“Hey.

Yeah, you.

Come here for a second. Sit down. Pry your eyes away from the charts for just a moment. I know…I know, it’s hard. But I promise that the markets will be fine without your constant attention.

I want to ask you a question…is this your first bull run?”

Maybe it is, and maybe it isn’t. But the question that seems to be on everyone’s lips is: Ethereum, why you not move?

This article was originally published on my Substack

I am probably not the only one who feels some deja vu about this. It seems like anyone who’s been through a few cycles knows that Bitcoin always outperforms everything in the beginning. Everyone panics, switches all their money from ETH to BTC at the last moment, and then watches with unabashed horror as ETH rallies while they miss both. Classic.

It’s just a law of the universe. Like how modern cinematic brands will always make one too many sequels before they call it quits and that the only people who hate Lululemon are those who have never actually tried on their clothes.

The fundamental question I aim to explore in this article is:

1. Is Bitcoin’s early run simply the repetition of a historical pattern?
2. Or is it because Bitcoin is stepping into its role as a risk-off asset while ETH remains a risk-on asset?
3. Or is Bitcoin just still doing normal Bitcoin things, and Ethereum actually losing its edge?

To fully answer this question requires a deep dive into Ethereum, the technology, its competitors, and the changing narrative around ETH, but I’m leaving this article a bit more brief, and I’ll cover some of those other questions later.

In this article, I cover:

1. Has BTC historically outperformed ETH early on during bull runs?
2. How are ETFs changing things?
3. What about the macro market conditions?
4. My conclusions

Lessons From Historical Bull Runs: Does ETH Lag Behind BTC?

So, is it actually true that BTC outperforms ETH at the beginning of bull runs? The answer? Yeah…kind of.

During the 2017–2018 bull run, it really depends on how you look at the data. It is true that BTC soared to $19,764 in December 2017, only for ETH to peak at $1,448 nearly a month later in January 2018. But, in the early part of 2017, ETH clearly outperformed BTC, although a lot of that can be chalked up to how early it was for Ethereum — it was about $10 per ETH at the beginning of the year.

The 2020–2021 bull market was a bit different. Both BTC and ETH hit their all-time highs on November 10th, 2021, with BTC reaching $69,000 (you can’t make this stuff up) and ETH hitting $4,878. Although Ethereum’s percentage gains (1,255%) outperformed Bitcoin’s (539%) during the bull market, its earlier rally was slower, reflecting the typical pattern of capital rotation into altcoins.

So, it’s not a closed cut trend, but it’s also clear that it’s not necessarily a cause for concern just because BTC is rising while ETH sits stagnant.

In general, the narrative goes that BTC is the first mover because investors are generally more comfortable investing in BTC — considering it’s the oldest, has the largest market cap, and has the most name recognition. As money floods into the crypto markets via BTC, positive overall sentiment grows, more people get involved and learn about alts like ETH (although I feel like, at this point, ETH isn’t really an “alt”), the cycle of FOMO drives people from BTC to ETH and then to small cap coins, NFTs, and whatever else the hypers are peddling.

Also, I can almost guarantee that in two months, everyone is going to feel pretty good about Ethereum. It just seems that the narratives are so reactive to short term price fluctuations. I guess that’s the fourth law of the universe.

Has ETH Historically Lagged Behind BTC? TL;DR

The short answer is kind of. It’s not a strict pattern, but the numbers certainly say that just because BTC is moving first, doesn’t mean you should be concerned about your ETH.

If you hold ETH, history is on your side. Hold tight, and do something with your ETH in the meantime.

But hold on…maybe this time is different? Maybe there are other factors that weren’t there in the past that are changing the trend?

ETF Analysis: Why Are Bitcoin ETFs Outperforming Ethereum ETFs?

One of these differences is that we’ve got crypto ETFs now. Sexy.

Bitcoin ETFs have greatly outperformed Ethereum ETFs since their inception (Spot BTC ETF came online in January of 2024, and the ETH ETF in July 2024).

Why is that?

I’d say that there are three main reasons:

1. Investors understand BTC better

Bitcoins’ narrative is both clearer and more clearly aligns with current global geopolitical and economic trends. I’ll discuss this more below, but BTC is digital gold and is generally considered a risk-off asset, while ETH is risk-on.

Simply put, when your aunt asks you about crypto, they usually say Bitcoin, not Ethereum, and certainly not Peanut the Squirrel. The day we have a PNUT ETF is the day I retire from crypto.

Furthermore, I imagine that ETH still remains largely a mystery to institutional investors. Ethereum’s broader utility in DeFi, NFTs, and smart contracts is harder to explain to traditional investors. Ultimately, ETH is aiming to be digital money on top of a digital, decentralized financial system. That’s a harder pitch than digital gold, and there are a lot more pieces that have to be in place to make it happen.

2. Bitcoin has more regulatory clarity

Bitcoin does have more regulatory clarity because Ethereum is a more complicated product. The big issue here is that without regulatory clarity, ETH ETFs can’t benefit from ETH’s native staking. That’s a huge advantage that ETH offers and a huge part of its long term value that’s simply not being reflected in its ETF.

However, I fully expect this to be temporary. An ETH ETF with native staking is coming.

3. A Bitcoin short squeeze

With a lot of BTC being purchased by these ETFs, the price was pushed up pretty dramatically. As crypto short sellers (those betting against BTC) face liquidation, they’re forced to buy more BTC to cover their position, further pushing the price up.

Obviously, if ETH started to rally, we’d see a similar situation.

Better Days Ahead For ETH ETFs?

The tides do seem to be shifting. Positive total inflows for the ETH ETF reached 241 million (as of four days ago). You can see this reflected in the chart below. But obviously, there’s still substantially more interest in the BTC ETF than the ETH one.

The Impact of the ETFs: TL;DR

The crux of the evidence here is that BTC is more appealing to institutional investors.

However, despite the fact that the BTC ETF is outperforming the ETH ETF, I think that BTC and ETH will behave similarly to their historical pattern, ETF or no ETF.

The factors making the BTC ETF more attractive are the same factors that made BTC more attractive in the past and caused it to lead the bull run (i.e., name recognition, regulatory clarity, easier to understand). It’s just that the market potential is much larger as the doors are open to institutional investors.

Also, the ETH ETF has begun to do better as of the last week. So, my thesis might be correct quite soon.

Leading the Bull Run charge…see what I did there?

Macro Market Conditions

So here’s the thing that I actually think is different: the macro market conditions and how suitable they are for a monumental Bitcoin run.

Here’s the thing. Bitcoin’s timing is almost too good to be true. It’s almost so perfect that it either makes me believe in a conspiracy theory or in God.

How is it that we have an inflation-proof, digital, fungible asset that just surpassed the market cap of silver, while MMT economic policies are threatening the West with unprecedented inflation and challenging the dollar as the global reserve asset?

Add in the results of years of international policies of appeasement and the rise of the China, Russia, Iran, and North Korea block, and you have a strong case for why the dollar won’t continue to be the main thing on central bank reserve asset sheets.

I think people are catching on. The real explosion will be when/if enough countries recognize that enough other countries are adding BTC to their balance sheets and don’t want to be left out. That’s where things get very, very interesting.

I don’t think we’re there yet. Only 7 countries have BTC, and other than Bhutan and El Salvador, most of those acquisitions came through legal seizures. But maybe countries are buying and keeping it anonymous? I mean, I would if I were them. But assuming we’re not there yet, if this narrative catches on, this is how BTC could really outpace ETH.

And companies are certainly catching on:

Data source

Risk-On vs. Risk-Off Assets

But, even if we don’t see a massive run on Bitcoin driven by central banks and companies, Bitcoin is better situated for the global economic situation than Ethereum.

Bitcoin’s narrative as a hedge against inflation positions it well during periods of tightening monetary policy, as it is increasingly seen as a “risk-off” asset, similar to gold. Ethereum, by contrast, functions more as a “risk-on” asset due to its reliance on speculative activity within its ecosystem.

This is critical.

Macro Conditions TL;DR

This narrative I presented above is the main reason that I have chosen to keep about half of my crypto investments in BTC (although I know many more who choose to be all in on Bitcoin for these reasons).

Ultimately, the narrative of Bitcoin as digital gold and as a reserve asset is gaining steam.

Conclusion: Bitcoin or Ethereum?

If you’re still with me, thank you. Everyone tells me I waste too many words. Maybe they’re right. But I also think people appreciate knowing there’s actually a human behind this keyboard. And god, we’re all just monkeys messing around, so let me have some fun with it.

I think that ETH is going to be just fine, and I expect the market to play out similarly to how it has in the past. I imagine that this BTC price explosion will soon be followed by a similar increase of ETH toward its all-time highs. Then we’ll probably see the continuation of the meme coin hype, some return of ETH NFTs, and some things that no one is expecting (wish I knew. I’ll tell you when I do).

However, I think that we are also seeing Bitcoin stepping a bit more into its destined role as the ultimate risk-off asset. I think we’re going to have to get used to the ETH/BTC ratio being heavily in Bitcoin’s favor for the next few years, at least until Ethereum is able to step more into its destined ultra-sound money role.

