Three things today; thoughts about privacy rotation(?), Avalanche subnets & gaming, and where is Terra headed.

First things first, let’s talk about narratives.

Bitcoin was innovative, it was a new technology that has never been utilized. Ethereum was innovative, it enabled smart contracts and it carried blockchain one step further. PoS L1s was innovative, they onboarded a lot of non-crypto-native people, made crypto cheaper, and bring competition to the markets. DeFi 2.0 was innovative, it made decentralized finance accessible, more secure, user-friendly, and solved a lot of liquidity problems. These DeFi 2.0 protocols have also been utilized by PoS L1s which pushed the narrative even further.

Now we are in the middle of a narrative (thus, rotation) crisis. You just launched a new PoS L1? Ok lol, I’m just going to use Ethereum, Avalanche, Solana, etc. anyways. Oh, you made a new lending protocol that utilizes the “nobody cares” technology? Get in the line dude, there is a gazillion of your new technology lending protocol in all chains. And no, your stupid-ass L1 won’t kill Ethereum. So, in these uncreative conditions, crypto people really need a new narrative & rotation opportunity. (Recently there was a mid-sized Cosmos & IBC narrative, but it has been (currently) murdered by its creator, EVMos). The recent Russia-Ukraine War & sanctions on Russia, along with approaching regulations on crypto seems to have pulled some attention to privacy tokens because the noun “privacy” is the opposite of the nouns “sanction & regulation”. I think this mini-narrative is actually just about this, nothing more. A basic comparison, in these kinds of turbulent times, physical commodities see a capital inflow: like oil, grain, and precious metals (all up-only nowadays). But unlike oil, grain, and gold; privacy tokens like XMR have no real use case. I don’t ever believe a Russian oligarch will buy XMR or ZEC with his precious Gazprom money. That’s why the recent privacy narrative will not be lasting. Actually, until something truly innovative for the retail comes again, I don’t think any narrative is going to be long-lasting.

Moving on to Avalanche subnets. Subnets were a long waited feature that is basically enabling projects to launch their own chains under Avalanche. The very first subnet is Avalanche C-chain. When we refer to Avalanche blockchain, actually we usually address C-chain, and after subnets are launched, many more are to come. Avalanche launched a $290M fund, called Multiverse. This fund is launched to support the development of subnets, but as you can see in the name, it’s called Multiverse. They want to support gaming subnets, and we can actually see that from the first subnets: Crabada and DeFi Kingdoms. DeFi Kingdoms got a $15M fund from there. I do think that L1 blockchains need to specialize in fields. They won’t replace Ethereum in my humble opinion, but they may take a market share in certain fields if they do good and specialize in some fields, e.g., gaming. We saw how Avalanche Rush, a $180M fund to be used in DeFi dApps, benefited the growth of Avalanche. Even if they manage to pull a fraction of the same success, subnets will be a net +EV for Avalanche.

Approaching from a different side; subnets are a long waited feature that perhaps the whole Avalanche narrative is built on. If it won’t be successful, I would assume that would be catastrophic for Avalanche in the long term. Avalanche foundation got the money, and in my opinion, they will aggressively use it. We know they are good at executing these funds (sorry, NEAR Foundation) so while the wind is still on the Avalanche side, there will probably be some nice opportunities on the Avalanche side. Before moving on to Terra, I want to say a few words on DeFi Kingdoms. Harmony is pretty much only DeFi Kingdoms; biggest DEX, NFT marketplace, and 42.15% of the total Harmony TVL as of today. Now that they are moving to Avalanche as a subnet (even though it will co-exist on Harmony), I’m guessing they might decide the execute important operations on Avalanche. This could mean Harmony cannot get the credit for DeFi Kingdoms success anymore. This will be interesting to watch.

Finally, Do Kwon’s mooncoin. Terra is a blockchain and there are two native tokens of it: LUNA and UST. LUNA is the governance token and UST is a stablecoin pegged to 1 U.S. Dollar. LUNA and UST work together to maintain this peg: when there is demand for UST, LUNA is burned to create new USTs, and when UST is under $1, holders can sell it to get $1 worth of LUNA. This is the most awesome ponzi in crypto. That being said, I do believe this is a ponzi until it isn’t anymore. How so?

