Is the DeFi Token Really Ready to Shine Again?

Compiled by: Deep Tide TechFlow

Guests: Arthur Cheong, Founder and CIO of DeFiance Capital; Jordi Alexander, Founder of Selini Capital and Chief Analyst at Mantle

Host: Laura Shin, Writer and Host of Unchained

Podcast Source: Unchained

Original Title: 2 Crypto Investors on Why They Believe DeFi Is Poised for a Bull Run

Release Date: October 16, 2024

Background Information

In recent years, DeFi tokens have faced numerous challenges, but are we on the verge of a new bull market? In this episode, Arthur Cheong, Founder and CIO of DeFiance Capital, and Jordi Alexander, Founder of Selini Capital and Chief Analyst at Mantle, discuss why they believe DeFi is primed for a resurgence. They analyze improvements in DeFi regarding security and user experience, the impact of Layer 2 solutions on Ethereum, and whether Ethereum or Solana will lead the next bull market. Additionally, they explore whether the popularity of Memecoins will affect attention on DeFi and why sustainable token economics is crucial when evaluating tokens. Are DeFi tokens really ready to shine again?

Why Arthur Believes a DeFi Bull Market is Coming

Maturity of DeFi and Changes in Market Environment

• Arthur believes that DeFi is preparing for a bull market based on several observations. He points out that since the DeFi summer five years ago, the industry has undergone significant changes, with a growing understanding of what works in DeFi and what does not. He compares this process to Gartner's hype cycle, suggesting that DeFi is currently transitioning from "disillusionment" to "enlightenment," with the industry experimenting extensively with different products and methods, ultimately finding effective solutions.

• Furthermore, Arthur mentions that changes in the macroeconomic environment will benefit DeFi. He anticipates that interest rates will decline in the next six to twelve months, significantly reducing the opportunity cost of engaging in DeFi and on-chain activities. He believes that finance remains the largest market fit for cryptocurrency, and DeFi will attract more capital inflow.

Connection Between Traditional Finance and DeFi

• Jordi agrees with Arthur, emphasizing that DeFi is the most market-fit product in the crypto space. He notes that as the efficiency of asset usage improves, the applications of DeFi will continue to grow. Although the exploration of Real World Assets (RWA) has started small, there is significant room for development, and as regulations become clearer, more institutions will begin to safely engage in on-chain transactions.

DeFi's Response in a Low-Interest Rate Environment

• Laura raises the question of whether the current macro environment will make DeFi stand out more in a bull market. Arthur responds that DeFi will be more sensitive to low interest rates than other sectors. He points out that the high yields offered by DeFi will attract investors looking for higher returns as interest rates decline. Over the past two years, many investors have opted for low-risk investment strategies, but as rates fall, they will be more inclined to take risks for additional returns.

Market Lessons and Future Opportunities

• Jordi adds that past market cycles have taught investors many important lessons. He mentions that many low-cost fork projects of Uniswap or Aave have not gained attention in this cycle; only truly innovative and differentiated projects will attract investor interest. He notes that some successful projects have emerged in DeFi, such as Pendle, which demonstrate the market's demand for and recognition of innovation.

How Has DeFi's Security and User Experience Developed?

Improvements in Security

• Arthur believes that since 2021, DeFi has seen significant improvements in security. He points out that security practices, user interface (UI), and user experience (UX) have all advanced considerably. Over the past four to five years, the user experience when using crypto wallets has improved significantly. He predicts that in the next two years, the need to manage seed phrases and private keys will decrease dramatically, and the popularity of smart wallets and embedded wallets will make on-chain interactions more convenient for users.

• Arthur also mentions that many mature DeFi teams are more focused on security, which will reduce the likelihood of DeFi protocols being attacked or exploited. He notes that the design of next-generation smart contract Layer 1 blockchains (like Move language) is superior in security compared to Solidity, indicating that the industry has learned from past lessons.

Enhancements in User Experience

• Regarding user experience, Arthur emphasizes that DeFi has already surpassed centralized exchanges in certain areas (like lending). He points out that the total assets deposited in DeFi have reached $20 billion, far exceeding the lending scale of any centralized exchange.