With current global geo-political trends, the impact of modern monetary theory on Europe and America, the growing acquisition of BTC by companies and central banks, and the central bank squeeze (which I think is coming), I think the global conditions are aligning extremely well to benefit Bitcoin’s narrative as risk-off digital gold and as a digital reserve asset.

On the other hand, ETH’s destiny is different. The narrative around ETH (at least that I ascribe to) is as ultra-sound money, a vehicle that will operate less like gold and a lot more like the foundation of a digital monetary system, with yield-bearing ETH, flexible smart contracts, and deflationary burn pressure. However, the promise of this is still several years and lots of technological developments away.

The Bottom Line:

In the long term, the promises of ETH and BTC are different. In the future, I expect them to move independently of each other, according to their risk classes and the relevant economic and geopolitical developments.

However, as of now, they’re both too early in their adoption cycles to move independently of each other. They’re still considered “crypto” to most people, and I think a bull market will benefit them both.

I am also still very optimistic about Ethereum. First, 29% of ETH is locked up in staking protocols, demonstrating significant long term trust in Ethereum. Second, Bitwise just acquired Attestant, a $3.7B Ethereum staking provider, a sign of things to come for institutional ETH buyers? I’d say so.

For now, in my opinion, hold onto your ETH bags. Good things are coming.

I’m just a man with a limited amount of time and capacity in my eyeballs to focus on a screen, but the bit question that still needs answering is:

“Well, yeah, Noam, maybe the market and price fundamentals point at this being like any old bull market, but what if Ethereum is fundamentally dying, being devoured by ETH-killing parasites, and it is slowly rotting?” Good question. That’s a topic I plan to tackle.

In future articles, I think the two topics that need to be unpacked are:

1. Maybe the optimism around Bitcoin is unfounded, and it doesn’t have as bright of a future as we thought.
2. Maybe the pessimism around Ethereum is unfounded, and its bull-case isn’t years away like we thought, but much closer.

Also, ya’ll know this is not financial advice, right?

Why Is Ethereum Lagging Behind Bitcoin? was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.

I am often asked my opinion of crypto by those who have not yet delved its rabbit holes. This is my letter to them.

I like crypto and I hold a pretty risky amount of my money in it. I have for a long time. This is not a recommendation. I have also learned my lesson already to never recommend anything to anyone else when it comes to money. Instead, I write this to explain to you the way I think about things.

First, not all crypto is made equal. There are enormous money making opportunities that I don’t touch. Meme coins, NFTs, early project hunting. I don’t think these kind of activities are bad. I just don’t have the desire to spend hours every day chasing these opportunities. Emotionally, I also can’t yet handle the stress of it. To play around in the depths of these rabbit holes, you need very extensive knowledge of the technology and ecosystem and you need to spend extensive time on social media.

Instead, I’m referring to the core crypto assets: Bitcoin, Ethereum, maybe Solana. There are other tokens that are worth mentioning (CRV, OP, ARB, the EigenLayer token) but they also require a lot of additional knowledge. I want to focus on my general crypto thesis of why does it matter?

My Three Most-Bullish Crypto Narratives

1. Serious Innovation and Talent

First, I haven’t found an industry attracting such talent. It’s up there with AI, neuroscience, and space exploration. Yes, the scammers and the SBFs make the headlines, but there are so many brilliant, talented people quitting their jobs in tech, joining crypto companies, solving problems, sharing, learning, and collaborating. The speed at which crypto innovates reflects this massive pool of talent. This is the absolute frontier and I like putting my money where I see such motivated talent.

Speaking of the frontier — this is one of the most interesting and exciting industries I’ve ever come across. This is a digital frontier where the smartest and most talented people win. It is cutthroat. Make one mistake and you can get wrecked. Have one vulnerability in your code, and your entire community can get wrecked. But also, this is a fertile field which has very little sympathy for “trying” or “good enough.” Such an industry cultivates stress tests every idea to the max and ensures that only the best succeed. Explore some narratives (even past ones like the Stable Coin Wars) and get a taste of this digital Wild West.

2. Crypto Is A Financial Revolution

Next, I see crypto as a means of financial protest for a generation of people that feel disenfranchised from traditional assets, burdened by the financial irresponsibility of the generations that came before, and disillusioned by the current “game.” But this is not a violent, anarchist revolution. This is an extremely well-designed alternative that is already a growing revolution with radical implications. Adopting a financial system outside the reach of governments — protected from inflationary decisions and the corrupt tendency to use monetary policy as a financial weapon — is so potentially disruptive that I think the only reason governments haven’t taken a more aggressive stance is because they don’t yet understand its potential. But their kids do. You know, the ones who were told “go to college, work, and you’ll be able to buy a house and be happy.”

But this dream is dead. The wealth divide is growing rapidly. People have to work harder and harder to get ahead. They feel the system is rigged against them and they don’t want to participate. The worse things get, the more appealing this revolution will become. Crypto offers an alternative game. And the global macro economy is playing right along with it.

3. DeFi Works

The fact that DeFi works at all is insane to me. And it not only works, but it hosts billions of dollars and allows people to genuinely access numerous financial applications. You can have your entire financial life on DeFi. I do.

Gamma is a nice auto-balancing vault for providing liquidity across DeFi

You can lend, borrow, contribute to ecosystem security in exchange for rewards, vote in decentralized governance systems, all without middlemen. Real products are being launched by decentralized organizations. I understand that this is still siloed. But the important thing is that it’s built, it’s being actively improved, and it works. I really think, in the context of the points I made above, this is an “if you build it, they will come” type situation. And built it we have.

Final Thoughts

All in all, what I see is an extremely innovative industry attracting top talent, with demonstrated value, working applications, and more and more TradFi adoption. The global macro economic is playing perfectly into the original thesis of Bitcoin. The crypto infrastructure is being laid as we speak. I think it’s inevitable at this point.

Of course, there are no guarantees. I do think that holding BTC and ETH — and not getting too fancy with things — may still be one of the smartest investments you can make. The risks are there. Yes. But they’ve dramatically decreased — especially with the approval of both ETH and BTC ETFs. I also think that — when you take into account the risks with stocks, real estate, and bonds — crypto is not even all that risky. Those assets have been propped up by federal policies and collective narratives that — arguably — have them extremely overvalued and the most vulnerable to the (potential) coming fallout of western monetary policies. I don’t think crypto is actually as risky as people think.

It’s for these reasons I hold crypto. This is certainly not a ride for the faint of heart. A part of you will either crumble from the gut-wrenching up and downs of financial gain and loss or you will consciously carve the fear and attachment out of your heart and be a new Buddha. Either way, be careful out there. But I am very excited to see where we are in ten years. I think you should start paying attention.

Thanks for reading. I would love for you to share your comments and ideas. Please leave me a comment or hit me up on AirChat or Twitter to discuss this article (I like AirChat the most!)

As always, none of this is financial advice. I am not telling you to buy or sell anything, just sharing my underlying research and conclusions.

I do hold a portfolio of cryptocurrencies. I was not paid by anyone to write this article.

If you would like to support this writing, please, leave me a comment (I love your feedback), pledge on Substack for when/if this newsletter ever goes paid-mode (you won’t be charged, only if/ever we make this paid):

…or you can buy me a cup of coffee or send some ERC20 tokens my way!

ERC-20 Address: 0x4F9960B2A808e8083C2D12420Aba4496D10e6D37

Buy Me A Coffee ☕️

Naval recently posted on AirChat that, when you’re building a startup, there’s often that one thing at the beginning that you don’t know how to solve. It becomes the “we’ll figure it out later,” thing. He said, in his experience, that thing never gets figured out. I fear that decentralization is often the “we’ll figure this out later,” thing.

This article was originally published on my Substack

I think that decentralization is often an after-thought for crypto protocols because it’s really hard and there is major incentives to centralize. Decisions must be made, competitors beat, features shipped, headlines made, and users satisfied. These things are just easier with huge marketing budgets, centralized development teams, permissioned validators, and VC checks. Every startup wants to move fast and break things, but good luck with that if you rely on decentralized governance.

Ultimately, everyone wants things to be cheaper and faster and they want it to be the way that they want it, three things that are sacrificed with decentralized architecture. Thus, the commitment to decentralization must be just as firm.

If you want to see this fact in the wild, just check out your local zoo, err political system. Libertarians tend to frame political discussions around limiting the expansion of centralized government — (i.e. the question is, not what should the government do, but what role should the government play?). Liberals (in the classical sense) aren’t against government. Rather, they understand the power of it, and so they aim to distribute and decentralize it. Yet, there is always someone in favor of giving away power to a bigger government somewhere in the stack, especially when things aren’t going the way they want it to be going. And history has shown that those who have been given power, seldom surrender it.

The value of decentralization is kind of like the value of preventative health care. It’s not flashy and it doesn’t make big bucks. Why? Because you never get to know how many times you would have gotten sick if you hadn’t eaten well. You’ll never know how many accidents were prevented by your safe driving. You’ll never know how many lives were saved because the tyrant never rose to power. And you’ll never know what disasters were prevented by your slow, thoughtful, and uncompromising approach to building a decentralized protocol. Life saving surgeries are sexy. 10,000 tps are sexy. Decentralization is not.

