Crypto market dynamics: Waiting for macro turning points, DeFi protocols actively innovate

Recently, the crypto market has continued to decline, mainly due to the lack of a clear macro direction. Bitcoin and altcoins are showing similar trends, and the internal correlation of the crypto asset class is close to the peak since the beginning of the year. The current market situation confirms our previous view: the macro economy will continue to dominate Bitcoin's performance, while the inflow of US spot ETFs is gradually decreasing, and the market is starting to look for other catalysts beyond Bitcoin halving.

Despite reiterations of summer rate cut plans by the European Central Bank and others, higher-than-expected inflation data in the U.S. has raised market concerns over a delay in the Federal Reserve's rate cuts. This has led to a stronger dollar, which in turn has put pressure on the crypto market. However, after the Federal Reserve meeting, the dollar's rally has stalled, and following weak non-farm payroll data on May 3, market expectations for the first rate cut have shifted from November to September 2024. On May 9, the number of unemployment claims exceeded expectations, further increasing the likelihood of accelerated rate cuts.

However, we believe that the Federal Reserve will not pay excessive attention to changes in the unemployment rate in the short term, as the current unemployment rate of 3.9% is still close to historical lows. We still believe that the U.S. economy will be supported by technological advancements and government spending, and will not fall into recession. The Federal Reserve's next meeting is still expected to focus on inflation indicators, which highlights the importance of the upcoming PPI and CPI data, especially if they are higher than expected.

It is worth noting that Grayscale Bitcoin Trust ( GBTC ) experienced fund inflows in the first two days since its transformation into an open-end fund. Although the source of the inflows is still unclear, this indicates the completion of a structural capital rotation. We believe that the early outflows from GBTC are mainly related to bankruptcy proceedings, profit-taking from discounted trades, and a shift towards low-fee products. Looking ahead, we expect that the flow data will not show structural distortions.

In terms of on-chain development, Aave recently announced its V4 protocol plan as part of its long-term roadmap for 2030. V4 includes several architectural improvements, such as a unified liquidity layer, fuzzy interest rates, and liquidity premiums. V4 also focuses on enhancing the use of GHO stablecoin and improving risk management and liquidation engines. Although the mainnet launch is expected in the second quarter of 2025, this announcement reflects the maturity of mainstream Decentralized Finance protocols in core functionalities while continuing to innovate in other areas.

Expanding the functionality of DeFi protocols is a technical challenge, especially compared to traditional Web2 companies that "act fast and break the mold." Successful DeFi protocols rarely can seamlessly scale their initial architecture, but instead deploy new versions and incentivize liquidity migration. This process is often slow, as Aave V3 only surpassed V2 in TVL in September 2023. We expect the adoption cycle of Aave V4 to be similar.

Despite the significant improvements in the new version's features, the cautious migration of liquidity highlights the importance of the Lindy effect in the DeFi market. The trust built over a long operational time seems to be more important than new mechanisms. A decentralized environment means that time is often the most reliable method for verifying the security of protocols. This underscores the characteristic of immutability in smart contracts and the financial attributes of Web3 products, particularly how to maintain stable security amidst rapid innovation. Therefore, the long-term adoption cycle of encryption products may differ from that of the Web2 market.

The Aave 2030 roadmap seems to compete with Maker's Endgame, especially in the renewed focus on the GHO stablecoin. Both protocols are important sources of Decentralized Finance lending, but they have taken different strategies. Although the decentralized stablecoin market has been shrinking compared to centralized stablecoins, Aave remains focused on this area. While Aave recently surpassed Maker in TVL, we believe these long-term developments may be overlooked by the market in the short term, as the macro environment remains a focal point.

Looking ahead to the coming week, the market will focus on U.S. inflation data and Fed Chairman Powell's speech. Unless there are significant surprises, volatility may continue to compress. Due to a lack of clear catalysts, the correlation between the crypto market and traditional markets may increase. The deadline for 13-F filings is approaching, making it worth paying attention to who holds U.S. spot Bitcoin ETFs. For ETH, as the VanEck spot ETF application deadline approaches, it may continue to lag, as market expectations for approval are low.