The Insiders Recap to 2020 (Part 2)
A trip down memory lane and reviewing some predictions from 2020.
|Kerman Kohli||Jan 8||3|
This is a continuation from the first part since Substack was telling me part 1 was getting too long!
Yield Farming Peak (August)
We all started seeing that yield farming was becoming an extremely lucrative activity and the run-up of YFI enforced to crypto-natives that there was a new avenue to start making money regardless of if there was a macro bull-market or not. This tweet from Andre sums it up pretty well:
I think the amount of stress everyone had to monitor all the new farms coming out was very high and the new developments were starting to become way too overwhelming. However another trend of this time was that the time to get an audit was outstripping the time to launch by a large factor and “apeing in” became a thing.
Unfortunately YAMs was one of the first major farms to blow up, this was only the beginning of exploding farms as we know it today.
Bitmex Goes Down
The other major trend we saw in August was that regulatory enforcement for centralised exchanges started becoming a thing starting with Bitmex getting KYC’d and eventually the co-founders being explicitly arrested! My main take-away from this event would be that all roads will have to lead to DeFi in the future. I’m pretty sure we’re already there with Binance now lagging when it comes to token selection and the high interest rates only available in DeFi.
Sushi Saga (September)
This was one of the most unique events alongside COMP launching their own token to be fair since it’s given a lot of insight as to how defensible protocols really are and what the true moat is! I think at the time many (including the Uniswap team) feared that users would move off Uniswap forever and stick with Sushi or that all the capital would move from Sushi back to Uni. Funnily enough, both of them actually won out since Uniswap is hitting ATHs and so is Sushiswap.
However looking back, it seems like Uniswap launching their own token was probably a mistake or rushed given that the state of governance is pretty much bricked. There’s some theories as to this might actually be on-purpose but maybe it’s highlighting the fact that you don’t actually need 24x7 liquidity mining farms in order to grow TVL…
My conclusion for this post were the following points for investors in the space:
#1 and #2 I’m still firmly behind. #3 & #4 are still to be determined.
Full post here: https://defiweekly.substack.com/p/sushi-swap-one-of-the-most-interesting
The End of DeFi Summer (October)
As DeFi Summer ended there was one key thing to note and that was that no new influx of money was coming into the wider crypto ecosystem, it was all of us basically pwning each other till the death. The question around how the next influx of money will come in was still on everyone’s mind, one thesis which I think had enough merit was the following:
I’m personally really surprised that this theory actually did end up playing out as described above. On a more micro scale, we started to get more targeted and mature in our learnings about how liquidity mining really works. This post was probably one of the most crucial reads to understand it all:
Another observation at the time I made was that liquidity mining was favouring capital providers way more than people actually helping out on the ground. I wanted to better understand what really makes a crypto network thrive and came up with the following triangle called “A Networks’ Hierarchy of Needs”:
If you want to know what each of these actually mean I highly recommend reading the whole post: https://defiweekly.substack.com/p/holistic-networks
Hello ESD (November)
November was quite the ride with a new algorithmic stablecoin on the scene called ESD. The complexity around it is pretty high when you first learn about it but eventually it all makes sense. What makes ESD unique is that it’s achieved a much sharper peg compared to Ampleforth and has a new design that creates a lot more areas to work and improve on through the fact it doesn’t break composability. The way I view it ESD as a system is a guiding hand that shows the correct path to market participants on how to regulate itself. As an experiment so far, ESD has grown to a $500m market cap compared to the $100m when I first wrote about it in November.
Some other interesting developments that have happened since are that ESD has a sister fork called DSD that provides a way for those who missed out on ESD to still get in at a better place. The community around ESD is a lot stronger and they’re already working towards a v2 design of the protocol that marks some significant improvements already.
The Path Ahead
Well that marks the end of this 2020 roundup, I hope you enjoyed and learned plenty from reading through this all - I know I certainly did even though I wrote many of these posts a while ago! If there’s one way that I’d summarise 2020 it’d be the foundations have been laid for significant usage and traction over this coming year. What started out as a cute prototype and toy will soon be responsible for managing trillions of dollars in volume and hundreds of billions of dollars AUM.
A few ideas for what might happen in the coming months based on what we’ve seen so far:
Every project will probably try to do everything in attempts to expand with their larger treasuries. Over expansion will most likely be the downfall when the bubble pops due to lack of focus.
Token incentives won’t be as easy to come by for higher quality projects, many will learn that you don’t need to keep the rewards tap on forever.
Projects will emerge that promise the world on very little traction, this will be a repeat of 2017 in some regards. The next bear market will be when people call “The Death of DeFi”.
Stablecoins will become a ridiculously large market and many players will emerge to support swaps, leverage and more in this segment.
This cycle the tools for leverage will become much more deadly than the previous cycle, given the limitations of Etheruem there could be more Black Thursday events that we see play out
High quality DeFi projects will command $10b-$25b valuation and seed rounds for DeFi projects will become increasingly expensive due to the high network valuations on launch
Given the high yields DeFi offers and the low cost of capital in the real world, the incentive for TradFi will become increasingly high to jump in the game
DeFi will be touted to solve “the world’s problems” and reach peak euphoria this bull market. When this becomes clear we’ll probably be reaching the top and you might want to think about reducing exposure
Naked assets will become increasingly harder to come by in user’s wallets as every asset will be wrapped in some form or the other. Watch more in this space for protocols that take advantage of this ;)
The design space for new DeFi applications are still wide open but require more creativity as the basic infrastructure tools have been laid out. My predictions is we’ll see all sorts of new novel financial instruments that weren’t possible before
Last but not least, thank you to all of you who have been loyal readers and subscribers! I’m pretty stunned by the amount of people reading this newsletter and all the opportunities it’s bought - so really, thank you.