Notes on Hal Press’ hour-and-a-half interview with Empire. Readable in <15mins.
On Recent Market Rally
Hal had been vocal about his bullishness during the digestion period after FTX debacle
His December 2022 thread explaining his November bullishness:
The Bottoming
A confluence of factors approaching the year-end:
FTX blowing up was likely the final worst thing that could go wrong in 2022
On top of the mass capitulation was tax loss selling, fund redemptions, and traditional funds window-dressing. Anyone who wanted to sell had every reason to do so
Someone had to be absorbing all that supply. Prices had come to a level where there was strong-handed demand from crypto natives
Structural supply was not really there either. ETH inflation was practically flat after The Merge and BTC emissions were low in $ value
Flow dynamic was perfectly primed for a year-end inflection
Wider considerations:
We were down a major exchange but crypto fundamentals never changed
Accelerated regulation after the episode can be positive for the future
Broader positive macro inflection that crypto wasn’t pricing in while dealing with its own issues
The Bounce
When the market bounced:
Most pockets of discretionary crypto exposure had already been zeroed out
Crypto then does its thing, creating FOMO in anyone underexposed
Continuation would then be likely as people chase the move
Sparking a positive feedback loop where onchain fundamentals catch up/surpass current valuation and vice versa
The Misses
ETH failed to rebound as strongly expected:
Underestimated the pricing-in of Shanghai withdrawals which was ~3 months away
ETH may have been used as the funding leg for higher beta altcoin longs
ETH/BTC may have been a crowded trade coming into 2023
On ETH/BTC
Thoughts on Shanghai Upgrade:
Shanghai is probably not as negative of an event as people expect
There is structural demand for ETH
60%+ of staked ETH is already liquid (in the form of stETH, rETH, etc.)
The remaining 30%+ of illiquid home stakers are die-hard ETH maxis, unlikely to contribute to selling pressure in a heavy way
“Two months after Shanghai, no more technical selling of ETH”
On LSDs
$RPL Positioning:
Thinks the obvious winner should be Rocket Pool
The most direct beneficiary of staking participation, $RPL is needed to stake on Rocketpool
Being decentralization maxis, its the likely go-to for home stakers
Q: Are LSDs overvalued?
Revenue from fees charged on staking reward
Staking participation on Ethereum is 15%, other chains at 60%+
Non-withdrawable staked ETH is part of the reason
Post Shanghai upgrade, staking participation should go up dramatically meaning increased revenue for LSDs
Expenditure on maintaining staked ETH derivative peg
Protocols like Lido use token emissions to maintain peg on stETH
Post Shanghai upgrade, reduced emissions required to maintain stETH peg as natural arb is now present
LSDs trading at an expensive valuation
More often than not, most crypto assets are “overvalued” from a tradfi perspective
Crypto has a much shorter-term audience that isn’t going to hold an asset for 10 years to reap the earnings outflow
Therefore fundamentals matter less than they do in tradfi
Q: Anything that might change your position? Be it on ETH or LSDs?
Phases of conviction:
Much stronger when no one talks about it
When a narrative has run its course & views are being better appreciated by the rest of the market, move on to the next opportunity
View differentiation is a factor in determining personal conviction
On ETH Dominating the L1 War
ETH has won as the premier L1 at least in the foreseeable future
Many large-scale chains being built on ETH (Arbitrum, Optimism, Starknet, zkSync, etc.) that will utilize ETH as collateral, fees, settlement, etc.
It has built up a strong liquidity moat (e.g. DeGods floor price pumped when migrating to ETH)
More than being an L1, ETH has a better chance of being a sustainable SOV than BTC
In the long term, an SOV should not be paying for security through emissions. This security cost should transition from emissions to actual fee generation which is what ETH has done
On Aptos Pump
In the short term, FDV really is a meme. Market cap + money flows is what matters
Many got this wrong (including Hal, who covered <$10)
Systematically, with low float tokens, the market knows to force overly shorted positions to cover
Price leads narrative, what started with a plain short squeeze gets ascribed a meaning
Reportedly, Korean investors are focused on gaming & L1s (which is how Aptos has been marketing itself over there), leading to Korean retail buying
A confluence of these with the year-end inflection + hackathons lined up in the new year is what brought on the rally
More broadly, any token that was low float and heavily shorted took off without the need for fundamentals
On L2s
No bias toward any particular L2 product
While various L2s compete for the same mindshare, ETH benefits from all their marketing efforts and increased usage
Value accrual between layers:
Majority of value will accrue to the app layer (e.g. dYdX), followed by L2 and ETH (likely) sharing the remainder almost equally
While ETH does see a smaller cut of L2 activity, revenue coming in collectively across all L2s will still add up
On ETH
To Hal, value accrual is but a part of the value proposition for ETH
ETH is also competing for the decentralized SOV market cap too
Adoption of ETH as collateral for DeFi activity contributes to that value proposition as well
Ultimately ETH is likely not going to be deflationary, price would go up, L1 fees will compress as L2s pick up the work leaving ETH at a minor, steady state of inflation (<1%)
Cost of running a PoW (BTC) & PoS (ETH) node differs greatly. BTC miners have to cover ongoing expenses with farmed emissions while ETH rewards do not hit the open market for the same reason
On dYdX
Been a hated token for a long time now
An app layer token that actually has product-market fit, generates revenue, and returns that revenue to holders is extremely powerful (e.g. GMX)
dYdX has the potential to be that + supercharged
Team delaying token unlock shows their commitment to solving these other issues and their conviction toward the value add that will occur over the year
Assuming v3 executes in Q3 2023:
dYdX will be its own L1 on Cosmos (valuation re-rating)
Continued product-market fit
$350M of revenue has been generated so far, moving forward these could accrue back to validators ($DYDX stakers)
A bypass to regulatory issues, instead of turning on a “fee switch” the protocol is merely returning revenue to stakers
On Macro and Deflation (Hal’s Condensed Take)
Covid-created inflation:
Inflation is a product of supply & demand
Covid created demand during the downtime for things people wouldn’t usually buy, and at the same time caused massive supply bottlenecks
The view that covid was going to create an extremely tough economic period (which is not the case today) gave central banks the green light to implement extremely easy monetary policy, supercharging demand
It was the perfect storm for prices to rise on everything
Post-covid:
With artificial demand evaporating, there now is a massive oversupply
E.g. Intel is experiencing the largest inventory correction in its history
Inflation should stagnate and deflation should set in naturally