Hey all, hope you enjoyed your holidays! As you can tell, we’ve had an explosive year back so far and thought I’d take the time to review some of the events and review some subjectively strong opinions I made during that time. I’m not sure how many are right or wrong but I’m sure there’s something valuable from reflecting back on your own work. For what it’s worth, this isn’t your usual 2020 DeFi recap!
Lots of alpha leaks in this post fyi.
Competing Chains (Jan)
During January, people were still trying to figure out if competing chains would have a chance since the majority of the loudest VC’s had heavy bags from competing chains. Seems like that part about new chains being obsolete is mostly true as majority of the plays are at the “application layer” aka DeFi protocols/apps and the existing chains are struggling to garner any interest.
For those of you that are new to the space, virtually every new company would raise in equity as tokens were looked down upon. In a short 12 months, tokens are the new narrative and nobody wants equity. The number of equity -> token transitions has exceeded most people’s expectations. One thing to keep in mind when we enter the next bear market is that investor’s preferences for tokens will most likely shift to equity as they may become unpopular again. Hard to say for sure but the key thing here is that tokens vs equity is basically a flavour of the season for private investors.
Peer-to-peer Tokens (Feb)
Earlier in Feb this year we saw Opyn launch their Convexity protocol for options which was the first attempt at on-chain DeFi options. However, the way they implemented their protocol was based on expiring tokens which I was pretty bearish on due to the lack of integrations possible for such tokens. The team is great and working hard to solve some of the issues around expiry and pricing through their new AMM model however if there’s one thing which I’m continually bearish on is tokens that are “short-term”. I think whichever team can crack this properly could be onto something or maybe the current technology on Ethereum will never be well suited for expiring tokens. Many fixed-interest rate protocols currently face this issue as well.
Early Innings of iEarn (March)
Back in March we saw some pretty crazy activity on iEarn (now know as yEarn) where someone turned $89k into $465k in a single transaction. Before things could play out people were jumping on Andre and calling him irresponsible for not deploying audited code and employing the “test-in-prod” philosophy. I think there’s something really crucial to remember here and it’s that up until this point there was social consensus amongst the community that you had to have your code audited otherwise bad things such as this would happen. In some ways Andre gave permission to other builds to experiment building with unaudited code and accelerate the pace of innovation. It didn’t come at any cost though:
The Ethereum community needs to self reflect on its habit of witch hunting The last one just caused the founder of one of the most exciting DeFi projects to step down He never raised funds, turned away money, and shipped like an animal Disappointing
March 2nd 2020
19 Retweets151 Likes
As you can see from the above, one of DeFi’s best builders was basically shunned and discouraged from working on something he thoroughly enjoyed working on. However, if there’s anything to learn from this incident to all builders out there is that public opinion is ephemeral and should never discourage you from doing whatever you do. Similarly for investors, what isn’t “hot” today can become the next biggest thing in a matter of a few months.
COMP & DeFi Valuations(April)
April was easily one of the most interesting months that offered a glimpse into the rest of the year in DeFi. The largest thing that got me excited was Compound announcing the launch of their token and their subsequent allocation & implied valuation. This was before the very start of DeFi yield farming. When I ran the numbers on the COMP token, their implied valuation was about $100m. One part which I got wrong was it about being non widely traded, they really did let the flood gates wide open on it!
When COMP went live at a $1b+ valuation I think that exceeded all of our expectations imo. a16z and everyone else who got in that round made a killing even at a Series A level. However, one aspect which interested me at the time was that SV based companies retained a premium/edge over non-SV companies. I and many others believed that this would eventually flip. Turns out it did.
If you did read this article and believed that LEND would reach parity with COMP at a $30m valuation – congratulations! Everyone else is now buying LEND/AAVE at a $1b+ valuation. Talk about unicorns. The other thing worthy here is realising that differentiation can be built through incremental features + token distribution.
Some of the take-aways from that piece were:
Most of the above happened, I’m still not sure if I agree that foundations are terrible however the part around VC tokens vs community tokens has largely played out as expected. Tokens that sold too much to private investors too quickly are facing issues with building a healthy token price narrative. The part around decentralisation for regulatory safety is a theme we’re seeing accelerate rapidly as well.
The Rise of Aggregators (May)
In May I probably wrote a crucial piece around how I saw the rise of aggregators and the paths they could take. This was when 1inch was still a tiny startup that was doing $10m of volume and people thought of it as a cute application. In this DeFi Weekly post a key thesis I had was that aggregators would become sharks and cannibalise down the stack. That pretty much happened with 1inch and launching Mooniswap + their own token.
I also did an interview with DegenSpartan at the time with his predictions for the the rest of the year. Pretty amazing to see most if not all of these be pretty spot on. I personally know SNX felt expensive at $0.78 at the time but given it’s still 10x’d from then is mind boggling to see.
Farming is Born (June)
June was probably the start of the DeFi craze and yield farming as a thing in crypto. It’s also the time that DeFi probably hit its golden moment amongst the community. I probably wrote a bit too many articles about COMP and BAL but there’s plenty of reflections to look back and re-summarise.
I think at this point our mental models for how a startup works fundamentally changes. Furthermore another key shift that happened with rise of liquidity mining was that centralised exchanges became redundant much quicker than anyone probably realised.
Uniswap is where tokens start and when enough time passes they eventually reach Binance. This is such a stark contrast to a year ago where getting listed on Binance was so important.
While yield farming was great at the start, there were some issues and were some suggestions that I thought could improve said schemes. We’re seeing pretty much all of these happen at the moment:
SUSHI locks rewards for 6 months (with 1/3 up-front)
ARC uses the concept of reward campaigns rather than continuous yield farming
YFI used yield farming as the initial distribution and made A LOT of early farmers extremely rich
A Side Note on AMMs
Earlier in the year I did a little rundown of all the AMMs in the space and their relative advantages and disadvantages. The protocols covered were Uniswap, Balancer, Bancor and Curve. Ultimately from writing that piece there were a few take-aways that I wanted to keep in mind. Looking back it seems like AMMs are indeed being unbundled however the counter-point to this is that general purpose AMMs are going to start becoming “full-stack” by adding stablecoin swap support. Will their dominance get stronger or will the stablecoin specialists win? With regards to Bancor, it seems like using a native token to create a reflexive scheme hasn’t played out as expected.
The launch of YFI (July)
Over a regular weekend I jumped onto Twitter and there were talks about some new strange token called YFI launched by Andre and was worth $1,000 in the matter of a few hours. I decided to dig in a bit more and was decided to yield farm with a very tiny stack because the risks were extraordinarily high.
Like these contracts had a very high chance of losing all of your money entirely. So rather than farming YFI, I decided to buy some outright because there were some factors that made it pretty attractive purchase.
The date that article was posted was 23th July 2020, which was right at the start of YFI’s crazy run-up to $40k. The best part about this was that this opportunity was available to anyone, everywhere and without the need for any accreditation status.
In the case of YFI, regular individuals accumulated at $1000-levels only to see it 40x over the course of a few months.
Alright I’m pretty much hitting the word-count limit for part one, the second part should be in your inbox soon.