Thread by @kaiynne

As promised, a thread on where DeFi goes next and why DeFi summer was not the zenith. I’m feeling particularly self-indulgent so this is going to be a long thread.

Original tweet I am responding to is here.

https://twitter.com/DegenSpartan/status/1451849957623824386

It is irrefutable that every og DeFi token has been rekt against ETH in the last year, in hindsight this really shouldn’t be surprising. During DeFi summer the blue chip projects were not just the dominant ETH narrative they were the only narrative.

As new narratives have emerged many people have rotated out of DeFi tokens into NFTs, DeFi is deep into the trough of disillusionment.

Combine that with severe regulatory headwinds and market uncertainty and you have a perfect environment for a lack of conviction on the future of DeFi. But the future is actually brighter than ever, we just need to zoom out.

Let’s take a step back to 2016, the early Ethereum community was very diverse and so were the narratives. Governance, identity, prediction markets, tokenisation, DEXs, stablecoins, capital formation and of course DAOs.

The DAO in mid 2016 managed to combine many of these narratives together creating the first concrete example of the power of smart contracts on Ethereum and of course the danger.

Watching $150m pour into a smart contract and then pour out again made headlines worldwide and raised awareness of Ethereum significantly.

But the capital formation narrative had actually started almost a year before the DAO with the @AugurProject ICO in August of 2015. By the time of the DAO there had been more than a dozen token sales.

For good or ill, depending on how tolerant you are of speculation as a driver of attention in capital markets, following the DAO the dominant narrative became the ICO. This barely changed except for a few flickers from early L1 competition like polkadot until early 2018.

We also had our first brush with NFT mania in late 2017, but this was crushed by both scaling challenges and the start of the bear market.

In mid July 2018 it became pretty clear that the market correction was not going to be temporary, the late November sell-off was the nail in the coffin on the bull market as even our most ardent hopium dealers faced reality.

But in August of 2018 right as things were looking grim a group of memologists looked around at the rubble and realised almost everyone still building was implementing some kind of financial contract. coinmarketcap.com/alexandria/art…

Thus the DeFi narrative was born, and from the first DeFi summit during DevCon4 it was the dominant narrative until early 2021.

DeFi momentum continued to build as yield farming gained traction. The problem was basically everyone building at the smart contract layer was deep down the DeFi rabbit hole. We drank a little too much of the koolaid and started asking ourselves how DeFi would onboard 1m+ users.

With benefit of hindsight this question looks hopelessly naive. The fundamental problem is that finance is primarily infrastructure. Very few people in the world deeply care about market structure and payment rails. Maybe a few tens of thousands.

While the ICO boom had tapped into the almost unlimited demand for speculation, DeFi yield farming was a much more challenging process. Plus the market had matured and become more efficient making it tough to just yolo into anything, though of course many did.

This meant that most of the DeFi summer participants were existing crypto natives. There was a ton of capital flowing in but it was mainly from large funds and whales rather than end users. The gas price spikes only skewed this further.

But fundamentally most of DeFi is infrastructure, which is only interesting to a tiny fraction of the population even factoring in the speculative aspects of governance tokens.

So where does this leave us? We have new financial in fracture that will enable a 100x improvement in many aspects of financial markets. But very few people care and the install base of Ethereum is still a tiny compared to web2.

Queue NFT mania wave two. NFTs are the tokenisation of culture, and where most people do not give a fuck about financial infrastructure everyone participates in culture. The addressable market is all of humanity.

If you need any further evidence of this just look at the number of celebrities being NFTpilled on twitter in real-time. Yes we had a few ICO chillers in 2017, and a few anomalies like @mcuban during DeFi summer. But NFTs have generated more attention than any other narrative.

Does this mean that we will see DeFi continue to languish in relative obscurity, I honestly think so from an attention perspective. But this doesn’t mean that DeFi will not have impact.

NFTs are going to absorb and connect to many aspects of culture. Gaming, Sports, Music, Movies, Art and many more will be transformed by NFTs. And this will lead to the moment where we have an install base of 50m+ users.

Link to part 2.

https://twitter.com/kaiynne/status/1453474244734693383