Aug 18, 2022
Defi Summer 2022: The Benefits of a Forest Fire
“Fire, the primary change agent in the boreal zone, is as crucial to forest renewal as the sun and rain.” [1]
Virtually everyone involved in financial markets — investors, hedgers, and speculators alike — has experienced the pain of the 2022 downturn. The US equities market has endured significant repricing as market participants fled to the exit in a panic throughout the year. Supply chain disruptions, a war in Ukraine, and fiat currency inflation all contributed to this market volatility. This phenomenon was only exacerbated in the crypto markets, where Bitcoin declined nearly 75% off of its 2021 all-time high.
What was once exuberant optimism turned into outright pessimism in June of this year, as major crypto firms once held in high regard were forced to liquidate massive positions and file for bankruptcy. Stablecoins lost their peg, Luna went to zero, and Celsius froze their customer’s assets in an attempt to maintain solvency and avoid liquidation. An endless stream of bad news.
This is true capitulation.
2017 market cycle survivors and 2020 buyers know one thing about this market: it is cyclical. The entries most investors dream of when prices are high; few take them when they arrive. Conviction and a long-term perspective brought investors throughout history the greatest returns. In short, it pays to be optimistic when others are fearful. The central question now becomes: where should one express that optimism with their dollars? If cycles play out as they have in the past, one should expect summer to be a good time for DeFi tokens to take back some market share they lost to NFTs and gaming in late 2021. But what exactly was DeFi summer? Why should we expect it again?
2020 was a wild year for markets and a great year for DeFi. The total value locked (TVL) on-chain bottomed in March of 2020 and began to grow exponentially. Thanks to the rise in popularity of DeFi protocols such as MKR and AAVE, users flooded to the Ethereum network in search of high yields not offered by traditional banks. Ethereum was hardly the only one to experience this, as nearly all popular layer 1 platforms saw an influx of liquidity to smart contract applications built on top of them. For example, take a look at Polygon’s TVL from 2020 to 2021.
When speculators hunt for yield, they are also placing a bet on the growth of an ecosystem. The DeFi governance tokens they farmed early are now used as voting power to steer the direction of the protocol, much like traditional venture capital in legacy markets. These tokens are also known to appreciate in value rapidly with growing TVL. As users flock to the platform, so do prospective governance voters, builders, and even other protocols seeking to leverage their treasuries by farming in a new ecosystem. Holders of tokens like AAVE, CRV, and MKR saw incredible returns on their investments following the entries they took during DeFi summer (over 1800% from bottom).
DeFi coming under increased regulatory scrutiny in 2022 should tell you all you need to know about what is coming next: mass adoption. Regulators and Lawmakers do not spend millions in tax dollars on industries which they believe to be a flash in the pan. Summer of 2020 was a good first step to what is now growing into a legitimate and accepted part of the global financial system. Governments cannot close Pandora’s box.
Human beings tend to vastly underestimate network effects and exponential growth. A small seed of interest can spark a massive boom. Look no further than Fantom in 2021 — a million dollars of TVL in April of 2021 quickly became over seven billion dollars.
Compare this now with the aggregated TVL across all layer 1 platforms. The trend is clear as day. As more developers leave their careers in Silicon Valley, and as engineers and coders leave their desks at JPM for new horizons, the space is only going to get larger. With mass adoption comes diminishing returns, so time is of the essence if your goal is to find investments with short-term 1800% returns. The arrival of institutional money in crypto has removed much of this opportunity and upside for the little guy. Early-stage investing has become gatekept by VCs and larger funds who get in via seed rounds and OTC markets. Most new ecosystems and popular layer 1 platforms have gone through their own boom and bust cycles for on-chain DeFi. Capturing upside in this sector requires a keen eye for not only strong teams and brands, but for emerging layer 1 platforms as well. At the intersection of these two ideas is where I found SaucerSwap on Hedera Hashgraph.
SaucerSwap aims to provide its users with a full suite of DeFi applications, leveraging the power of a new and wholly under-utilized layer 1 platform: Hedera Hashgraph. With blazing fast transactions and fees averaging less than a fraction of a penny, the Hashgraph is a perfect candidate to attract a wider audience to the power of decentralized finance.
SaucerSwap is not only an onboarding ramp for native HTS projects, but also an endpoint for cross-chain liquidity which can be bridged through hashport. SaucerSwap’s governance token, SAUCE, serves similar utility functions to SpookySwap’s BOO token; namely, farming, voting, and single-sided staking. Given the similar tokenomics, it is likely that SAUCE will be a buyback deflationary token once single-sided staking is implemented. These same tried and true mechanisms have propelled other ecosystems into the stratosphere.
Crypto is here to stay. Shifting demographics play a key role, and as the concentration of wealth flows from the old to the millennials and gen z, there is little doubt as to the validity of the inflows. With the Hedera ecosystem as a whole having a TVL below twenty million dollars (excluding liquid staking), the upside potential is incredible.
Markets in 2022 have burned through what is overgrown and created space for the new to take root. Right now the forest is still covered in thick smoke, most are still too afraid to enter. Little do they know; the fire’s already out, and some of us are planting seeds.
Take care,
