DeFi is Turning into a Casino
Innovation is disappearing and pointless DeFi projects are taking their place. Every week there is a new chain, and every week there is a fork of Aave or Uniswap deployed to that chain. What is so interesting about this new chain or fork? Nothing. Therefore, the developers have to incentivize users to use their products in the new feature of the day — points. Initially a great idea to help influence users to use your products has turned into the promise of points and airdrops for projects that actually don’t do anything useful.
Defi Projects
Most of us are already Degens so why not gear projects that get us excited? The most obvious was the Layer 2 — Blast.
You can refer people to get extra points? — Def not a pyramid scheme
You get instant yield on ETH or USDC? — Even better!
I can’t withdraw my tokens? — Who cares!
Billions of dollars poured into Blast anyways. You’d think Blast was incorporating zero knowledge proofs, a data availability layer, or even implementing a Solana virtual machine?
Of course not. Blast is just a typical optimistic rollup that instantly deposits ETH and stablecoins into yield-bearing assets. Other L2’s caught on with Manta making a jab at Blast.
Manta also was able to get a billion dollars of TVL. The points aren’t the problem. It is the focus of points as the basis for TVL without offering new technology. DeFi has hit its limits on swap functionality and lending/borrowing. We don’t need anymore. One new area of innovation has been restaking but it didn’t take long for the Degens to find a way to exploit this new innovation.
Restaking
The basic idea behind restaking is the ability to restake tokens to provide collateral for multiple protocols / chains. You can learn more about it here. Eigenlayer started the restaking revolution. It was only a matter of time before the Degens came along and found ways to increase leverage in the system. The first was LRTs or liquid restaking tokens (e.g. puffer, renzo, ether.fi, Kelp). Again this wasn’t surprising because we already have liquid staking tokens and freeing up locked tokens to be used for collateral made sense.
And then came Karak.
Karak is a restaking protocol similar to Eigenlayer. Instead of using only Ethereum as Eigenlayer has chosen, Karak has opened the floodgates to virtually anything. At present, you can stake LSTs, LRTs, stablecoins, BTC, and Pendle ETH contacts. Pendle is just another leveraged product to increase rewards.
It’s all fun and games until someone depegs….
You can thank Renzo for this one. After completing their first airdrop last week, users decided to move onto the new airdrop program of the day. Since you can’t withdraw straight from Renzo, users swapped for ETH on Uniswap and got rekked. ezETH (Renzo’s LRT), depegged to $688 when it should have been ~$3,300 — Ouch.
Stacking security has its limits. This is one of the major reasons crypto has been so successful against TradFi. TradFi is built on complex financial instruments without knowledge of the underlying collateral. Thereby creating massive leverage. One example is the term fractional banking.
DeFi is entering this arena as projects will look to promote riskier and riskier projects using restaking as collateral. What happens when Lido or RocketPool has a mass slashing event and all the protocols that used those tokens as collateral get severely impacted. Think of a house of cards.
Memecoins
Can’t finish an article without talking about memecoins. The epitamy of gambling. What does WIF or Joe Boden do? No one cares. “Number go up” is all that matters. Now I can use these coins as collateral to buy more memecoins? The game continues. Building DeFi projects that promote memecoins are just adding fuel to the fire. It’s hard to take crypto seriously when Doegcoin has a Market Cap of $21B — roughly #337 on the S&P 500.
Per usual, bull runs create froth in the system. Most of these projects will disappear and most of us will be left holding the bags. Just be careful and understand when you are intentionally gambling vs trying to make investments. Projects that have been around through multiple cycles that offer lower yield are more sustainable than new projects promising airdrops.
-Just Another Crypto Analyst
Doing this for fun but if you want to leave a tip:
Ethereum: 0xa33aE4207466cD866D13fA587067B1F824C06d4A
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Cosmos: cosmos1uv0cu8mcmpdcfdemt28aej6zxw8vrr4kmdd5gr
