The defi hunt for yield is nearing an interesting inflection point imo. As Compound competitors start to offer similar incentives, investors know that in aggregate, it will be “too good to be true” in that the high yields are ultimately coming from a future intrinsic value /1

2/ of tokens which can at most be worth the value that can be extracted as rent from future borrowers and lenders . Let me use exchanges and exchange coins as an analogy -

3/ let’s say each of us have a favorite up and coming exchange that we think will eventually become the new Bitmex. We may each rationally value our favorite new exchange on that basis. But while any one of us can be right, we can’t all be right.

4/ and so it might not be obvious that any particular exchange token is overvalued, we could get to a point where in aggregate, they obviously are. Imo, this happened in 2017 with “ethereum killers.” We won’t have 20 “world computers” at scale.

5/ okay, so back to defi. We may soon be at the point where every rational investor realizes that the aggregate token value is greater than the rents that can be extracted from borrowers and lenders over the next decade. But if the bull run continues...

6/ that’s how you get a classic bubble. Everyone knows it’s a bubble, but rationally participates because everyone hopes to capture profit before the music stops playing. That’s was Wall Street in 2007, and crypto in late 2017.

7/ will that happen with defi? I don’t know. Seems plausible. It’s hard to say no to the possibility of huge short-term profits on the back of a solid narrative. How does that narrative break? Eventually the system is maxed out on leverage,

8/ and the stakes amounts and yield available start falling, even slightly. As with crypto generally in late 2017, that causes the momentum chasers to reverse course just as fast as they piled in. Maybe we get a bug or a game theory attack at a moment of vulnerability.

9/ then as the tokens start falling in value, that virtuous cycle of increasing locked up capital becomes a vicious cycle of falling token price -> falling yield -> less staked assets -> lower intrinsic token value -> lower token price.

10/ to be clear - I’m not predicting anything here, just exploring a possibility - that defi may become a classic bubble fueled by liquidity mining, and how that bubble would unwind.