RelayNode NYC #58 - Yield Farming, Supercharging Network Effects
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RelayNode NYC is curated by:
David Gogel: Founder @GogelX/Definancier, Advisor/Operator/Investor, Advisor @Paperchain.io, Wharton MBA/BS/BA, fmr Associate @Techstars' Blockchain Accelerator, Co-president @Wharton FinTech, Corp Dev @LinkedIn @AIG
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Market Stats (as of Sunday, June 21st, 11PM EST)
Don’t fight the Fed: Despite increasing coronavirus cases and weekly jobless claims coming in worse than expected, stocks continued to climb on the heels of retail sales booming 18% in May and more monetary stimulus. As part of a continuing effort to support market functioning and ease credit conditions, the Fed added functions to its Secondary Market Corporate Credit Facility. The program has the ability to buy up to $750B worth of corporate credit. Last week, the Dow, S&P 500, and NASDAQ gained 1.0%, 1.9%, and 3.7%, respectively.
The total market cap of crypto-assets sits at ~$267B, flat WoW. The price of bitcoin traded between the $9K-$9.5 range, continuing its weeks-long consolidation. The market’s attention has shifted to DeFi and governance tokens.
1 Big Thing: $COMP, progressive decentralization, and next iteration of token distribution
On June 15th, Compound Finance started distributing its governance token, $COMP, which rapidly became the most valuable token in DeFi. This represents a big milestone for DeFi and an important step to fully decentralizing governance of the protocol.
The $COMP market on Uniswap was initially funded with 2,000 ETH and 25,000 COMP, setting an initial price of ~$18.30 per $COMP. After 1 week of speculative trading (only a limited supply of tokens are available on the market), the $COMP price increased more than *17x* and is currently trading at ~$297, implying a fully diluted market cap of $767M.
What is Compound: Compound is an algorithmic money market protocol on Ethereum that lets users earn interest or borrow assets against collateral. Anyone can supply assets to Compound’s liquidity pool and immediately earn continuously-compounding interest. Rates adjust automatically based on supply and demand.
What is the $COMP Token: $COMP is an ERC-20 asset that empowers community governance of the Compound protocol. $COMP holders and their delegates debate, propose, and vote on all changes to the protocol. By placing COMP directly into the hands of users and applications, an increasingly large ecosystem will be able to upgrade the protocol, and will be incentivized to collectively steward the protocol into the future with good governance. Thus, users of the protocol earn a yield on their digital assets, earn *volatile* $COMP tokens, and gain governance rights. While $COMP does not currently have a claim on any cashflows, eventually, token holders might be able to vote to get a share of fees paid or vote to buy back tokens.
$COMP Distribution: The total 10M COMP supply is broken down as follows: 42.3% reserved for protocol usage; 24% to shareholders of Compound Labs, Inc.; 22.25% to Compound founders & team, subject to 4-year vesting; 7.75% reserved for future governance participation incentives; 3.72% to future team members. Over the next 4 years, ~2,880 COMP will be distributed daily to users of the protocol. Distribution is allocated to 8 markets, proportional to the interest being accrued in that market. Within each market, 50% is earned by suppliers, and 50% by borrowers.
Valuation: According to Julien Thevenard, VC investor at Fabric VC, $COMP is trading at a ~760x P/E ratio. Investors are betting on a future vote to share earnings with $COMP holders, and assets locked to explode. Valuations appear absurd to me.
Growth Metrics
In the past 7 days, 20,739 total COMP has been earned across Compound markets, worth $6.2M. According to DefiPulse, the launch of COMP generated a ~520% increase in Total Value Locked, a ~$573M increase in capital locked. The total supply of assets is $934M from 25,926 unique addresses; total borrow is $319M from 3,496 unique addresses.
The Big Picture: Unlike many ICOs, Compound successfully launched and grew its platform, attracting both borrowers and lenders, without a native token. The $COMP token distribution highlights how token-driven incentives can fuel growth by incentivizing liquidity provisioning through token rewards, growing trading volumes. More projects are likely to follow COMP’s distribution model.
