Coinbase Weekly Report: The market may reach a turning point this week

Original title: Weekly: Following the Undercurrents

Original author: David Han (Institutional Research Analyst)
Original translation: DAOSquare

Key Points

· While the dollar's momentum has stagnated, we believe the upcoming PPI and CPI data on May 14 and 15 will likely determine the dollar's next major direction. We believe the Fed will continue to prioritize fighting inflation over early signs of a cooling labor market.

· Grayscale Bitcoin Trust (GBTC) saw inflows in its first two days since its transition to an open-end fund, marking an important completion of the asset's structural capital rotation.

· Aave recently revealed plans for the fourth iteration (V4) of its protocol, which brings many new architectural improvements as part of the Aave 2030 long-term vision, with a focus on supporting their GHO stablecoin, which is scheduled to launch in Q2 2025.

Market View

The continued lack of clear macro direction has led to a continued decline in Bitcoin in recent times. Altcoins have also shown the same situation, with correlations within the crypto asset class still close to their highest point since the beginning of the year. The current uncertainty in macro factors proves our thesis in our April Outlook that macroeconomic conditions will continue to dominate BTC performance (with altcoins following closely behind), and the market is beginning to look for other catalysts besides the Bitcoin halving as US spot ETF inflows taper off. Although the ECB and other central banks have reiterated their plans to cut interest rates in the summer, higher-than-expected US inflation data has still raised market concerns about the Fed delaying rate cuts. Expectations of extended US rate cuts have led to a stronger dollar, which in turn has weighed on the broader crypto market due to its key role as the quote currency on most crypto exchanges.

However, the dollar's strength has stalled following a more dovish-than-expected Fed meeting, with market expectations (based on Fed Funds futures) for the first rate cut shifting from November to September 2024 following weaker-than-expected nonfarm payrolls data on May 3. Higher-than-expected initial jobless claims on May 9 further added to the drive for faster rate cuts, as the Fed has a dual mandate to not only fight inflation but also keep unemployment low.

Nevertheless, we do not believe that changes in the US unemployment rate (currently at 3.9%) will be a focus for the Fed in the near term, as it remains near historic lows. In fact, we still believe that the US economy will be supported by technological progress and government spending, and is not on the verge of entering a contraction period. At the next Federal Open Market Committee (FOMC) meeting, we believe that the Fed's attention and rhetoric will remain focused on inflation indicators, which highlights the importance of the upcoming PPI and CPI data on May 14 and 15 as expected macro catalysts, especially if they are higher than expected.

Separately, Grayscale Bitcoin Trust (GBTC) saw inflows in the first two days since its transition to an open-end fund. Although the source of these inflows is unclear, as they have a higher management fee (1.5%) compared to similar spot products (less than 0.5%), this development marks the completion of a structural capital rotation. We believe a significant portion of early GBTC outflows were related to bankruptcy proceedings (e.g., Genesis and FTX), profit realization on GBTC discount trading (40% discount to NAV a year ago), and a shift to low-fee products (<0.5% vs. 1.5%). While we have previously cautioned against using flow data as a preferred indicator of future price action, going forward we do not expect structural distortions in flow data.

On-Chain: Aave’s Progress

Meanwhile, Aave recently revealed plans for the fourth iteration (V4) of its protocol as part of the Aave 2030 long-term roadmap. The proposed V4 incorporates architectural improvements, including a unified liquidity layer (for flexible scaling of borrowing functionality), fuzzy rates (for interest rate curves previously controlled by governance), and liquidity premiums (adjusting borrowing rates based on collateral composition). V4 also focuses on strengthening the use of its GHO stablecoin and incorporates other improvements such as improved risk management and liquidation engines.

While the proposed mainnet launch date is in Q2 2025, we view this announcement (along with other major announcements from existing DeFi protocols like Uniswap and Maker this year) as an early roadmap for DeFi protocols to mature in their core functionality, even as they maintain market dominance and continue to innovate in other areas. This could set a precedent for new protocols in terms of decentralization, long-term token utility, and iterative feature rollouts.

Scaling DeFi protocol functionality is a technical challenge, especially compared to traditional web2 companies whose mantra is to "move fast and break things." Successful DeFi protocols rarely scale their initial architecture in a way that is transparent to end users. Instead, they deploy new versions and incentivize active liquidity migrations. This applies not only to Aave, but also to other leading protocols like Uniswap, Curve, Pendle, and others. These cross-version liquidity migrations are a difficult task as users need to actively switch. In fact, despite launching in 2022, Aave V3 did not surpass Aave V2 in total value locked (TVL) until September 2023. We believe that the adoption cycle of Aave V4 may also go through a similar process.

