I’ve been learning more about the Solana Ecosystem and pulling together resources that could be helpful to folks that are starting to build on Solana.
Solana uses a language called Rust which is used at companies like Dropbox, Yelp, and Mozilla. Rust is a powerful language but many teams (and engineers) particularly in emerging markets (like Africa) often don’t know where to start as the documentation and tooling on Rust for Solana is still early.
The common feedback from experienced Solana developers is to write Anchor, not core Solana as you’ll reduce boilerplate code by an order of magnitude, and get stronger security guarantees out of the box. A lot of common FAQs also live in the Anchor Discord so be sure to search there in addition to other sources.
Here are some helpful resources to get you started:
The biggest opportunity over the next decade is onboarding the next 1BN people into crypto. There are currently around 4m users who interact with DeFi and 80m unique blockchain wallets (0.1% of the global population). We are still in the very early stages of mass adoption of crypto, and chain tribalism distracts from the larger opportunity ahead.
I believe that the following things will happen:
We will live in a multichain world where chains are akin to nations (different philosophies, currencies, people and cultures)
Developer tooling, communities and libraries willbecome 10x better enabling a wider range of builders to develop natively on crypto.
Crypto will be abstracted away for the next 1BN people who are onboarding and most will have no idea that the experience is powered by crypto.
Multiple Chains Will Succeed
Multiple chains will endure and be “dominant”. Application developers will choose to route transactions through different chains depending on what they are trying to achieve. Developers have to think about the following things and it’s not immediately obvious where to build:
I believe we will live in a multi-chain future (e.g. Solana, Ethereum, Terra). Passionate, crypto native folks are often chain maximalists, but we all share one thing in common – we are crypto maximalists.
Developers will need to ask themselves the following questions (not a complete list) before they pick where to develop their applications and many successful applications will work natively across multiple chains:
Speed: What is the max load of the system? How fast can block confirmations happen? This varies a lot – Solana can process 65k transactions a second and has a block time faster than 0.5 seconds whereas Ethereum can process 30 transactions per second with a block time of 15 seconds.
Cost per transaction: What are the costs for different blockchains (L1 vs L2) to confirm transactions? Proof of work chains usualy cost more than proof of stake for example.
Security: How secure is the network? How battle tested is it? Are there good tools available to developers to plug common loopholes?
Decentralization: Can a small number of decision makers control outcomes or is the validator network decentralized?
Developers: Can you find Rust (Solana) or Solidity (Ethereum) for your project? Are there more folks with C (close to Rust) or JS (close to Solidity)background avaialble to be trained?
Community: Where are the users (geo) and what type of activity are they already doing (DeFi, NFT, Gaming)? Different chains have different levels of traction in different communities.
Onramps: Are there available Fiat onramps to the token that you require for the users you care about? Can you attract users or provide liquidity if needed?
Incentives: Are there special incentives on specific chains (grants or investment capital) or for users (liquidity mining) that can supercharge your growth?
My friend, Felix Feng put it nicely in a conversation we had a few months ago – different chains are like different nations with different philosophies, communities, and GDP. This Twitter thread also has some great nuggets:
I also enjoyed this data-driven take (from August) supporting a multichain future.
Developer Tooling Will Get 10x Better
Developer tooling will need to improve and deep communities will need to form to onboard the next batch of developers into crypto. If you talk to most people building and scaling projects engineers are the bottleneck to the pace of growth.
If we are going to live in a multichain future we will need better cross-chain infrastructure (check out projects like Polkadot, THORchain) which will help route different transactions to the right chains. Building on the “chains as countries” analogy, we need better transport and global passports to allow for cross-chain compatibility. I’m excited about Neon EVM which allows developers to write smart contracts in familiar languages like Solidity and deploy them on Solana (a second chain). I also think that aggregation services like Matcha which checks for the best prices and liquidity across DEXs will expand across chains (and potentially allow low gas or gas-less transactions) will help improve transaction efficiency.
In addition, I imagine we will need some standard tools to support regulation like on-chain KYC (this wallet is a real, verified person – e.g. Civic), Fiat<>Crypto onramps as a service (MoonPay, Ponto), and wallet analytics to early detect “bad actors” across applications.
Crypto Will be Abstracted Away
To really drive adoption, the complexity of interacting with crypto will need to get abstracted away for users (definitely) and for application developers (likely). Less than 0.1% (made up statistic) of the people who send money using traditional rails understand how the systems work under the hood. The same will be true for crypto; people just want their transactions to be reliable, fast, cheap, and secure.
Audius is a cool example of a decentralized “SoundCloud” built on top of Solana and IPFS where users don’t need to know that storage is decentralized and activity is recorded on-chain. Users can just have fun discovering and listening to music and not worry about keys or custody.
Even when users are onboarding into crypto they often want to just buy an NFT or a token but are confused by the prerequisite of creating a self custody wallet and setting up their own security (and often don’t have familiar mental models). Developers will need to allow new users to pay in Fiat (e.g. a credit card) and provide “temporary custody” of the user’s keys (account information and password). Users could then “claim” their keys with a second onboarding into self custody at a later date (which could just be a common service for all application developers.
This is not an exhaustive list — just a few perspectives on how product development in crypto is going to evolve and how that might help onboard 100x more developers and users into the technology.
We need a Global M-Pesa / Venmo powered by crypto rails. Both these products are closed ecosystems powered by outdated, expensive rails compatible with their chosen markets. Crypto will ultimately enable even better user experiences but powered by rails that give participants access to global finance, trade, and commerce.
M-Pesa was transformative in Kenya. It allowed people to send money from cities to rural areas instantly and quickly. A network of agents lets people cash in and cash out as well as exchange their mobile money for products like airtime (credits for their cell phones), pay their utility bills etc. M-Pesa, however, is controlled by Safaricom and is a closed-loop product.
Venmo in the USA makes us feel like we are making instant transactions but they are faking it using outdated ACH rails and making money through credit card fees and instant transfers. When you send money to a person or business it feels instant but recipients have to wait a few days to “cash out” typically. Venmo is handling the float and taking some risk in this process and many people have money in their wallets which enables float in the system.
Crypto has the power to disrupt these payment systems and power the next generation of how we send each other money. There are a few things that need to be solved to make all of this possible, and activate a whole new set of crypto users (who may not always know they are interacting with crypto):
Cost: With fast, cheap blockchains like Solana and ETH layer 2 solutions becoming more battle tested and proven, it’s now technically possible for peer-to-peer transfers to happen with very low cost per block/transaction which previously made small transfers infeasible.
Scaleability: In addition to lower cost, these chains are becoming more scaleable. Solana can handle 65k transactions per second on their blockchain which means transfers can happen instantly which was not possible on Ethereum (Layer 1) or Bitcoin.
