Where does DeFi go from here? November 4th to 11th

This week definitely feels calmer and more positive than the last. There are good reasons the DeFi bulls are bullish too, as the market has rallied well since my last bulletin.

People call it a “blue chip” rally, which means that it’s the household names that top the charts (at least that’s the standard definition, you can refer to your blue logos too).. AAVE and YFI rallied the most, followed by decent rallies for Curve and Synthetix. These are big names, but at the same time I would nicknamed things like Uniswap, Compound, Maker, “Blue Chip”, all of which made tepid profits at best.

In any case, the DeFi Pulse Index is pretty good:

Where does DeFi go from here? November 4th to 11th
Where does DeFi go from here? November 4th to 11th

But to me it looks like a rebound from oversold conditions that occurs even in deep bear markets.. The drop spurred discussion on what exactly we saw over the summer, mostly whether it’s like 2016 or 2017. The latter had a short decay between September and October to end the year in style, but while the former was fairly stable, producing slow growth back to earlier historical peaks.

As much as the “opinion leaders” on Twitter are optimistic about everything, I would say that we are firmly in the 2016 camp, and there is a graphic that makes it so succinctly clear:

Google trends for Bitcoin (red), Ethereum (yellow), DeFi (blue).

Actually, There’s a pretty big tip for DeFi searches in the summer. Can not you see it? This is because the relative performance itself pales in comparison to the cryptocurrency overall, and widespread awareness like 2017 is nowhere to be seen.. It is worth noting, however, that these results are from a permanent beginning:

DeFi searches filtered by the “Financial Markets” category.

There is definitely a positive argument here as we apparently are still at the top of the first entry.

At the same time, I think this DeFi rally sums up the worst aspects of 2016 and 2017 into one. We saw a lot of market naivety and fundamental back-end infrastructure failure that basically resulted in gigantic fees in 2017, and at the same time, the average person just didn’t know it was 2016.

The FTX CEO is now saying that even Ethereum 2.0 would not be enough to handle a load close to its widespread popularity, which is reasonable given the much higher processing requirements of DeFi smart contracts.

Overall, I think the sector is unlikely to resume growth until we have much, much better scaling (promising news on this front for 2021 and more use cases than just Ponzi games or, at best, loans for big money crypto whales).

Smart contracts could soon be buying things on Craigslist, something like that

One pretty interesting topic I covered this week is the birth of the Boson Protocol, a primitive DeFi for buying physical goods using blockchain. It sounds pretty crazy, but the concept is relatively solid.

They have these non-fungible tokens that make a claim on a specific item. In particular, it is a reciprocal deed of escrow between a buyer and a seller. It’s like doing Craigslist token deals, which is a pretty cool concept.. The NFT can then be swapped for the underlying product and its economy is designed to minimize third party arbitrage when the system is mature.

I cannot vouch for the details of the project and whether your proposed proposal will be accepted or even work in principle. There are many moving parts with multiple links and incentives so I’m sure it will take a lot of testing.

Currently, the Boson Protocol envisions physical air drops and loyalty points as the primary use case that I’ve heard large companies are keen to see. But everywhere I look forward to every new project that tries to bridge the gap between blockchain and the world.

The end of productive agriculture?

Uniswap token holders have scheduled a community call for Thursday to discuss whether the cash rewards should expire on November 17th.

Currently, Uniswap is by far the largest project in terms of the total lock value, with a record $ 3 billion. While it has always been pretty strong on its own, UNI’s liquidity run took it to new heights for pretty obvious reasons.

For Uniswap, income farming has a very specific purpose: to support liquidity in ether pairs as traders are given an incentive to join liquidity pools to collect the token.

That definitely had its mark: Uniswap is an incredibly liquid place for ETH, you can trade hundreds of thousands of dollars without slippage.

But existing owners are paying for it diluted, and this is arguably one of the reasons why UNI’s price is so low.

The community should, and likely will, rate this as the CEO of a hypothetical Uniswap Co. While the company is not losing money because cryptocurrencies have internalized the “Money Printer go ‘Brrr'” meme even better than the Fed. It is still worth doing a cost-benefit analysis.

I talked about the cost. So what are the advantages? More users, more liquidity, so theoretically there should be more volume. We see some kind of confirmation of this as the volume remains high despite the market downturn:

The problem I currently see with subsidizing liquidity is that it has no competitive advantage. As usual, subsidizes users to gain market share, but Uniswap is already pretty firmly entrenched and clearly dominating the market.

In general, I think the sooner we stop printing money to subsidize something, the better. My opinion here is exactly that, my opinion, so don’t hesitate to contradict me.

A reminder of why DeFi is good

Cred filed for bankruptcy this week.

Like its competitors BlockFi and Celsius, it provided performance across a broad basket of cryptocurrencies, especially those that were not part of the Ethereum network.

Nobody really knows what they did with this cryptocurrency. Others, possibly institutions and traders, have probably been slow, but we have no real way of checking.

And that’s exactly why DeFi is better. They know that it follows certain rules, everything is done in a transparent blockchain. Obviously, This doesn’t completely eliminate fraud or questionable behavior, and you trade the risk of custody for the risk of smart contracts, but it just feels better to know your money is where it belongs.

And as a side note, I know some of the companies mentioned are trying to position themselves as DeFi or “no banks”. The problem is that the difference between DeFi and banks is not “cryptocurrency or no cryptocurrency”, but rather “custody or no custody”. Centralized cryptocurrency lenders fail the critical litmus test.

I also think DeFi fans underestimate how close the building blocks are to the traditional financial system. Some even say that DeFi can prevent the 2008 crash from happening again because everything is over-guaranteed and transparent. I don’t think that’s a particularly strong argument considering how many leveraged derivatives we’ve seen so far.. I can almost feel a DeFi financial crisis looming because people are being fooled on a strange uniswap token that is powered by Curve-Aave-Compound Dai and that is powered by a derivative derivative of Ether.

But on an individual level, cases like Cred are just a DeFi indicator, not their keys, not their coins. Anyone in cryptography, including Bitcoiner, can agree that one of the main purposes of this step is to regain control of the finances.

What sets DeFi apart is that it pushes the principle of self-government to new limits and therefore it should really be appreciated.

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