- Boom 1 Through Boom 3
- Boom1 - Bitcoin is Money
- Boom2 - Ethereum ICOs
- Boom3 - L2’s, dApps & NFTs
- Bitcoin’s Boom4 Narrative
- Is Ethereum Replacing Bitcoin?
- Stock-To-Flow In 2023
- Bitcoin’s One Trillion Dollar Market Cap
- Bitcoin Price Predictions
- Ethereum’s Innovative History
- Proof of Work to Proof of Stake
- The Future of Ethereum’s Base Layer
- Staking Changed the Game
- ETH Demand Drivers
- What’s Next for ETH?
- ETH’s $1T Market Cap
- Alt L1s - Ethereum Alternatives
- Liquidity Mining Programs
- Are “ETH Killers” Dead?
- Decentralization: How Important Is It?
- Layer 2s: An Overview
- Polygon / MATIC
- Do Users Care About L2s?
- Issues with L2s
- Portfolios and Predictions
- DeFi - Decentralized Finance
- Where DeFi Yields Come From
- Decentralized Exchanges (DEXs)
- DeFi on Bitcoin?
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.
In February 2020, my brother and I were set to launch a crypto fund to help friends and family get exposure to crypto. We called the fund Boom3. The thesis was simple, Bitcoin’s 4 year halving dictates the crypto market cycles and the next bull market was imminent. That is, until COVID struck.
We were confident in our thesis, but with no experience managing people’s money, let alone through a global pandemic, we decided to shut it down before it ever began. Sad too, because the Bitcoin price ran from ~$10k to ~$70k over the course of the next year. Boom3 was real, and now, in 2023, it’s time to start planning for Boom4.
Boom 1 Through Boom 3
Boom1 - Bitcoin is Money
When I started in crypto in 2013, Bitcoin was the only cryptocurrency in town. The thesis at the time was simple. Bitcoin is the new decentralized, permissionless, digital money - and soon everyone will be using it. But that didn’t mean the price was going up…
From the peak in 2013 through all of 2014, the bitcoin price fell from $1,200 to $150. It was hard to remain confident. 2015 was mostly sideways, but momentum began to build as big companies like Microsoft XBox announced that they’d start accepting bitcoin as payment. Momentum built as Bitcoin head into it’s 2nd halving in Summer 2016.
Boom2 - Ethereum ICOs
Bitcoin’s momentum through 2016 aligned with the growth of Ethereum which launched in 2015. Initial Coin Offerings, or token “ICO’s” were all the rage, but these projects were little more than exciting ideas vs actual products you could use. But that didn’t matter. Anyone who bought Bitcoin through the bear market saw massive gains as the price of Bitcoin grew to almost $20,000 at its peak in December 2017.
The “crash” was hard, but familiar. 80-90% drops from peak to trough is common after an intense bull run. But buying during the bear market and hodling on tight, that’s where the money is made.
Boom3 - L2’s, dApps & NFTs
The bitcoin halving in 2020 came only months after COVID struck, and again kicked off a bull market which drove the bitcoin price from ~$4k to $69k at it’s peak - an over 1,600% gain in only a single year.
This cycle it was time to prove what could be built on top of blockchains. Decentralized DeFi applications and NFTs were all the rage - and plenty of L2’s popped up to take the load off the base layer.
While this represented yet another epic bull market, bitcoin’s performance was lackluster. A primary narrative around bitcoin is it’s usage as an inflation hedge - and COVID kicked off the most inflationary moment in human history! Yet bitcoin performed no differently than past cycles.
Bitcoin’s Boom4 Narrative
January 2023 started off with a bang! Bitcoin price was up 40% from December and a nice rally appears to be in the works. It could mean the bottom is behind us, but I don’t necessarily think we’re ready for the bull market yet. That won’t come until around the time of the next Halving which is scheduled for February 2024.
The bitcoin narrative is still alive and well! With Ethereum migrating to Proof of Stake, Bitcoin remains as the only remaining Proof of Work blockchain at scale. And no other blockchain has a guaranteed finite supply in the way Bitcoin does.
In the past, I wanted Bitcoin to innovate, but I’ve gone full circle on that as the industry has matured. It’s refreshing to know that Bitcoin won’t change. It’s digital gold, and it’s doing exactly what it was designed to do - be an safe, secure, digital, permissionless, decentralized store of value.
Is Ethereum Replacing Bitcoin?
Newcomers to crypto consider Bitcoin and Ethereum as competitors to one another - but that couldn’t be further from the truth. They’re solving completely differnet problems for completely different people. There’s room for both.