Education and Transparency

• Jordi adds that, in addition to improvements in security and user experience, education is also an important aspect of DeFi's development. He states that after the Luna incident, users have become more cautious about the sources of yield from stablecoins, and many unreliable yield products have lost their appeal. Users are now more focused on the sustainability of yields and are beginning to ask more constructive questions, indicating that the market is moving towards a healthier direction.

• He also mentions that with the Ethereum merge and the launch of Eigenlayer, users' understanding of staking and re-staking is deepening. This enables users to better utilize their Layer 1 assets, enhancing the liquidity and usability of assets, laying the groundwork for further development of DeFi.

Can DeFi Activity Be Sustained Long-Term?

Issues of Activity and Sustainability

• Laura raises the concern that despite many improvements in the DeFi space, there are still questions about its long-term sustainability. She observes that many emerging protocols often see a sharp decline in activity after launching incentive programs. Users may quickly sell off tokens received from airdrops rather than continue using these chains. This phenomenon leads her to ponder whether DeFi activity can be sustained long-term.

Performance of Different Protocols

• Arthur believes that the sustainability of DeFi needs to be analyzed based on specific protocols. He points out that some mature protocols (like Uniswap and Lido) can maintain high revenue levels with little to no incentives. This indicates that certain protocols have achieved sustainable usage models, while emerging protocols are struggling to gain market share through incentive measures.

• He further explains that incentives in DeFi are not limited to DeFi itself; this phenomenon of "yield farming" is also common in Layer 1 protocols. Many new protocols adopt aggressive incentive measures in their early stages to attract users and establish an initial market base.

Market Reactions and User Behavior

• Jordi adds that the market has recognized that many incentive-based projects do not possess long-term sustainability. He notes that incentive-based projects launched in recent months are often quickly sold off, indicating that participants are mostly professional investors rather than ordinary users. These large holders (whales) can identify unreasonable token valuations and sell at appropriate times.

• He agrees with Laura's point that DeFi still lacks a sufficient user base, but with improvements in user experience, the development prospects in the coming years are optimistic. Jordi believes that protocols that can provide a good user experience will have the opportunity to carve out a place in the market.

Layer 2 Solutions: A Boost or a Burden for Ethereum?

Impact of Layer 2

• Laura raises the increasing discussion about whether Layer 2 solutions have a parasitic effect on Ethereum. She points out that, aside from affecting Ethereum's base assets, the existence of Layer 2 may lead to liquidity fragmentation. This prompts her to consider the impact of Layer 2 on DeFi and the underlying chain.

Jordi's Perspective

• Jordi expresses his views on Layer 2, believing that in most cases, Layer 2 is not parasitic. He notes that the reduction of Layer 1 fees is not the main factor affecting Ethereum's price. While Layer 2 may lead to some users paying less attention to Ethereum, this does not mean they pose a threat to Ethereum's overall ecosystem.

• He mentions that when users engage with non-Ethereum chains, they may occasionally remember that these transactions ultimately settle on Ethereum, but their direct interaction with Ethereum decreases, which may lead to a decline in awareness of Ethereum. Additionally, the lack of composability between Layer 2 solutions makes them appear less like a unified chain, which also affects user confidence.

Arthur's Perspective

• Arthur holds a different view, believing that the current Layer 2 solutions are indeed parasitic to Ethereum, as they capture a significant amount of fees that should have flowed to Ethereum. He points out that most of the fees paid on Layer 2 ultimately go to their sequencers, which are often operated by the Layer 2 teams themselves and lack sufficient decentralization.

• Arthur believes that the incentive mechanisms of Layer 2 are not aligned with the interests of Ethereum. Most Layer 2 teams are more concerned about their own tokens rather than the long-term value of Ethereum. He mentions that as the valuations of Layer 2 tokens decline, teams may be more inclined to prioritize their own interests over those of Ethereum.

On the Prospects of UniChain

• Laura mentions the recently announced UniChain and asks whether it can address the aforementioned issues. Arthur believes that as the largest DeFi application, the success of UniChain may lead to more activity shifting to UniChain, thereby capturing more value instead of dispersing it across Ethereum.

Will Ethereum or Solana Lead the Next Bull Market?

Laura's Question

• Laura notes that Ryan Berkmans recently stated on the show that Ethereum will benefit from the market recovery in the long run. However, she observes that many people believe this relationship is parasitic. She asks whether the recovery of DeFi will only occur on Ethereum or whether it will happen jointly between Ethereum and Solana, and whether Solana's bull market prospects might be stronger.

