Waterdrip Space Panel No.5 recap — What’s Next after the DeFi & CeFi Crash?
Waterdrip space panel NO.5 Recap
Topic: What’s Next after the DeFi & CeFi Crash?
Date: 2022/7/5
Speakers we invited:
Elaine — Investment Manager of Waterdrip Capital
Layla — Investment Manager of Huobi Tech Capital
Xiaohan Zhu — Co-founder of Sumer Money and Meter.io
0xAlpha — Co-founder of Deri Protocol
May — Head of business strategy of Volare Finance
Cohost：
Susan — Co-founder of Bitpush
Rex — Investment Assistant of Waterdrip Capital
Sponsorship:
15 Meter Punk NFT from Sumer Money & Meter.io
Q1: As the market went down, what is your view on the current secondary market trading? As a Defi project, what would you do, and what is your plan to deal with the current situations like low trading volume, lost users, etc.
0xAlpha:
I think the winter is going to last for a while, maybe one year or even longer. Being a team of a Defi Project does not affect what we’re doing right here. But we do see some symbols of an increase in the trade volume, especially for prices of Ethereum at $1,000 and Bitcoin at $20,000. Those are the most actively traded symbols in their protocols. This is primarily caused by people’s concern about Bitcoin and Ethereum going further lower.
Meanwhile, we just keep building. We’re building a developer community for outside developers to build things on top of their protocols or combine their protocols and other projects. We are also trying to make trading more user-friendly to lower the barriers.
May:
As a Defi option protocol, I think we’re feeling relatively more grateful for the current volatile market. As you know, the options are built for the volatile market. The options market is clearly underdeveloped in crypto and the demand for customized risk management should only increase over the long term. Especially in the few recent cases, the proper risk management rules felt to be designed and executed. I think people would need options to hedge against the risk while earning yield, and we’re just here to take this position.
Xiaohan:
This is already the second bear market we have been through. In comparison, it is actually still pretty active. Back in 2019, I think the bear market is actually a good time for developers because there was less time pressure for building. You don’t have to rush on everything. It’s easier for projects to collaborate. We have several major Dexes in discussions that we’re looking to bring to Meter.io. For Sumer, we finished everything in terms of the security audit, but right now our focus is basically polishing the product and also building the initial user base without having to launch a token.
Elaine:
As crypto VC, we went through two rounds of bear and bull markets. Crypto markets are very positively related to US stocks, so somehow there’s no decoding of the independent market of Crypto. I think the Federal Reserve expected to raise the interest rate several times this year and the SNP 500 has not yet reached the bottom. The Crypto currency bottom may not yet come and the market may go lower than now. The liquidity of crypto is not good. Therefore, for the second market, I think retail investors should not operate very frequently. Keep money in your pocket. Cash flow is very important for the down trend market.
From our views as an investor, there’s not many relatives to see on Defi. According to the data from DefiLlama, there is only 75 billion which is way less than the ATH of 250 billion from last December. It downs a lot. We can see the market went up in 2020 summer due to the Federal Reserve printing large amounts of money. Low liquidity is hard for Defi to boom up. Also, due to the recent protocol crisis, many investors lose their confidence. Most of the tokenomics is very similar like copy paste from the curve. I think it may take a little bit of time to recover. And many top of the different projects so maybe have to wait for new tendency.
Layla:
The current market is not very as active as before. Actually according to the relevant data, the market cap of this industry also decrease a lot. A lot of people will not divide into tokens, but they will choose to go for maybe NFTs. It might be a tendency for the current market.
In the capital, maybe investing in Defi has off-flow. It should be a good chance for the Defi projects to improve their product.
Q2: When would be the best time for you to do the secondary market investment? What kind of indicators will be the basis for you to determine the switch from the late bear market to the early bull market? Are there any factors other than crypto world that can be used as a reference?
Elaine:
I think we should pay attention to 2 special investment related time. The first one is when US slow down and even stop the raising the interset rate. The second one is the next Bitcoin halving. The mining profit may further decrease, so the miners have negative expectations.
0xAlpha:
I do agree with the part that there are like some indicators for example, some of those macroeconomic factors like Cpi interest rate or even like more advanced parameters in the interest rate. And also there is a fear and greed index. These are the things that you can depend on to find the switch from the late bear to the bull market. But I think for most people, the best practice is not to time the market with such indicators. The market timing is always very difficult, even for those top traders and top institutions.
