Deep liquidity and a boatload of incentives were responsible for their success, but Curve has now evolved beyond just another application status - they have become a baseplate.
- Before I begin, I’d like to thank @LordBogdanoff for coming up with this concept & @0xSami_ for fleshing out his thoughts in this wonderful article. Also, huge shoutout to @0xcarnation for reading through this and sharing some much needed wisdom. Now, it’s on me to add my twist to the story - I hope you enjoy this imagining of DeFi 3.0 amidst market-wide chaos. *
Economics is mostly geared towards the idea that market participants are acting rationally at almost all moments. While economic models might reflect minor deviations from an actor’s best interests at times, they fail to take into account the frequency of these irrationalities. Because humans are so complex and engage in infinitely different lives, it seems almost impossible that any model could display these behaviors in a rational or effective way - this is exactly the problem with economics. I’ll clear the air in this first paragraph and say that I have not done nearly as much research into the field of economics as I should have, but I can say that I’ve read my fair share of books and could easily back my words up if I were to receive some angry DMs - let’s proceed.
I won’t try and explain the examples of irrational market behavior, as we’re all too familiar with recent developments of retail investing mania. Whether this can be attributed to the Dogecoin / Elon Musk effect or Robinhood’s stratospheric rise is irrelevant - more individuals than ever are trying their luck at investing, much to the dismay of their collective net worths. Instead of delving through an endless series of WallStreetBets posts of -75% accounts, I would much rather examine the biases that economists have unknowingly employed which have led to the great birth of ponzinomics.
We’re all familiar with the idea of a decision tree. Each of us is faced with a myriad of choices in everything we do on a given day. Choosing one over the other can have consequences, extrapolated onto the scale of an entire lifetime. No human is perfect. We constantly make mistakes and wish to live our lives as a reflection of what they could be in our head. It is of human nature to want to achieve something bigger than yourself. Whether this be the goal of ruling a nation or living out an idealized fantasy in your head, the drive is innate. You might be an accountant from Ann Arbor or a sixth grade student in Japan, but you live a unique life and ultimately dream of different scenarios that could play out on any particular day.
While your immediate surroundings might require you to own a home, pay the bills and buy your family groceries, these are decisions you make out of necessity - they don’t need to be calculated because it can be determined that the vast majority of market participants will fulfill these needs first without any hesitation. Barring any unforeseen circumstances like a loss of a job or natural disaster, it can pretty much be assumed that business will remain as usual.
Obviously, there are economic models to determine the probability of these events and measure the effects of any irrationalities, but most economists are focused on determining the outcomes of future events and extrapolating current models to fit into market scenarios years down the line. If it isn’t obvious enough, I’m not complaining about the lack of thought given to black swan scenarios. None of us are nearly as intelligent as Nassim Taleb (haha), so why should we care about predicting the impossible when people like him are so on top of it? For the sake of clarity, I’m actually complaining about the lack of creativity present in economics.
I guess I should say that I’m less mad at economists than I am at economics as a whole. The truth is that these individuals have been psyoped into performing these bland calculations in order to distract from the fact that it’s practically impossible to generalize the irrational behaviors and desires of a market meant to satisfy and fulfill the needs of over seven billion individuals. No matter which way you spin it, a small army of humans with ivy league degrees can’t deconstruct the vast hivemind we call the global population, despite how many times they break things down into postulations over supply and demand.
Because economic models are of great importance to any nation engaging in international affairs, these models can get rushed and thrown together without much thought into the “what-if” or “how about this” scenarios that actually contribute to anything important in the global economy. If it pleases the leaders of a country, the job has been done and you can move onto whatever issue is next. Why should economists seek out the impossible when they can just do what’s required of them?
