Transcription
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Hi, I'm Ral Pal, and welcome to my show, The Journeyman, where I travel to that nexus of understanding between macro, crypto, and the exponential age of technology. Now, I know most of you are focused on crypto right now, and there's no better person to talk to than Jamie Coots. Jamie runs crypto analysis at Real Vision. It's in Real Vision Pro. I found him when he was working at Bloomberg, and he's amazing at what he does. And I wanted Jamie to come and show what his ideas were, where he thinks we are in the cycle, what's going on, and where the opportunities lie. So, I hope you enjoy the conversation with Jamie Coots.
Join me, Ral Pal, as I go on a journey of discovery through the macro, crypto, and exponential age landscapes. In The Journeyman, I talk to the smartest people in the world so we can all become smarter together. Jamie Coots, welcome back, my friend.
Good day, Ral. Nice to be back again, mate. Yeah, look, uh, you and I haven't caught up properly. We've been catching a bit of slack, but not had a proper conversation. So, it's always good for people to listen into what you're thinking. Um, you know, what you've been writing about, where your head's at. So, where do you want to start?
I think just top-level, you know, everybody always wants reassurances. Is it over yet? You know, are we all doomed? What's going to happen? Have I got the wrong tokens? You know, there's just so much fear in the space, and you know, there's a lot of hand-holding that needs to be done. So, I guess we start at the top level of like, where the hell are we?
Yeah. Well, I mean, let's talk about like market psychology. Um, I think, you know, every cycle is different but the same, and it just feels like the scar tissue from the last cycle, which we all felt, is manifesting in a lot of the commentary that's coming through at the moment.
Yeah, agree. Now, it's a four-year cycle. This is when it has to end. Therefore, it will. You know, last cycle it was like, to the moon forever, because no one was keeping an eye on or no one really, well, there were people such as yourself who are really getting a good handle on it, and it was really in early. No, even I failed in the last cycle, 'cause I thought there was another leg to go. So, yeah.
Yeah. So then everyone's sort of, I, I guess, truncated this cycle, and for good reason. And it's not without, you know, that there are frameworks out there that are credible, um, that should say that, you know, this is, you know, a time when things start to get, you know, peakish. Um, but we haven't had the typical business cycle, and not many people do that business cycle analysis that you and Julian do. So, that framework that underpins everything at Real Vision and GMI, um, is sorely missed elsewhere. But it just feels that, you know, it's a mechanical response to like the market that this is now when we should be peaking, and it's, it's been, um, yeah, interesting to see the commentary flying on Twitter and everyone else, and even within our membership here about, you know, is the top in? So, yeah.
I, I'm always fascinated by market psychology and, you know, and how it, how it manifests in the market. I also think what's quite interesting is that everyone is very attuned to the liquidity cycle aspect now, and how that is going to change the outcomes in the future, as much as we think that, you know, we've still got more to go. Um, and all those things are sort of, they're the unknowns, but the framework that, you know, we have here is, is very, I think, very clear that we have got more to go. Um, I've got a, you know, we've talked about like my Bitcoin cycle risk framework and the topping indicators that I've been building. I mean, they're not screaming at me euphoria. Um, there is definitely, definitely, and I highlighted this in that last report, Ral, um, trend exhaustion signals in the Bitcoin chart and fundamental, um, deterioration as well. But I think that's a function more of the transition into higher beta crypto through ETH, primarily the falling of Bitcoin dominance, which is typical of this point in the cycle anyway.
Right. Yes. Yeah. And, and that transition really started, you know, second quarter, but it was very clear by sort of July when I was on paternity leave that transition had occurred, because I looked at the on-chain data on Bitcoin, the ETF flows between Bitcoin and Ethereum, and obviously the price action, and it very much lines up with, you know, that transition period in the crypto market from Bitcoin dominance to, um, high-quality altcoins, not, you know, a dash for trash sort of market that we saw in 2021 when people were getting stimulus checks, but a high-quality alt season, um, run at the moment. So, that's kind of where I'm at.
And when we talk about the high-quality alt season, I want to see where your head's at. My head's at is quality Layer 1s, revenue-generating projects, and a few big things that capture attention, whatever they may be, that don't come with revenues or anything else, but they capture attention. We're seeing, you know, Hyperliquid's obviously one of them. Maybe Athena's another. Um, we're seeing obviously Sui, Solana. What are you, how are you thinking this next phase, and what are the types of tokens that participate?
Yeah, I like the way that you've just distilled that down into a very clear sort of representation of what really matters. Um, cash flows, you know, are these, are there protocols that are fundamentally strong, meaning that they have cash flows, they have usage, they deliver utility, and have very strong tokenomics? And there are a handful of those, and they are being rewarded by the market, as they should. Um, I always, I've always had this view that as this, as the asset class grows, and as the, you know, for lack of a better term, sophistication of the, uh, the marginal new investor, uh, comes in, that they're going to look at fundamentals more and more. That's always been my base case. Um, and I think that's playing out. I mean, you mentioned Hyperliquid generating a huge amount, you know, generating the sort of cash flow or revenues that would make a, you know, NASDAQ 100 company sort of water like in terms of just the growth. Um, in terms of like the multiples, I know we're not talking like for like, but in the case of Hyperliquid, um, you know, it's trading on a on a revenue multiple that would put it, you know, in the median of a, um, a tech stock in the S&P. Um, but it is those high-quality, um, tokens, um, L1s, and the DeFi protocols, and yeah, the things that will grab attention because, um, that is not going away. Um, memes are definitely not going away. In fact, I've, I'm starting to entertain maybe my first, uh, meme position, which we can talk about later. Um, because I've, by the way, you know, the Doge, um, um, ETF launches tomorrow. So, by the time this is out, it'll have launched, which is interesting. I was going to put in my.
That was the one I was going to put it in my note. That's. Well, we'll talk about that in a bit. Yeah. Yeah.
