Section 7. DeFi 2.0 - Transcripts

January 11, 2022

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Key Trends, people, companies, and projects to watch across the crypto landscape with predictions for 2022.


section seven

defy two point

oh In the first chapter of this section we covered the core building blocks of Web three N. F. T.

S. Or identity and unique digital asset


The Blockchain registered lands of the metaverse

and the decentralized

hardware networks that will host it. All the next three chapters then are all about how we manage the virtual worlds financial systems, scale their

infrastructure to accommodate billions of users human and

machine and govern them over

time. Start with developments

in the decentralized financial system

or defy as there has been a ton of new development

this year. Despite most B five

blue chips living through a relative

Bear market, many are down 80% or more

versus each year to date

before we dive deep into defi let's start with the currency that bridges us from the old world to the new tether

Section 7.1.

The U. S. D. T.

Bridge much to the chagrin of bit for

next R. I. P.

And short sellers everywhere. It's unlikely that tether will fail or put an end to this crypto bull market if that were to happen. The

death of tethers usd t would much more likely come at the hands of a US

government seizure than a bank run from the company's

depositors with tether things are never quite

as they seem. So I get the mainstream confusion.

It's actually

pretty simple and I'll reiterate last year's entry on tether saying

tethers de facto boosters, major global crypto exchanges and market makers are likely to gloss over

us. DTs risks in the absence of obvious replacements to the

near universally accepted dollar denominated reserve,

the muted market

impact of this year's

settlements. N. Y. A. G. And

CFTC may have lulled some to conclude the worst case

scenario in tether would be an orderly move into other stable coins. But it's one thing to send money from one platforms perpetual contract to another's. Like we saw with bit max

last year quite another report sees dollar

reserves to new banks.

Weather is the ultimate digital euro dollar and a lot

of people trust us D. T. Not because they have done business with tether at scale

though many have

or because they believe the U. S. D. T. Reserves are fully

backed at times they haven't been

or because they

are comfortable being complicit in a global conspiracy. Nobody's got time for that. But rather because at the end of the day they have to trust

tether and the system has worked so far it's inaccurate to call tether a fraud and it's also a clear way to out yourself as

someone who doesn't know what they're talking about.

There's a lot of legitimate companies that work with them at scale. UsD T. Remains the reserve trading currency for most of the world's largest exchanges and

trading pairs. It's not

particularly close U. S. D. T. Is an

order of magnitude more liquid than US. D. C. Or B. UsD even coin base added support once it got out the door for its I. P. O. This spring. And there are

co creator of

U. S. D. C.

Other has published two audits of their reserves already this year reducing concerns that the company is running a fractional reserve.

The company settled

with new york's

Attorney General $18 million dollars

and with the cftc

$41 million dollars relatively paltry sums for something

that critics decry

as a Madoff sized Ponzi scheme. The company's fib about co mingling funds after the 2016

bit finex hack and customer Balin paid off and likely

saved customers and

the industry in the process. Would it have been better

to tell the whole truth and destroy the underlying

market? Yes.

The company shuffled funds around in 2018 to cover for the $850 million dollars that was stolen

by an unscrupulous partner during some insane under the table. Panamanian and eastern european banking transactions. But even that's at least partially on the U. S. Government

tether wouldn't have had to resort to such desperate counter

party measures if U. S. Banks would take on regulated crypto customers in the first place. I know it sounds like I'm making excuses for bad behavior but that's not it. My point is that we all hold our noses and accept

Kryptos cowboy for what it is a bridge to

mainstream adoption point desks.

Marc Hochstein nailed it with this parable a bridge called tether tether is the most convenient but rickety

rope bridge that spans the mountaintops of the legacy finance world and the

crypto finance world. It's

shady as a service by design. Less exposed to seizure risks due

to the jurisdictional arbitrage it relies upon, it's also likely

to get replaced at

some point. Even if the

terminal date remains

unclear, I think of tether as the Omar little of crypto

everyone knows

Omar breaks the rules but the man lives by a

code. Everyone in the game respects him even if they fear him and regulators should know by now that when they come at the king you best not miss R. I. P. Omar

Usd T sheriff, stable coin

Market declined from 80

percent to % 50 this year but tethers structural importance to crypto

exchange settlement remains intact.

