1) This is my first in a series of posts on The State of DeFi.

To start off: how _is_ DeFi doing? Are we seeing explosive growth, or is it just a mirage of transmining 2.0?

2) Some caveats:

a) Some others know DeFi better than I
b) I don't know the future, I'm just guessing
c) Not investment advice
d) In the end value is in the eye of the beholder. It doesn't matter what I think, it matters what you all think.

3) Anyway, back to the topic at hand: how real is the DeFi Summer?

I'm going to start by making the bullish case. And that bullish case starts with the numbers.

4) Total locked value in DeFi is in the billions; Compound alone is over $1b. This is up _massively_ from a few months ago.

Is the world putting its money in DeFi products? Yes. Yes, it is.

5) Well ok, but is it trading?

http://Curve.fi  has done nearly $100m in volume today, greater than Deribit and Bitfinex put together.

Uniswap has traded $36m today. The majority of its total volume ever has come this month.

1inch is nearing $1b total historical volume

6) OK, so people are locking value in DeFi, and trading volumes are up massively. Are valuations up?

Well, duh. COMP, LEND, MKR and SNX each have higher mkt cap than any DeFi project used to, and combined fully diluted value is billions.

7) So, ok, the numbers look pretty good--they all pretty strongly support explosive growth.

So what's the counterargument?

8) Well, one could point to the relative scale of those numbers. Sure, DeFi is approaching $1b of total historical volume. On a busy day in March, FTX traded over $5b. One exchange, in one day. And it wasn't the only one. All of DeFi ever still hasn't caught up.

9) But, OK, still, DeFi is growing, right?

I actually really like the anecdote that DeFi traded ~2x Bitfinex today. Bitfinex is famous of many things--most of all an anonymous enemy on Twitter (remember when bitfinex'd was a big thing?).

10) But ask @paoloardoino, and you'll hear a different set of things. Among them: a strong aversion to substance-free volume. Bitfinex fees are relatively high and they're proud of that because it means their volume is real and their trades really wanted their trades.

11) In fact, Bitfinex has processed billions of dollars of fiat/stablecoin trades this year (creations/redemptions/USD deposits/withdrawals). But those don't show up in their 'volume', because they don't consider it to be real, substantial deltas changing hands.

12) Sure, Bitfinex only traded $35m today. But it probably made around $50k on that ( https://leo.bitfinex.com/ ). DeFi exchanges traded $100m and had a revenue of..... $0.

FTX also had similar stablecoin trading volume today to DeFi. But we also didn't count it.

13) Instead we classified them as deposits/withdrawals--depositing USDC and withdrawing TUSD, 1:1. Which, I guess, would correspond to infinite TLV on a stablecoin:stablecoin pool.

14) Where is that DeFi volume coming from?

Well, looking at https://www.curve.fi/  and https://www.coingecko.com/en/exchanges/uniswap, it was mostly stablecoins, and governance tokens of platforms trading and locking.... stablecoins.

15) And how about the locked volume? Again, it's all stablecoins. Compound, the largets, is mostly people borrowing DAI from themselves; Curve is basically all stablecoins.

Most of DeFi right now is people locking, trading, and lending stablecoins against each other.

16) Why? Well, because at this point any project with their salt has liquidity incentives. The total notional per day is around $1m (!!!). So people are buying, and selling, and borrowing, and lending, and locking their stablecoins for pay.

17) And where is that pay coming from? It's coming from the governance tokens, really. They're being airdropped on platform users. And all of a sudden they have huge valuations.

18) But you can't spend valuation. So really, the money that liquidity farmers make is coming from the people buying the governance tokens.

And why are they buying those governance tokens at so much higher a valuation? Because their projects TLV is up.

19) So that's the whole cycle. Liquidity incentives --> TLV up --> valuation up --> larger incentives --> TLV up more --> ...

It's a positive feedback cycle, starting out of nothing, creating billions of volume, locked assets, and valuation.

20) But it's not creating revenue, or value for users (outside of the price paid by governance token buyers, of course).

It's the entire sub-industry. Out of nothing, it made something.

Transmining. But, you know, decentralized.

21) All the metrics are popping, but it's also basically a circle-jerk. So where does that leave us? Is it all a brilliant growth strategy and marketing plan, or just smoke and mirrors?

I'd like to tell the story of two exchanges here: FCoin and BitMax.

22) For a while, they were very similar. Both were printing billions of dollars of "volume" per day. All the volume was transmining--content-free wash trades incentivized by exchange token airdrops.

Both tokens pumped exponentially, and then crashed all the way back down.

23) And when their exchange token crashed, all the bullshit fell away and what FCoin had left was... nothing. Or, really, less than nothing. No volume, no valuation, and no assets.

So how about BitMax, another exchange that lurked at the top of the fake volume leaderboards?

24) Well I'd like to think that we played some part in this, although the truth is probably that it was going happen with our without us.

They had successfully built up a significant userbase. And in 2019, BitMax turned off their transmining and fake volume.

25) We were talking to them at the time, and said that we were only comfortable working with them if they cut out the transmining. They promised they were discontinuing anything that encouraged fake volume.

We were skeptical. As it turns out, that skepticism was unwarranted.

26) BitMax did, in fact, turn off their transmining, and the fake volume went away. And after doing that, they started to build.

They launched more features, improved their tech, and listed projects.

27) And one remarkable thing about BitMax is that it doesn’t just list random projects: it’s quietly started to list _good_ projects. Their projects have performed well, and it’s not all a “market making” mirage--that’s what happens when you choose good teams.

28) And, on top of all of that--they’re really good to work with. We’ve had a long series of good interactions with them, and we’ve heard similar stories from others.

29) The exchange started in many ways as a marketing ploy--which I guess is obvious from the name. But over the last year they’ve successfully combined the userbase they got with an increasingly great product.

30) FCoin and BitMax both started out as large marketing plays--not unlike liquidity farming today. But they diverged after that; one went under while the other ended up as one of the better exchanges in the space.

31) DeFi is now facing that choice. The growth so far has been almost entirely hot air and marketing bubbles. But the same could be said about Apple in some ways. And, obviously, Juicero.

What will happen when the hype fades? What industry will we leave behind?

32) DeFi Summer could burst, leaving an embarrassing mess behind. Or it could mark the beginning of the true decentralization of finance.

To get there, we have to build good products, and leave behind a space we're proud of when the smoke and mirrors fade away.

33) And to be clear, some of the current projects _are_ building out the space. Compound is a clean, functional product with cool use cases. Balancer extends Uniswap in an interesting way.

Just because someone made a great marketing play doesn't mean there isn't substance.