Defi Farm #25 - October 16th Weekly Update

ABY - always be yielding

October 16, 2022

Hi everyone,

Welcome to the 25th weekly edition! Let's dive in 🤿Over the past 7 days:SPY: -1.76%BTC: -0.8% ETH: -1.5% 

Major L1's:SOL: -7.5%AVAX: -5.9%Near: -13.8%Algo: -3.1%FTM: -6.6%

Today I'll go over:- Exploring the road ahead 🛣- Interesting news from this week- Cool projects and protocols I came across this week- Defi farm of the week

Exploring the road ahead 🛣

For those of you who have been reading this newsletter since edition #1, you know by now that I very rarely comment about price, which way I expect the market to go, or offer specific recommendations on tokens. The furthest I'll go is to suggest checking out yield opportunities on specific defi protocols.

This is all mainly because (1) I have no idea where the market is going (2) I can't control it and (3) I spend close to no time looking at price charts.

The following few paragraphs are just me hypothesizing a possible near- to medium-term future which I could see MAYBE playing out. (<- If it was possible to throw more hedging words into that sentence, I would.) These are some ideas that I've been kicking around in my head and discussing with some of my friends who are also in the defi space.

So let's get into it, here's what I've been thinking about.

In this bear market, we've seen alt Layer 1's perform pretty awfully compared to ETH.

These three charts are a few of the major alt-L1's denominated in ETH. (All alt-L1s charts look pretty similar to these.)

This is also true for many protocol tokens within that token's native ecosystem.

In fact, I'm often someone who will always recommend selling farmed protocol tokens off into their native L1 (or stables) because "protocol tokens usually get farmed to zero".

Look at the chart of PTP/Avax or Quick/Matic or Geist/FTM, they all look like the above graphs, but even worse.

So what?

As we continue in this specific market environment, I see very few scenarios where alt L1's outperform ETH. During the last bull market, we saw a crazy outperformance of these alternative L1's because ETH was so busy + so expensive that many folks were forced to only transact on cheaper L1's. However, during this current market environment, that catalyst isn't there.

  • The ETH chain is seeing much lower demand for block space and transaction fees are a fraction of what they were.

  • There's now also a bunch of fear (totally justified) in using cross-chain bridges.

  • The ETH L2 ecosystem is now alive and continues to develop. If someone is priced out of ETH main net, it's a lot easier for them to go to Optism or Arbitrum. These options weren't even available during the last ETH gas spikes.

Important Disclaimer: I think alt-L1s have some difficult headwins in the short- to medium-term, but I personally think a healthy basket of top L1's will do fine in the long-run. ETH isn't going to be the only L1 chain if web3 gets to the level of adoption that we want.

If these market conditions continue, (low ETH gas prices and more usage of cheap ETH L2's) one thing that I don't think has as many headwinds as alt-L1's are blue-chip ETH-native Defi tokens.

Historically these ETH-native defi tokens have performed incredibly poorly when compared to ETH. Convex ($CVX), Aave ($Aave), Curve ($CRV), Maker ($MKR), Yearn ($YFI), etc are not tokens that have been good to hold onto.

However, when you look at the price charts of these tokens, denominated by ETH, they all seem to have found something that looks like a floor.

And that's what takes us to the thesis that I'm currently thinking about.

If ETH gas prices remain low, and general macro-trends stabilize, if we start to see value accrue anywhere, I'd think we may start to see some value accrual in these cornerstone ETH-native defi protocols.

Now - does that mean you should go out and buy all of these blue-chip defi tokens? Probably not. Again, all of this price discussion has been relative to the price of ETH. If we continue to see ETH prices decline in terms of USD-value, these tokens will likely do the same. There's also a TON of difference between all of these individual tokens, so DYOR.

You should also consider the fact that (1) I may be totally wrong or (2) maybe ETH gas prices go way back up quicker than expected. I just bring this line of thinking up to hopefully spur everyone to start thinking about what might happen next, given the current state of defi.

Interesting news and things from this week

Some cool stuff happened this past week. Here is just a small sampling.

Interesting protocols/projects I found this week

Otterspace (link) - This is a pretty cool new DAO tool that launched this past week. Otterspace offers DAO operators the ability to created and issue NTT (non-transferable tokens) to DAO members that unlock utility. For example, these NTT's (or badges) can be rewarded to help track reputation of members, give extra governance powers, or unlock varying levels of permissions.

Defi farm of the week

This week, I think the Balancer stETH/USDC pool on Arbitrum is probably one of the best risk-adjusted yields you could find.

That's all I have for this week! Stay safe out there and as always, stay yielding!

Today is the last day to apply for the Intro to Web3 cohort-based course I'm teaching in partnership with Invisble College. If you're interested, be sure to apply here before tonight!

If you ever want to chat with me and nerd out about defi/web3, I made some time available on my calendar each week. Feel free to schedule some time!

-Andy