Um, so, yeah, no, I think it is a, you know, a much more discerning market, and you're not seeing the broad-based rally. I mean, we're still, I think, early stages of this sort of broadening out or alt season, for lack of a better term. Um, but it is going to be a very discerning type rally until we get to the end, when there will be short-term pumps and small caps, real small caps with, you know, no product-market fit, that will start running. Um, and that is on my, you know, that's on my checklist for, uh, a market peak. We're not there yet.
So, let's first talk about Layer 1s. And you and I have kicked this around for a long time. Is I don't believe that revenue is, you know, revenue accrued to the chain itself is the key metric, um, and it confuses people. Um, how do you, how are you thinking about this now?
It is an important metric, um, because it shores up the security of, of the chain. Uh, but at the same time, the, you know, the, the trend is lower C transaction costs. So, the, if you look at revenue as a share of settlement value, that is going to continue to decline. I think it's an important thing to, to understand. Um, but there's probably better ways to synthesize fees as a, in a more of a relative valuation measure, like fees relative to some other aspect that defines value on the chain, that's probably more relevant than just looking at it as in a gross or, sort of a nominal basis. Um, I've started to really dig into a little bit more around some of the valuation frameworks, and, you know, you, you were like one of the guys who came out early with sort of the Metcalfe's Law framework, um, you know, which was modeled on settlement values and daily active addresses. And no doubt that there's like, just models price. Um, a lot of the things though in crypto model price, because, you know, what the metrics that we use are, they're dollar-based metrics of the, or defined in the price of the actual token. So, if the token increases, so does that metric, and it's very hard to disentangle how much of it leads one another or what leads. So, it's, it's, it's the ongoing issue with crypto in that, like, how do you value these? Where is the predictive value in all these on-chain metrics? Um, and I think the jury is still out, but if you look at things like, um, settlement values, right? The set, which is part of your Metcalfe's Law framework, that's in, you know, that doesn't get talked about enough, which is like, how much value is actually moving across these networks? How much of it is stablecoin-oriented? How much of it is just peer-to-peer transfer? Because if not, you're kind of measuring the activity of, of the economy based on the fees that the banks make or something, or the telco providers. That's, that doesn't make sense, right? Because on top of the telco infrastructure, or the, the internet infrastructure, is all of the value that comes on top. And if you don't capture that, then you're not capturing the actual value of the network itself and what you can use it for.
Absolutely. It's a really, it's a, it's a multifaceted approach. So, if you just look at fees, or if you just look at users, you're missing a lot. If you just look at one of these metrics, they're not telling the whole story. And they're also pretty much, at, at every metric can be gamed.
Yeah, that's also the problem. So, you need to have a multifactor approach when looking at this. So, I look at the hardest one to game for an extended period is settlement, because that costs you a fortune. You can game wallet addresses. You can game active wallets. You can game all of that. But it's really hard to game total value transacted or total value settled.
Yeah. Because you're paying, yeah. You're paying a fee on that. Like, someone's paying the fee. Um, now, it, there, there is still scope for some [ __ ] around that as well within chains. Um, because there is, in all of crypto, there's general [ __ ]. General [ __ ] is what you need to assume at all times. You do. You do.
Yeah. Um, so you have to look at all these metrics with some degree of skepticism, but if you can build up a, you know, a patchwork of them to tell, is this network expanding? So, you mentioned like layers, which is, inc is a critical element. So, you've got the fees, which is maybe, in, like, in isolation, just an expression of like rent-seeking, right? But if the number of applications on top of that network are expanding, and the number of interactions between those, uh, applications expressed through diversity of, of transactions. So, borrow, lend, DEXs, per, you know, social applications, and then the settlement value. You get a much more complete picture of, okay, fees are growing, but, you know, as a percentage of the overall value, that might be declining, which means that this chain is, you know, is essentially becoming more efficient. Um, and the tax, or the toll to operate in that network, or in that economy, is declining as a percentage of the overall GDP.
And so, well, that's another way of thinking at it, because you and I have talked about these as economies, and we're looking at GDP, and tax take is not necessarily the best measure of economic activity.
No, it's kind of another way. And you might say the chain, the fees are the taxes, as you said, to operate within the economy, but that's not necessarily the full value that the economy transacts.
Yeah. Like, if, if you compare it to a country, right? So, if it's just, you know, if there are no other alternative countries to go to, then that country has got monopolistic sort of pricing power and will overcharge for services to a point where people start to get fed up and move elsewhere. And that kind of happened in 2020 and 2021. So, yeah. And, and Ethereum knows this, and Ethereum's going through its, you know, its scaling, um, mission, um, and that's why you can see that, um, you know, it's performed very well this year in terms of most metrics. Fees have been strong, but like, fees have actually been declining because they're making those strides to make the, to make costs in the, in the Ethereum ecosystem cheaper. So, that's, that's kind of like a government deregulating the economy, freeing it up, charging lower taxes, you know, creating a better free market economy, because before Ethereum, to your point, back in 2021, with the economic activity that was going there, it was too expensive. It was the, it was the California of the crypto economy, and everyone's like, "Yeah, we love it here. It's amazing, but I can't afford to live here any longer."
Yeah. We just, yeah. We don't like the policy, so we're going to move. And welcome to Solana.
Yeah. Yeah. Or the Layer 2s. Yeah. Yeah. Exactly. You think of the Layer 2s as kind of different states somehow within that equation. And they're cheaper, offer lower tax breaks, but they're not quite as good. There's not as much policing around, so they're not as secure. You know, it's like, it's amazing how similar this is, once you think of it in economic terms as digital economies.