Old school investors and “big money” will typically start with Bitcoin. Bitcoin’s Lindy Effect is strong as it was the first cryptocurrency and always will be. This bull market we’re experiencing in January 2023 was literally a whale calling the bottom and buying up a ton of bitcoin - and that was just one whale. There are thousands more out there waiting to strike.
For newcomers, it sucks to only be able to afford a small sliver of a single bitcoin, but thats ok. 0.00001 BTC is still more than 1,000 worthless tokens.
Stock-To-Flow In 2023
PlanB is famous for his stock-to-flow model (S2F) which values bitcoin based on scarcity. Many crypto investors, including myself, have used this model to predict the price, but how well did it hold up through Boom3? And should we still use it today?
S2F breaks down into two parts:
- The bitcoin halving creates a supply shock which kicks off a bull market
- You can use the bitcoin supply to predict the price at the top of each cycle
While part one is still in tact, I doesn’t think investors should read to deeply into the price predictions spit out by S2F. They’re a good guideline, but human emotion can’t be quantified or properly taken into account in any model.
In PlanB’s latest prediction, he doesn’t even bring up the S2F model until 3/4 of the way through his video - thats a telling sign. And his “predictions” are much more generic moving forward:
- Over ~32k at the time of the halving in 2024
- Somewhere between $100k and $1M top in 2025
Bitcoin’s One Trillion Dollar Market Cap
Bitcoin reaching a $1T market cap seems like an important number to keep an eye on. With 19.2 million BTC in circulation, that puts the $1T market cap at $52k.
In Boom3, BTC grew larger than $1T for a short time, but couldn’t hodl onto it. It wasn’t ready. Next cycle, I think it could be.
Bitcoin Price Predictions
So what numbers are we keeping an eye on? First, that $1T market cap number at $52k. Second, the previous all time high at $69k. Third $100k - just cause it’s a psychological level everyone will be waiting for once we break the all time high.
While we’ll likely see some resistance at the $1T and $69k level, I think we’ll blow past $100k if we reach it. $100k is only ~30% gain over the previous top, and when Bitcoin sets a new all time high in a new cycle, it doubles, tripples, 10x’s it’s previous all time high!
If I had to make a guess, I’m looking for bitcoin to top out around $250k in 2025.
Ethereum’s Innovative History
As mentioned at the top, our portfolio currently consists of 20% ETH, and while I still use BTC in my business, I’m focusing on increasing his ETH stack going into Boom4.
ETH is growing faster than Bitcoin - and this makes sense as ETH is a platform for building decentralized applications on top of.
The Ethereum network has already innovated in a number of ways, including EIP-1559 and the transition from Proof of Work to Proof of Stake.
Ethereum launched as the first ICO of all time in 2015 but wasn’t traded on Coinbase until May of 2016. It was the first crypto Coinbase launched after being Bitcoin only for many years. The 2017 boom (Boom2) was largely driven by ICOs built on ETH.
During Boom2, people new to crypto mistakenly thought there were thousands of blockchains, when in reality most of these crypto assets were tokens built on Ethereum.
Boom2 was really built on business plans and ideas - not functioning products. In contrast, the last cycle (Boom3) was all about the products being built on Ethereum. A lot has changed in a very short time.
We’re now seeing Ethereum blossom into a true foundational layer with lots of new ideas, products, and innovation that allows people to build things on top of it. In a way, it’s similar to how the Internet evolved in its early days.
Proof of Work to Proof of Stake
We’ve discussed how Bitcoin is hesitant to change, however Ethereum is much different - innovation is happening at the base layer. Perhaps the biggest change was the merge from Proof of Work to Proof of Stake. This is a big deal as far as energy consumption goes, the overall speed of transactions, and now the possibility of scale. Proof of Stake is a first step, a base layer requirement to now built L2s and scalability improvements on top of - things that simply weren’t possible with Proof of Work.
This was a huge deal for Ethereum, a technological feat, like swapping out the engine of an airplane while it’s in mid-flight. A lot of people were very concerned something bad would happen, and there was a lot of anxiety surrounding The Merge. But the plan didn’t crash, and everything went to plan.
The next “big” thing to happen with Ethereum was EIP-1559, which dramatically changed the supply and issuance of Ethereum.
One of the things that has always been in question with Ethereum is its issuance mechanism. Unlike Bitcoin’s strict issuance schedule and hard 21M cap, Ethereum’s inflation rate has always been a bit “flaky.” EIP-1559 looked at the inflation rate of Ethereum as well as the demand and usage of ETH that affects this rate.
