DeFi Tokens, So Hot Right Now - The Daily Gwei #3

The moon times are back! At least, they are for the so called '“DeFi Tokens”.

Over the last few months, we’ve seen Ethereum-based DeFi projects explode in use and their tokens begin to increase in value. This has prompted their creators to think deeply about the “tokenomics” of these protocols and begin adjusting them to capture even more value.

First, a little bit of recent history to give some context as to why this is all happening. Back in November of 2018, the Havven project rebranded into what is now known as Synthetix and they went from a stablecoin project to a synthetic asset protocol. The pivot also came with a vast revamp of the token which acted as a bootstrapping mechanism for the protocol. During most of the bootstrap period, the SNX token appreciated by about ~22x vs USD from $0.07 to $1.57 (its all time high) through a novel incentive mechanism (paying SNX out as rewards via inflation of the token).

These days, we’re seeing a slew of projects follow in Synthetix’s footsteps by revamping their tokens to better capture the value of their protocol. Kyber announced their Katalyst upgrade in December, Loopring added staking to their token and Aave are adding more functions to their token (some details here).

These projects have also made major strides via deliverables and growth with Kyber achieving all time high volumes ($1bil+ total), Loopring releasing their zkRollup DEX and Loopring Pay recently, and Aave’s value locked continues to march higher (currently ~$95mil). This has all culminated in the returns for their tokens that you can see visualized below.

We’re also seeing the continuation of “liquidity mining” that Synthetix pioneered where protocols distribute their tokens via use of the platform. Compound is distributing its governance token (COMP) to users who lend/borrow on the platform, Balancer is distributing BAL governance tokens to users who supply liquidity to the different pools and mStable plans to distribute the MTA token via a similar mechanism as well.

Aligning incentives is critically important with crypto protocols and I believe these distribution mechanisms will work to build out an “army” of loyal early adopters who are directly invested in seeing the platform succeed because they will also stand to capture the upside (through a properly designed token).

I believe we’re currently entering into a new and smarter phase of investing in & growing these protocols. With tools like Token Terminal, investors now have the power to accurately benchmark different tokens against each other (using metrics like PE ratios) and decide on what they believe is either undervalued or overvalued (relative to the rest of the crypto market).

For a deeper dive on what I’ve talked about today, I suggest reading Arthur Cheong’s excellent piece that he wrote for Camila Russo’s The Defiant newsletter. Check that out here.

Have a great day everyone!

All information presented above is for educational purposes only and should not be taken as investment advice. Out of the tokens mentioned, I currently hold a material amount of mStable’s MTA, Loopring’s LRC, and non-material amounts of SNX, COMP and BAL.

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