Narrative Alpha: Compound Moves, App Chains, Terra Aftermath & Bear Advice

A new format that goes deeper on more topics

So I’ve been going quite broad with some of the recent Narrative Alphas to the point where it feels like too much to digest. I’m going to try a slightly different approach where I keep it to a few key themes but try to go deeper into each one as a story. Let me know what you think!

1. Compound Moves

At the start of this month we had Compound receive a B- credit rating which makes them able to take on institutional capital.

Compound Labs @compoundfinance

Today, Compound Treasury received a B- credit rating from S&P Global Ratings. This makes Compound Treasury the first institutional DeFi offering to be rated by a credit rating agency.

medium.comCompound Treasury Receives S&P Credit RatingCompound Treasury received a B- credit rating from S&P Global Ratings.

What’s my take on this:

If we take a step back and look at a “successful” DeFi app (defined by north of $1B+ TVL and well defined), what steps do they take to expand and grow? Well their growth options are basically:

1. Expand to other chains. Only issue is most “other” chains kinda suck, the users aren’t there to stick around or will only stay if you offer them stupidly high yields. That doesn’t even take into account whether the chain itself is stable and works (something you can’t take for granted these days).

2. Add more assets. Given BTC and ETH make up an overwhelmingly large majority of the market, as a market leader Compound doesn’t have much of an incentive to go for markets that will by definition be smaller than the ones it already does well in (BTC + ETH).

3. Go to the real world. This is the path that we’re seeing has parallel trends with MakerDAO’s strategy of onboarding more Real World Collateral. Unanimously both protocols have decided that the existing crypto market is tapped out and going for the multi-trillion dollar TradFi market is a better bet given the size and untapped potential.

My personal critique of this strategy is that what happens on-chain doesn’t bode well with what happens off-chain. The hard cryptographic guarantees you get break down as soon as you have to rely on legal contracts and lawyers. That being said, I get the logic if it’s a trillion-dollar market. I have some alternative thoughts on another strategy to scale but we’ll leave that for another time.

One final passing note I have here is that I’m keen to see whether Compound still decides to forge ahead with Compound Chain or if they’ve ditched the idea altogether. I’ll be keeping an eye on it.

2. App Chains

As the Alt-L1 trade is unraveling and all the ugly truths come out, there’s a new narrative forming. This one is around “app chains” where an application will create its own blockchain rather than use an existing one. Here are three interesting threads from the best in the space to gain perspective on this:

Dan Elitzer 🌱 @delitzer

UNIchain is inevitable. There are 3 costs to DEX traders: 1) Swap fee (to LPs) 2) Tx fee (to validators) 3) MEV (to validators/MMs) Today, UNI holders can only flip switch to take part of 1. 2&3 are more attractive long-term and better align incentives.

Hasu⚡️🤖 @hasufl

Sometime in the next 1-2 years, there will be a flippening from "fat protocol thesis" to "fat application thesis". The space is way overinvested in L1 copycats

Token Terminal @tokenterminal

How it started vs. how it's going for @AaveAave Exciting to see how applications navigate in a multi-chain or platform world https://t.co/I8fPOSUc9O

Chris Burniske @cburniske

In the raging debate between monolithic and modular blockchains, it’s clear modular is the more elegant long-term scaling approach. That said, next expansion will be a hodgepodge of architectures, & monolithic is likely to be more mature, potentially taking greater user share.

What’s my take on this:

Over the past year or two we’ve had tens of billions of dollars allocated to Alt-L1s because everyone wants to catch “The Next Ethereum” (tm). However it’s becoming clear that the moat Ethereum has is a lot higher than what anyone realised and that the underlying chains are only worthwhile if there are good apps on them (who would have thought wow).

Ari Paul ⛓️ @AriDavidPaul

An interesting learning from Solana's congestion issues: no amount of 'free' bandwidth is sufficient. If there's any real interest in using the protocol and at least some value on it, at low enough fees, congestion will happen, period. Similar to estimates of how much data,

But the question is: if an app is so valuable that it takes the users with it, why would it decide to give free business to another chain when it could just create its own chain which would:

• Increase the utility of the token

• Get transaction fees of the network

• Capture MEV value that typically gets leaked to shared network actors

Of course the problem with this is that it makes assumptions around composability that we obviously haven’t fully solved but we’re not too far off. The base thesis in my mind is that the direction of the future will be app chains but the path to it is going to be very messy. The other implication of this thesis is that sticky applications are going to command premiums that haven’t been seen till date.