Usd T really should be in the markets

infrastructure chapter in

U S. D. C. In the defi section given its explosion as a

defi reserve but I didn't want to separate

packs owes and U S. D. C. I was also sick of editing section 7.2. Die versus U S. T. There have been numerous attempts to challenge die as kryptos leading decentralized stable coin but all have failed so far

is this time different

following a set of

upgrades and top tier integrations. Tara's. Ust the fastest growing, decentralized, stable

Coin of 2021

is positioned to give die its strongest challenge yet

on september 30th

terra underwent its highly

anticipated Columbus five upgrade which spawned dozens of new applications and

enabled terra to

expand its reach. Cross

change through cosmos, inter Blockchain communication protocol or iBC, a

new insurance protocol and

Terra Ozone helped add the $3 billion ust via luna burns to its community

treasury within mere

weeks. In addition, the

cross block chain bridge wormhole V two launch support for

terra bringing terror. UsT to ethereum and Selena

momentum for US. T is accelerating and it's now positioned to become the de facto interchange stable coin

though. Maker DAO attracts criticism for its lackluster token

price performance and is generally less sexy compared to everything else happening in defi two point oh it has never been in a better position fundamentally, Maker TVl is at an all time high of $20 billion dollars and

Die supply recently surpassed $8.5 billion. The most impressive part of all this growth is that unlike nearly every

other defi and stable coin competitor, Maker DAO has provided

no incentives to use its

platform. All of its growth has been

organic despite its new competitors, die

is still the most widely integrated, decentralized, stable coin in the

industry and the preferred decentralized, stable coin on ethereum defi ecosystem. That's thanks

in large part to its four year track record of stability. The most important attribute of a stable coin

is survival.

Di stands in

a league of its own.

It survived multiple brutal drawdowns and proving

its resilience something competitors can't replicate so easily diverse. UsT comes down to ethereum defi dominance. One thing UST has in its favor

is that it's not even trying to compete with die on its home turf.

Instead, UST is building its

own ecosystem on terra and aggressively expanding multi chain. If crypto continues evolving to a multi chain

future, the winning, decentralized stable coin may be the one that proliferates across the broadest ecosystem of block chains.

Tara is marching in this

direction while di

continues to serve primarily as an ethereum reserve, there's plenty

of room for both.

Section 7.3. The algorithmic stable coins renaissance following a mini hype cycle in Q 4 2020 algorithmic stable coins crashed violently and entered a

long trough of

disillusionment early this year. But we're seeing a renaissance in the sector today, Powered by two new

innovations, fractional

reserve stable

coins and protocol controlled

value. First though, what do we

even mean by algorithmic stable coins.

Here's an excerpt from a thematic

research piece we published

on the sector earlier this year. Most first generation algorithmic stable coins trace their origins

To a paper written in 2014 by Robert Sam's titled A Note on Cryptocurrency


Senior Ridge shares as described a stable coin model which involved

two tokens, a stable coin and a token that shares in the system. sr

Ridge profit for new issuance demand for a stable

coin increases the price of that stable coin rises above

$1 expansion and

the supply of stable coins must increase. New issuance is

distributed to shareholders until demand

Is met and the price comes back to the $1 equilibrium. The opposite happened when demand falls when

the price of the stable

coin falls below

$1 contraction,

stable coins are removed from circulation through a burn

mechanism. In exchange for the issuance of New

senior Ridge shares

what this model does is effectively bifurcate the system into a speculative asset that absorbs

volatility and

backstops the system in a stable asset that is the object of stabilization. This sounds

simple and effective on

paper but brings up

too obvious limitations


reflexive. Itty can create bank runs on these protocols and the lack of collateral backstop

means the bank can legitimately go to zero,

reflexively propelled early experiments es de frocks to great heights that annihilated them on the way down.

Senor it shares in these systems are only worth something if buyers believe in

the ongoing viability

of the systems and the

positive NPV of their future

monetary supply.

When heavy redemptions hit quickly, it crushes

confidence and chills reinvestment in the shared tokens, causing a death spiral without any collateral

backstop. To offset the spiral,

algorithmic, stable coins are dependent on outside lenders

of last resort to bail them out during severe conditions.

Users or bag holders need to step in to save the system or the shares and stable coin will fade

to oblivion. Then there's the bootstrapping

challenge, you need to reach a sufficient level

of market capitalization and bootstrap enough liquidity to

ensure fluctuations in demand won't cause significant volatility in the stable coins.

However, in the absence of genuine early demand for

a given stable coin,

you need to

manufacture that demand through incentives to speculators

that speculation fuels reflectivity. But the more reflexive a stable coin is, the less stable and useful it is and the greater the perceived risk of a future liquid

crisis. In the protocol, fractional reserve models and protocol controlled value

have changed the calculus for algorithmic stable

coins, fractional reserve, stable coins pioneered by frank's protocol

built upon the idea that there is a sweet spot

between over collateralized

and pure

algorithmic stable coins that allow

for a scalable capital, efficient, decentralized, stable value asset.

The fractional reserves dampened reflexively during protocols of contraction offering stable coin holders 1-1

convertibility between

stable coins and underlying collateral and

generally provide greater confidence in the peg compared to purely algorithmic models

in the year since fractions launched,

Its reached $1 billion dollars in circulation

and has maintained a tight peg throughout the year including the May crash protocol controlled

value PCV was pioneered

by faye protocol which functions similarly to a giant

maker dial vault. What makes

fade different is that the protocol owns the assets under deposit to the system, not the individual LPS of the vaults collateral, he is not alone against collateral so much as it's effectively a sale of collateral assets in exchange for a stable coin. The system features two assets

tribe a governance token that can provide a backstop in bank run similar to M. K. R and faye

the stable coin if

a is able to do virtually whatever it wants with its treasury

assets, much like a depositor governed bank. Once

they're deposited, fake can deploy balance sheet capital into

lending and staking

pools across defi or by other reserves. That flexibility has created organic demand for its stable

coin and reduced

reflectivity so far it's unclear if these

improvements will be enough to challenge die

for decentralized, stable coin supremacy.

But the iterations

in fe and facts seem like

a step in the right direction. Section 7.4, the emergence

of non pegged stable coins. When Bitcoin

was born, it captured the

imagination of its early adopters who began to seriously consider the potential for

non sovereign digital currencies.

Bitcoin's promises, a currency was long

term, it would

likely remain volatile for a long time

but its believers thought it would

eventually stabilize once it's built it's user population and liquidity to this day, Bitcoin remains incredibly

Volatile. It plunged more than 30% in

A single day. This may, despite its 750

billion dollar market

cap and it's unclear whether Bitcoin will ever achieve

stability given its inflexible

supply. The builders of the crypto economy aren't

waiting for Bitcoin to stabilize to bridge the

gap. We've witnessed a rise in dollar peg stable coins to solve Kryptos, volatility

bug and catalyze adoption for Blockchain applications beyond

huddling. But early iterations have presented a new problem.

Stable coins have dollarized our

block chains and have put the entire crypto economy at systemic risk. In the

process, a currency ultimately pegged to and controlled by the Fed and Treasury limits our ability to build a truly sovereign monetary system.

That's what led to the launch of a new wave of projects this year aimed

at creating free

floating stable coins which are unpaved fiat currencies. Non peg stable coins offer an opportunity

for the crypto economy

to achieve stability while eliminating its dollar dependence.

The controversial

but indisputable leader of this movement is Olympus Tao.

Launched in March 2021.

Olympus incentivizes users to bond tokens, die LP tokens

etcetera to its protocol permanently

in exchange for a

new token called

The protocol attracts liquidity by offering them at a discount to the value of the collateral

received. The newly

issued home can only be redeemed at

par value after a vesting period.

The game theory has

been powerful so

far in eight

months since it's fair

launch, Olympus has

accumulated seven

$100 million in Treasury assets and rocketed to $3.5 billion in market cap. Olympus Tower was now a behemoth with a hand in

multiple sectors of

defi as it's realized a significant premium thanks to the faith its users have in the protocols ability to

conduct effective monetary policy at scale. If Olympus Tower to accrue a treasury worth

tens of billions

of dollars, it might have the

resources to stabilize a

$100 billion dollar non peg stable coin.

Much like how central banks around the world stabilize their own


If all of this sounds

weird to you, you're not

alone. Non peg stable coins are undeniably a lot to wrap your head around

and deserve skepticism. There are Ponzi

like game theory

attributes of the protocol that drives interest and participation and it's unclear how those will hold up amidst a broader crypto selloff. However, judging by the number of forks it has

spawned Olympus now may be the year's most important new project and non peg

stable coins. Maybe the

best bet this industry has when it comes to depending from the U. S. Dollar Section 7.5 world coins

steely gaze

world coin launched this fall with some impressive backers and an

audacious goal

get a fair launched digital

currency into the hands of one billion people by tying the retinal scans to a unique verified identity. They

Use zero knowledge cryptography

to secure the

identities on chain and then

Incentivize network of orb operators to onboard new users $10 at a time

in return for looking into the metal

scanners. The early results sounded impressive. Look I know this sounds bad.

Yes it involves a metal iris scanning

orb built by the folks working

on open ai.

Yes the goal is to

Air drop a new world currency and 20

is owned by wealthy See backers. Yes the

on boarding model relies on door to door techno mormons getting paid

$10 per convert, willing to store their

biometrics on

these new devices. Yes the manufacturer's name is undisclosed and

that could end poorly.

Yes the orb does look like the death star on its side but with a fresh wax

and an eye scan

eligible digital currency

was also the currency of the galactic

empire I think.

But what if it works as biology pointed out?

Face I. D. Scans hundreds of millions of faces per day. Can we

articulate a difference between that versus world coin or any similar opt in technology for proof of human?

If you run any

service with more than a few trusted users will immediately discover the need for some kind

of proof of human.

Not necessarily the state's old fashioned and bureaucratic ky c impositions but something

otherwise you'll have pots frauds,

trolls, fakes


in his mind. And the minds of the backers,

you want to be able to distinguish good users from bad

ones to protect community members

identities and privacy while also powering the new pseudonymous

economy. That means

progressives discover that you can build stateless money,

libertarians discover

that you then need to rebuild something much like a state identity reputation, anti fraud custody trust, community. I haven't been able to make up my mind

because there will be second order and third order

effects that we can't anticipate good and bad. If this early experiment isn't

all successful,

Section 7.6 Unit Swap V three vs The World.

We're going to dive a little deeper into the plumbing of defi now. So

this section will assume you have a working knowledge of the basics.

If you don't, I would encourage you to read the defi chapter I wrote in last year's thesis

to come up the learning

curve on automated market makers, a mm yield farms,

vaults, flash loans, oracles, impermanent loss and more. This report is long enough already. So I'm

assuming a little bit

of prior knowledge for this particular section. Here's a good refresher on

decentralized exchanges and how

they work. We're only going to talk about

one particular decks today though,

As some people think, you know, Swap V3 could eventually subsume all of the other ethereum is Texas. They certainly have a head start even if they flattened out somewhat thanks to ethereum is gassy bloated chain but most of the focus more recently has been

in providing the infrastructure and tools to power more liquid markets and competitive market making that's a smart progression as the defi world becomes wallet centric


Destination centric unit swap has three

million users while meta mask has 10 million plus users. The biggest difference in V three is that liquidity

providers are active

instead of depositing assets into

a pool that passively

provides liquidity along a ditch deterministic price curve liquidity providers actively adjust the ranges of buy sell liquidity which are then

aggregated by the unit swap

automated market maker dubbed concentrated liquidity. These tighter ranges help improve capital efficiency by orders of magnitude

through better concentration

of liquidity around current market prices. They also reward professionals and punish retail LPS V three allows for what are essentially limit orders by

market makers and

introduces customizable trading fees. 30 Bps 10 Bps five Bps one Bps that incentivize liquidity

providers to make

new markets on otherwise illiquid pairs. These upgrades should combine to attract more professional market makers who actively monitor shorter term liquid positions,

lazy liquidity provisioning will no

longer be profitable and help you to better compete against other centralized

and decentralized

exchanges where it had previously struggled to

keep pace due to its low expected spreads. E.

G like to like pears on curve concentrated liquidity is clearly the future of

mm and V

3's early success speaks to. That unit

swap has increased its decks market share to 70 plus percent since launch, whether non hmm DEX is

featuring order books. Ultimately prevail is

something you can decide for

yourself. It's one of our most thoroughly covered sectors in Mazari Pro as the spoils of success are sky high

Section 7.7 per versus DY DX.

You might have seen the batshit crazy headline in Bloomberg last month. New defi perpetual platform. Dy DX briefly

surpassing coin

based in nominal trading volumes.

Yes, the early token incentivized trading rewards helped. But this was also coming

from a newer network that had

carved I'd US customers for even

using the protocol.

The centralized exchanges perpetual

volume dominates spot volumes and I'd expect defi will be no different. That makes Perp and Dy

Dx attractive

relative value.

Place to spot Texas for the year if you're looking for a 70

I. Q idea,

the biggest unlocked this year for decentralized derivative

Exchanges was the launch of L 2s. Historically

these exchanges were

infeasible on the ethereum base layer due to slow

transaction settlement times and high

costs requirements for perps to flourish, frequent oracle updates, liquidations, etcetera. Perpetual protocol grew up on

ethereum side chain XD

has since

Launched its V two version

on arbitral.


launched on its own application specific ZK Rollup earlier this year. In both cases,

increased transaction throughput, lower

latency and lower fees enables these types of

projects to finally work derivatives outside of perpetual are a different story. Their complex, nonlinear, difficult to price, generally less lucrative given the lower demand for some experiments worth

watching like anti matters everlasting option. Tracer dials, bull and bear tokens that attempt to

neutralize volatility

decay. Arthur Hayes can explain better than I can but the real action will continue to be in Perps and the real battle to watch is

defi. Perps versus sex perps

Section 7.8. Al Comics of D. Finance two Point

oh the

Simplest breakdown I've seen of the path from defy one

.022.0 came from Mali but this wasn't

half bad as a visual

of where we

are in Kryptos hype and

installation cycles. The hottest family of tokens you'll

hear about if you talk to anyone in defi circles are the defi two point oh crew and anything with protocol controlled value.

QP tries and sam tries to explain

this better than I might but I'll

Try to Eli five here first some context.

The Defi boom started 18 months ago with compounds

yield farming

program and instill a preferred

incentive scheme among defi projects has been to offer native token incentives for liquidity

providers. LPS

to underlying defi


juices, early liquidity in these systems and

everyone from market makers and unit swaps a mm

lenders and borrowers in a babe vault holders and yearn etcetera have flocked to the protocols with the highest risk adjusted

returns which include protocol revenues and token denominated liquidity mining rewards.

These capital providers were critical during

defies bootstrapping period but

have diminished in value over time because they're fickle the capital they provide is

hot and they moved from project to project.

LPS are more like Locusts than humble farmers as they create a perpetual expense for protocol. Treasuries and relentless selling pressure on projects saw this and

realized yield farming

1.0 was

unsustainable instead

of creating native Treasury token yield farms, they began to create liquidity

as a service schemes

that rented liquidity from other protocols. We've already talked about how Olympus and Faye leveraged this model. Olympus Tao pioneered

bonds which sell native home tokens at a discount. In exchange for Olympus LP

shares phase

partnership with Ondo finance opened the

door for projects that put their native Treasury

tokens to work in fe

as collateral assets they would match contributed collateral with its stable coin fay in return for liquidity over fixed periods of time, token matt created

a decentralized market maker that directly connected to the DAO Treasuries willing to lend their native tokens to the decks in return for Toki.

In all these cases, liquidity is now being

provisioned at the dow level rather than the liquidity provider level.

Protocol controlled liquidity is a subset

of protocol controlled value. Protocol control liquidity is about douse provisioning

liquidity using their token.

Treasuries. Protocol controlled value is about douse monetizing their balance sheets more broadly as mentioned earlier. Olympus dow now has a Treasury worth

More than $700 million dollars in non native assets and is putting those assets to work indexes, ending protocols yield aggregators and even venture capital

that improves the returns of the dow. It's Treasury assets generate

yield and reduces

its cost of capital. The

dow doesn't pay external

sources for its liquidity, higher revenues, lower costs.

This is the biggest

Unlock of defeat 2.0 beyond new models for liquidity provisioning and

balance sheet monetization this year

has brought the dawn of

automate ear's enhancers

and extenders. Automation protocol

rebalanced liquidity positions

across mm S and later ones.

Recycle rewards and provide auto compounding services.

Convex finance is one of the leading examples. They

recycle cRV

token and curve LP tokens for

boosted rewards.

Trading fees and

governance tokens enhancers are protocols that do not introduce new operating models for defi.

Rather recycle the outputs from existing protocols to optimize returns for the end user. Good example of this is

abracadabra dot money which is similar to maker dow but with the important difference that it

creates. See DPS from

yield bearing assets and has much

looser risk controls, extenders are protocols that stack various underlying defi protocols.

Al Comics is a good

example. Its vaults function similarly to make our dowels. The protocol

also re hypothesis states it's

collateral assets and deposits them into

yield aggregators

like urine creating yield generating synthetic tokens

which look like

self repaying loans. The re hypothesis cation creates risk as the protocol absorbs the risks of the lower level protocols it's built on still self repaying loans. Critics will point to subprime mortgages and other

Derivatives and note that defy 2.0 will have a significant garbage in garbage out problem with

cascading failure risks.

Others will greedily

And literally invest in the Magic Internet money. $5 billion dollars in liquidity

In six months. I'll

be honest. I haven't yet wrapped my head around all of this and whether it's all Moon math or a new substantial financial model. Section 7.9

the fat applications thesis

crypto is going modular

at an accelerating rate Ethereum plans to rely on a roster of layer two execution platforms like optimism, arbitral, Stark ware

and ZK sync

ethereum competitors like Salon A

and avalanche have developed formidable parallel defi layers and user

bases. Cosmos has unlocked cross chain communication bringing its multi chain ibc

universe to life.

And polka dots. Para chain auctions have finally kicked off.

In other words the shift to a multi chain future

is here and it's creating a massive opportunity

for existing defi brands to extend to new ecosystems. The theory um only strategy may not be viable for those hoping to capture most of

Kryptos growth in coming

years when most

basic transactions

become uneconomical on layer one When users end up on layer 2s or competitive

layer ones. The market for liquid trusted financial services will reward

multi chain applications.

Most D five

blue chips have already figured this out though. They generally fall

into four baskets.

One ethereum centric protocols deploy

copies of their contracts

only do ethereum layer two's like arbitral or

optimism E. G. Unit swap

spray and pray protocols

deploy copies of their

contracts to any E. V. M compatible

Chain or layer one

side chain

E. G. Sushi will

launch anywhere

aside from tron number three

targeted Mbm destinations

protocols deployed copies of their contracts

to the VM compatible chains or side chains once these networks have shown

some initial promise

often accompanied by a native liquidity mining

program curve

and Eva have been open minded when compared to uni

swap but more

strategic than sushi.

and four defy hub independent chain

protocols launched a new standalone chain with the

potential to connect with multiple networks. Compound chain is a prime example,

there are no silver bullets. Each approach comes with distinct trade offs. The ethereum centric approach

aligns with the vision and values

of the ethereum faithful

one of kryptos largest

and wealthiest defy you spaces.

In theory brand recognition should enable

these applications to dominate their respective market sectors wherever they deploy, which already seems to be the case for you

Know, V3 as it's outpacing other decks is built on optimism

and arbitral in daily

trading volume. But the ethereum only strategy prevents

unit swapped from capturing breakthrough assets that trade on other

networks, spray

and pray approach

usually rewards projects for being one of the first applications

on a new network, increasing the chance they can corner the market in that ecosystem and can increase

gross volume and free

revenue if executed

Well requires more work for potentially negligible returns, splits

liquidity and introduces more tech

debt the spray and pray poster child is Sushi which has launched on 14 14 different chains. Despite the

Effort, of its total liquidity is on ethereum arbitral and polygon.

Sushi isn't the largest trading venue in most of its new locations, suggesting this model

might not be optimal

targeting upstart chains once they exhibit sufficient user growth is

a logical strategy, it ensures that new chains will have some organic

demand and projects can often attract

incentives avalanche rush in return

for their migration

curve. And Eva

have used this strategy to near perfection as they

leveraged external

incentives and their prominent brands

to become some of the largest applications on each new base layer chain. They join

strategy isn't foolproof. It's viable for defi blue chips but probably

not upstarts

and it's likely to react to effectively capture the early growth of smaller networks with cult like communities. Moon river. The last

approach is the most interesting

launching an independent

application specific chain which becomes a

protocols new home

for cross chain

integrations and liquidity

sovereign chains are

chained neutral by

nature and might improve a

project's defense

ability, difficult to

fork token economics for steak

validation means the token

has fee capture and security properties and its potential to become a central hub for activity.

The substrate based compound chain is an example of defi blue chip going rogue and

thinking outside of the TBM box,

there's a high upfront

cost to attain the

technical and economic resources required to build and secure new

chain, but it might be the most lucrative

Path Chris Brunelleschi wrote three years ago that interoperability

of state and value is likely to place

downward price pressure on layer

one block chains that have no monetary premium while enabling

strong middleware protocols to achieve cross

chain winner takes most dominance

in their respective services.

This thesis hasn't materialized yet. The infrastructure to enable seamless multi chain usage is immature. Base layers have instead continued to

Grow fatter. But as we're now in month 16 of a defi bear market, it's worth betting on the resurgence

of the fat application thesis. I still think

chris will be proven correct. Probably sooner rather than later.

Section 7.10 tokenized funds and index coop.

one thing I learned

in reading four years of Hester pierce's speeches one night recently. Four more years, Four more

years Hester was that the E. T. F. Space itself is less than 30 years old.

I didn't know that. I also didn't realize E. T. F. S. Account

for essentially

all of the growth

and innovation in the fund space. Since 2000, the number of mutual funds has been declining while E. T. F. S have ascended to 20% of global assets

under management in open ended funds,

remainder our mutual funds despite their track record of

Success, $60 trillion dollars in total net assets, lower management fees

and higher net returns for their investors.

Each new E. T. F. Application uses

an exempted application

process that requires

sec permission for each new product, wouldn't you know

it. Commissioner Pierce has pushed to codify

the exempt of relief standards for ETF

sponsors so they can get new

ETF products to

market faster. She thinks that

would drive competition,

give investors more freedom and allow more creativity to

flourish in the E. T. F. Space. That there hasn't

been any innovation in the now $30 trillion dollar fund markets since the

birth of the internet is fairly alarming, especially for the financial capital of the world. It's also one

reason I'm bullish on projects

like Index Coop, which

makes it simple to create a custom index of tokens using smart

contracts. The index methodologies

get rewarded for

crafting and marketing new products and are incentivized to get them

distributed across defi. Really examples are how

defi pulse monetized its index, the D. P. I. And how bank lists helped create the bed and GM. I tokens

all with pretty basic

market cap weightings to boot.

This should be the tip of the iceberg to

illustrate how much customization we could see in the

crypto index space. Consider the credit rating

agencies and the E. S. G. Ratings agencies. Moody's and Fitch may have helped cause the great recession with their pay to play

consistency on

subprime mortgages but at least they followed a similar

rubric. The DsG providers are all over the place. There's

no common methodology

or standard for sustainability and

each provider simple provides a subjective lens through which to view


investments likely based on the decreed politics of the day, but I

digress. Where are

the downsides to constructing more creative and subjective indices. In defi

there's opportunity for smart beta products,

sector specific

plays, portfolio copy trades and more. The biggest near

term opportunity could be shadow stunk

like we've already seen on

synthetics mirror um a etcetera

considered that the total value secured by chain link oracles smart contracts that leverage their data

infrastructure Is now $75 billion 10 next year over year. And you have the foundation

for something

big, reliable oracle data, synthetic stocks, Coop smart contracts. All we

need are CNBC talking heads for

distribution and we're full stack fam

maybe illegal but big

Section 7.11

defies split personalities. David von Erich of Skynet said

defy has a dirty secret. While the smart contracts themselves

are fully decentralized developer teams still have substantial control over the user through their

control of the front end. We're excited

to be announcing home screen a new application on Skynet that allows users to fully decentralized their

Web three Front ends,

you know from this summer that authorities

are generally not fans of defy.

My guess as you know from my chapter

four is that things will get worse before

they get better and we'll see a bifurcation of defiant to see

defy known

teams and a non fi pseudonymous developers. More often than not the split will be on front end tooling, not protocol level hindrances when the front ends of popular defi products

tied to centralized DNS or DNS names controlled by the

core teams, it creates censorship, risk

and security issues.

Some front ends can

insert malicious code E. G steel user funds in either case defy can lose credibility with regulators who will either say,

well clearly you do have the ability to comply with our rules. So you're definitely a securities offer or this is rife with fraud

and bad for investors.

That's what drove SIA's Skynet

team to announce a new project called home screen

pushed to secure unstoppable front ends

in web three.

I think home screen or standards like it will be critical in

the US as US

defi developers get pushed to the shadows under the watchful eye of Sauron.

Within three years half of defies development may be synonymous cutting

edge open

research and the

other half maybe see defi integration points.

Both are good

in my opinion. A non fi and

truly permission. Lys front ends is where we should be

fighting like hell and testing the limits of code and law. No one wants to defend

the developer and maintainer of a tumbling

service that

intentionally cells to dark net customers. We

do want to defend the teenage

garage hackers who are

playing with magic internet money and creating new primitives for global

finance. Their heroes screw the haters.

Section 7.12

The c. d five boom, one of the most mind melting

things of the year happened

when french banking giant associate general

submitted a public proposal

through maker dollars governance

forum to have their new bonded

tokens approved as collateral for

$20 million dollars in die.

This is the bull thesis many of us

had in our bull case

for ubiquitous public block chains that institutions would do what they had previously done and peer to

peer lending marketplaces and enter

the space when it was legal and sufficiently liquid to do so safely. That doesn't make this flow

chart any less maddening.

The ocean is hardly alone.

We had ey gear

up to launch permission polygon

Chains. The deliciousness of our three spinning

up a defi token on

ethereum visas plan to build a layer to stable coin network connecting public block chains and future central bank digital currencies looks more ambitious than

anything else. It's the sort

of thing we should be shouting from the rooftops

because it normalizes stable coins and fluff central bankers at the same time. Oh we're just keeping the seat warm for your C. B. D. C.

Don't worry, it's not like

that with us. Dc. As Stanley said, institutions are still

practicing before taping

into defy my bet is the majority

of defi users and volume are ky seed within the next couple of years. That

seems positive and arguably the only sustainable medium

term path and it could open

things products like fractional reserve

banking and off chain credit scoring to be determined if we want those

things. That still leaves the question of whether institutional entrance to

defy will tip protocol, governance so firmly

in the regulated direction. Projects

begin to fork in

compliance code at the

core level and turn

into walled gardens.

Don't tell me this

is fun. And also tell me that proof of stake systems are

resistant to the majority rules coercion.

I'm not saying

I like this potential

future just that it seems like a non negligible risk

Section 7.13 governance snafu

compound is sort of responsible for the entire defy farming

Craze and bull run these past 18 months. So I suppose we'll give them a pass on the colossal proof of accidentally sending $160 million dollars of tokens to users this

fall during

a routine

protocol upgrade. Then scrambling to reclaim the tokens through a series of offsetting governance proposals to the communities

credit. They got a bunch back.

They weren't the only ones with issues unit Swap took flak for its $20 million. no

strings attached grant read no minimum holding period to the defi education fund which

resulted in a quick 50% sale of uni for us dc. The community doesn't

want to be dumped on servers. Even

if you're spending the dollars on really important policy

work as designed given DCs political still

prefer greenbacks, crypto analytics firm flipside

saw this and

said, hey, we won't dump on you give us $25 million in collateral for community enabled analytics and will Hodel steak and make money off the

float. Pretty clever. But alas, that to drew controversy from

An angry competitor and the proposal failed a 16 Z had a good nuanced no vote.

We're going to talk more about

Governance in Chapter nine on

dow's sit tight

until then for

now. Suffice it to say that I am super mega.

Bigly bullish on governance infrastructure improvements and protocol, Treasury

development and ongoing tao distribution

models that pay users, individual contributors and