Narratives
A new approach to The Syllabus
đ Welcome to the eighteenth issue of The Syllabus from Invisible College â a weekly newsletter that helps you navigate the fast-moving world of web3. To get this newsletter delivered to your inbox, subscribe here:
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Now onto this weekâs postâŠ
Markets are largely driven by narratives and crypto is no exception. Gloomy news can create a self-fulfilling prophecyâpeople get spooked, and markets contract as investors shift to less speculative assets.
Lately, weâve seen established crypto assets like BTC and ETH start to follow broader market trends, albeit with much more volatile swings in value. This can partially be attributed to the increase in institutional money and algorithmic trading in them. But itâs mostly because investors are reacting to the same exact narratives as everyone else.
These narratives can be frustrating for fervent believers. For example, letâs say youâre holding SOL because you have conviction in the long-term prospects of Solana. Yet as the market crashes due to unrelated circumstances, as we saw with the Terra fallout last week, SOL suddenly plummets ~43% in just two days.
The key is to check in with your gut feeling on each bet youâve made. If you still believe in Solanaâs chances in the long run, then thereâs no reason to sell your SOL. In fact, a drop in value could signal the perfect time to buy more of the assets you believe in the most.
Even in a bear cycle, there are still narratives that run counter to wider market sentiment. For example, I own a Moonbirds NFT and I watched the floor price grow ~17% over the 48 hours when Terra was plummeting.
If you feel too busy to keep up, youâre in luck. Weâre kicking off a new approach to this newsletter where weâll highlight a few of the important web3 narratives weâve been discussing in Invisible College into bite-sized summaries so you can get up to speed quickly.
So without further ado, letâs dive inâŠ
Where will DeFi go from here?
As we covered last week, the Terra fallout created a massive disruption across the entire crypto market. The downstream effects are far from settled and the debacle has given the industry a sobering dose of reality. When tokens get as big as UST and LUNA, they must be able to withstand a bear market without erasing huge amounts of wealth from everyday people.
Weâve already seen a proposal to fork the Terra blockchain (without a new form of UST included as of yet), but we also saw the Terraform Labsâ legal team resign and Korean investors file both civil and criminal lawsuits against Terra founder Do Kwan. Beyond that, many pundits have chimed in with their takes and analyses on the future of DeFi.
In DeFiâs Original Sin, writer 0xHamZ compares DeFi protocols to traditional central banks saying:
âRight now there is limited real world utility across any of the crypto stablecoins. Most DeFi is leverage folding chasing its own tailâ
Thatâs all well and good during a bull market, but when the market sours, many large DeFi investors unlock their liquidity and move it elsewhere.
0xHamZ ends the piece with a simple three bullet point case for what the end game of on-chain banking might look like:
On-chain banking is cheaper given its cost structure
Immediate payment / settlement
Tokenization allows for borrow/lend incentives not possible today
In other words, focus on whatâs uniquely possible with blockchain technology, rather than trying to reinvent the proverbial banking wheel.
The DeFi Resilience Spectrum
Another unique attribute to blockchain applications and smart contracts is immutabilityâthe inability to change them over time. Youâll see DeFi protocols move to entirely new smart contracts since the previous versions are unchangeable. This is why the decentralized exchange Uniswap is on V3, rather than more incremental versions such as V2.1, V2.2, etc. that youâd see in web2 products.
TokenBrice wrote a 20-min deep-dive piece on the concept of âunstoppable DeFi protocolsâ and their various levels of resilience.
Brice works on growth at Liquity so the piece is partially self-serving, but itâs still interesting to understand the range of DeFi protocols nonetheless.
Here are some highlights from the piece:
DeFi protocols gather asset pricing through oracles such as Chainlink. This can become a vulnerability if the pricing isnât accurate at any given moment, meaning investors can take advantage of it. Weâve seen this in the past where traders will arbitrage between two different DeFi protocols because of price discrepancies.
Since smart contracts are composable, DeFi protocols can easily integrate with other protocols. For example, PoolTogether sources yield from Compound and Aave. This leads to powerful capabilities. But, as Brice explains:
âThe general rule is that a protocol is as resilient as the weakest link in its composability chain.â
Front-end website risks are real. Weâve seen protocols like QuickSwap which had their GoDaddy domain hijacked recently. Their underlying smart contracts were fine and liquidity providersâ funds were safe, but users who swapped tokens on their website during the hijacking mightâve put their funds at risk.
Be safe out there and never hesitate to ask questions in the Invisible College Discord community.
On a lighter note
In a funny and timely response to the UST shake-up, the group that created the Non-Fungible Olive Gardens project late last year, launched a project called USDTea, âthe first stablecoin backed by cans of AriZona Iced Teaââreferencing how tall cans of AriZona Iced Tea have maintained their $0.99 price point for 30 years.
Other Recommended Reads and Listens
A Theory of Justice for Web3
Li Jin and Katie Parrott make the case for how web3 can be our chance to make a better internet.The 2022 State of Crypto Report
VC firm a16z unveils their first-ever data-driven overview and analysis of web3.How to Survive a Bear Market
Olaf Carlson-Wee joins Blockworksâ Empire podcast to give some timely bear market advice.
Invisible College, is a school that helps people learn to build and invest in web3. To access our courses, events, and learning community, youâll need to hold at least one Decentralien. You can get yours on Magic Eden.
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