Vampires, Early Days of DeFi and More

Level 2 - Value Investor

Welcome Avatar! We’ve had quite a few paid posts and it’s a good time to jump through some basic items before we move to Curve, Sushi and more. While the next token is Curve, we’d like to note that Sushi is one of the most commonly cited vampire attacks. With this in mind we’ll go over the basics for the newbies to DeFi.

Vampire Attack

In short, a vampire attack is when you offer better returns in an attempt to steal market share from another DeFi projects (ergo taking users). Now. If we want to expand the definition of a "vampire attack” we could argue that any mechanism to steal market share is a vampire attack. For the purposes here we’ll stick with returns.

When Sushi swap launched its vampire attack on Uniswap, the high returns caused the project to grow extremely rapidly. This is great as we now have two separate projects that can be used to swap tokens. More competition generally means more competitive yields.

Pausing for a Second. If this sounds complicated we can compare this dynamic to the current clown banking system. Imagine a world with a single bank. In a single bank world, the interest rates would likely be negative today. They would charge you to hold onto your money because there are no alternatives out there for you!

Back in the day, when interest rates were above 5%, you could imagine a system where there is only one bank. In that case the interest rate would be a lot lower than 5% and closer to zero. Once again… if there is only one bank they will pay the smallest savings rate. After all, they make money by lending the money out at a higher interest rate.

To tie this together, now imagine a world with 100+ banks (basically what we have today), and you’ll find that each bank offers *similar* interest rates. Yes there is some variability but the point stands. It is unlikely that you’re going to switch from Krusty the Clown bank to Bozos Capital Markets for a 0.01% interest rate change.

Conclusion: Vampire attacks are broadly good for consumers *if* the developers have intentions of creating a truly competitive alternative in a sector where there is monopoly power.

The Bad News! You come here for a reason, we keep it real. There is a lot of bad associated with vampire attacks. In a scenario where the vampire attack is malicious, you could see a complete loss of capital.

Pausing and Going Back to Banks: In the traditional banking world, the amount of red tape required to start a bank is enormous. This is actually good for consumers in *some* ways as you know the firm will not sprint off with your money. Over time, the real risk is that the bank is insolvent or a catastrophic event causes the money to be lost (bank run, currency collapse etc.).

For DeFi? Good luck, anon.

In DeFi, there are no regulations since it is decentralized. If a vampire attack is launched on any chain there are many potential issues: 1) the code is purposely made buggy, 2) the project manager suddenly runs off with the coins and 3) the tokenomics are unclear and have triggers built in (unknown to general public). While this is a base level explainer the point is the same: if you lose your funds no one is coming to help you.

Conclusion: Putting this all together, the benefits of vampire attacks = better returns and competitive offerings. The downside = potential rug pull and loss of funds. This partially helps explain why returns are so high on new DeFi projects. They have to offer higher returns otherwise no one will use it. Meanwhile, if the returns are extremely high it is likely a rug pull. Chicken and Egg problem that takes time to master/understand.

Some News - Early Days of DeFi

PayPal (LINK): CEO of PayPal Dan Schulman recently stated that they are “really pleased” with the momentum they are seeing in crypto. In addition, it is not just the PayPal website, but the mobile app Venmo that is seeing adoption/use of crypto.

While none of the above is surprising he stated the following “How can we use smart contracts more efficiently? How can we digitize assets and open those up to consumers that may not have had access to that before? There are some interesting DeFi applications as well. And so we are working really hard”

We’ll monitor this development but at this time doubt that PayPal is going to build out a DeFi project. This would conflict with their current strategy of attempting to accumulate at the expense of holding the keys. IE. they are effectively getting their customers to buy the coins for them without the customer having access to the private keys! Genius.

Goldman DeFi: We’re sure everyone saw the news, a “DeFi ETF” was launched (LINK). In the end they appear to be using buzz words to collect more fees. They even had the guts to call it “Digitalization of Finance”

No need to get hyped for now. They have to ramp up on AAVE Pro institutional along with their buddies from Pt 72 and Millennium. When you start to see sudden boomer coins (like ICP) we’ll know the game has really begun!

Sneak Peek

Since it has been a while since we did a free post here is a sneak peak on what we’re building out on the DeFi substack paid version. We’re going through each coin and every single revenue line item by coin. This is only a quick snapshot (as of end of month) and will become more robust over time.

Disclaimer: None of this is to be deemed legal or financial advice of any kind and the information is provided by a group of anonymous writers with Wall Street and software backgrounds.

For those interested in detailed revenue break downs and analysis by coin, our paid Substack goes through each project by line-item where applicable. Curve will be covered next!