Risks: Over the first few days, USDT yields were the highest, resulting in 76% of COMP being earned by USDT suppliers/borrowers. In the last 24 hours, yield farmers are moving from USDT to BAT and WBTC. Market paricipants are trying to find a nash equilibrium. Leverage is increasing. ETH gas prices are high. Yield farming is driving up borrow rates for stablecoins. According to the Amber Group, the biggest risk to stablecoin yield farming is a permanent depeg.
The Bottom Line: Progressive decentralization and governance rights are becoming big drivers for value accrual in DeFi protocols. While yield farming showcases Ethereum’s composability, it remains to be seen whether increased DeFi activity will result in value accrual for ETH. As Chris Burniske explains:
Go Deeper:
What To Read
🌐 MACRO / WHY BITCOIN?
🌐 Bitcoin Difficulty Adjustment: Bitcoin’s mining difficulty adjusted up 14.95%, its most since January 2018. Big upticks in difficulty have knock-on effects for miners in terms of cost. Miners contributing hashing power to the network are now facing the 4th-most difficult 2-week mining period in Bitcoin’s history. A higher difficulty could cause miners to sell to protect profitability.
🌐 Big week for Crypto Derivatives: According to the Block, a record $1B worth of BTC and ETH options will soon expire on Deribit. Bitcoin options expiring June 26 make up the biggest portion of Deribit's OI with 69% or 70,000 contracts set to expire. On June 26, ~290,000 ETH options are also set to expire. Such a large expiry event could result in outsized market volatility as traders unwind positions.
💰 FUNDING, M&A, EXITS
💰 River Financial, a Bitcoin brokerage, raised a $5.7M seed from Polychain Capital, Slow Ventures, and Castle Island Ventures, among others. The firm offers a spot market, cold-storage solution, and private client product in 15 states. Funds will be used to expand across the US and launch new products.
💰 Tornado.Cash, a privacy solution allowing for non-custodial private transactions on Ethereum, raised 244 Ether ($59,000) from The LAO, one of the first for-profit DAOs. The LAO is a Delaware LLC, with legal paperwork also living in smart contracts powered by OpenLaw.
🔓 DEFI / CEFI / OPFI
🔓 How does DeFi cross the chasm: Jesse Walden, an investor at a16z, explains popular narratives on how DeFi will become mainstream. Growth will be driven by global adoption (bank the unbanked), institutional adoption (DeFi as global casino), and a "real" crypto economy (driven by non-financial consumer apps).
🔓 dYdX adds USDT support using Curve: dYdX, a derivatives DEX, announced it added USDT deposits & withdrawals on its permissionless Bitcoin perpetual futures, tapping into ~$5.7B in potential liquidity.
💱 STABLECOINS & CBDCs
💱 Key stablecoin metrics set new highs: Joel John, Investor at Outlier Ventures, has a fantastic post on the state of stablecoins as of Q2 2020. The combined stablecoin market-cap of the seven most significant projects is at $10.5B. Most notably “Tether is a controversial project, but as I have said earlier - it has been critical for adoption. Almost "too big to fail" at this point.”
🌉 INFRASTRUCTURE
🌉 Blockchains for public procurement: In partnership with the IDB and the Office of the Inspector General of Colombia, Ashley Lannquist from the World Economic Forum released an excellent report investigating, designing, and trialing the use of blockchain technology for corruption-prone government processes, anchored in the use case of public procurement.
🌉 Open standard designed to simplify blockchain deployment and interaction: Coinbase released Rosetta, an open-source technical framework for crypto-asset listings. Coinbase is encouraging blockchain projects to integrate Rosetta so that they can more easily list new assets on the Coinbase Exchange.
🌉 Battle for ASIC Supremacy: BitMEX explores the history of Bitcoin mining ASIC manufacturers and analyses the 5 main players in the market. BitMEX evaluates Ebang’s recent IPO prospectus and comments on the challenges the group faces with respect to its market positioning, profitability and geo-politics. BitMEX concludes that post the 2020 Bitcoin halving, further industry consolidation is likely in ASIC manufacturing and mining farm operating sector.
