This Week in DeFi – July 17th

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To Our DeFi Community,

The Initial DEX Offering (IDO) is here. And while it’s not perfect, it’s a substantial improvement from the token distribution models back in 2017 and 2018.

While the evolution has been slow, DeFi tokens have taken small steps over the past few years to improve incentive designs, distribution methods, and more. The Initial DEX Offering is another step in this evolution as it provides investors with permissionless access to token offerings. The movement was initially marked with UMA depositing 2% of the token supply into Uniswap for what many are calling the first IDO. What’s interesting to note with leveraging Uniswap and other similar AMMs for these offerings is that these tokens are priced on a curve. They’re effectively primed for a pump and dump as everyone’s buying and no one is selling (because no one actually holds the token yet).

just to clear up some misconceptions…

yes, @UMAprotocol *listing* price = seed round price. but, token also being sold on a curve

with just:

$30k UMA purchase, buyers paying 10% premium
$56k = $20% premium
$237k = 77.% premium
$513k = 156% premium
$1m = 300% premium pic.twitter.com/mTNbCkxi8L

— Matteo Leibowitz (@teo_leibowitz) April 29, 2020

The key difference here between Initial DEX Offering and token sales in the ICO era is that the motive isn’t for the developers to cash out big on the token offering (well..sort of). Since the teams have to put up another liquid asset as collateral in addition to their tokens (mostly ETH) and liquidity can’t easily be removed without destroying price discovery, the token sales tend to not drive a massive profit for developer teams. Instead, these types of offerings allow the market to discover an accurate valuation for the protocol while the primary distribution mechanism for the public is through value-added participation like liquidity mining (also known as yield farming).

We’ve seen a similar offering this week with bZx – the lending and margin trading protocol – distributing their native governance token (BZRX) via an IDO on Uniswap. But like UMA, we continue to see the issues surrounding the permissionless nature of these AMMs and their respective design features. Since a handful of these offerings have happened between now and UMA, people are starting to game the systems. With bZx, the problem came from users setting up front-running bots, effectively allowing a few individuals to purchase the tokens in the same block as the bZx team made the genesis deposit. What resulted was the price of BZRX immediately spiking up to $0.60/token compared to its listing price of $0.05/token. Within the hour, the tokens were brought back down to earth with a more sustainable price of $0.12, leaving many retail investors deep in the red as they had virtually no chance of getting the tokens at a reasonable price.

This brings up the trade-off between “Fairness vs. Openness”. While anyone can participate in these sales, the permissionless nature of these liquidity protocols opens up the opportunity for bad actors who aren’t aligned with the long-term vision of the respective protocol. Instead, they’re primarily concerned earning a quick buck (and there’s nothing really wrong with that either). But it’s problematic, to say the least.

Personally I am a Rawlsian when it comes to ethics, but I also accept there is a harsh trade-off when trying to achieve fairness, it comes at the expense of efficiency. This is the challenge, tempering efficient markets to achieve fairness, where do we even start?

— kain.eth (@kaiynne) July 14, 2020

The silver lining here is that DeFi teams are becoming aware of the underlying issues. Best exemplified by mStable – who was set to launch a similar offering as bZx on Balancer this week – the team elected to delay the offering in order to design a more fair and robust system for their MTA distribution event. In turn, mStable’s token offering will be hosted on Mesa, a Gnosis-based DEX offering ring trades and batched orders to prioritize fair pricing over the instant settlement. Investors can place bids before the auction begins (which starts on Saturday, July 18th), allowing anyone to get a fair price, with the chance of the offering concluding within 5-30 minutes depending on demand for the tokens. Equally as important, all proceeds from this auction will go to the mStable Aragon DAO and will only be available once the mStable protocol has achieved a sufficient level of governance decentralization.

This is a massive improvement over previous offerings as they’re not relying on an AMM to price the token but normal market dynamics instead. While IDOs are not perfect, we can imagine that they’re not going away anytime soon. If anything, we should expect token teams to get better at launching these offerings that are more conducive to the average DeFi user.

So for those just tuning in to the world of open finance, dust off the ol’ Ledger and start paying attention. Because the DeFi bull market is here.

Till next week!

–Lucas

Interest Rates

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