ChainLinkGod Podcast - The Unwinding of Crypto Ponzinomics
Primer: The recent unwinding of crypto ponzinomics has affected quite a number of people. ChainLinkGod and Crypto Oracle provide a recap of the boom and the subsequent bust, their thoughts on shifting away from ponzinomics to a sustainable revenue model and the implications that come with those decisions.
How Is Crypto Oracle Doing?
Not a fun time to be in crypto
Been keeping himself busy with other hobbies
Macro affects crypto to a certain degree
Ton of leverage in the market. Once it unwinds, it cascades downwards
Transparency of on-chain analytics hastens people to act
From 2021 Till Now
2 major themes:
NFTs blowing up
Chain rotation thesis where people migrate to other chains to get free money
The same reflexivity that made crypto go up so much made it go down so much
Most of the DeFi primitives for the app layer has already been built (e.g. DEX, money markets, derivatives)
“Robert Leshner had a good tweet where he said that DeFi is going to make all the same mistakes that TradFi made.”
- Crypto Oracle
More people realize that being a LP is not a risk-free move
Will have ramifications on liquidity in the space
Interesting to see how protocols react to large withdrawal
Economic models were based on assumptions that work when token price goes up
What happens when number goes down bad?
Saw the Terra UST collapse
Caused a chain reaction of events
People pulled their funds off Celsius and Celsius could not meet its obligations
Funds are pressured. 3AC overextended itself
Causes a cascade of lenders to default
Ironically, de-risking yourself from CeFi platforms triggers a bank run on those platforms
Either the bank run continues or some entity steps in to bail out these funds
Dichotomy Of Free Markets VS Regulated Markets
Crypto is fairly unregulated and we don’t self-regulate well
It promotes a lot of bad things like ponzinomics
Run into unsustainable things
This leads to regulatory capture
Regulators are self-interested actors, not credibly neutral actors
Think that the market will split into:
Regulated DeFi
Unregulated DeFi — throwing away the admin keys and becoming totally trustless
Going totally trustless means building the perfect protocol from the onset, which is not realistic
Unregulated DeFi will move into more of a black market
Decentralization is a wide spectrum. Awkward to lump everything into DeFi
Active VS Inactive Governance
There are protocols that are not designed well at the onset
Hence, people want to actively take measures to prevent certain things from happening
Not reacting quickly would cause the protocol to go belly up
Conversely, opening up governance features more leads to human intervention, which then becomes the choke point
It comes down to your preferences on decentralization
In reality, nothing is trustless. The goal is to minimize the amount of trust needed
Having a DAO does not mean you have solved governance or decentralization
Direct democracy for DAOs doesn’t work well:
Most people think they want to participate but they don’t
Most people are not technically savvy enough to give informed opinions on most things
Benefits of DAOs:
It’s more transparent
Get to influence and talk to the decision makers directly
In bearish markets, token holders may end up voting and jeopardizing the long-term sustainability of a protocol because of the negative price action
On Democracy
Plato was against democracy
Democracy assumes that people make rational decisions and not emotional decisions
However, we have seen a lot of people make emotional decisions in crypto
Tokenomic models have to shift to sharing fees with token holders rather than being pure governance tokens
Value Of Tokens
Boils down to how the protocol generates revenue
Tokens that can realistically extract value are:
Tokens used as collateral to underwrite risks
Tokens used to govern parameters that need to be adjusted
Example:
UNI token does not underwrite any risk
Instead, LPs take on the risk
As a simple DEX, there isn’t much to govern over
ChainLinkGod’s focus is on:
How do protocols generate revenue?
How can they defend taking revenue?
ETH is backing Ethereum
AAVE is staked in the safety module
LINK backs the Oracle services
Insurance For Protocols
More demand for insurance for protocols
Token holders who manage governance parameters should be the ones taking on the risk if they did not set the parameters correctly
Thinks that it will shift from governance tokens to a board of directors with soulbound tokens/NFTs
Once you have an insurance model, then you can justify value extraction
Many community members create analytical dashboards about their project’s tokens. However, these dashboards do not show metrics that they are poor in (e.g. issuance rate, expenses, how much they are spending in token subsidies, etc.)
"Issuing tokens to users to get them to use your platform to spend fees is not sustainable, because you're always going to be spending more hidden token issuance, then you're going to be making in the fees.”
- ChainLinkGod
Possible Solution To Ponzinomics?
Bring real world assets with actual sustainable revenue on-chain
Stablecoins have product-market fit. They are cheaper and easier to transact
Need to emulate TradFi because DeFi is not that different from it
Have to bring equities, corporate bonds, and government treasuries on-chain
Regulators will push some bill or proposition that bans huge swaths of the crypto ecosystem
Optimal route is to work with regulators to see what compromises can be made to maintain the majority of the benefits of crypto
Taking Crypto To The Next Level
Improving the user experience
Making compromises regulatory-wise
Improving custody
Protocols Pivoting Away From Tokens
💡 ChainLinkGod raised the idea that projects might not have sufficient revenue to distribute to token holders and may pivot away from them. Crypto Oracle shares his thoughts on ChainLinkGod’s question.
Might pivot from tokens to traditional equity as it’s easier to work with
Some financial apps underwrite a lot of risks and require a token
However, others could consider a traditional business model where they raise funds through VCs or through the ICO model
Such businesses could earn revenue and pay out equity on the blockchain
What can you do after your token subsidy phase ends and your protocol is not underwriting risk and there isn’t much governance parameters to adjust?
Could end up in a Mergers & Acquisition (M&A) situation where protocols with failing economics merge with protocols with sustainable real revenue flows that have an actual need for their token
Closest example is Rari Capital and Fei protocol merging together
If you don’t issue a token, you are not competitive when compared to a protocol that does the exact same thing
If you issue a token, it will be useless later on
Projects have to determine what’s a reasonable cut for revenue share
They also need to account for business expenses
Is a huge proponent of Chainlink because of its large value capture
Business Model For Play-To-Earn Games
Traditionally, people invest in a game studio
The game studio makes money from the games they sell and transaction fees on the secondary market
Games can’t be played forever
Might be better to invest in the studios rather than in the games
Play-to-earn doesn’t work as it needs an endless stream of money entering it
Play-and-earn could work because people play the game for fun
Conclusion
Crypto is not over. The tech is very young
It’s not going to achieve the idealistic, utopian version of a trustless society
Have to set realistic expectations
“Don't live life thinking crypto is your savior, because you're just going to be stressed as fuck all the time.”
- Crypto Oracle
Take this time to get a hobby or to learn about crypto in preparation for the next cycle
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