🍰 LAYER 1
🍰 What are Ethereum gas fees used for: Rafael Schultze-Kraft published an analysis on Ethereum fees and how these are distributed across different transaction categories. As of May 2020, around 20% of all fees are consumed by $USDT transfers. The bulk of fees are being used for DEXs (e.g. KyberNetwork, idexio, dydxprotocol, 1inchExchange), Games, and Tokens (e.g. $POCC, $WENI).
🍰 ETH 2.0 Staking as a Service: ConsenSys is launching a new staking-as-a-service platform aimed at institutions. The first order of business will be to work with several industry partners to build a staking API for Ethereum 2.0, the first phase of which is supposed to launch this year.
🍰 ETH 2.0’s economic upgrades: According to Nick Tomaino, GP at 1Confirmation, the tech upgrades that come with ETH2 are exciting and tend to get most of the attention, but the economic upgrades (solidify the monetary policy, reduce the issuance rate, burn transaction fees) may be more impactful.
🍰🍰 LAYER 2
🍰🍰 Scaling Ethereum tokens on Reddit: Reddit announced a partnership with the Ethereum Foundation to find a Layer 2 scaling solution for its Ethereum-based “Community Points” system to launch on mainnet with the ultimate goal of onboarding the site’s 430M users. Community Points are earned by accumulating upvotes on quality posts. Proofs-of-concepts are due by July 31.
⚖️ LEGAL
⚖️ Missing funds: Wirecard, a Germany-based payment processor and crypto debit card issuer, revealed that a total of €1.9B ($2.1B) could not be accounted for. “There are indications that spurious balance confirmations had been provided from the side of the trustee respectively of the trustee's account holding banks to the auditor in order to deceive the auditor and create a wrong perception of the existence of such cash balances or the holding of the accounts for to the benefit of Wirecard group companies. The Wirecard management board is working intensively together with the auditor towards a clarification of the situation.”
⚖️ Who will replace SEC Chairman Jay Clayton: Geoffrey Berman stepped down as U.S. Attorney of the Southern District of NY. President Trump has nominated Jay Clayton, current Chairman of the SEC, to the position. The SEC Chairman has been a blocker to more favorable crypto regulation (e.g., BTC ETF) in the US. His replacement will make or break the US’ leadership in innovating capital markets. Jason Brett explains the implications for the crypto community.
🎥 PODCASTS / VIDEOS OF THE WEEK
📅 Upcoming Events / Conferences
If you would like to highlight events in future editions, please submit here.
June 24: FO256 - Digital Assets Conference For Sophisticated Investors (Virtual)
June 24-26: Remote Crypto Con (Virtual)
June 15-21: Korea Blockchain Week (Seoul)
June 30: DFINITY Foundation Tungsten (Virtual)
July 6-7: M2 Asset Management (Oxford)
July 15-16: Asia Blockchain Summit (Taipei)
July 21-23: Singapore Blockchain Week (Virtual)
July 22-23: Mining Disrupt (Miami)
August 1: Dystopia Labs / Blockstack: FuturePROOF (Virtual)
🎓Highlighted Industry Jobs (non-exhaustive list for NY)
If you would like to highlight jobs or internships in future editions, please submit links here.
Gemini - Senior Corporate Counsel (new)
3Box - Full Stack / Backend Engineer (new)
tZERO - Senior Project Manager (new)
Fireblocks - Demand Generation Manager (new)
Fidelity Digital Assets (FDAS) - Director, Corporate Business Development (new)
Chainalysis - Principal Security Engineer
Columbia University - Adjunct Associate Faculty, Intro to Blockchain, Cryptocurrencies & Analytics
Genesis Global Trading - Operations Analysis
BlockWorks Group - Account Executive
Streamr - Head of Developer Relations
Nothing written in RelayNode NYC is legal or investment advice and should not be taken as such. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence.