Yeah. Yeah. No, absolutely. And, you know, as more, more value comes on-chain, you know, people will start making these, um, I guess, discernments around which jurisdiction they want to operate in. But I still, but to that point as well, like, I think that it almost gets abstracted away in the end, like, you know, if you look at sort of interoperability protocols that are out there that, s, no one ever speaks about, um, and they're still fairly nascent, um, and there's too many of them at the moment, but, um, essentially now, as an application, right, as a business in the crypto economy, you can, instead of going to Ethereum and building on the Ethereum stack, you go to an interoperability protocol that has the connections into all of the different chains, and you deploy on that interoperability protocol, and, you know, atomically, you launch across all these different chains. Um, so you can sort of see a world where even some of the, um, you know, the tougher choices that developers need to make now about which ecosystem to go first, is kind of, is, is starting to get abstracted away, which is ultimately good for the end consumer, which is us.
So, okay. So, Layer 1s in your models, um, what's looking interesting? What's not interesting right now? We're starting to see picking up of activity overall, but it's still not quite perfect. But, so, what are you seeing in your models?
I, I, I just see that, um, we've got a situation where value is concentrating in the, in the top L1s, um, and I think that it's becoming harder and harder to maintain a thesis around these L2, sorry, these, uh, tier twos in the smart contract platform world, or tier threes, let alone, um, as value does get more concentrated in the, in the larger.
What are the tier one, twos, and threes? Give us examples of them.
So, if you just look at settlement value, um, this is actually in the next report, Ral, um, which we're coming in the next couple of days, but I'd focus in on settlement values, right? So, you know, one half of your Metcalfe's Law model. This is a breakdown in of settlement volumes across L1s and L2s, most of the, most of the large ones. Um, so Ethereum is doing, this is a 30-day median. So, it's, it's about 28 billion per day, which is just, you know, wild when you think about it. Um, Tron, which, you know, has much lower application diversity, it's basically a one-use chain, um, and has, does have governance issues as well. It's not, you couldn't ever claim as, as decentralized as, um, as Ethereum, but it settles about 24 billion. So, right there, you have, you know, the lion's share of all settlement value across the, uh, you know, across the crypto ecosystems. Now, Solana and Sui, which has really raced up the growth rates in SUI this year, have been phenomenal, and I'm trying to dig a little bit deeper in terms of like, where that value, where that value is sort of, um, flowing from and to. I think it's because I did the work on it in GMI and looked at its relative growth versus Solana, you know, because similar fast, performant, modern chains. And I mean, it's massively outstripping the speed, obviously, it's an earlier stage, so, of course, the rate of change. It seems that it's the Bitcoin settlement layer that's big, plus stablecoins are moving fast, and the DeFi ecosystem is starting to work as well.
Yeah. Big. So, Bitcoin on Sui. Yeah. Yeah.
Well, I mean, the, I was genuinely surprised that Sui had, uh, increased its position in terms of settlement values to where it is now, where it's rivaling, um, Solana. So, that's, that's pretty phenomenal. BNB is still there. Um, you know, it does, and just again, for people to frame this, this is the settlement value of Metcalfe's Law. When you look at Solana, there's more active users. So, of course, Solana is still worth more than SUI, which doesn't have as many active users, even though it's settling the same amount. It's like Doge has a lot of value as a market cap because it has a lot of active users and holders, and less so of the on-chain activity. So, it's like, you can have different variations of this that drives the overall market cap value.
Yeah. Yeah. And there's no, there's no, um, perfect mix as well. I would argue that diversity, application diversity, uh, is a very important metric overall that takes time, uh, and Solana has, because if not, it's like, again, going back to the economic example, it's like the Saudi Arabian economy is just oil. Can be very profitable, very rich, but it's so driven by one factor. So, the more diversified the economy, like the US economy, for example, the better it is. And Saudi Arabia knows this, and for the last 10, 15 years, has been diversifying, uh, its economy aggressively because it doesn't want to be, you know, solely relying on that, on, on a commodity.
Yeah. Yeah. So, I mean, when you look at the, when you look at the settlement, um, values, there are, um, you know, there's a whole lot of, you know, this, sorry, I can't see the chart, but where's Hyperliquid? Because it has shot into almost the top 10. It's now currently larger than, but it doesn't appear so high in settlement volumes, is that right?
Yeah. So, I, I should caveat this too. So, the settlement volume, uh, data is coming from one of the, um, on-chain metric companies, so, um, Artemis. And what goes into settlement volumes are a couple of different things. You've got the stablecoin transfers, you've got peer-to-peer transfers, you've got, you know, the equivalent of like, whatever network the ERC20 token transfers, NFTs, um, DEX volumes. And so, they don't have all of those, all those different columns of settlement values, uh, for all of these different networks aren't being counted up. So, Hyperliquid, when I check the data, they're only capturing the DEX volumes, which is spot volumes, which is not the derivative volumes on top. They haven't captured derivative volumes, but they also have not addressed, um, the peer-to-peer transfer side. But Hyperliquid is a very young chain. So, that is quite small, but it's also being undercounted. So, some of these numbers are probably not 100% reflective of the true state, but I think that they're pretty good proxy for, you know, where things are now. There is a table in my upcoming report which looks at settlement values as well as, uh, applications. So, you know, how many protocols are now on the chain? Because obviously Hyperliquid didn't start as a chain, it started just as a perpetuals, um, trading venue, and then it launched a chain, and then it went after applications. What I'm seeing in Hyperliquid in terms of the growth of applications on that chain after just one year of being around is pretty extraordinary. It's gone from like one application to 40 applications, which, uh, is more than Sui, and it puts it in sort of like top, top five or six. Um, now Sui is just there as well, but then you obviously got BNB, this established, um, players like BNB, Solana, Ethereum, of course, and Arbitrum, Base. Um, but, you know, what you're seeing in, um, these emergent L1s being Sui and Hyperliquid is the net worth growth aspects, which give you confidence that even though you're out the risk curve in them, that you're seeing the kind of growth that we did see in Solana in the previous, uh, in the previous bull market, that, you know, provides confidence that, okay, uh, even though value is concentrating, they are now growing more aggressively or faster than the, the more established L1s, and they will be around, most importantly, in five, 10 years from now.
