Core Strategy

Crypto Equities Portfolio

Book Some Gains on “High Flyers”

A month ago, we added SBET to our crypto equities portfolio. This was a bet on ETH outperformance as well as premium expansion from SharpLink, a company that had just undergone a massive selloff following subpar treasury strategy execution and was trading at ~1.6x NAV.

We’ve since realized a ~4x gain (vs 14% gain in BTC), and in my view, it’s probably not worth overstaying our welcome here in the short term. We would favor spot ETH exposure over SBET at these levels, so we’re removing SBET from the crypto equities portfolio for now and will look to re-enter when the multiple seems right. If looking for a name to roll those proceeds into, GLXY seems like a good risk/reward here as it appears the market is finally starting to re-rate its balance sheet holdings and data center business.

BONK Rotation Into SOL

BONK is another name that has done quite well for us recently. We wrote on Friday that it was due for a re-rating based on the team’s memecoin launchpad siphoning flows from Pump.Fun, and that the launch of the PUMP token would result in a move higher for BONK. BONK is now up more than 3x over the past 24 days and up ~75% since our Friday note. I think it needs to cool off a bit and that it’s worth rolling some proceeds from this BONK rally into SOL.

That said, it’s tough to say the repricing is totally over. BONK has not only retained but gained market share since the PUMP token launch, and the numbers still suggest a possible ~85% upside from here. But again, we don’t want to fly too close to the sun, so we’ll be reducing (not eliminating) exposure in the Core Strategy to reflect that.

Removing Jito

Having spent some time with the Jito team, I have little doubt in their ability to execute. I still view JTO as a core piece of infrastructure within the Solana ecosystem and think it’s a project worth keeping on our radar.

That said, when the chart speaks, you’ve got to listen. Jito has traded poorly year-to-date on both a relative and absolute basis. If you’re looking for 10x opportunities over a longer time horizon, I think this is still one to own. But for a liquid strategy, the token is dragging on performance.

Maybe the community institutes substantial buybacks in the coming months, which could give it the kick it needs. I suspect the recent trading behavior has to do with a supply overhang that’s still working its way through the market (look at JTO market cap vs token performance). If a fundamental catalyst emerges or if the chart starts to show signs of life, we’ll revisit it. For now, I think it’s appropriate to free up 250 bps in the Core Strategy for better risk/reward setups.

Sticking With HNT Despite Past Performance – Watch for Halving on 8/1

HNT is another small Core Strategy allocation that hasn’t traded well. Like Jito, it has product-market fit, with Helium Mobile and its data offload products averaging roughly 1,900 new subscribers per day over the past 90 days, and offloading ~20–30TB of data daily to seven carriers.

This has driven steady increases in data credit usage, which means more HNT is getting burned. That HNT burn ostensibly accrues value to the token, but the market hasn’t recognized this yet. Inflation is still outpacing protocol earnings, which is likely why.

However, inflation is set to decrease over time, with the next major step being Helium’s halving on August 1^st. As the name implies, emissions will be cut by 50%.

Protocol margins are still negative, but they’ve been trending in the right direction for several quarters. If they keep growing usage, the halving could bring them closer to profitability. At the very least, I think it presents a compelling trade setup over the next 3–4 weeks.

Views on the Majors

Still Favor ETH Over BTC – ETH has been the belle of the ball lately, massively outperforming for the first time in a while. It’s back to levels we last saw in January. CME flows and ETF inflows remain strong, and ETH treasury companies have been a big boost to the chart. I continue to expect ETH outperformance through year-end.

Favor SOL Over BTC (Maybe Even ETH) – As we mentioned in our crypto comments video on Monday, we think SOL likely starts to trade better post-Pump.Fun launch. It has similar treasury company tailwinds and has the fear of a PUMP-induced liquidity suck behind it.

Aerodrome: Solid Fundamentals & Base-Related Tailwinds

As you’re probably aware by now, ETH has turned a corner and broken out to reach its highest level since January. We expect ETH strength relative to BTC to continue in the intermediate term. For those looking for higher-risk beta exposure to the broader ETH ecosystem, we think AERO is an interesting opportunity here, and we’re dedicating some time to unpack it further.

Overview

Aerodrome is a decentralized exchange (DEX) on Base, the Layer 2 network built by Coinbase. It holds the majority market share among DEXes on Base, accounting for anywhere from 60%-80% of spot volumes at any given time. AERO, the native token of Aerodrome, has been a feature in our Core Strategy since the beginning of this year. The thesis is simple:

1. Compelling Token Design – AERO’s tokenomics are quite favorable compared to other DeFi protocols. While it has a history of high emissions, those are declining over time, and there’s reason to believe that earnings will outpace emissions in the future. The protocol is also built with tokenholders in mind, which isn’t something every DeFi project can say.
2. Generates Significant Revenue – Aerodrome has generated ~$200 million in annualized revenue over the past 90 days.
3. Valued at a Reasonable Multiple – That revenue translates to a 7.6x multiple, which is quite favorable vs other DeFi protocols.
4. Proxy Token for Base – It’s the largest and most liquid token on Base, making it a proxy for the success of the Base ecosystem.
5. Backed by Coinbase – Coinbase is a successful, well-capitalized company that has invested capital (via its venture arm) into Aerodrome and engineering resources into Base and is therefore incentivized to help both succeed.

Compelling Token Design

Let’s take a step back and look at how Aerodrome differs from other decentralized exchanges. There are three major stakeholders on a DEX: the trader, the liquidity provider (LP), and the tokenholder.

Traders want great execution, LPs require compensation for their services, and tokenholders ideally want some return of capital or value accrual in exchange for their investment. Historically, DEXes have only satisfied two out of those three.

