Narratives

A new approach to The Syllabus

May 23, 2022

👋 Welcome to the eighteenth issue of The Syllabus from Invisible College – 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 week’s post…

Markets are largely driven by narratives and crypto is no exception. Gloomy news can create a self-fulfilling prophecy—people get spooked, and markets contract as investors shift to less speculative assets.

Lately, we’ve 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 it’s mostly because investors are reacting to the same exact narratives as everyone else.

These narratives can be frustrating for fervent believers. For example, let’s say you’re 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 you’ve made. If you still believe in Solana’s chances in the long run, then there’s 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, you’re in luck. We’re kicking off a new approach to this newsletter where we’ll highlight a few of the important web3 narratives we’ve been discussing in Invisible College into bite-sized summaries so you can get up to speed quickly.

So without further ado, let’s dive in…

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.

We’ve 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 Labs’ 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 DeFi’s Original Sin, writer 0xHamZ compares DeFi protocols to traditional central banks saying:

“Right now there is limited real world utility across any of the crypto stablecoins. Most DeFi is leverage folding chasing its own tail”

That’s 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 what’s 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 immutability—the inability to change them over time. You’ll 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 you’d see in web2 products.

TokenBrice wrote a 20-min deep-dive piece on the concept of “unstoppable DeFi protocols” and their various levels of resilience.

Brice works on growth at Liquity so the piece is partially self-serving, but it’s 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 isn’t accurate at any given moment, meaning investors can take advantage of it. We’ve 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:

“The general rule is that a protocol is as resilient as the weakest link in its composability chain.”

Front-end website risks are real. We’ve seen protocols like QuickSwap which had their GoDaddy domain hijacked recently. Their underlying smart contracts were fine and liquidity providers’ funds were safe, but users who swapped tokens on their website during the hijacking might’ve 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, ”the first stablecoin backed by cans of AriZona Iced Tea”—referencing how tall cans of AriZona Iced Tea have maintained their $0.99 price point for 30 years.

The Syllabus