I worry that we are forgetting this in the age of meme coins, NFTs, ETH-killers, and ETFs. We are forgetting the very values that these systems represented, what ultimately laid the foundation for what we are seeing now. I am not against these things. Like Evelyn Hall said, I might not agree with meme coins, but I will defend with my life your right to issue them. I don’t think meme coins are ruining crypto. Fads will come and go. But let’s not forget what’s more important.

What Is Decentralization?

Decentralization is important because decentralization is security. Vitalik published a great article years ago, exploring the definition of decentralization. According to him, decentralization is important because, decentralized systems are more fault tolerant (keep the network operational), attack resistant (prevent attack), and collusion resistant (prevent people working together to game the system in their favor). I like this definition. But you can also see how collusion resistance might be very annoying to the people who KNOW what’s best and what direction we should go. When the end justifies the means, everything becomes an obstacle — especially decentralization.

Bitcoin’s whitepaper writes in its introduction:

“What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”

Ultimately, we can expand the term “transact” to include “interact” so that we can include turing-complete blockchains like Ethereum where network state changes include the transfer of information, not only financial transactions. This is what we are building. The timeline on this is long because the implications of such a system are immense. This is not about who can support a 3-minute NFT mint sellout without lagging today (ok, it’s also about that). It is about what system can survive the next 50 years without collapsing and without sacrificing decentralization. The protocol that can do that will be the most valuable asset in the world. That protocol will be capable of underpinning a global economy.

I find that people often underestimate the timeline on this and thus, put too much emphasis on short term achievements or failures. It is so long because I think true adoption will require generational change. It will require my generation (the millennials), and perhaps the one after, to reach roles of political and economic power, in order to truly rely on decentralized protocols. And which one do you think we’ll choose when we’re ready for that change?

Ultimately, we can find ways to optimize for speed later on (lightning, L2s, zero-knowledge proofs). But I would argue that we seldom find ways to decentralize later on. This is why, personally, I don’t worry so much with short-term scaling issues with Bitcoin and Ethereum. The question is whether they ever can be solved. If they can, then I’m fine with the slow road. Scaling feels to be more of a technical issue which feels solvable with time while decentralization is more of a philosophical issue which tends not to be “solved” but protected.

While I wanted to make the above point, obviously, scalability is still important, and the possibility of scalability is critical. So, is there a path forwards for decentralized architecture to be able to scale to support billions of users? I will tackle this article in the future.

The Three Forms Of Decentralization

Decentralization is a lovely buzz word, but it’s critical to explore what actually makes something decentralized. Again, I want to reference Vitalik’s article here again. He refers to three different forms of decentralization:

1. Architectural Decentralization (how many computers)
2. Political Decentralization (how many owners of those computers)
3. Logical Decentralization (if the interfaces and data structures were cut in half, would it continue to operate?) — i.e. 51% attack for Bitcoin.

In blockchain terms, we are speaking about:

1. How many nodes and what’s the barrier of entry?
2. How many entities operating those nodes?
3. How many of the nodes can shut off or be compromised while the network still operates?

What’s interesting to consider is that, ultimately, total consensus regarding motives is a form of centralization. Vitalik cites how Bitcoin happened into a happy situation where developers tend to be english speakers from the West while miners tend to be Chinese speakers from China, creating an additional barrier to collusion.

We reach a funny sort of paradox when we speak about decentralization as a diverse marketplace of ideas and trials, yet then I say that the one thing everyone in this marketplace should value is decentralization. I remember a quote here that said that you haven’t found truth if you haven’t found paradox. To value decentralization is to protect the marketplace. It is a blank canvas which gives freedom of expression…and immutability.

I will mention here that I think it’s very important to take this framework and apply it to existing protocols and evaluate their decentralization levels. That is a task for tomorrow.

The Long Road Forward

I am not bashing platforms that opt for performance over decentralization. If I was launching an NFT today, I would probably choose the performance-based protocol. I think it’s even possible that such a protocol becomes the preferred option for low-value economic activities. And I think that’s great. But I would argue that it simply will not be sufficient for securing high value transactions and interactions.

Politics should be framed first around, what do we want government to do and then, is it government’s role to do it? Decentralized protocol design should be — what do we want this protocol to do and what is being sacrificed to make that happen?

We must allow for the possibility that we don’t know the right thing. What is most important is protecting the institutions (and now, protocols) that allow for that public discourse: for a trial of ideas and designs. I will not even fault those protocols choosing tps over decentralization. We must even allow for them as part of this experiment. The more the merrier. But I do invite a deeper awareness into the public discord about the critical importance of the freedom of expression and immutability.

We see all too well the corrosive capacity of group-think to dissolve the decentralized systems that, to them, represent an obstacle. Ultimately, even code will falter to protect us if too many join their ranks. It is a more formidable defense than anything we have seen before…but if in the end, decentralization is no longer valued, even code can be changed.

When the axe came into the forest, the trees said “The handle is one of us”

What interests me now is how these developing protocols respond to the masses chanting, “faster.” What I care about is whether the loudest voices in the development space are willing to take the hard road. I care about who will have compromised least in 20 years, not which protocol is pumping today. I’m not saying not to chase short term gains. But I am pleading that you not mistake short term financial aspirations with core values. And often, those who chase the next shiny thing miss the forest through the trees and end up hodling Fool’s Gold.

Thanks for reading. I would love for you to share your comments and ideas. Please leave me a comment or hit me up on AirChat or Twitter to discuss this article (I like AirChat the most!)

As always, none of this is financial advice. I am not telling you to buy or sell anything, just sharing my underlying research and conclusions.

I do hold a portfolio of cryptocurrencies. I was not paid by anyone to write this article.

If you would like to support this writing, please, leave me a comment (I love your feedback), pledge on Substack for when/if this newsletter ever goes paid-mode (you won’t be charged, only if/ever we make this paid):

…or you can buy me a cup of coffee or send some ERC20 tokens my way!

ERC-20 Address: 0x4F9960B2A808e8083C2D12420Aba4496D10e6D37

Buy Me A Coffee ☕️

Update 04/25: I originally recommended that you farm ZkSync, but someone brought it to my attention that they think the snapshot has already happened, given that the token is already being listed prelaunch on CEXs. So instead, we’re focusing on Scroll.

First off, I just want to say I appreciate your support as I build this Substack. It’s a lot of time, but I enjoy the research a lot and love to write. The suggestions and comments (and coffees!) I have gotten have been awesome. Muchas Gracias. I hope you’re all hanging in there with this market volatility.

Now, into our main topic. If you have ETH and you feel a bit left out watching everyone claim airdrops and earn yield, here’s what you can do with your ETH if you don’t know what to do. It’s really not very complicated, but we’ll discuss some risks you should be aware of.

What Are The Risks?

Let’s be clear…keeping your ETH on Mainnet and in cold storage is the safest thing you can do. Every protocol you interact with is one more potential point of failure. We are only going to discuss legitimate protocols that should be safe, but crypto doesn’t give a damn about your shoulds and even the most reliable protocols have had failures before.

Thus, I have split up your ETH options into two categories of risk based on how degenerate the activities are. Personally, I would only do Option 1 with most of my ETH and then designate a small percentage to Option 2.

Option 2 becomes significantly risker once we opt for using bridges. Bridges represent amazing honeypots for hackers since they centralize a huge pool of assets. If a bridge is hacked, any stolen assets simply go *poof* on their corresponding chain (i.e. if you bridged ETH to Optimism and your bridge is hacked, you now have no ETH on Optimism).

Is It Too Late to Airdrop Farm?

I’ve heard this from some people that they think it’s too late to airdrop. I’ll be honest, in December when I started farming, I thought it was too late.

“Now” always feels like too late.

It might be too late for some protocols, who knows. But it’s certainly not for others (including EigenLayer and Renzo). I personally would just do it and let the cards fall where they will.

Option 1: The Least Risky

As I said before, the least risky thing you can do is do nothing. However, if you’re inclined to do something, this is the safest option.

How to Stake your ETH

By staking your ETH, you get rewarded for participating in ETH’s Proof of Stake consensus protocol and you earn yield (right now, about 3–4%). If you don’t have 32 ETH to run your own validator, you can use Lido or RocketPool, which pool your ETH and then operate the validators for you.

Lido and RocketPool are the largest and haven’t had any issues until now. If you want, you can stake your ETH directly with these protocols. However, I would simply suggest swapping your ETH for either stETH (Lido) or rETH (RocketPool). You can use any decentralized exchange. I personally suggest Uniswap. I would recommend getting rETH just for the sake of maintaining decentralization within the Ethereum ecosystem (since Lido is the largest staker of ETH right now).

These tokens are called LST (Liquid Staking Derivatives) and basically represent a proof of deposit into Lido and RocketPool staking pools. You’ll see that each of those tokens are worth more than ETH. This is because the yield is build into these LSTs. The yield just compounds into the price of the LST.