Susan:
I really think the timing market is really Mission Impossible. Not only in crypto market, but also in stock market. No one can timing the market. But for one thing like the Indicators, to some degree, maybe we are not able to know the market goes. As we know, the rising Defi is the engine of the last bull market. But maybe for the next bull market, something like new technology coming up will lead to the next bull market. You don’t know what is going to drive the next bull market?
May:
I’m sitting on 2 rows actually: one is the investor.and the other role is representing option project. From an investor perspective, we’re not trying to capture the turning point. Whoever stays will definitely have the longer vision. From the view of Volare Finance, we’re delivering different type of strategies, just like how we have bullish strategies period strategies or directions. Neutral strategies, which will give people different kind of like options when we are facing different market situations. Catching the turning point is actually a little bit risky based on my own experience. That’s why I try to avoid making decisions based on that?
Layla:
I’ll share an interesting story here. Recently, I was talking with some friends who are working for funds. They are considering buying tokens from the secondary market since they think the price is just as low as before and even lower than the primary market. It might be a situation in the current primary market.
It is necessary to consider the micro environment to support decision-making, since actually all the markets share the same flows. If the micro environment is not performing well, crypto market cannot change to bull market either.
Xiaohan:
I actually kind of feel the entire crypto market goes in psychos. Basically, the only thing that Crypto has proved to be really unique and the part of super advantage to the traditional is on the finance side. So you would typically see in the beginning of the cycle from Bitcoin and Ethereum. After that, there will be the boom in financial related applications. Back in 2017, it was the ICO. In the last cycle, it was Defi. And then after that it was NFT and Gamefi sort of you can build some Ponzi type of scheme in there and create high paying users and thinking about attracting users out of crypto into crypto. In terms of the user activities in the bear market, it can be really low. For example, back in 2019. We hosted several Defu meetups and conferences. We invited projects like Compound, dYdX, and MakerDAO at that time. The number of users at that time for these protocols was about 100 to a thousand levels, the TVL was around a hundred million rage. The bear market can be really brutal. New drivers on the financial related application side may push the market forward to the next level.
Q3: There have been a lot of big things happening in the crypto world recently. One of them that cannot be ignored is the liquidity crisis of Celsius Network. According to the liquidity crisis of stEth, what impact does it have on future crypto projects? As a Defi user, what is your view? As a project, how and what would you deal with it?
Layla:
I think one of the key issues may be the risk management. Some of the projects were designed and borned in the bull markets . The liquidity was enough at that time. This could be an issue.
For the crisis of Celsius Nextwork, 3 Arrows Capital has caused a serious problem of chain reactions. I saw the report saying a Singapore institution has stopped their deposit and withdrawal. This has a huge influence on the entire crypto market. There should be something that has not finished.
0xAlpha:
One thing that needs to be pointed out is Celsius is not Defi. The Celsius crisis is not a Defi problem.
Not just limited to Celsius, there are more crises like BlockFi and Babel Finance. They displayed the building problem or intrinsic problem of a centralized system. It is inevitable. It’s almost impossible for outsiders to know what’s going on inside and you only get to know the issue or the crash after it takes place. The crisis has been there for several days or several weeks and these institutions have pretty much already been dead several weeks ago after people found out about their crisis. I think there are some relevant articles regarding these bankruptcies in which the author gave a term floaters to describe it. It means people drowned to death underwater. I think that is a very good analog for exactly what happened to the centralized institutions.
I’m very fortunate to be a Defi user so that I have avoided all these centralized crashes. As a project, we do not have this kind of problems. But we are also affected. Projects should improve the robustness against this kind of market turbulence. I guess the only way you can get immune to such crisis is to improve the overall antifragile ability of the project.
Also, I want to say more about the Celsius crisis. I think that’s largely a marketing trick and their narrative of replacing Wall Street or replacing the banks is just a fake story for Celsius and many other similar projects. Cause they’re just doing exactly the same thing a bank does. They just absorb a lot from the depositors and lend the money for a high rate. So there’s nothing new about there and that’s why I think their narrative is nothing but a line. In the later stage, whether part of the money goes to very high risk investment, if you put money like deposits into a very high risk investment like a hedge fund kind of investment, that doesn’t sound right. That narrative is a fake story and there is very little added value from such centralized institutions.
