RWA Season > Alt Season

We normally talk about Florence Finance and the importance of RWA’s in these blogs, but this time I wanna flesh out my take on Alt-Season and why I believe that this cycle will be different!

Historically money would flow primarily into BTC. Given the reflexive nature of this asset, due in large part to the HODL meme & Maxi culture, this would give explosive price action. This, in turn, would allow traders and early investors to make/take profit and recirculate that capital into other crypto projects, first ETH and then other Alts. The beauty of this is that crypto was, at its core, pretty self-sufficient in terms of funding its own growth & innovation in the early days. Add some venture money to the investment side and some hedge fund & market making money to the trading side of that equation it is not hard to see where crypto’s historic price performance and volatility came from….It was beautiful because it seemed to repeat relatively predictably and fueled growth & innovation in a seemingly self sustaining manner….the question is whether it remains sustainable.

My answer may surprise you, but I’m gonna argue YES….for now at least, but this time the drivers will be different!

Over the last cycles the groundwork and infrastructure have been laid first and foremost through the smart contract innovation that happened primarily in the Ethereum ecosystem. There is plenty of innovation outside as well, but today I think the EVM is still comfortably in the lead when it comes to innovation, core devs, users, TVL and above all security & reliability.

As adoption/utility was initially driven primarily by trading, it made sense for each project to have its own token not only to fund the innovation it stood for but also to create more tokens for people to trade and thereby increase the value of the network/ecosystem as a whole creating a Cambrian explosion of new token distribution & incentive systems. Compound this with a regulatory environment that disincentivized projects from giving tokens actual economic stake/value in the underlying project, the recipe for absurd ponzinomics was complete.

I believe we are coming to the end of that ERA of tokens for the sake of tokens, the ultimate culmination of which are points and meme coins, the latter of which are explicit about the fact that they have no utility and represent speculation/attention value only. Increased regulatory clarity will allow tokens to represent underlying economic value, ETFs and the advent of RWA’s with on-chain use cases that are actually better (by an order of magnitude) than existing TradFi implementation is gonna be the game changer this cycle.

Let me expand on those last points:

• StableCoins at the outset were useful for settlement between crypto exchanges mostly because many of them struggled to maintain proper TradFi banking relationships and were price insensitive with respect to gas fees/costs. Sure there were some early crypto adopters using USDT on Tron for remittances but let’s be honest that is at least two hops beyond the realm of most normies, let alone institutions.

That said, the growth metrics are already quite impressive at $3 Trillion of volume, it’s nothing to be sneezed at…. Just think of what those numbers could be if we get true mainstream adoption.

• Now that we have MICA, financial institutions in Europe and further afield will have an incentive to maintain active on/off ramps for Stables as it will provide them with a large and growing depositor base. The US is also starting to cotton on that issuers like Circle and Tether might actually be the best thing since sliced bread, given their issuance calendar. So I’m gonna go out on a limb and speculate we will have regulatory clarity for Stables in the US as well by the end of the year. This in turn will make Stables more accessible to mainstream users and given the roll-out of L2s and Web3 wallet infrastructure with <1ct global 24/7/365 settlement/execution it should be crystal clear to anybody with international business/payments this will take over GLOBAL payments & settlement. Global payments and settlement alone could add a trillion or more to the Mkt Cap of Crypto in no time once regulatory green light is given.
• Let us shift gears, and talk about non-crypto ETFs. they can be thought of as a constantly changing basket of underlying financial assets. This basket usually tracks some benchmark or group of assets and given settlement times in TradFi, opening hours of global markets and legacy IT infrastructure….You can only imagine what a back-office and IT nightmare it is to keep these things humming and ticking across the globe. Same can be said for all other mutual/pension/insurance funds. Replacing that entire IT and operational stack with a blockchain and oracles made perfect technical sense, but $20 gas fees and scaling issues posed real-world hurdles to practical implementation prior to the advent of L2s, ZK & other roll-up tech being rolled out. These now allow for an order of magnitude improvement both in terms of cost efficiency as well as allow 24/7 trading & instant settlement and will improve further over time. So when Larry talks about tokenizing everything he’s not talking about your Apple or Nvidia shares….He’s talking about a complete revamp of BlackRock’s back-office and putting ALL of its AUM on-chain…that’s 10 Trillion in AUM for BlackRock alone!
• Brokerages and pension funds are pretty good when it comes to custody (relative to banks with your deposits) but as Stocks, Bonds and ETFs become tokenized they too will have to move to a blockchain based tech-stack and this will drive innovation and bring down costs…..and bring brokerage assets on-chain as well.
• Lastly the crypto (BTC/ETH) ETFs…They are obviously contributing to the accessibility of BTC/ETH for people with brokerage accounts, are great in driving adoption and have ushered in net buying of the underlying assets, but I will argue that this is not net NEW liquidity for the crypto ecosystem like native BTC buying was.
• And herein lies my final point on why this cycle is different. Previous cycles were primarily driven by new money coming in and NGU of existing crypto tokens. I believe this cycle is gonna be more about on-chain AUM/TVL going up. I.e. not through new money coming in but through existing assets being tokenized. Where and how the value associated with that “migration of value” from the TradFi to the block-chain based system is gonna be captured is the million dollar question.

I have focussed above on the big drivers and I am sure there are many nuances but if i squint my eyes I am starting to see:

1. The outperformance of protocols with real business and revenue models: e.g. MakerDAO, AAVE & Lido dominating the ETH Beta performance metrics of late over things like L2 governance tokens with opaque revenue models
2. I am seeing the AUM growth of RWA protocols like Blackrocks BUIDL (>500m), Ondo (>300m), Maple (>250m) and the plethora of treasury backed Stables outstrip the rise in Market Cap (i.e. NOT FDV!) of other/classic Alt-coins, And that’s before some of the RWA Tokenization Tsunamis (TTS) described above have kicked in
3. Most of these Tokenization Tsunamis are being built on the EVM and I believe that CoinBase Web3 Wallet & Base rollout and other EVM compatible roll-ups is going to kick that into a whole new gear this cycle.

…My thesis therefore is that in total crypto market cap terms, the growth this cycle might actually outstrip the growth seen in previous cycles but that the growth will come from bringing treasuries, other RWA’s and Real World use cases on-chain, rather than from increasing numbers/valuations of non revenue producing Alt-Coins. Think of it as Foreign Direct Investment in the crypto economy as opposed to organic GDP/Growth.

Although the SVM and other blockchain/programming language innovations represent serious potential I think the EVM has a window of opportunity to capture the first wave of Institutional adoption for which I believe it is ready. The SVM and others will help scaler to include consumer applications but until they have gone a whole cycle without downtime I fear they are still not suitable for Institutional use.

So instead of BTC/ETH dominance falling because of outperformance by Alt-coins the more likely reason for it to fall this cycle will be because of REAL WORLD adoption. And the Alts that stand the test of time this cycle will join BTC/ETH in the next to form the core of a new system/stack.