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What you are missing out in DeFi
Exponential Growth, Crossing the Chasm and Social Experiments.
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Conclude below. This is not financial advice.
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DeFi is an industry. It is more than one main project.
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Today we will talk about the phenomena in Defi space on a general level. Overall space has been developing very rapidly. Notably, today's infrastructure allows for more efficient and large-scale testing. This motivates experimental projects at the technology level with a variety of solutions, brings traditional financial products to DeFi in cryptography form and experiments at a social level. All have significant strides.
What you are missing on DeFi? All the returns.
DeFi is starting to cross the chasm. New users are coming on board daily.
Social experiments in the capital and power distribution. It's a whole new world.
What are you missing on DeFi?
One of the most vibrant and innovative industries NOW
In our opinion, if you do not observe DeFi, you are missing out on one of the most innovative and vibrant industries on earth. DeFi is growing at an exponential rate where there is a lot of experimentation.
Not only at the technological level but also at the social level and at the financial-economic level.
There is a lot of liberal innovation going on with so much interest. The results are really interesting.
The first thing that you can miss is the exponential growth of a highly innovative industry, here are some numbers that I want to share with you.
Since December 2020, DeFi has grown more than 20 times, with Total Value Locked increasing from $682M to $14B. This is really good.
We are seeing real exponential growth. If we look back to 2019, a year ago, there were not many DeFi projects. Today in 2020, the growth is remarkable and it is continuing. On average, the Total Value Locked increases by about $416M per week.
New high-quality projects launching weekly
There are tons of innovative new protocols released every week.
Roboadvisor 2.0: Balancer, for example, is a decentralised exchange similar to Uniswap, with some differences. It takes the same approach of having liquidity groups and providing those pools of liquidity so that users can interact and trade different assets.
Crypto Derivatives: With other protocols like Perpetual, mStable protocol and many other projects launching weekly with excellent teams, products and really innovative from the technology side and also from the experimental social side which we will dive into later.
Growth in new protocols: About other data is the number of protocols in the DeFi space. As of April 2020, many new projects have been launched weekly. Many of these products are already in use and they are groundbreaking from a technology standpoint.
According to Defipulse data, in April there were 24 protocols on the raking. Now in December, after a few months of operation, we have about 50 different protocols. The growth is really amazing, something keeps happening every week and grows more steadily. Users defy the early days of the protocols, helping them evolve about everything that is going on.
Network effect = Value: They are interconnected to transfer value between them. When new projects and protocols begin to challenge and try to add value, they can automatically transfer and interact with the protocols. Gradually, they become powerful and more valuable.
This is reflected in the network effect, which adds value to the user as more users join the network, provides more value to the user, and the user also provides value to the network. It also happens when new projects and protocols get started.
Defi is starting to cross the Chasm
Maybe it is exaggerating a bit, but thinking about starting to see some signs. One of them is starting to cross the Chasm, which is a really important signal in technology.
The Chasm chart you can see here is that of Geoffrey A. Moore, who shows the different market stages every technology product goes through until they mature and reach mainstream users. If you will see DeFi as an early market, it is in the Early Adopters phase and is trying to get past the Chasm into Early Majority phase. Because we are starting to see some small signs that DeFi becomes ready to participate in Early Majority and becomes unstoppable.
This is an example of Uniswap, it is a decentralised exchange where they have over $2.4 Billion in trading volume per week and some days reach $400 Million to $500 Million per day in trading volume. That is really a lot with a piece of code that lives on the Ethereum network and people can reliably interact with it, meaning there are not any middlemen.
In September 2020, Uniswap overtook Coinbase for the first time in terms of the trading volume. Coinbase is a centralised cryptocurrency exchange comprised of a large team and they work directly with regulators. Coinbase, like Google or JP Morgan, functions as a cryptocurrency bank.
Uniswap is increasing in trading volume and has already surpassed Coinbase's volume once. This is a sign that DeFi protocols are starting to gain value and surpassing trade of CeFi.
Aave is like a money market protocol similar to Compound. They are constantly innovating and adding new products and services to their DeFi platform. In August 2020, they were approved in the UK for an authorised electronic mining organisation.
That is very important news for DeFi. This means now Aave will be the bridge between traditional finance and DeFi. Users and businesses will now be able to have access to converted payments and Aave will also be able to issue crypto accounts for both users and businesses.
Like with Uniswap, which began "eating" the trading volume from centralised exchanges, the untrusted protocols with all the different products for which they were licensed. This is similar when Aave connects with traditional finance.
As mentioned, DeFi has some signs that it is beginning to break through the Chasm between the Early Adopters and Early Majority phases. This is really good.
Social Experiments in the capital and power distribution
One of the most innovative and vibrant industries on earth with exponential growth, DeFi, has signs that it is starting to overtake the Chasm and where we have communal experiments. Surprisingly interesting associations with the funding and power distribution being held in protocols.
We have yEarn Finance, Compound and Balancer and many more when we talk about what an experimental society in the decentralised distribution of capital through the governance token that all these platforms issue.
And through the governance token, what should users do if the token distribution is fair? The protocols are different, they have different products and sometimes the distribution is fair and sometimes not. If the system is implemented in such a way that they want to distribute power, distribute decisions and power among communities, this is really interesting. It distributes ownership of the protocol amongst users, mainly through liquidity incentives by providing liquidity to these systems.
Users receive governance tokens as a reward. They can also purchase them with exchanges like Balancer and others. The general idea is that through the governance tokens provided by these platforms, the protocol distributes ownership among users. Thus, the protocol is governed by users, not stakeholders with capital (e.g. VCs).
It is very different when comparing it to traditional companies like Google or Apple, where users do not have access to the system for the first time. Or the difference between these big companies and decentralised protocols is the provision of free governance tokens to distribute ownership on that platform. Users can do this from the start, and anyone can do it around the world. The only thing is they need some capital and a wallet. Users can start participating in Compound, yEarn Finance, Balancer or any other protocol, which distributes the governance tokens. This is really powerful.
Yield Farming is defined as the act of leveraging various DeFi protocols and products to earn profits or returns through a combination of the interest rate and token incentives.
As mentioned, the governance token gives the user ownership of these protocols, allowing them to participate in decision-making, making changes to these protocols, how they are. Operation and productivity farming was the original way in which these protocols were distributed. The user who provides more liquidity receives governance tokens. This is one of the important things to think about yield farming.
Is Yield Farming sustainable? This is one of the distribution mechanisms that has been of great help and they are evolving. Remember that in April 2020, mechanisms to encourage productive agriculture did not exist.
These have existed in the past and starting with $COMP from Compound to yield farming is one of the main reasons why this is growing so much to distribute the governance token in the community and that is all that we have today.
DeFi is one of the fastest-growing industries on the news. Only in 2020, figures on locked assets have grown rapidly and reached tens of billions of dollars. Besides, the transaction volume of DeFi protocols has also increased rapidly. This shows the development potential of the DeFi space, trying to increase access to traditional financial markets and mainstream users.
We have new projects with a differentiated and useful product for the users. They are experimenting with different experiments both technologically and socially. This is going to be a challenging way but it is worth doing.