And how's Avalanche doing? Where does that fit into this? Because this is a name that comes in and out of, you know, tier one.
Yeah. Yeah. I mean, it's, um, I, obviously they're doing some stuff on the DeFi side as well. Uh, and their price has been pumping. They're doing okay on most metrics. Like, I can see growth in.
Do you think of them as a tier one or tier two?
Um, well, I haven't, I guess I haven't really properly defined what tier one and tier two is. I think tier one, based on settlement values, is Ethereum, Tron, uh, and, you know, basically that's it in terms of settlement values. And then after that, you've got BNB, Avalanche, Sui, um, as your sort of tier twos, and Hyperliquid, you could argue is probably tier three based on that metric, but when you holistically look at it, it's a tier two.
Yeah. Which would make sense with. Yeah. Yeah. But I, yeah, I, it's probably, um, underserved by me in terms of analysis.
Okay. So, we've looked at that and kind of understood what's driving this, and I think that that's really useful work that you've done, because it, it really kind of frames it pretty clear. And yes, we've got the other side of the equation to look at, but it makes sense of the market caps. Uh, where is Tron? I'm just going to check my CoinMarketCap ranking. Tron is number 10. Okay, fine. So, it has one application, as you said, um, but it does a lot of settlement, but not that many end users, because I guess a lot of the users are the stablecoin companies themselves, like Tether. So, that's a one user base. Does that make sense?
Yeah. And there's also, you know, Tether's launching its own L1. So, look, I mean, I've, I've liked Tron. Tron's been an outperformer. We've, I've written it up in the, um, you know, yeah.
You spotted this trend a while ago with with the Tron crazy. Like the Tron chart is phenomenal. No one talks about it because it's got great, um, tokenomics, but it has got all these other flaws as well. The tokenomics are so strong. It's got a huge amount of users and it burns. So, ultimately, you've got a very supportive tokenomic, um, sort of policy, and the price chart on on, um, Tron is a very low volatility uptrend. Um, you know, shockingly so for crypto. So, yeah, I've been, but I am, I'm cognizant of the fact that Tether is the largest stablecoin on that network, and Tether is going to compete directly with Tron. So, I, I, I mean, I think that we're, we're in a world now with stablecoins where this is all going to grow the pie. So, I think there are a lot of people out there saying Tron's dead because of this, um, you know, emerging threat from Tether, but, you know, network effects are network effects. Like, Tron is used all throughout the emerging markets, so it's, it's not going away. But, um, yeah, there is definitely a competitive threat there, and the fact that it hasn't diversified is, um, you know, is a risk.
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Okay, so let's move on to the next group. Uh, whether we want to think about whether it's DeFi, whether it's revenue, let's call it revenue-generating applications, stuff like that, you know, which is a different way of valuation because you move away from Metcalfe's Law and go into more traditional valuation models. Uh, talk us through that whole sector.
Well, I, you know, I've, I think Hyperliquid's at the top of that as well, but it, it seems that Hyperliquid is valued off Metcalfe's Law and not the revenues, which has always been my point is that if you are a fast-growing deep network, then you get valued on network effects. Amazon never got valued on earnings.
Yeah. Yeah. So, the, so the multiples that the market pays for smart contract platforms versus applications is huge. Like, the, the difference. What I mean, so the, the premium for, I don't have the data here, but like Hyperliquid and Tron are based on their fees, uh, if you want to use that as the metric or revenues, um, are the cheapest smart contract platforms by a country mile. You know, Solana is trading on, I don't know, maybe one to 200 times fees or revenue. Um, Ethereum is on maybe three or 400 times, and then Hyperliquid's basically on like 11 or 12 times. Tron's maybe on six or seven times. So, it's, it's like massively different. And that's the market, I think, with Tron, that's the market pricing the risk, um, of the network, be, you know, so I think there's some rationality there. Um, Hyperliquid started as an application, now it's a chain, so now it should be, you know, valued much more on sort of Metcalfe's Law, and it's, it's playing out. That thesis is playing out because, you know, it was a one-application business, now it's a network, and other people are building on it, like Morpho, and I, I think it's Morpho, um, which is the, you know, a large lending protocol, which is doing really, really well, competitor to Aave, is building on, um, Hyperliquid now, and so are some of the other sort of, you know, high-quality applications. So, it is creating network effects. So, it should be valued on a, um, on a Metcalfe's Law sort of basis. And I think it's, you know, it's very undervalued. But in terms of these other, um, DeFi protocols, like, there is definitely an argument to be made that they are sort of mispriced, the good ones, um, relative to smart contract platforms. Um, you know, they're trading on sort of multiples around 5 to 20 times fees. Uh, you know, which in, you know, in terms of like compared to like TradFi, it's, these are not eye-watering multiples. And I think that's why, you know, when Franklin Templeton set up a team, and like all these other traditional fund managers come in, they're going to look at these, some of these protocols, see how fast they're growing, see the multiples that are, um, that are levied on them, are not the sort of maybe eye-watering multiples that they were led to believe, or they thought they would see when they come into crypto, and, you know, they start making up, you, you know, they start making allocations to it.
Yeah. It used to be called, back in the '90s, we used to have, you either bought the growth stocks, you actually outperformed always. And those people who wanted to be more traditionalist would do something called GARP, which was Growth at a Reasonable Price.
Yeah. Yeah. Which is what they're doing here. I can see it. I mean, even the hedge fund managers we deal with at XPAM, they kind of gravitate towards this because you can build a justifiable thesis around valuation, because most people don't really understand the Metcalfe's Law stuff.
Yeah. Yeah. But to me, it underperforms still. I mean, Uniswap may be amazing, but it's never going to outperform a Layer 1 over the full cycle. That seems.
I would argue that it depends on the Layer 1. Like, maybe not the tier ones or tier twos.
