The Breakdown - DeFi Degens Are Crypto’s Suicide Squad

Episode Date: September 4, 2020

Today on the Brief: Traditional markets falter, led down by tech stocks Bitcoin falls under $11,000 for the first time since July Stablecoins mint $100m daily since mid-July Our main discussion is about DeFi’s “degens.” NLW talks about: The numbers behind DeFi’s recent run up What “degen” means in this context Why degen is in part a reaction to previous bitcoiner critiques of Ethereum  Why degen is (in even bigger part) a reaction to a no-yield, artificially low interest world

I see this interesting sort of rejection where people who have been on the other side of those attacks who maybe were involved in other parts of the space besides Bitcoin are effectively saying, look, if we're not pure and we never can be, we're going to go all in on complete degeneracy. We see your accusation of shitcoin and raise you total absurdity. This is shitcoin X absurdo, basically. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com, BitStamp, and nexo.io, and produced and distributed by CoinDes.

What's going on, guys? It is Thursday, September 3rd, and today we are talking DFI. But not all of DFI. Instead, we're going to dig into a specific subculture movement, the DGens. First, however, let's do the brief. First up on the brief today, it is a bad, bad day for markets. Bloomberg's headline is Tech Leads U.S. stock's biggest route since March. The S&P is down 2.87% and the NASDAQ is more than 5% off the high. Now, interestingly, these are the three sub-bullet sub-articles that Bloomberg connected to the news. The first was about jobless claims giving mixed signals, and what that had to do with is the

fact that while continuing claims and initial claims both were down slightly, the change in methodology this week made it really hard to compare, and in some ways it seems like jobless claims are actually up. The second sub-bullet was trade deficit swells to biggest since 2008, and I think that one's pretty self-explanatory. The third one is again about jobs and has to do with tomorrow's jobs report for August, where it says, jobs gain seen hanging on in August with tougher road ahead. You take this all together, and what you have is a story where the markets actually seem a lot more fragile than perhaps we've been pretending. The net result of this can only be more action from the Fed and Treasury, because God forbid there would be a reset in the evaluations which we've seen reach historic levels. Next up on the brief today, unfortunately, alongside stocks, Bitcoin fell too.

In fact, it dumped. We saw a drop of $403 in an hour to come down under $11,000 for the first time since July. This had been telegraphed a little bit by inflows of Bitcoin to exchanges, but frankly, the thing that I loved most about this was CoinDesk's headline. As Bitcoin falls for second day, long-term holders probably won't care. It's a great reminder, especially in the context of the conversation we're about to have about D-Fi's D-Gens about why the long-term buy-and-hold strategy or some version of it, like dollar-cost averaging, is so nice in these times of volatility and turmoil. Last up on the brief today, I wanted to talk about an undercover stablecoin story.

This comes from Nick Carter, who points out that there's been so much attention elsewhere that we haven't noticed that stable coins have been adding $100 million a day since mid-July. The total supply of USD stablecoins coming into this year stood at about $4 billion. It is at $16 billion today. And interestingly, I believe this is more than just speculative activity. It's more than just people moving out of risky assets into stable, stable coins in the crypto space. I think it's the beginning of a new system. being primed, and that system has, yes, both a crypto dimension. Obviously, stable coins are a key part of the trading activity happening in Defi, but it also has to do with people who are looking

for an escape from their local currency regimes into something approximating U.S. dollars. And in case you need another indicator of this being a big deal, the Bank of England's new governor Andrew Bailey has been in the news calling for more global regulation around stable coins. This is one of those areas of the crypto industry that can seem boring at first, but actually is one of the most fascinating things when it comes to understanding big picture changes in the global financial system. With that, let's turn to our main topic, D-GENs. So what's been happening?

There has been an absolute surge in activity around defy. Now, to put some numbers around this, defy applications usually involve parking some number of token, in a smart contract in order to automatically earn some yield. For this reason, the main overarching metric is total value locked. In fact, in many ways, TVL has replaced crypto market cap as the key metric, at least at this part of the industry. At the beginning of the year, there was $690 million in total value locked in defy applications. By the beginning of February, that number had jumped to $1 billion, but at the beginning of July it had jumped to $2 billion.