Regulation: Governments have used money to control their economies and societies for a long time, and crypto threatens a this power lever. It’s clear to me that taxation and regulation is imminent across major jurisdictions but my hope is that leading developed economies (like the USA) and emerging economies (all over Africa) will open their minds to the potential benefit to their society outweighing the loss of control.
Custody: In order to interact with crypto you have to create a wallet and keep your “keys” and pass-phrases to your account secure. For less digitally native and less literate people this is a tall order and the only real alternatives are to trust centralized exchanges with custody of your accounts (they keep your keys secure). I expect we will see a lot of innovation in the custody space (e.g. group custody, biometric gating etc) in the coming years.
UX: One of the biggest issues with crypto is that it’s so f*cking jargony and confusing for normal people. Crypto natives are often un-empathetic to “normies” who are experiencing crypto for the first time and this is reflected in the design of their products. As we develop products in crypto we need to remove the jargon, find familiar mental models in traditional finance and take all the friction out for normal people while preserving the functionality for crypto native power users. Crypto can power the back end and does not always have to be front and center – most people who interact with financial products today have no idea how the technology works.
Liquidity: We need enough liquidity (and systems to scale this up and down) on both sides of transactions so that users can complete tasks without having to understand how their transfers affect the global supply. Right now if you make trades that are a significant part of a pool you can adversely affect markets, which is inefficient when multiple pools exist across exchanges.
On and Off ramps: In many countries the hardest thing is figuring out how to convert local cash to cryptocurrency. In emerging markets these are often “over the counter” WhatsApp groups powered by trust because these communities are small enough. In developed economies centralized exchanges like Coinbase power most of the on and off ranmps. We need better standards and process to get fiat (cash) into digital cryptocurrency and back into cash that people can use their cryptocurrency for “real world” utility.
On-Chain utility: As more functionality moves on chain and/or seamless integration with real world use for money (e.g. paying school fees, rent, utility bills) the need for on and off ramps becomes less important. Users will have less reason to take their money “off chain” and they will be able to power more of their lives through crypto.
One of the companies I’m most excited about in this space is Ponto (where I’m an angel investor and advisor). They are building infrastructure to enable every fintech to offer access to crypto for their customers by bundling technology, compliance, and liquidity (cash in cash out). This allows traditional fintech startups to focus on delightful and consistent customer experiences while Ponto takes care of everything else under the hood. If you’re interested in learning more or potentially joining the company check out their careers page here.
I’m an active angel investor in emerging markets, particularly in Africa, often in businesses that power the flow of money. Individuals and small businesses get money from friends and family (remittance), trade (exchange of goods and services), labor (salary), or credit (loans). All these systems that power the flow of money can all be improved with crypto rails.
Once we give 1BN more unbanked people who have cell phones but limited access to digital finance new access to global finance at their fingertips we are going to see unprecedented improvements in financial mobility and global trade.
The internet was transformative because it democratized access to information and enabled instant, complex communication. I think that cryptocurrency has the potential to have as big an impact on the world by powering digitally native trade and commerce. Cryptocurrency allows people to transact seamlessly and agree on the terms for the transfer of value instantly and trustlessly. As more utility is available on-chain more of our daily activity will be powered by crypto rails. NFTs are an early example of this utility.
I’ve been playing around with Non-Fungible Tokens (NFTs) for a little over eight months now and they are super fascinating from both a technology, cultural, and utility standpoint. NFTs are on-chain assets where each one is unique as opposed to “fungible” assets like Bitcoin or USD where each one is worth the same. They can be used to verify ownership of digital assets such as images (the most common use case right now).
Yes, we are living in some weird metaverse microcosm where pixelated Twitter profile pictures (PFPs such as CryptoPunks) can cost more than most people’s houses but this is the start of people placing value on their digital identity. PFPs allow people to express themselves while being a member of a bigger tribe. It’s not much different to being a sneakerhead and buying some rare Air Force 1s to collect and share with your other sneakerhead friends.
Beyond digital identity, NFTs have immediately made lives better for both creators and collectors which I’ll summarize in more detail below.
NFTs are better for Creators
I’m particularly excited about what NFTs mean for creators. Creators have historically given very large portions of their income to promoters, curators, and auction houses. NFTs can help creators find, interact and transact more easily with their customers.
Trading behavior: NFTs allow creators of products (digital or physical) or understand the behavior of their buyers. Are people “flipping” when they purchase? Are people long-term holders? What are the transaction and trading behaviors of their holders?
Direct Interaction: Ownership is all verified and on-chain so creators know who owns their products, how long they have held it for, how many they own etc. This allows creators to have direct interaction with their fans and supporters in a way that was almost impossible in the past.
Annuity: Many NFTs allow creators to participate (via revenue share) in all future transactions of their products. This leads to an ongoing “annuity” from people trading their products and a much lower percentage of fees to marketplaces and platforms which I think is healthy.
Digital distribution: NFTs and distribution tools allow creators to run more complex launches without a lot of technical experience. Creators can run raffles, auctions, or even sell NFTs that can be redeemed for physical goods like the Damien Hirst NFT.
NFTs are better for Collectors
NFTs also make the experience better for buyers and collectors. Here are a few ways that NFTs are superior to “offline” tradiitonal models.
Ownership: NFTs allow collectors to actually prove that they own the asset in a way that is verified by the collective community as it’s “on chain” and cannot be forged.
Authenticity: NFTs are “digital papers” that certify that the asset is authentic. For high-craftsmanship products (e.g. fine art, mechanical watches) authenticity is important. Verifying authenticity is a big part of the reason people transact through trusted dealers and they often charge high fees for this service.
Liquidity: NFTs unlock more liquidity for owners. They can find other collectors to transact with faster and more easily which has always been an issue for more niche products.
Legacy: NFTs allow us to track the history of ownership of assets which is often lost for other products. A Rolex that was owned by Jack Nicklaus sold for $1.2M because it was his watch. Steph Curry’s Bored Ape is likely worth more than the average one because he owned it.
Community: Collectors like to engage with other collectors. NFTs make it much easier to find other real collectors and engage and transact with them and feel part of a club gated by ownership. It’s possible that NFTs are the start of early social networks powered entirely by cryptocurrency.
Many folks are being onboarded into crypto through NFTs and can be tricked more easily than purchasing a physical piece of art from an artist or gallery. They can be victims of organized “pump and dump” schemes, “rug pulls”, fake minting links in Discord all completely anonymously and without recourse. We still need clearer user experience , better requirements/standards, better tools, and trusted information so that the communities and projects are safer for everyone.
