Why is value coin no longer working?

Under the impact of the meme craze, 2024 has become the first round of "disenchanted bull market" in the history of cryptocurrency. This year, the industry finally stopped hiding its belief in money and gambler nature. The disenchantment of technological liberalism has plunged most people into extreme nihilism. Even shouting terms such as "embrace scams" cannot mobilize the emotions of speculators. The simple and crude meme PVP casino has become the last spiritual opium to maintain the industry's activity.

The consensus on criticizing VC coins and value coins is widespread, from retail investors, communities to exchanges, and even VCs themselves. Looking back at the development history of cryptocurrency, although there are exciting innovations in application scenarios such as DeFi, the underlying logic of the industry has never changed. When you ask a project party what his business model is, the final answer must be: "Sell coins." This has led to the absurd behavior of talking about business models in the crypto industry, because in essence, an industry based on speculation has no logic.

However, this Ponzi growth has finally peaked. After the collapse of FTX, Three Arrows, Celsius, etc., people discovered that the so-called "institutional bull" in the previous cycle was actually a "leveraged bull". From the perspective of total market value, the crypto industry has never returned to its peak in 2021, which seems to indicate something. Perhaps the gambler's capital in this world is really limited.

Today, the soul-searching question facing the crypto industry seeking growth is: Can it really accommodate large-scale long-term funds and serious investors? With this question in mind, we start from some simple perspectives of traditional value investment and briefly analyze the revenue capacity of the DeFi field, which has the most clear application scenarios in the industry.

BlockBeats Note: In this article, we use the P/E price-to-earnings ratio as the main indicator to judge the valuation level of the protocol. Among them, the protocol fee income (Fees) is regarded as revenue, which is used to calculate its P/S price-to-sales ratio, while the protocol profit (Revenue) is the actual profit obtained by the protocol or DAO after deducting the distribution of interests among all parties, which is used to calculate its P/E price-to-earnings ratio. In addition, since the third quarter has not yet ended, the performance of the quarter will be estimated based on the average of the data in July and August.

DEX

The DEX field selects the head protocols of the mainstream public chain ecology to better present the DEX revenue of the entire crypto industry, including: Uniswap and Curve in the Ethereum ecology; Jupiter in the Solana ecology; Trader Joe in the Avalanche ecology. As a reference, in the traditional financial market, Coinbase's price-to-earnings ratio is currently 38, and Robinhood's price-to-earnings ratio is 62.5.

Uniswap

Due to the current fee mechanism of the protocol, the Uniswap protocol itself does not have any profitability. Therefore, when the protocol fees are regarded as protocol revenue, we can only use the price-to-sales ratio (P/S Ratio) to calculate the valuation level of Uniswap. In the past three quarters, Uniswap's P/S valuation multiplier has been relatively stable at around 8. During the sharp rise in UNI prices in April this year, the fee income of the Uniswap protocol also increased accordingly due to changes in trading volume and fee mechanisms, and showed a resonant trend with the UNI coin price in the following months.

However, despite this, the Uniswap protocol itself does not have any profit, which is determined by the current protocol fee mechanism. Currently, when users trade tokens through the Uniswap protocol, they need to pay a 0.3% transaction fee, which will be shared by the liquidity providers (LPs) of the pool and the liquidity reserves of the pool, and the Uniswap protocol itself has no economic return. According to official documents, the team may also charge a 0.05% fee for the protocol in the future, and this "fee switch" is therefore regarded as one of the most important factors affecting the fundamentals of UNI.

On the other hand, as the leading DEX in Ethereum and even the crypto market, Uniswap is still very strong in terms of business scale and activity. The total transaction value (GMV) of the protocol remained at US$180 billion in the first and second quarters of this year. Although the crypto market cooled down in the third quarter, judging from the current data, Uniswap still maintained a relatively stable business level.

From the source of fee income, although the Uniswap team and community have worked hard to promote the multi-chain development of the protocol in the past six months, the Ethereum mainnet is still the largest source of fees for the protocol, with a transaction volume of $1.16 billion on August 15 alone, followed by Arbitrum and Base, whose combined transaction volume is roughly the same as the mainnet. According to the latest report from CoinGecko, in the first half of this year, Uniswap is still the application protocol with the largest ETH consumption, destroying a total of about 71,915 ETH.

Uniswap Fee Income and Revenue Source Ecosystem

In the past week (August 18-22), Uniswap V3's trading volume on the Ethereum mainnet reached 3.96 billion US dollars, of which the top 15 trading pairs contributed 3.28 billion US dollars, accounting for 82.8%. Correspondingly, Uniswap's LPs also received a total of 4.36 million US dollars in LP incentives in the past week, of which the LP income of the top 15 trading pairs was 2.34 million US dollars, accounting for 53.6%. This is because in trading pairs with large trading volumes, LPs are more inclined to choose liquidity pools with lower fees to generate income (Uniswap LP fee tiers are not described here).

Uniswap's top trading pairs and fee tiers

Since the protocol itself has no profit, Uniswap Labs has created revenue for itself through front-end API charges in order to solve the team's continued operation. In October last year, Uniswap Labs began to charge a 0.15% transaction fee for transactions of mainstream tokens including ETH, USDC, WETH, USDT, DAI, etc. in its web applications and wallet products, and increased the fee to 0.25% in April this year, and expanded the scope of levied currencies, and Uniswap Labs' revenue surged accordingly.

