Aave Credit Lines, USDC Blacklist, Compound Governance

This week has been a particularly big week in DeFi land with over $2b worth of value being locked up. $0 – $1b took 1.5 years. $1b – $2b took 5 months. Not bad at all. That being said let’s look into some of this week’s events and take a deeper look at why they matter and some thoughts around how we’re seeing a change in the landscape before our very eyes.

Aave Credit Lines

Rather than figuring out how to enable under-collateralised loans from start to finish, Aave has cemented it’s place to simply facilitate the first part – the infrastructure to facilitate giving credit to someone else. While the problem of how to trust people still remains, there’s plenty of experimentation that can be done with this since developers only need a front-end and web3 integrations to play around with this new mechanism.

In the short term we probably won’t see anything ground-breaking with this. However there’s a bigger play over here. The Aave-wrapped token ecosystem is becoming increasingly large and by packing more features like this, we’re starting to see Aave going to give Compound a greater run for its valuation. For reference, check out what I wrote about in early June: https://defiweekly.substack.com/p/governance-liability-and-competition

Aave is currently trading at a $230m valuation (almost fully diluted) while $COMP trades at a $500m valuation (not fully diluted). Why is there still a difference? In short, the Silicon Valley premium. A term used to describe teams/tokens that are based in the Valley and have the right investors on their cap/token tables. Let’s take a look at some of the contenders and their valuations. $MKR and $COMP are right at the top, although not by much. The day $SNX tops $MKR is going to be a day where I think that location will become increasingly irrelevant in the crypto space and the only metric that will matter is traction.

However, when you look at this chart there’s another interesting dynamic going on. Ignoring the absolute numbers and purely comparing the relative numbers, we have fascinating play going on where the amount of value locked up by these projects is very correlated to the the amount locked up.

If there’s three calls I’ll make from here it’s the following.

1. Loopring will probably grow into a ~$300m valuation as gas fees get continually higher and retail will move off into L2. They’re the furthest in the game and the team has always been heads down executing. $120m valuation is a cheap bet to make.

2. Bancor’s new liquidity mining program + reflexivity scheme will allow it to grow AUM very quickly – they’re taking a page out of the Synthetix playbook. Many, including myself, were wrong that forcing a native token into the ecosystem will harm TVL. Team is also extremely hard working and the main reason for their valuation discount is their large ICO. Look past this and you have free alpha as ETH maxis continue to play them down. $100m valuation with decent upside.

3. Last but not least, Aave is going to reach parity with COMP. This is probably the hardest of all to hit but I’d put the chances of it at least 50%. The “a-token” ecosystem is going to start capturing liquidity effects that aren’t too easy to put a finger on right now but are surely building given the pace of development and execution. $250m valuation is high for sure, but buying the right asset at a bad price is often more important than buying the wrong asset at a good price.

Okay I’ve probably given away enough alpha for this edition, moving on.

USDC Blacklist

On a bigger note, the following event happened. TLDR: $100k wallet associated with scams was frozen by CENTRE (the issuer for USDC).

This is pretty big news because USDC was always believed to felt “impartial”. What’s also very interesting about this piece of news is that FATF just released a report about money laundering with stable coins and mentions the term “stable coins” 230 times in the report. TLDR of the report: stable coins are going to start becoming regulated in the next 6-12 months. Read it for yourself directly over here:

http://www.fatf-gafi.org/media/fatf/documents/recommendations/Virtual-Assets-FATF-Report-G20-So-Called-Stablecoins.pdf

What’s also big news about this is that it solidifies the characteristics of the 3 stable coins we have right now:

1. USDC – regulated by US concerned geopolitical events and blacklisting is still not a non-zero chance. Liquidity is decent and easy to get in and out of.

2. USDT – do they have reserves or not? Nobody properly knows but at least their uncertain regulatory stance makes them a more stable choice for crypto native people since that’s basically what majority of this industry relies on (DeFi included lol).

3. DAI – the most decentralised on paper but also the most dangerous due to its reliance on ETH beneficiaries minting causing a constraint supply. Almost half of the supply is currently being used to farm COMP. The peg is relatively unstable and relies on a governance vote that takes a few days to execute and see the effects of. Brittle is the best word to describe DAI.

Ultimately the type of stable coin your application relies on will be a political statement in itself.

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