DeFi is dead

Mmm, crypto so good! Yes yes yes!

(So sorry for the clickbait title, I promise it’s not what you think..)

It’s really been a while. When I last wrote a substack in November, I was really into modularity and how Ethereum might scale to accommodate tens of millions of users. Since then, modularity has become a pretty hot topic (at least when the coins aren’t going up) and everyone is a believer in DA layers, restaked stETH (congrats to Eigenlayer on launch) and is using L2s nearly as often as mainnet Ethereum. But I’m not here to talk about any of that.

Since November, crypto has found itself in a series of weird spots. FTX had just blown up, the entire world believed crypto was finished because one man got a little too big for his britches and ran off with a few billion dollars and it was consensus that we’d never get another cycle again. It’s pretty reasonable to take all of this and more as a reason I haven’t found anything worthwhile to write about in over eight months.

Prices didn’t start going up until the first or second week of January, but by then, it didn’t matter - AI was here to save the world. ChatGPT became the fastest growing consumer app of all time, everyone was using it to do their homework so they could spend more time learning about liquidity pools, AMMs and - I’m just kidding, no one was doing that.

Crypto had quickly become an afterthought, with a new article from mainstream media each week telling you to quit your job at a DAO, sell your digital gold and get the fuck out of the metaverse before you lost it all. Jokes on them, 90% of crypto twitter probably did lose it all in 2022 and early 2023. Putting that aside, we (as an industry) were being hit with gut punches three times a day while our coins took a ride on the euthanasia coaster to zero. BTC and ETH fell from 60k to 16k and nearly 5k to 800 respectively, while alts practically raced to zero as everyone’s adderall prescriptions ran out. Don’t forget about the bored apes, they’ve also had their fun in all of this.

Despite everything, DeFi TVL has remained very, very large given all that you can do currently. For years - and basically all of DeFi’s lifecycle - the promise was to democratize finance while making a boatload of money through novel incentives like liquidity mining, protocol owned liquidity (3,3) and a host of other gamified mechanisms along the way that led many early and reasonably early adopters to make a huge return on their money and time spent.

Here we are today.

DeFi has held up extremely well through all of these blow-ups, weeks of red candles and the collective loss of faith in crypto and its endgame. On-chain liquidations, transparent / open source code and the benefit of not needing to transact with a bank proved to be (gasp) actually useful in the midst of arguably the worst bear market in crypto’s history. I say this with complete naivety as I showed up in 2021, but I think that if you took the sheer number of people involved with crypto, the amount of liquidity in the market and the scale some of these projects and companies achieved, this was by far the worst bear market based on how many people got fucked. But what do I know?

Speaking of the distant bear market, it’s been interesting to me on how fast we made it out alive. I think that the blow-ups from FTX / Alameda, Genesis, 3AC, Terra / Luna and the 987 other catastrophes we experienced were able to “speed up” the pain and avoid a drawn out period of gloom and doom. Don’t get me wrong, the market went down hard and it really did take a long time. If you mark May 2022 as the start of the bear market and sometime in Q1 2023 as the end, that’s nearly two years. But I’m sorry, it was worse in 2018 because there was 100x less money in crypto and there were only twenty people there.

Got it.

But we’ve made it out alive, or at least, a small number of us made it out alive with less than critical amounts of brain trauma and a very reasonable amount of mental illness to have contracted. Majors have rocketed off their lows by quite a bit, a decent number of alts have recovered (while a handful have flown, looking at you pendle), L2s and some alt L1s are seeing their DAUs rebound off the lows and DeFi continues to see new products get pushed out every month, to much fanfare from the thirteen Compound users that are still here.

Speaking of 13 users, zkSync has been able to attract over $200 million from North Korea, China and whoever’s left on crypto twitter with more than $500 in their bank account. Sure, 75% of the TVL is made up of stable coins (why wouldn’t it be?) but it’s nice to see people at least trying to act like they’re excited about using four different DEXs and a couple of Compound forks.

All jokes aside, it really is impressive that DeFi still has over $50 billion of TVL, let alone anything in the 11 figure range at all. It’s clear to me that DeFi as an industry has PMF, not only for those of us who probably find ourselves in a first world country, but for those who aren’t as lucky to have the banking infrastructure we do. As crazy as it sounds, the reality of putting money in a bank account and being able to take it out whenever you want is something that a vast majority of the global population doesn’t have.