Anchor is the most demand-driving dApp in Terra, and it is actually the only thing that UST has a real utility. It gives a 19.5% interest rate for UST (source), a stablecoin. How? Anchor uses collaterals from borrowers to generate income and pay depositors. If generated yield > Anchor UST interest rate, the extra money is stored in yield reserve. But the thing is, there are much more depositors than borrowers, and so the generated yield < Anchor UST interest rate. That means the yield reserve is on a steady decline for some time. See the screenshot below:

It was about the drain, but there is a huuuuuge increase on 18th February. This increase is called Luna Foundation Guard (LFG). They are rich from LUNA, and their duty is basically to fill the oil tank when it is about to drain. You can see that the yield reserve continues to decrease after it has been filled. Anchor yield reserve decreased 10% in the last 19 days after the reserve has been replenished. Meanwhile, UST depositors and deposits are increasing even more rapidly after Terra restored trust with LFG. But, considering Anchor had a reserve of $21M just 20 days ago, the out-of-the-gas situation isn’t a serious problem at the moment, there is a lot of fuel in the tank.

I do think that until Anchor runs out of gas, UST needs to find an extensive utility beyond Anchor. They might fill the tank again if it drains too fast, but eventually, Anchor has to be sustainable. I think having more collateral options is vital. Perhaps we might also see a lower UST yield but obviously, Do Kwon doesn’t want to do that because even though, e.g. 13% yield, is very nice but it hurts the sentiment of “LUNA/UST are completely sustainable”. There is a kind of a problematique here because continuing the sentiment that it is sustainable, actually makes it sustainable. Why? Because LFG becoming richer to use its juicy liquidity to replenish the reserve, meanwhile UST is becoming more mainstream. One more note, I hate when blockchains/protocols or anything has a public figure that has “fans”. We repeatedly saw how dangerous is that.

Disclaimer: This article is written only for research purposes, and this is not financial advice.

Three things today; thoughts about privacy rotation(?), Avalanche subnets & gaming, and where is Terra headed.

First things first, let’s talk about narratives.

Bitcoin was innovative, it was a new technology that has never been utilized. Ethereum was innovative, it enabled smart contracts and it carried blockchain one step further. PoS L1s was innovative, they onboarded a lot of non-crypto-native people, made crypto cheaper, and bring competition to the markets. DeFi 2.0 was innovative, it made decentralized finance accessible, more secure, user-friendly, and solved a lot of liquidity problems. These DeFi 2.0 protocols have also been utilized by PoS L1s which pushed the narrative even further.

Now we are in the middle of a narrative (thus, rotation) crisis. You just launched a new PoS L1? Ok lol, I’m just going to use Ethereum, Avalanche, Solana, etc. anyways. Oh, you made a new lending protocol that utilizes the “nobody cares” technology? Get in the line dude, there is a gazillion of your new technology lending protocol in all chains. And no, your stupid-ass L1 won’t kill Ethereum. So, in these uncreative conditions, crypto people really need a new narrative & rotation opportunity. (Recently there was a mid-sized Cosmos & IBC narrative, but it has been (currently) murdered by its creator, EVMos). The recent Russia-Ukraine War & sanctions on Russia, along with approaching regulations on crypto seems to have pulled some attention to privacy tokens because the noun “privacy” is the opposite of the nouns “sanction & regulation”. I think this mini-narrative is actually just about this, nothing more. A basic comparison, in these kinds of turbulent times, physical commodities see a capital inflow: like oil, grain, and precious metals (all up-only nowadays). But unlike oil, grain, and gold; privacy tokens like XMR have no real use case. I don’t ever believe a Russian oligarch will buy XMR or ZEC with his precious Gazprom money. That’s why the recent privacy narrative will not be lasting. Actually, until something truly innovative for the retail comes again, I don’t think any narrative is going to be long-lasting.