Also, if you have a Ledger, you can simply use their staking service directly from your cold storage.

Now, just hold on to your LST with your cold storage for eternity and worry not anymore. This is extremely hands off but you’re also not just letting your ETH sit idly. You can let your FOMO go.

Optional 1.5 Alternative:

This option adds an additional layer of risk then Option 1, but not as much as Option 2.

There are really two options. I’m listing them in the order of risk:

1. Restake your rETH or stETH on EigenLayer, without bridging it first.
2. Deposit your ETH on Renzo1, without bridging it to another network first. That way, you avoid the additional risk of bridges, but still gain access to the Renzo and EigenLayer airdrops. Of course, the gas fees will be higher when interacting with Renzo.
3. If you’re interested in this, follow the instructions in Option 2 for Renzo, but don’t bridge your assets first.

2 is more risky than one since you’re exposed to the additional smart contract risk on Renzo. However, you do qualify for an additional airdrop with #2.

Option 2: More Risky

There’s a lot of options that you could do here. You could go and deposit your LST into a DeFi liquidity pool. If you want to maintain exposure to staked ETH, you could deposit it as stETH/rETH and claim the extra 3–4%. I suggest Curve.

In all honestly, what I recommend is to hold most of your ETH as one of those two LSTs (stETH or rETH), but keep it out of liquidity farming. I don’t think the extra 3% justifies the additional risk you are taking, even with Curve. I would simply hold it in cold storage on ETH Mainnet.

But then, I would then take about 10–20% (ish — depending on risky you’re feeling) and airdrop farm with it.

If you want a very simple way to airdrop farm, here’s how. Essentially, we’re going to transfer our ETH to an L2 that will be having a future airdrop. The idea is that we will get some of that airdrop by bridging funds to the L2 and interacting with dapps within its ecosystem.

First things first, I recommend creating a different crypto wallet address (I use Metamask) and transferring all of your airdrop farming ETH to that wallet. You just want to be as careful as possible.

Then, add the L2 to your wallet. To add Scroll to Metamask, click here. To add Linea, click here.

Then…

A Simple Airdrop Farming Strategy For Your ETH

1. Choose one of these bridges to bridge your ETH over to an L2. The bridges I listed in this article will likely be having airdrops of their own. I suggest using Jumper and using the StarGate option.
2. Choose which L2 to transfer to. Personally, I would focus on Linea and Scroll. Both have raised huge amounts of money at staggering valuations and could have very lucrative airdrops. Airdrop farming is an endless rabbit hole, so this is my recommendation if you want to dip your toes into two potential valuable airdrops, but aren’t looking to throw on your Alice stockings and go diving.

• Transfer at least .01 ETH to both Linea and Scroll. The more the merrier as it will likely qualify you for more of the airdrop. I usually try to do .1 ETH if you can afford it.

3. Interact with dapps: Consistency is required for this step, since we want to make a couple transactions on each chain each month. I’ll try to send out monthly reminders to do this, so subscribe if you’d like those. We’re going to focus on two Dapps that will probably have airdrops of their own.

• SyncSwap: Head over to SyncSwap and swap some of your tokens for another token. If you’re on Scroll, I suggest swapping and making sure you’re holding either rETH or stETH. If you are on Linea, I suggest swapping for either ETH or wETH (relevant for the next step).
• Renzo (only for Linea): Next, assuming you’re on Linea, go to Renzo and stake your ETH or wETH. Renzo is a restaking protocol that uses EigenLayer. EigenLayer is a pretty sweet protocol that essentially allows other applications to leverage the value of staked ETH. This is an awesome ELI5 if you’re interested. I expect EigenLayer to have a massive airdrop as well. By staking here, you (probably) qualify for both the EigenLayer airdrop and the Renzo airdrop.

That’s it! That’s what we’ve got for you.

Recap

If you followed my advice, and did Option 1, you’ve taken on a bit more risk than doing nothing, but are now earning 3–4% yield on your ETH.

If you went a bit more degen and did Option 1.5, as well, you are now earning for EigenLayer and Renzo.

If you did Option 2, you’re hopefully going to qualify for both EigenLayer and Renzo, as well as Linea, Scroll, SyncSwap, and your bridge of choice. I recommend continuing to make semi-consistent transactions on these L2s in order to properly qualify for the airdrops (monthly is probably good enough). I plan to release monthly reminders.

If you want to farm other L2s, I would recommend following the same process as above. Bridge to your L2 and then stake on Renzo (not all L2s are compatible with Renzo). You can also subscribe for $22 a month to Bankless’ airdrop hunter2 if you want to go really deep.

Thanks for reading. I hope this was helpful. Please leave me a comment or hit me up on AirChat or Twitter to discuss this article (I like AirChat the most!)

As always, none of this is financial advice. I am not telling you to buy or sell anything, just sharing my underlying research and conclusions.

I do hold a portfolio of cryptocurrencies. I was not paid by anyone to write this article.

If you would like to support this writing, please, leave me a comment (I love your feedback), pledge on Substack for when/if this newsletter ever goes paid-mode (you won’t be charged, only if/ever we make this paid):

…or you can buy me a cup of coffee or send some ERC20 tokens my way!

Buy Me A Coffee ☕️

ERC-20 Address: 0x4F9960B2A808e8083C2D12420Aba4496D10e6D37

Hope your airdrop hunting is yielding fruits. As I continue to write about farming airdrops — especially L2s — I realized that there are a bunch of different options for bridging. I wanted to create a reference for what bridges might be having airdrops of their own, so that we can expand our farming to those platforms when bridging funds from ETH Mainnet → L2s, or from L2s → L2s.

Bridges from L2s → L2s will always be cheaper (usually under a dollar) while ETH Mainnet → L2s will be more expensive (usually between $5 to $10 depending on gas prices). A really good tool to track ETH gas prices is Ultrasound.Money. You can also see when the cheapest gas times are.

However, there is some advantage to making sure you transfer at least .005 ETH from ETH Mainnet → L2 because, some platforms in the past have incorporated that into their criteria. Any additional funds can be transferred from a different L2.

So without further ado, let’s dive in.

The Index:

The links here are to my Substack since that’s my primary place I publish. However, you can also read all of my articles here!

I created this Google Sheets to help you track your airdrops. When you go to the sheet, just click “File” → “Duplicate.” Then you’ll be able to edit it.

On a side note, sometimes I include referral links. These referral links are a great, no-cost way, that you can support this writing. However, I always disclose when it’s a referral link and give you a non-referral link option.

1. Potential Bridge Airdrops
2. Jumper
3. Bungee
4. Orbiter
5. OwlTo Finance
6. deBridge
7. Rango
8. Final Thoughts

Bridge Airdrop Farming Strategy

Ideally, you can do a bit of round-tripping, where you move tokens from one chain to the next, using different bridges for each transfer. For example, you could go:

• ETH → USDC on Jumper
• then USDC → USDT on Bungee
• the USDT → ETH on Orbiter…

And so on…

You can also just transfer the same asset across different L2 chains.

Potential Bridge Airdrops

These are the bridges I’ve identified that might have airdrops. It’s not clear how much you need to bridge in order to qualify for potential airdrops. I would assume that the more you bridge, the more you’ll earn. I would suggest aiming to bridge at least $100 worth of tokens and try to do like three transactions per bridge. If I was doing L2 → L2, I might try to make the transactions in multiple waves over a couple of days (if I wanted to be really tricky).

Basically, the principals are:

• More Money + Money Transactions + Consistent Activity = More Likely Airdrop

Below, I also compared prices across various bridges for bridging ETH on Optimism to ZkSync and ETH on Mainnet to ZkSync. These fees are just estimates since — especially for Mainnet Bridges — I didn’t execute those transactions, but just looked at the protocol’s estimates.

Jumper Bridge

(non-referral link)

This is actually a bridge aggregator, meaning it connects you with multiple bridging options. This means, that if you choose wisely, you might be able to hit multiple airdrop birds with one stone. Ideally, choose the StarGate option, since they use LayerZero which will likely have an airdrop in the future.

I love Jumper. It currently supports tons of L2s and gives you various options for which path to take from one chain to the other. This L2→L2 Swap costs like $.01 in fees right now.

Fees Comparison:

• ETH Mainnet → ZkSync Era: ~ $8.00
• ETH OP → ZkSync Era ~$0.02

Bankless lists this airdrop as likely given that some very early users have already received an airdrop for their participation and that the team is tracking current early usage.

Bungee

(non-referral link)

This, like Jumper, is also a great bridge aggregator that allows you to compare fees across protocols and supports lots of L2s. Using Bungee will also probably qualify you for a Socket airdrop, since Bungee uses that on the backend.

Fees Comparison:

• ETH Mainnet → ZkSync Era: ~ $7.20
• ETH OP → ZkSync Era ~$0.02

This protocol is awarding points to contributors on Discord. It’s likely that these points convert to tokens in a future airdrop. What isn’t known is whether or not using the bridge right now will qualify for an airdrop. My guess will be that it will.

Orbiter

(non-referral link)

This is a nice platform and people often choose it for its speed and availability.

