I’ve already spoken about DINO’s and why I think they’re structures built on quicksand, but as with crypto and fiat thinking, they would take a dumb idea and double down on it. The latest craze being NFT’s and DEFI, which to me is complexity theatre build on a foundation of quicksand. However, proponents of these protocols will tell you to focus on the massive “yields” you’re generating and that it’s decentralised, and that’s why you’re getting these returns.
Those greedy bankers were taking all the yield for themselves but with these protocols, cutting out the rent-seeking middleman ensures that you receive better returns for investing your capital. Now, this does sound like a compelling narrative and one that has successfully embedded itself in the minds of those who don’t understand basic math, but this is anything but the truth.
Now I am no DEFI hater; I think the overall concept is promising; my only objection is the current implementation which I believe to be fundamentally flawed and used to siphon off money from public markets faster than ever before.
Being paid in inflation/seigniorage
Not all DEFI projects are the same, and any DEFI proponent will be the first to point that out, but the vast majority is about yield farming. When Decentralised Exchanges came online, they lacked liquidity. To combat this, they encouraged users to lock in capital for the different trading pairs the exchange supported.
As an individual investor, you would lock in 2 pairs of coins, wBTC/USDT, and you get paid the fees. This solved the problem of liquidity on exchanges; however, having liquidity is one thing, having trading volume is another.
If the investor incentive is to lock up capital, you have to strike a balance by getting the trading volume up to make up fees that provide a worthwhile return for capital allocators.
Instead of competing with exchanges on the price of fees and liquidity bases they can attract for different pairs, these DEFI projects instead decided for the easier route to reward investors in a DEFI token.
An implicit default and failed model
This is a default on your business model. You cannot generate the fees needed to maintain the ecosystem, so you sucker investors in with inflation YOU Have complete control over. You can offer them 10, 100, even 1000% APR for locking up capital because you’re paying these users in a token that you issue out of thin air.
Imagine for a second if you put your savings in a bank, let’s say it was USD, and they like, okay thanks you’ll get %100 interest on your money, but it’s paid in our native bank bucks.
You’d be running the other way as fast as possible, yet with DEFI, people tend to apply different rules. I am not sure if it’s naivety or if they see it as gambling and money they are happy to lose, but this makes very little sense to me if you’re looking at it from an investment standpoint.
VC’s are heavily involved in DEFI.
If we look at many of these Defi projects, they are popping up at record rates, but no one takes the time to consider where they are coming from; this may be anecdotal. However, I’ve asked a few DEFI proponents, and none of them took the time to review where these DEFI projects come from, not questioning things like:
- who is funding them,
- who gets an allocation of the tokens,
- who seeded them
- which smart contract they crudely copied and changed slightly
All they see is the next yield farm, and the value of the next DEFI token, in USD, sucking in a new host of those looking to get rich quick. What I see is DEFI is a way to get around being an ICO and raising capital and exchanging it for a token directly but adding additional layers like liquidity lock-ups as a way to say no, we’re not releasing an ICO; we’re something completely different.
But if you remove the way it is issued, it’s a similar method to the ICO, which is venture capital funds looking for new forms of yield. Instead of chasing the next SPAC or going public, a DEFI project is the path of least resistance to sucking in public capital.
You spin up a contract, offer some stupid yield, you get the users to lock up capital, and instead of rug pulling, you dump your allocation of the DEFI token for a quick 5, 10, 100x, and since and repeat.
If we do a quick Google on some of the top DEFI projects, you’ll quickly find that they are funded by the same group of individuals. If we look at popular names like Decentralised Exchanges Uniswap, Aave, 0x, Idex, and many more, they were all seeded by the DEFI alliance.
The DEFI alliance is funded by a host of market markers and investment firms like CMT through CMT digital and DRW through Cumberland Crypto and a few more; these are massive firms in the traditional space.
Now I am not saying it’s wrong for them to get into the sector; they can do what they want, but why would they be building something they cannot profit from doing. DEFI is pitched as a way to disrupt the current financial establishment, but to me, it looks like business as usual with a few jargon terms and marketing gimmicks.
Creating trickle-up cash cows
To me, this current crop of DEFI and staking are NOT how we free ourselves from the banking ecosystem; in fact, I see it as an extension of the banking system. A new ecosystem that plays by the same trickle-up rules as the fiat system. Whales and early-stage investors naturally have the advantage as they are closer to the issuer of the currency and have more resources to deploy, such as bots, to ensure they can arb these fragmented markets/protocols they create.
They are spinning up as many DEFI projects to give end-users the illusion of choice. Still, in the end, the money is all filtered back to similar sources, the banks and investment funds you wanted to get away from by moving into cryptocurrency.
Bitcoin is a hedge against all this shitfuckery and snake oil selling, and while I see no problem risking some of your BTC for a yield, the CAGR it gives you simply from HODL’ing is more than enough of a return, and anything else is pure greed.