Profile Pictures and Generative Art
Profile pictures, collectibles, and generative art are driving most of the trading volume for NFTs right now. I think they are culturally important and the start of digital expression in the Metaverse, but I don’t think many new projects will have long term staying power. OpenSea is currently the largest NFT marketplace. Should the company hold on to its 97% market share, that suggests a total annual GMV of $28BN. (Source: The Generalist Article, from public data).
The most common type of project is modeled after CryptoPunks which was the first project of this kind. The formula is a few thousand (usually 10k) randomized images created with some unified theme (lions, monkeys, aliens etc) and traits (body, hat, sunglasses etc) each with non uniform rarity attached to each trait. This results in a distribution of outcomes which are a combination of the traits (and some are much rarer than others). Rarer NFTs typically command much higher prices in popular collections.
Collectors can mint (create them) these NFTS and for the most popular projects this can be a battle for how much “gas” buyers are willing to pay to secure one of the NFTs. It’s not uncommon to see people spend thousands of dollars on gas just to get to the front of the line and have a chance to mint a rare NFT. Once buyers have minted they can keep the NFT, or trade them on a marketplace like OpenSea which is the most popular place to trade (280k+ monthly users in September 2021). The project creators often receive a portion of the value of all future trades acting as an annuity if their project has trading activity over a sustained period of time.
Buyers pick NFTs on the market based on aesthetics and rarity then often showcase their NFTs as their profile pictures in social media and private communities. The most popular projects are CryptoPunks and Bored Ape and the “floor price” for each is 110 ETH ($400k) and 40 ETH ($150k) respectively.
Every credibly project typically has a published roadmap after minting is complete such as access to special events, future NFTs for holders, or even full-blown games. In reality, very few projects will actually have to stay power to build a robust and active community and continue to develop and innovate. Developers often take the minting the profits which can be substantial (e.g. 10,000 mints x 0.05ETH x $4000 per ETH = $2M) and move on to the nest project. This “drop formula” is becoming stale and many new projects don’t have the same demand unless they have some sort of unique innovation so I expect this wave to pass in the next few months.
On-chain generative art is also a popular category (CryptoArte, and Art Blocks were early innovators). They both have programmable on-demand generative content that is stored immutably on the Ethereum Blockchain – a true intersection of art + code. CryptoArte is an NFT art collection that tells the history of Ethereum with each block representing a moment of time. Art Blocks has done a great job of curating new projects and giving creators a launchpad for their work. Chromie Squiggles were the first project on Art Blocks and the cheapest one is 9 ETH ($37k).
The Potential of NFTs
I’m most excited about the next phase of innovation for NFTs. I think there is a lot of space for growth in terms of quality and utility for NFTs and will be following the developments closely. Here are a few of the areas that I’ll be tracking closely.
As I noted above, NFTs are a great medium for collectors. Collectors can have a good understanding of the total supply of collectibles and also the metadata for these collectibles (for rarity) of the entire universe. As metadata standards and analytics tools (e.g. Dune Analytics) improve this will help collectors build and trade with a more data informed perspective.
Collectors can also more easily get benefits from holding NFTs like access to communities or get special roles or rewards for holding the NFTs (although this has some legal/regulatory ramifications). This could be further segmented based on “sets” with different properties or “time based” to incentivize long term holding of NFTs.
As the technology becomes more mainstream and battle tested, more established creators will embrace NFTs increasing the quality of art available to collectors (see Damien Hirst “The Currency” below).
Digitally Native Communities
I’m very interested in NFT communities where holding the NFT is an “access token” for the community. I’m a member of 888 Inner Circle (promise of NFT drops and early access to quality artists), and Metaverse HQ (early information and access to future NFT drops and a community of serious collectors). These NFTs are all identical and purely act as a gate to access the community.
The same is true for communities like Bored Ape Yacht Club or Solana Monkey Business community MonkeDAO on Solana which have similar NFT ownership requirements to join but the different NFTs add more personality and freedom of expression for the participants. However, many of these communities don’t have a clear purpose and it’s hard to figure out at what level to engage in the discourse.
What’s clear to me is that we’re in the early stages of NFTs powering decentralized social networks and we need better tools to filter important and relevant information from these communities that stretches beyond tracking hundreds of Discord channels.
It’s also clear to me that we’ll see meaningful collaboration within these communities — members will collaborate in a digitally native way and be rewarded by their fellow community members or from the “treasury” (or DAO) where many of the high quality NFT communities are very well capitalized.
Merging of Digital and Physical
I also think that many physical craft products, tickets and collectibles will have companion NFTs and we are already seeing these patterns emerge. These NFTs will represent legal ownership and act as “digital papers” for the products.
NFTs are also very likely to power tickets for events (authenticity, tradability) so that event organizers can capture a larger part of trading revenue over the marketplaces. The same thing will likely happen for gift cards, or coupons as the technology provides a more robust infrastructure for this type of product.
Trading and Composability in Gaming
Many games (especially MMOs, RPGs and MOBAs) have used in game items to increase the power of your in game character or as a medium of self expression. These items typically only have value in the games themselves and it’s not uncommon to see people trading high level accounts on eBay(with lots of loot). The issue with these items or in game currency is they only have economic value in the game and not outside the game.
Games powered NFTs can power composable Avatars where each individual object is an NFT that can be tradeable outside the game which makes the in-game items more valuable because they are liquid and have real world value. The same is true for earned in game currency.
There are also interesting projects like Loot which start off with the NFT or set of NFTs and encourage developers to build games or experiences with those items/NFTs. It’s a mental model that starts with the NFT v.s. starting with the experience which has never been done before.
Gaming is very likely to be significantly disrupted by crypto and will drive a lot of creativity especially on fast, cheap blockchains like Solana. Aurory is a RPG project that I hold and and am tracking closely. The hardest thing in gaming is making something super fun, so I hope many of these projects are not taking too much “game mechanic” risk to increase their chance of success.
Intersection of DeFi and NFTs
The intersection between DeFi and NFTs is also particularly compelling. There are a number of projects that allow for fractionalized NFTs which allows multiple people to bid and own an NFT. PartyBid and Fractional.Art and I’ve used both products (see CryptoPunk Zombie below). This also improves liquidity for NFTs because collectors can trade much smaller units of an NFT which increases the size of the addressable market.
High value NFTs will also be used as collateral for borrowing. Wealthy people who own physical art have been doing this for a long time, but this can now all happen in a decentralized environment in the future pending some regulatory hurdles.
It’s also going to be possible to rent NFTs (like folks do with Axies right now in Axie Inifity) when they have utility. This could be extended to club memberships, season tickets, home rentals etc so that owners can get more utility from these products.