Moving on to Avalanche subnets. Subnets were a long waited feature that is basically enabling projects to launch their own chains under Avalanche. The very first subnet is Avalanche C-chain. When we refer to Avalanche blockchain, actually we usually address C-chain, and after subnets are launched, many more are to come. Avalanche launched a $290M fund, called Multiverse. This fund is launched to support the development of subnets, but as you can see in the name, it’s called Multiverse. They want to support gaming subnets, and we can actually see that from the first subnets: Crabada and DeFi Kingdoms. DeFi Kingdoms got a $15M fund from there. I do think that L1 blockchains need to specialize in fields. They won’t replace Ethereum in my humble opinion, but they may take a market share in certain fields if they do good and specialize in some fields, e.g., gaming. We saw how Avalanche Rush, a $180M fund to be used in DeFi dApps, benefited the growth of Avalanche. Even if they manage to pull a fraction of the same success, subnets will be a net +EV for Avalanche.

Approaching from a different side; subnets are a long waited feature that perhaps the whole Avalanche narrative is built on. If it won’t be successful, I would assume that would be catastrophic for Avalanche in the long term. Avalanche foundation got the money, and in my opinion, they will aggressively use it. We know they are good at executing these funds (sorry, NEAR Foundation) so while the wind is still on the Avalanche side, there will probably be some nice opportunities on the Avalanche side. Before moving on to Terra, I want to say a few words on DeFi Kingdoms. Harmony is pretty much only DeFi Kingdoms; biggest DEX, NFT marketplace, and 42.15% of the total Harmony TVL as of today. Now that they are moving to Avalanche as a subnet (even though it will co-exist on Harmony), I’m guessing they might decide the execute important operations on Avalanche. This could mean Harmony cannot get the credit for DeFi Kingdoms success anymore. This will be interesting to watch.

Finally, Do Kwon’s mooncoin. Terra is a blockchain and there are two native tokens of it: LUNA and UST. LUNA is the governance token and UST is a stablecoin pegged to 1 U.S. Dollar. LUNA and UST work together to maintain this peg: when there is demand for UST, LUNA is burned to create new USTs, and when UST is under $1, holders can sell it to get $1 worth of LUNA. This is the most awesome ponzi in crypto. That being said, I do believe this is a ponzi until it isn’t anymore. How so?

Anchor is the most demand-driving dApp in Terra, and it is actually the only thing that UST has a real utility. It gives a 19.5% interest rate for UST (source), a stablecoin. How? Anchor uses collaterals from borrowers to generate income and pay depositors. If generated yield > Anchor UST interest rate, the extra money is stored in yield reserve. But the thing is, there are much more depositors than borrowers, and so the generated yield < Anchor UST interest rate. That means the yield reserve is on a steady decline for some time. See the screenshot below:

It was about the drain, but there is a huuuuuge increase on 18th February. This increase is called Luna Foundation Guard (LFG). They are rich from LUNA, and their duty is basically to fill the oil tank when it is about to drain. You can see that the yield reserve continues to decrease after it has been filled. Anchor yield reserve decreased 10% in the last 19 days after the reserve has been replenished. Meanwhile, UST depositors and deposits are increasing even more rapidly after Terra restored trust with LFG. But, considering Anchor had a reserve of $21M just 20 days ago, the out-of-the-gas situation isn’t a serious problem at the moment, there is a lot of fuel in the tank.

I do think that until Anchor runs out of gas, UST needs to find an extensive utility beyond Anchor. They might fill the tank again if it drains too fast, but eventually, Anchor has to be sustainable. I think having more collateral options is vital. Perhaps we might also see a lower UST yield but obviously, Do Kwon doesn’t want to do that because even though, e.g. 13% yield, is very nice but it hurts the sentiment of “LUNA/UST are completely sustainable”. There is a kind of a problematique here because continuing the sentiment that it is sustainable, actually makes it sustainable. Why? Because LFG becoming richer to use its juicy liquidity to replenish the reserve, meanwhile UST is becoming more mainstream. One more note, I hate when blockchains/protocols or anything has a public figure that has “fans”. We repeatedly saw how dangerous is that.

Disclaimer: This article is written only for research purposes, and this is not financial advice.