DeFi Weekly #52

Gods Unchained smashes records, Compound raises $25m, Synthetix Spartans are taking over

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  • Hello everyone, this week's DeFi Weekly is going to be a monster but buckle in as there's plenty of important things going on.

  • It's no secret that Gods Unchained is smashing records by minting over 7m+ NFTS over the past few days leaving CryptoKitties behind. The only difference is they haven't clogged the entire network while doing it. How? Well for starters: incentives. Even in 2019, as soon as investors hear of a base layer chain the pattern matching kicks in and it seems to be a worthwhile gamble to make. Joel Monegro’s Fat Protocol thesis is probably the most influential, yet misguiding, blog post written in the entire space. The thesis that value ONLY accrues to base layer chains is terribly misguided. It's not to say that it won't, but blindly believing that it's the only way is a sure shot way to lose out on the next set of returns. Gods Unchained is a perfect example of the application layer creating and capturing value ($6m worth of cards sold out) while still using "slow" blockchains (Ethereum). I'd expect over the next year or two we're going to see even more applications come out that create more value. While majority of generation 1 DeFi is infrastructure focused (MakerDAO, Compound, dYdX, Synthetix), generation 2 of DeFi is becoming increasingly application layer focused (Dharma, PoolTogether etc). This leads to my next point in today's edition:

  • Compound raises $25m for their Series A! This is a pretty big achievement as it's the most money we've seen being poured into a DeFi equity based company. Robert Leshner has a great track record which helps, but the key milestone is the fact over $100m in loans has been originated from their platform. It's not a secret that Compound's Seed investors enjoyed a good on-paper return after this Series A, however does that validate that investing in infrastructure is necessarily valuable? For context, Compound doesn't actually make any revenues as an entity. Why? As per SPT0615-JD on Reddit, "extracting fees will make them a VASP and subject them to AML/CFT requirements and licensing. Right now they are defensibly a software provider, not a money services business." (source: We're seeing Compound take the classic Silicon Valley route of creating value and then capturing it later. This model has worked very well over the past 20 years with todays' unicorns but will the same playbook work in crypto? Not so sure. In order for Compound to extract fees they're more or less going to have to become regulated which means... KYC! So when/if that happens, Compound's defensibility may go down as liquidity moves away. The reason why I say that is that actors in DeFi don't actually care about the entity providing capital, as long as it provides capital at good rates. We saw this first-hand with Dharma when they started subsidising loan origination. After the subsidies were cut we saw a sharp 40% decline in liquidity. Orders with the P2P loan matching were also present but I wouldn't count it as a large reason. The counter force which Compound is banking on is creating a larger developer community and integrating with more end user applications (exchanges, wallets etc). Since Compound is based in the US and not fully decentralised, they're still under the mercy of the SEC. Right now lending protocols aren't really on their radar, but given another 2-3 years we're going to see regulation become a more dominant theme in the space. Will the create capture value later model work or fail in crypto?

  • Last and final point for today, Synthetix is making massive waves this week by taking out second place on DeFi Pulse! What's caused the spike? It's hard to say directly but part hype and part value. In May earlier this year the amount of ETH locked up went from a few million to close to $20m. The market for once actually reacted to this fundamental value creation and the price of the token rose as well. This virtuous cycle continued till a16z invested $250k causing the price to go on an even more aggressive upwards trajectory. From the hype of the token price it's also attracted more users to the platform causing the amount of ETH to be locked up to reach over $100m! On the surface this doesn't really sound like a big deal but in comparison to Compound it's worth thinking about more deeply. Synthetix is creating and capturing value directly through their token which anyone can buy into. Value capture is created alongside value creation rather than being deferred into the future. In the current climate of 2019, tokens are extremely unpopular amongst investors as it doesn't offer the same rights and protections as equity. However the outsides returns from tokens and immediate liquidity are hard to ignore. This post by Chris Burniske is one of my favourites that I keep referring to every time: It'll be interesting to see which tokens make their comeback from the graveyard after extreme 2017/18/19 sell pressure. Regardless, congrats to the Synthetix team for the achievement!

  • That’s a wrap for this week!