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With the yield farming craze and recent market drop, we've begun to hear calls of a so-called "DeFi Bubble", with a few arguing DeFi has topped
In today's daily, I take a longer term view and look at YF, DeFi vs ICO boomand where I think we are in the cycle
Thread
In today's daily, I take a longer term view and look at YF, DeFi vs ICO boomand where I think we are in the cycle
Thread
(1/27) First, it's important to realise speculation has always been crypto's killer app
The ICO boom was only the most extreme example, but crypto's history is dotted with boom and bust cycles, dating back to 2013 and Namecoin, Mastercoin (now Omni) and Maidsafe
The ICO boom was only the most extreme example, but crypto's history is dotted with boom and bust cycles, dating back to 2013 and Namecoin, Mastercoin (now Omni) and Maidsafe
(2/27) For those who lived through the ICO madness, the recent food coin high season 
may bring flashbacks of the futility coin fuelled 2017 boom (ht @Obstropolos)
While the underlying mechanism is the same, there are some fundamental differences worth exploring
may bring flashbacks of the futility coin fuelled 2017 boom (ht @Obstropolos) While the underlying mechanism is the same, there are some fundamental differences worth exploring
(3/27) Before we dive into differences, let me start by admitting that ultimately much of the “yield” currently available in DeFi is subsidized by the same exact dynamic that powered the ICO boom: speculating on overpriced shitcoins.
(4/27) While in the ICO boom this was reflected in rapid price appreciation, it’s now reflected in astronomical APYs, paid out in crop coins whose price is sustained by those unfortunate enough to buy rather than farm
(5/27) However, the genius of Yield Farming is that it manages to transform crypto’s inherent fondness for speculation into fundamentals, growth and community, creating a positive reflexive loop
(6/27) Rather than merely distributing tokens to those willing to pay for them as with ICOs, yield farming distributes tokens to the actual users of the network, incentivizing them to contribute work, time and ideas.
(7/27) This incentivizes the bootstrapping of the supply-side of a network, driving down costs on the demand-side
If executed properly, it also creates a community of users who all have skin in the game and are incentivized to contribute their time and ideas to the project
If executed properly, it also creates a community of users who all have skin in the game and are incentivized to contribute their time and ideas to the project
(8/27) We've already seen a couple of examples of this, with @CurveFinance attracting over $1B in liquidity and offering better execution than CEXes on some of its pairs, an idea unthinkable even a few months ago
(9/27) On the other side, projects like @yearn have shown the power of yield farming and fair launches in bootstrapping an insanely strong community consisting of many of the smartest people in the space (the "Citadel")
Together, they've created a behemoth with nearly $1B AUM
Together, they've created a behemoth with nearly $1B AUM
(10/27) These are two examples of many I could cite
The key takeaway is that this DeFi boom is bringing with it real innovation and value. This is dramatically different from what was happening in the ICO boom where the vast majority of projects didn’t even have a live product
The key takeaway is that this DeFi boom is bringing with it real innovation and value. This is dramatically different from what was happening in the ICO boom where the vast majority of projects didn’t even have a live product
(11/27) Leaders like @AaveAave and @synthetix_io (formerly Ethlend and Havven) were funded via 2017 ICOs, and after iterating through a bear market that saw their prices drop >95%, both have landed on products with product market fit and vastly surpassed their ICO valuations
(12/27) This maps on well to @CarlotaPrzPerez's framework for technological revolutions, in which a frenzy and bubble is proceeded by a crash, during which the buidlers buidl and sow the seeds for the next phase of growth.
(13/27) It's important to remember the value prop for DeFi is doing to finance what the internet did to data
Transforming financial primitives into “Money Legos” and creating an open ecosystem that enables permissionless innovation
Transforming financial primitives into “Money Legos” and creating an open ecosystem that enables permissionless innovation
(14/27) Similar to the internet, new token-based business models will not only collapse the cost of financial services but also make them accessible to a much broader swath of people, while creating entirely new and unforeseen use cases and applications
(15/27) Finance is the world’s largest market for consumer software and DeFi's TAM is estimated in the trillions of dollars
To put this in perspective, the cumulative market cap of DeFi is currently at $13.5B
To put this in perspective, the cumulative market cap of DeFi is currently at $13.5B
(16/27) In comparison, the cumulative market caps of largely inactive Layer 1 projects like Ripple, Bitcoin Cash, Bitcoin SV, Litecoin, EOS, Cardano, Tron, Stellar, NEO and NEM is ~$32B
(17/27) Indeed, even if no new money enters the space, we see this repricing being corrected by the market as money flows towards the only vertical in crypto showing signs of product market fit
However, it will be a bumpy ride as you can't have massive upside without volatility
However, it will be a bumpy ride as you can't have massive upside without volatility
(18/27) All this said, it's important to note that crypto sits at the very edge of the risk curve and is thus extremely sensitive to the global macro situation
A move towards deflation will pose serious headwinds for crypto broadly and DeFi specifically
A move towards deflation will pose serious headwinds for crypto broadly and DeFi specifically
(19/27) Dazzled by recent stock market and risk asset surges, many underestimate the very real probability of a post-COVID solvency crisis
Key recovery indicators peaked in June and this is reflected in the dollar which has broken out of its descending channel
Key recovery indicators peaked in June and this is reflected in the dollar which has broken out of its descending channel
(20/27) Strong dollar is bearish for risk assets and potentially signals the beginnings of deflation and the insolvency phase @Kevin_Kelly_II and I described in our macro piece earlier this year https://medium.com/delphi-digital-research/david-and-goliath-the-institutional-argument-for-crypto-in-a-post-covid-world-d80f3df65e0f
(21/27) While we see crypto, led by BTC, eventually decoupling from the stock market and risk assets more broadly, this is still a ways away
DeFi sits in the highest risk pocket in an already high risk crypto space and is extremely vulnerable to the global macro situation
DeFi sits in the highest risk pocket in an already high risk crypto space and is extremely vulnerable to the global macro situation
(22/27) Just as Yield Farming causes positive reflexive loops on the way up (as speculation leads to higher yield and improving fundamentals in the form of more supply-siders and consequently demand-siders), the inverse happens on the way down
(23/27) The circularity of the DeFi ecosystem means all projects are tethered to this until we manage to break into real world adoption
While it’s still early, we believe this real world adoption is closer than ever before
While it’s still early, we believe this real world adoption is closer than ever before
(24/27) @AaveAave recently received its Electronic Money Institution License in the UK and preparing to launch tokenised mortgages
We’ve spoken to many strong teams looking to bridge the real world via crypto savings accounts, and will announce an investment in this space soon
We’ve spoken to many strong teams looking to bridge the real world via crypto savings accounts, and will announce an investment in this space soon
(25/27) Finally, we’re extremely excited about the innovation happening in the gaming and NFT space, as we still believe incentivized virtual economies are a natural environment for crypto to flourish, unlocking massive innovation and value for gamers
(26/27) To recap, we’re still at the very beginning of DeFi with explosive growth potential ahead of us


That said, it’s important to realise DeFi’s relationship to the global macro environment which may lead to short/medium term volatility
That said, it’s important to realise DeFi’s relationship to the global macro environment which may lead to short/medium term volatility
(27/27) We see the top echelon of DeFi projects having the ability to significantly outperform even during periods of extreme macro instability


During those times, we hope you can return to this post, remind yourself of how early we still are, and HODL!
During those times, we hope you can return to this post, remind yourself of how early we still are, and HODL!