Although only a very small part of the transaction activities on the Uniswap protocol are completed through the official web API, the team can still make a lot of profit from this because the protocol GMV is very considerable. As of writing, its total revenue has reached $59.6 million, and is about to break the $60 million mark.

Top left: Uniswap head trading pair liquidity source share; Top right: Uniswap head trading pair volume (traffic) source share; Bottom: Uniswap Labs profit source breakdown

But Labs can make money does not mean UNI holders can also make money. Due to the fee mechanism problem, the source of value supporting the token price has always been the biggest pain point of UNI. In extreme theoretical cases, the development of the Uniswap protocol and Uniswap Labs has almost nothing to do with the UNI token. When the two generate income, these values cannot flow to UNI. When the two encounter bottlenecks, panic will be reflected in the price of UNI first.

Therefore, after the community launched a proposal in May this year to turn on the fee switch and incentivize UNI holders, the market reacted so violently to UNI. However, this change that completely affects the fundamentals of Uniswap does not seem easy to achieve, and the proposal has been repeatedly postponed due to obstruction from various interest groups. Behind this is still the industry's concern and compromise on the regulatory issue of "securities or not".

Curve

As one of the leading DEXs that once fought head-on with Uniswap, Curve's trading volume has now dropped to eighth place, overtaken by Aerodrome of the Base ecosystem. Curve's full circulation PE value is far from the current circulation multiplier, and its valuation expectations have fallen rapidly in the past two quarters, from 60 to 25 and then to the current 19. On the one hand, it is limited by market turmoil and large fluctuations in currency prices, and on the other hand, it is also related to the fact that its founder encountered liquidation again in the second quarter of this year, which affected market confidence.

Unlike Uniswap mentioned above, Curve has actively practiced token value capture since its launch. Curve was originally an AMM focused on stablecoin swaps. With a series of economic model innovations, Curve has expanded the utility of CRV. In addition to distributing fees to LPs, it also distributes CRV to them and returns part of the fees to CRV holders. This structure enables LPs to obtain benefits other than fees, and CRV holders can also obtain part of the benefits from the generated fees.

In June this year, Curve changed its fee allocation incentive mechanism, transitioning from 3CRV tokens to its native stablecoin crvUSD to improve the practicality of crvUSD and enhance Curve's stability and liquidity. The redemption role of crvUSD to Curve was once very obvious. From the perspective of revenue channels, crvUSD has exceeded Pool's revenue for a period of time since its launch. However, on August 5, a large-scale on-chain liquidation occurred in the crypto industry, causing Curve to lower the lending rate of crvUSD. The interest rates of pools such as ETH and WBTC were as low as zero tenths, and capital flight was obvious.

Curve Protocol Profit and Source

A detailed analysis of the breakdown of Curve liquidity pool revenue shows that this DeFi protocol's flagship business is losing its main position. At this stage, the main contributor to Curve pool revenue has shifted from the former 3CRV pool (consisting of DAI/USDC/USDT) to the TriCrypto pool (consisting of USDT/ＷBTC/WETH), which accounts for more than half. Judging from the revenue contribution ratio of the stablecoin pool and the non-stablecoin pool, Curve's past main stablecoin transactions are even more bleak, accounting for less than 22%.

Left: Curve Protocol Profit Sources (Divided by Liquidity Pool); Right: Curve Protocol Profit Sources (Divided by Liquidity Pool Attributes)

It can be seen that as the stablecoin market gradually moves towards the winner-takes-all decisive battle stage, the low-slippage stablecoin trading scenario (Stable Swap) that used to rely on the prosperous stablecoin ecosystem is gradually disappearing, accompanied by Curve's soul-searching question about "what kind of platform should it be". At present, the answer given by Curve is crvUSD. In the future when its old business is gradually dying out, Curve's fate almost entirely depends on its win or loss in the stablecoin decisive battle.

Jupiter

Jupiter is the leading DEX trading aggregator on Solana. As a trading platform, Jupiter provides spot trading, DCA fixed investment, and limit order trading services. In addition to carrying trading needs, Jupiter also provides Launchpad services. In October 2023, Jupiter launched a perpetual contract trading product and entered the derivatives market. Three months later, $JUP was launched. When JUP was first launched, Jupiter's P/E ratio was 48. In the second quarter, affected by the cold market conditions, P/E fell slightly by 16%. As the market warmed up, Jupiter's P/E also returned to its original position.

Jupiter's profit channels mainly include limit order transactions, DCA order transactions and derivatives trading income, as well as the part of the tokens allocated to Jupiter by projects incubated or operated by Jupiter Launchpad. Currently, Jupiter charges fees of 0.1%, 0.1% and 0.07% for limit order, DCA and perpetual contract opening transactions respectively. As of August 23, Jupiter's revenue this year is calculated to be US$120 million.

Jupiter Protocol Income Source Breakdown

Among Jupiter's current revenue, perpetual contract products (Perps) support the overall revenue of the protocol. Since its launch in October last year, Jupiter's perpetual contract trading product revenue has steadily increased, with weekly fees increasing from US$500,000 at the end of October to US$2.6 million at the end of January. In mid-March, Jupiter's trading fees exceeded US$7.6 million. Since its launch, Jupiter has relied on perpetual contract products to generate nearly US$150 million in protocol revenue.

