Cryptocurrency Market Q3 Outlook: 9 Catalysts and Key Projects
Cryptocurrency Market Q3 Outlook: 9 Key Catalysts and Projects
Written by: THOR HARTVIGSEN
Compiled by: DeepTechFlow
The second quarter was indeed a tumultuous period for the cryptocurrency market. The market peaked around the middle of the quarter, but was then hit by a series of bearish news for the next month and a half, including lawsuits against major exchanges and concerns about the decoupling of USDT and TUSD.
Before delving into what is about to happen, let’s evaluate the protocols that performed well in the past quarter.
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In the DeFi space, several sectors continue to grow and attract organic demand. These include liquidity staking, on-chain perpetual trading, and so on.
Perpetual DEX
In Q2 of this year, on-chain perpetual exchanges like dYdX, GMX, and Gains generated a total of $117 million in fees. These products maintained high usage rates throughout the bear market period. The ability to trade cryptocurrencies, forex, and other assets on-chain is still one of the most organically demanded areas in the DeFi space.
The table below compares the trading volume on the largest perpetual protocols in Q1 and Q2.
Total trading volume decreased by 8.2% compared to Q1, which is not a significant drop considering the generally bearish environment we experienced in Q2. Although dYdX still leads the way in terms of trading volume, the protocol saw a significant drop in market share during the quarter. Other “OG” perpetual exchanges such as GMX and Gains also experienced this.
New protocols such as Level and Kwenta have seen significant growth, and the main reason for this growth is undoubtedly the large trading rebates (i.e. native token issuance) offered to traders on the protocol. Over time, it remains to be seen whether users will continue to stay on the protocol or jump to other trading platforms as these incentives decrease.
Vertex opened their Arbitrum-native exchange to the public in April and recently saw a significant increase in trading volume. Vertex has yet to launch their native token, so this portion of trading volume may have been generated by airdrop speculators.
Ethereum Liquidity Staking
Over the past six months, liquidity staking has increased from around $7 billion to over $18 billion. With the overall DeFi total value locked (TVL) remaining at around $45 billion, $11 billion of inflows is quite substantial.
After the Shanghai hard fork, the unlocking of staked assets attracted a large amount of liquidity in this area. Here are some data comparisons on staked assets in the first and second quarters:
From Q1 to Q2, the projects that benefited the most were Lido, Rocket Pool, and Frax Finance. Lido not only attracted 1.6 million ETH ($3 billion) in inflows, but also gained a considerable market share despite new competitors.
Rocket Pool and Frax both have unique moats that attracted new liquidity.
Rocket Pool launched their 8ETH mini-pool, while Frax Ether consistently offered the highest staking yield due to its dual token model.
Swell was launched in Q2 and also gained significant TVL. They are currently running a promotion where early depositors can mine the upcoming $SWELL token. Therefore, some of this new liquidity could come from users hoping to participate in the airdrop.
Chains
Here are the financial statements of the larger market cap L1 and L2 blockchains in the cryptocurrency space. The numerical explanations are as follows:
- Fee = the transaction fees paid by users on the chain;
- Revenue = the remaining fee portion that verification nodes obtain after taking their share;
- Profit = revenue minus token emissions.
Ethereum achieved its best-ever quarter in terms of profits, growing over 300% from Q1 this year.
As shown below, Ethereum generated $4.3 billion in fees in Q4 2021, but due to the release of a large amount of ETH before the switch to proof of stake, the earnings were largely negative.
How will these fee amounts translate into profits in today’s environment?
If Ethereum averages $4 billion in fees per year and has a profit margin similar to that of Q2 2023, annual profits would be approximately $24 billion, giving Ethereum a price-to-earnings ratio of no more than 9.5, considering the current price of $1,900.
Arbitrum’s fees during this period also increased significantly and is one of the few chains that has a positive profit. Currently, L2 profit margins are quite low because most of the fees are paid to the main network’s validating nodes.
With Proto-Danksharding set to launch later this year, profit margins are expected to increase as Rollup fees decrease.
Chains like Solana, Polygon, and Optimism have suffered significant losses due to the large amount of token issuance to incentivize users and pay validating nodes.