Now, it currently sits at $9.15 billion and is growing rapidly. Arjun Balaji from Paradigm put it this way. He tweeted, DFI projects are launching faster than Google can index results, leaving Twitter the only option. By the time Google surfaces it, the project has probably accrued 400 million TVL, one to two known vulnerabilities, and a fork of its own. This rapid increase is being driven by the phenomenon of yield farming or liquidity mining. And I did a full episode on this on July 23rd called a simple explanation of defy in yield farming using actual human words, but basically liquidity is the life of any financial system.

We know that, right? See, the Fed. The Fed has been obsessive about keeping liquidity in the system for now more than a decade. Well, even in these smaller nascent systems, liquidity really matters, and basically these new defy protocols are incentivizing people to lock up tokens as liquidity by offering them yield in the form of a new native token. People then speculate that those new native tokens are going to become more valuable, so they earn their token for locking up other tokens and creating more liquidity in the ecosystem. If it sounds a bit like a Rube Goldberg machine for money,

you're not totally off. Additionally, this sort of craziness is reflected in the names of these protocols, which are pretty me-me-me. You've got yams, you have sushi, et cetera, et cetera, et cetera. An important caveat for the rest of our conversation, there are a lot of folks in this space that see this whole veggie phase as really an important part of a much more significant journey. Effectively, this group believes that what this stage is showing is the power of

compose abilities. the ability to bring order books and other instruments of central finance on chain. To them, this is a necessary experimental sandbox kind of step to how traditional finance, which they see as hampered by fees, intermediaries, etc., is going to be transformed by these new decentralized open permissionless protocols. That's, however, not what I want to talk about today. What I want to talk about is a cultural underpinning that is burgeoning with it, which is the DGens. So what is a D-Gen? To be clear, this is not some highly recognized term that has an

explicit meaning yet. Instead, it is a common descriptor that is self-applied, by the way, mostly, among people who are playing these crazy financial games with veggie tokens, and often playing with probably much more capital than they should. D-Gen as a word obviously comes from degenerate, it harkens to degenerate gambler, but I think that there's more going on as well. I think, frankly, that this represents an attitude and a culture shift that's worth exploring a bit more. And basically, I think that this is decidedly different from the non-bitcoins, the ICOers, in 2017, in early 2018. What's going on, guys? I'm excited to share that one of this month's breakdown sponsors is crypto.com. Crypto.com offers one of the most cost-efficient ways to

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or visit bitstamp.net slash pro to learn more and start trading today. That's bitstamp.net slash pro. In this crisis, many investors aim to keep and grow their digital assets. Others seek to maximize the yield on their cash. Nexo allows you to achieve exactly these two goals. The company offers instant crypto credit lines against all major cryptocurrencies, with interest rates starting from only 5.9% APR. Nexo also lets you earn up to 10% annually on your fiat and digital assets. What's more, interest is paid out daily, and you can add or withdraw funds at any time. Get started at nexo.io. What are the characteristics of this culture, this subculture that I'm recognizing? First, there is a replacement of moralizing and world-changing rhetoric for raw financial games.

Again, like I said, there are plenty of people who are in Defi who are convinced about the other side and the potential, the world-changing potential of decentralized financial alternatives on the other side. But unlike 2017, most folks who are in this DeFi space, particularly the ones who are self-applying this term of D-Gen, are not wrapping it in big world-changing language. It's a financial game pure and simple. It's a radical experiment in game theory and incentives. As part of this, rather than apologizing for senior age, i.e. the benefit of printing money, they're embracing it, leaning into it, and figuring out what they can do with it to best design the most insane incentive systems. These incentive systems, by the way, are the liquid hot magma of the system

that could easily turn from some casual degeneracy to outright Ponzi. So is really probably where to keep the sharpest eye. But anyways, back to the culture itself, I think on some level it is at least in part a reaction to the critique of Bitcoins or attacks on non-Bitcoiners on Ethereum people in specific. Basically, I see this interesting sort of rejection where people who have been on the other side of those attacks

who maybe were involved in other parts of the space besides Bitcoin, are effectively saying, look, if we're not pure and we never can be, we're going to go all in on complete degeneracy. We see your accusation of shitcoin and raise you total absurdity. This is shitcoin X absurdo, basically. I don't know how far I take this argument, but I do feel it's at least a little part of this energy. It's a part of the energy to sort of take a critique that's been leveled against you and just reject the premise of the critique wholesale. At the same, time, though, I don't think that the Bitcoinser critique of Ethereum and non-Bitcoiner people is the biggest underlying force in this movement to the extent that it's a cultural movement.