Left: Jupiter perpetual contract product fee income source breakdown; Right: Jupiter perpetual contract product user interaction behavior breakdown

For investors, JUPJupiter provides an entry point for users to share protocol income. Investors can capture the growth dividend of Jupiter's perpetual contract products through JLP (Jupiter Liquidity Pool). JLP is a basket of currencies, and its assets are composed of SOL, ETH, WBTC, USDC, and USDT. On this basis, the mechanism of JLP is similar to GMX's GLP. On the one hand, it makes profits from the losses of perpetual contract traders, and on the other hand, it obtains 75% of all perpetual transaction fees. These fees will be automatically reinvested in JLP, thereby achieving continuous compound interest.

In the transaction fees of Jupiter perpetual contract products, the daily trading volume is mainly between US$200 million and US$900 million, with a peak of US$1.6 billion on August 5. Corresponding to this is the continuous loss of contract users. According to Chaos Labs data, traders on Jupiter perpetual contract products have been in a loss state for nearly three months. When the market encountered a sharp fluctuation on August 5, the amount of losses of traders exceeded US$30 million, and these losses brought liquidation income to Jupiter. It can be said that under ideal circumstances, when the market rises, JLP, as a "crypto market blue chip ETF", can rise in sync with the market, and when the market ends the unilateral rise, the losses of traders on Jupiter perps will increase, and JLP's income will also increase, realizing a positive flywheel.

Jupiter perpetual contract users have not realized profits

Since its launch, JLP has maintained a steady upward trend, and there has been no significant decline even when the overall crypto market fell. In March, assets such as SOL and ETH rose to a staged high and began to fluctuate and fall. JLP achieved a slight increase overall, and its annual yield of over 100% impressed the community. After the market fell, JLP's annual yield also decreased. Currently, the TVL of the JLP pool is US$661 million, with an annual yield of 21.9%.

JLP Price Chart

JLP's achievements are the accumulation of Jupiet's development in the DeFi field in recent years. Looking back on its history, the market for its main transaction aggregation business has reached the "ceiling" and the growth space is saturated. At the beginning of this year, Jupiter's DEX trading volume surpassed Uniswap V3 several times, becoming the DEX aggregator with the largest trading volume. In addition, 44.3% of Solana DEX trading volume is conducted through Jupiter; if robot trading behaviors such as MEV and brushing are excluded, the trading volume through Jupiter accounts for 63% of Solana DEX's total trading volume.

Left: Solana DEX trading volume source breakdown; Right: Solana DEX trading volume source breakdown (excluding robot trading)

Although on the surface, Jupiter's DEX aggregation business does not directly generate profits, its market share advantage makes Jupiter the preferred entry point for Solana ecosystem users to trade. This traffic advantage brings a lot of traffic support to its Perps product. Among the perpetual contract products in the Solana ecosystem, Jupiter's daily independent wallet count accounts for more than 70%, far exceeding other products such as Drift, Zeta, and Flash.

Left: Source of Solana's daily increase in users; Right: Source of Solana's perpetual contract products' daily increase in users

Looking forward to JUP's future growth space, the determining factor is whether JUP can share Jupiter's revenue dividend. Currently, JUP is positioned as a governance token, and Jupiter's founder has repeatedly emphasized the importance of JUP to community development, intending to separate JUP from protocol revenue. Therefore, Jupiter's performance in the perpetual contract market has overestimated JUP's growth expectations, and JUP is facing a similar growth dilemma as UNI.

Trader Joe

Trader Joe's valuation multiples and GMV indicators fluctuated significantly in the first three quarters of 2024. In the second quarter, P/E valuation multiples rose across the board, up 76%. After that, Trader Joe's revenue and trading volume remained at a relatively stable level, and the market's expectations for Trader Joe's growth were stable.

Since the beginning of 2024, Trader Joe's TVL has remained between $150 million and $200 million. It was more prosperous from April to June, and the TVL has dropped below $100 million in the past month. Trader Joe's TVL is mainly distributed in Avalanche ($114.26M) and Arbitrum ($45.38M), accounting for a large proportion of the total TVL. Correspondingly, Avalanche is also the main source of Trader Joe's commission contribution, accounting for about 60% - 70%, followed by Arbitrum, accounting for 21%.

Top: Trader Joe's total TVL changes; Bottom left: Trader Joe's fee income and protocol profit; Bottom right: Trader Joe's fee income source

From the perspective of JOE empowerment, JOE holders can obtain protocol dividends. TraderJoe's protocol income ratio has multiple modes, among which V1 charges 0.05% of all transactions as protocol income, V2 does not charge protocol fees, all protocol fees are allocated to LP, and V2.1 charges different ratios of protocol fees according to different LB pools, ranging from 0-25%. As can be seen from the figure below, JOE's market value fluctuates synchronously with protocol fees.

Trader Joe's protocol revenue and TVL and market value correlation

In mid-June, Trader Joe launched V2.2, introduced the Liquidity Book hook function, and implemented centralized incentives. The daily output fee of Trader Joe V2.2 has a good growth momentum. The daily output fee has exceeded 20,000 US dollars in the past week, while the daily output fee of Trader Joe V2.1 in the same period was between 20,000 and 50,000 US dollars. In the two months since its launch, Trader Joe V2.2 has accumulated 5.66 million US dollars in protocol fees, and after deducting LP incentives, there are still 1.2 million US dollars in protocol revenue.