I could even see a world where Gaming, DeFi and NFTs all collide and where resource production in game is functionally equivalent to yeild farming (gives users tradeable tokens) and in game assets are tradeable as NFTs but this is likely a while away. The 13 year old in me is thinking about a crypto native Command and Conquer Red Alert and getting pretty excited to play it 🙂
We are still in the early innings of both DeFi and NFTs powered by crypto. It’s easy to dismiss NFTs and the current expression of projects as “fads” but after digging a few layers deeper, it became more obvious to me that it is one of the most important innovations in crypto to drive more utility on chain.
I’ve been spending the last few months getting deeper in the Solana ecosystem because of the explosion of new projects, attractive yields and step function better crypto experience enabled by faster speeds (65,000 transactions per second) and lower cost (fraction of a penny). The goal of this post is to give new users a starting point on Solana.
The recent price movements in $SOL have drawn a lot of attention to Solana although this is a lagging indicator of all the cool stuff that has been built on the platform over the last few years. Solana has added almost $5bn in total value in the last two months to its ecosystem.
I think there is space for multiple chains to co-exist in the future depending on their intended use cases. However, there seem to be more and more high quality projects and great development teams innovating on Solana and this will lead to more users and more money moving to the ecosystem.
The graphic below is a good summary of the different chains and supports the case that Solana may be technically superior to alternatives. I won’t go into details about the blockchain trilema (decentralization, security, and scalability) in this post but plan to write more about this later.
People are drawn into crypto and new L1 blockchains for different reasons: technology, financial returns, cool stuff (collectibles, art) and community. Each of these can bring in new users and developers into the ecosystem and these folks can cross-sell into the other products which creates a halo effect.
I started playing around on Solana because it was so fast and transactions were basically free. It was an order of magnitude faster than Polygon which was in turn an order of magnitude faster than Ethereum. It felt like I was just using the internet today over a dial up connection on my 486 dx2 in the 90s in Mombasa, Kenya (which was pretty slow). I then started yield farming because of the attractive returns and only recently discovered some of the NFT projects. I came because of the technology and then cross sold into DeFi and then NFTs.
Here are three excellent articles on Solana if you want to learn more:
I’ll summarize some of the tools, DeFi and NFT projects that I’ve used as well as share some thoughts for the future.
On Ramps & Tools
One of the first things you’ll need to do is figure out how to buy Solana and figure out how to get money into the ecosystem.
Acquire SOL: The simplest way to get exposure to the whole ecosystem is to buy and hold $SOL. I set up a recurring purchase on Coinbase to buy some $SOL every week and dollar cost average.
Wallet: If you want to engage on projects in Solana you’ll need a wallet (like you use MetaMask on other chains). You can just send $SOL from whatever place you choose to buy it (e.g. Coinbase). My favorite wallet for Solana is Phantom which is a Chrome extension – it’s fast, intuitive and well designed. You can also “stake” your $SOL with validators for 8% yield if you just plan to hold.
On-Ramps: If you want to bring other currencies to Solana like $USDC, you’ll need to use an exchange like FTX.US that lets you send $USDC to a Solana wallet. You can’t do this from an Ethereum wallet or Coinbase (yet).
Portfolio tracker: It’s really useful to pick a tracker to visualize all your positions or it can get super confusing. I use Step Finance and I like it. You can view your investments by investment type and also claim tokens, swap and visualize your NFTs. A decent alternative is Sonar.
Once you’re set up with some $SOL and $USDC in your Phantom wallet you can do a lot and that’s when the fun starts.
The yields on Solana are very high right now, with many pools paying 40%+ APR for credible projects. I only farm on projects that I think have long term potential. Here is the process I usually go through before investing in a project. Make sure you understand the risks of Impermanent Loss (IL) when farming assets that are not correlated as large price deviations can adversely affect your returns over just holding the asset directly.
Raydium: Raydium is one of the oldest DeFi projects on Solana. It’s been more battle tested than the others on this list. They have a cool feature called “AccelRaytor” which is a place for new projects to launch. Users who stake Ray get special access to these projects.
Orca: Orca is a decentralized exchange designed for normal people, not programs. I first heard the team talk on the Solana Podcast and they are an ex Google/Stanford team that is very thoughtful about UX and product design. I’m excited about what they will build. They recently launched their “double dip” pools which pay out multiple tokens as rewards (including STEP-SOL). I stake SOL-USDC and I’m comfortable with the impermanent loss (IL) risk even as the price of SOL goes up, given the high farming yields.
I’m playing around on Sunny,Marinade Finance and others but top three are good starting points with attractive yields and intuitive UX.
NFTs only really started picking up on Solana a few weeks ago, so are still pretty new and there are a lot of new projects launching every week so this section will get out of date quickly.
If you’re going to mint NFTs I’d also recommend setting up a different wallet for minting without any NFTs and a small amount of money in them. Solana transaction confirmations are harder to parse and this will prevent any bad actors from stealing your stuff.
My favourite projects are:
Solana Monkey Business (SMB): One of the original NFT projects on Solana with 25k Twitter followers. I joined the MonkeDao Discord, which is a community owned and operated DAO for SMB holders and found it to be an inclusive and knowledgeable community on Solana.
Degenerate Ape Academy: I think these 3D apes are fun and cool. Mine looks like “The Dude” from the Big Lebowski. They have 48k Twitter followers and a solid discord community. Lots of folks have these Apes as their profile picture (PFP) which is just one signal of their community.
My favorite generative art project is Playground that also has a great community around it.
Marketplaces and Tools
All the marketplace are fairly new and have their fair share of teething issues. I imagine there will be a lot of improvement on all these platforms over the next few months (addition of bidding, UX improvements, etc)
Magic Eden: Probably best marketplace on Solana for NFTs right now, with the best UX. They curate and verify the projects so it’s a “safer” place to get started and buy some NFTs.
Solanart: Solanart was the most popular marketplace but Magic Eden has surpassed it in the last few months.
Solanalysis: This is a great tool to visualize price and volume movements for NFTs across the ecosystem. They even have a section for upcoming drops which is handy if you want to mint anything.
Metaplex: Metaplex is building the “Shopify for NFTs” on Solana and allows creators to host their own storefront and mint NFTs etc on their site.
I’m going to continue to track the new projects on Solana and am particularly excited about projects that unlock new use cases that were previously impossible or prohibitive without the speed and cost-effectiveness of Solana. A few areas in no particular order:
Global payment rails: There is a lot of whitespace for simplifying the UX and accessibility for global payments. On and off ramps into crypto as well as regulatory landscape are still the biggest barriers to entry this, but Solana seems like a viable place for more innovation here.
New financial products: Many financial products require real time execution (or low cost) or multiple dependencies to be viable like call/put options, derivatives or auctions e.g. Zeta Markets and Soleon.
