Yesterday, Compound went live with their token distribution scheme and the response from the community has been nothing short of crazy. The team provided about $2m worth of liquidity in $ETH and $COMP, yet the price exploded to over $100 valuing the token north of $1b. Crypto unicorn via liquidity mining scheme say what!?
There’s so much to unpack over the past 24 hours that I want to cover but here’s the crux of what’s really going on:
People depositing USDC, then borrowing USDT with USDC as collateral and farming $COMP multiples of how much they actually own. As a result, stable coin yields are stupidly high right now.
The influx of people wanting to earn $COMP as the value sky rockets, causes more stable coins to enter into the system and further push prices higher
The above two processes stop or come to a halt when the incentives are reduced or the price of $COMP devalues since yield farmers reduce their stake
Okay so now that we’re all on the same page about what’s going on, what are some learnings and implications?
Anyone can own + control a bank
This is obvious, but worth pointing out. The fact anyone can now own a piece of $COMP which will entitle them to voting rights and cash flows (coming soon) is a huge step in terms of what this technology can enable. $COMP is basically a bank that lives purely in the cloud and took < 10 people to actually develop. Also the fact that it’s a liquid unicorn in less than 3 years is really, really wild to see. The past of raising continual rounds of investment and hoping to go public are over. Tokens will enable a whole new generation of wealth that is closest to what we saw with the internet.
Enabling token transfers helps grow liquidity mining
Unlike $BAL, $COMP opened the gates from day one and allowed trading to commence as tokens were being distributed. As a result the price was a crucial bit of the growth loop as things went wild. $BAL also has their liquidity mining program going on but the action of depositing liquidity to seeing how much your tokens are actually worth doesn’t exist, this really dampens the effect of said liquidity mining program.
“Investing” in startups will look different
As every DeFi team under the sun will use liquidity mining to distribute tokens to ensure a legally safe, compliant way to distribute tokens the competition for liquidity is going to become very fierce. Next generation capital allocators are going to be those who know where to place their liquidity based on a healthy risk/reward ratio. As this liquidity generates fundamental value to the protocol, the price of the token will also rise. Users using the protocol actually keep the value generated. This is quite literally the utopian crypto dream come true. Since liquidity mining will cause valuations to rise, getting into deals earlier will become even more challenging since a protocol at a $5m-$10m valuation is very attractive before public markets pump it up.
What does the rise of DeFi mean?
eric.eth @econoar7 hours ago, the $COMP market on Uniswap was funded with 2,000 ETH and 25,000 COMP, setting an initial price of ~$18.30 per COMP. Within 3 minutes, 10,000 of the initial supply had been taken by 3 whales and price went to ~$48. It's currently at $96. 🤔
It’s no secret that DeFi tokens are starting to explode in price. That being said, I think there’s some very crucial things that are going to come out of it as a result.
Competing layer 1s are having an increasingly larger up-hill battle. Attracting developers to be excited to build a simple token contract is 100x more difficult than building a protocol that has many more primitives to compose with (AMMs, stable coins, lending, interfaces, wallets). Slowly, most investors will need have one of two options as the DeFi bull market takes off:
Sell L1 tokens and re-invest aggressively into DeFi/ETH
Keep L1 tokens, raise additional funds to invest specifically into DeFi/ETH
However, option #2 is only available to those who have shown positive returns since raising money from LPs given macro conditions isn’t the easiest task. Apart from Layer 1’s getting rekt, there’s one other party that is going to lose out big time in this DeFi bull run.
This isn’t a popular opinion (or maybe it is), but centralised exchanges are going to start losing out very soon. Fun fact, the reason why Binance grew to the size it is since it was the only place to get the largest selection of tokens under the sun. However, as they’ve grown larger and larger they’ve actually become one of the last places to get a token. As of now, the following tokens still aren’t available on Binance:
SNX, COMP, GNO, NMR and the plethora of other DeFi tokens coming out soon.
A very key fundamental shift has occurred:
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