9 Catalysts to Watch in Q3: Bitcoin ETF, LSDfi, Frax…

Agreements with product updates and narratives are more likely to attract attention and perform well in the short to medium term.


The second quarter was indeed a turbulent period for the cryptocurrency market. The market peaked around the middle of the quarter, but the following month and a half was affected by a series of bearish news, including lawsuits against major exchanges and concerns about the decoupling of USDT and TUSD.

Before delving into what is about to happen, let’s evaluate the protocols that have performed well in the past quarter.

In the DeFi field, several sectors continue to grow and attract organic demand. These include liquidity pooling and on-chain perpetual trading.

Perpetual DEX

In the second quarter of this year, on-chain perpetual exchanges such as dYdX, GMX, and Gains generated a total of 117 million US dollars in transaction fees. These products have remained highly utilized during the bear market period. The ability to trade cryptocurrencies, forex, and other assets on-chain is still one of the most organically demanded areas in the DeFi field.

The table below compares the trading volume on the largest perpetual protocols in the first and second quarters.

Compared with the first quarter, the total trading volume decreased by 8.2%, which is not much considering the bearish market environment we experienced in the second quarter. Although dYdX still leads significantly in terms of trading volume, the protocol’s market share has seen a significant decline between quarters. The same is true for other “OG” perpetual exchanges such as GMX and Gains.

New protocols such as Level and Kwenta have seen significant growth, and the main reason for this growth is undoubtedly the large amount of trading rebates (i.e., native token issuance) provided to the protocol’s traders. Over time, it remains to be seen whether users will continue to stay on the protocol or jump to other trading platforms as these incentives decrease.

Vertex opened their Arbitrum-native exchange to the public in April and has recently seen a significant increase in trading volume. Vertex has not yet launched their native token, so this portion of the trading volume may have been generated by airdrop speculators.

Ethereum Liquidity Staking

Over the past six months, liquidity staking has increased from around $7 billion to over $18 billion. With the overall DeFi total value locked (TVL) remaining at around $45 billion, $11 billion of inflows is quite significant.

Shanghai hard fork has enabled the unlocking of staked assets and attracted a large amount of liquidity to this space. Here are some data comparisons about staked assets in Q1 and Q2:

From Q1 to Q2, the projects that benefited the most were Lido, Rocket Pool, and Frax Finance. Lido not only saw inflows of 1.6 million ETH ($3 billion), but also gained a considerable market share despite the emergence of new competitors.

Rocket Pool and Frax both have unique moats that attracted new liquidity.

Rocket Pool launched their 8ETH mini-pool, while Frax Ether consistently offered the highest staking yields due to its dual-token model.

Swell launched in Q2 and also gained significant TVL. They are currently running a promotion where early depositors can mine the upcoming $SWELL token. Therefore, some of this new liquidity may come from users hoping to participate in the airdrop.


Below are financial statements for the larger market cap L1 and L2 blockchains in the cryptocurrency space. The numerical interpretations are as follows:

  • Fee = transaction fees paid by users on-chain;

  • Revenue = the remaining portion of fees obtained by validating nodes after they receive their share;

  • Profit = revenue minus token emissions.

Ethereum achieved its best quarter ever in terms of profit, growing by over 300% from Q1 2021.

As shown below, Ethereum generated $4.3 billion in transaction fees in Q4 2021, but due to the release of a large amount of ETH before the switch to Proof of Stake, this resulted in significant negative revenue.

How will these fee amounts translate into profits in today’s environment?

If Ethereum averages $4 billion in fees annually and has a similar profit margin to Q2 2023, the annual profit would be approximately $24 billion, resulting in an Ethereum P/E ratio of no more than 9.5, considering the current price of $1,900.

Arbitrum has also seen a significant increase in fees generated during this time and is one of the few chains with positive earnings. Currently, L2’s profit margins are quite low because most of the fees are paid to the mainnet’s validators.

With the launch of Proto-Danksharding later this year, it is expected that profit margins will increase as Rollup fees decrease.

Chains such as Solana, Polygon, and Optimism have seen significant negative earnings due to a large number of token issuances to incentivize users and pay validator nodes.

9 Catalysts and Narratives to Watch in Q3

Cryptocurrency is an attention-based economy. Protocols with product updates and narratives are more likely to attract attention and perform well in the short to medium term. Here are some top narratives worth keeping a close eye on.

Bitcoin ETF

The second quarter was very positive for the cryptocurrency market due to the sudden interest of institutions in Bitcoin. Companies such as BlackRock and Fidelity have applied for Bitcoin ETFs, and the market generally believes that their approval is highly likely. A few days ago, the SEC stated that recent applications were incomplete, and although the market initially sold off, prices quickly rebounded as these applications seemed to only require more specific regulation to determine which exchange to use to provide the product. Many ETFs have already been resubmitted, including Fidelity’s Bitcoin ETF, which lists Coinbase as the exchange to be used.

