The Potential of NFTs

The internet was transformative because it democratized access to information and enabled instant, digital communication. I think that cryptocurrency has the potential to have as big an impact on the world as the internet 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 there are more interesting foundational things happening under the hood that are more interesting than the current representative use cases for the technology.

In particular, I think that 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.

Right now it’s easy for users to get scammed with NFTs, and for “rug pulls” to happen anonymously.  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. We still need better standards, better tools, and better information flow for people interacting with NFTs so that the communities 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 fun, but I don’t think most projects will have any staying power and most of the NFT transaction volume will come from other places in the future. 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). 

https://dune.xyz/queries/3469/6913

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). 

CryptoArte
Example Art Blocks

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.

Collector Tools

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).

https://currency.nft.heni.com/

NFT 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 the 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” where many of the high quality NFT communities are very well capitalized.

Merching 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.

Satoshi Studios produces sneakers with a companion NFT and QR code powered by the Lukso Network. Breitling is using Arianee to create digital papers for its mechanical watches. This will rapidly extend to other high value, scarce products from wines & spirits to fashion and art.

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 are often only tradeable in the games themselves and it’s not uncommon to see people trading high level accounts on marketplaces (with lots of loot). The issue with these items is they are only valuable 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 much more valuable.

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 🙂

Further Research


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.

Solana – Practical Primer

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.

Source: Defi Llama (September 7 2021)

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.

Source: RareLiquid

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.

  • 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. 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.

DeFi

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.
  • Saber: Saber is built to provide liquidity across chains. I typically only stake stable pairs (high or perfect correlation pairs with no IL issues) in their liquidity pools e.g. USDC-DAI and wFTT-FTT. The founders are brothers Dylan and Ian who previously worked at Pipe in product and engineering and they raised $7.7M from Social Capital, Jump, Solana Foundation and Multicoin Capital.

I’m playing around on Sunny, Marinade Finance and others but top three are good starting points with attractive yields and intuitive UX.

NFTs

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.

Projects

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.
  • Aurory Project: The Aurory project plans to make a game and by releasing NFTs to users, they start to build a community and a player base for this game. They have 76k followers on Twitter and just announced that they will be dropping free NFTs from the game to all Aurory holders, which was a cool community development move and not something I’ve seen before.

I’m also tracking some of the generative art projects like Rox, Abstratica and Frakt to see which ones have a community form around them and ship innovative work.

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)

  • Solanart: Probably best marketplace on Solana for NFTs right now. They curate and verify the projects so it’s a “safer” place to get started and buy some NFTs. You can buy Degenerate Apes and Aurorys here.
  • Digital Eyes: Digital eyes has a wider variety of projects than Solanart and worth browsing to see the breadth of projects in the ecosytem.
  • 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.

The Future

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.

Angel Investing Areas

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.

Future of Work

I think that the way we work is going to change fundamentally; jobs will be unbunded, people will collaborate digitally (natively), and more creators will be able to monetize their passions. These shifts are being accelerated by Covid-19 and it’s incredible to see all the innovation happening here.

Tools for Work

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:

  1. 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.
  2. 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.
  3. 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.

Example companies include Remotion, Aviyel, Claap, Playbook, and SkillMagic.

Tools to Create

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.

Example companies include Ribbon, Slerp, Contra and Mirror.

Tools for Gamers

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.

Example companies include Start Playing Games, Metafy and Vungle (sold to Blackstone in 2019).

Emerging Markets

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.

Africa

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 run a fund (with external investors) to support this thesis and have written about it here, if you want to learn more. It’s never been a more exciting time to invest in technology companies in Africa 🙂

Example companies include: Flutterwave, Sokowatch, mPharma, and Shara. Full list of 40+ companies here at https://www.mushaventures.com/africa.

Global (mainly Asia)

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).

Example companies include: Cashfree, Guidewheel, SalesKen, and Everstage.

Amazing People

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.


If you’re interested in talking about ideas in these areas please feel free to reach out on my website (https://www.mushaventures.com/contact). I often co-invest with a close group of angels, Village Global (where I’m a Network Leader) and Sequoia Capital (where I’m a Scout).

DeFi Set Up and Project Diligence

https://defi.cx/dyor-what-to-check-before-buying-a-token/

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. 
  • Hacks: Check to see if they’ve been hacked in the past (https://rekt.news/leaderboard/) and avoid projects that have been hacked.
  • 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. 
  • Rewards: New projects are particularly fun because you can get rewarded for being an early user and supporter in a very meaningful way, much like early equity investors (e.g. early UniSwap users got $12k of tokens awarded to them). 

Understand the terms

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.

The Depths of DeFi

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.
  • Reading and learning: You’re reading more frequently and have discovered things like the Finematics Youtube Channel, the Bankless newsletter and podcast, and maybe Kevin Rose’s Modern Finance Podcast. You understand things like impermanent loss, rug pulls, and the difference between proof of work and proof of stake. 
  • 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. 

Deep waters

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).

https://twitter.com/WuBlockchain/status/1401418884310200320/photo/1 

The Darkness

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 🙂

Here is a similar take from the folks over at Finematics, who produce great content and I’m a supporter of theirs on Patreon.


I hope you enjoy your experiences throughout your journey in DeFi, but unless you want to dedicate a lot of time and mental space to it, wade in and just have fun the shallows and rest safe and easy 🙂