Top: Trader Joe V2.2 TVL and fee data changes; Bottom: Trader Joe V2.1 TVL and fee data changes

Looking forward to Trader Joe's development space, the first thing to consider is that its trading activities mainly occur on Avalanche. Since March, Avalanche's trading volume has dropped significantly, reflecting that Avalanche's appeal is not as good as before. But Grayscale launched the AVAX Trust Fund last week, which may boost the price of AVAX to a certain extent, thereby bringing liquidity to Trader Joe.

But the most important thing is Trader Joe's polishing of its own business. Last week, Trader Joe's official Twitter account released its latest roadmap, announcing that the existing DEX will be expanded to form the "Joe Stack", and stated that the core competition of decentralized exchanges in the future will focus on CLOB (central limit order book) in order to provide higher capital efficiency. Trader Joe V2.2, as part of the "Joe Stack" layout, started relatively smoothly. The V3 design proposed by Trader Joe in the roadmap is related to the memecoin issuance service. Through the advancement of these businesses, Trader Joe's development space will have more driving force.

Lending

Due to the overall monopoly of the head protocols in the crypto industry, the lending protocols selected in this article are all from the Ethereum ecosystem, including: Aave, MakerDAO, FRAX. At present, these protocols have basically entered the stage of multi-chain development, so the source of income is not limited to the Ethereum mainnet itself. As a reference, in the traditional financial market, Lending Club has a price-to-earnings ratio of 29.7 so far, and SoFi has a price-to-earnings ratio of -16.2.

Aave

After hitting a high in the first quarter of this year, Aave's price-to-earnings ratio began to "cut in half" in the second quarter and stabilized at around 22 in the following months. This is partly because the price of AAVE tokens fell in early April, and partly because of the continuous strengthening of the fundamentals of the Aave protocol itself. The protocol GMV has maintained steady growth in the past two and a half quarters, and in the third quarter, which has just passed the halfway point, this data has exceeded the performance of the entire second quarter.

In terms of protocol fee income, Aave has repeatedly hit new highs this year, and its overall performance is close to the level of the previous bull market, which is relatively rare in the current DeFi projects. From the source of fee income, Aave, like Uniswap, mainly relies on the on-chain activities of the Ethereum mainnet. In Aave's overall market, Ethereum V3 accounts for more than 13.9 billion, accounting for 72% of GMV.

Since the end of last year, Aave's user activity has been growing steadily, and even the cooling of the market has not stopped the development of this trend. From the perspective of user behavior, user deposits account for the absolute majority, because many people regard Aave as a relatively safe on-chain interest-earning channel.

Aave protocol fee income and protocol profit

However, it is worth noting that compared with Uniswap, Aave's growth in the Base ecosystem is more significant. In the past period of time, Aave has been creating a new high in daily new users in the past two years, and a large part of the rapid growth comes from the Base ecosystem. From May to July, when the market was relatively cold, the growth rate of new users of Aave in the Base ecosystem significantly exceeded that of other ecosystems, and in terms of the number of unique wallet addresses of the V3 version, Base has also become the ecosystem with the largest number of Aave users, accounting for 29.8%.

Top: Aave protocol daily new users; Bottom left: Aave user activity and interaction behavior breakdown; Bottom right: Aave user ecosystem source

On the other hand, the Aave community's proposal on "activating fee conversion" at the end of July is also an important reason for the recent strong performance of AAVE tokens. The proposal hopes that the protocol will initiate a fee conversion mechanism and repurchase AAVE tokens from the open market to return the value of the protocol to the tokens. At the same time, the news that Aave made a huge profit of $6 million during the on-chain liquidation in August further increased the expectations of this proposal.

Smart money in the market is obviously more sensitive to these signals. Many addresses have bought AAVE in large amounts since the beginning of the month, making the token enter the "Smart Money Inflow List" many times. Recently, a whale spent 4,000 stETH (about 10.4 million US dollars) in one day and bought nearly 80,000 AAVE at an average price of 135 US dollars. This optimistic sentiment is also reflected on social media, with more and more tweets "calling AAVE". However, in terms of PE, the current price of AAVE tokens has achieved a reasonable market valuation for Aave as a leading lending protocol, and there is only room for expectations and speculation.

MakerDAO (now Sky Protocol)

MakerDAO's PE value has been relatively stable this year, remaining around 8 for three quarters. This is a relatively low level in the history of project development, second only to the fourth quarter of 2023, when MakerDAO's price-to-sales ratio was only 6.3. At the same time, MakerDAO GMV has also remained at a stable level, which is almost the same as the four quarters of last year.

According to makerburn.com data, the PE value given by MakerDAO is 31, which is at a high level in the past year, but from the perspective of protocol revenue, Maker's revenue has quickly returned to the original downward channel after a surge at the beginning of the year. This means that from the perspective of MKR token prices, the market has not lowered its expectations for its valuation due to the decline in Maker protocol revenue.

MakerDAO officially announced the correlation between P/E and annualized profit of the protocol

MakerDAO can be said to be the most profitable DeFi protocol besides Uniswap. Its main sources of income include RWA income, stability fees paid by users, and liquidation penalties. Thanks to the RWA shift in 2022, MakerDAO allocated 80% of its funds to short-term US Treasury bonds and 20% to investment-grade corporate bonds to obtain interest income. This not only drives an increase in overall fees, but also gives MakerDAO a more stable and diversified source of income. Judging from MakerDAO's current income types, RWA accounts for the vast majority of its income.