These people get paid to do what they do, just like anyone else does, and wasting time trying to do the impossible would be a waste of time and wouldn’t please anyone. It comes as no surprise that ponzinomics have risen from the ashes of economics, offering a fresh substitute for a dull social science that’s somehow still around today. Economics is boring and lacks everything that makes ponzinomics fun. I’m not saying a field like economics needs to have all the hallmarks of rebasing tokens or Safemoon clones, but a little bit of this couldn’t hurt. We’ve moved past a time where the collective held respect for their government, as it’s become increasingly clear the emperor has no clothes and you’re better off throwing your annual Roth IRA deposits into Tetranode’s Locker. Since so much of the trust in authority we once held has decayed in the past few years, it should have been extremely obvious to anyone that the economy would come to reflect this, giving us gems like TSLA, GME and DOGE. Ponzinomics meets TradFi, although slightly different from the ponzi games we play in crypto land.
There is no upper bound on what constitutes fair play in the field of ponzinomics. Crypto has certainly played its role in this game, but is by no means the driver of this school of thought. Ponzinomics consists of everything from 15-figure APY rebasing OHM forks to Metaverse cat-girls. We are currently in a chaotic growing period of crypto as we find ourselves frequently categorized as a sandbox world for million dollar JPEGs and dog coins, much to the disdain of anyone who’s staked a chunk of their net worth in this magic internet money. Many get annoyed by these digs at crypto, as they’re often overblown and regularly develop into ad hominem attacks that rarely hold a mirror up to the space. Well, our critics are correct. Just look at us.
If I was given a bag of loose coins for everyone on CT that has ever directly or indirectly used their followers as exit liquidity, I’d have to hire a staff of 10 to roll my change for me. It is what it is, crypto markets are still PvP and it’s better you realize this sooner than later. Are we going to get together and cry about this to try and fix the problems we’ve created? Of course not. None of us will feel any shame presenting the pitch deck of a metaverse strip club project with veTokenomics and a unique revenue sharing model to 50 VCs this week. That’s just business.
Ponzinomics pay well, and money is always better off in our own pockets than it is in the hands of a dirty capitalist. So what are we gonna do? We’re going to flip Decentralized Finance on its head and enact some of the change we supposedly plan to bring about in the world. I present to you the DeFi 3.0 thesis.
All about making the door a litttttle bit wider
Clearly, there have been more sellers than buyers lately. Everything is red, numbers go down, not good, we want numbers to go up. Unfortunately for us, it doesn’t look like this will be happening consistently anytime soon. Maybe we’re in a bear market, maybe we aren’t. I’m still excited.
It’s easy to feel like nothing is happening in DeFi when the coins aren’t going up, but it just takes a little bit of looking outside of the echo chamber to realize how strong the community actually is. There are so many projects currently being built that are doing completely unique things, I’d be a crazy person if I wanted to describe all of that. Instead, I’ll share this totally safe link that you should click on to navigate to @fomosaurus’ page. And that’s just a start, there are so many builders putting in work right now that I find it absolutely negative IQ to be bearish mid-term to long-term in the slightest. Moving on. In order to define what DeFi 3.0 could be, we should probably backtrack to our humble beginnings and how we got to this point.
DeFi 1.0 was characterized by the creation of the AMM and a summer of food farms. Uniswap was (and still is) king, Sushiswap tried to dethrone the king and got shot down, yearn finance rose to prominence and DeFi TVL skyrocketed from basically nothing. Liquidity mining and mercenary farmers became the vernacular and protocols tried their best to maintain relevance in a space becoming increasingly oversaturated. Even today, there are few protocols still standing from this time. DeFi 1.0 can be viewed from a historical perspective as the wild west mixed with high APYs and Pool 2s. I will say that however bad DeFi can be, there are a few positives. These include a clean UI (not necessarily smooth UX), the ability to swap token A for token B, yearn finance and the Curve Wars (because they’re fun). All of these are good looks for the space, and we need much more of these if we hope to eventually topple the monster of TradFi.