No, I mean, the tier ones and twos, you know, the ones that get momentum and are growing. Yeah. Um, even if the revenues are growing in Uniswap at the same rate, it won't go up as much because it's priced off revenues and not off network.
Yeah. Like, I've, I, I believe that to be true. I've oscillated a little bit. I was of the, I was of the view that we were going to see a rerating in DeFi protocols. Um, and, but I, I don't think that that, um, you know, I don't think that that smart contract platforms suffer as a consequence. Put it that way.
Yeah. Right. Um, and the reason for that is that I see a world where the good, the, the very high-quality applications, DeFi applications, because really DeFi is the pillar or the, the subsector within crypto that has product-market fit. It's clear. Real-world assets, tokenization, all that, all that, uh, all those tokenized assets are going to be in lending pools and, um, collateralized in Aave and more. You know, I think the outlook is very, very positive there. Um, and I thought that, you know, like the, like a business, they will end up owning the customer to some degree, and with AI sort of augmented into their, into their applications, that, um, they would become, I guess, the moat would sort of improve around the high-quality ones. Like, you can kind of see that there is like a tier one, tier two, or tier three sort of aspect forming in DeFi protocols, like with borrow, lend, it's really Aave and Morpho, I guess. Um, there's a whole list, a long tail, um, you know, and some of the high-quality, cheap, and growing very, very fast, but there is sort of a tier structure happening. So, I thought that, that there was going to be a rerating, and I still believe that to be the case. Um, and I think there's a case to be made for smart contract platforms to be rerated, um, down when you start looking outside of the top tiers. Like, I look at some of the multiples, and like, I'm going to really piss off a lot of Cardano fans, but like, the thing doesn't have activity. It had, it trades on an insane multiple to its settlement value and to every other metric. Um, and I think that that, you know, those multiples have to compress over time, and I'm surprised.
It depends on the number of users still. I mean, not users, but wallets, some, whatever it is, is what's driving it, because it's not network activity.
Yeah. Something's driving it. Not sure. Um, yeah, and I don't want to piss off everybody by talking about these things, but, um, yeah, the revenue thing to me keeps coming up, and it just reminds me of the '90s growth at a reasonable price, and it always underperformed the actual things you wanted to buy. But it's justifiable. It's high quality. You kind of can build a good thesis around it. Uh, kind of makes sense. And as network activity increases across all of the Web3 ecosystem, we will see activity on Uniswap, ar, everything just increasing, just as more things come on-chain, there's just more activity. I mean, there's good businesses.
Yeah. Yeah. Yeah. And, you know, and I think they, you know, they, to some degree, they end up owning the customer in the end, like the business, and a lot of the chains get sort of like abstracted away. Um, so I think there's a, I haven't actually added any, uh, detail.
How do they own the customer? Talk me through that process more.
So, from a, um, relative to smart contract platforms, I think in the future, we operating on-chain will not necessarily be as attuned to which blockchain we're operating on, because we're going through an application front-end, which is not the chain. It could be the wallet, right? The wallet is really the new, not the new front-end. It is the front-end into the crypto economy. Um, and so, or the specific application that we go to for whatever purpose, whether it's to swap something, or, um, you know, to collateralize a loan, or, uh, whatever it might be. And so, the, you know, whether we're operating on Ethereum or Solana or an L2 is sort of irrelevant. It's more so the, the application, uh, and if we like that experience with that front-end, you know, we'll do more business with it, and they will collect more of our sort of, you know, our fees and, and revenue from us. So, that's more the case. It's not to say that it, in a hyper-competitive crypto economy with low barriers to entry, that, you know, a competitor can't come along and knock a off the off the top of the, um, table, or knock Uniswap, uh, off from like DEX, um, you know, from spot, um, swaps, or spot volumes, um, that can happen. But I just think that relative between, in these two worlds of applications, like the higher layer versus the bottom layer, I think we'll, in the future, we'll think less about the chain and more about the application.
And talk to me about DEXs. What, what do you see happening there? Where, where's the interest lie outside of, outside of, um, Hyperliquid?
Um, it's, it's a good question. So, um, or is it just spread across different chains? You, what, what are you seeing? Anything interesting there in DEXs?
I think there's, you know, I mean, you've got Base, Solana, and Ethereum, by Ethereum main chain, um, as being the sort of the big venues. Um, although, you know, DEX volumes are definitely on the rise as well. And Solana's, sorry, um, Hyperliquid's DEX volumes relative to perpetuals is like about 5% of perpetuals. It's just like the perpetuals business is insane, but it's also growing its spot volumes as well. I think it's an exciting space because, um, you know, I've had this discussion with the index provider that I've worked with, which is a company called Bitwise. It's to create crypto indices for for retail, for the masses, right? And originally, um, you know, we originally classified the subsectors as like, uh, perpetuals and, um, and DEXs into two different subsectors. And that might be still valid, but I see a world where DEXs become more than just spot. They'll become perpetuals. They'll also have inbuilt borrow, you know, borrow-lend. Um, makes sense, right? Or interfacing like Legos, but like they all go after each other's business. So, I think it's interesting. I think Uniswap and, you know, these businesses have an opportunity to like, diversify into other aspects of DeFi. Um, so, look, I mean, I like Aerodrome. It's interesting, like, because it seems to be the dominant one on Base that has a, has a very strong position and growing fast. You know, Raydium, um, and Pump on Solana, um, are very strong as well. And then, um, you've got Hyperliquid coming up. And then on, um, Sui, you've got Deep.
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And do you think theoretically there's a pairs trade to be done? A mental pairs trade to be done, which is you would be short the DEXs, the centralized exchanges, and long the DEXs, i.e., their market share over time rises faster than the market share of, let's say, Coinbase, [Music] Robinhood, Kraken, whatever, right? Does that, is that your mental framework? That that DEXs become a larger part of the system or not, because of the onboarding still is lacking?