Elaine:
As we know, the lending business is very stable during the bull market. But if you compare with the bear market, you will face great problems like money efficiency, liquidity, etc. The low capital efficiency will lead to the low APY, it will affect the expansion of the debt. These projects in crisis all have the problem of capital efficiency. On the issue of stETH, it comes with great risk, but we are here for ETH2.0. The Eth is locked up. It kind of suffers from the loss of confidence. I’ll suggest we should do more research about Lido, Curve, and AAVE to know about the potential risk.
Layla:
It’s just like chain reactions when one of the sections suffers a problem . They will also influence a lot of things. We cannot know some internal situations of some exchanges and some projects whether they are suffering in a centralized system. I would suggest all the listeners or their audience to do your own research about whether you are going to make some investment into certain tokens. Maybe consider more and try to reduce the frequency to do some trading and just keep our eyes on the market.
May:
We can learn from this lesson, which means what will be the impact that could be happening in the Defi. I think the industry will be similar as what we learn from the 2008 crisis. We need some necessary financial products, not just product who can give you yeilds. We need some product that can help you hash the risk based on insurance strategies. The mechanism should be provided to those financial institutions whether you are Defi or Cefi.
Under the liquidation scenario, a lot of users are squeezing. We are all kind of expecting huge dump. But I think we should be able to figure out a mechanism to let a firm fall in an orderly way instead of just having multiple players dramatically impacted on this part. We may also see some traditional finance solutions in some Web3 Finance solutions as we are looking for some revolutionary change. But in fact, we need to make sure that certain rules need to be followed. For example, we need to require stronger capital or liquidity positions for those financial firms.
Q4: What happened to 3 Arrows Capital is also a huge boom to the crypto world. They’ve been doing pretty well in the past few bull runs. What is your opinion about that? Would there be any 3ACs in the near future? What do we learn through this story?
Elaine:
What happened to 3AC was not that surprising because many of my hedge fund friends here in Wall Street watch them a lot. Also, they kind of like to shot them. It was very dangerous because 3AC was very transparent for the untrained. They used several leverage to access accelerate the return.
The media may not disclose is that both the centralized and decentralized leading companies have the 3AC exposures but only the centralized lending company has failed. So I think many of the other companies holding of the 3AC’s LP have suffered this round. I think it’s the time for the whole market or especially for the institutions to remove leverage. When all the leverage is removed, I think the whole market will be more healthy and I think that will also be a turning point.
0xAlpha:
I think in the future, we will see 3AC or 4AC, even 5AC or whatever. History will always repeat itself. We just need to be cautious with this kind of centralized system, especially the overleveraged centralized system. We just need to be cautious with this kind of centralized system, especially the overleveraged centralized system. Before we didn’t really have a choice, centralized institutions were the only way to provide service for the financial demands.
But now, we do have a decentralized choice, which is Defi. Defi is your friend.
Xiaohan:
Because I was running an investment fund, we had a portfolio of tokens and 3AC was actually one of the trading partners. We had several OTC tradings with them. I knew they were pretty aggressive, but the news really shocked me.
I think many hedge funds in the crypto space try to image themselves as highly regulated, very disciplined investors. They just have to like portray that image here because they have to raise funds from traditional financial institutions. However, I’m concerned that these types of regulations may have a bad impact on Defi, because the benefit of Defi is transparency.
May:
I think in the near future, maybe not. But in the future, definitely.
For sure, we don’t like such kinds of player, they’re manipulating the market, they are kind of breaking the “rules”. What we can do is to protect ourselves with decision-making rules, like how we should work with such kinds of teams. Personally, I don’t work with the Cefi Solutions, just because it may not be very safe on that part. People will see that’s why we need Defi.
We should know that certain types of rules need to be followed and monitored and people have the right to understand what’s going on in the back. We all see that people prefer to follow the bigger players, no matter in what kind of industry. However, in Web3, what we are looking for is we should have the right to govern the product. We should have more rights in the future.