0xHamZ @0xHamz

As L1s scale to become cheaper they become worst investments Given commoditization of blockspace and unbiquitous returns on hardware --- its easy to see scenarios where Layer 1s simply become a public good This is equivalent to a toll-road that makes a thin return

Aave is a good example of this. As the technology gets better, people won’t know or care which chain their assets are on as long as they know they are safe and won’t be taken away from them. Provided this criteria is met, the chain is just an abstraction.

Fat application thesis is going to make this whole space far more mature and interesting.

3. Terra Aftermath

So now that Terra has fully exploded and the cat is out of the bag, we’ve all started doing some soul searching as to what happened and where we went wrong collectively. Here were some great perspectives I found on the whole debacle:

Mudit Gupta @Mudit__Gupta

I don't think the crypto space has ever seen anything of this magnitude and severity before. Even the DAO hack feels nothing compared to the Terra crash. This is going to have long-lasting consequences. It's bad for the whole space. Prepare for a long bera. Winter is coming.

Hasu⚡️🤖 @hasufl

UST is worse than Bitconnect. At least Bitconnect didn’t masquerade as a stablecoin. When your ponzi targets people’s savings (not investment) portfolio, there is a special place in hell reserved for you. Half of CT influencers, VCs, and trading firms are complicit.

ChainLinkGod.eth @ChainLinkGod

When you’re an outsider looking in, our industry looks like a fucking joke And honestly, kinda hard to blame them The incentives for crypto devs are simply broken If you’re not providing xx% yield or a token to speculate on, 99% of your user base just don’t care

What’s my take on this:

Crypto needs adoption in order to grow. The fact that we have sentiment like what’s shown above from people who are in the industry shows how broken a lot of our shit is. Before we talk about mass adoption we should probably talk about mass cleansing. Outsiders can implicitly feel that crypto is a place with broken incentives and those who are skeptical (and rightfully should be) will stay away which delays everything for everyone.

It’s important that we go through a proper bear cycle so that we can rebuild our industry and incentives with logic and sense. Scaling on the current moral foundations we have is only going to create bigger problems and negatively impact people’s perception of crypto. If the only way to succeed in crypto:

• as a project is to give high yields

• as an investor is to dump at the top

• as a user is to extract the highest yields

Then we’re not going to make it. Until we solve these issues I’m expecting a lot more pain.

Hanzo (🎬, 🎬) @RoofHanzo

Rethinking the whole “cults are bullish” in crypto thing

Frank Chaparro @fintechfrank

"Do Kwon, the CEO of Terra creator Terraform Labs, was one of the pseudonymous co-founders behind the failed algorithmic stablecoin Basis Cash, CoinDesk has learned."

coindesk.comUST’s Do Kwon Was Behind Earlier Failed Stablecoin, Ex-Terra Colleagues SayBasis Cash, an algorithmic stablecoin project founded by the anonymous “Rick” and “Morty” in 2020, was actually the work of Terraform Labs employees.

4. Bear Market Advice

All the tourists, easy money people, CT heroes are all gone. The people who are left are people who still believe and the people who always have believed. This stage of the market is much more interesting because this is where the winners of the next cycle are fundamentally born. Here are some of the best pieces of wisdom that I viscerally agree with:

Tom Schmidt @tomhschmidt

This is a letter that we sent to our portfolio company founders and partners at @dragonfly_cap this morning. We thought it may be useful to a wider audience, so we are publishing it here to share with you as well 🫡 medium.com/dragonfly-rese…

medium.comTo All Dragonfly Founders and FriendsThis is a letter that we sent to our portfolio company founders and partners this morning. We thought it may be useful to a wider audience…

tuba 🦈 @0xtuba

re-read: "Surviving Crypto Cycles"

paradigm.xyzSurviving Crypto Cycles - ParadigmOriginally sent as a private note to portfolio companies: PDF Founders, In the first 2 months of 2021, crypto prices have already doubled and continue to hit new all-time highs. Bitcoin has

What’s my take on this:

Bear markets are very different places to what people are used to in bull markets. A lot of what people thought was real/legit gets exposed to be fake/not real anymore. This causes a cascade of identity crises. If you’re a retail investor this is going to be your chance to shine since the valuations available on the market are going to be dirt cheap. If you’re a project, hopefully you have enough cash to survive the next 24-36 months since things are going to be rough until you make revenue or stay alive to see the next bull run.

Ultimately though I think a focus on revenue and sustainability is going to be a big shift we see since unsustainable unit economics create problems that compound with interest that is very hard to pay back once it starts unwinding.

Bear markets are truth markets at the end of the day.