Fees Comparison:

• ETH Mainnet → ZkSync Era: ~ $6
• ETH OP → ZkSync Era ~$0.05

They have integrated a points system and it’s pretty likely that they’ll do an airdrop in the future.

OwlTo Finance

(The above is a referral link that doesn’t cost you anything but that supports this work. If you would rather use a non-referral link, here it is: Non-referral link)

This one is descent and many recommend it. Personally, I don’t like the UI/UX, but I have used it and it worked well. They’ve implemented a points system, so it’s clear that there will be an airdrop at some point.

Fees Comparison:

• ETH Mainnet → ZkSync Era: ~ $5.00
• ETH OP → ZkSync Era ~$3.50

Same deal with Orbitor. Probably worth only doing this ETH Mainnet → L2.

deBridge

(The above is a referral link that doesn’t cost you anything but that supports this work. If you would rather use a non-referral link, here it is: Non-referral link)

deBridge also has a points system, which puts them in firm running for an airdrop. I don’t love their UI either, but I’ve used them without any issue.

Fees Comparison:

• ETH Mainnet → ZkSync Era: ~ $5.80
• ETH OP → Linea ~$0.05

They don’t support ZkSync which is why I resorted to using Linea for the bridge test.

Rango

(The above is a referral link that doesn’t cost you anything but that supports this work. If you would rather use a non-referral link, here it is: Non-referral link)

This, like Bungee and Jumper, is a bridge aggregator. You can try to target Zebra as well through Rango, for a two for one.

Fees Comparison:

• ETH Mainnet → ZkSync Era: ~ $6.80
• ETH OP → ZkSync Era ~$.02

I also don’t love the UI/UX for this bridge, but they come recommended within the industry. They worked perfectly for me.

Final Thoughts

All in all, that’s six bridges that I expect to have an airdrop. My two favorite in terms of usability are Jumper and Bungee. Since I think they’re the best, I imagine others will too, and I think their airdrops might be the most valuable. But that’s purely speculation on my part.

As I said before, I would try to use all of them, but I would try to have at least $100 in transfer value before moving on to another. There’s also no reason that you couldn’t transfer the same $100 around various L2 chains, using each of these bridges. You’ll spend a bit of money in gas, but not too much if you’re not transferring from ETH Mainnet.

It is possible that these bridges will reward ETH Mainnet transfers, so consider that as well if gas prices are especially low or you already have to make that transaction.

If you missed it above, I put together this spreadsheet to just help us keep a running tab of where all of our money is and what protocols and dapps we’ve used.

Hope that’s helpful. I should be launching a guide to ZkSync in the next day or two and will be referencing this article a lot. I hope it’s a helpful reference for you as well.

Happy Hunting. Keep your head on out here.

As always, none of this is financial advice. I am not telling you to buy or sell anything, just sharing my underlying research and conclusions.

I do hold a portfolio of cryptocurrencies. I was not paid by anyone to write this article.

If you would like to support this writing, please, leave me a comment (I love your feedback), pledge on Substack for when/if this newsletter ever goes paid-mode (you won’t be charged, only if/ever we make this paid):

…or you can buy me a cup of coffee or send some ERC20 tokens my way!

Buy Me A Coffee ☕️

ERC-20 Address: 0x4F9960B2A808e8083C2D12420Aba4496D10e6D37

Oh airdrops, let me count the ways I love thee:

1. Yee don’t require me to risk my crypto like with trading
2. Yee teaches me about the far reaches of DeFi
3. Yee look like magic money to my friends & family

It’s become pretty standard practice for new crypto protocols to airdrop tokens to their early users to bootstrap platform development and incentivize participation.

Specifically, I wanted to look at the past airdrop criteria for L2s, Dapps, and Bridges, to help me (and you) understand how best to qualify for future airdrops.

Because my goal is to farm as many airdrop opportunities as possible, that means I want to be strategic about using bridges and dapps that might qualify me for additional drops. It’s the ole — kill two birds with one stone. Thus, I also analyze past airdrop criteria for dapps and bridges.

You might just want to just skip down to the takeaways if that’s more your jam. I included all of the criteria data for each platform, but it’s a lot, so I summarize it up at the bottom.

The Index:

The links here are to my Substack since that’s my primary place I publish. However, you can also read all of my articles here!

1. Which Airdrops Am I Targeting?

2. The Risks

3. Past L2 Airdrops

• StarkNet
• Optimism
• Optimism Airdrop Event 1
• Optimism Airdrop Event 2
• Optimism Airdrop Event 3
• Optimism Airdrop Event 4
• Arbitrum
• Celestia

4. Past Dapp Airdrops

• dYdX
• 1INCH

5. Past Bridge Airdrops

• Wormhole

6. Additional Airdrop Takeaways

7. The Best Way To Farm Airdrops

8. The Key Takeaways

What Past Airdrops Did I Include?

I researched a few different airdrops to gain insight into how those airdrops selected their recipients. Specifically, I looked at Optimism, Arbitrum, StarkNet, Celestia, dYdX, 1Inch, and Wormhole.

I avoided analyzing protocols with point-farming like Ethena, Blast, Jito, EtherFi and many others. First, I really don’t love these systems as they look like semi-ponzi structures to me. Second, those are so simple to farm, you don’t need me to tell you how to do it. And third, I think that L2s without point systems tend to be the most lucrative, because there’s more uncertainty around farming them and whether that farming will amount to anything.

Ultimately, unexpected airdrops are more valuable than the ones everyone is farming.

Which Airdrops Am I Targeting?

The whole point of this exercise is to help us understand how to target and receive upcoming airdrops that I think could be big. There are so many potential airdrops that we have to focus. I would rather spend my time meaningfully participating in protocols that I really believe in, rather than spraying and praying across hundreds.

In particular, I’m interested in farming promising L2 protocols. Ultimately, I also can farm exchanges and other Dapps while also farming the L2, which is what I do (and will talk about that more in future farming guides). Ultimately, how valuable these L2 Governance tokens actually are is up for debate (and I’ll also explore that in an article that’s currently in the works).

Now, specifically, these are point-less airdrops that I am focusing on — ranked in my order of priority:

1. zkSync
2. Scroll
3. Linea
4. Fuel
5. Eclipse
6. Hub

Some other potential airdrops that we’ll explore later:

• Mantle
• Taiko
• LayerZero
• Shardeum

Additionally, there’s some obvious point-farming drops that I think are worth our time, including:

• EigenLayer
• Renzo

There are many more that might be worthwhile to look at. I recommend subscribing to Bankless Pro (this is referral link that helps me and doesn’t cost you anything and supports my research & writing. If you do mind, here’s a non-referral code) which gives you access to their airdrop guide for $22/month. That’s what I do.

But if the 83+ airdrop opps or $22/month on Bankless is too overwhelming, I’ll continue to publish easy airdrop guide for the protocols I think are most worth your while, and I will be sending monthly reminders to make transactions according to my own farming schedule (since consistency counts). Hopefully, that will make it easier on everyone!

The Risks With Airdrop Farming:

Let’s review the risks. Airdrops are technically your reward for taking risks by putting money on new, untested, crypto protocols.

• You could be vulnerable to hacks and protocol failures. Every additional bridge or dapp you use in the farming process is an additional fault point. This is especially true if you’re staking or providing liquidity on a dapp. Simply bridging or swapping as a one-time transaction tends to be pretty low-risk.
• The protocol itself could get hacked or have a tragic, unforeseen error.
• Airdrop farming makes you a susceptible target for scams. Always click on trustworthy links and use a new Metamask wallet specifically for airdrop farming. Please double check any links before connecting your wallet.
• I’m unsure about the long-term value proposition of L2 tokens. This is only relevant once you get the airdrop.
• Many of these airdrops allocate 35–50% of the tokens to the teams and investors. You can often see the effect of this in the massive fully-diluted marketcap of these tokens. This doesn’t increase the risk in receiving the airdrop. But it will effect the long-term of value of these tokens.

Please be careful and don’t risk more capital than you can lose.

Past L2 Airdrops:

Here’s a handy sheet I created on google sheets that you can use to keep track of your farming. Just remember to duplicate the sheet do you can edit it.=

Here are the following L2s — from 2022–2024 — that awarded considerable airdrops to their early users. Below, you’ll also find the criteria and some takeaways.

The StarkNet Airdrop

Airdropped on Feb. 2024 — totaling $2.1 billion

StarkNet was a pretty considerable airdrop. There will be more airdrops as well, so it might be worth continuing to participate on the network, especially in their governance. The criteria for the first airdrop was one or more of the following:

• You used Starknet more than five times in total during three separate months
• + transacted with a cumulative amount of at least $100 before November 15th, 2023
• + had 0.005 ETH or more in your account on that date.
• Used a StarkEx-based app at least eight times before June 1st, 2022

Less relevant for basic users:

• was a member of Early Community Member Program (ECMP) or made three repository commits that appeared in the Electric Capital report and one made before 2018.
• Participated in Ethereum, including:
• staking ETH prior to 2022,
• were a member of the Ethereum Protocol Guild,
• contributed to GitHub as an author or co-author of an EIP,
• or you made at least three commits to a repository that is one of the top 5,000 repositories worldwide

The Optimism Airdrop

Optimism has had four separate airdrop events. The criteria became more strict with each event.

