Thread by @Shaughnessy119

1/ Loved Delphi's DeFi report 📖💰

It's the most comprehensive report I've read on DeFi 👀

Kudos to @ashwathbk, @yeak_ and editors by @Kevin_Kelly_II, Brian M h/t @Delphi_Digital

Sharing my take on their themes + projects I want (and don't) to fund in 2023

1/41 🧵

2/ Setting the stage, Decentralized Finance has gotten crushed in the bear market

Most blue chip DeFi tokens down 80-90% and the longer tail of tokens down more

What's hard to see in the price charts are the teams that just gave up or disbanded. This will take time to show up

3/ The authors call out DeFi's growth headwinds

- DeFi products are speculation based
- Onboarding is difficult
- Retaining users is hard
- Overall UX of the space is far from ideal

4/ A few headwinds I would add in are:

- Regulatory uncertainty for founders launching DeFi tokens/projects

- Regulatory uncertainty for existing DeFi projects (Uniswap fee switch anyone)

- 2 year treasury bills are at 4.24% which act as a vacuum for risk asset/token vals.

5/ Theme 1: Loss of CEX trust is bullish DEXs

Given #FTX I couldn't agree more.

CEX's will continue to exist especially for the majority of users and centralized frauds will reoccur in every industry

DeFi needs to continually iterate to steal marketshare from CEXs over time

6/ What does this mean?

The arrow should point in the direction of recreating the FTX experience, on-chain.

This means a sophisticated matching engine and a one-stop shop easy consumer experience (aggregate DeFi protocols)

DEX vs CEX marketshare demonstrates our success

7/ Theme 2: Blue Chips Rise

It's obvious that stakeholders will flock to more established DeFi primitives (@Uniswap, @AaveAave etc) that have time-tested brands, higher TVL, well funded teams and stickier TVL at the cost of the more grassroots, experimental DeFi primitives.

8/ Throwing my VC hat on, it's also going to be difficult for DeFi founders to attract capital on ultra founder favorable terms (i.e. high vals, long vests) given investors can allocate to live DeFi projects with liquid tokens which carry less risk than launching a new project

9/ Theme 3: 0-1 Speculation Primitives

The people want a primitive that offers high leverage and ease of use

We have @dYdX (DV Port Co), @GMX_IO and other options available, but we are a long way from @binance level volumes and jurisdictional blocking / UIs are a headwind

10/ The Binance experience on-chain will take 5-10 years of continual DeFi and L1/L2 improvements

God forbid anything happens to Binance (would kill crypto, not something I'd ever want to see), we need an on-chain alternative.

My favorite case is a slow, continual DeFi shift

11/ Theme #4: Undercollateralized Money Markets

Undercollateralized MMs are necessary for the market makers of the world to operate (@wintermute_t) for efficient markets. Depositors get higher yield.

Crypto has overcollateralized loans (aave, compound), but we need undercollat

12/ I'm unsure if there is a golden unlock here, or moreso just a mixing of TradFi (centralized risk analysis and evaluation) and Crypto tenants (on-chain transparency and lend access) to achieve something better than very overcollateralized loans to enable more efficient markets

13/ #Genesis is relevant right now

- #DCG owes $1.7B to Genesis
- Genesis owes $900m to Gemini Earn
- #Gemini Earn users can't withdraw

If this was more on-chain, Gemini earn depositors may have had more insight into where the 6% stable yield was being generated and the risks

14/ Probably a future thread, but the Gemini, Genesis, DCG debacle is going to be long and drawn out

It's devolved to legal battles

DCG's crown jewel (@Grayscale) has its future fee gen under pressure (lawsuits, Reg M) which hurts DCG's liquidity outlook

15/

https://twitter.com/Shaughnessy119/status/1593639677126393858?s=20

Theme 5: Improving Passive LP products + Delta Neutrality

TLDR: You're probably losing money being an LP on a concentrated Uni V3 position unless you're a pros pro.

16/ Beating impermanent loss is the focus and if this isn't achievable then orderbooks may reign supreme (for majors, amms probably win long tail)

Projects are iterating to give an improvement over IL.

17/ @GammaSwapLabs is mentioned

"Using GammaSwap, users can borrow an LP position and separate the tokens, gaining positive exposure to impermanent loss.

18/ Liquidity borrowers pay a funding rate to GammaSwap LPs, which results in a payoff structure that beats the vanilla LP position in all scenarios."

19/ Theme 6: The Rebirth of UX Aggregators

Given an ever growing list of DeFi apps, clean and expansive aggregators are an obvious need long term

Existing front-pages of DeFi will expand integration wise (@zapper_fi, @DeBankDeFi are port cos) and in functionality.

20/ Historically wallets have been hard to monetize

@MetaMask added in fee swaps to monetize. Longer term maybe some MEV is returned to MM via Flashbots and Suave.

I think wallets may enter a new era of emphasis if the teams execute the right way

21/ As wallets expand they should roll out their own Web3 browsers/UIs to navigate DeFi/Web3 from within that space vs visiting a site and then having your wallet pop-up.

