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MEMO W22 JUN 2024

Linear forecasts are wrong in a non linear world. - xh3b4sd

I heard one of the main characters of this cycle say we are in the third inning of this crypto cycle. I find the baseball metaphors a bit difficult to comprehend personally, but let me humour you. There are 9 innings in a game of Baseball. So at the end of the third inning the game is theoretically 33% over. Now, it is good to have this data point, but I do not put too much weight on it personally. My current understanding of where we are in the cycle is that we are past the first half of it. My gut feeling is that this cycle top may happen around Q2 2025. That would then be less than 12 months from now. My base case for the rest of this cycle is to be a bit more dampened, and here is why. The two main narratives causing most of the gains of this cycle have been meme coins and ETFs. Both of those narratives have mostly already happened in my mind. What is left is utility and its effects. The thing with tokens that have not much going for them but utility is that they cannot hide behind narratives involving delusions like hope and speculation. It might be arguable how fairly priced ETH is right now. In my mind it is rather fairly priced all things considered. ETH does not have much of a monetary premium right now because all it can do at the moment is to earn its monetary premium. ETH does earn its monetary premium, it is just not very big. And I am saying this with the understanding that ETH is the very thing in the crypto economy that supports most of the crypto economic activity. This is the cycle in which institutions are indeed starting to adopt crypto and from here it is a slow burn with dampened volatility, working its way up to secure an ever higher baseline. Our plans are measured in centuries.

One topic for this Powerlaw memo are various industry market cap predictions that people think we should reach this cycle top. One of the prominent numbers I heard this past week was a 10 trillion USD market cap prediction, that I find somewhat unrealistic to achieve this cycle. And here is my thought process around it. For starters, some numbers of historic industry market cap tops. The cycle top in January 2018 was far below 1 trillion USD. The cycle top in November 2021 was only a tiny bit above 3 trillion USD. The 10 trillion USD market cap top prediction for this cycle assumes linear growth between crypto cycles. While many prices rise exponentially in early tokens, and while network adoption may happen exponentially at some point, trillion Dollar market caps rarely keep scaling linearly over longer time horizons. All things equal, and notice that all things are never equal, the market cap multiple in front of us, in order to reach 10 trillion USD, is still 3.74 times of the current total crypto market cap. And that must be considered in the context of the current cycle about 50% over already based on my personal estimation. To say it differently, the past two cycles made a 3x each over their entire time length. The 10 trillion USD predictions do now claim to put in an even higher multiple than the past two crypto cycles in only half the time available. I think this is very unlikely to happen. I think there is a less than 5% chance of the 10 trillion USD market cap to happen this cycle around. In comparison on the asset level. BTC and ETH have a market cap of roughly 1.35 and 0.45 trillion USD respectively at the time of writing. The suggested multiple of 3.74 times from here would put us at 5.05 and 1.68 trillion USD market cap for BTC and ETH. The respective asset prices would have to reach 250,000 and 14,000 USD for BTC and ETH, all things equal, and I think those targets are not reasonable to assume for the current crypto cycle. In the long term we will probably get there, but my gut feeling tells me that crypto cycles become more muted as the industry matures. A more mature industry does then also imply dampened volatility to the upside and the downside. Running some numbers here made me aware of the fact that the ratios between BTC, ETH and the rest of the crypto markets is 5, 1.7 and 3.3 respectively, meaning BTC is half the market, ETH is one third of BTC, and ETH is half of everything else. Those ratios should change with growing stablecoin ecosystems. At some point in the future it might not make any sense anymore to put stablecoins together with blockchain networks in the same buckets. But today those industries are still in their infancy. The take away here, considering all of the above, is that we are likely to chop sideways for some time, with an upward tendency until somewhere around Q2 2025, because we frontloaded this cycle massively due to the spot ETF narrative. Last cycle almost all gains were still to be had after 50% of the cycle. This first half of last cycle happened between December 2018 and December 2020. This time around I think half of the gains have already been had, exactly because we frontran the spot ETFs and frontloaded most of the speculative energy in this industry. There is now still way to go and there are now still gains to be had, but what is yet to come is not the majority of gains for this cycle by any measures. My base case for this cycle would be to not go beyond 6 trillion USD in total crypto market cap.

Taiko mainnet went live this past week and the cool thing about it is that Taiko is the first "based" L2 rollup, which means that its bundled transactions are sequenced in a decentralized fashion by L1 block builders. So far L2 rollups have been running their own more centralized sequencers, which was often a major driver for the generated L2 revenue. I think the vision for all rollups is to become "based", which will then also enable to solve the L2 fragmentation issues we are seeing today. Chances are that in 2 years from now all Ethereum liquidity, whether it originates on L1 or L2, will be managed and be made available to anyone almost instantaneously in a unified way using guaranteed preconfirmations and based rollups that participate in shared sequencing. I know this was a mouth full and a lot of words in one sentence. Over the coming months we will see developments in those areas and discuss them here as they advance.

And another L2 rollup got announced recently, the ENS L2. ENS is the Ethereum Name Service, originating on L1 mainnet. The planned L2 will allow ENS to operate more efficiently and enable users to enjoy a broader feature set. One idea I heard was about more fine grained structured ENS names and cross chain interoperability.

Our numbers in this Powerlaw memo are all about the blobs. Taiko went live a couple of days ago and is doing already almost 25% of all blobs. Taiko and Base together make over 50% of all blobs at the time of writing. The Dencun upgrade brought us blobs on the 13th of March 2024. It has been about 10 weeks since then and every day about 17,000 blobs are posted on Ethereum L1. This number is in a considerable uptrend. The average amount of blobs per block is at 2.3 right now. Quick recap of how blobs work. Blobs have their own fee market in order to price data availability on L1 mainnet. There is a maximum of 6 blobs allowed per block. If there are more blobs in a block than the current blob target of 3, then the blob base fee is being increased. If there are less than 3 blobs in a block, then the blob base fee is decreased. If the amount of blobs remains unchanged across blocks, then the blob base fee does not change. We expect the number of blobs to further increase in the coming months. For one, because L2 rollups start to make more use of blobs. And two, there are almost 50 more L2 rollups planned to launch in the coming months, which will in part increase the blob demand, even if not all of those L2 rollups use Ethereum as their data availability solution. Watch out for them blobs!

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