DeFi Weekly #57

0x's Making Moves (Future AMM Player?), A Look into Nervos Network (The Catchup Game), Dharma Monetising (Stay Decentralised or Get Regulated?)

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This week has plenty of super interesting things going on - let’s get stuck in!

This is slightly old news but last week 0x launched a DEX aggregation API to get the best quote across multiple exchanges. I personally found this pretty fascinating as this isn't something that pertains to their core competency of being a decentralised exchange - it's more of a dev tool launched for the ecosystem. One key motivation for the move is most likely in response to DEX aggregation site which has been increasing in their transaction volume over the past few months. I've attached a graph below showing their almost exponential rise over the past few months.

Obviously 0x would love a piece of this volume, hence this recently launched API. If we take a step back and look at how 0x is positioned in the crypto ecosystem we get the following:

The obvious gap over here which I think 0x is most likely working on is an AMM which will directly compete with Uniswap. I'm not sure how exactly it'd compete or what unique advantage it'd have apart from price (of which they might not be able to compete due to having to provide value to token holders). Another question which I'm slowly starting to wonder is how much runway does 0x have considering they've been operating for 2-3 years and had budgeted for a 4-5 year run way. Given the way their token has been trending negative since the bull market and 0 change from staking, there's not much which is going to turn investor's confidence around in the future value appreciation of the token unless the value capture mechanism is much stronger. It may be possible that they'll consider doing an equity round for a centralised order book should the money dry up, or they "decentralise" leaving all their contracts left open sourced. Their market cap is $162m, however there's still 40% more of the supply to be unlocked and any meaningful sell will further tank the price. Alt season could change things, assuming mania causes irrational speculating into 0x once again - however that may be unlikely given other more successful value capture tokens (and new tokens that would launch as well).

From a few conversations I've had, many investors seem to be bullish on Nervos which recently launched their token and main-net last month. I haven't heard too much about it except it's another layer 1 chain that claims to be "designed for layer 2 scaling". My initial first impressions of it were that it seemed like another poorly attempted chain, however I think after doing a deeper dive into it I'm slightly more optimistic (although I stress the point slightly). For those of you that aren't up to scratch, Nervos basically makes their native token the right to store data on the base chain rather than pay for computation. Each "storage cell" can also store custom logic/scripts that can be used to deploy contracts, libraries etc. It uses a UTXO model to combine the inputs of cells with their outputs. The idea around it is that eventually the token becomes a store of value as storage becomes scarce which incentivises a good value capture mechanism but also allows developers to build more storage efficient layer 2 solutions. One added benefit of the way they've designed their system is that you can deploy custom hashing/signing algos to sign transactions with which in theory would make it easier to support other encryption schemes for things such as SNARKs and STARKs without requiring an EIP style base layer change. Their docs have good and clear explanations about how the whole system works without too much jargon and seems relatively legit. You can read more here: Okay so now that I've got that out of the way, why am I still not so excited about Nervos? Well for starters, they don't have any way for 3rd party developers to write "smart-contracts" from what the docs show. If you were to classify the progress a layer 1 has made in terms of developer utilities it looks a little something like this:

  • You can deploy custom functionality but need very high insider context and a lot of help from the dev team

  • There's docs you can read and maybe be able to deploy everything magically goes right and there's no quirks with the API (which there almost is because no dev internally will test their own stuff smh)

  • Not only are there docs, but many 3rd party sources will teach you how to do the basics (deploy a token), read data off-chain etc.

  • There's multiple implementations for each component in the stack: multiple node client implementations, multiple JS libraries to interact on-chain, multiple wallet providers

  • Many developers have built useful applications with developer access to allow developers to create composable applications that magically work together with access to significant liquidity (able to sell at least $100k worth of native currency for USD with less than 0.25% slippage)

So where is Nervos on this scale? Level 1. It's basically where Ethereum was right when it launched 4 or so years ago (maybe even less since you could deploy contracts yourself when Ethereum launched). Furthermore, the whole thesis of optimising for layer 2 scaling is a bit weird to focus on when there's literally no activity apart from sending CKB on-chain at the moment. It's like claiming you have the usage of Ethereum and offering a solution to it except for the fact you have literally no-one using your chain. If there's one piece of advice I'd give layer 1 chains, identify a real use case which can attract a certain class of user orientated application and optimise for that - not technical things your chain can do.

Surprise surprise, Dharma charges 10% fee on interest earned by their users! Assuming they're coming close to the end of their Series A money, they need to start showing some kind of revenue for Series B investors as great team and story doesn't necessarily fly anymore. Assuming there's ~$1m locked up, with it earning 5% on average, and a 10% fee that means most likely $5,000/year in revenue that they can book. I don't think those numbers are going to do anything meaningful to the bottom line for raising more money but it seems that becoming regulated and providing easy on-ramps could help that number go up. However like we've seen in crypto, either you go 100% decentralised or 100% regulated. In their current form, Dharma is a bit of a hybrid that's starting to lean more towards being regulated. The most similar situation I can think to them is Veil who closed down. In their closing post they said this one line which is commonly overlooked in crypto:

Link to post:

I increasingly feel like Dharma is in a situation to where Veil was when they decided to fork Augur and become semi-centralised, semi-decentralised. You can already see the effects of alienating one group as crypto-natives are confused as to why you'd pay a 10% fee for "just a nicer UI"

The team's response is that non-crypto natives will be happy to pay as they're receiving a higher interest rate. Having personal experience with attempting something similar, non-crypto natives literally get scared when they hear their money is touching crypto. If you ask anyone with money and say "what if you could earn much more then regular interest rates?" and when they ask how you just mention the word "crypto" their brain switches off. Crypto still needs social legitimacy in order for people to try it out. Regardless, I wish Dharma the best of luck as navigating crypto is no easy feat - especially when you're in the drivers seat.