Jordi's Perspective

• Jordi believes that the bull market will not be limited to a single chain. He mentions that projects and applications typically consider liquidity and user base when choosing a chain. Ethereum almost monopolized this market during the bear market, while Solana successfully attracted a large number of users, especially in the Meme coin space, due to its unique culture and rapid responsiveness.

• He points out that while DeFi is also important for Solana, if Ethereum improves its inter-chain composability and user experience, it will remain the primary hub for capital, especially since stablecoins and large users are still concentrated on Ethereum. Therefore, both chains have their own development paths.

Arthur's View

• Arthur believes that the success of the bull market will be broader, but Solana and Base may achieve more success. He mentions that Solana has performed excellently at the ecosystem level, successfully attracting new users, particularly in the success of Meme coins. He cites the example of the new phone launched by Solana Labs selling out quickly because people know that the value of airdrops often exceeds the phone itself.

• He also notes that Coinbase has excelled in promoting on-chain narratives and the "on-chain summer" movement, and Base's user migration and activity have also been very successful. Base's TVL reached hundreds of millions in a short time, indicating that Coinbase's resources and focus will lead to greater success for Base in the future.

Jordi's Addition

• Jordi agrees with Arthur, stating that Coinbase has successfully attracted many users to on-chain trading. He mentions that other large exchanges are also working to educate users on how to use on-chain services, and although Base lacks an ecosystem token, Coinbase's success is still significant.

• He also notes that UniChain may attempt to incentivize community development through token economics, which will be an interesting observation point.

Should the Ethereum Foundation Provide More Support for DeFi?

Laura's Question

• Laura raises a question about whether Ethereum founder Vitalik truly supports DeFi. She mentions that Kane Warwick has expressed concerns, believing that the Ethereum Foundation's support for DeFi is not proactive enough. Vitalik responded to criticism with an image showing his support for DeFi. Laura asks, whether everyone thinks the Ethereum Foundation and Vitalik support or oppose DeFi, and if they oppose it, what can they do to promote the development of DeFi.

Arthur's View

• Arthur believes that the Ethereum Foundation is not opposed to DeFi but is simply not interested in the use cases of DeFi. They believe that DeFi is already successful enough and therefore does not need additional support. However, he thinks this strategy is misguided, as other Layer 1 chains are leveraging this to capture market share. He points out that liquidity for DeFi on Ethereum has already become fragmented, making it more difficult to build DeFi on Ethereum.

• Arthur further notes that the Ethereum Foundation has failed to effectively communicate with DeFi developers when making changes to the technical roadmap, leading to a slow response from the DeFi community regarding certain changes. He mentions a recent proposal regarding minimum viable issuance that could impact DeFi operations, but the Ethereum Foundation seems to have overlooked feedback from DeFi developers.

Jordi's Perspective

• Jordi agrees with Arthur, stating that Ethereum should be a financial center, not just a cultural center. He mentions that the Ethereum ecosystem needs to attract infrastructure and investment to support higher-quality applications. He believes that DeFi is one of Ethereum's greatest successes and should receive more attention.

• Jordi also notes that although Ethereum is already a mature system, this does not mean that developers do not need support from the Ethereum Foundation. He states that developers should be able to sustain themselves, but if the Ethereum Foundation could communicate with the community earlier regarding technical changes, it might avoid some unnecessary conflicts.

Arthur's Addition

• Arthur further emphasizes that DeFi is the most active part of Ethereum and should be prioritized. He believes that while the Ethereum Foundation does not need to completely abandon support for other projects, its attitude towards supporting DeFi should be more proactive.

Laura's Summary

• Laura concludes by stating that although the Ethereum Foundation's support for DeFi seems insufficiently proactive, this does not affect DeFi's performance in the upcoming bull market. Arthur and Jordi believe that the revival of DeFi is not limited to Ethereum, and other chains like Solana and Base will also play important roles. Overall, the development prospects for DeFi remain optimistic.

What Social Phenomena Do MemeCoins Reflect?

