the aftermath of the sharp declines on October 11 and November 3, wondering how long it will take for synthetic stablecoins, Vaults, and Yield products to recover. However, Hyperliquid's BLP and HIP-3 growth models are coming in waves, and the stablecoin YC prepared by Framework has launched on Sky.

There is also the sudden arrival of Aave V4 and the mobile financial product App.

In terms of absolute data, it is indeed a market recovery period now, but from a subjective feeling, the project parties seem to be innovating while closely following historical trends.

In other words, the market cycle has decoupled from retail investor activity, which is not uncommon. The fundamentals of the U.S. economy have little to do with the real economy; what matters most to Trump is lowering interest rates + stock prices. Americans and the real industry are merely a part of the play.

In this round of cycles, if one still believes in the four-year cycle of Bitcoin, that is just staying in the time machine of 2017, just like the flash crash of CloudFlare, as the crypto infrastructure has been constantly changing.

Hyperliquid represents a DEX that is indeed seizing the CEX market, especially in combination with memes that change token valuation, pricing, and distribution systems. The era of CEX is visibly declining, with Kraken having only a valuation of 20 billion USD, and many CEXs are turning to support their own DEXs.

As the high FDV impact on Binance's pricing system occurs in 2024, VC is already dead, and then it becomes the era of market makers: behind Hyperliquid and a host of other Perp DEXs are market makers, and behind many YBS projects are also market makers.

SBF came from Jane Street, Jeff came from Hudson River Trading, and the founder of Variational came from the market-making department of DCG.

Even the market makers were the first to face ADL liquidations on 10·11, where fortune and misfortune coexist; the market structure led by market makers is more rigid and faster than that led by CEX.

Web3Port is frantically dumping operation coins, while DWF repeatedly manipulates coin prices. Even Hyperliquid's HLP faces such accusations. Whether centralized market makers or decentralized treasuries, as long as they participate in the market-making system, they cannot escape the suspicion of market manipulation.

If the current market structure is referred to as a “recovery”, then the market makers have been severely affected, resulting in their inability to continue manipulating the market, which in turn leads to market stabilization.

It is not uncommon that before the collapse of FTX in 2022, there were rumors in the market that Alameda once held a 20% market making share in the BTC market. In the biography of SBF & FTX, “Going Infinite,” SBF admitted that they were one of the earliest professional companies to engage in large-scale market making.

Image description: BTC liquidity plummets

Image source: @KaikoData

Returning to the flash crash on October 11, from the perspective of market makers, it was purely a technical crisis, or rather, the trading liquidity prior to this was a technical boom: there were no retail investors trading, but market makers were buying and selling.

Image description: 10·11 Liquidity Plummets

Image source: @coinwatchdotco

The existence of market makers is not an issue in itself, but for altcoins or newly issued tokens during TGE, it means significant sell-offs. Airdrop hunters, profit takers, and even VC and project teams themselves will resolutely sell to market makers in order to lock in profits.

Market makers will find themselves in a dilemma: if they do not manipulate the market, they will inevitably end up with all the junk coins, or they will become the Lich King, trying to increase market volatility as much as possible, making a little profit for themselves while occasionally allowing market participants to earn a little.

Image Description: Mainstream Market Maker Positions

Image source: @arkham

There is a huge flaw in the reasoning here; it can only observe the composition and changes of the positions held by market makers, making it difficult to specifically analyze how they manipulate coin prices within CEX. The data from DEXs like Hyperliquid is relatively transparent and will be left for future analysis.

In summary, the market is not rebounding; rather, the market makers have suffered heavy losses, coupled with the series of collapses in the YBS project, which has left market makers unable to manipulate the market. What we are seeing now is the real price mechanism at work.

There is no recovery, only honesty.

The 70% Law of Natural Monopoly

The segmentation of various tracks in the cryptocurrency space has already shown products that have the characteristics of “natural monopoly,” such as EVM, which is relatively a failure as an infrastructure compared to the Bitcoin network. Everyone desires BTC, but does not want to engage in P2P transactions.

Except for supporters like Jack Dorsey who insist on using the Bitcoin network as a stablecoin chain, the dream of BTCFi has already been real and tragic enough. Stopping the imagination about it would benefit the entire industry.