When might ETFs be approved?

The deadline for BlackRock and Ark ETF is August 12, and although it may be delayed, experts predict that the answer is likely to be announced on that day.

The market seems to be anticipating approval in August, so a denial or delay may have an adverse effect on prices. The deadline for Blackrock ETF is February 23 of next year.

The Importance of Bitcoin ETF

In the coming months, this is the most important driving factor to watch closely. Bitcoin ETF not only allows large institutions to access this asset, but also opens up a bullish period for the entire cryptocurrency market. Without proper Bitcoin price fluctuations, alternative coins cannot rebound.

DeFi cannot gain new liquidity injections for the same reason. If the ETF is approved later this year, the beneficiaries will not only be Bitcoin. Considering this, the following catalysts may cause specific assets to perform well in a more optimistic environment:


You may already know that EIP-4844 will introduce Proto-Danksharding to Ethereum in the third/fourth quarter. With this implementation, Rollup will be able to send batches of transactions (called blobs) to the Ethereum mainnet, reducing fees on these second-tier chains by up to 20 times. Therefore, the main beneficiaries will not be the Ethereum mainnet, as fees here will not decrease until the full Danksharding is launched in the future, but Rollup chains like Arbitrum and Optimism. The trading prices of $ARB and $OP are much lower than they were earlier this year, and if history repeats itself, they may both rebound before this event.

Liquidity Staking and LSDfi

As mentioned earlier, liquidity staking for Ethereum (ETH) was the fastest growing in various DeFi fields in the second quarter. Here are some protocols that are worth close attention in the third quarter:

  • frxETH – Frax will launch frxETH V2 and the Frax chain later this year, including a native lending market created for LSD, and frxETH as a native Gas token on-chain to increase staking APY, etc.

  • EigenLayer – Eigenlayer has already garnered strong interest from investors and is likely to see a lot of liquidity injections as they launch officially later this year.

  • swETH – Swell is running an event where early minters of its native LSD swETH can receive “pearls” that can be exchanged for native $SWELL token airdrops. As long as this event continues, the protocol is likely to continue to grow.

  • ETHx – Stader Labs will launch ETHx on the mainnet on July 10th. Its main feature is that it only takes 4 $ETH to run an Ethereum node.

The massive growth seen in the LSD space in Q2 is unlikely to continue at the same pace in Q3. Higher staking rates and less on-chain activity have led to a general decrease in APY. In a lower return environment, stakers are looking for ways to increase yield, and that’s where the LSDfi protocol comes in. The table below, which was included in last week’s news brief, shows the current statistics for top LSDfi projects.

Pendle has seen massive growth in liquidity, with its native token $PENDLE rising over 100% in the past week, reaching recent highs after being listed on Binance. The Pendle team likes to keep quiet about new features on the protocol; however, it’s safe to assume that there are a lot of plans for the protocol in Q3. They recently applied for an OP-grant to drive liquidity on Optimism and hinted at a launch on the BNB chain. Cross-chain expansion seems to be imminent.

Stablecoin protocols supported by LSD, such as Lyra and Raft, have also seen significant growth recently. It’s clear that there is demand for this type of product, but perhaps more evident is that recent success is largely attributed to heavy token incentives/airdrop mining. There are currently three or more protocols planning to launch very similar products in the coming weeks/months, so competition for liquidity will undoubtedly increase.

Base (Coinbase’s layer 2 scaling solution)

Just last week, Coinbase announced that Base passed all security audits and has met 4/5 criteria for mainnet launch. Base is built on the OP-stack, and Optimism’s recent Bedrock upgrade makes transactions on Optimism and OP chains like Base significantly cheaper. With only “testnet stability” left as a condition, mainnet launch is likely to happen in Q3. Coinbase has over 40 million registered users, many of whom may not have been exposed to DeFi before. This is likely to be one of the most important “Onboard” events of the year. Coinbase may only offer support for mainstream protocols like Uniswap and Aave that have been extensively tested, but having a large retail user base is great for the entire space.

Additionally, this could be a nice narrative for $OP, as Base will commit a portion of transaction fee revenue to the Optimism treasury.

