🐸DeFi Crash Course For Beginners🐸
"Why are yields so high?"
"What is (3,3)?"
"Is USDT a ponzi?"
Feeling too far behind to catch up in crypto?
Dw!
Here's a 5-min rundown of all things DeFi starting from zero.
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FULL BLOG POST AT @Noahpinion: noahpinion.substack.com/p/a-defi-crash…
1/ Crypto was just a pipe dream in 2017.
- Mining BTC was edgy
- Buying 🍕 & 💉w/ magic Internet money was dope
- Satoshi said decentralized P2P cash settlement was good & became the voice of God
- Vitalik embedded programmable logic on top of P2P settlement, called it Ethereum
But mostly it was a big fat Keynesian Beauty Contest...
- apes bought BTC & ETH thinking more schmucks will buy after them
- more apes bought🦍🦍
- ... more apes bought 🦍🦍🦍🦍
- China banned crypto
- apes got paper hands and sold 🧻🤲
- ... more apes sold 🧻🧻🧻🤲
- winter ❄️
2/ Crypto needed stability... Stablecoin is born
The first stablecoins were centralized & fully collateralized.
e.g. Tether, USDC
If u want 1 USDC u put $1 USD into Circle's managed reserve pool.
Next gen was decentralized & price was algorithmically pegged.
e.g. Basis, AMPL
3/ DeFi is born
First, what is DeFi (decentralized finance)?
It's really just a bunch of ordinary financial systems related to moving money (lending, investing, payments, etc.) BUT whose code runs on any computer in the world instead of on computers controlled by one company.
The whole point is to get rid of:
- single point of failure
- single point of corruption / manipulability
- govt's ability to shut it down
- paralyzing bureaucracy
- organizational & infrastructural fat as a result of not being open-source & having massive sales/ops teams
4/ AMMs (automated market makers)
After stablecoins, ppl made decentralized exchanges (Dexs). They ran into computational limits trying to put bid/ask order book quotes on chain, so they said "Fck it let's have a robot 🤖 quote prices & respond automatically to supply/demand!"
What is an AMM?
- It's a buncha 2-coin "swap pools" (e.g. BTC-USDT)
- Participants:
LPs/liquidity providers ~ deposit tokens into the pool
traders /liquidity takers ~ buy one token for the other from the pool
Uniswap (first AMM)
TLDR:
- price correlates with supply
(more demand ➡️ less supply ➡️ price goes up)
- so, just use a math equation to set real-time prices (based on supply, which is measurable):
like x*y=k, where x is supply of assetX & y is supply of assetY in a swap-pool
5/ Yield (part 1: lending)
Any financial system needs (margin) lending.
Some ppl borrow tokens (BTC, ETH, SOL, etc) to stay market neutral while deploying such tokens for staking, margin trading, etc.
Others borrow USDC to not have to cash-out of positions, i.e. give up gains.
Early margin lenders realized:
- to boost customer acquisition, need GROWTH HACKS
e.g. Compound, Aave, Cream
- began issuing TOKEN REWARDS to lenders & borrowers according to how much activity they conduct relative to the whole pool
- when reward tokens appreciate 🔜 JUICY YIELD!
6/ Yield (part 2: AMMs)
Needless to say, when a growth hack works, everybody catches on. AMMs began deploying similar TOKEN REWARD incentive programs.
e.g. Balancer, Curve, Bancor
On top of fees to LPs, AMMs also chucked in some native tokens to sweeten the deal.
7/ Yield (part 3: every DeFi protocol)
This chart below says it all: "DeFi Summer!"
From June to Sept 2020, every DeFi protocol under the sun began issuing their own native governance tokens as rewards to users.
Yield for CAC!
8/ Composability (of yield)
Really just a fancy word for "money legos." In systems where all is open source, u can easily string together different protocols for bigger use-cases.
e.g. @ProjectSerum explains here how to compose a 2x leverage system with a few button clicks
The worry though is that Ponzis start taking advantage of composability... so that one ponzi gets composed on top of another and another...
And it's a house of cards.
Every coin that u think is there for real has a money multiplier of 69420x.
What will happen in a rate hike... ?
9/ MEMES!
No doubt: memes drive markets, esp crypto.
Here are some of my favorites from 2020-2021.
10/ What's in store in 2022?
Onboarding next 1B users on DeFi will look nothing like the first 10M early adopters.
- TradFi Distribution Channels:
A big push to integrate with credit unions, traditional brokerages, 401-K and IRA plans, modern wealth managers/robo advisors, etc.
- Prime Brokerage and Cross-Chain:
see
- Crypto Exchanges Acquiring TradFi Brokers:
for customer acquisition & also we'll just see more DeFi-TradFi convergence in general in 2022
- Options Will Take Off:
trading volumes grew 4x in 2021, and will continue
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