Outside of EVM, only Binance and USDT come close to the concept of “monopoly” as super products. Please note that this does not conflict with the impact of DEX on CEX, or the innovative impacts of USDC/USDe/YBS/Curator.

Super Product ≠ Track

L1 scaling), and even now turning to privacy and AI, still highlights that in a situation of doing as one pleases, EVM remains the mainstream choice.

However, the market share of Binance and USDT, as well as Hyperliquid's share in the Perp DEX, is roughly around 70% at its peak, after which more market actions are needed to solidify the current position.

Image description: Market structure under stable shares

Image source: @GLC_Research @defillama @SPGlobal

Empirical summary: under a solid market structure, the top projects can occupy 70% of the market share in that sector. However, the market environment changes over time, and currently, the shares of Hyperliquid, USDT, and Binance have all fallen below 50%.

Of course, the EVM is absolutely stable in the overall VM track, with only a few competitors like SVM or Move VM that can be considered as entering a hyper-stable structure.

Image description: Mainstream market makers

Image source: @coinwatchdotco

Looking at market makers from this perspective again, we know that there are at most 20 mainstream market makers, and it is speculated that they held a dominant position in the market before October 11, but they have not achieved a natural monopoly. Even if they forcefully maintain it, they are now at the end of their strength.

What changes will occur in the market structure in the next phase?

Transition between the old and the new is underway.

• Following the path of traditional finance will be constrained by traditional financial valuation models.
• Following the path of Internet financial technology companies will be limited by Internet scale valuation.
• To find a valuation model suitable for the cryptocurrency industry, one must not be defined by any existing industry, allowing for the emergence of a top player worth 50 trillion, similar to AI.

Recently, the market has indeed been very strange. Solana, as a pioneer in RWA and institutional adoption, suddenly had its foundation chair, Lily Liu, say that it wants to revive the crypto punk dream, combining with Ethereum to return to the L1 Scaling route, along with the privacy concept mentioned earlier, which has spread from Zcash to infinity.

Crypto seems to be regaining the technical logic and valuation system of the crypto world, and this is increasingly less related to market makers. Even when institutions adopt it, it is more about “crypto projects using institutional funds to engage in DeFi,” rather than “selling crypto's DeFi to institutions.”

In summary, remove MM internally and rid ourselves of institutions externally.

Even the OGs must keep up with the new era. The DAT co-branded by Li Lin and Xiao Feng has also directly died in the womb. After piercing through Chinese VC, the Big Name effect of the OGs is also about to enter history.

Cryptography allows one to regain their dreams, but the cost is to shake off the parasitic system on it.

Referencing the most mature capital market in the United States, A16Z is a part of the American capital market, but Chinese VCs are not; it is the government, state-owned enterprises (state capital groups), and internet companies (previously) that have the money.

Mapping to the situation of Chinese VCs in Web3, Chinese VCs do not have the ability to participate in market pricing and distribution systems. Market makers and CEX used to be, but after 10·11, the trend of on-chainization in the industry has become increasingly evident.

On-chain ≠ Decentralized.

A typical example like Hyperliquid is transparent on-chain, but it is not decentralized in terms of physical nodes and token economics.

Even in the capital reform of state-owned enterprises in reality, it is not simply about selling the old to exchange for the new, but rather investing in new industries to obtain a ticket to a new world.

From this perspective, the biggest problem for market makers is similar to that of Memes: liquidity lacks value. In the extreme nihilism of PVP, they can make a lot of money, but market makers cannot serve as a dominant force in the industry.

Long-termism in dreams and technology, Vitlaik does too much, MM does too little, still needs to be more moderate.

Conclusion

Essentially, this article is written for myself. Theoretically, the market should stagnate after October 11 and November 3, but the decline in TVL has not hindered the innovation and self-repair of DeFi, which leaves me puzzled.

Vault, YBS (Yielding Stablecoin), and Curator are still evolving. The market is more resilient than we imagine. If we continue to view the market with the mindset we had a month ago, or even a week ago, we will not understand it.

After the MM-led era in the industry, the balance between the values in the crypto space and the profitability of products will redefine the valuation logic.