Breakdown of MakerDAO Protocol Revenue Sources

In the second quarter of this year, MakerDAO's revenue reached $85 million, a record high, but the current MakerDAO fee income has fallen compared to the better market conditions in March. So far, MakerDAO has generated profits of approximately $61.875 million in the third quarter of this year. Stability fee income is $227 million, liquidation income is approximately $3.73 million, Uniswap transaction fee income is approximately $1.65 million, DAI expenditure is $40.71 million, MKR expenditure is $8.586 million, and DSR expenditure is $120 million.

MakerDAO Protocol Balance Sheet

In addition to RWA, the hype narrative about the "Maker split" has also fueled market expectations for the MakerDAO protocol itself. Last year, MakerDAO launched its Endgame plan to reduce costs and increase efficiency, launching upgraded versions of DAI and MKR, NewStable (NST) and NewGovToken (NGT), and also launched the first SubDAO SparkDAO to expand the ecosystem.

On August 27, the Maker protocol was officially renamed Sky, launching SKY as the new native governance token, and DAI was also renamed USDS; each MKR token can be upgraded to 24,000 SKY tokens, and DAI will be converted to USDS on a 1:1 basis.

After the expected split, MakerDAO's valuation may have lost an important expected push, and the market has also had concerns about Maker's "centralization". Maker co-founder Rune Christensen clarified that only USDS will have the freezing function, but this also further confirms Maker's subsequent RWA shift, because if Maker wants treasury bond returns as support, even through secondary treasury bond transactions, it must have freezing functions and VPN area blocking functions.

FRAX

Frax Finance is a DeFi application that integrates multiple product lines such as "stablecoins, trading loans, LSD, RWA, L2", etc. It has issued assets such as FRAX, FPI, frxETH, sFRAX, FXB, and built application scenarios from lending to chains around these assets. At the beginning of its launch, Frax Finance had gained an absolute advantage in Curve War with frxETH and was considered one of the most innovative DeFi products. Frax Finance continued to innovate in this cycle and bet on Fraxtal, but the effect was not satisfactory.

Frax Finance's market value began to decline after entering the second quarter. The FRAX token fell by more than 70% in half a year, while the protocol revenue experienced a period of increase, causing Frax Finance's PE to fall by 83% in the second quarter. In the past two months, FRAX's decline has slowed down, protocol revenue has also grown slowly, and the PE ratio has rebounded.

In addition to the gas fees charged by Fraxtal, Frax Finance's revenue channels include treasury bond income, AMO, and ETH LSD. FRAX and FPI are two stablecoins in the Frax Finance ecosystem. FRAX is pegged to the US dollar at a 1:1 ratio. Its current market value is $640 million, ranking eighth in the stablecoin market, which is about one-eighth of DAI's market value. FPI is a stablecoin pegged to the average of the US CPI-U. Its current TVL is $97 million. The two together only account for 0.4% of the stablecoin market.

Frax Protocol Revenue and TVL Correlation with Market Value

In addition to stablecoins, Frax Finace's performance in the spot trading and liquidity staking markets is not as good as before. Fraxswap charges a 0.3% handling fee for each transaction. Since the TVL fell below $60 million, this part of the fee has remained between $1,000 and $5,000. DefiLlama data shows that the estimated annualized fee is $1.8 million. Frax Ether's daily revenue has also been on a downward trend this year, with an annualized revenue of $1.43 million.

Top: Fraxswap TVL and revenue changes; Bottom: Frax Ether TVL and revenue changes

With no breakthrough progress in existing businesses, Frax Finance turned its attention to chain issuance. In February this year, Frax Finance launched the modular blockchain Fraxtal, hoping to capture block fees and open up new sources of income. Frax Finance also integrated all tokens in the ecosystem into the Fraxtal application in order to achieve a positive cycle. frxETH is used as a gas payment token, and FXS is the sequencer staking token of Fraxchain. Users can also stake veFXS on Fraxtal, while veFXS could only be staked on the Ethereum mainnet before.

However, after the launch of Fraxtal, it only accounted for $13 million in daily trading volume in Fraxswap's chain trading volume, which is comparable to the trading volume data of Fantom, Avalanche and other chains, and did not reflect the liquidity advantage of "own chain". Fraxtal's activation effect on frxETH and veFXS is not obvious. The supply of frxETH has been on a downward trend since the beginning of the year, and the price of FXS has also fallen rapidly since February, with a drop of nearly 50% in two months.

Left: Changes in the proportion of Fraxswap's transaction volume on each chain; Right: Changes in frxETH supply

In addition to Fraxtal's efforts, Frax Finance also resumed its proposal to distribute protocol fees to veFXS holders in April. After the fee switch was turned on, Frax Finance said that veFXS stakers' returns increased 15 times. From the data, veFXS's APR did surge significantly from April to May, reaching a high of nearly 16%. But it soon fell sharply and is currently less than 2%.