Despite the large number of functional improvements in the new version, the cautious migration of liquidity highlights the relative importance of the Lindy effect in the DeFi market. That is, the trust gained from market time seems to be more important than new mechanisms that may be attractive to a small group of users. The adversarial environment of decentralized technology means that time is often the most reliable way to determine the security of a protocol, more important than audits and theories. We believe this highlights the characteristics of smart contract immutability and the financialization of Web3 products, that is, how to maintain stable security amid rapid innovation. As a result, we believe that the long-term adoption cycle of crypto products may be different from what we see in the Web2 market. For end users, the consequences of web3 financial vulnerabilities are far more serious than web2 data vulnerabilities that do not disrupt core application functionality.

In addition, the Aave 2030 roadmap seems to compete with Maker's Endgame, especially Aave's renewed focus on its GHO stablecoin. Many of the elements proposed in Aave 2030, such as Aave’s specific network, GHO’s cross-chain liquidity layer, augmented reality asset (RWA) integration, and updated protocol branding, are reminiscent of Maker’s Endgame vision.

With TVL of $10.5 billion and $8.2 billion, respectively, Aave and Maker are both important sources of lending in the space. However, while Maker borrowers are limited to DAI, Aave supports lending across a wide range of assets beyond its own GHO stablecoin. Given that DAI’s market cap has only grown from $5.3 billion to $5.4 billion year-to-date, questions remain around its ability to increase cross-chain adoption and gain market share. That said, it’s interesting that Aave appears to be focusing on the decentralized stablecoin space, even though the market in that space has been shrinking relative to centralized stablecoins like USDC. With DAI demand on hold, Aave actually surpasses Maker as the largest lending DeFi protocol in early 2024. However, we are still in the early days of web3. While Maker’s Endgame plan and Aave’s 2030 roadmap provide a promising vision for the future of these protocols, we believe these developments may be overlooked by the market in the short term as the macro environment remains the anchor of attention in the short term.

Crypto and Traditional Finance

(As of 4pm EST on May 9)

Source: Bloomberg

Coinbase Exchange and CES Insights

Crypto traders are looking for the next market catalyst. This upcoming week, the market will see US inflation data and hear a speech from Federal Open Market Committee (FOMC) Chairman Jerome Powell. Unless there are any major surprises in the data or the Chairman's tone, we will likely see volatility continue to compress. In the absence of clear macro or crypto-specific catalysts, the correlation between traditional markets and crypto assets will likely continue to rise, with crypto taking the US stock market as a reference. The 13-F filing deadline is May 15, and many companies will wait until the last minute to submit their applications. It will be interesting to see who takes a spot in the US spot Bitcoin ETF. But unless a very surprising name emerges, it is unlikely to be a market-moving event in our opinion. As for ETH, as the May 23 deadline for the VanEck spot Ethereum ETF application approaches, it may continue to lag behind. In speaking with traders, expectations for approval are mostly low.

Coinbase Platform Trading Volume (USD)

Coinbase Platform Trading Volume (Asset Ratio)

Funding Rate

Notable Crypto News

Institutions

· Global Crypto Companies Turn to Hong Kong for Refuge and Opportunities (TechCrunch)

· Mastercard Teams Up with U.S. Banking Giants for Tokenized Settlement Trial (Cointelegraph)

Regulation

· U.S. Securities and Exchange Commission (SEC) Issues Wells Notice to Robinhood Crypto for Suspected Securities Violations (The QCP receives in-principle approval from Abu Dhabi regulator (Coindesk)

· SEC files final response in Ripple XRP case (Cointelegraph)

General

· Friend Tech sees resurgence in activity following V2 launch (The Defiant)

· Bitcoin network surpasses 1 billion on-chain transactions (The Defiant)

· Vitalik Buterin proposes EIP-7702, aiming to improve account abstraction on Ethereum (The Block)

Coinbase

· Coinbase benefits from ‘hostile regulatory environment’: Bitwise (The Block)

Global

Europe

· UK FCA says 30% by 2023 of financial crime operatives come from crypto firms (Crypto News) · BNP Paribas, Europe’s second-largest bank, bought shares of BlackRock’s spot Bitcoin ETF: SEC filing (Decrypt) · Crypto banking firm BCB Group receives regulatory approval in France as an electronic money institution and digital asset service provider (BCB Group) · Vodafone looks to integrate crypto wallets with SIM cards (TradingView) · German central bank chief calls for rapid CBDC adoption to remain competitive (CryptoSlate) · Hong Kong spot Bitcoin and Ethereum ETFs see $11M in trading volume in debut (Watcher Guru) · Chinese police arrest suspect who created numerous fake identities to claim STRK airdrop (Crypto Briefing) · PwC China and Xalts Strategic partnership in blockchain and tokenization (RWA Tokenizer)

· Australian Tax Office asks crypto exchanges to hand over transaction details of 1.2 million accounts (CoinDesk)

· South Korea bans cryptocurrencies in updated donation law (CoinTelegraph)

Big stories of the week ahead

Original link

欢迎加入律动 BlockBeats 官方社群：

Telegram 订阅群： https://t.me/theblockbeats

Telegram 交流群： https://t.me/BlockBeats_App

Twitter 官方账号： https://twitter.com/BlockBeatsAsia