New mental models in gaming: I think gaming will bring in an entirely new audience into crypto (and much larger than the collectibles wave). NFTs which are composable, tradeable and have utility are going to change the way we think of gaming completely. Star Atlas is an exciting project with a credible team and nice concept art, but we still have to wait and see if the game is fun. Axie Infinity is a great case study of innovation in “play to earn” on Ethereum and Ronin as well (podcast episode on Colossus).
Empowering creators: We’re moving to a world where creators are becoming more empowered and will have a more direct relationship with their audience and can capture more of the value that they create vs. giving a large portion to platforms, agencies and investors. I expect a lot of innovation in this area.
Overall, we’re still at the start of everything and it’s going to be a lot of fun to have a front row seat on this ride. 🍿
Note: As usual, nothing in this post is financial advice. Please do your own research.
I’ve been an angel investor for over 10 years. I try to invest in areas where I have have some sort of asymmetric advantage; usually in specific areas where I have knowledge and experience or people who I know well.
Here are some areas that I’m super excited about and actively investing.
Crypto / Web3
I think crypto/Web3 is going to change the way we build and consume products in many different industries across the digital and physical world. It’s going to be a multi-decade long shift and I’m excited about engaging with and supporting the community at all levels (more here).
I’ve been investing in chains and tokens since 2013 (starting with BTC) and played a more active role in DeFi towards the the end of DeFi summer in 2020. I now spend time every day learning about new projects, buying tokens, yield farming and providing liquidity for projects that I plan to support over the long term.
I’ve also started started making equity investments in Web3 companies and I’m particularly excited about companies that are innovating in:
Future of finance (DeFi, Emerging markets)
Content creation and ownership (NFTs, marketplaces)
Gaming (collecting, competing, play-to-earn)
Community (DAOs, creators, contributors)
There is still much to learn and much to follow as more innovation happens — this is just a starting point and I’m sure this list will continue to evolve. I’m mostly chain agnostic, but particularly excited by some of the possibilities that are unlocked with faster, cheaper protocols like Solana.
Example companies include Ponto (backed by Polychain and General Catalyst), Mirror (backed by USV and a16z), Topos and Paysail.
As more knowledge work becomes distributed, more work will happen in the cloud. I believe we’ll look back in 5 years and be shocked at how inadequate our tools were in 202I. There are three areas of innovation that I think are especially exciting:
Communication & Collaboration: I think the best tools will seamlessly work in person, hybrid & remote as well as synchronously and asynchronously (Slack is a great example). If we reduce the mental load as to “which tool is right for which situation” work will be more fun and productive for us all.
Orchestration Layer: As we use more and more tools to build products together, each of these tools will need to communicate with each other better (using APIs) and we’ll need some common standards to make this happen effectively.
Community: We will need better tools to build genuine deep relationships for organizations (internally and externally) – people desire to find community and their tribes and invest deeply in these communities.
At Automattic, a fully distributed company for 15 years with over 1400 people across 85 countries I helped make P2 which is the internal tool we used to power distributed work at scale and so understand this space as both a user and a builder. I’m also a productivity nerd, tools enthusiast and product manager so love meeting startups innovating to make work better — although incredibly competitive, some new products will be built that we’ll use every day for work.
Creators of all kinds, from all over the world are now able to make a living through (side) hustles/projects over traditional employment. There have been great improvements in creator tools (and reduction in cost) and access to large audiences through distribution channels (albeit through mostly closed networks – Twitter, Instagram, YouTube). I worked at Automattic on WordPress for the last few years and 43% of all websites in the world are now made using WordPress, an open source project to help folks create their online presence.
The tools that creators need to power their workflow, improve production quality and engage their audience are going through rapid innovation and improvement. The best creators will also want a more direct relationship with their community and want to capture more of the value they create over paying a large share of this value to these discovery and engagement platforms.
I believe that making games is going to be as easy in the future as making a website today. There is a ton of innovation in both the tools both for gamers and game developers and I’m excited to support building this future. I tend not to invest in game studios but look for products that support the growth of the overall gaming industry instead. I spent five years making games at Pocket Gems, where our games reached hundreds of millions of users and it was one of the most fulfilling professional experiences I’ve had to date.
I believe that there will be significant value created in global, and particularly emerging markets over the next decade. The data point to more and more entrepreneurs building businesses in their home countries (even after a tier 1 US education #novisas) versus trying to build their companies in entrepreneurial hubs like Silicon Valley e.g. over 40% of Y Combinator founders are now international, and the vast majority want to build their businesses in their home markets.
There is great potential for technology to power the growth of Africa – many young people ready to work (median age of 19), increased urban mobilization (45% living in cities by 2025), high smartphone penetration (50% and growing fast) with digital finance access, and increasing capital and talent flows into African technology hubs. I grew up in Kenya, worked in mobile money across Africa and have been an active investor on the continent for 7 years; it is now more than half of my seed investing activity.
I’m also investing more foundational startups all over the world (mostly in Asia) and my general approach is to partner with a local seed fund or angel investor and build a strong relationship with them as both an LP in their fund and co-investor. I have started implementing this approach in Indonesia (Intudo), India (iSeed), and Asia (Iterative) and am learning more about the Pakistani venture ecosystem as well.
I believe that the best SAAS companies in the world can come from anywhere as long as product quality and sales (team with experience in western companies helps) is world class. If these companies are based in countries with cheaper technical talent they can offer products at lower cost and win sales against similar companies who are building in markets like the US. I’m also excited about foundational fintech rails in each market (where local norms and regulation are distinct).
As much as I enjoy investing in areas where I have specific understanding or theses that I’m exploring, incredible people are a trump card.
If I know the founders well or someone in my inner circle can vouch for the founders I’ll often invest as long as I believe that the market is big enough. Ultimately, and especially at the earliest stages, people are most important and amazing people are difficult to find.
Examples of companies founder by people I know well because I collaborated with them closely in the past include Heron Data, Rinse, ID.me and many others.
I’m experimenting with Decentralized Finance (DeF) as I’ve been thinking more about unbundling of work and cash flow. I think that DeFi, and yield farming in particular, could be a viable mechanism to generate predictable cash flow, that is not tied to active labor.
I hope to be able to only commit a few hours a week to spot-check positions and harvest rewards and 1-2 full days a month to research new projects and rebalance the portfolio. I will track the starting point and try and calculate my effective yield but given the volatility of the assets and unpredictability of the rewards, I know the result will be difficult to replicate consistently.
It’s also worth noting that this kind of active management might not be significantly better than just buying and holding ETH (this article has some good data) which has much fewer fees and work associated with it – but where is the fun in that 🙂
This is the structure I use for my strategy:
% of Assets
Stablecoins that earn yield passively
High correlation long-only assets
Stable and Long
Stablecoin + long-only asset
High incent temporary reward pools
Very High (Daily)
Polycat, Pacake Swap (Polygon)
The core of my farming is liquidity pools with stable pairs and stablecoins (like USDC which is collateralized and pegged to the dollar) with assets that I’m long like Ethereum, Matic or Solana.