I'm not sure. I actually haven't thought about that. Um, I see it all grow. I see the whole pie growing, obviously. Yeah. Yeah. Um, but I haven't, I don't really have a strong thesis around that at this point. Um, because again, I see a lot of hedge funds with Coinbase or Robinhood in their book. In, they mainly trade tokens, but it's the way of expressing volumes. I guess it's a really simple macro top-down, hey, this space is growing, there's more volume, those will do well. But I wonder whether the, I see others having DEXs instead. I'm just wondering, I wonder what's the dominant bet. Um, I'm not sure. My guess is still the centralized exchanges, because you're onboarding new people into the world, and for a DEX, you already have to be in that world, right?
Yeah. And what, but what about the, um, I guess hybridization? So, you've got Coinbase who started Base, you've got OKX who has started a wallet, right? So, and they're going to capture crypto volumes and crypto, um, activity through their wallet. Um, I'm not sure what they've done on the on the DEX side of things as well. So, I think you're going to see forays from the centralized exchanges into the crypto ecosystem to capture the purely on-chain activity in the same way.
I mean, look, Robinhood's a, um, classic example, right? So, they're building on Arbitrum. So, I think that it's harder to make that CEX versus DEX, um, sort of dichotomy. I think in the future, because we're going to see.
Yeah. Yeah. Yeah. And, you know, the reality is is Robinhood and Coinbase and Binance and stuff have so much money that they can basically point and shoot at any sector and have a damn good chance of winning it.
Yeah. Well, did you see that tweet that I sent out? It was, it was a table that I did. I use Bloomberg data to aggregate the global commodity and exchange businesses, the traditional ones. So, you've got, you know, ICE and NASDAQ and, you know, London Stock Exchange, Hong Kong Stock Exchange, and then you insert Coinbase or insert centralized exchange volumes and decentralized exchange volumes. And I, I can't remember the exact rankings, but I'm going to say, just at the top of our head, that, um, if you aggregate centralized exchanges in crypto and just gave them, like, aggregated them as one sort of, um, entity, they would be fifth or sixth in terms of global exchanges. Global traditional exchanges that are trading fixed income, every asset, spot, well, um, you know, cash, and also futures, right? So, they would already, they're already fifth. And this is an asset class that has like, you know, what is it, 3 trillion or 4 trillion. Um, and DEXs, if you aggregate them together, were about number 11. So, they're just outside the top 10. And if you think about the growth, it's really only been three years of growth, three or four years of growth. Where are they going to be in three or four years' time? And then you look at the multiple that, um, you know, you would, that Coinbase is being assigned, and then you assign that to all the businesses in, um, you know, in crypto, then there's a lot of, it's actually undervalued.
And the other one I've looked at is, you know, I keep an eye on that Crypto.com number of active wallets metric, which is now at 900 million. Is it 900 million? I think 800 million, whatever, right? It was five, it was 600 last year. Now it's suddenly, it's like, [ __ ], we're gonna get to a billion by Q1 of next year. And the way to think about it, people just argue about this all day. I'm like, stop thinking it's not a billion users, we understand that, but how many bank accounts do you have and sub-accounts? You know, you got your household checking account, your savings, or IP addresses. It's that, it just shows you the speed this is growing. And when I looked at it, there are more. I mean, there's now twice as many of those. Let's assume the number of active users is, I don't know, 500 million, whatever the number is. Pick your number. It's more than all of the traditional brokerage accounts added together in all traditional markets. That's what, that's what I've got to is like, there's more active people in this because of the young cohort and all the foreigners and everybody else, because it's a global access to globalized products than exist elsewhere in all of markets.
Yeah. I mean, when I did those settlement volumes, like, it was because I just got the data that I've been looking for for a while. I remember I speaking to you maybe like six months ago, you're like, I can't believe we can't get this data, and suddenly I got it. So, I dug into it, and I was just sitting there going, "Holy [ __ ], it is matched. This tiny little asset class is matching Visa's total transaction volumes of the last five years."
I know. But it's growing at 90% and Visa is growing at 8. So, where is it going to be in five years' time? So, it looks like, if this is the most updated one, yeah, we'll get to 942 million wallets by the end of this year. Right. By the end of 2025, you know, I think, you know, I remember, I remember even like, uh, the projections for a billion.
Being sort of 2027, 2028. So, yeah, we're growing faster than is that right? I remember you saying maybe like three years ago it would be like 2027, 2028, we'll get to a billion, but we're here. That's where we nearly are. We seem to be going faster than the projection, 'cause we were projecting about a 43% annual growth, but it looks like at this stage, but it looks like it's still growing faster than that. So, it's still growing faster than the internet was at this stage, which is an extraordinary thing.
Yeah, it makes sense. Like, it's built on top of an exponential network. So, it should move faster. And that's with every single headwind and every hostile regulator and national government working against it for really the last couple of years. So, it's pretty phenomenal.
Yeah. And do you look at overall activity about, you know, how is this new global economy? So, not the regional economies of Ethereum versus Solana, but the global economy doing? You know, total value that's happening on this? Because I mean, that's something I think we don't step back enough and I try and do that as much as possible just to see, you know, how we, how we doing. And I've talked about it with a number of wallets. Super interesting to know what the total activity in all of crypto is.
Um, yeah, I do. So, I've got a, I don't know if we want to share this, but I've got, um, dashboards here which sort of aggregate smart contract platform activity. Um, and one of those earlier tables was, um, settlement values. So, that's one aspect to it. But looking at total TVLs, um, you know, total stablecoin, um, transfers, you know, how much, um, value is being bridged, you know, into the ecosystem or between, uh, networks, um, everything. So, I do look at that stuff. And I wonder what total daily value is. Like, we look at FX markets and we kind of know it does like a trillion dollars a day or whatever the number is, couple of trillion a day. I wonder what we totally do across all of crypto, Bitcoin, smart contracts, uh, you know, the whole lot.