Functional wallet browsers would be nice via Metamask, @phantom, @xdefi_wallet (port co)

22/ Theme 7: Ditching veTokens

@CurveFinance championed the model. The longer you lock your governance tokens (2 weeks to 4 years) the more voting power you get and you earn fees from swaps.

More voting power = more control of CRV emissions to pools

23/ This is important since if projects themselves accrue enough voting power they can direct emissions to their pools which juices yield instead of printing their own token to offer yield

24/ What happened is @ConvexFinance burst on the scene and allowed users to convert CRV to cvxCRV so they can earn the usual rewards while being liquid/unlocked

25/ Convex allowed users to

- Stake CRV for cvxCRV for liquid token + fee gen (convex locks up CRV for veCRV)

- Stake CVX for vlCVX to control gauges (and CRV the cvxCRV people are locking up)

26/ Since only vlCVX had gauge control, it offered outsized control (1 vlCVX controlling 5 veCRV), bidding up the price of CVX in the process

Convex's lead became virtuous over curve as Convex offered incentive separation.

Convex offered yield with no lock or outsized gov power

27/ Ve Dynamics have their issues, but it is an improvement over normal staking. I think it is becoming copy pastish for a lot of projects scrambling for a token use case.

28/ 🔮🥠 Time for some projects/ideas I am not interested in funding in 2023 and those I am interested in

(I'll probably be wrong on a lot since I'm human but I'd rather be in the ring vs in the crowd watching)

🔴 In 2023 not too interested in funding

29/ - DeFi projects which are not materially different vs live and liquid versions (way less risk buying liquid DeFi tokens who have communities)

- DeFi projects on less popular L1s outside of Ethereum (and L2s), Cosmos and Solana.

30/ Too much risk vs building on established L1s or strong new L2s. Open to killer ideas.

- DeFi index plays (boring, need a lot of AUM to scale). Will let TradFi folks tackle.

31/ - Synthetic stock plays (too much regulatory risk and its not crypto native and I hate rebuilding what we already have. Rather go full crypto native vs having one foot in the old world.).

32/ - Lending and borrowing (Aave/Comp hard to displace, unless it's a step function improvement on undercollat borrowing)

- New AMMs on ETH (On ETH Uniswap has won. Interested in adjacent plays like LP provisioning etc).

- Stablecoins. USDC has won for now.

33/ Liquity and Rai are decentralized options.

- NFT financialization. Need a really smart team to build out the finance side while offering something NFT holders "Actually" want to use.

🟢 In 2023 looking to DD and potentially fund

34/ - Projects lowering the hurdles of self custody

- Projects recreating the FTX/Binance experience on-chain

- This is most likely funding individual projects (perps, options, etc) that are then aggregated together

35/ - Projects greatly advancing the UI/UX of DeFi (wallets may win on the DeFi browser side)

- AI is a buzzword but interested in any areas of AI advancing the most complicated aspects of DeFi (smart contract auditing, LP provisioning, risk analysis, economic modeling etc)

36/ - Projects advancing undercollateralized lending in a novel way that incorporates blockchain's tenants

- Advances in stablecoins, but I think USDC may just win at this point (tether is historically too opaque).

37/ - Potentially a DeFi investment DAO (has to be a hub/spoke model with concentrated decision making in each sub dao or it doesn't scale nor is it efficient - i.e. voting on plays becomes a crowd and risk taking is shunned)

38/ - Perpetual projects that advance on what we have today. Clear and massive PMF.

- Structured products as retail gets access to higher deposit APYs and funds can seed an options market.

- Excited about on-chain orderbooks given the issues with LP provisioning on AMMs.

39/ @SeiNetwork is a recently funded example.

- Kind of DeFi but Opensea competitors. BLUR gaining momentum as a PRO version of OS and Sudo with the AMM avenue. Uniswap's NFT plans are a potential hurdle for both.

40/ - MEV plays - but it will be hard to compete with Flashbots (Suave as a network of executors compete to return MEV back to users/user interfaces).

- Controversial but open to regulatory DeFi type plays.

- Any DeFi play with Exogenous cash flows or a path to get there

41/ - Open to anything thats super interesting. I'm low IQ so this is all I can think of.

42/ Are you a buildooor?

DM me a deck and I'll DM you a calendly link if we are interested

43/ One last prediction

- Solana DeFi isn't dead. @aeyakovenko and Raj have built an ever improving chain that continue to get better (firedancer, jump building). It will take time to cleanup the Alameda driven VC Ethos (high vals, short unlocks) but they will persevere.

44/ 🎙️ Stay tuned for a podcast between myself, @ashwathbk abd @yeak_ covering their report!

Read the full report here: members.delphidigital.io/reports/the-ye…

45/ Disclosures:

- Delphi Ventures may own equity or tokens in the projects mentioned in this thread. I've done my best to call them out specifically.

- NO tweet is an endorsement.

- Everything in in my own personal opinion

I am AMPED for 2023!

@yeak__ missed the second underscore apologies fren

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