Everything that is outside the “Safe” section requires a wallet (or multiple wallets across multiple chains) to access and is all pretty confusing (even crypto native folks). You’ll need to use some aggregators like Zerion, Zapper or DeBank (better for cross-chain) to help you visualize your portfolio and your trading history. I try not to have more than 10-15 core positions at any point in time but curiosity, low friction, and lack of discipline usually get the best of me so I end up having to trim back every few months.
I’m not borrowing against my assets yet, but it’s something that I’m considering when there are good incentives for borrowing against “safe coins” like BTC or ETH. In traditional finance, this is one of the main benefits of using a financial advisor like Goldman Sachs or owning a primary residence — you can often get leverage against your assets so I will experiment more in this space in the future.
All you have to do is send in your money and pick how you want to get paid (I get paid in ETH on BlockFi) which makes it fairly easy to access for most people even those completely unfamiliar with crypto. Celsius has slightly faster withdrawal times than BlockFi which usually takes a few days.
Even though this is “safe” in crypto land there is still no FDIC insurance as crypto is not FIAT so you are mostly relying on the fact that BlockFi and Celsius are well run with strong risk management practices and will refund you your money in case of an incident. This is just a reminder that this is still a lot less safe than a bank or money market account.
Stable Pairs (30%)
Stable pairs are assets with high or 100% correlation which reduces the impermanent loss risk of exchange rate volatility. This strategy is reserved for assets that I plan to hold anyway.
Stable pairs are assets with high or 100% correlation:
As a farmer providing liquidity for stable pairs (usually in an equal ratio) you are usually rewarded in trading fees and special tokens as an incentive for providing liquidity.
When the market moves your assets will typically increase or decrease in value in synchronization which means you reduce your exposure to Impermanent Loss. Impermanent Loss occurs when a the automated market maker rebalances the pool to get to a 50/50 ratio of value and can eat into your expected gains significantly.
New projects especially on new chains (e.g. Polygon or Solana) will incentivize you to provide liquidity on their platforms. The “safest” ones have established projects moving to new chains – e.g. Balancer moving from Ethereum to Polygon feels safer than a totally new project on Polygon.
I generally avoid new algorithmic stablecoins unless there is a very good reason to trust it – eg. UST is probably fine on Terra as it has a $2BN market cap but still makes me nervous as it’s not technically collateralized.
You usually don’t make that great yields on stable pairs but I generally look for incentives that can get me to 15%+ yields.
I’ve been playing around a little bit with leverage for correlated pairs (starting with Alpha Finance), but this just adds more risk and most of the reward is in $ALPHA (degen coins) that I’m likely to sell as I harvest.
DFX is a decentralized FX for currency stable coins to allow for EUR-USD-CAD transfer which is offering 20-40% yields for providing liquidity with $DFX rewards.
Stablecoin + Long Assets (30%)
For this strategy, I usually look for pools that pay higher yields than the stable pairs because of the increased risk and margin erosion from Impermanent Loss (explainer video here).
For assets that I plan to hold like $BTC, $ETH, $MATIC, and $DPI I will often invest in a pool with a stablecoin. e.g.
I only do this for things that I would hold anyway and when the farming rewards are high enough so that I’m comfortable that they will offset the impermanent loss.
I think that a number of projects on Solana (e.g. Raydium) and Terra (Anchor, Mirror) are interesting and I’m able to execute this strategy on those protocols as well.
I target 25%+ yields here (higher than stable pairs) but they can often end up much higher.
I usually provide liquidity on the major exchanges like UniSwap V3 or SushiSwap which have high volume so good trading fee revenue, but often will move these pairs to new chains (like Polygon) where the token incentives are better. Revert Finance is a good tool to track all your liquidity positions and APY.
Projects like Balancer, Visor, and Charm are interesting from a liquidity management perspective and can help counter the effects of 50/50 pools that you would just let sit passively — I’ve recently increased my exposure to these projects.
Mirror is a decentralized platform to own public securities like ETFs, Apple, or Google and is a new project with token incentives to provide liquidity.
Degen Coins (<1%)
Here is where it gets really weird and this is a place where I don’t think most people should participate. It’s as close to gambling as you’re going to get in Crypto but the 1%+ daily yields can often be very enticing. I’m almost never planning on holding these over the long term unless I start to really get conviction on the project.
Holding and providing liquidity for Degen coins is extremely risky. I’ve already been burned over and over again with the allure of stupid APRs and had a front seat to the Iron-Titan fiasco where I almost lost my original investment besides being up almost 3x within a 2 week period.
I very rarely participate in Degen projects on Ethereum – the gas (transaction hash) fees are so high that it’s usually not worth it. Most of my degen activity is on Polygon but also play around on Solana as well.
However, It’s a lot of fun to play with these projects so if you do dive in, pick projects that seem legit and put in a small amount of money into the pools (or farm with stables) and then sell off the LP rewards as they come in to reduce risk.
It’s even more fun to be in Degen projects/pools with friends because it’s exciting and things move fast. It’s also helpful to have friends around to tell you when to get out!
I look for 200%+ APYs for this strategy and try not to stay in the coins for too long – if you do make gains, I’d suggest locking them at around 2-3x and then playing with house money. I’ve never really made any money on Degen, but I’ve never really made any money gambling at a casino either 😂
Note, these projects may not exist when you read this 🙂
Pancake Bunny: Yield aggregator with auto-compounding pools on Polygon. I’m in the ETH-Bunny pool at 1% yield per day.
Polycat: Yield aggregator with auto-compounding pools on Polygon I’m in the FISH-MATIC pool at 0.8% yield per day.
OHM: An algorithmic reserve currency. I’m staking OHM at 1% yield per day.
I hope this helps folks, and none of this (as with everything on my personal blog) is financial advice. I’m just sharing my own experiences in case it’s helpful to others and to refine my own thinking.
DeFi is evolving quickly and presents interesting opportunities to make money by investing in new projects. This is a summary of what I wish I’d done before starting to invest more seriously and my current diligence process before backing a project. As always, I’m writing this all up to be helpful to others, clarify my own understanding and get feedback to refine my approach.
DeFi Set Up
Before you get started I’d spend a bit of time getting set up — I did not do all of this in the beginning and am much calmer now that I have some of these bases more covered.
A sounding board: Build a network of friends who are more experienced that you can ask about projects and share experiences. All of this is incredibly confusing as a new person, and so it’s important to give and get help. It is also helpful to have early warnings if risky projects look like they are heading for trouble.