In Bitcoin, transaction fees go to miners, but now with EIP-1559, the base fees added to every transaction on Ethereum are burned. Only Priority Fees going to Ethereum validators. What makes this interesting is that now more ETH is being burned than issued. There’s 120M ETH in supply right now, and since the merge to Proof of Stake Ethereum has been deflationary.
The burn will continue, and this economic schedule was designed so that about every year, 1M more ETH are going to get burned (this goes on for the next ~50 years). Currently, they’re projecting that ~200 years from now, the supply of ETH should stabilize around 50M.
Although we cannot even fathom what will happen 200 years in the future (let alone tomorrow, in cryptocurrency!) these long term plans show that Ethereum is committed to being a huge global economic player down the road.
The Future of Ethereum’s Base Layer
As exciting as these ambitious plans are, it’s also scary because the transition to using Layer 2’s built on top of Ethereum means no longer interfacing directly with the base layer. This transition to L2s is a little bearish in the short term, because it means less transactions and less fees for the base layer. But if you’re thinking long term, Ethereum is setting itself up to be the foundational layer for a global internet and digital money - which is super bullish.
L2s act like layer on top of the blockchain that wraps up thousands of transactions into one cryptographic proof that only requires a single transaction on the base layer to verify all of them. The long term idea is that there’s going to be enough layer twos doing so many transactions that this alone will fill up the blocks and continue the deflationary burn that Ethereum is going through.
This is a big vision, but it’s happening right now before our eyes. Around Oct 2022 the number of transactions on L2s outpaced the number on the base layer - the L2s combined did more transactions per day than Ethereum did at its base layer per day. We’ve already flipped, and that’s almost unreal because hardly anyone is even using L2s yet.
It’s a little scary to think that most of us won’t be interfacing wit the base layer in the future, but it sounds like that’s where we’re heading.
Staking Changed the Game
Whereas you basically need to be a miner to earn yield in Bitcoin land, Ethereum allows you to generate income from the base layer. On the Proof of Stake network, it currently does about 3-8% rate of return. This is what we refer to as the “risk-free rate” and should create a lot of demand - people will be buying ETH just to stake it and generate income.
In Episode #46 of The BitLift Podcast, Pete predicted that 80% of all ETH will get staked. If that happens, only 20% of ETH will be in circulation - which will create explosive price movements as demand for ETH increases.
It also may cause price volatility similar to the 2017 ICO boom where ETH crashed to around the ~$100 to $300 range for a long time (Dec 2018 through COVID). Then the Bitcoin halving kicked off Boom4 where ETH topped out around ~4.8k.
That’s nearly a 5,000% gain - this is unheard of in most investing (when was the last time Microsoft stock had a 5,000% gain?). I recommend that all crypto portfolios prioritize “blue chip” cryptocurrencies. Volatility is unlikely to stop soon, and the best strategy is always to dollar cost average over an extended period of time.
If you don’t have cash to dollar cost average into more crypto, you should consider snowball farming, which uses yield from staking to grow your crypto holdings.
ETH Demand Drivers
As for what is being built on ETH, the most obvious is DeFi. As far as controlling your own money, using smart contracts, and using code to govern what you do with your money - DeFi is undoubtedly the way forward. Every time a centralized crypto scandal (like FTX) occurs, it just validates why decentralized finance is so important in this space.
The next biggest ETH product is Web3. The original vision for Ethereum is that it’s the world’s super computer and the new Internet is going to be built on top of it. Currently, we are seeing infrastructure being built like decentralized domain names on ENS and decentralized file storage using Filecoin. Currently, the dApps are still accessed via Web2, but as the infrastructure improves, DeFi platforms will move towards Web3, further solidifying Ethereum as a foundational layer.
Lastly, NFTs - the most misunderstood piece of the cryptosphere. NFTs are about the rise of the Creator Economy. Everyone working for themselves on the decentralized internet. Creations today are digital first - so the only way to create authentic versions of these products is to mint them as NFTs. In the future, every time any piece of art, music, or other content is interfaced with - it’s going to happen on the Ethereum blockchain.
NFTs also present a way for creators and their fans to have direct relationships - something that has been chiseled away at over the years through 3rd party publishers (who also take the majority of artists’ revenue). People want to support the creators they love, not a media conglomerate - and NFTs are a way of making that a reality.
What’s Next for ETH?