9 Catalysts and Narratives to Watch in Q3
Cryptocurrency is an attention economy. Protocols with product updates and narratives are more likely to attract attention and perform well in the short to medium term. Here are some top narratives to watch closely.
Bitcoin ETF
The second quarter was very positive for the cryptocurrency market due to institutional sudden interest in bitcoin. Companies such as BlackRock and Fidelity have applied for bitcoin ETFs, and it is widely believed that their approval is likely. A few days ago, the US Securities and Exchange Commission (SEC) said that recent applications were incomplete, and although there was initially selling in the market, prices quickly rebounded as these applications appear to only need more specific guidelines to determine which exchange will be used to offer the product. Many ETFs have already been resubmitted, such as Fidelity’s bitcoin ETF which lists Coinbase as the exchange it will use.
When might ETFs be approved?
The deadline for BlackRock and Ark ETF is August 12, and although it may be delayed, experts predict that the answer is likely to be announced on this day.
swETH – Swell is running an event where early adopters of their native LSD swETH can earn “pearls” that can be redeemed for a native $SWELL token airdrop. As long as this event continues, the protocol is likely to continue to grow.
ETHx – Stader Labs is launching ETHx on mainnet on July 10th. Its main feature is the ability to run an Ethereum node with only 4 $ETH.
The huge growth seen in the LSD space in Q2 is unlikely to continue at the same pace in Q3. Higher staking rates and less on-chain activity have led to generally lower APYs. Stakers are looking for ways to boost their returns in a lower-yield environment, and that’s where the LSDfi protocol comes in. The table below from last week’s news brief shows current stats for top LSDfi projects.
Pendle has seen massive growth in liquidity, with its native token $PENDLE up over 100% in the past week and recently hitting a high after announcing a listing on Binance. The Pendle team likes to keep quiet about new features on the protocol; however, it’s safe to assume that there are many plans for the protocol in Q3. They recently applied for an OP-grant to drive liquidity on Optimism and hinted at a launch on the BNB chain. Cross-chain expansion seems to be coming.
Stablecoin protocols supported by LSD like Lyra and Raft have also seen significant growth recently. It’s clear that there’s demand for this type of product, but more notably, recent success has been heavily attributed to large token incentives/airdrop mining. There are already 3+ protocols planning to launch very similar products in the coming weeks/months, so competition for liquidity is sure to increase.
Base (Coinbase’s Layer 2 Scaling Solution)
Just last week, Coinbase announced that Base has passed all security audits and has met 4/5 of the criteria for mainnet launch. Base is built on the OP-stack, and the recent Bedrock upgrade from Optimism has drastically reduced transaction costs for Optimism and OP chains like Base. Now only “testnet stability” remains as a condition, so mainnet launch is likely to happen in Q3. Coinbase has over 40 million registered users, many of whom may have never been exposed to DeFi. This could be one of the most significant “Onboard” events of the year. Coinbase may only offer support for mainstream protocols like Uniswap and Aave that have been extensively tested, but having a large user base of retail investors is great for the entire space.
Additionally, this could be a nice narrative for $OP, as Base will commit a portion of transaction fee revenue to the Optimism treasury.
Frax Chain
Frax Finance has developed a variety of products, including the $FRAX stablecoin, $FPI price index, Fraxswap, FraxEther, FraxFerry (a cross-chain bridge), and more. Frax also announced that they are building an Ethereum-based layer 2 blockchain designed to unify all of these products into one DeFi hub. It is a hybrid Rollup, meaning it adopts the Optimistic Rollup architecture and leverages zero-knowledge proofs for state consensus. Its goal is to offer end-users high scalability, fast finality, and strong security. The chain is scheduled to launch in Q3/Q4 of this year, but the most important part of the announcement is that frxETH will become the token used to pay transaction fees. This could lead to a significant increase in the supply of frxETH if there is demand for the new layer 2 solution. However, more frxETH used to pay gas fees could also result in fewer frxETH being staked as sfrxETH, which could drive up staking yields. However, swapping to another token just to use the chain could be a burden for some users and, in the worst case, could slow adoption. I am somewhat skeptical, but overall excited for this outcome.