Start small: I usually start with a smaller amount for new projects and if the user experience with the DApp (Decentralized Application) after a few weeks is good, and I like the risk/return profile, I make it a “core position”. I aim to have no more than 10-15 core positions at any point in time or it it’s very hard to track.
Understand risk: Understand that there are layers of risk – new chains, new projects, new tokens all have compounded risk compared to established projects. For example, supplying USDC-DAI on UniSwap Liquidity pool (LP) on Ethereum is way less risky than a RAY-SOL LP on Solana. Another example is using multiple platforms like Beefy to autocompound your DPI/ETH LP on QuickSwap creates layers of risk vs. investing in a single token.
Secure your DeFi environment: Spent the time securing your wallets and trading platforms (See this article from the CEO of Nexus who had $8m stolen from him). I use a password manager (1PassWord, LastPass), MetaMask, and write down my codes on paper which are torn in half and kept in separate and secure places. I also use two-factor authentication for everything using products like Google Authenticator/Authy over text where possible. I also use a separate email and browser profile for all my crypto projects.
Impermanent loss: Understand impermanent loss before providing liquidity. Impermanent Loss occurs when an automated market maker rebalances the pool to get to a 50/50 ratio of value. Impermanent loss can mean that you actually make less money by providing liquidity than just holding tokens if the price of the underlying tokens changes. This video is great and this article from Bankless and this from Bancor are also excellent.
Fees: When executing on strategies especially in Ethereum there are often layers of fees involved (both putting money in and taking money out) – e.g. Token Transfers, Transaction Approvals, Swaps, Pooling Tokens, Staking LP Position, Claiming Rewards, Pooling and Staking to Compound Claimed Rewards. Each of these has a gas fee and can seriously eat into your returns. Good article on holding ETH vs. Active Strategies.
Portfolio trackers: You’ll need to use some portfolio trackers like Zerion, Zapper and DeBank (DeBank better for cross-chain) to help you visualize your portfolio and your trading history. The newer projects will likely be excluded so you may have to use a spreadsheet as well.
You need to get comfortable knowing that you’ll never precisely be able to calculate your expected yield – rewards are constantly changing, fees are hard to estimate, and you never know how impermanent loss will affect your returns.
Before Backing a (New) Project
New projects are riskier than established projects (higher risk of logic bugs, hacking risk or rug pulls) so do extra research before investing in these projects even if the yields are enticing. In particular, projects with very high XXX%+ yields are inherently very risky and need more work / or less capital at risk.
For thse newer projects, you need to do extra research and I usually go through the following steps to help you derisk:
Research: Read the medium/announcement posts, join the project Discord and follow their Twitter account — look for good English, signs of a strong community, and engagement from the project developers.
Audits: Check to see if they’ve passed audits – Certik and Perk shield are common but this does not guarantee against hacks.
Understanding: Don’t just ape in (go in big, hard, and fast) to chase yield without actually understanding the project. If you can’t describe it in one sentence, don’t invest — I’ve been greedy and gotten burned many times including a front-row seat to Iron Finance where I just managed to get out with my original investment.
For all your DeFi investments you should read through and understand the terms of your investment as well as the circumstances for each situation. Here are the things I usually look for before making an investment:
Fees: Deposit and withdrawal fees.
Lock-up periods: Some farms don’t even let you take out your capital or are subject to high fees if you pull out before the lockup.
Vesting: Vesting of rewards or hurdles before you get your liquidity provider rewards.
Source of Yield: Yield can come from trading fees, liquidity pool tokens, or additional third-party staking fees. All of these are usually volatile and require active tracking.
Total Value Locked (TVL): I only consider investing if there is at least $1M in pools and there is active trading in those pools else you expose yourself to more slippage and liquidity risk.
Liquidity to trading volume ratio: When Trading Volume > Liquidity that feels particularly dangerous (volatility/pumping/dumping etc.)
Price slippage: Particularly important for small pools where you are a significant % of the pool which impacts both your deposit and withdrawal.
Difference between APR and APY: APY assumes compounding which is usually inflated as most people are not manually compounding and rewards don’t stay stable over the course of a year.
This guide (Part 1, Part 2) is BSC (Binance Smart Chain) specific but the concepts are all solid in case you’d like to dig in further or get alternative perspectives.
Decentralized Finance could potentially change the way we interact with financial services forever and is a total rabbit hole. Here are some of the “levels of depth” that you can get into DeFi and roughly reflects my journey into the DeFi abyss (yes, I will be overusing this analogy!).
I don’t think that most people should move past the shallows unless you’re interested in the underlying technology, are comfortable with the significant risk, and want to follow the impact of DeFi on the financial services ecosystem.
Dipping your toe in the water
When starting your dive into cryptocurrency and DeFi, the best thing to do is to set up a regular order to buy Ethereum and Bitcoin (e.g. every two weeks) through an exchange like Coinbase to dollar cost average and hold. $BTC and $ETH are ~80% correlated to each other but neither are particularly correlated with the stock market.
BlockFi and Celsius are also great options to hold USD stable coins (USD coins backed by real USD) and make 5-10% in interest that can be paid out in cryptocurrency or stable coins.
Just these two things alone is probably more than 90% of the financial advisors know, which also makes me a little sad given that they are a gateway to investment products.
Wading in the shallows
Once you’re in the water and you have an account on an exchange like Coinbase or Kraken, you may start buying a few more tokens for projects that you’ve heard are interesting like Solana ($SOL), Cardano ($ADA), Polygon ($MATIC), or Polkadot ($DOT).
Once you’ve bought your cryptocurrency the natural next step is to consider what else you can do with it 🙂 You will create a MetaMask Wallet and install the browser extension to manage your currencies and make your first swap between cryptocurrencies. You’ll send some $ETH to your wallet and maybe buy something like the DeFi Pulse Index ($DPI) which is a collection of some of the most popular DeFi tokens like Uniswap, Sushi and Aave. The BED Index ($BED) is also a pretty solid choice.
You can probably get most of the exposure and benefits of participating in the crypto and DeFi ecosystem by stopping here. You’ll probably also save a ton of money on transaction fees and a lot of unwanted stress. It’s also probably simple enough to do your taxes by just exporting a file from Coinbase and a wallet CSV export.
Feet off the floor
If you’re wondering what’s next, this is when it starts getting more fun. Instead of just holding assets passively your coins start “working for you” and generating yield – much link investing your fiat (USD) you are investing your cryptocurrency.
The main things you’re going to start doing are:
Providing liquidity: You’re not just holding tokens for projects that you like but you’re providing liquidity in pools (LPs) on exchanges like Sushi or UniSwap.
Staking: You’ve discovered that exchanges or projects will provide extra incentives for providing liquidity (as LP tokens) or with the tokens directly by staking these tokens and locking up your assets for rewards.
