Boom1 marked the rise of Bitcoin in 2013. Boom2 in 2017 was centered around Ethereum and ICO mania. Boom3 brought us Ethereum Alternatives, DeFi and NFTs. As we wander the depths of the 2023 bear market, we’re revisiting each crypto sector to see how it performed during Boom3 and formulating our plan of attack ahead the next bull market – Boom4.
- #49 Boom4 Predictions – Part 1: Bitcoin
- #50 Boom4 Predictions – Part 2: Ethereum
- #51 Boom4 Predictions – Part 3: ETH Killers & L2s
- #52 Boom4 Predictions – Part 4: DeFi, Web3, DAOs & NFTs
Today, we’re looking at the decentralized application layer (dApps) to explore what’s being built on blockchains, and what might get built next in Boom4.
With a decentralized blockchain like Ethereum, it only makes sense that the first projects to gain momentum were finance-related apps. With a lot of decentralized money floating around, people needed a place to lend it, spend it, trade it, etc. DeFi was the obvious answer.
Many of the core concepts in DeFi are not new – swaps, lending, borrowing, bonding, etc are not new concepts. However, a lot of the current generation is getting a taste of this for the first time with DeFi using sophisticated tools.
Traditional ideas like lending (CDPs, for example) – things that banks do – are being recreated as smart contracts on Ethereum. But ultimately, the goal for most people is to make money – not just store it. In the case of DeFi, the fees users earn on decentralized exchanges like Uniswap and Curve form a lot of the yield that happens in this space. But how do DeFi fees actually work?
Where DeFi Yields Come From
All yield in DeFi comes from one of three places: Swap fees, Lending fees and Rewards. The first two are sometimes referred to as “real yield” since it’s income earned by the protocol and forwarded to the investor. Typically these “real yields” are further incentives with rewards and incentives.
When an investor performs a swap on a decentralized exchange (DEX) like Curve or Uniswap, they pay a small transaction fee. Depending on the pool, this usually ranges from ~0.1%-0.3%. This small fee is given to the people who provide liquidity to that pool. This small sliver of a fee is what turns into yields that people are earning in DeFi on swaps.
When an investor lends $1000 at a 2% rate – the 2% interest is what they earn. Instead of loaning directly to a borrower, lenders can pool their funds which are borrowed by a group of investors to minimize the risk. A popular dApp for doing this is Compound, who is also noted as the inventor of Liquidity Mining at the dApp level.
Rewards & Incentives
The most controversial place yields come from is incentives and rewards. Projects often juice pools my incentivizing investors with their own token on top of the “real yield”. Users can re-invest these reward tokens, stake them or sell them for more ETH depending on their strategy. There are even Auto Compounders like Yearn or Concentrator who will sell the reward tokens for more LP tokens to help snowball the investment – for a small fee of course.
Decentralized Exchanges (DEXs)
- Uniswap is by far the biggest decentralized exchange and benefitted heavily from first mover advantage. They also did a huge airdrop at one point, but the Uniswap token itself doesn’t earn any fees (it’s a governance token). All the fees earned are provided to liquidity providers, and there’s been a lot of debate as to whether UNI holders should also earn some of those fees.
- Sushiswap is a fork of Uniswap, the main difference being that they do give some of the fees to SUSHI holders.
- Curve got put on the map because it specializes in like kind pairs, which are tokens of the same value. For example their 3pool which contains USDC, Tether and DAI all of which are $1 pegged stablecoins. The tech under the hood is slightly different for swapping stablecoins (as opposed to say, ETH for USDC). Curve now has a lot of Ethereum and liquid staking token pairs (frxETH/ETH for example). Curve has now gone on to create v3 which allows for even non-pegged pairs like their Tricrypto Pool which pools WBTC, ETH and USDT.
- THORchain is unique in that it enables cross chain swaps, allowing users to swap ETH for native BTC (not wrapped BTC). This is an important piece of the puzzle, because the alternative is using a centralized exchange to swap USDC on Ethereum for BTC natively. Being a decentralized exchange, THORchain is bringing something of real value to the table.
While these DEXs are often referred to as platforms, they are really protocols. Developers can build other platforms on top of their protocols that integrate their own. Swaps are foundational to DeFi, and DeFi is foundational to crypto.