I think it's not hard to connect the dots in a zero-yield world. What I mean by that is that the way that monetary policy is now, interest rates make it so that there's absolutely nowhere to park your money. We are being forced systematically farther and farther out onto the risk curve. In that context, why not take it even further? There is a similarity and something of the same sort of market in accessibility and even market nihilism you see with the Davey Day trader crowd in the Defy DGens. The defy DGens just have much more radical instruments, much more experimental instruments to express that sort of market nihilism.

In fact, it's a more internet-native version of that same impulse that's leading so many people to pile into the bankruptcy trade of Hertz. And in the context of that internet nativeness of the DGens, there's anonymity as a core piece of it. The people who are creating these veggies are often anonymous. Chef Nomi of Sushi Swap, for example. Base protocol, which calls itself in its Twitter profile game theory for degenerates. Again, all anonymous. Now, of course, the question for people who are interested in DFI is, is this a good thing or a bad

thing for the space? And I think, interestingly, right now the DGens are more. degenerate gambler mixed with market dataists than they are super villain. A different way to put it is they're more suicide squad than Lex Luthor. Of course, when the honeypot gets big enough, and boy, we've gone from $2 billion to $9 billion in just a couple months, supervillians are likely to enter, right? What's more, even the amoral rather than the immoral, can become villains when the wrong people, in particular vulnerable people, get involved. I haven't seen that yet, but this is a moral. But this This is why I keep saying that people who are in this space should be glad it isn't easier

to get involved and play these crazy defy games. Part of what made the ICO movement so destructive in many ways was that you had the ability for Korean pensioners to get involved with random tokens. That's just not happening right now, and I think that that's a good thing. The interesting question will be whether some big hack or vulnerability, which frankly feels absolutely inevitable, right? I mean, these are unaudited smart contracts. There is just an absolute race to see how fast people can do different things.

You're going to see fork wars, et cetera. The question is an if but when something happens that crashes at least some part of this party. I wonder, though, whether that will be enough to actually get these D-Gens to stop. Remember, they're nihilist. It's a different set of attitudes. It's potentially a different appetite and willingness to risk and lose things. That said, I do think that U.S. regulators, while they will obviously be very late to the party, I can't imagine them not coming in and absolutely skull-cleaving some of the stuff that's happening now in about two years.

We've seen that obviously with ICOs, where settlements still are coming out to this day for things that happened two, three years ago. And I think that this could be an even higher level. Although, again, who knows? Maybe this makes the anonymity trend matter more. and maybe this makes the fact of who participates, or rather the fact that you don't have the same sort of vulnerable people participating that you did in the ICO movement, maybe the government cares less, although that's not a bet I'd be really up for taking if I was involved. To sum up, I see this space right now as a weird combination of financial engineering experiments

with a reactionary subculture. And as I said at the beginning, this is an all of Defi, And in fact, this whole D-Gen idea, even for those who would self-apply it, it's not like that's the whole identity. It's not like there's a D-Gen movement that people are part of. It's more I see this sort of ethos, this attitude, this energy that even people who are more straight-laced and who do have those big, longer-term ambitions for this space, are leaning into this side of themselves. And I think that that's worth exploring. Now, for most people, the vast majority of people, in fact, the right thing to do is watch on the sidelines. To give you a concrete example, I have not cashed out my Bitcoin to go start yield farming. That's just not what I'm focused on. And as I said earlier in the show,

for the vast majority of people that want exposure to this space, DCA into Bitcoin, buy it, hold it, forget it. That's the right way that you're not going to end up crazy. However, whether this is a bubble, a mania, a flash in the pan, or something new, and frankly, 2 billion to 9 billion in two months, one would reasonably have questions about it, it's driving a huge portion of the energy and attention in this crypto space. So hopefully this episode gives you a perspective to make up your own mind about it, to figure out what you think about it outside of Twitter debates, outside of recriminations and accusations. And I think that that's what you deserve. That's what I'm here for. I'm trying to give you all the different pictures of things going on in markets, be they traditional markets or

the Bitcoin market or the crypto markets. And like it or not, this is a part of it. The D-Gens are here at least for now. Anyways, guys, I appreciate you listening. I appreciate you discussing these things on Twitter. And until tomorrow, be safe and take care of each other. Peace.