Crypto Market Weekly Report: The market may be approaching a turning point, Aave announces V4 plan

Key Points

• The upcoming US PPI and CPI data may determine the movement of the US dollar. The Federal Reserve is expected to continue prioritizing inflation over the job market.
• After GBTC transitioned to an open-end fund, the first two days saw inflows, indicating that the structural capital rotation of this asset is basically complete.
• Aave announced the fourth-generation protocol (V4) plan as part of its long-term vision for 2030. V4 introduces several architectural improvements, focusing on supporting its GHO stablecoin, which is scheduled to launch in Q2 2025.

Market Analysis

Recently, Bitcoin has continued to decline, mainly due to a lack of clear macro direction. Altcoins have shown similar performance, with the correlation between crypto assets still close to the early-year high. The current macro uncertainty confirms our view from April: the macro economy will dominate BTC performance, with a decrease in inflows into U.S. spot ETFs, as the market looks for catalysts beyond the halving. Although the European Central Bank and others have reiterated plans for rate cuts this summer, higher-than-expected U.S. inflation has raised market concerns about the Federal Reserve delaying rate cuts. The strengthening of the U.S. dollar, in turn, puts pressure on the crypto market.

However, after the Fed meeting took a dovish turn, the dollar's rally stalled. Following the weak non-farm payroll data on May 3, the market's first expectation for a rate cut shifted from November to September 2024. The higher-than-expected jobless claims on May 9 further increased the pressure for a rate cut.

Nevertheless, we believe that changes in the unemployment rate in the United States will not become a focus for the Federal Reserve in the short term, as it remains 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. At the next FOMC meeting, we expect the Federal Reserve to continue to focus on inflation indicators, highlighting the importance of the upcoming PPI and CPI data as macro catalysts.

Additionally, GBTC experienced capital inflows in the first two days after its transformation into an open-end fund. Although the source of the inflows is unclear, it marks the completion of structural capital rotation. We believe that the early outflows from GBTC are primarily related to bankruptcy proceedings, profiting from discount trading, and a shift towards low-fee products. Looking ahead, we anticipate that the capital flow data will not exhibit structural distortions.

On-Chain Updates: Progress of Aave

Aave recently announced the fourth-generation protocol (V4) plan, as part of its long-term roadmap for 2030. V4 introduces multiple architectural improvements, including a unified liquidity layer, blurred interest rates, and liquidity premiums. V4 also focuses on enhancing the use of the GHO stablecoin and improving risk management and the liquidation engine.

Although the mainnet is planned to launch in Q2 2025, we believe that this announcement (, along with other significant announcements from protocols such as Uniswap and Maker ), marks the maturation of the core functionalities of DeFi protocols. This may set a benchmark for new protocols in terms of decentralization, token utility, and functional iteration.

Expanding the functionality of DeFi protocols is a technical challenge. Successful DeFi protocols rarely seamlessly extend their initial architecture; instead, they deploy new versions and incentivize liquidity migration. This applies not only to Aave but also to other leading protocols such as Uniswap, Curve, and Pendle. Cross-version liquidity migration is a daunting task. In fact, although Aave V3 was launched in 2022, it did not surpass V2 in terms of TVL until September 2023. We expect the adoption cycle for V4 to be similar.

Despite the numerous functional improvements in the new version, the cautious migration of liquidity highlights the importance of the Lindy effect in DeFi. The trust accumulated over time in the market seems more important than new mechanisms. A decentralized environment means that time is often the most reliable method to verify the security of protocols. We believe this underscores the immutability of smart contracts and the financialization characteristics of web3 products, specifically how to maintain stability and security amidst rapid innovation. Therefore, we believe the long-term adoption cycle of encryption products may differ from the web2 market. For end users, the consequences of web3 financial vulnerabilities are far more severe than data breaches in web2.

In addition, Aave's 2030 roadmap seems to compete with Maker's Endgame, especially with Aave refocusing on its GHO stablecoin. Many elements proposed in Aave 2030, such as specific networks, GHO cross-chain liquidity layers, enhanced RWA integration, and updated branding, are similar to Maker's Endgame vision.

The TVL of Aave and Maker is $10.5 billion and $8.2 billion respectively, both of which are important sources of lending. However, Maker borrowers are limited to DAI, while Aave supports a wide range of asset lending. Given that DAI's market cap has only grown from $5.3 billion to $5.4 billion this year, its ability to enhance cross-chain adoption and market share remains in question. Interestingly, Aave seems to be focusing on decentralized stablecoins, despite the relative decline of centralized stablecoins in this area. In the face of stagnating demand for DAI, Aave actually surpassed Maker to become the largest lending DeFi protocol in early 2024. However, we are still in the early stages of web3. While Maker's Endgame and Aave's 2030 roadmap outline a bright vision for these protocols, we believe that these developments may be overlooked by the market in the short term, as the macro environment remains the focal point.

Encryption and Traditional Finance

Coinbase Exchange Insights

Crypto traders are looking for the next market catalyst. This week, the market will focus on U.S. inflation data and Powell's speech. Unless there are significant surprises, volatility may continue to compress. Due to the lack of clear catalysts, the correlation between crypto assets and traditional markets may continue to rise, with cryptocurrencies referencing U.S. stocks. The deadline for 13-F filings is May 15, and many companies will wait until the last minute to submit. It will be interesting to see who holds the U.S. spot Bitcoin ETF, but unless surprising names emerge, it's unlikely to impact the market. ETH may continue to lag as the May 23 deadline for the VanEck spot Ethereum ETF application approaches. Communication with traders shows that expectations for approval are generally low.

Noteworthy Encryption News

• Global encryption companies turn to Hong Kong for opportunities
• Mastercard partners with U.S. banking giants for tokenized settlement trial
• The SEC issued a Wells notice to Robinhood Crypto for allegedly violating securities regulations.
• QCP receives in-principle approval from the Abu Dhabi regulatory authority
• The SEC submitted its final response in the Ripple XRP case.
• Friend Tech's activity has revived after the V2 launch.
• The Bitcoin network has surpassed 1 billion on-chain transactions.
• Vitalik Buterin proposed EIP-7702, aimed at improving account abstraction on Ethereum.

Global Vision

Europe

• The UK FCA states that 30% of financial crime in 2023 comes from crypto companies.
• BNP Paribas purchases shares of BlackRock's spot Bitcoin ETF.
• BCB Group has obtained regulatory approval in France.
• Vodafone plans to integrate the encryption wallet with the SIM card
• The President of the German Central Bank calls for the rapid adoption of CBDC to maintain competitiveness.

Asia

• Hong Kong spot Bitcoin and Ethereum ETF first day trading volume of 11 million USD
• Chinese police arrested suspects who forged identities to claim STRK airdrop.
• PwC China collaborates with Xalts in the blockchain and tokenization space.
• The Australian Taxation Office requires crypto exchanges to provide details of 1.2 million account transactions.
• South Korea prohibits cryptocurrency in updated donation laws.

Major Events in the Coming Week