by Jamie Burke
Another article posted in this series Outlier VentureBlog, I suggest we have a year for a 5-year DeFi hype cycle that probably consists of several minicycles. The overall impact has quadrupled from today’s combined market value and doubled 2017’s $ 600 billion highs for continued “mainstreaming” of the industry.
In fact, it is not impossible that we will have to do just a few things over the next 24 months. So now that I have your attention, let me explain how in three posts.
First, for the purposes of this series, I define ‘Retail DeFi’ both as current consumers who use encryption today (albeit primarily through CeFi) and for speculative purposes, and as entirely new users who, without the innovations below, would have no interest in keeping encryption directly as an asset.
Like previous article (Each hype cycle is usually the result of a combination of innovations formed at the right time. I suggest that the demand for retail DeFi is boosted by the following innovations:
Triggers of innovation: NFTs via ERC-721 and ERC-1155 (Supply) + NFT Marketplaces (demand)
‘Non-Exchangeable Identifier (NFT), also known as‘ fine ’, is a special cryptographic identifier that represents something unique; non-reimbursable tokens are therefore not interchangeable according to their individual specifications’
These two standards enable all kinds of unique programmable digital products that have a wide range of logos and features, such as:
social currencies, commissions, collectibles, access tokens, digital art, loyalty points, and redemption of digital physical products.
But in reality, most things in your life are irreplaceable, including friendships, a house, a car only narrow use cases, such as many are interchangeable. So NFT use cases are as limitless as your life today. The question is what is best suited for digitization.
NFTs: Loyal Customer Circuit Closure and User Retention (Supply)
If we look at the DeFi 1.0 crop phenomenon as different food protocols, where returns were offered aggressively, but at the same time was characterized by pressure to eliminate inefficiencies (fees), which means that without a loyalty mechanism there is no form of platform lockout, and only competition to the bottom and short-term ” revenue-seeking and exit scams.
If we think of liquidity mining in a marketing context, it’s really just a kind of subsidized user acquisition. It is supported because it is not tied to a real revenue stream, at least not yet. You actually want to outperform the competition, which has to be said to be incredibly common in the VC-supported consumer technology being traded (like to say riding) when you hope your winner will take over all the markets. But it is very difficult to maintain when money runs out or users can easily switch. In any boot context, if you only run such an aggressive user application without a storage program, you will get a high volume.
And users switching (in this case, liquidity leaks) to look for the next profitable opportunity is exactly what we saw in DeFi 1.0, hundreds of millions of locked value was poured into protocols like Yam, Sushi, but then just as quickly withdrew to put on the next protocol at the same speed, when inevitably a limited amount of liquidity mining subsidies run out or depreciate.
However, due to their unique nature, NFTs can serve with pre-established rules based on loyal behavior. They can also, in principle, add value, trade freely, and bring in returns through a feature like royalties. In fact, you can think of them as a powerful CRM toolkit that locks users in and breaks negative patterns.
And we’ve already started to see them used in DeFi in experiments like the Aave NFT mine. In addition to revenue, users also earn NFTs (Aavegotchis), the increase in value of which is based on active participation and loyalty to the new game, which is closely aligned with the market economy of ghost loans. Because the entire industry can openly track the success of this mechanism, copy and modify its code, you can expect DeFi to close the circuit more and more with the theoretical actions of innovative NFT games and bring the promise of sustainable growth to DeFi itself.
In addition, because these assets are unique, their liquidity is expected to be much lower than that of convertible assets, which brings stability but also increases in the form of collateral (such as $ VALAS, A social currency guaranteed by the NFT guarantee, in this case primarily through digital art). Therefore, they can also be introduced as collateral in the DeFin borrowing market alongside real stable currencies such as $ DAI. This means that good NFT collectors can actually launch collections by borrowing their own collections and earning NFT Marketplace management tokens and returns such as $ RARI (at the Rarible NFT Marketplace), raising their value, and strengthening the leap period.
NFT Marketplaces: encryption mainstreaming (demand)
Many of the uses of the NFT, such as collectibles, digital art, and reward points, are also forms of digital goods that people already know and understand and are therefore more acceptable to the wider society. Because they are often produced in a visually appealing multimedia format, they have the potential for powerful memetics and can be highly viral when shared on social channels such as Twitter, Instagram or Twitch by tapping into huge existing Web 2.0 users.
In this context, you can think of NFT marketplaces such as SuperRare, Rarible, or NiftyGateway to have a similar function to CEXs (central exchanges such as Binance) during the ICO boom among retail users. The fact that NFTs are, in fact, a kind of ‘cryptographic asset’ is almost completely eliminated depending on the degree of centralization (as in some operating modes ramps are used on and off the ramps and in others only MetaMask).
But in fact, because NFTs are the most interesting when they are considered “digital consumables”; context-driven experiences consumed in virtual environments such as Decentraland, Cryptovoxels, or Sandbox, and it can be argued that the most valuable NFT marketplaces are in the virtual environments they consume.
This experiment may start with cryptographic companies that usually experiment with NFTs-as-CRM (as a pioneer of Linkdrop with customers like Coinbase and Binance, who operate in a highly mandatory space), but I believe the wider consumer world will accept it, especially in demographics with the highest drop culture well-established, like fashion and games (like companies like Crucible.network are pioneers), creating a level of demand that triggers something much higher than the 2017 ICO cycle.
However, there are still some significant barriers that need to be removed before this can happen, most notably Ethereum gas prices are not sustainable for smaller digital products. Triggers can include:
- Successful / deployment of ETH2
- ETH layer 2 scaling solutions
- Interoperability between ETH chains (Cosmos / Polkadot)
- Interoperability of ETH chains with specialized NFT protocols (DApper Labs Fuse, Luxo)
- Ethereum’s competitors are capturing market share
- Trade and gas optimization (bioeconomy) / economic interoperability (Z! P)
Portfolio in this segment:
This is not a new thesis, but it has evolved from a strong feedback loop with an evolving 30 startup portfolio. Below is a summary of the projects mentioned in this article.
- Bioeconomy, Gas optimization and cultivation of positive production
- Crucible, NFT identity and vault management
- Linkdrop, Acquiring and retaining NFT users
- Boson protocol, dCommerce Digital to redemption of physical goods
- ZIP CODE, Cloud loans for multi-chain exchange and general ledger consumption costs
Next in series:
3/3 Institutional DeFi: AI Lego, STOs and dPrime (drop soon)
This article was first published at Outlier Venture blog.
Decentralized financing, also known as DeFi, is a fast-growing sector of critical currency. While cryptocurrency coins create a diversified stock of valuables separate from all state-sponsored fiat currencies, DeFi creates decentralized financial instruments separately from traditional centralized institutions.