Yeah. Uh, so I mean that, yeah. So, it's around 70 billion in terms of, um, settlement volume, settlement value on-chain a day at the moment. That's taking the last 30 days median, right? Or 30-day average, right? 'Cause it's, it's extremely volatile. It's around sort of 70 based on the numbers that I was just working with for this report.
Okay. Um, 70 billion in settlement value versus kind of call it 4 trillion in total value. Right. Yes, that's right. It's so, and let, let me give you another number. Um, so on the cumulative on-chain settlement volume for the last five years is $57 trillion. Smart contract platforms, that excludes Bitcoin. And what's Bitcoin done, do we think on top?
Uh, I can't remember. I haven't really looked at it for a while, but it's probably the same again, roughly maybe. Um, yeah, look, I don't know. I'd be speculating, maybe half, I think.
Okay. Um, but if you compare, so Visa did 70, around 70 trillion over that time. So, that's the dominant, um, that's a dominant payment network. It's like a layer three on, on the financial system. Um, so you've obviously got bigger networks like Swift and Fedwire, which is colossal. Um, but in terms of like trying to give, try to give it some sort of comparison, it's really slightly shy of what Visa's done over the same period of time, but it started at essentially zero.
Yeah. I mean, that's amazing growth. And, you know, if you listen to what Scott Bessant says, he's like, well, we think we can have a $3 trillion stablecoin market. That's just in the underlying value held, not in the transactions that executed on that. And you can see how this is just going to go to warp factor 10 in terms of, you know, exponentiality of all of this stuff.
Yeah, that's, you know, that's a good point. People get hung up on like the value, but it's actually what that does to the velocity of movements inside the crypto economy. Um, because actually, you know, that's an, that's another important, um, I think valuation metric that doesn't really get looked at enough. It's like, it's, it's about how quickly capital moves that also determines the value of a network or an economy. Um, and it's been, you know, the biggest, you know, bugbear of traditional Keynesian economists for the last 20 or 30 years. Like, why is velocity going down a lot? So, you know, here you've got a, a, a new economy essentially where velocity is increasing and with stablecoins really accelerating. Um, you know, I think that should be like the cornerstone that of any pitch to any traditional investor as to why they need to look at this, um, ecosystem. It's not so because it's like 4 trillion, it's going to 10. It's going, why it's going because not only is value moving on-chain, but it's just easier to transact and that velocity of transactions is a multiplier on the asset price, on, on the value of the assets. So, yeah, it's a big, it's a big thing.
Um, and so finally, because I mean, we've gone through a lot of stuff. Where is your measures? Because you look at liquidity too, and you've been posting some stuff on X about it. Give us your top-down, where we are on the liquidity cycle from your perspective.
So, I think we're, I mean, April for me was the demarcation of an important inflection in liquidity because we, you know, I have my own global liquidity, um, index as do you, and they're all sort of like proxies for the, for kind of what we think global liquidity is. And they differ a little bit, but once you regress these things, they have a very strong correlation. And if you do sort of like predictive measures like Granger causality and whatever, yes, it does have very significant, significant predictive value. So, I do use it a lot, but I also, you know, appreciate that it's not a perfect one for one for global liquidity.
No. And people get confused over that. It's a, it's a roadmap. It's the, it's the contextualization of where we are in the cycle and what to kind of expect as opposed to, oh, well, it went up today, so in, in a month's time, it'll go up. You know, it's like, it doesn't work that way.
Yeah. Exactly. It's going to wiggle. It's going to, you know, it's going to surprise a little bit. But like, from a first principles basis, global liquidity goes up, that increases the marginal demand for risk assets. And the preference for risk asset investors is the assets that give the most protection to monetary debasement, which is why they've got marginal new dollars coming into the, to the financial system to buy assets in the first place. So, but that, that sort of what I call like a super bullish regime, which is just like using technical analysis on global liquidity, looking at the breakout that happened in April gives us runway for another, uh, typically though, these periods of like the breakouts last for about two years based on previous cycles. But this is a, you know, the, the ascent of global liquidity, the cycle is far more moderate for reasons we can get into. But like, I think that, and also, let me just, um, also add that global liquidity increasing is not, or the absolute level of global liquidity is not the most important metric. It's the rate of change. And we'll sniff that slowing down. So, I think there's another sort of six months left in the cycle. And I know that's pretty much lining up with where you are as well. Um, maybe it's a little bit more, maybe it's a little bit less.
Well, I, you know, our view is if the dollar continues lower and rates go lower, financial conditions are easing. And that gives a nine-month lead. So, it might push it out further than, than we expect. We don't know yet, but definitely doesn't feel like the end of the cycle is going to be this, this year by any stretch.
Well, yeah. And so, well, that actually, you know, that correlates to what I see on the chart here 'cause we've just broken above like it's been sort of five months, um, where we're in this sort of new regime where global liquidity is higher than where it was at the peak of the last cycle. And that usually, and, you know, I've got another chart here which looks at sort of liquidity versus debt, which I think is like the critical metric. And the problem is that debt has been growing at a clip. Like, I think since 2023, when I ran the numbers, US public debt has risen by about 15%. GDP has gone up by 10%. So, there's a 5% differential there. That is a problem. The bigger problem is that the liquidity growth is around 3 or 4% since then. So, there's almost, I've been trying to think this, I've been trying to think this through, Jamie, from, you know, you and I swapped that chart. You, you send it over to me and say, what do you think? And I'm like, yeah, okay. And I've been thinking, my fear is we're not measuring part of global liquidity. And that's the, the duration of issuance, right? The bills, I don't think is getting captured by any of our work. Somebody else on Twitter posted something about it today that they, they're working on it. And I fear that somehow we're missing yet another liquidity lever that we didn't know was coming, which was like, we're not going to issue at five years anymore. We're just going to issue in the first three to six months. Uh, and that's more. And Mike How was on, um, on the podcast today and it was like, that seems to be more liquidity that we maybe you're not capturing in this.