Transitioning to DeFi 2.0 took a bit longer than you would have expected, as this narrative didn’t really kick up until somewhere around October or November of 2021. We’re probably all too familiar with Curve Wars and OHM forks, but let’s examine them just one more time (no promises) to figure out why this narrative was able to take such a stranglehold over CT. The veTokenomics model was able to convince a bazillion speculators that because the tokens were in demand from basically every protocol, they’d go up a ton. Additionally, OHM’s ridiculous APY spawned ten million forks, almost all of which failed. Ironically enough, the only fork of OHM that actually did well was Wonderland, but it all came crashing down once one of their founders was revealed to be a criminal and people caught onto the fact that DAOs roleplaying as SPACs isn’t as cool as it sounds. Hell, not even an actual SPAC can do well, just go check out some of the Chamath examples if you’re curious. Protocol owned liquidity (PoL) was a pretty big part of DeFi 2.0, as Olympus was able to grow a massive war chest of over $500 million, even though there’s not much a protocol can do with this money to drive value back to token holders.
Despite the fact that the DeFi 2.0 narrative fizzled out pretty fast, I’d consider it a success. No, not because of the fact that I sold the local top of CRV, but because this was a perfect way of testing CT’s ability to grasp onto a narrative.
After I started posting on Substack about the Curve Wars, hundreds of other writers far more intelligent than me began to report on it, leading to a brief period of euphoria. The time I spent during all of this was a blur, and I can’t believe that it’s 2022 already. I won’t try and go back and see how long this narrative lasted, but it caught on hard and it caught on fast.
My entire TL and replies were littered with $20 CRV price targets and $5,000 OHM price targets, despite the fact that veTokens weren’t able to offer very much to the common man. Yeah, protocols would pay an arm and a leg for them, but why wouldn’t they? Giving you a 40% APY on whatever veCRVglOHMcvxDPX token is an amazing deal when they’re able to direct the Curve Gauge to their pool of choice. While DeFi 2.0 ultimately came crashing down with the rest of the market, this was a very enjoyable time that got me into crypto - I haven’t looked back since.
While there were attempts at continuing the narrative of DeFi 2.0 (remember solidly?) they failed as well, mainly due to the fact that DeFi 2.0 tokens had already gotten quite a big haircut and nobody cared anymore. This brief stage could be referred to as DeFi 2.25, only because the narrative was hanging by a thread of on-chain derivative protocols and this ve(3,3) token that nobody really asked for. For the sake of my sanity, we’re leapfrogging DeFi 2.5 or 2.75 and going straight to 3.0, it just makes sense this way.
If DeFi as a whole has done one good thing, it’s taught an entire community of degenerates how to consistently improve upon the process of snatching money from investors. We’ve been able to craft increasingly complex protocols that almost immediately catch the attention of everyone. Whether this be a new DEX on Fantom operating as a fork of Trader Joe or a 23-figure APY rebasing token on Harmony, we got it. And don’t act like DeFi protocols aren’t getting better at marketing, because a ton of them are very interesting and offer very visually appealing sites. If we hope to drive a renaissance period to DeFi, we need to backtrack and focus on providing for those who will actually help us achieve our goals: the community.
No, not the kind of NFT project that asks for your social security number to get on a whitelist, but the actual community backing DeFi and trying to innovate upon the traditional ideas given to us from TradFi - let’s get everyone involved.
Much of this section will be focused on the baseplate thesis written by my good friend @0xSami_ and the ideas that he expanded upon in the awesome article. For starters, I’ll briefly go over the Fat Protocol thesis that was first discussed (afaik) by Joel Monegro back in 2016.
The fat protocol thesis describes the relationship between a system and its applications. Giving an example of the internet and its biggest applications, Monegro stated that Web2 was characterized as a fat application > fat protocol situation where giants like Google and Facebook accumulated trillions in market capitalization while the infrastructure of the internet simply existed. Applying this to crypto, Monegro proposed the fat protocol thesis - blockchains like Ethereum and Bitcoin (old post, I know) could accrue value like never before, building an infrastructure for smaller applications that would feed off of a protocol’s success.
