# Dichotomy of Capital Onchain By [0xSnarks](https://paragraph.com/@0xsnarks) · 2024-04-22 --- The following passage aims to conceptualize the emergent personas in the capital structure of DeFi, how they interact, and what this means for builders and participants moving forward. This reading will be most pertinent to traders, investors, and builders as a means to give contextual insight of how to think about market participants. Market Structure ---------------- There is a dichotomy developing in DeFi and the broader crypto market structure between Owners and Stewards of capital. Owners can be considered large capital holders, typically possessing 8 to 10 figures on-chain, who are slower to make moves and averse to unnecessary risks. Conversely, Stewards comprise <15% of capital on-chain, but contribute to the overwhelming majority of economic activity on-chain. Stewards have smaller portfolios with a high appetite for risk and frequently rotate through different coins, DeFi products, and chains to maximize their returns. Characteristics --------------- Not all Owners and Stewards are created equally, though their behaviors in each respective group are similar. ### **Owner** There are 2 main types of Owners on-chain, we will refer to them as Structural Owners and Defacto Owners. 1. **Structural** **Owners** are defined by a formation of capital due in part or in totality by a “structure”, mainly on-chain DAOs, Funds, and protocol treasuries. 2. **Defacto** **Owners** have gained wealth through a series of investments (being early). In both cases, Owners of all types have similar behavioral patterns: * They typically have very concentrated on-chain portfolios (less than 5 investments in tokens or protocols) * Largely yield-seeking for an asset they denominate wealth in (USD or ETH) * Are risk averse and don't mind being late to an investment or protocol if it has been derisked * Over-index on [Lindy](https://en.wikipedia.org/wiki/Lindy_effect) characteristics or brand equity (study $1B+ Aave deposits earning less than 5% in the bear) ### Steward Stewards largely fall into three categories: 1. **Rotational Steward**: Often have larger portfolio sizes. Frequently use and understand DeFi. Typically employ leverage (wether through perps or money-markets). Focus on momentum-based strategies. 2. **Yield Farm Steward**: Similar to rotational stewards but have larger portfolio sizes. They typically look for medium-term opportunities with potential for larger payoffs, such as airdrops or points. 3. **Memecoin Steward**: Tend to heavily invest in meme coins. Rarely participate in rotating majors or yield farming. Usually have smaller bet sizes per trade. Focus on achieving 100%+ returns with a short-term bias in trades. The Dichotomy ------------- This dichotomy has created an interesting market structure from which lending protocols, perpetual exchanges, and fixed-yield have greatly benefited. Furthermore, there is evidence that this trend will grow as DeFi gains more adoption. With lending and yield-stripping primitives, we observe a symbiotic relationship where both owners and stewards benefit. Owners profit from new narratives and protocols via stewards, while stewards gain from enhanced capital efficiency and higher returns via owners. This relationship offers two key advantages: 1. **Owners** achieve higher yields with lower risk and gain proxy exposure to new assets and narratives with minimal effort or maintenance. 2. **Stewards** receive higher returns, access more capital to deploy, and experience lower opportunity costs. Here are two specific examples that demonstrate the practical application and benefits of these dynamics: ### Pendle [Pendle PTs](https://pendle.gitbook.io/pendle-academy/pendle-101/chapter-2-yield-tokenization-basics#pt-and-yt-in-pendle) for various assets (LRTs or Ethena) provide an extremely high fixed yield (50%+) with no lock up and with sizable capacity. This is because stewards are speculating on the value of various airdrops by purchasing YT’s, thus relinquishing their yield to owners (the assumption being made is that the airdrop reward will be far greater than the yield they are giving up). Owners are profiting from this since Pendle ostensibly has low risk and the yield in ETH can scale higher than trying to be the fastest to dump an already diluted _potential_ airdrop. To date, the top 3% (50 addresses) of PT-ezETH holders own 62.5% of the supply. They all have >$5M on chain, with the largest having $200M onchain (in one address kek). source: [https://etherscan.io/token/0xeee8aed1957ca1545a0508afb51b53cca7e3c0d1#balances](https://etherscan.io/token/0xeee8aed1957ca1545a0508afb51b53cca7e3c0d1#balances) ### Maker Maker is a Structural Owner in many ways, mainly since they operate the largest and most resilient decentralized stablecoin, with a large balance sheet. Recently they have made efforts to earn some of the sweet Ethena yields. They have uniquely done this by creating Morpho Blue pools, whereby users can borrow DAI against USDe and sUSDe. They are currently deployed just north of 300MM earning ~21%. This may seem odd since Ethena is only giving ~17% on sUSDe and a whopping 0% on USDe, but most borrowers are not in it for the yield. Instead, these stewards are taking advantage of an opportunity to farm sats (points) which they are betting will give them a token that exceeds the 4% cost of capital in the long term. Maker wins because, should yields remain this high, they’ll add $63M of revenue to the DAO. Stewards win because if the trade pays off, they will receive an airdrop 5-10x that of their initial capital. source: [https://morpho.blockanalitica.com/metamorpho/vaults/0x73e65dbd630f90604062f6e02fab9138e713edd9](https://morpho.blockanalitica.com/metamorpho/vaults/0x73e65dbd630f90604062f6e02fab9138e713edd9) Actionable takeaways -------------------- Okay, so what does this all mean? Well, if you’re a DeFi builder (such as myself) you can already see the value in the segmentation of participants. You should be indexing on a specific crowd dependent on your product, the associated risk, and the Lindy effect. If you are a new product that requires LPs, you must over-index on yield farmers and rotational stewards by creating incentive structures that make the opportunity attractive enough for them to pay attention. If you pass this chasm, you will be blessed with the opportunity to scale to Owners. If you are a **Steward** yourself, first I think it's useful to determine your edge: momentum for rotational; risk calculation for yield farmers; being early, and sizing for memecoiners. Then you should focus 100% of your time optimizing outcomes based on this. You will do yourself a disservice and lose money if you are dabbling on all fronts. Typically large players become large by optimizing their edge and making a few big bets that pay off. If you are an **Owner**, I have very little insight to give you other than reminding you that being late-early and sizing aggressively is your superpower. An illustrative anecdote is the pattern observed among large Pendle PT whales, who almost exclusively join the pools in the last week or two—perhaps there's a lesson there. Certainly, you don’t want to be left holding the bag, but if you have 8+ figs on-chain, I’m certain you know what you’re doing (maybe). Finally, I believe this trend is set to continue with a huge opportunity for protocols such as [Sentiment](https://twitter.com/sentimentxyz) to benefit from by creating a marketplace that can scale along with Owners and stewards. Sentiment provides the best way for Owners to get risk-adjusted exposure to new narratives, while the risk is managed dynamically as markets evolve. Stewards can access capital to farm and create positions that are currently inaccessible to them. With v2 around the corner, it would behoove market participants of all sizes to stay tuned in. See you on-chain. --- *Originally published on [0xSnarks](https://paragraph.com/@0xsnarks/dichotomy-of-capital-onchain)*