While leverage via borrowing/lending is big business in traditional finance, it is also the source of most major meltdowns – especially in crypto where the assets being leveraged are volatile. The entire banking system is built on lending, but they are lending against more stable, traditional collateral, like real estate and employment.
We wouldn’t be surprised to see more “commercial lending” between DAOs and large DeFi treasuries. Consumer borrowing apps aren’t going anywhere, because unfortunately people are making a lot of money from liquidating other people’s collateral. But the lending side of DeFi will become more foundational as it grows in scale, even if it’s not as focused on the consumer side.
One project putting together all the pieces of the DeFi puzzle is Frax. FRAX is a stablecoin, and in order to operate at scale their AMOs use borrowing and lending as well as swaps to maintain stability. The FRAX stablcoin maintained its peg through the LUNA collapse even better than Tether, which is pretty impressive.
Frax’s FRAX Swap, FRAX Lend and FRAX stablecoin create what they call the “DeFi Trinity.” This ecosystem of dApps will be a common theme entering Boom4 as projects race to own the user and provide them all the necessary pieces of the DeFi puzzle.
While Frax is building the DeFi protocols themselves, ShapeShift is building an easy to use interface that connects popular DeFi protocols together. Investors can perform swaps through Curve, Staking via THORChain, LPing via Uniswap, etc. all through ShapeShift’s website. Whereas Frax can be a bit technically difficult to use, ShapeShift’s goal is to simplify the DeFi experience.
But does being an “aggregator” of great protocols lead to a good business? Some protocols may cut ShapeShift in on a cut of their revenue, but ShapeShift’s business model remains unclear. Eventually they will have to find a way to make money.
DeFi on Bitcoin?
Bitcoin acts like digital gold making it the ideal DeFi collateral. However, Bitcoin does not have a smart contract language, so our only options are to use Centralized Exchanges or to bridge BTC to another chain and use it there (like wBTC on Ethereum). Most hardcore Bitcoiners aren’t going to be quick to bridge their BTC. It’s not stopping projects like Sovryn and Stax from trying, but based on the charts people simply aren’t using it.
NFTs will undoubtedly continue to grow in popularity. They are a big piece of the DeFi puzzle in that they enable the collateralization of real world assets. But more interesting is NFTs role in the new creator economy. NFTs aren’t just about JPEGs on blockchains. Other use cases will also include minting social media posts as NFTs, and integrating NFTs into video games as unlockable content. In a way, the NFT “ape” craze of Boom3 with a Trojan horse – it allowed the NFT movement to gain a lot of momentum for what’s coming next.
Boom3 NFTs weren’t simply about the artwork, rather, the communities being built around the art. Much like the Bored Ape community, we’re likely to see collectible artwork as “exclusive access” continue to be a big deal in future cycles. Either way, the art world is coming to NFTs in a big way and will allow investors to support artists and content creators they love.
We don’t “invest” in NFTs as much as we use them to support creators and experimentation. The idea of investing in NFT indexes could make sense, but even there the risk/reward doesn’t appear to be there.
Decentralized autonomous organizations, known as a DAOs, are an important component of everything that is happening in crypto. Decentralized platforms still have a group of people running them, but we don’t want them to be centralized – a community should be involved in the decision making process. This is where DAOs come in.
We already have DOs (decentralized organizations) like Google employing thousands of employees spread around the world. But they are not autonomous and still consist of top down decision making.
DAOs solve for centralization and top down decision making but at he tradeoff is speed. Instead of transactions per second, we’re thinking in terms of decisions per second. Making a DAO faster meaning making faster decisions, which requires centralization.
Ethereum’s goal of being the global supercomputing platform is coming to life in the form of Web3. Web 2.0 features like Identity, domain names, file storage and databases are all being recreated on decentralized infrastructure.
ENS domains (like gerbz.eth) can point to wallets, smart contracts and even a file on IPFS (the interplanetary file system). These decentralized naming systems act as an identity you can take with you across dApps.
All the images, files, and data of Web3 will be stored on IPFS or Arweave, decentralized file systems which incentivize users to store files via tokens like Filecoin.
Web3 remains the final frontier of crypto and truly encompasses the vision of a decentralized internet and a move away from the big centralized tech kings like Google, Amazon and Facebook. The question is whether Web3 is ready for Boom4, or is it a bit too early – only time will tell.