In Sami’s words, protocols have focused far too much on value creation over value capture. An example of this would be Curve Finance and their ability to capture value and drive it back to the protocol and token holders, versus a protocol which has tried to accumulate TVL with no means of expansion. Curve was able to act as a springboard (or baseplate) for protocols like Convex to build off of, offering the opportunity to accumulate value while still bringing it back home to Curve. Sami described this as the difference between an open-loop system versus a closed-loop system. Safe to say we’re bullish on loops without an opening in them.
I thought all of this was very interesting, as I’d never thought about the philosophy behind Curve and how they were able to become so strong. Sure, incentives are good, but anyone can incentivize for a certain period of time and maintain relative stability. Curve has maintained their moat and remained tied with Uniswap as the place to go for stablecoin swaps. Deep liquidity and a boatload of incentives were responsible for their success, but Curve has now evolved beyond just another application status - they have become a baseplate.
If you’ve ever played with Legos before, you know that the bottom of a baseplate cannot attach to the top of any other blocks. This is intentional, as a baseplate is typically very large and meant to support other structures, not the other way around. Curve Finance changed the game, leading to the inevitability that I send this article to the Lego corporation and request some updates to their baseplates - but let me explain.
Imagine a main baseplate set on a table. Let’s call this the protocol layer, and for further simplicity, let’s call this first baseplate Ethereum since everybody loves Vitalik and DeFi started on Ethereum. On top of the baseplate, you might have a few blocks put together with some more on top, creating a small fort - these are our applications, the protocols that exist on Ethereum (the baseplate). While many protocols can happily exist forever and maintain profitability and high TVL, there are those that make their way beyond this status and become baseplates themselves - this being Curve Finance. Imagine Curve as a baseplate of its own, stacked on top of the lego bricks we placed on the prior baseplate.
“Wait, you just said this wasn’t possible-”
I know, but we’re breaking down barriers and writing history, gimme some time to explain. Curve has transcended the status of an application and has become a protocol of its own, as we’ve seen Convex and yearn piggyback off the success of Curve and benefit from Curve’s deep liquidity and market share. Convex, yearn and other protocols involved with Curve are additional blocks built on top of the Curve baseplate, which are all built on the Ethereum baseplate. Look at this beautiful picture my graphic designer made for us, and observe the separation between normal applications and the baseplate applications in DeFi.
My idea of what DeFi 3.0 could look like (at the start)
Isn’t that something? Not only can an application evolve into a protocol layer of its own, but other protocols can build off of this and eventually replicate the process if they’re able to produce open-loops themselves. Here’s a paragraph from Sami’s article which describes the situation better and more coherently than I could.
We must grow
So, what’s the next step for DeFi protocols? I present to you the idea of an illiquid governance token.
“But wait, illiquidity is bad because-”
Ah ah ah, give me a second. We’ve seen the evolution from liquidity mining incentives, to high APY rebasing tokens that translates into PoL - what if we combined this into a token that provided users absolutely no way of cashing out? Whales control DeFi, as they can migrate from protocol to protocol, thanks to the liquidity of reward tokens like cvxCRV or the ease of drying up a liquidity pool. This is bad for the smaller fish, as they don’t have the portfolio size to play on a level like this and are stuck in an upstream battle of information asymmetry. If protocols could align incentives between stakers by offering a revenue-locked (rl) or governance-locked (gl) token, users could easily display their trust and long-term belief in a protocol. These tokens could still accrue value, offering a share of future revenues for those brave enough to get in early and ride the many waves of fortune and pain. Protocols would advertise a high APY to gain the attention of investors, only to reveal that they aren’t here to make just anyone a quick buck - they want those who are actually in it for the tech, unironically. This could probably be referred to as ve(3,3)^2, as protocols could implement a valve mechanism, or maybe we should just ditch ve(3,3) altogether.
You can currently lock your CRV for up to four years, but rewards are liquid and users have the option to opt out of reinvesting them, offering a minor misalignment of incentives. I believe the solution for this is to cut out those who only want the money.
