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MEMO W08 FEB 2024

Any asset is bound to fail over time. That is simply due to the changing nature of the world we live in. - xh3b4sd

My understanding of the macro is that we are roughly halfway through the bull market already. I base this theory on the global liquidity cycle, which bottomed around June 2022. That was also the time around when ETH put in its cycle bottom. 19 months and 180 percent later ETH is sitting at around 3,000 USD again. We have already seen in January that many stocks and indices put in new ATHs. My initial reaction to that was fear. The higher we go the more likely it will become that the music stops, at least for a while. I saw some statistics that ATHs in the S&P500 imply higher prices 12 months after these respective ATHs, in 16 out of 17 cases. The global liquidity cycle is estimated to top out around September of 2025, which is about 18 months away from now. What seems odd to me is that 2024 has become too easy already. Just about everything is up, and we can expect everything to get a lot more easy over the next 12 months. We could ask which role interest rates play in our liquidity based models. There are no obvious repetitive cycles to be found when looking at interest rates. Whatever the Federal Reserve is doing is a reaction to economical and political whims. And more often than not the Federal Reserve is any combination of too early, too late, too active, and too passive. In that light, interest rates operate within global liquidity cycles like everything else, with the caveat that interest rates beget more or less liquidity in reflexive ways. Just this week Larry Summers called for rate hikes with a 15% probability. Truflation trends towards 1.6% CPI whereas the FED is tracking 3.1%. Truflation might be undershooting to the downside, since they were also overshooting a lot to the upside around June 2022. The market is pricing in an ever decreasing amount of expected rate cuts for 2024, and that decrease might not be over just yet. As it stands right now, higher for longer might still be on the table. And that will be alright.

Two notes on stablecoins. First, Circle stopped issuing USDC on Tron. We can speculate why they did that and why that matters. Tron is some centralized system on which almost 40% of all stablecoins reside. Almost all of the stablecoins on Tron are USDT. The USDT issuer is Tether, which is Circle's competitor. My instinct tries to interpret the action that Circle has taken this week as an act of economic war. Circle puts its foot down and makes a stance for the sake of its own image, which tries to optimize for favourable US regulation. It is widely expected for Circle to make its IPO at some point this year. And in order for USDC to be perceived as the cleanest stablecoin blessed by US regulators, Circle has to draw very clear lines between itself and Tether's USDT. The game is on. And second, stablecoin marketcap on L2s is sitting around 3.5 billion USD as per GrowThePie. That number seems to be steadily increasing. The plain amount here is not impressive at all, considering that all of the stablecoin marketcap is almost at 140 billion USD. The encouraging dynamic to realize here, as I see it, is the fact of a steady upward trend of stablecoins used on L2s. We could argue stablecoins are not a good proxy for L2 adoption or growth. We could say that the ways in which stablecoins are utilized within the crypto industry, are rather manifold. Some denominate their wealth in a more stable digital asset without doing really anything onchain. Some use it as a base pair for trading more volatile assets. Some use stablecoins to pay employees or to pay for services onchain. Stablecoins are somehow used in so many different ways that it becomes hard to tell what is what. And at that point I find myself at both ends of the bellcurve meme saying "up is up".

Talking about Eigenlayer restaking in the context of Ethereum. Restaking is the concept of staking ETH multiple times. You can stake your ETH once in liquid form and then stake that liquid staked ETH again for another purpose. Staking ETH has the purpose of securing the Ethereum Blockchain Network. The liquid form of staked ETH is for instance stETH and rETH, which can be staked again in Eigenlayer. The purpose of restaking is to secure other crypto economic use cases. For one, restaking makes for more yield, and more risk. And two, restaking allows any network or primitive to utilize the economic security of Ethereum without having to bootstrap that economic security themselves. That is a huge unlock for new creative ways of economic activity across all DeFi. Now, people tend to be worried about new DeFi primitives that introduce creative ways of leverage, which in turn tends to cause a lot of trouble eventually. We could ask whether restaking is a form of leverage. In the traditional sense the answer should be no. Because restaked ETH cannot be liquidated based on changes in the price of ETH itself, which is how margin based leverage works. Traditional margin accounts define a certain collateral threshold that fluctuates with price changes of the underlying collateral and effectively provides a range of available leverage that way. Margin accounts get liquidated if collateral thresholds get crossed. Restaking does not define any such margin and therefore does not have any liquidatable collateral threshold. The "liquidation" of restaked ETH is called slashing, which intends to penalize malicious validators. You have to be dishonest in order to get your staked or restaked ETH slashed. And having bad intentions is fundamentally different from random price changes that no single actor can be made responsible for. Based on that reasoning I like the framing of restaking to be a form of corporate bond. When you restake your ETH, you effectively lend out assets in order to underwrite some kind of economic activity. By underwriting another business you assume the risk of that business and its ability to pay you back in the future, in full, plus interest. If we squint hard enough we can try to make the case for restaking being a form of leverage and I can totally understand the arguments. The point here might simply be this. Institutional restaking operates under fundamentally different and more predictable circumstances than retail trading on margin accounts.

At last some boring numbers. We saw 2.5 billion USD in digital asset inflows within a single week, of which 99% came out of the USA. That gets to show why the ETF approvals by the SEC are so relevant to the crypto industry in terms of cash flow. Murica is where the money's at.

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