Currently ETH is hovering around the ~$1,550 range. In the 2017 cycle, we fell 90-95% from the high to the low. This time around, the “crash” (peak to trough) is roughly ~80%. It would appear the bottom is in, and if this is the case it’s a very bullish sign.
We could definitely still have a bad week, or drop below $1,000 - but it appears that with each cycle ETH will drop a little less. It’s definitely trending in the right direction.
The large majority of newcomers enter crypto during a bull market and buy at the top (or close to it). Some may experience that euphoric moment - others will be humbled when the price crashes. A small percentage of those folks will go down the crypto rabbit hole, and understand that the future of money will be built on these blockchains. These are the people that stick around during the bear market, when the general public has forgotten about crypto and has moved onto more “sensational” stories like the FTX collapse.
Zoom out, and see through the market through the lens of cycles. If the goal is to buy low and sell high, the ideal time to buy is during a bear market - like the one we have now. People that disappear and only come back for every “boom” when the excitement is back are not investors - they’re gamblers.
ETH’s $1T Market Cap
We’ve discussed how the $1T market cap for Bitcoin would require a price of $52k/BTC. For Ethereum to achieve the same $1T market cap (based on its current supply of ~120M) the price of one ETH would need to be $8,300.
ETH always seems to be one cycle behind BTC. ETH’s ICO boom happened after BTC’s previous boom where Bitcoin foundationally stabilized. And now Ethereum is foundationally stabilizing - always one cycle behind. The $1T seems very likely and I’m keeping an eye on the $8,000 price level.
ETH maxis will sometimes talk about ETH being a $10T asset, which would be $83k! Maybe a few cycles down the road when crypto truly is money and governments have stopped printing paper currency.
Alt L1s - Ethereum Alternatives
Boom3 saw the rise of dozens alternative layer 1 general purpose smart contract platforms, aka “ETH killers”. Chains like Avalanche, Solana, Fantom, Binance Smart Chain, Cosmos, Tezos, Polkadot, etc. all believe they can out perform Ethereum in cost and speed - but is that enough to attract users?
Apparently not. One thing all these chains had in common during Boom3 was large “liquidity mining” programs, aka they gave away millions of dollars in free crypto to attract people to their chain. This made it easy to drive demand, but is it sustainable? How does a platform even afford to give away money?
Liquidity Mining Programs
Projects like Avalanche set aside large portions of their token for liquidity mining programs. They give these extra tokens to projects building on their platform and instruct them to reward it to their users as incentives. As a result, the yields all go up as well - prior to the liquidity program, for example, you could get 3% for lending our your AVAX. And now it’s ~38%, all because you’re getting a bunch of AVAX on top of the rewards with the fees you are earning. This is what causes the mania and why we start seeing prices 2x, 3x, 10x…
For example, Avalanche launched a $180 million liquidity mining program in late 2021, and the price went vertical (~$20-$150 over a few months). This method of incentivizing new users is highly effective and can be thought of as a marketing budget. Although it is a short-term technique, the hope is that users will stick around and continue to use the platform.
Are “ETH Killers” Dead?
Ethereum is the general purpose smart contract platform - you can do anything with it. NFTs, gaming, DeFi, Web3, the list goes on. Instead of trying to compete directly with Ethereum, we might start to see platforms become more specialized. For instance, Fantom’s focus on DeFi last cycle made it stand out from the crowd. I wouldn’t be surprised to see a chain focus on NFTs.
Obviously cost and speed are important, but as we discussed in the Ethereum episode, it comes at the cost of less decentralization. Something like Binance Smart Chain (BSC) became wildly successful because they essentially took Ethereum and got rid of all the decentralization, ran their own validators, and relaunched it.
Decentralization: How Important Is It?
The success of BSC shows that decentralization is of no concern to many crypto users. It’s the same in the rest of the tech world - most websites are run on Amazon Web Services, and most of the growth in the last decade has been from enterprise companies and conglomerates. So why don’t most people care?
One of the big trade offs with decentralization is that the more decentralized something gets, the slower it becomes. Ethereum is sort of like a government - there’s a lot of hoops to jump through and it’s not cheap, but it’s transparent. On the other hand, centralized chains offer the advantage of speed - which is important in a cycle where people are trying to make money fast.
All that considered, none of the chains were able to “kill ETH” even with their centralization. Now, the battle rages on - to L2s!
Layer 2s: An Overview
An L2 is a faster, cheaper layer on top of Ethereum. Think of Ethereum as the database - it’s slow, where all of the world’s data is stored. L2s, on the other hand, are where the processing will be offloaded to.