Take Uniswap, the dominant DEX on ETH and ETH L2s. It passes all fees to LPs (for now, since there is always the looming threat of a fee switch being activated). That’s great for traders and LPs, but tokenholders are left out.

Curve Finance tried to fix this by splitting fees between LPs and tokenholders, but in doing so, neither side was fully satisfied.

Aerodrome takes a different approach, borrowing the best parts of predecessor DEXes and building what they call the “MetaDEX” model, one that centers around the token.

Put simply, Aerodrome’s architecture and tokenomics are designed to solve long-standing issues with DEX models and leave all three stakeholders (tokenholders, LPs, and traders) happy.

It does this by making the token central to all economic activity on the DEX.

The DEX operates on a vote-escrow model. A veAERO holder is someone who locks their AERO tokens in exchange for vote-escrowed AERO (veAERO), which grants them governance power within the protocol. The longer the lock period (up to four years), the more veAERO they receive. These holders vote on which liquidity pools receive weekly AERO emissions, directing value to LPs.

In return, veAERO holders earn trading fees from the pools they support and bribes offered by protocols looking to attract liquidity.

This structure aligns long-term stakeholders with the health and growth of the platform. veAERO holders influence liquidity incentives and protocol direction. LPs are compensated appropriately, which in turn creates deeper liquidity for traders and leads to better execution.

While the vote-escrow model isn’t new, the way Aerodrome compensates LPs is different. Instead of splitting fees between LPs and voters, all fees go to voters. Voters then direct AERO emissions to LPs. This makes AERO the central economic unit of the ecosystem.

Heavy emissions were a valid concern at launch. Aerodrome leaned into inflation to bootstrap liquidity, and it worked. That’s why it leads the DEX market on Base. But emissions have tapered off and will likely continue to do so.

Yes, emissions have historically outpaced revenue, weighing on tokenholder profitability. But the protocol’s bottom line is trending in the right direction, and it’s possible that revenue will soon outpace emissions.

Headline emissions also don’t tell the whole story from a float perspective. AERO is continuously being locked by individuals and protocols seeking governance power. Currently, about 50% of the supply is locked, with an average lock duration of 3.76 years.

If you look at the change in circulating supply, which factors in supply pulled off the market due to token locks, instead of just raw emissions, the protocol has actually been profitable in 3 of the past 12 months.

Generates Significant Revenue & Valued at a Reasonable Multiple

Aerodrome handles 400,000 to 500,000 transactions per day, with daily volume ranging from $400 to $600 million. This fluctuates with broader market activity, but over the past 90 days, it has translated to ~$200 million in annualized revenue.

That puts Aerodrome in third place behind Hyperliquid and Jupiter. But unlike those platforms, Aerodrome trades at a much lower revenue multiple (7.6x) compared to 20.4x for Jupiter and 59.4x for Hyperliquid.

AERO also stacks up well against its direct comp set. The chart below shows DEXes across multiple ecosystems. While some competitors may have more favorable fee multiples, Aerodrome offers a clear valuation edge when measured by value accruing to tokenholders.

Proxy Token for Base

Base is the leading L2 on Ethereum by TVL but doesn’t have a native token. That could change someday, but probably not until Congress passes a market structure bill (sidenote: the CLARITY Act passed the House today and will move to the Senate, but it will not be voted on immediately). For now, if you want exposure to Base, you need to invest in the apps built on it.

Aerodrome is the largest app on Base by activity, fees, and market cap. As the chart below shows, Base dominates DEX volumes by a wide margin. So if you want exposure to Base, you buy AERO.

Backed by Coinbase

Coinbase incubated and launched Base. While Base is expected to evolve into permissionless infrastructure over time, Coinbase remains its primary developer and sponsor. They contribute engineering resources, ecosystem support, and provided initial adoption firepower. They’re also the sole sequencer on Base today, which is a nontrivial line item on their P&L.

In February 2024, Coinbase also invested an undisclosed amount into Aerodrome through their Base Ecosystem Fund.

So Coinbase is not only building Base, they are also backing its leading application. And Coinbase is currently in the process of integrating DEX pools into the main Coinbase app. This would allow users to access Aerodrome through a CeFi frontend, which could drive more on-chain activity.

Further, Coinbase just launched the Base App, a complete rebrand of the Coinbase Wallet. Coinbase views this as a “consumer gateway” to the on-chain universe. It is possible that this also brings an additional cohort of users onto Base and increases activity on Aerodrome.

Bonus: A Venture Bet on On-Chain FX Markets

This part is more forward-looking, but worth flagging.

Aerodrome is well-positioned to power on-chain FX markets. The financial world is waking up to the fact that crypto offers better infrastructure for traditional assets as it allows for permissionless access, global reach, composability, and instant settlement. The best examples of traditional assets on crypto rails are stablecoins.

Most stablecoins today track the U.S. dollar. That’s unlikely to change anytime soon since the dollar remains the cleanest dirty shirt in the fiat laundry pile. But down the line, people will likely want access to liquid on-chain markets for other currencies, whether for trading, hedging, or treasury operations.

The key word here is liquid. The challenge in bootstrapping FX markets on-chain is that there’s not much aggregated demand yet. Part of that is due to poor on/off ramps in certain jurisdictions. Part of it is the lack of users looking to exchange USDC or USDT for stablecoins tracking the yen or peso.

This is a chicken-and-egg problem. But Aerodrome’s unique incentive model could help solve it.

For example, if Coinbase wanted to offer on-chain FX markets to clients, they could use their locked AERO to direct emissions to stablecoin FX pools. That would drive liquidity, which in turn could bring in more users.

This is unlikely to be a near-term tailwind, but for anyone making a venture-style bet on Aerodrome, it’s a real upside scenario worth keeping in mind.