Cutting Through the Hype of Decentralized Finance
Authors: BVVentures Asset Management Team
BVVentures ran an in-depth analysis of decentralized finance (DeFi) by taking a quantitative approach, with the goal of turning data into insights. Our team focused on DeFi verticals, investors, funding metrics and investor returns to give a glance of the state of DeFi. DeFi provides the most asymmetric return profile currently available with many projects returning over 10x and over 50x and 100x capital in less than a year. The full report can be downloaded here: https://docsend.com/view/nymsirsz2cqz3cdj
• Yet limited penetration of DeFi even in crypto with just 5-7 per cent
• DeFi attracted $1 billion of funding since 2017 and has turned this funding into a market cap of close to $100 billion, equalling a 100x value appreciation on the capital invested
• Token funding in DeFi makes up more than 70 per cent of total funding and is suggested a key parameter for the strong developments. Token economics drive hyper-exponential growth
• 75 per cent of total funding is allocated on projects building on Ethereum, with Multichain, Polkadot and Solana growing fast but from a smaller base
• 60 per cent of projects delivered above 3x and 30% above 10x returns, usually within 12 to 18 months, with DEXs providing highest returns followed by liquidity aggregators
• The extreme asymmetry of risk/reward makes this market very attractive, however small funding requirements and high complexity, does makes this a difficult market to enter
• Particularly, the areas insurance, staking rewards and derivatives, DAOs and social & creators are hot sectors that will likely make 2021 their year
Cryptocurrencies are back and make headlines every day. Bitcoin has seen explosive growth from March 2020 lows of less than $4,000 and is now trading in the $30,000-$40,000 range, becoming increasingly recognized as a new asset class.
2021 has been and will continue be an exciting year with developments like the NFT boom, sky-rocketing volumes on crypto exchanges and IPOs from the likes of Coinbase. Market cap of crypto players may reach several hundreds of billions, potentially valuing the overall space in the trillions. All developments guide towards one direction – UP.
A lot of uncertainty is created around the asset class, but the narrative of banks and media outlets should not deter people from engaging in the space. It is a jungle and rules are established on the go. This requires a trusted sherpa to climb the crypto Olympus. It is the best time to research the future because the magnitude of impact will be pivotal and the future has never been closer. It will not take even 10 years to unfold.
What we are seeing is likely to be the most transformational paradigm shift of the past 100 years. The biggest transformation is happening in fintech, enabled by cryptocurrencies, blockchain technology and distributed ledgers.
Today 10 million people are managing a wealth pool of around $1 trillion via the internet. This is not going away and has passed the point of no return. The DeFi community has been building for the last 3 years through a long and tough crypto-winter.
External effects are further accelerating the shift: a global pandemic keeping the world trapped with catastrophic effects on the economy and liberal money printing. General distrust in institutions climaxed, with limited signs of slowing down.
We expect to see further productivity jumps, translating into growth that will amplify supply of capital and chase scarce assets and attractive yields.
Further to that, de-platforming is giving birth to a new sense of censorship resistance. GameStop fuelled frustrations even further, with mediocre decision making and potential collusion on higher levels. This made evident rules are not necessarily aimed at protecting retail investors but returns. Regulation is becoming close to impossible to enforce but will nevertheless play a lasting role, not only when it comes to KYC and AML in order to prevent nefarious activities. Users and investors may be the regulators’ targets of last resort, as it may be impossible to regulate DeFi protocols themselves.
Technological progress is driving change. A new generation of decentralized entities, known as Decentralized Autonomous Organisations (DAOs), immune from credible attack vectors, and new decentralized protocol, like Uniswap, represent the FOREWORD FROM BVV4 emergence of new forms of digital legal entities.
2020 showed that many blue-chip ICOs from 2016 and 2017 finally delivered on their promise and created extreme returns for their stakeholders and token investors. Ethereum KPIs are almost at an alltime-high. Polkadot, an interoperability protocol founded in 2016, has evolved into a very vivid ecosystem.
MakerDAO is now the lifeline of the Ethereum and DeFi ecosystem. Nonetheless, competitors are waiting at the gates and the battle for liquidity has just begun. Adoption, network performance, security and gas cost are the KPIs that will decide the winner.
DeFi is the next frontier and has already created several explosive growth stories. Total value locked is over USD100b. Uniswap, a decentralized exchange, raised just $11 million. After its token sale, Uniswap reached a fully diluted market cap of $36 billion, delivering returns in excess of 26,000 per cent in less than 12 months to its backers.
More entrepreneurs understand tokens can be used to fasten growth, create network effects and drive real utility. Blue-chip DeFi projects will deliver again and misjudging DeFi for the ICO craze of 2017 will likely be a mistake. The future of finance is at our doorstep and it is about time to take a very close look.
We joined forces with many entrepreneurs that are already transforming the centralized world with decentralized solutions. We are excited about decentralized finance. Digital assets are here to stay.
We need to build infrastructure and rails on which the future of finance can unfold, and work side-by-side with what we believe will be among the most impressive and impactful cohort of entrepreneurs the world has seen to date.