Left: FXS price trend; Right: veFXS APR change

In general, a P/E of 50 indicates that the market still has high expectations for Frax Finance's future growth and is optimistic about its relatively comprehensive product layout in the DeFi field, but Frax Finance's current business performance and revenue decline trend do not support this high valuation. Frax's profitability is under pressure. In the highly competitive DeFi market, building an L2 can only consume Frax Finance's energy and market attention.

Liquidity Staking

The liquidity staking field selected head protocols including LSD and LRT, including: Ethereum ecosystem liquidity staking protocol Lido, interest rate derivatives protocol Pendle; Solana ecosystem liquidity staking protocol Jito.

Lido

In terms of financial reports, Lido may be the "best looking" in the DeFi field. Since the source of income comes directly from the release of PoS, Lido continues to create considerable profit returns by relying on the scale effect. At present, Lido occupies 28.5% of the entire ETH staking market, and the protocol collects 10% of the ETH staking income, totaling US$175 million as of writing.

From the perspective of PE value, the market's valuation expectations for Lido are still shrinking, from 31.6 in the first quarter to 18.7 in the second quarter. The main reason is of course the overall decline in the crypto market, but in the current third quarter, the PE indicator has further fallen to 13.7, which to a certain extent reflects the market's re-evaluation of the development pattern of the staking and re-staking track.

Building a monopolistic business model in a decentralized world has always been an important reason for Lido to be criticized. Many competitors have also used this to play their own marketing cards and continue to snatch users from Lido. It must be admitted that this track is far from entering the final stage. New LSD and LRT protocols are still emerging, and Lido seems to be unable to keep up with the pace in the rapidly changing market trends. This can also be seen from Lido's customer acquisition cost. Although the revenue of the protocol continues to grow, its customer acquisition cost (also the difficulty of acquiring customers, the red part in the figure below) is also continuing to increase.

Lido Protocol Expenditure and Net Profit

In the past, the market positioned Lido as the absolute leader in the liquidity staking track, but with the emergence and development of the decentralization narrative and the re-staking track, Lido's position has been shaken. In addition, the market's emphasis on protocol revenue generation and token value feedback has become increasingly strengthened. As another mainstream governance token without value capture, LDO is also receiving doubts from investors.

Jito

Jito is the first protocol in the Solana ecosystem that combines MEV solutions and liquidity staking business. It also uses MEV income as staking rewards, increasing protocol staking income. With the substantial growth of the Solana ecosystem in this round of the market, Jito's MEV and liquidity staking businesses have both achieved rapid growth. Compared with Ethereum, Solana's liquidity pledge development started late. Jito, as a new force after the recovery and rise of Solana's ecology, was officially launched in December last year. With the airdrop incentive, Jito quickly became the top DeFi protocol in the Solana ecosystem.

However, with the end of the bonus period at the beginning of the project and the increase in competitors, the market's valuation expectations for Jito are gradually returning to normal levels. Since the first quarter, when Solana's ecology was hot, Jito has just completed the airdrop and has been launched on major trading platforms, with a PE value of up to 534. However, after the market sentiment calmed down in the second quarter, Jito's PE value fell back to 153, and is currently stable at around 120. However, Jito's GMV is also increasing steadily, and the third quarter has not yet ended and has exceeded the total amount of the second quarter.

Currently, the liquidity pledge ratio on Solana has increased from about 2% in the first half of 2023 to the current 6%. In terms of the market share of LST assets, stSOL and mSOL used to share the world, but with Lido's withdrawal from the Solana ecosystem, Jito has become a latecomer. At present, JitoSOL's share is close to 50%.

However, the current farming channels for LST assets on Solana are not abundant, and without the temptation of sufficient yield, users do not have a strong demand for holding LST assets. However, in July this year, Jito announced the launch of Jito Restaking, a staking infrastructure platform that supports hybrid staking, restaking, and LRT modules, as well as AVS modules. This is equivalent to becoming the EigenLayer of the Solana ecosystem, which means that JitoSOL still has a lot of room for development in the future.

In addition, the MEV memory pool income was once the moat supporting Jito's ecological niche. It extracts 5% from the MEV tips paid to Solana validators, and part of the fees will also be allocated to JitoSOL. Pledgers can not only get SOL staking rewards, but also additional MEV rewards. However, data shows that from the current number of SOL staked in Jito, the MEV rewards obtained are relatively small.

Left: Breakdown of Solana liquidity staking market share; Right: Jito liquidity staking fund size and MEV fee income

Jito’s pseudo memory pool setting once made it a unicorn project in the Solana ecosystem, but in March this year, Jito suspended the pseudo memory pool function provided by the Jito block engine, but Jito searchers can still submit other types of MEV transaction bundles that do not rely on the memory pool Stream, such as arbitrage and liquidation transactions.

At the end of April, Jupiter launched Jito Bundles Tipping to combat MEV attacks. Since May, Jito Tips has gradually increased its share in the Solana network, and users are increasingly choosing to pay tips to get a better trading experience, but Jito Labs' share of value distribution has remained at around 2%.

Left: Sources of Solana on-chain transaction volume (traffic); Right: Solana on-chain value (income) distribution flows

On July 28, Jito's fee income reached $3.27 million, surpassing Lido's $2.94 million, becoming the protocol with the highest fee income among all blockchains on that day. It can be foreseen that Jito, as one of the infrastructures of the Solana ecosystem, will still have a relatively optimistic outlook for future development. However, its governance token JTO currently has limited value capture capabilities besides governance functions. From a PE perspective, what we need to consider is whether the $3 million in revenue and the so-called leading position can justify its PE valuation of over 100?