Joining the project communities: You may join a few project discords or telegram chats and potentially even participate in the discussions when you’re really excited about the project.
Friends: You probably have a group of like-minded friends that are at the same stage in their journey that you can bounce ideas off.
When you are in the deep waters you’re comfortable with the basics, you have a clear strategy and you’re switching projects regularly to try and find the best risk-adjusted reward across different chains. I’m here in my DeFi journey.
New Projects: You’re investing in totally new projects, reading whitepapers/announcements, and staying on top of the latest incentives so you can get the best rewards for your tokens.
Degen: You’ve invested in a few degen projects with high volatility – you’ve been burned by impermanent loss a few times and exited too early or too late.
Multiple Chains: You’re investing across multiple chains like Polygon, Terra, and Solana and complaining about the gas fees on Ethereum all the time. You’re scared to look at how much you’ve spent on gas. You go to https://fees.wtf/ and are sad.
Best Price: You’re using tools like Matcha to look up the best exchange rate for your swaps vs. going to UniSwap by default. You feel good when you save money on fees.
Portfolio Construction: You’re starting to think more about portfolio construction, investing discipline, and having some rules for when you invest and when you exit to improve risk/return.
Leverage: You’re starting to get loans on your stable assets and leverage for some stable liquidity pools but still nervous when you do this (and keep collateral around in case it goes sour).
Governance: You are holding governance tokens for some projects that you’ve been supporting for a while and actively voting on the future direction of the project (much like shareholders vote).
Trimming down: You’ve invested in too many things and constantly have to trim back and rebalance because you’ve collected so many useless coins that you don’t know what to do with them.
Portfolio Tracking: You’re using tools like Zapper, Zerion, and Debank for cross-chain — you may even get frustrated that all these tools don’t support all the projects that you’re investing in. You probably have a spreadsheet to calculate all your positions and daily yield because the other tools don’t support it.
This chart shows how other chains like Polygon and BSC have increased the overall trading volume significantly in 2021, due to much lower gas fees (cost per transaction).
I honestly have no real idea what lurks in the darkness, and don’t really want to dive here if I can avoid it, but I can only imagine the following things exist:
Programmatic trading: Instead of manually moving around your money you’re writing code to programmatically make trades or execute strategies with specific logic.
Pre Launch: You’re in all the right communities and know when projects are launching, when exchanges will list tokens, and maybe even have tokens before the general public.
Arbitrage: You have a deep understanding of the incentives, risk, and arbitrage across chains and are able to systematically take advantage of these before retail investors (much like traditional finance).
Moving markets: You’re pooling assets, taking out flash loans, or in small communities of large investors to take advantage of scale and your trades are actually moving markets. I recently came across a tool called Furcombo which is a no-code tool to let users use flash loans to take advantage of price arbitrage across decentralized exchanges.
Stacked Leverage: You’re taking advantage of stacked leverage and incentives which is hard for normal retail investors to understand or access.
OTC: You’re not trading using conventional systems because your trades are so large that you can get better rates over the counter 🙂
One of the movements I’m most excited about is decentralized finance. Here is the description is taken directly from the Investopedia article which sums it up nicely.
“Decentralized finance is a system by which financial products become available on a public decentralized blockchain network, making them open to anyone to use, rather than going through middlemen like banks or brokerages. Unlike a bank or brokerage account, a government-issued ID, Social Security number, or proof of address are not necessary to use DeFi.”
One of the better crypto funds I’ve come across, 1kx, estimates that 35% of the cost of the labor market is driven by establishing trust – legal, tax, accounting, auditing, KYC, etc. DeFi refers to a system by which software written on blockchains makes it possible for people who have no established relationship or confidence in each other collaborate without going through a middleman or central authority with a trustless transaction. It puts established centralized institutions such as banks, clearing houses or governments at risk and as such is one of the most disruptive ideas of our generation.
The blockchain is enabling a shift from the “internet of information” to the “internet of value” where information and value transfer can be written into the same protocol and the incentives of users and developers are more closely linked than ever before.
We are still in the early innings of decentralized finance; even though there is ~$75BN locked in the ecosystem, the global financial system is close to $100TN (1000x the size). DeFi only really saw the volume pick up a little over a year ago in May 2020 (the start of the “DeFi Summer”).
This evolution from traditional finance to decentralized finance is not going to be a smooth ride — the incumbents are centralized institutions like governments, banks that are deeply ingrained in our politics, economics, and culture. The disruption is all bottoms up and global by design and these central institutions are not going to embrace change or give up control quietly.
Traditional or Centralized vs. Decentralized Finance
Centralized (traditional) finance gives control to a small number of organizations (banks, governments, clearing houses) which users of those organizations are supposed to trust. In many developed markets we trust these central organizations but it’s not true in many emerging markets, with good reason.
Centralized finance excludes many people in the world. Almost 2BN people in the world don’t have access to the banking system and almost 40% of Americans under 25 are underbanked. These systems are built on outdated infrastructure and process which have very high fixed costs relative to decentralized finance and lack interoperability. Another thing that we cannot control as individuals is the leverage ratio of central banks, the supply of money (governments can print new USD causing inflation) and this gives us less control of our finances in the long term.
DeFi, has many structural advantages – better technology, faster, cheaper and no reliance or expense needed for central institutions which operate with much higher costs — physical locations, expensive employees and rigid systems.
For example, international wires using traditional rails can have multiple intermediary banks, complex processes, unpredictability of the final transfer amounts (FX and fees) long wait times, and high transaction cost. It’s expensive, slow, and feels awful compared to crypto rails. When you first send USDC to a friend in another country using their wallet address instantly, which is fully trackable and is a fraction of the cost it’s so obvious that the incumbent technology and process is broken.
Here is some high level data on two lending platforms on traditional vs. decentralized rails; Lending club (-60% margin) vs. Maker Dao (+99% margin) and decide which is a better business 🙂
Even though decentralized finance has many structural advantages and I’m very bullish on the bottoms up shift towards decentralized finance, the products and experience are still in their infancy and not appropriate for most people.
It is complicated to access, requires understanding of the underlying mechanisms (which are in turn, complicated) and you have almost no protection as a user. There is constant risk of getting hacked, logic bugs in Distributed Applications (DApps), rug pulls, user error and no FDIC insurance to save you if the sh*t hits the fan. If your wallet or the projects you’re investing in gets compromised you lose your money and there is no way to get it back. The tax code in the US also treats cryptocurrency like property which means that every time you swap currencies it’s a taxable event which is also no bueno for your taxes. The attitude of many enthusiasts in the ecosystem is one of “do your own research” not one of protection or support – proceed with caution even if you are curious.
If you’re interested in digging in further, here are a few articles that I think are worth checking out: