Key Trends, people, companies, and projects to watch across the crypto landscape with predictions for 2022.
Transcript
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
primitives.
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
stabilization.
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
downward
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
currencies.
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
etcetera
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
versus
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.
Dy DX
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
protocols,
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
responsible
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