Pendle

Pendle Finance is a pioneer in the on-chain interest rate derivatives market. In 2023, this market experienced significant growth. Pendle's circulation PE index reached 555 in Q4 2023, and experienced a sharp decline to 77.9 in the first half of 2024, and recently rebounded to around 180.

The Ethereum staking boom in April brought a huge amount of liquidity funds to Pendle, and this prosperity lasted until early June. Most of the transactions on Pendle are concentrated on Ethereum and its related re-staking tokens. The prosperity during this period depends on the airdrop incentives of LRT protocols such as Etherfi, Ethena and Renzo. These protocols have given 2-4.5 times the airdrop points multiplier to the liquidity providers on Pendle, which also paved the way for the future business development of Pendle.

Pendle re-staking related liquidity pool fund reserve breakdown

Since the third quarter, the end of the airdrop of various LST protocols and the expiration of multiple financial products on Pendle have brought liquidity tests to Pendle. At the end of June, Pendle's TVL experienced a sharp drop from US$6.6 billion on June 27 to US$3.9 billion on July 1, and the protocol revenue was also cut in half. Specifically, on June 28, $1.3 billion of eETH (Ether.fi's LST token) and $700 million of WETH flowed out of Pendle, and there are only $445 million of eETH on Pendle at present.

Top: Pendle protocol revenue and TVL correlation with market value; bottom left: TVL changes of Pendle's liquidity pools; bottom right: Pendle's capital inflow and outflow breakdown

In terms of protocol revenue, Pendle's cumulative revenue is about $12 million, and the revenue growth rate has slowed significantly since July. 20% of Pendle's revenue belongs to liquidity providers, and the rest is distributed to $vePendle holders. In the past three months, vePENDLE's basic APY has been between 0.8% and 2.5%, and the maximum APY has fluctuated between 25% and 150%, reflecting that vePENDLE's earnings are very unstable.

Top left: Pendle protocol cumulative fee income and profit; Top right: Pendle chain cumulative fee income source breakdown; Bottom: vePendle basic APY and maximum APY changes in the past 90 days

From Pendle's rise to its "failure", it can be seen that Pendle is currently very dependent on the development of the LRT track. Although in the long run, the LRT track still has a lot of room for growth, but in the context of insufficient new liquidity, the prosperity of the LRT protocol in the first quarter is more like a flash in the pan. Pendle needs to choose new growth channels and make good use of its leading advantage in the interest rate derivatives track.

Derivatives Market

In the derivatives market, we selected the top protocols with the highest trading volume and the emerging protocols that have been launched recently as a reference for the development and changes of valuation in this field under the concept of CLOB (central order book), including: dYdX, GMX, Orderly Network. Because some top protocols have not yet issued tokens, such as Hyperliquid, they are not included.

dYdX

Among decentralized perpetual trading protocols, dYdX's trading volume ranks at the top all year round, and it is a well-deserved top protocol. However, since its launch a few years ago, dYdX has also faced severe transformation challenges. Since the beginning of this year, dYdX's protocol revenue and token market value have continued to decline, with protocol revenue falling from $139 million in the first quarter to $75 million in the second quarter. As of now, the third quarter revenue has just exceeded $25 million, and there is no sign of stopping the downward trend. The current P/E ratio is 39.5.

In October 2023, dYdX started the v4 upgrade, realizing the transition from the Ethereum Layer 2 network to an independent blockchain in the Cosmos ecosystem. The v4 upgrade will make dYdX fully decentralized and community-operated, and DYDX will become a real income token (Real Yield Token). However, in terms of token prices, DYDX only rose at the beginning of this year, and has continued to fall since March, and is now 77% below its high.

A major driver of the token's decline is the sharp decline in dYdX's trading volume. Although V4 has improved performance, overall, dYdX's current daily trading volume is far from the $6 billion peak of the protocol. It currently only maintains a level of $400 million. After removing wash trading, this figure has fallen to less than $30 million.

Left: dYdX V3 and V4 trading volume; Right: dYdX protocol real trading volume

From the source of fees, dYdX Chain's fees have gradually become the main source of revenue for the protocol. The fees generated by the two in August were $3.89 million and $1.19 million respectively, which shows that dYdX's migration plan was successful. However, in the current stock market competition of derivatives protocols, dYdX has begun to show signs of decline. From the perspective of market share, dYdX has been continuously degenerating from its absolute monopoly in the past, and has been seized by emerging products such as Hyperliquid, Jupiter, and GMX. Its current trading volume accounts for less than 20% of the total volume of Perp DEX.

Top left: dYdX protocol TVL breakdown; Top right: dYdX protocol fee income source breakdown; Bottom: Changes in the market share of perpetual contracts

In addition to the obstruction of market growth, the token DYDX is also facing the selling pressure of large unlocking. DYDX will begin unlocking large amounts of tokens on December 1, 2023, with 15% of the total supply unlocked at once, and the remaining 35% unlocked in batches every month, to be released within 6 years. These token shares mainly come from investors, founders, consultants and employees, accounting for up to 84.41% of the circulating supply. Currently, 71.06% of dYdX tokens have not been unlocked.