The way it works is that many transactions are combined into “rollups” - several different technologies exist for how this is done. Ultimately, this allows many transactions to be processed at once while only one interaction with the base layer is needed.
There are lots of projects to keep an eye on - Arbitrum, Polygon, Optimism. These are all L2s being built on Ethereum that roll up tons of transactions together. They then do one major transactions and peg those to the Ethereum blockchain.
From a user standpoint, there’s nothing but benefits - it’s faster and cheaper, for one. You can do the same DeFi things as before, use the same dApps you are familiar with and continue to interact with most of the smart contracts you are using. When it comes to fast trades or flipping NFTs, the speed (and fees) of L2s are going to be what you’re after.
These L2s are, in a way, leveraging some of the security benefits of Ethereum and its decentralization. It’s almost like saying, “Ethereum is here to stay, so we might as well build on top of it.” This is a bullish outlook moving forward, and it’s likely we’ll continue to see more L2s during the next cycle.
It’s also important to note that Ethereum wants users to move to L2s. They are actively designing the base layer to be inoperable with all these new L2 technologies, and they want users to be interfacing with only L2s. Perhaps in the future, users will think they’re using Ethereum but instead they’re using an L2 without even realizing it.
Polygon / MATIC
Polygon is not only its own blockchain but they’re also building an Ethereum L2. Polygon is the blockchain, MATIC is the token. There’s a lot of momentum - they’ve got a ton of impressive partnerships in the pipeline:
- Stripe - Payouts in USDC over Polygon - instead of to bank accounts
- Reddit - Millions of NFT avatars minted on Polygon
- Starbucks - Starbucks Odyssey loyalty program
- Adobe - Enable NFT marketplace on Behance, creative design community
- Instagram - Users can mint and sell NFTs directly within the app
- Robinhood - Crypto wallet exclusively on polygon
This is a big deal, and it could drive a lot of demand in the next cycle.
Do Users Care About L2s?
To the average person, the technology doesn’t matter as much as what you can do with it. In the future, we’re likely to see blockchains being used “under the hood” while the general consumer isn’t necessarily “aware” of it. Loyalty programs and paycheck platforms are examples of use cases that are currently happening, but wouldn’t necessarily involve the end user needing to know anything about cryptocurrency. This is huge for adoption.
The Internet itself is much the same - users are interacting with Google Cloud and Amazon Web Services all day long, but generally have no idea they are doing so.
This is why these partnerships - like the ones Polygon has acquired - are so important. They allow for the creation of native tools that bridge the benefits of what crypto is to the end user without them having to do anything new. People won’t care what it’s running on, they’ll just notice the benefits!
Issues with L2s
One issue with all these alt chains is that DeFi liquidity is fragmented across them. If you want to do a swap on Uniswap, for instance - what chain are you doing it on? The only liquidity available to you is the liquidity on that chain.
ZK rollups will eventually enable the ability to have “cross roll up liquidity.” This means that the L2 you’re on won’t even matter! A billion dollars worth of USDC across all the rollups could have a shared liquidity pool, and that means you’d have access to it no matter which L2 you’re on.
Portfolios and Predictions
So do ETH Killers and L2s make for good investments in Boom4? I’ll continue to keep my portfolio primarily in “blue chips” (BTC/ETH) while reserving 10~25% for speculative trades throughout the cycle. I like to keep an eye on “where the energy is flowing”. Where are the meme coins launching? What are people excited about? Then I’ll pick up tokens like L2s - not for a long term hold, but just for a trade.
As for L2 tokens like Optimism’s OP or the potential of an Arbitrum airdrop, they’re essentially just governance tokens and have no real use. Still, they’ll likely see lots of speculative trading as they’re used to incentivize the platform.
Buying L1 or L2 tokens during the bear might still be a bit premature, but we’re keeping an eye on which of these tokens move along with the rest of the market. If you notice certain Alt L1s and L2s aren’t “along for the ride” so to speak, they might not perform well in Boom4.
DeFi - Decentralized Finance
With a decentralized blockchain like Ethereum, it only makes sense that the first projects to gain adoption 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 during DeFi Summer with their COMP token.
Rewards & Incentives
The most controversial place yields come from is incentives and rewards. Projects often juice pools by 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 (Automatic Market Operators) 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.
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.
Written by: @gerbz Gerbz is the founder of BitLift and has been journeying down the crypto rabbit hole since 2013.