Polygon 2.0
Polygon recently announced “Polygon 2.0,” which brings together various innovations the team has built over the past few years. It includes Optimistic Rollups like Arbitrum and Optimism and combines cross-chain security mechanisms similar to Cosmos. Polygon 2.0 consists of four layers.
- Staking Layer: Validators stake MATIC tokens in a way similar to PoS chains.
- Interoperability Layer: Shared cross-chain bridges that allow assets to be minted and burned in an interoperable way between chains on Ethereum.
- Execution Layer: Polygon 2.0 will operate two different execution layers.
- Subnets: Application-specific blockchains similar to subnets on Avalanche or application chains on Cosmos.
- zkEVM: Uses Ethereum for data availability and is the most secure but also most expensive Rollup solution. PoS-based zkEVM uses Polygon for data availability (secured by MATIC), and then only publishes proofs on Ethereum for greater scalability.
$MATIC has been seeing a lot of downward pressure lately due to forced selling from Celsius selling its assets to buy BTC and ETH. Therefore, there could be a rebound once Polygon 2.0 launches later this year.
dYdX V4
V4 aims to make dYdX decentralized by launching the exchange on a custom application chain in the Cosmos ecosystem. The previously centralized off-chain order book will now be managed by validators on the application chain with an in-memory order book. Validators for each block will submit trades to ensure all trades go through and they have the same version of the order book/chain. Current testing has achieved over 500 trades per second. $DYDX has been criticized in the past due to high inflation rates and low token utility. With V4, the token is likely to gain more significant utility, potentially including aspects of revenue sharing. This was mentioned in a previous post about the protocol.
“Starting with dYdX V4, dYdX Trading Inc. will no longer operate any part of the protocol. As such, it will no longer earn revenue from trading fees on the protocol. The same is true for all other centralized parties, unless the community decides otherwise.”
The $DYDX unlocking schedule is as follows:
- 30% unlocked on December 1, 2023;
- 40% unlocked on the first day of each month from January 1, 2024 to June 1, 2024;
- 20% unlocked on the first day of each month from July 1, 2024 to June 1, 2025;
- 10% unlocked on the first day of each month from July 1, 2025 to June 1, 2026.
Public testnet is launching, indicating mainnet launch is near. This could be a strong narrative for the token if there is an announcement about a $DYDX fee-sharing mechanism. However, it is important to remember the large unlocking schedule starting this December.
GMX V2
With public testnet launching several weeks ago, GMX V2 seems closer than ever before. This upgrade brings many new features, one of which is the adoption of Chainlink custom low-latency price oracles for better trade execution. Another significant change is the independent liquidity of each trading pair and the ability to create synthetic trading pairs.
Each trading pair will have its own liquidity pool. For example, the ETH/USDC pair will have ETH as the long collateral and USDC as the short collateral. Synthetic pairs like SOL/USDC can also be created, with the ETH as the long collateral and USDC as the short collateral for its liquidity pool. This model aims to simplify the deployment of new liquidity pools, and the main benefit of independent liquidity is a reduction in risk for liquidity providers.
Synthetix V3
Synthetix is a DeFi liquidity hub that supports various derivative protocols on Optimism, such as Kwenta, Lyra, Thales, Polynomial, and more. This year has seen a significant increase in trading volume, with most of the volume coming from Kwenta traders.
Synthetix V3 is an upgrade that has been in development for the past two years, with the aim of becoming the liquidity layer for all DeFi. Currently, all synthetic assets are collateralized by the native governance token, $SNX. V3 will introduce various upgrades, including multi-collateral staking, risk-isolated permissionless pools, cross-chain liquidity, and more. V3 is already live on the mainnet technically, but core innovations such as Perps V3, Pools V3, Teleporters, and Cross-chain Synthesis are still in development.
Others
Here are some other protocols in the space that may be worth paying attention to:
- The Vertex Protocol recently launched and has seen strong trading volume growth;
- Level recently launched on Arbitrum and now accounts for around 50% of the volume on the chain;
- The Pear Protocol is launching soon and will leverage existing infrastructure for the liquidity of its trading platform.
