BitMEX founder Arthur Hayes: Why is LooksRare the most promising amid the U.S. Independence Day crash?

Despite the previous predictions of the bottom being broken, Arthur Hayes not only mocked himself but also analyzed the future market. Regarding the crisis of Celsius and 3AC, he believes it will exacerbate the wave of institutional closures. He pointed out that the U.S. Independence Day on 7/4 will witness another collapse. He also revealed and analyzed the DeFi protocol tokens he holds, among which he is most optimistic about the NFT trading platform LooksRare.

This excerpt is taken from Arthur Hayes' article. Any views expressed are the author's personal opinions and do not constitute investment advice.

Celsius and 3AC Crisis

Arthur believes the key issue lies in "mismatched borrowing and lending periods."

What happens when you borrow short-term funds but invest them in long-term locked projects? This is almost always the cause of every banking-led financial crisis. In 2008, banks that borrowed in the short-term debt markets but lent long-term either received government bailouts, were acquired by commercial banks, or went bankrupt. In 2022's crypto market, companies are borrowing money from retail investors at high rates and locking it up in DeFi for the long term.

When retail investors withdraw in large numbers, the incorrect allocation of lending deadlines destroys these companies' business models. BlockFi was the first to sell shares at a 66% discount to raise additional funding, but at least without suspending withdrawals. BlockFi was valued at $30 billion in March 2021, but this month, its valuation dropped to just $10 billion.

Hedge Fund Math Problem

Arthur states that this math problem will exacerbate the institutional wave of closures:

1. Charging users $100, losing down to $50, and only being able to collect performance fees once the capital recovers to $100.
2. Closing the fund, liquidating assets to raise funds, turning the $50 into $100, enabling the collection of performance fees on profits exceeding $50.

Given the current market situation, venture capitalists closing existing funds, liquidating all assets, raising another fund, and buying the same assets at lower prices within weeks/months makes more sense. This allows them to truly profit from the crypto market revival, but in the short term, it will create more selling pressure in the market.

After Terra's collapse, Arthur was surprised to see many top DeFi projects he considered plummet by 50%. He believes this is because many investment institutions hold significant positions in UST and LUNA, forcing them to sell assets to cover losses caused by the Terra ecosystem.

US Independence Day Sees Another Decline

In his article "Shut it Down!", Arthur mentions his insights on why the market may bottom out after Terra's collapse. However, upon reevaluating macro factors, including the Federal Reserve starting to shrink its balance sheet and the European Central Bank soon to raise interest rates, he finds a profound weekend approaching.

As of 6/30, the Federal Reserve will hike rates by three digits and start shrinking its balance sheet. July 4, a Monday, marks the US Independence Day, with the stock market closed and banks on holiday, setting up another major sell-off event for the crypto market. This will further lead to:

• Tightening of USD liquidity, causing a drop in risk assets once again.
• Venture capital institutions needing to continuously sell any liquid assets to meet user redemption demands.
• Funds can only be deployed on fiat until 7/5.

He states:

The period from 6/30 to 7/5 will see a crazy decline. I predict Bitcoin will hit $25,000 to $27,000, and Ethereum at $1,700 to $1,800. The bottoms have been shattered. How low will we go? I believe we will find out during this decisive weekend. This week BTC and ETH rebounded to $20,000 and $1,000, respectively. Can they withstand the new wave of attacks when exchanges can't accept new dirty fiat?

Which DeFi Protocol Tokens to Hold?

Arthur still has deep confidence in protocols with practical applications that users are willing to pay for financial services. Despite these protocols being copied by junk projects, they remain leaders in the underlying DeFi protocol category. He urges believers that it's time to sow the seeds for the next bull market. These protocols exhibit the following characteristics:

• Down 75% to 99% from their historical highs at the end of 2021.
• Have actual users willing to pay for services.
• Were the first to define key services that DeFi should provide.

Arthur emphasizes:

Just as I hold BTC and ETH, I also hold all the junk coins listed below. Do not take this as investment advice. On the contrary, I implore you to challenge my thoughts, which can help you find value in this challenging period.

Evaluation Method

Arthur believes that ultimately, all companies must generate cash flow, even if developers are solely focused on user growth, they would want users to be monetized in some way eventually.

He also anticipates exponential growth in Ethereum wallet numbers. The potential market size (Total Addressable Market, TAM) for these DeFi protocols will continue to grow, with long-term total revenue rising. Therefore, he outlines the Price-to-Earnings ratio (P/E) of the discussion protocols as follows:

• Protocol price = Fully diluted market value.
• Earnings = Annualized on-chain revenue for the last 30 days. If you earn $100 in the past 30 days, that's $1,267 per year (100 * 365/30 = $1,267).
• Sales = Annualized on-chain total fees collected in the last 30 days. This should be higher than earnings because some protocols distribute some revenue to liquidity providers.

Decentralized Exchanges (DEX)

Arthur excludes some top DEX platforms, citing reasons such as:

• Curve: Focuses solely on stablecoin trading, while he favors junk coin trading. Additionally, a P/E ratio of 108x is not cheap.
• PancakeSwap: Built on BSC, but it is neither decentralized nor pretends to be, with a P/E ratio of around 25x, not particularly cheap.

Avalanche and Solana also have other major DEX protocols, but he has not evaluated them. In the realm of L1 smart contracts, he is somewhat of an Ethereum maximalist. The key indicators that confirm the value of Uniswap and SushiSwap are the total protocol revenue and the daily trading volume most associated with revenue. The data below presents a strong argument that the market share of spot DEXes is not insignificant but steadily increasing year over year.