Optimism Airdrop Event 1:

Airdropped on May 2022–200m OP tokens to 250,000 early adopters worth about $400m. the Snapshot was taken in late March 2022.

Who qualified?

• Addresses that bridged to OP Mainnet from L1 during the early phases of mainnet (prior to Jun 23, 2021),
• OR used OP Mainnet for more than 1 day and made a transaction using an app (after to Jun 23, 2021).
• 95% of multi sig wallets that used Optimism
• Gitcoin donors
• Addresses that bridged to another chain — like Polygon, Fantom or BSC — but still made an app transaction on Ethereum in each month after they bridged, and transacted at an average rate of at least 2 per week since then.

Optimism Airdrop Event 2:

Airdropped on June 2023–1,742,277.10 OP to 307,965 unique addresses

This airdrop focused on those that participated in Optimism goverance.

Who qualified?

Governance:

• Had an Active Delegation ≥ 20 OP at Snapshot
• Had 54,367 total ‘OP Delegated x Days’

Usage:

• Had made App transactions on Optimism across 6 distinct months
• Spent ≥ $20 on Gas Fees

Optimism Airdrop Event 3:

Airdropped on Sep 18, 2022–19,411,313 OP to 31,870 unique addresses

This airdrop further rewarded delegators:

• Addresses with fewer than 18,000 OP Delegated x Days (or 9,000 if delegated to a voting delegate) were not eligible for this airdrop.
• Addresses who were delegated for < 7 days were not eligible for this airdrop

Optimism Airdrop Event 4:

This airdrop rewarded NFT creators who met a certain criteria such as volume transacted for an NFT which was created by their wallet.

The Arbitrum Airdrop

Airdropped on March 23, 2023 — worth $1.97B

Arbitrum rewarded users both for their usage of Arbitrum One and Arbitrum Nova. I would recommend staking some ARB and participating in their governance process to qualify for future airdrops. I think there is more to come.

Who qualified?

Users who used Arbitrum One:

Bridged funds into Arbitrum One

1. Conducted transactions:
2. during 2 distinct months
3. during 6 distinct months
4. during 9 months
5. Conducted more than:
6. 4 transactions or interacted with more than 4 different smart contracts
7. 10 transactions or interacted with more than 10 different smart contracts
8. 25 transactions or interacted with more than 25 different smart contracts
9. Conducted more than:
10. 100 transactions or interacted with more than 100 different smart contracts
11. Conducted transactions exceeding:
12. $10,000 in value
13. $50,000 in value
14. $250,000 in value
15. Bridged more than:
16. $10,000 of assets
17. $50,000 of assets
18. $250,000 of assets

Usage on Arbitrum Nova:

Bridged funds into Arbitrum Nova

1. Conducted more than:
2. 3 transactions
3. 5 transactions
4. 10 transactions

Penalties Employed By The ARB Airdrop (important to review!)

As you can see, users needed more than 3 points to qualify for the airdrop. You could lose points for several activities including:

1. If a wallet transactions have all occurred within a 48-hour period, one point is subtracted.
2. If a wallet balance is less than .005 ETH, and if the wallet hasn’t interacted with more than one smart contract, one point is subtracted.
3. If a wallet address has been identified as a Sybil address during the Hop protocol bounty program the recipient is disqualified.

Celestia (TIA)

Airdropped on Sep 2023 — total $728.4M

It’s depatable whether this is considered an L2

Who qualified?

• top 50% of active users of the top 10 Ethereum rollups by TVL

Public Github contributors to:

• public goods and key protocol infrastructure of Ethereum, rollups, Bitcoin, and Cosmos
• Celestia projects
• Stakers of ≥ $75, allocated by stake and onchain activity on Cosmos Hub and Osmosis
• Users with a snapshotted balance of $50 onchain or bridged to the top 10 Ethereum rollups by TVL on L2 Beat, as of 20 April, 2023

Past Dapp Airdrops:

When farming L2 airdrops Since a lot of these L2s will require us to transfer ETH from either the mainnet or an existing L2, it’s wise for us to use dapps that might have their own airdrops. I included the dYdX and 1Inch airdrops in our analysis:

The dYdX Airdrop

Airdropped on Aug 2022 — worth $2.01B

dYdX is a Perps trading platform.

Criteria:

• Users who utilized DYDX before July 26, 2021. Depending on how much you traded, you were awarded the airdrop.
• The lowest tier was between $1 to $10k

The 1Inch Airdrop

Airdropped on Dec. 2021, worth $670m

1Inch is a decentralized exchange that works on a bunch of different ETH L2s.

Who Qualified?

• People who used 1Inch before December 24, 2020 and did:
• 1 trade before September 15, 2020
• or made at least four trades
• or traded a total of $20

Past Bridge Airdrops:

Bridges allow us to transfer tokens between chains. Since a lot of these L2s will require us to transfer ETH from either the mainnet or an existing L2, it’s wise for us to use Bridges that might have their own airdrops. I included Wormhole — which recently had an airdrop — to assess what criteria we might need to meet when using Bridges:

The WormHole Airdrop

WormHole airdropped $3B in tokens on April 3rd, 2024.

Those who interacted with the protocol before February 6, 2024 were eligible. Unfortunately, the exact criteria for the airdrop weren’t released, which is probably a wise decision. But it was a combination of total value bridges and total amount of transactions.

Additional Airdrop Takeaways

I think it’s important to note that many later airdrops adopted the blacklists or sybil lists of earlier projects and banned them from their own airdrops. Avoid this kind of behavior because the consequences could be immense. On a side note, I don’t think this applies to “airdrop farming.” This applies to strategies that create dozens or hundreds of wallets and try to spam transactions with bots.

The Best Way To Farm Airdrops

Earlier airdrops were much easier to qualify for than current drops. They were also much more lucrative. As more and more people have caught on, platforms have become more stringent in their criteria.

However, there is still a lot of money to be made, especially farming platforms that raised significant capital. Personally, as I said in the intro, I like targeting platforms without points systems, because they tend to be a bit less hyped and thus, the tokens are more concentrated to actual users and early adopters. That’s not to say it’s not still valuable at times to jump in on the point pyramid…

…but since those platforms pretty much reward you according to how much staked capital you have, you’re probably only going to get about $1 for every $20 you stake.

It’s also important for me to say that the most valuable airdrops are always the ones no one expected. The only way to increase your likelihood is to be an active explorer of the crypto ecosystem. Test out new things. Join new platforms. Sign up for email lists. Etc. I’ll do my best to keep an eye out and share anything I think looks promising.

As you can see from past L2s, it’s not so much about how much capital you stake, as it is about how consistently active you are. Based on my research, I think it’s really important to do the following:

The Key Takeaways:

1. Transfer AT LEAST .01 ETH to the L2.

• . 1 ETH is better, if you can afford it.

2. Keep that ETH on the L2

• Don’t transfer it off until the airdrop

3. Interacting with as many Dapps as possible on the chain

4. Make monthly transactions, consecutively, in increments of a few transactions every month

5. Make transactions on Dapps and Bridges that might also yield airdrops.

6. Bridge funds from L2 → L2, not ETH Mainnet → L2, since you will save lots of money. If you can, do multiple bridges as well to qualify for bridge airdrops.

7. For Bridges and Dapps and L2s, it comes down to total value and total transactions. If you don’t have the funds to make large transactions (in excess of $1k), then you’ll need to compensate with quantity.

It’s also important to note that snapshots were generally taken about 2 months before the airdrop, meaning that only those users who met the criteria before the snapshot qualified for the airdrop. So get on it! (Which is my way of saying subscribe to get specific airdrop guides 🙂)

Now…let’s write some guides and farm some L2s.

As always, none of this is financial advice. I am not telling you to buy or sell anything, just sharing my underlying research and conclusions.

I do hold a portfolio of cryptocurrencies. I was not paid by anyone to write this article.

If you would like to support this writing, please, leave me a comment (I love your feedback), pledge on Substack for when/if this newsletter ever goes paid-mode (you won’t be charged, only if/ever we make this paid):

…or you can buy me a cup of coffee or send some ERC20 tokens my way!

ERC-20 Address: 0x4F9960B2A808e8083C2D12420Aba4496D10e6D37

Buy Me A Coffee ☕️

Grab yourself a fair-trade latte and put on that do-not-disturb because, today, we’re learning some skills. With about 15 minutes, you should understand how to use options in your crypto portfolio.

If this feels daunting, don’t worry. It’s not very complicated! I feel like there’s been a major incentive for TradFi to make options look really complicated as justification for laws denying the majority of people the ability to use them. I mean…

• Casinos ✅ Legal
• Sports betting ✅ Legal
• Lottery ✅ Legal
• 30 year mortgages ✅ Legal
• Options…. ❌ Only with a license!?!

…does anyone still really believe that the SEC/government’s motivation is really “protecting” people at this point?

