Index Protocols, Index Tokens

Plasma just raised $500M in TVL via an ICO-like mechanism. Hyperliquid ($HYPE) continues to massively outperform. Both represent index protocols over a hot sector. What does this mean for other alts?

Disclaimer: None of this is financial advice, nor should be construed as such. This is purely meant to be informative. I very likely hold a position (private or liquid) in some of the protocols/assets mentioned.

Alts are Dead, Long Live Alts

It’s no secret that BTC dominance (% of crypto market cap that’s BTC) has continued to rise at an astonishing rate since bottoming in 2023.

In spite of many new altcoins launching, in spite of deregulation across the board and in spite of a very crypto-friendly US administration, we’ve yet to see a prolonged “alt season”. Some don’t think we ever will. It’s possible we’re in a new phase of crypto where this remains true, and we only see pockets of alt performance. After all, while Bitcoin has everything going for it (digital gold narrative, immaculate conception, longest provenance, institutional flows, etc.), it’s harder to make the case for many other alts.

That being said, we have had outperformance by several alts (like HYPE, VIRTUALS, etc.) and continued outsize interest in certain private market alts (i.e. Plasma’s XPL ICO today and Pump’s intention to move forward with a $1B ICO).

Why?

Obviously the answer to that question is not an easy one. For each of those assets, there’s a number of very valid reasons that can be mentioned. It would be hard to chat about Hyperliquid’s outperformance without mentioning the behemoth of a business that is the core exchange (one of the highest revenue per employee businesses in the world after Tether) and the buybacks of the HYPE token. Virtuals/Bittensor have created their own mechanisms for value tie in of agents/subnets to the core protocol token. Plasma has had good marketing/mindshare and branding, largely due to it’s ties to Tether/Bitfinex and work from the team.

But I don’t think this is the full picture. These are all critical factors for sure, but not necessarily new mechanisms/execution (with the exception of Hyperliquid; I’m not sure if we’ve seen a protocol with that much revenue buying back their own token).

I think it’s because these protocols/alts offer a “sustainable” “index” over a core thematic that no other asset can. In other words, they are assets for indexing over a particular primitive/sector that the market canonically agrees is valuable.

Now why are “sustainable” and “index” in separate quotes? I’ll go in reverse.

“Index” in this case is pretty simple; this asset is viewed as one of, if not the, canonical asset for a specific thematic or sector (compounded more by there being a higher comparable in another asset class i.e. equities). For Hyperliquid, HYPE primarily indexes exchanges (since all of crypto is financial, the exchange is core to the lifeblood). It’s equity comparable is Binance/Coinbase. For something like Plasma, it represents an index over stablecoins. While from a product perspective it’s equity comparable is something like Visa, one might include Circle Internet Group in the convo here. For Virtuals/TAO, its different parts of the AI stack; most of its comps are private companies (I’d argue that neither have truly become index AI assets; it’s a massive sector and they’re focused on specific parts of the stack).

”Sustainable” represents signals the market takes as an asset being worthy of capturing most of the flows that want to allocate into this “index”. In Hyperliquid’s case:

• One of the best exchange products, DEX or CEX

• Assistance Fund using revenues from exchange to buyback HYPE

• HyperEVM L1 (enables HYPE supply contraction via protocols/staking on top)

• Jeff and the Hyperliquid team had very, very deep markets experience

From these it’s easy to see the hype (forgive the pun). If Hyperliquid’s valuation and model (especially given all the recent incidents around James Wynn and the question of orders being transparent) is truly sustainable in the long-run is something only time will tell.

In a similar way, Virtuals was the first to kick of the “tokenizing AI agents waves” and so far have spent a lot of time in terms of nailing tokenomics/supply control to enable contraction of supply. Again; it’s unclear if this is long-run sustainable; it doesn’t appear most Virtuals agents are actually useful or have a deep tie-in with their token. Still, it faces less token sell pressure than something like TAO. That being said, TAO is a much larger asset (financially) targeting a more general coordination problem with different tokenomics.

Funny enough, I’d argue that neither TAO or Virtuals have really become the canonical AI index asset largely due to having the weakest “sustainability” arguments (sustained launches on Virtuals versus subnet sustainability on Bittensor). Of course, I’m biased, but much of the product and GTM work that has gone into Ritual is aimed at capturing broader, more sustainable whitespace in AI. After all, there’s only so many agents or crowdsourced tasks; the number of on-chain applications that can be built when given access to AI is nearly inifnite, and that’s where we’re focused.

Plasma, as a private project, benefits from having a strong tie-in with Tether/Bitfinex which needs no introduction. Given the XPL token is probably the first token that one can hold to gain some exposure to Tether, it’s no surprice its ICO cleared. That being said, I’d be very curious about their value capture given that they’re promising zero-fee transfers (I’d assume it comes from other activity around stables, i.e. swaps and credit). I’d also be curious to see how it holds its position given that we haven’t seen much yet from Stable.xyz (another project backed by Bitfinex), Codex (backed by CB Ventures and Circle), Radius (ex-Circle) etc.

I’ll also throw in another key point I omitted above; all of these projects are purpose-built for the narrative they’re indexing on from a technical perspective. While I won’t bore you with details, this makes them (or most of them) somewhat defensible from a product perspective.

Okay, so what does this long rant mean for alts?

Basically, what the market at this point in time seems to be signaling is that for an alt to be wanted, it needs to:

1. Index over a narrative/sector people actually care about

2. Have a confluence of strong signals (team, revenue generation/apps, sustainable economics, etc.)

3. Moderately hard to replicate at a product level or a network-effects level

I think a lot of alt assets that have launched recently have 1 or 2 out of 3, but I’d say only really Hyperliquid has all three in abundance and a token that is tradeable. There are some good teams with good tech that have launched in areas that don’t really get bids (i.e. privacy), and there are sectors where people care about it and teams launching have good teams, but its overcrowded (i.e. high-throughput infra w/o an enshrined ecosystem).

The above might be obvious to many, but I do think that these confluence of factors will become more apparent and are very topical right now given the Circle IPO/Plasma ICO. Certainly, a lot of my thinking on strategy at Ritual is focused on how we can come to be viewed as the index protocol for AI (and some other narratives).

I’ve always been of the opinion that if you’re going to swing, swing for the fences. In other words, if you’re building (and actually building, not just here to launch a coin) to just capture beta flows or comp to what is the index protocol/asset in a hot sector, you’re probably better off recalibrating.