Arthur also points out:

I believe DEXs are the future trading platforms for non-professional traders because the development of CEX tends to be dominated by a few high-frequency trading (HFT) companies, marking the first time in history that retail traders can choose their trading platform category. CEX will adopt policies that benefit HFT at the expense of retail traders, and I expect DEX's future policies to be more user-friendly for retail traders, as they are supported by governance tokens and DAOs. The trading volumes of both CEX and DEX will continue to grow, and I believe they can develop together.

Uniswap

Currently, Uniswap fully allocates fees to liquidity providers. Arthur assumes that token holders will propose to share some of the fees in the future, which is why the data in the image uses the Price-to-Sales (P/S) ratio instead of the P/E ratio.

Sushiswap P/E Ratio

Uniswap vs. SushiSwap Price-to-Sales Ratio

The chart shows the Price-to-Sales ratios of Uniswap and SushiSwap. From a valuation perspective, Sushi is significantly behind Uni. However, compared to top CEXs, both valuations are quite low.

Healthy, sustained trading volume:

Arthur quotes data from CME and ICE, showing them as the top two exchanges globally by trading volume. During the 2008 financial crisis, these exchanges had a P/E ratio of about 10x. The market later recovered due to massive money printing by the Federal Reserve. Currently, Uniswap and SushiSwap's P/E ratios are lower than or close to this level, considering their extremely low base numbers, coupled with their potentially significant market sizes.

Chicago Mercantile Exchange (CME) P/E Ratio:

Intercontinental Exchange (ICE) P/E Ratio:

Decentralized Exchange for Derivatives

Arthur emphasizes the complexity of leveraged trading on-chain, where no protocol achieves the sublime beauty of Uniswap and SushiSwap in the spot domain. However, some protocols have attractive valuations and good revenue compared to top CEXs. Even with significantly lower trading volumes than top CEXs, capturing just 10% market share will increase DEX derivatives trading volume by five times.

He notes that dYdX, for him, is not a true DEX but a centralized order book hosted on the dYdX engine, settling trades only on-chain. dYdX's P/E ratio is also higher than that of GMX, which impressed him the most.

GMX

GMX offers total return swaps (TRS) for some cryptocurrencies and stablecoins since its launch, with a trading volume of $33 billion as of 6/14. Transaction fees are shared between liquidity providers (LP) and DAO, totaling $44 million to date. Arthur states:

It is well known that derivative trading volumes should be several orders of magnitude higher than spot trading. Any DEX monopoly will earn a significant amount of transaction fees, making it a future bull market case in a single area. From what I see, GMX is currently the best. However, I don't believe it will currently capture enough fees from leveraged DeFi traders and surpass the trading volume of spot DEXs like Uni and Sushi.

GMX P/E Ratio:

Decentralized Internet ENS

Shouldn't the global decentralized computer assist in hosting the decentralized internet? This is the fundamental spirit of the Ethereum Name Service (ENS). You can purchase ".eth" top-level domains from ENS, and payment must be made in ETH.

Arthur lists the following:

• ENS domain numbers are growing exponentially.
• They are both domains and tradable assets with healthy secondary market trading volume.
• Domains are identities: Transferring to "arthur.eth" is much simpler than to "0x…".
• Domain annual fees depend on the number of characters, representing ENS protocols with Annual Recurring Revenue (ARR).
• Various online services: Platforms like Twitter may use ".eth" as your online identity for receiving tips.

ENS's competitor in Web2 is Verisign, one of the mainstream DNS providers. Arthur's reasoning is that Verisign had astronomical P/E ratios during the dot-com bubble of 2000, followed by a continued low point, much like ENS now. Therefore, if ENS can capture the potential of Web3/public chains, its P/E ratio should be several times higher, similar to Verisign's back then. He concludes:

• Whether ENS can support more .eth domains will require time to prove.
• Can it create a new asset class as an NFT?
• There is potential, but the market is not optimistic about ENS's prospects.

LooksRare

Due to its first-mover advantage, OpenSea monopolizes 80% to 90% of trading volume. However, Arthur believes it is ultimately centralized. Notably, LooksRare is the protocol that interests him the most among those mentioned in his article. Its advantages include:

• Decentralized marketplace
• Transaction fees and royalties transferred to LOOKS DAO
• Future governance rights for LOOKS holders

Note: According to previous reports, 100% of transaction fees should belong to LOOKS stakers, while royalties go to creators. LooksRare distributes these immediately, unlike OpenSea's bi-weekly payouts.

Arthur emphasizes the key point in the above image that LooksRare is second only to OpenSea and significantly ahead of the third-place Rarible.

Due to central bank tightening liquidity policies, not only NFTs but also the price of LOOKS coin plummeted by 98% from its all-time high of $6.87, now hovering around $0.17. Despite this, he notes that the platform's fundamentals are strong, and a P/E ratio of two to three times for a platform that could become a mainstream cultural exchange platform is very low. He describes LOOKS as a call option, with the greater the volatility, the higher the intrinsic value.

He concludes:

NFTs won't die; they will have a profound disruptive effect on cultural economics. The media will only focus on those who make big bucks with JPEGs. Please continue to talk nonsense; I will use my diamond hands to scoop up those cheap LOOKS tokens. The global NFT platform game is essentially over; it will be very difficult to replace OpenSea or LooksRare. Liquidity brings liquidity; those who have played with NFTs know that selling results in significant slippage, and it's best to sell on the top two platforms. Once again, liquidity brings liquidity.

Conclusion

MARKETPEOPLE

Related

• Renowned Flashbots researcher Hasu: "My Binance account has been locked, and I still don't know the reason."
• Celo Embraces Ethereum! Celo's transition to Ethereum L2 earns praise from Vitalik, CELO surges over 15% in a single day
• Media Trust Declines! Grayscale Report: Blockchain Predictive Market Has the Potential to Become a Source of Truth