The Cyclicality of the Crypto Assets Industry and Investment Opportunities

In the current turbulent market, we invite Ryan, the founder of Solv Protocol, to discuss how to identify genuine cyclical opportunities and the new financial experiments that DeFi is conducting in the market.

Panic Spreads and Hedging

The "gold rush" in the crypto world is gradually cooling down. Market sentiment has shifted to panic, with investors withdrawing funds and adopting a wait-and-see approach to reassess their investment strategies more cautiously. The decline in Bitcoin's price has sparked widespread discussion on whether the bull market has already ended.

However, this change has not weakened the confidence of core investors. Those who gained huge profits in the last bull market still firmly believe in the long-term value of Crypto Assets and continue to increase their positions. Some speculators have begun to withdraw, while investors who truly understand the industry cycle see new opportunities.

Ryan believes that the cyclical dividends of the Crypto Assets industry have not completely disappeared and still have advantages compared to traditional markets. He stated: "This is likely to continue until around 2028, and opportunities still exist. However, compared to the previous cycle, many arbitrage opportunities have significantly decreased this time."

The Survival Battle of Retail Investors in a Zero-Sum Game

Regarding whether retail investors can make money in the current market environment, Ryan pointed out: "Anyone who is rational and has made the right choice, holding Bitcoin until now, is actually guaranteed to make a profit. The key is that many retail investors in the past did not like holding Bitcoin. If not operated properly, most retail investors will be eliminated in the volatility."

He believes that there are two key steps to take next: first is "returning to the essence", re-examining and selecting Crypto Assets that have true value support; second is "staying rational", adhering to a long-term investment strategy amidst market fluctuations.

Ryan stated: "This cycle is very different from the past two cycles. The bull market of Bitcoin has further enhanced its asset status globally, especially in the process of proving its worth in the traditional financial world, where its wealth effect has been increasingly recognized. Those who hold Bitcoin are more likely to achieve certain returns, although the magnitude may not be as high as in the past."

Bitcoin's New Mission and the Path of DeFi Innovation

Recently, Solv has staked 250 BTC in the first phase of the Babylon mainnet, occupying the largest staking share in the market for Babylon. This is a strategic layout that aligns with Ryan's thoughts on Bitcoin assets and the possibilities of new applications.

Ryan believes that current innovations have reached the top of the pyramid, especially in the field of advanced financial products like interest rate swaps. The focus now is not on new algorithms, but on whether new assets can be introduced. "Whoever can introduce new assets will succeed in this cycle. Therefore, I think it is better to focus on the introduction of new assets rather than on new algorithms."

Financial Freedom and Blockchain Democracy

Talking about motivation, Ryan believes that 99% of people enter this industry to make money, but there is also a small portion of people who do so because of their faith in blockchain technology. He stated: "Although only about 1% of people may enter this industry because of their belief in blockchain technology, considering that over 100 million people are involved globally, even 1% is quite a considerable number. These people believe in the early potential of blockchain technology, and they see the transformation that blockchain can bring to traditional industries."

Regarding the future of DeFi, Ryan believes that it cannot completely replace traditional finance, but rather improve certain inefficient aspects through more efficient methods. "DeFi can provide better services for the second and third categories of non-financial assets. The traditional financial system has very strict regulations on securities-type assets, while DeFi can provide better services for non-financial assets."

Selected Program Content

JoyChen: The recent market performance has been full of challenges. For most retail investors, this is undoubtedly a difficult time. There is a saying in the market: retail investors have actually not made money in this bull market. What do you think about this statement? Who do you think can really make money in such a market environment?

Ryan: I think a very simple example is that if you bought Bitcoin one or two years ago and held it until now, you would definitely be making a profit. Because compared to the prices from one or two years ago, the value of Bitcoin has significantly increased. Therefore, anyone who is rational and made the right choice by holding Bitcoin until now is actually guaranteed to make a profit.

The key point is that many retail investors in the past did not like holding Bitcoin. They preferred to invest in altcoins because the fantasy that altcoins brought them was either a hundredfold increase tomorrow or a 10% gain. For these people, the potential return of a hundred times is more attractive because they might have only invested 1000 RMB or 1000 USD, while expecting a high return that exceeds their anticipated threshold.

JoyChen: Does the transition from SolvETH to SolvBTC indicate that your team has a more optimistic outlook on Bitcoin's prospects?