• Laura poses a question exploring why Meme Coins have performed so well in this cycle. She mentions that although there is a dichotomy between Meme Coins and DeFi, Meme Coins seem to have become the "darlings" of this cycle. She wants to know what everyone thinks is the reason for Meme Coins becoming market stars.

Jordi's Perspective

• Jordi believes that the popularity of Meme Coins reflects a rebellion against traditional venture capital (VC Coins). He mentions that many projects backed by VCs have underperformed, leading to a loss of confidence in these projects. He also points out that society is in a state of heightened dissatisfaction, with many people hoping to change their lives through speculation. Meme Coins have become a "lottery-like" escape, attracting a large number of people seeking quick wealth.

• He describes this as a philosophy of "nihilism," reflecting people's dissatisfaction with reality and their desire for speculation.

Arthur's View

• Arthur adds that Meme Coins and DeFi are somewhat oppositional. DeFi projects typically have clear value capture mechanisms, while Meme Coins lack such mechanisms. He believes that Meme Coins can serve as a pressure test for DeFi and the underlying layer, showcasing the market's animal spirits. He compares this phenomenon to the stock market, arguing that exchanges should support various trading activities, including Meme Coins.

• Arthur also mentions that Meme Coins have existed as an asset class for some time and have carved out a niche in the market. He believes that although the value capture mechanisms of Meme Coins are not as clear as those of DeFi, they still have a reason to exist.

Jordi's Addition

• Jordi believes that the future of Meme Coins may be divided into two uses: one as a speculative tool for online casinos, and the other as a financial asset for certain online communities. He expresses skepticism about whether Meme Coins can reach the massive market capitalization envisioned by Morad, suggesting that this would require broader participation in the market.

Why Token Unlocking May Determine the Success or Failure of a Project

• Laura raises a question about the relationship between Meme Coins and DeFi, asking how the current strong performance of Meme Coins might affect the future development of DeFi. She wants to understand whether new users will enter DeFi, or if Meme Coins will compete with DeFi, or if people will lose interest in Meme Coins.

• Jordi believes that the popularity of Meme Coins may enhance overall market activity. He mentions that some protocols are currently performing well in trading Meme Coins, even though Meme Coins themselves may not be as mature as certain DeFi projects. He points out that the unlocking mechanisms of Meme Coins are similar to those of DeFi projects, but in his view, the liquidity and locking mechanisms of Meme Coins are relatively loose, which may lead to greater price volatility.

• He states that continuous unlocking can lead to a decline in the expected value of assets, causing ordinary investors to feel frustrated. He believes that while Meme Coins may continue to rise, when the market returns to rationality and liquidity is insufficient, investor sentiment may be affected.

Arthur's Perspective

• Arthur adds that the existence of Meme Coins cannot be ignored and may have a positive impact on the use of DeFi. He mentions that on Solana, many Meme Coins that have graduated from platforms like PancakeSwap are performing actively in liquidity pools, which supports DeFi activities.

• He believes that there may be more overlap between Meme Coin and DeFi investors. Those who have gained substantial returns from Meme Coins may turn to seek DeFi projects with greater growth potential. He states that the relationship between Meme Coins and DeFi can be complementary; although ordinary investors will still focus on Meme Coins, institutional investors may pay more attention to DeFi due to the activities surrounding Meme Coins.

Are Tokens in Cryptocurrency Overvalued or Undervalued?

• Laura mentions that there are some capital allocation issues in the market, which may lead to strange phenomena in the valuation of cryptocurrencies. She asks Jordi and Arthur what they believe are the main issues faced when valuing Tokens.

Jordi's Perspective

• Jordi points out that the current discussions about Token valuation in the market mainly revolve around relative value comparisons, such as comparing the value of one chain to another. He believes this approach is not a good foundational framework, as it may lead to misallocation of capital. He emphasizes that the market needs a better framework to assess the value of Tokens and mentions some articles by private equity investors calling for the establishment of a systematic and easy-to-understand valuation framework.

Arthur's View

• Arthur supplements Jordi's perspective, stating that while there have been many attempts to establish valuation frameworks for crypto assets, these frameworks have never been widely accepted. He believes that Bitcoin's uniqueness means its valuation primarily relies on relative comparisons rather than cash flow analysis. He points out that Bitcoin, as the largest crypto asset, sets the valuation tone for the market, which affects the valuation of other assets.

