Single Point of Crisis: The Moment MM Exits the Central Position

Network effects are not limited to the internet.

Water and electricity grids have strong exclusivity, making them very suitable for “monopolistic” collective management, which can benefit or harm society as a whole. However, the network of relationships among people is naturally distributed and decentralized; even a super social butterfly finds it difficult to know everyone.

Is crypto ultimately a web of funds, or an interaction space between people?

Satoshi Nakamoto clearly believed in the latter, the peer-to-peer trading model. From this starting point, the history of the cryptocurrency world is a journey of appreciation and expansion of funds, fully embracing the connections of capital while reducing direct interactions between people.

The only reasonable follow-up question is, how long will the density of this funding network last before it collapses?

01 Why the Market is Reviving

Many people are still trapped in the aftermath of the sharp declines on October 11 and November 3, wondering how long it will take for synthetic stablecoins, Vault, and Yield products to recover. However, Hyperliquid's BLP and HIP-3 growth models are coming in droves, and the stablecoin YC prepared by Framework is now live on Sky.

There is also Aave's sudden arrival of V4 and the mobile financial product App.

In terms of absolute data, it is indeed a recovery period for the market, but on a subjective level, it seems that project parties are tightly grasping historical trends to innovate.

In other words, the market cycle has decoupled from retail investor activity, which is not uncommon. The fundamentals of the US economy are also unrelated to the real industry; what the Trump administration is solely focused on is lowering interest rates and stock prices. Americans and the real industry are just a part of the play.

In this cycle, if you still believe in the four-year Bitcoin cycle, that is just staying in a time machine from 2017, similar to the flash crash of CloudFlare, as the crypto infrastructure has been constantly changing.

Hyperliquid represents a DEX that is indeed seizing the CEX market, especially in conjunction with Memes, changing the valuation, pricing, and distribution systems of tokens. The era of CEX is visibly declining, with Kraken having only a $20 billion valuation, and many CEXs are turning to support their own DEX.

When the high FDV impacts Binance's pricing system in 2024, VC will already be dead, and then it will be the era of market makers: behind Hyperliquid and many other Perp DEXs are market makers, and behind many YBS projects are also market makers.

SBF came from Jane Street, Jeff came from Hudson River Trading, and the founder of Variational came from the market-making department of DCG.

Even the market makers were the first to suffer from ADL liquidations on 10·11. It's a double-edged sword; the market structure led by market makers is more rigid and faster than that dominated by CEX.

Web3Port is frantically dumping operations to manipulate coin prices, while DWF is repeatedly accused of manipulating coin prices. Even Hyperliquid's HLP faces such accusations. Whether it's centralized market makers or decentralized vaults, anyone involved in the market-making system cannot escape the suspicion of market manipulation.

If the current market structure is called a “recovery”, then the market makers have been severely impacted, resulting in their inability to continue manipulating the market, instead allowing it to stabilize.

It is not uncommon that before the collapse of FTX in 2022, there were rumors in the market that Alameda once held a 20% market-making share in the BTC market. In SBF & FTX's biography “Going Infinite”, SBF admitted that they were one of the earliest professional companies to engage in large-scale market-making.

Image description: BTC liquidity plummets

Image source: @KaikoData

Returning to the flash crash on October 11, from the perspective of market makers, it is purely a technical crisis, or one could say that the trading liquidity before this was a technical boom: there were no retail investors trading, but market makers were buying and selling.

Image description: Sudden drop in liquidity on 10·11

Image source: @coinwatchdotco

The existence of market makers is not a problem in itself, but for altcoins or new tokens from TGE, it means a massive sell-off. Airdrop hunters and profit takers, and even VCs and project teams themselves, will resolutely sell to market makers to lock in profits.

Market makers will find themselves in a dilemma: if they do not manipulate the market, they will inevitably end up holding all the junk coins, or they will become the Lich King, trying to increase market volatility as much as possible, earning a little for themselves while occasionally allowing market participants to earn a bit as well.

Image description: Mainstream market makers' positions

Image source: @arkham

There is a huge flaw in the reasoning here; it can only see the composition and changes of the positions held by market makers, making it difficult to specifically analyze how they manipulate coin prices within CEX. The data from DEXs like Hyperliquid is relatively transparent and will be left for analysis in the future.

In summary, the market is not rebounding, but rather market makers have suffered heavy losses, and the consecutive failures of the YBS project have left market makers unable to manipulate the market; now the real price mechanism is in operation.

There is no recovery, only honesty.

The 70% Rule of Natural Monopoly

The segmentation of various tracks in cryptocurrency has already shown products that exhibit a “natural monopoly” color, such as EVM, which is relatively a failure as an infrastructure compared to the Bitcoin network. Everyone desires BTC but does not want to engage in P2P transactions.

Aside from enthusiasts like Jack Dorsey insisting on using the Bitcoin network as a stablecoin chain, the dream of BTCFi has already become painfully real and tragic; stopping the fantasies about it would benefit the entire industry.

Outside of EVM, only Binance and USDT are close to the concept of “monopoly” as super products. Please note that this does not conflict with CEX facing the impact of DEX, or the innovative impact of USDC/USDe/YBS/Curator.

Super products ≠ track

L1 scaling), and even now shifting towards privacy and AI, highlights that despite the arbitrary nature, EVM remains the mainstream choice.

However, the market share of Binance and USDT, as well as the share of Hyperliquid in Perp DEX, is roughly around 70%, after which more market actions are needed to consolidate the current position.

Image description: Market structure stable share

Image source: @GLC_Research @defillama @SPGlobal

Empirical summary: under a solid market structure, the top projects can occupy 70% of the market share in this sector. However, the market environment changes over time, and currently, the shares of Hyperliquid, USDT, and Binance have all fallen below 50%.

Of course, EVM is absolutely stable in the overall VM track, with only a few competitors like SVM or Move VM that can be considered as entering an ultra-stable structure.

Image description: Mainstream market makers

Image source: @coinwatchdotco

Revisiting market makers from this perspective, we know that there are at most 20 mainstream market makers in the market, and it is speculated that they held a dominant position before October 11. However, they have not achieved a natural monopoly, and even if they forcibly maintain it, they are now at the end of their strength.

What will the market structure look like in the next phase?

03 Transition between old and new ongoing

Walking the path of traditional finance will limit valuations by traditional financial valuation models.

Following the path of internet financial technology companies will be limited by the scale valuation of the internet.

Walking out of a valuation model suitable for the crypto space, not being defined by any existing industry, is the only way to roll out a top player worth 50 trillion like AI.

Recently, the market has indeed been quite strange. Solana, as a pioneer in RWA and institutional adoption, saw its foundation chair Lily Liu suddenly say that they want to rekindle the crypto punk dream, combining with Ethereum to return to the L1 Scaling route, along with the privacy concept mentioned earlier, which has gone from Zcash to boundless.

Crypto seems to be regaining the technical logic and valuation system of the crypto circle, and this is increasingly less related to market makers. Even when institutions adopt it, it is more about “crypto projects using institutional funds for DeFi” rather than “selling crypto's DeFi to institutions.”

In a nutshell, remove MM internally and get rid of institutions externally.

Even the OGs must keep up with the new era. The DAT co-created by Li Lin and Xiao Feng has also directly died in the womb. After breaking through the Chinese VC, the Big Name effect of the OGs will also enter history.

Cryptocurrency helps to regain one's dreams, but the price is to shed the parasitic system on it.

Referencing the most mature capital markets in the United States, A16Z is a part of the American capital market, but Chinese VC is not; it is the government, state-owned enterprises (state capital groups), and internet companies (previously) that have the money.

Reflecting on the situation of Chinese VCs in Web3, they lack the ability to participate in the market's pricing and distribution system. Market makers and CEX used to be, but after 10·11, the trend of on-chain development in the industry has become increasingly evident.

On-chain does not equal decentralization.

For example, Hyperliquid is transparent on-chain, but it is not decentralized in terms of physical nodes and token economics.

Even the capitalization reform of state-owned enterprises in reality is not simply about selling the old to buy the new, but rather about investing in new industries to exchange for a ticket to a new world.

From this perspective, the biggest problem for market makers is similar to that of memes: liquidity lacks value orientation. In the extreme nihilistic PVP, they can earn a lot, but market makers cannot serve as a dominant force in the industry.

Long-termism of dreams and technology, Vitlaik does too much, MM does too little, still needs to be a bit more moderate.

Conclusion

Essentially, this article is written for myself. Theoretically, the market should stagnate after 10·11 and 11·03, but the decline in TVL has not hindered DeFi's innovation and self-repair, which leaves me perplexed.

Vault, YBS (Yield Bearing Stablecoin), and Curator are still evolving. The market is more resilient than we imagine. If we still hold onto the views we had a month ago, or even a week ago, we will not be able to understand the market.

After the era dominated by MM, the balance between the values of the cryptocurrency circle and the profitability of products will redefine the valuation logic.