On the other side of the coin, it’s a little bit frustrating that the only “wins” DeFi have achieved on the application level are staking ETH, earning 4% yield on stables, trading perps on-chain against the house and occasionally wrapping assets in a basket to earn slightly higher yield. When I first got into crypto, I immediately became obsessed with the Curve Wars of yesteryear, enamored with the narrative and how it framed DeFi to be something larger than life. Of course, we’ve all moved past the Curve Wars and grown up a little bit, but I still struggle to think of a time since then that DeFi has been the “main character.” Was that the best we can do?

Lido’s growth over the past 6-9 months has been incredible, as I’m pretty sure almost none of us could have suspected Maker’s dominance to ever be overthrown. Speaking of, Maker has also done incredibly well and is actually on track to maybe take the throne (putting ETH aside) as the most attractive crypto asset to TradFi players and institutions. Cash flows are king.

But the issue remains - DeFi tokens suck.

If you’d held practically any reasonably large (say, > $50m market cap) DeFi token since the start of the bear market, you aren’t reading this - you’re out on the street holding a cardboard sign and asking people for change. Sure, a lot of coins like LDO, MKR, SNX, COMP, RPL have moved exceptionally off the lows, but not everyone operates in crypto by selling at an invalidation level, watching a coin drag down 75% then hitting the green button to make a return. Similar to the stock market, a large portion of crypto investors (failed traders) go with the DCA approach or simply buy something with reckless belief that it will 50x in three years. It’s unfortunate, but this is the game.

“But Knower, if you can’t buy and hold DeFi tokens, NFTs are essentially high beta shitcoins with pictures attached and no-one is actually using zkSync organically, how can we make any money?”

That’s a great question.

I firmly believe that current valuations for a number of coins are not only at least reasonably valued (based on fundamentals from made-up sources) but actually undervalued in a handful of cases. DeFi might not have as many DAUs as ChatGPT, but this doesn’t discount its benefits and the resilience it’s had over the last two years.

Look me in the eyes and tell me that MKR should be one hundred dollars a coin as the protocol continues pushing for RWAs and increases its ARR nearly everyday.

Yeah, stuff gets hacked and people lose money; there’s nothing we can do about this, not unless we want to try and run it back with centralized DeFi companies again. But just look at the number of protocols that have been hacked and the amount of money that’s gotten wiped from the system and compare it to the DeFi TVL chart from earlier - people don’t give a fuck.

If you’re reasonably deep in crypto and transact on-chain at least a few times every week, chances are you’ve been rugged. Hell, if you had never even transacted on-chain and went with the passive approach of depositing in a CEX, chances are you got rugged even harder.

This only tells me one thing: crypto is a volatile asset class and because of this, bad actors will enter and do their best to extract value from innocent individuals. This is just how the world works, unfortunately. But let me retrace my steps, I’ve steered too far from the topic I originally set out to write.

By now, if you’ve (hopefully) been reading all of this, you should be able to tell that it’s a clickbait title. DeFi isn’t dead, it’s actually more alive now than ever and arguably in a position where we need it now more than ever. But I know that’s not why you’re here, because if you’re like most, you don’t spend hours everyday on Twitter and countless hours each week getting liquidated because you’re in it for the tech. You’re here to make some money and eventually say that you were here for the democratization of finance and to participate in the dismantling of the traditional financial system.

You’ve probably seen clips on Twitter of the TikTok Live woman who receives those odd little gifts and spits out a response every two seconds. You’ve also probably asked yourself why she’s doing this, who’s watching these and what she’s even doing in the first place. I don’t care enough to go and dig into the bounds of human psyche and give you an answer as to why this is happening, but I will say that it isn’t a surprise. Here’s a blurb from CL’s (@CL207) very recent write-up:

Scam Shitcoin Supercycle

We’ve seen social media and the internet at large turn humans into hyper-consumerist shells of what we once were. If you’re like me, people much older than you probably used to tell you to “put down that damn phone” - this doesn’t really happen anymore, mostly because everyone has a phone and all generations are extremely addicted to consuming content, whether they realize it or not.