Anyways, politics aside, I think this is a very useful skill to have — how to short crypto assets. For a deeper dive into crypto options, beyond simply shorting, check out this article.

What You Will Learn:

1. What are options
2. Step-by-walkthrough of how to purchase crypto options: There are many platforms you can use, but we’re going to share our favorite / the one we think is easiest: Lyra. On Lyra, you can short BTC and ETH.

The links for Lyra — an options trading DEX– are affiliate links which gives me some rewards if you end up choosing to trade on Lyra. If you don’t want to support me with an affiliate link, here is a non-affiliated link as well.

Index:

The links here are to my Substack since that’s my primary place I publish. However, you can also read all of my articles here!

1. How To Short Crypto
2. How To Actually Use Options
3. A Real Life Example: My Friend’s Trade

• What Risk Did My Friend Take Here?

1. Why Would You Short Crypto?

• How Much Can You Lose?
• Why Don’t We Use Perps?

1. Step-by Step Guide To Shorting Crypto with Put Options
2. Let’s Review The Risks
3. Can We Trust Lyra
4. Parting Words

To be clear, I am not personally shorting crypto and this isn’t a recommendation or analysis on whether this is a good idea. However, there is obviously a time and place for it.

How To Short Crypto

The number one reason you should understand options, as a beginner, is because, I think they are absolutely the best way of hedging your portfolio against downside. I would much rather purchase an ETH Put when I’m feeling like the market is a little bit too high, then sell some of my beloved ETH. To protect against a big ETH drop using options is not very expensive and the payout could easily be 10–20x the initial cost.

Now when we say “shorts” or “longs,” there’s not actually an asset called a “short.” Short selling refers to borrowing an asset, selling it, and then rebuying it later on in order to repay the loan (hopefully for a cheaper price than you borrowed it for). However, we often refer to shorting an asset to mean: any strategy in which one is betting on the asset decreasing in value, while “Longing” refers to betting on the asset increasing in value.

There are two types of options and a whole variety of strategies you can build using them:

• Puts: A contract to sell an asset at a specific price (known as the strike price) on a specific day in the future.
• Call: A contract to buy an asset at a specific price (known as the strike price) on a specific day in the future.

Both of these options can be used to both short and/or long an asset.

The value of being right can be very, very high with options.

So How Would I Actually Use Options To Short Crypto?

We usually use Puts to short crypto assets. You might have caught on that both Calls and Puts can be used (if you want to explore that more, check out this article), but Calls are a bit more complicated in this scenario.

So, we’ll focus on Puts!

When I buy a Put, I am buying an agreement with someone to sell an asset at a future date. In this agreement I have to decide several things:

1. The expiration date
2. Which asset
3. What price do I want to be able to sell that asset for? (the Strike Price)

For example, if I think ETH is going to keep falling, I might buy a Put with a strike price of $2000 for May 01. Depending on the type of option, this means, that I can exercise my option and SELL 1 ETH on May 01 for $2000. This is really good for me if ETH is less than $2000. If ETH is $1600 on that day, I’ll make $400 per option. I could also sell the option on the open market before May 01, although there’s no guarantee what price I’d receive.

Why wouldn’t I buy a Put for $3000?

Clearly, having an option to sell ETH for $3000 in this scenario would be better! The thing is though that they’re much more expensive. The higher the strike price, the higher cost of the Put Option. This is because my counterparty is more likely to lose in this case.

So…we need to analyze the cost of the option alongside the risk and potential upside.

On a side note, some options are called American Options which can be exercised before and up until the expiration date. But Lyra doesn’t support these types of Options. However, even with Lyra’s options (called European Options), you could always sell the option on the market before it expires.

How To Short Crypto With Options: TL;DR

To “short” an asset, we can technically use several different methods. However, I’m going to focus on the easiest one, as demonstrated by my friend, which is to buy Put Options:

• How To Short: We want to buy Puts above the price we expect the crypto assets to be at which allows us to sell for a profit.

As a real life example, let’s say we think ETH is going to keep dropping past $3350. Let’s say we think it will hit $2500 by May 01. In this case, we should buy an ETH Put with a strike price above $2500 to make a profit.

The higher the strike price (in compared to the actual price of ETH), the more we will make. But also, the more the option will cost.

A Real Life Example:

The following prices reflect the date when I wrote this article — Friday, March 29.

Let’s take a real example to cement this.

My friend decided that he wanted to purchase ETH options. He went to Lyra and purchased “x” amount of put options on Lyra. He bought Puts for ETH @ $2,600 on April 26th. This means that, on April 26th, he has the right to sell x amount of ETH for $2,600. If ETH is $2000 on that date, he would make $600 per option. If ETH is $0, he would make $2,600 per option. Considering these options cost $38.50 per option, that would be almost a 15x return if ETH hits $2000. There is also a fee involved that has to be considered (about $2 per option in this case).

You may ask, how do I exercise the option on that date? Do I actually need to own ETH? The answer is that no, you don’t have to. On the expiration date, Lyra automatically settles the trade. If ETH is below the strike price, the counter party has to pay you the basis (which is the price difference between the option and the underlying asset).

Not all option markets have automatic settlement.

What risk did my friend take here?

The risk is that the price of ETH is above $2600 on April 26. Assuming that’s the case, he would simply not exercise the option. It would expire and he would have spent that $39.80 per option for nothing.

The other risk that needs to be noted is the counterparty risk, which is specific to the platform you are trading on. This is the risk that the counterparty doesn’t pay up when you win. You can read more about this here. So ONLY USE REPUTABLE PLATFORMS WITH GOOD RISK MANAGEMENT RULES!!

Why Would You Short Crypto?

You don’t have to believe the entire crypto market is going to collapse in order to purchase Puts. They can actually just be a really good way to hedge without selling a bunch of crypto. Let’s say I want to hedge my position a bit. Let’s say I own 10 ETH — worth about $36,000 right now. If ETH drops to $2000, I would lose $16,000. Now, I could always sell some of my ETH to hedge. But, instead, consider if I bought 20 put options for ETH with a strike price of $2600 on April 26.

If ETH drops to $2000, I will lose $16,000 of the value of my ETH, but I would make $9,400 ($12,000 minus the strike price which was $2600) through my 20 options, which would greatly offset my losses. If ETH keeps running up towards $5,000, the most I can lose is about $800 from my puts (20x the price of puts which is $39 right now).

How Much Can You Lose?

The appeal of options (and probably why you need a TradFi license to deal them) is because the potential upside and downside can be immense.

For our purposes, if you’re buying Puts, you can only lose up to the amount you spent on the options.

If you were selling Puts, you could lose A LOT more. But that’s advanced stuff, so we’re not going to go into that now. Click here for more.

Why Don’t We Use Perps?

Perps can also be used in this situation. However, Options are more exact (because you have to decide WHEN the price will drop). But, they also allow for higher winnings and no chance of liquidation (at least in our scenario).

For more info on this, read this article.

What Platform Should I Use?

Your options here (haha, see what I did there), are either a centralized exchange or a decentralized exchange. I don’t think we need to go into the advantages and disadvantages of both.

I will be publishing a compare and contrast in the future, but for now, we’re going to use Lyra. Lyra is well respected in the space, has been around longer, and all collateral is held on-chain. The only thing that is centralized is the order book.

Lyra is also very convenient because they autosettle, so you don’t have to remember to do anything on the day of expiration for your options. Lyra is also giving out trading rewards right now.

Understanding a Crypto Options Marketplace

For this example, we’re using Lyra’s dashboard. As you can see, a Put Option looks like this:

• Column 1: Strike ($3000): The price you will be able to sell the asset on the expiration date.
• Column 2: Delta (-0.18): The difference between the option asset price and the current price today (0 means no difference, so -0.18 means an 18% drop
• Column 3: IV (84.53%): The percentage — in comparison to today’s price — of the options asset price (in other words, $3,000 is worth 84.53% of today’s ETH price of $3547.
• Column 4: Rewards (90.4): The bonus rewards for one purchase of these options contracts that Lyra is offering — worth about $8 at today’s price.
• Column 5: Bid Size (30.00): How many of these contracts Lyra would be willing to buy from you right now
• Column 6: Bid Price ($81.7): How much Lyra will buy one of these contracts from you.
• Column 7: Ask Price ($91.9): How much one of this contract costs. 1 contract means the ability to sell 1 ETH at that price (i.e. 1 ETH at $3000 on the date of the contract)
• Column 8: Ask Size (59.31): How many of these contract are available for purchase right now.

Simply, when we refer to a Put Option, I’ll write it like this:

ETH with a strike price of $3000 on April 26 OR ETH at $3000 on April 26.

A Step-by-Step Guide To Shorting Crypto with Put Options

Ok, so lets assume that you want to do this.

Here’s one way to short ETH or BTC:

1. Choose your platform. In my friend’s case, he used Lyra — and by using Lyra right now, you make yourself eligibility for their trading rewards. Lyra supports Bitcoin and Ethereum Put and Call Options. You can also buy leveraged perps.

2. Navigate to their “Options” tab and select BTC or ETH. You can also check out their Perps section which allows for trading with leverage.