Top: DYDX token unlocking schedule; Bottom: DYDX unlocked token ratio and share ownership breakdown

During this cycle, dYdX's performance can be regarded as "stable", and it has always maintained a leading position in the perpetual contract track, but the large-scale unlocking of such "old debts" limits the development space of DYDX. The dYdX official also gave corresponding restrictions. Starting from July 1, the monthly unlocking volume of DYDX has been reduced from 33 million to 8.3 million, a decrease of 75%. However, under the fierce competition, in addition to eliminating the hidden dangers of selling pressure, dYdX needs to find its own incremental market besides "making chains".

GMX

As one of the most outstanding protocols in the bear market, GMX adopts a unique mechanism to allow users to trade with a basket of funds GLP (GMX Liquidity Pool). The perpetual product JLP of Jupiter, the aforementioned Solana ecological DEX platform, draws on this mechanism of GMX.

GMX's PE value has been declining slightly in the past three quarters, maintaining at around 10. GMV performed poorly due to the poor market conditions in the second quarter. As of now, the total GMV in the third quarter has surpassed the total amount in the second quarter.

Last August, GMX launched V2, which maintained a balance between long and short positions by modifying the fee mechanism, so as to reduce the probability of systemic risk in GMX when facing drastic market fluctuations. Currently, the trading volume is mainly concentrated in V2, but judging from the 7-day trading volume, GMX has ranked tenth in the derivatives market.

Perp DEX trading volume ranking in the past 7 days

All fees generated by GMX's Swap and leveraged transactions are allocated to GMX stakers and GLP liquidity providers, and the income distribution model is 27% to GMX stakers, 63% to GLP providers, 8.2% to the protocol treasury, and 1.2% to Chainlink.

In July, the GMX community passed a proposal to "change the income distribution model to repurchase and distribute GMX", suggesting that the current income distribution model of GMX be changed from "repurchase ETH and distribute ETH" to "repurchase GMX and distribute GMX".

The proposer said that this was done to increase market confidence in GMX through continuous buying, and because there are some zombie staking accounts in GMX, distributing rewards as GMX will help reduce the amount of GMX in circulation and put more GMX into a dormant state, thereby stabilizing prices and supporting the market. Although the proposal also states that users will be provided with the option to convert their GMX rewards to other tokens such as ETH, in a sense it can be said that GMX currently only has repurchases but no dividends.

Orderly Network

Orderly Network is a full-chain perpetual contract trading platform established in April 2022, jointly incubated by NEAR and WOO Network. It combines the liquidity and transaction speed advantages of CEXs while retaining the transparency, sovereignty and on-chain settlement characteristics of DeFi, aiming to build an efficient trading ecosystem that can meet users' needs for liquidity and speed while maintaining decentralization and transparency.

On August 26, Orderly Network completed TGE and started staking the native governance token ORDER. The PE value was estimated to be 16 based on the opening FDV and the profit of the quarter. As a project that has been in operation for a long time but has just started the token issuance, this value reflects the market's stable expectations for Orderly.

However, in the past quarter, although Orderly's total revenue has been growing, Orderly's TVL and revenue growth rate have been on a downward trend, and the corresponding amount of deposit funds has also been decreasing. On the one hand, it is affected by the overall market conditions, and on the other hand, it is also related to the expected landing of Orderly's coin airdrop.

Left: Orderly protocol capital flow and TVL changes; Right: Orderly protocol profit

The current total number of user accounts of Orderly Network exceeds 420,000, and the transaction volume in the past 24 hours has reached 100 million US dollars. BTC and ETH are the assets with the largest transaction volume on Orderly. Liquidity fragmentation and inefficient utilization have always been the drawbacks of the DeFi field. Different block networks are independent, and funds are locked in a single network and cannot be shared. Orderly Network uses the "cloud liquidity" mechanism to uniformly manage and allocate liquidity resources to solve this problem. At present, WOO, which uses Orderly for transactions, has become the DeFi front-end that contributes the most to Orderly Network transaction liquidity.

Top: Orderly perpetual contract trading pair breakdown; Bottom left: Orderly trading volume (traffic) source breakdown; Bottom right: Orderly value distribution (profit) flow

Currently, Orderly has been integrated with 41 crypto projects, which is consistent with its main DEX backend service concept, and its intention to open the era of on-chain transaction rebates and customized services for large customers may also bring certain added value to its project expectations. From a PE perspective, Orderly has a certain cost-effectiveness compared to other competitors in the same track, and there is also an expectation of listing on a first-tier trading platform after the announcement of the completion of financing.

Are DeFi coins overvalued?

When we analyze the fundamentals of tokens and projects, we often use the logic and indicators of traditional financial markets to compare and predict price fluctuations, but at the same time we deny the possibility of the development of Token as a new type of stock that is more innovative and composable at the underlying technical level and application scenario level. This denial comes from the lack of confidence in the application potential of the protocol itself on the one hand, and the great fear and compromise of supervision on the other hand.

In the current crypto world where narratives are coming one after another and tokens are changing with each passing day, "looking for the next narrative" can no longer serve as the underlying logic to support the advancement of the industry. Under the macro background of the end of the whaling era, the crypto industry is also returning to the value thinking of intensive cultivation. Perhaps, finding a good business in a market full of wine and women is the sustainable long-term way. But even so, investors still need to solve another ultimate question: Do these businesses really have anything to do with the tokens in my hand?

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