TikTok has exasperated this, with the for you page probably on track to becoming the most successful psychological weapon in history. Social media started as a way to get in touch with friends and loved ones, and even a way of connecting you to those you haven’t seen a while or others who you haven’t interacted much with in person. Since then, we’ve seen social media become weapons of capitalism, a way of isolating the individual into prisons of their own construction. Most people I know will spend hours and hours each day just scrolling through TikTok, with each swipe or click adding another bar to their digital jail cell. All hyperbole, but you get my point.

Yeah, I’m guilty of doing the same on Twitter, but the difference is if I didn’t browse Twitter for a few hours a day, I wouldn’t have a job.

The society we’ve found ourselves in is one that doesn’t often make sense. It’s common for people to finish a meal and immediately start scrolling. As soon you wake up, immediately find yourself scrolling. This wasn’t how it used to be. Part of this (and CL mentions it quite a lot on his Twitter) has contributed to some of the valuations we’ve seen in crypto. If the majority of the developed world can spend more than four hours a day scrolling and consuming content, why can’t something like Bitcoin take hold as a concept? There’s a psychological barrier to break through, but it’s my belief that each passing day will only make this more likely to occur in the very near future, if it hasn’t already.

You can still shout from the rooftops with your underwater shorts about how there aren’t any fundamentals, but take a look around you -is the outside world really operating on fundamentals?

There’s an alien intelligence in the form of AI that’s rapidly integrating the way we work, think and learn. TikTok is melting our minds. We’re consuming more content than ever before and somehow still going out and living regular lives.

We’re living in an increasingly digital world, why shouldn’t digital money have valuations that reflect this? Does this explain why an Elon tweet send Milady to a 7 ETH floor? Maybe. But if you find yourself constantly searching for the “why” behind a trade, you’re not going to perform nearly as well as those who simply look for the “why nots.”

Nothing is more exemplary of this phenomenon than the on-chain degeneracy that’s occurred through 2023 so far. Taking only a few, we’ve seen the following happen extremely quickly:

• PEPE → $1.5 billion market cap

• RLB → $400 million market cap

• UNIBOT → $70 million market cap

These coins don’t reflect the values of DeFi or cryptography as a tool to empower the individual, but does anyone care? People are trying to make money right now, putting the horse before the carriage (or is it the cart?). We have this belief that given enough time, the things we build will catch on with the masses; until then, we’re biding our time trying to find the next 1000x on Dex Screener. You’ve probably missed at least one (or maybe all three) of these home runs, but that’s okay. We’re in the first inning, or maybe somewhere in-between that where nobody realizes the game even started. It keeps getting reiterated and reframed on Twitter, but we really are in an entirely new meta. These coins are representative of internet meme culture, gambling as a way to “make it” and the hyper-financialization that’s taken over the internet.

Unibot is a tool whose entire purpose is to help you buy and sell shitcoins faster through Telegram - you can’t look at me seriously and say that isn’t objectively cool. PEPE did a 1000x or something all because people thought it was funny. Rollbit may or may not be an unlicensed bucket shop, but nobody cares - they’re doing more volume than your favorite crypto exchanges. I really like this thread from Jingtao (@whyillbedamned) because it describes the shift we’re seeing in on-chain behavior and how important it is to recognize this earlier than others:

I’ve never been more bullish crypto, not only from my experience of watching these coins melt faces and shock 99% of crypto twitter, but because this is happening in tandem with a handful of huge innovations that are raising money on the private markets. On-chain gaming, new primitives for non-custodial wallets and zero-knowledge technology all operate under the core ethos of crypto, whether or not they’re making money right now or managing to attract mindshare. All of this is happening under our noses while HarryPotterObamaSonic10Inu trades at a higher valuation than a DeFi token whose protocol has $500 million in TVL.

But that’s okay.

You shouldn’t be kicking yourself because you missed these or screaming about fundamentals - whether you like it or not, these are the early stages of crypto adoption and are a clear example of what people enjoy doing on-chain. So what they don’t want to buy your dinosaur DeFi coins? Get out there and learn how to take advantage of these opportunities and adapt to the new meta, the one that’s fueled by a world that increasingly makes less and less sense.

It’s okay to have a little fun sometimes.

As always, thanks for reading. I’m going to try and write more of these shorter pieces each time an idea comes to me, but no promises. Stay sane out there.