Minority view: the vast majority of DeFi tokens are worthless

DeFi

You may have noticed that the decentralized financial DeFi on Ethereum has now become the hottest topic in the cryptocurrency field, further consolidating the first-mover advantage of Ethereum, and is expected to challenge the leaders in the traditional financial services field.

The success of DeFi is attributed to the three basic properties of the decentralized blockchain network:

Composability: Any output from an existing solution (such as a mortgage or automated market making) can be easily used as an input for a new solution. This means that developers can build on the work of others, mix and match existing services to create their own financial supermarket (cryptocurrency people call it Money Lego).

Transparency: Every project is transparent, open source, and can be copied. Developers can not only understand the inside story of a successful project, but also copy the code and launch their own variants.

No permission required: anyone can do anything. User participation, supplier entry, etc. do not need to obtain permission, do not need to follow the KYC procedure for confirming user identity, and do not need to comply with the legal supervision of anti-money laundering / combating terrorist financing AML / CFT. Those with innovative ideas will build them, and those who like related services will use them. It’s that simple.

At the same time, support for stablecoins, oracles, and infrastructure such as ramps for other platforms (such as Bitcoin) are also increasing.

All of this and the earliest DeFi protocol has been around for many years. However, it was not until the rise of liquid mining at the beginning of this year that the above-mentioned firepower was fully realized. As for the innovative incentive plan of liquidity mining, a real-life example can be used to help readers better understand: in the past, banks once gave new account holders a toaster. The DeFi project goes one step further, giving away equity to liquid mining participants in the form of governance tokens. The more users who borrow to provide liquidity or transactions in a particular agreement, the greater the return they will get from future income and a greater say in ongoing governance.

Liquidity mining is the expansion of the decentralization of the encryption field and the shared spirit of the community to the field of financial services. There is no off-chain peer-to-peer reference product, but similar to Robinhood giving away stocks to its customers for free based on usage.

However, Robinhood will never do this because its infrastructure cannot handle this practice, and the regulators do not allow it-this is another reason why the only real innovation in financial services occurs on the blockchain.

The introduction of liquid mining has made the DeFi world extremely hot. Even those who do not have immediate borrowing or transaction needs are beginning to participate in getting rewards. This surge in lending and trading activities has created a virtuous circle: the more people using the protocol, the more valuable the tokens are given, and therefore the greater the incentive for new users to enter the game. In just three months, the value of DeFi-related assets has increased by 10 times, and the cost of Ethereum has soared at the same time.

All of these have greatly promoted the adoption, energy and excitement of DeFi. DeFi has reinvigorated the crypto ecosystem, attracted attention from the outside world, and created greater trouble for regulators that are still struggling to resolve the difference between security tokens and tokenized securities. But it is not a good thing for the value of the DeFi governance token itself.

In the most pious DeFi circles, this statement of mine may be considered heretical, but I think that most DeFi tokens are worthless. why? This is determined by the characteristics that make DeFi stand out. In the cryptographic circle:

Composability + transparency + no permission required = no moat

Simply put: if you build a DeFi, users will come in, but someone will copy a copycat agreement, and then users will leave you and run into the copycat agreement. Anyone in this world can do anything, including copying your code, adjusting your solution and copying the name of your agreement, then every successful project will have imitators, and because there is no account registration, national boundaries or regulatory barriers , Your customers can become their customers and can be converted with one click.

This is not just a guess, it has actually happened. The popular decentralized exchange Uniswap forked out Sushiswap, which was then copied to Kimchiswap. Another popular agreement, Curve, was stuffed into Swerve, and Yearn, which has a high yield on farming yields, has spawned more imitators, countless.

The problem lies in the basic equation of trust. The main goal of a decentralized platform like Ethereum is to minimize counterparty risk, which is the fundamental driving force for financial innovation in the new century. The success of the platform in this regard makes it easy to develop new solutions, and it is difficult to profit from them, because everyone shares this most important advantage. This is not the case with traditional finance. You can spend billions of dollars to copy the physical infrastructure of the New York Stock Exchange NYSE or Bank of America BoA, but you can’t get their customers because they don’t have the license, reputation, and trust that make these entities trustworthy. relationship.

Ironically, this means that the only lasting value of any DeFi solution comes from messy and centralized content that cannot be simply copied and pasted, such as business development, venture capital support, and talent.

This also means that at the current price, the DeFi protocol with the longest history, the most sophisticated team, and the more ups and downs than the protocol with only a few months of history, its tokens are the only ones worth having.

My favorites are MakerDao, Compound, Aave and Uniswap. Everything else is either too new, unverified, too little used, or too easy to replicate (as Dai increasingly penetrates the obscure corners of the DeFi ecosystem and Latin America, Maker seems to be increasingly becoming the only one that can truly prevent copycats solution).

Ironically, the market currently values ​​most of these agreements in the opposite order of mine. Without these basic agreements, there is no reason for the DeFi aggregator Yearn to exist, but the latter has a higher market value than all the aforementioned agreements. Synthetix, a synthetic asset manufacturer, has issued less than US$60 million in sUSD stablecoins, but its valuation is higher than that of Maker, whose Dai stablecoin is close to US$1 billion. These gaps are the result of the never-ending desire for free funds in the cryptocurrency world. Maker will not give up any equity, while SNX has transferred a lot of equity.

These gaps will eventually be resolved. The valuation of the core agreement will rise to the highest, and some of the current soaring prices may eventually be worthless. But even then, the fact that DeFi is easy to construct will always limit the upside of valuation. The most sustainable winner will be the off-chain infrastructure provider. The simple reason is that USDC’s cash reserves or Bitgo’s cold wallet cannot be forked.

Ethereum itself will once again become the biggest winner because DeFi increases its value and consolidates its first mover advantage. It would be wrong to take Ethereum’s sky-high transaction fees today as luck.

Demand exceeds supply, which is the best thing any startup may encounter.

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