Layla:
To be honest, I think maybe it is necessary for the institutions to do more researches about the project that they would like to make the wealth management to see whether the project is reliable or not. To calculate the pressure that the project could undertake and do better risk management. It is very important.
I’m not sure about whether there will be more 3AC in futures, but it is affected at a number of project institutions are influenced by these situations. With the market going down, they might face more challenges in the coming future. I think all these kind of things and all these institutions should do better risk management to control the risk.
Q5: For the DeFi projects, the discussions about the regulatory issues are impossible to avoid. With the development of decentralization, some governments have started to regulate the crypto currency and the defi derivatives. What is the impact of the policy on DeFi? Are there potential risks or could this be an opportunity for developing DeFi? Do you still believe in the future of DeFi? What keeps your eyes on DeFi?
Elaine:
Defi is still in an early stage. We’ve seen a lot of these institutions entering this market of the Defi relatives recently. For the next round, maybe we will have more web2 Defi traders over retail traders. Also, dYdX announced that they will deploy on the Cosmos and build its own chain. I think it’s a good signal because dYdX is leading the whole derivatives market to a more kind of scalable market which has a more users friendly function and is more scalable. I also check over the layer2 Defi. They do have a bright future as well. We do have Volare Finance in our portfolio.
Besides, I think the Defi ETF and the index portfolio also may have a good future in bear and bull markets. Also, I know that Sumer Money also provides cross chain synthetic assets protocol solution. I think this will help investors to choose some beta investment portfolio. At the same time, I think the Defi Insurence Solution is also very important for the Defi market and the future.
0xAlpha:
I want to add some points to what Elaine just said before I answer the question. Regarding the dYdX, I personally don’t think dYdX is a good example to be referred to as a Defi project. Simply said, it is not a Defi project and it is a fake Defi. Just because they’re famous, big and they have big trading volume won’t maintain them as a great example of defied derivative. They’re nothing but a centralized system diploid on AWS connecting to Ethereum through some layer 2 technologies. I’m not going to elaborate on all the details here, but actually I wrote an article and have some points about it recently.
Okay, first of all, Defi is not something to avoid crisis. The market always goes up and down. Crises cannot be avoided, and crises are just the building part of the economy. But they can happen in very different ways. Going forward, more and more crises will happen, but just to mention, we can see the Terra Luna thing or the crisis procedure from day 1 instead of know after several weeks or months. That is the key difference and that is what I want to say.
Xiaohan:
That’s my concern for regulations of Defi. Basically, like most of the regulators, they have no idea what Defi is and how it works. There is a lot of education and logging has to be done.I’m not that confident that this can be done. Probably actually. And also, the whole purpose of Defi is sort of avoiding traditional regulation because people are interested in freedom and transparency. They don’t want to have types of thing like Big Brother looking over your shoulder, so I’m relatively pessimistic about regulation on Defi, but I think regulation is definitely necessary.
But I’m still very optimistic about Defi. As I mentioned earlier, the only proven application for blockchain is actually a financial related. The next bull definitely still comes from the broad sense Defi for crypto.
May:
I think this could be a very interesting combinable products compared with traditional finance. We see a lot of like a institutions are taking dominant. Maybe we’re not going to see a lot of Defi projects taking dominant. But when we’re talking about the Defi firms, I think we should be able to see some strong solutions in the near future.
Layla:
Finance is one of the most important parts for Blockchain and Crypto ecosystem. Financial things could actually launch into our real world. For the last round, the situation, the stories, and for the future of Defi is still charming for me. To link with the real world. I think that will be something you will happen in the future.
Maybe to some extent, the policy would bring some limitations to the development of Defi. Somehow The policy and government supervision could protect users, especially when they made some problems.
Waterdrip Capital Brief Information
Twitter link: https://twitter.com/waterdripfund
Official website:http://waterdrip.io
Waterdrip capital was founded in 2017, based in Singapore and Shanghai ,which was funded by crypto OG investors. We have great resources in bitcoin mining and node service, we are also one of the biggest holders of Bitshare and top active VCs among asian Capital
We have already invested in more than 200+ projects varying from different fields of blockchain. Infrastructure/Metaverse/Defi/Web3/Gamefi ,we provide all-round post investment services for our projects, helping them to build together.
