by Jamie Burke
In this second article in a series published on the Outlier Venture blog, I suggest that we are in a 5 year DeFi hype cycle for a year, which is likely to consist of several mini-cycles, with the The overall effect is a quadrupling of today’s combined market capitalization and a doubling of the highs of $ 600 billion in 2017 due to continued mainstreaming of the industry.
In fact, it’s not impossible for us to fix a few things in the next 24 months alone. Now I have your attention, let me explain how about three posts.
Firstly, for the purpose of this series, I would define “Retail DeFi” as both existing consumers who are already using crypto today (although mostly through CeFi) and for speculative purposes, and as entirely new users who would not be interested in it without the following innovations To hold crypto as an asset class directly.
As explained in the previous article (each hype cycle is usually a result of a combination of innovations that come together in time. I suggest the following innovations that will drive DeFi retail demand:
Innovation trigger: NFTs via ERC-721 and ERC-1155 (supply) + NFT marketplaces (demand)
“A non-fungible token (NFT), also known as” clever “, is a special type of cryptographic token that represents something unique. Non-fungible tokens are therefore not mutually interchangeable due to their individual specification.”
These two standards enable all kinds of unique programmable digital goods with multiple token types and properties such as:
social currencies, rewards, collectibles, access tokens, digital art, loyalty points and redemption from digital to physical goods.
But in fact, most of the things in your life today are not fungible, including your friendships, your home, and your car. Only narrow use cases like Monet are fungible. So NFT use cases are as limitless as your life today. The question is which ones are best suited for digitization.
NFTs: Closing the Loyalty Loop and Retaining Users (Offer)
If we look at the phenomenon of yield management in DeFi 1.0, as in the various food protocols where the yield was aggressively offered but at the same time there was an inherent pressure to eliminate inefficiencies (fees), meaning that it was without a mechanism for loyalty there is no form of platform lock-in and only the specter of a race to the bottom and short-term “profit hunt” and exit fraud.
If we look at liquidity mining in a marketing context, this is really just one form of subsidized user acquisition. It is subsidized because it is not tied to an actual source of income, at least not yet. You are effectively looking to outperform the competition, which is incredibly common in VC-backed consumer technology (such as ride hail) if you are hoping to be a winner who takes the whole market in. However, it is very difficult to wait when you run out of money or users can easily switch. If you only do this type of aggressive user acquisition in a startup context without a retention program, you will get high churn.
And users moving to the next profitable opportunity (in this case, loss of liquidity) saw exactly what we saw in DeFi 1.0. In protocols like Yam, Sushi, locked values worth hundreds of millions are poured into, but then withdrawn just as quickly to put them into the next protocol at the same rate when the inevitable limited amount of subsidies for running out or running out of liquidity loses value.
However, due to their unique nature, NFTs can serve as a reward with preset rules based on loyal behavior. In principle, they can also increase in value, be freely traded, and bring returns through a license fee-like feature. In fact, you can think of them as a powerful CRM toolkit that can be used to trap users and remove negative patterns.
And we’ve already started using them in DeFi in experiments like the Aave NFT mining. Where users now not only earn income, but also NFTs (Aavegotchis) whose value increases based on active participation and loyalty in a novel game closely aligned with the market economy of Aave loans. With the entire industry openly tracking the success of this mechanism, replicating and optimizing its code, you can assume that DeFi is increasingly closing the loop with innovative NFT game theories, and DeFi itself brings the promise of sustainable growth.
Because these assets are unique, they are believed to have much less liquidity than a fungible asset, which brings some degree of stability, but also growth as a form of security (as in this case primarily from $ WHALE, one through NFT -Securities secured social currency, leveraged) through digital art). Therefore, in addition to actual stable currencies such as DAI, they can also be used as collateral on the DeFi credit markets. This means that good NFT collectors can actually boot collections by borrowing against their collections themselves, as well as earning governance tokens for the NFT marketplace and returns like $ RARI (on the Rarible NFT marketplace), increasing their value and the Reinforce the hype cycle.
NFT marketplaces: crypto mainstream (demand)
Many of the NFT use cases such as collectibles, digital art, and reward points are also forms of digital goods that people already know and understand and are therefore more acceptable to a wider section of society. Since they are often created in visually pleasing multimedia form, they offer the potential for powerful memetics and can be highly viral if shared on social channels such as Twitter, Instagram or Twitch to access massive existing Web 2.0 user bases.
In this context, you can think of NFT marketplaces like SuperRare, Rarible or NiftyGateway as a function similar to CEXs (Centralized Exchanges like Binance) during the ICO boom in integrating retail users. The fact that NFTs are actually a form of “crypto-asset” is almost completely abstracted away depending on the degree of centralization (as with some fiat on and off ramps and others only with MetaMask).
But in fact, because NFTs are most interesting when viewed as “digital consumables”. Context-driven experiences that are consumed in virtual environments such as Decentraland, Cryptovoxels or Sandbox, and it could be argued that the most valuable NFT marketplaces are in the virtual environments in which they are consumed.
This experiment could start with crypto companies experimenting with NFTs-as-CRM in general (as pioneering Linkdrop with clients like Coinbase and Binance operating in a heavily marketed environment) but I believe it is from the broader Consumer tech world is quickly adopted Especially in demographics where the “supreme drop culture” is well established, such as fashion and games (as a pioneer of companies like Crucible.network), there is a demand that is something much bigger than that ICO cycle 2017 triggers.
However, there are still some significant obstacles that must be removed before this can happen. Most importantly, Ethereum’s gas prices are unsustainable for lower value digital products. Triggers can be:
- ETH2 starts success / adoption
- Scaling solutions of the ETH layer 2
- Cross-chain interoperability at ETH (Cosmos / Polkadot)
- Cross-chain interoperability of the ETH with special NFT protocols (DApper Labs Fuse, Lukso)
- Ethereum’s competitors are gaining market share
- Transaction and gas optimization (biconomy) / economic interoperability (Z! P)
Portfolio in this segment:
This is not a new thesis, but one that grew out of a powerful feedback loop with an evolving portfolio of 30 startups. Below is a summary of the projects mentioned in this article.
- Biconomy, Gas Optimization and Income Agriculture
- Crucible, NFT identity and vault management
- Linkdrop, NFT user acquisition and retention
- Boson protocol, dCommerce Digital for redeeming physical goods
- ZIP, a cloud credit for multi-chain exchange and general ledger usage costs
Continuing in series:
3/3 Institutional DeFi: AI Lego, STOs & dPrime (available soon)
This article was first published on the Outlier Venture blog.
Decentralized finance, also known as DeFi, is a rapidly growing sector of the cryptocurrency industry. While cryptocurrency coins create a decentralized store of value separate from any government-backed fiat currency, DeFi creates decentralized financial instruments that are separate from traditional centralized institutions.