• He also mentions that as the number of "fool" ordinary investors in the market decreases, asset valuations become more realistic. He believes this is positive for the industry, as it means the market will no longer have meaningless overvaluations, and the rationality of assets will improve.

Jordi's Contrasting View

• Jordi disagrees, stating that the market is still in its early stages and is still influenced by "fool" money. He mentions that although the valuation methods for Bitcoin have become more complex, there is still a significant amount of irrational capital flow in the market.

Arthur's Addition

• Arthur further adds that professional investors usually have relatively clear ideas when valuing certain assets, especially in the DeFi space. He believes that the differences among professional investors mainly lie in their expectations for the future and their views on whether the asset has a monetary premium, rather than in how to conduct the valuation.

Laura's Summary

• Laura concludes by stating that since the purposes and missions of each asset are different, attempting to establish a standardized valuation framework may not be appropriate. She believes that investors should understand the characteristics and token economics of each asset to better assess its value.

Is Liquidity Risk Investment More Advantageous?

• Laura raises a question about liquidity risk investment, asking Arthur about the "liquidity risk investment" method mentioned in a previous article and how this method compares to other investment approaches, especially its advantages in the cryptocurrency space.

Arthur's Perspective

• Arthur explains the concept of liquidity risk investment, stating that this investment approach primarily targets liquid crypto assets, especially non-mainstream coins (non-Bitcoin and Ethereum). He believes that this investment method offers the best risk-adjusted returns in the crypto market.

• He points out that the advantage of liquidity risk investment is that investors can potentially achieve high returns while maintaining flexibility to manage risks. In traditional finance, investors often face a trade-off between liquidity and returns: to achieve high returns from startups, they must accept long periods of capital lock-up (usually 5 to 10 years); whereas if they choose more liquid investments, it is difficult to achieve returns of 50 times or 100 times.

• However, in the cryptocurrency market, Arthur believes that investors can enjoy the advantages of both. In the past two market cycles, many crypto assets have achieved returns of 20 times, 50 times, or even 200 times in public markets. He firmly believes that this situation is still possible in the future.

Bitcoin and DeFi: Untapped Potential?

• Laura raises a question about the combination of Bitcoin and Decentralized Finance (DeFi). She mentions that over the past year, Bitcoin has gradually entered the DeFi space, including Bitcoin's Layer 2 solutions, Bitcoin staking, and new developments related to WBTC (Wrapped Bitcoin) associated with Justin Sun. She wants to know more about the potential impacts of Bitcoin entering the DeFi world.

Jordi's Perspective

• Jordi expresses his views on the potential of Bitcoin in the DeFi space. He believes that Bitcoin performs well as an asset, indicating that there is still significant potential to be tapped. Although many Western Bitcoin enthusiasts hold a purist attitude and are reluctant to use their Bitcoin, in Asia, more and more people are eager to actively participate in on-chain activities. He believes this mindset will drive the application of Bitcoin in DeFi.

• He mentions that WBTC currently has some issues, but projects like Maker's CVBTC and Mantle's FBTC are working to unlock Bitcoin's potential. He believes that projects capable of creating a good ecosystem will succeed, especially Mantle, as it focuses not only on the asset itself but also on the integration of applications and ecosystem partners.

Arthur's View

• Arthur agrees with Jordi's perspective, stating that if more Bitcoin can be brought into the DeFi ecosystem, whether through Bitcoin's Layer 2 solutions or other smart contract platforms (like Solana and Ethereum), it will be very positive news. He states that it is currently unclear which method will capture the largest market share, but he believes the market will find the most successful path.

Challenges of User Experience

• Laura mentions that although she is very interested in cryptocurrencies, she often feels confused when using them in practice.

• Jordi also emphasizes the importance of user experience, believing that a good user experience can encourage more people to participate. He notes that more and more projects in the market are beginning to focus on culture and user experience, rather than just the technology itself.

• Both Jordi and Arthur express optimism about Bitcoin's potential in the DeFi space, believing that as more Bitcoin enters the DeFi ecosystem, the market will welcome new opportunities. Good user experience and ecosystem integration will be key factors driving this process. As the market matures, how to effectively combine Bitcoin with DeFi will be a trend worth paying attention to in the future.

免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。