Ryan: Yes, or rather, we have actually always had products related to stablecoins and Ethereum. But starting in 2024, we will basically focus on Bitcoin yield assets. The main reason is that the stablecoin and Ethereum markets have become a red ocean market, with very intense competition. The last cycle was a period of algorithmic innovation and underlying infrastructure innovation, such as AMM algorithms. But this cycle has shifted its focus to asset innovation. Whoever can introduce incremental assets into this industry will achieve greater success in this cycle.

JoyChen: Many friends from traditional finance often ask why the APY of Crypto Assets is so much higher than that of traditional finance when they first encounter it. Traditional financial investment products usually have a return rate of around 2% to 3%, while the return rate of Crypto Assets far exceeds this number. As a DeFi project that provides returns, how is Solv’s return rate guaranteed?

Ryan: In fact, this issue is not difficult to understand. In the traditional financial world, the amount of capital is very large, and all parties involved are very professional, so the easy money has already been fully earned. Traditional finance has developed for decades, even hundreds of years, and is already very mature. On the other hand, the DeFi world has only been around for five years, and is still in its bonus period.

A simple example is that once arbitrage opportunities arise in traditional finance, they are quickly absorbed by the market. However, in the Crypto Assets market, especially between DeFi and Crypto Assets exchanges, there are still arbitrage opportunities. Sometimes the Bitcoin price between two exchanges may differ by $100, yet not many people take advantage of the arbitrage. This is because the market is still in its early stages, with few participants, and thus there are still plenty of profit opportunities.

I believe that this industry bonus can last for a few more years, but it will eventually enter a more reasonable range. For example, in traditional finance, a quantitative fund's drawdown might be between 1% and 3%, with an annualized return of 8% to 10%, which is already at the level of top assets. In the world of Crypto Assets, however, the annualized return can easily reach several points or even higher, which still holds great appeal for investors from traditional finance. This essentially reflects the industry bonus.

JoyChen: The TVL of Solv is approaching $1.5 billion. I believe that TVL might be the most important indicator for retail investors, as their mindset is usually that if so much money is locked in, it means that the project team will definitely ensure the safety of the funds. What advantages does the growth of TVL rely on to achieve such a high level?

Ryan: First of all, I think this is a bonus issue. BTC itself has huge bonuses, so I don't need to persuade users too much because there aren't many competitors in this field. This has similarities with the success of early DeFi projects. Bonuses and timing are often more important than individual effort. Therefore, the main reason users choose us is that we are offering the most professional and best products.

Secondly, many people will question why the TVL is so high? Are there risks behind this? In the case of Solv, our product has real commercial value and product value. Solv is currently the largest reserve and yield protocol in the Bitcoin space; the more Bitcoin we reserve, the more income we generate, which directly increases the overall value of the protocol. Therefore, I believe that a TVL of over a billion dollars is just the beginning; it can reach 5 billion, 10 billion, or even 50 billion dollars.

The charm of DeFi lies in the fact that it does not require 500 or 1000 people to maintain such a large capital volume. Through code and smart contracts, it greatly reduces labor costs and trust costs. This allows us to manage this scale with a very streamlined team and rigorously tested products, and as the scale expands, the value of the protocol will continue to rise.

Finally, regarding the issue of returns you mentioned. Our products are divided into two parts: reserves and returns. The core of reserve-type products is to ensure the transparency of reserves, and we have introduced custodians to guarantee the safety and transparency of funds. The return-generating product line includes creating returns for Bitcoin through staking, quantitative returns, options trading, and other methods. Each product has different risks and returns, and users can choose suitable products based on their risk tolerance. Of course, we also ensure the transparency of assets, but in extreme cases, such as when certain platforms experience security issues, it may lead to losses, which cannot be completely avoided.

JoyChen: Overall, the product logic and custody method of Solv are relatively secure, but why do some DeFi projects still encounter issues? In which stages do these problems mostly occur? Can you discuss this issue from the perspective of the project party?

Ryan: In the previous cycle, there were particularly many project failures, especially during the stage of algorithm innovation. Algorithm innovation inherently brings new risks because the code is newly designed; if there are weaknesses on one side, it may be subject to attack. This is a common issue in algorithm innovation.

However, the situation has improved in the current cycle, especially regarding cross-chain bridges and other theft issues, which have significantly decreased compared to the previous cycle. Now, the problems are more on the asset side rather than the algorithm side. For example, certain fund arbitrage strategies may experience operational errors, leading to significant drawdowns or losses. This indicates that the risk control ability and strategy selection on the asset side have become more critical.