I would be the first to admit that. In fact, when I put this on Twitter, that's exactly what I said like a week or two ago when I put it up. I said, I'm not capturing this, I guess, this new form of liquidity, um, that's coming, you know, directly from the Treasury, uh, rather than through the central banks or the, you know, the monetary base metrics that make up my liquidity measures. So, I would definitely agree with that.
Could we measure it as a proxy using the rate of change of money market funds? Something? Because these get issued somewhere, right? They either get issued into stablecoins or generally issued into the banks or into money market funds or some combination. I wonder if there's an easy proxy or do you have to go through and clean the data and do all the laborious work of figuring out exactly what was issued and where in the curve?
I thought about stablecoins and using that as, um, trying to blend that in as a way to capture what the Treasury is doing, but I hadn't really thought it through, you know, construction. It's just, it's been the back of my mind like we haven't got, it's not complete yet. It feels like this, this is the conversation we're having in like mid-2022 when we were like building stuff and we were having these conversations and we kind of came to the same conclusion about like where the bottom was going to form. Um, but I, yeah, I, I haven't done the work. Um, and I'm sure you guys will, as will I, but I think it's definitely missing because obviously that's since 20, since Yellen, that has been the playbook. Um, you know, the quantitative, the balance sheet's been tightening for the last three years, but Bitcoin is up. And that's because liquidity is being pumped in through other mechanisms. That's why we've been using the total liquidity as opposed to Fed net liquidity and before that, the balance sheet.
Here's another interesting thing that we found in GMI. We're like, why is this business cycle longer? Part of it is like rates haven't come down. Okay, fine. Then we went back and did the foundational work again about debt maturity. And what we found is back in 2021, they lengthened the maturity of the debt because they could because rates were low. Yeah. Yeah. And so now four, five years later, we're having to roll that debt. And it's, it's because it was five years and not four years after the 2021 cycle, they extended the cycle by a year because they, they extended duration. Now what they're doing is looks like they're shortening cycle. And so it might bring the cycle back again, or if they continue to decision in the short end, maybe we don't get a cycle. I'm not suggesting that's the case, but just intellectually, it's interesting to see. Oh, and if they just continue to issue the short end, there is no cycle because it's just endless liquidity. Oh, yeah. So, I, I would love to see the work on the composition of debt based on maturity because I think that would just be a, like, and also the rate of change of the.
Did I not send you my last GMI?
Uh, I don't think so.
Okay, I'll send it to you right now. If you've done that, okay, I've got to dig in. Um, we did some of it. Yeah. Um, the thing that worries me, ra, okay, so they're moving to the shorter end in terms of issuance. Um, it's not that there's endless liquidity, it's that the system is [ __ ] way more fragile in that environment, right? Because they have to be, it's like a, they have to constantly be on, uh, the case in managing the financial system and, you know, making sure that that volatility in the bond market doesn't start creeping. 'Cause like with the previous regime of more long-dated issuance, there was these cycles of like four to five years and, you know, they became, I think, a lot more sensitized to it and able to get ahead of it. Now they've just basically turned into a short-term, you know, a short-term liquidity engine. Uh, which I think causes a whole bunch of other problems. It's like basically buying a car on a credit card. Yeah. As opposed to, you know, a five-year car loan, right? Which could accelerate the exiting of, um, from US Treasuries in, in one aspect, but maybe stablecoins sort of plug the hole. I don't know. It's, it's incredibly interesting, but obviously it's just more liquidity, more cowbell.
I mean, that that's the perfect end to the, to the podcast actually, because that's what it is, right? And, you know, that's the framework. You know, we've all kind of coalesced around the same framework, which is liquidity is the big backdrop, then adoption of the technology is the secular trend as well. Those two things are leading to what we talked about, stuff like the layer ones become, you know, the, the top two tiers becoming very attractive investments because the activity is accruing to those as new people find new applications. We got this whole other area, which is the applications built on top of these, which are generally revenue-generating, gives a whole other set of opportunities. You know, it's just a, it's a, it's a broadening space. And you've done a lot of pioneering work on sectors, subsectors that if people aren't on the Real Vision platform, it's on for Real Vision Alpha. If you go and look at the dashboards there, there's a really nice breakdown. And we're going to be only building on that further on, on sort of a lot of the work that you do, uh, on this. But I always love the fact that how you, me, Julian, Andreas, everything, and we all kind of weave around doing our own thing, but somehow it turns out to be this cohesive understanding with a few differences here and there about what this is all about. It's not like we're like, what are you going to write? I, I'll make sure I don't write something different. It's like, you know, what are you looking at? This is interesting. And it's just, it just comes this way. Like, yeah, I think the, the, the synergy is amazing because we don't, we don't collaborate. We just got, we do our own thing. But in the frameworks is, you know, are different. And I lean into your stuff on the business cycle. Yeah. It's like I've just sent you GMI and that came out 12 days ago. Um, so it's not like you read it so like, oh, I'm going to follow that framework. Is it's not how it works. It's just a genuine curiosity in the space that's that's building all of this stuff out. And I think it's, it's been great. So, listen, mate, fantastic conversation as ever. Really, really useful. And I look forward to reading your next piece when it's out.
When is it out?
Uh, it should be out on, uh, on Monday, US time. So, it'll be, and that's Real Vision Pro, right?
That's on Pro. Yeah. Yeah. Yeah.
Fantastic. All right, my friend. Take care.
Thanks a lot. Thanks, Ral. Nice to see you then. Lots in the conversation with Jamie there, as ever. It gives us a framework of understanding. You see how Jamie and I kind of feed off each other to try and build this deeper understanding of this new world. And hopefully, you got as much out of the conversation as I did. Anyway, I'll see you next time.
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