Frax Chain

Frax Finance has developed a variety of products including the $FRAX stablecoin, $FPI price index, Fraxswap, FraxEther, FraxFerry (cross-chain bridge), and more. Frax also announced that they are building an Ethereum-based layer-2 blockchain designed to unify all of these products into one DeFi hub. This is a hybrid Rollup, meaning it adopts the Optimistic Rollup architecture and leverages zero-knowledge proofs for state consensus. Its goal is to provide end-users with high scalability, fast finality, and strong security. The chain is planned to be launched in Q3/Q4 of this year, but the most important part of the announcement is that frxETH will become the token for transaction fees. This could lead to a significant increase in the supply of frxETH if there is demand for the new layer-2 solution. However, more frxETH used to pay gas fees could also result in fewer frxETH being staked as sfrxETH, which could increase staking yields. However, swapping to another token to use the chain may be a burden for some users, and in the worst case, it may slow down adoption. I’m a bit skeptical, but overall excited for this outcome.

Polygon 2.0

Polygon recently announced “Polygon 2.0,” which combines various innovations the team has built over the past few years. It includes both Optimistic Rollups like Arbitrum and Optimism, as well as cross-chain security mechanisms similar to Cosmos. Polygon 2.0 consists of four layers.

  • Staking layer: Validators stake MATIC tokens in a way similar to PoS chains.

  • Interact layer: Shared cross-chain bridges that allow chains to mint and burn assets in an interoperable way on Ethereum.

  • Execution layer: Polygon 2.0 will run two different execution layers.

  • Superweb: Application-specific chains similar to subnets on Avalanche or application chains on Cosmos.

Public chain: zkEVM will use Ethereum for data availability and is the most secure but also the most expensive Rollup solution. PoS-based zkEVM uses Polygon for data availability (secured by MATIC) and then only publishes proofs on Ethereum for higher scalability.

$MATIC has been on a downtrend recently due to a forced sell-off caused by Celsius selling its assets to buy BTC and ETH. As a result, the price may rebound once Polygon 2.0 is launched in the second half of this year.

dYdX V4

The goal of V4 is to decentralize dYdX by launching the exchange on a custom application chain within the Cosmos ecosystem. The previously centralized off-chain order book will now be managed by validators on the application chain via an in-memory order book. Validators for each block will submit trades, ensuring all trades pass and they have the same version of the order book/chain. Current testing has reached over 500 transactions per second. Due to high inflation rates and low token utility, $DYDX has faced criticism in the past. Through V4, the token is likely to gain more significant utility and even potentially include aspects of revenue sharing. This was mentioned in a previous article on the protocol.

“Beginning with dYdX V4, dYdX Trading Inc. will no longer operate any part of the protocol. As such, it will no longer derive revenue from protocol trading fees. This is true for all other centralized parties as well, unless the community decides otherwise.”

The $DYDX vesting schedule is as follows:

  • 30% unlocked on December 1, 2023;

  • 40% released in equal monthly installments on the first of each month from January 1, 2024 to June 1, 2024;

  • 20% released in equal monthly installments on the first of each month from July 1, 2024 to June 1, 2025;

  • 10% released in equal monthly installments on the first of each month from July 1, 2025 to June 1, 2026.

The public testnet is launching, indicating that the mainnet launch is imminent. This could be a strong narrative for the token if there is an announcement regarding the $DYDX fee-sharing mechanism. However, it is important to remember the significant unlocking schedule starting from December of this year.


With the public testnet launched a few weeks ago, GMX V2 seems closer than ever. This upgrade brings many new features, one of which is the adoption of Chainlink custom low-latency price oracles for better trade execution. Another significant change is the independent liquidity for each trading pair and the possibility to create synthetic trading pairs.

Each trading pair will have its own liquidity pool, for example, ETH/USDC will have ETH as the long collateral and USDC as the short collateral. Synthetic trading pairs can also be something like SOL/USDC, where the liquidity pool is collateralized with ETH as the long asset and USDC as the short asset. This model aims to simplify the deployment of new liquidity pools, and the main benefit of isolated liquidity is to reduce the risks associated with providing liquidity.

Synthetix V3

Synthetix is a DeFi liquidity hub that supports various derivative protocols on Optimism, such as Kwenta, Lyra, Thales, Polynomial, etc. The trading volume this year has increased significantly, with most of the volume coming from Kwenta traders.

Synthetix V3 is an upgrade that has been in progress for the past two years and aims to make the protocol the liquidity layer for all of DeFi. Currently, all synthetic assets are collateralized with the native governance token $SNX. V3 will introduce a variety of upgrades, including multi-collateral staking, permissionless, risk-isolated pools, cross-chain liquidity, and more. V3 is already technically live on the mainnet, but core innovations like Perps V3, Pools V3, Teleporters, and Cross-chain Synthesis are in development.


Other protocols in the space that may be worth keeping an eye on:

  • Vertex Protocol recently launched and has seen strong growth in trading volume;

  • Level recently launched on Arbitrum and now has roughly 50% of its trading volume coming from that chain;

  • Pear Protocol is launching soon and will leverage existing infrastructure as the liquidity platform for its trading.

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