Yeah, I know that crypto is a place where 99.9% of us are here to get rich and gtfo, but what if we could do both over the long haul? Wouldn’t it be nice feeling comfortable locking tokens in a protocol you believe in, versus having 25 tabs open and constantly refreshing Dexscreener to assure yourself a protocol hasn’t rugged you or gotten 75% of its TVL wiped in one transaction? And yeah, before you come running at me in my DMs, four years is a long time for anything, especially when it comes to locking your tokens in a protocol built in a sector that hasn’t even been around for four years. I’m absolutely positive that protocols could allow users to opt in for lower timeframes, or even see markets pop up for locked tokens like what occured with DeFi Kingdoms’ JEWEL token.
My dream
And while this all might seem like a stretch, I don’t think it’s outside of the realm of possibility. DeFi is starved for a new narrative, and reviving the community oriented aspects of DeFi would absolutely drive attention back to the sector as a whole. Maybe I’m dreaming too big, but I think by replicating the Curve model and creating something for protocols to fight over, we can actually start building towards something bigger than ourselves here. And while we’re at it, we should probably change the title of DeFi to OpenFi or something, as recent developments have shown we’re not nearly as decentralized as we should be. Sorry if that’s the name of a protocol out there, it’s just catchy and I like it.
Anyways, maybe this is all a pipe dream of mine. Curve Wars were a fun time and made a lot of people money, the timeline was more upbeat and my substack era was at its peak. It could be entirely possible that DeFi 3.0 will be something extremely different from what I’ve discussed, but I’d be happy to see anything new pop up. If you’re a protocol struggling to adjust to the turning tides of narratives, maybe adopt some new tokenomics and emphasize community. It seems to work pretty well for NFT projects.
Unfortunately for all of us, this is just a string of ideas right now. None of this may come to fruition, considering 99% of CT believes everything is going to zero. Bleh. Don’t listen to em.
If I could shill you new tickers that would 100x, I probably wouldn’t because of the SEC. But hypothetically, I would give you the tickers of some DeFi tokens that have gone severely under the radar over this past month, wink wink wink wink wink. Or would I?
Regardless of whether or not this thesis plays out, I am incredibly bullish on DeFi going forward, probably more than ever. I see tons of innovation happening with AMMs and derivatives, more people than ever getting DeFi pilled and a general lack of bullishness on the timeline means we’re far overdue for a pump - but I guess we’ll have to wait and see.
I was worried that I’d begun to fall out of touch with crypto because of school and stress over other writing work, but I’ve somehow become completely refreshed and excited to write again in a matter of days. Crazy how that works. A decent amount of this was written at around 4 in the morning, and I’ve tried my best to put together absolutely all of my current thoughts and opinions into this, though it’s inevitable I missed some of what I wanted to say.
As a whole, DeFi needs to return to its roots. We’ve gotten too money hungry and disassociated from our true cause - democratizing finance for all. If recent events in Canada haven’t woken you up to the urgency of our situation, I’m not really sure what will. If you’re not severely disturbed by the freezing of citizens’ bank accounts, maybe DeFi isn’t the space for you. That’s all I have to say about this.
At the end of the day, everything is a ponzi. Crypto is just a smaller ponzi where anonymous whales can dump their tokens on you at any given moment, where we fight over which protocol can deliver the highest yield that’s also sustainable in a horrific PvE environment. If we can eventually achieve democratized finance for all, that would be great. We have a long way to go from here, and until then, I guess we’ll just continue to use each other as exit liquidity until DegenSpartan rugs us all.
Thanks a million for reading and please share this with anyone that might be interested. I wanted to make this article a bit different, and I hope it was as enjoyable to read as it was to write. If you’re ever feeling generous, I’ll share my ETH address below. As always, follow me on Twitter @knowerofmarkets and DM me if you ever wanna chat about DeFi or Paul Thomas Anderson movies. Also huge shoutout to Aogiri Tree for always keeping me on my toes and taking the time to read over this before I sent it out. Until then, let’s continue to move up and to the right.
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mostly crypto & some other thoughts of mine