3. Select “Puts.”

4. Decide when and the strike price you think ETH will be. In my friend’s case, he thinks that ETH will be worth $2600 on April 26. Select your date. Currently available are two days in advance, April 5th, and April 26th, May 31, and June 28.

5. Select the Put you want and then enter in how many you want to purchase. You will see the costs including the Max Cost (how much it costs) and the Fees (the additional cost of the transaction). The Mark Price is the average between the Bid and Ask price (i.e. an estimation of the fair market value of this contract).

Now what happens?

Now, essentially, you’ve made a bet that ETH will be below $2600 by April 26th. If ETH is under that price on that date, you’ll make money (you’ll make the difference between the option’s price and the price of ETH). If ETH is above the option’s price on that date, you’ll basically just let the contract expire.

Do I Need To Do Anything On My Expiration Date?

Nope! The nice thing about Lyra is that your contract will auto settle. You don’t need to remember to do anything on your expiration date.

If you want, you could sell the option before the expiration date. You might make money this way, especially if the market moved in your favor. But, you will likely make more money (if you’re right) waiting until settlement day.

Let’s Review The Risks

The risk you would be taking with a Put Option trade is that ETH (or whatever the underlying asset is) is above the strike price of your option on the expiration date. In my friend’s case, the risk is that ETH is above $2600 on April 26. In that case, you would not make any money, your contract would expire, and effectively, you would lose the money you spent buying this contracts.

The other risk you are taking is associated with the platform you are using (in this case Lyra). Since you are basically betting on the price of the asset, when you win, someone loses. Because you’re buying a Put Option, all of your risk is up front (because, if you lose the trade, you simply lose the amount you originally paid for the contract). However, the person on the opposite side of that trade has all their risk on the backside of the trade.

An example of this is with my friend’s trade. If he loses, he just loses the capital he posted to buy those contracts. But his counter party must now buy his contract on the expiration date for the difference between the contract’s strike price and the underlying asset. So why would anyone do that? The reason is because the counterparty must post collateral to enter into the trade. So, it’s up to us to verify with the platform that they require adequate margin amounts and have adequate liquidation policies to guarantee we get our money at the end of days.

Can We Trust Lyra?

Here’s the god-honest truth. As far as I can tell, yes. Buuuuut, I haven’t yet finished my deep-dive review of Lyra where I will compare and contrast it with other competing platforms.

However, the team and platform has a good reputation in the space. They haven’t fucked up until now. They’re on-chain so your collateral is safe and everything is transparent. As far as I can tell, they have good risk management policies. And they have excellent support on Discord.

But, as I said, I can’t wholeheartedly tell you it’s safe from my own two eyes. I personally trust it enough to use it, and so do people I know, but please DYOR if this is not enough for you.

Parting Words

I had a lot of fun writing this article and I learned a lot. I plan to implement some of these strategies in my own portfolio. Honestly, I think buying Puts is a way better strategy when you’re nervous about crypto’s potential downside than simply selling your crypto.

But, as always, this is real degen stuff, so DYOR, don’t put in anything you’re not willing to lose, and please, make sure you have a really strong understanding of this before engaging in options trading.

From here, you can expect to read:

• Updates on how my friend’s trade is going
• A compare and contrast between options DEX platforms and a look at whether LYRA token is a good investment
• Option strategies

Peace ✌️

As always, none of this is financial advice. I am not telling you to buy or sell anything, just sharing my underlying research and conclusions.

I do hold a portfolio of cryptocurrencies. I was not paid by anyone to write this article. I do not hold Lyra’s token. I do not hold any option positions on Lyra or anywhere else at this moment.

If you would like to support this writing, please, leave me a comment (I love your feedback), pledge on Substack for when/if this newsletter ever goes paid-mode (you won’t be charged, only if/ever we make this paid):

…or you can buy me a cup of coffee or send some ERC20 tokens my way!

ERC-20 Address: 0x4F9960B2A808e8083C2D12420Aba4496D10e6D37

Buy Me A Coffee ☕️

Alright, let’s talk about Ethena and USDe. First, deep breath.

If you want to trigger an entire community’s PTSD , just tell them you’ve come up with a new yield-bearing stable coin…

For reference, all of the links in this article are referral links. I’m not trying to pull a fast one on you and I usually like to give people multiple links so they can support me or not. But Ethena requires a referral code…so here we are, both caught in the web of crypto’s hair-brained airdrop farming schemes. You do get a 10% farming boost if you use my referral link…

The Index

The links here are to my Substack since that’s my primary place I publish. However, you can also read all of my articles here!

1. Intro to Ethena
2. Ethena Protocol TL;DR
3. Ethena Protocol ELI5 (Explain Like I’m Five)
4. Crypto Perps & Options — ELI5
5. What Is A Funding Rate?
6. Where Does Ethena’s Yield Come From?
7. Is this yield sustainable?
8. The Risk With Ethena (IMO)
9. The Difference Between UST and USDe
10. Stability Mechanism
11. Yield Generation
12. The Bottom Line
13. Airdrop Farming

Welcome to Ethena

If we’re judging Ethena based off of how clutch their keywords are, give them the crown. The Internet bond…The synthetic dollar…

I mean, come on, maybe it’s just the writer in me, but wake up people of DeFi! It matters what your product is called! Learn. From. Ethena.

In a sentence, Ethena is the new product on the block, offering a stable coin, collateralized with ETH, pegged to the dollar, using financial short options for stability, with a built-in yield derived from ETH’s staking yield and some money made by holding those shorts (more explanation on that below).

I know, that’s a lot. I want to break this down as simply as possible because this protocol has come across my desk several times recently. Ok, maybe not my desk, but my notification feed! Ugh…2024 is so less romantic. I want to be typewriting this article in a little office laden with cigarette smoke…

“Lisa, where’s my coffee! And tell Vitalik that I don’t care how important it is, I can’t meet until Tuesday!”

*wakes up* to a lonely life of a crypto blogger.

*sigh*…

Why Am I Writing This?

The main reason I’m writing this is for the same reason I write anything — someone asked me to and I wanted to do so for my own research purposes.

There are a few main questions I want to hit with this article, questions I find myself asking myself — which, admittedly, is a very strange person for me to ask, since clearly, neither of us currently has the answer. That is why we are writing this article, I mean me…I…that’s why I’m writing this article:

1. An understanding of Ethena that my grandma could get behind
2. A thorough understanding of how Ethena generates its yield
3. An assessment of the risks

Ethena Protocol TL;DR:

If you want don’t want to read anymore, you can read this snippet to get my opinion of the protocol:

Overall, I’m sold. The economics of the protocol seem sound and I think it will be a valuable product. This is not another LUNA/UST ponzi!

However, you should be aware of what it is. It is not promising to be the stable coin with the tightest peg (and even the team isn’t saying that). They aren’t guaranteeing that this will always be 1:1 exactly with the dollar. They also aren’t guaranteeing that it will always have an attractive yield.

So what is it? This is a synthetic dollar which is much more independent from TradFi than something like Tether, that can provide predictably higher returns than simple staked ETH, that has a doxxed, experienced team, and will likely play the long regulatory game.

I think that USDe becomes a mainstay in DeFi and I would consider getting in on their future airdrop, or acquiring some governance tokens to the platform once it launches.

Ethena Protocol — ELI5 (Explain Like I’m Five)

Ethena has created a stable coin with 60ish% APR at the time of writing. It’s called *drumroll please* — USDe. Reeeeaaaaal original guys… (apparently, ‘e’ was the last letter available after ‘t, g, c, p’ are all taken!)

Approved parties can mint and redeem USDe from various exchanges by depositing stETH onto the platform. If ever prices differ between exchanges, arbiters will take advantage.

All USDe tokens are backed 1:1 by stETH.

Now you, saavy crypto reader, might now ask…”wen moon???”

NO! Wrong place, wrong time. You were supposed to ask, “how does Ethena maintain stability with only a 1:1 collateralization ratio with an asset as volatile as stETH?!?”

They do this by opening: “a corresponding short perpetual position for the approximate same dollar value on a derivatives exchange.”

What they’re saying here is that, when someone mints $1 of USDe, Ethena goes and opens up a short position on an exchange. They use the stETH deposit as collateral. (We’ll explain this more below).

*Eyes flip nervously back and forth between Ethena’s website and the Luna/Terra wikipedia article*….WHERE does the yield come from?

You’re finally paying attention. Or you’ve got a case of crypto PTSD but, haha…who doesn’t…am I right? Am I right? *nervous laughter turns to tears*

The ETH comes from the native yield generated by staked ETH + the funding and basis spread from the delta hedging derivatives positions.

Ok, well, to understand this, we need to understand what a crypto funding rate is and to do that, we have to start with: What Are Options:

How Does Ethena Protocol Work? TL;DR:

Very simply, Ethena holds stETH and issues USDe 1:1, with that stETH as collateral. They also hold short positions on ETH which means that they make money when ETH goes down. This protects the collateral. They also earn a funding rate on their short position which is their reward for holding options that are shorting the market when the general market is going long. They pass along that yield from the funding rate and the native yield from the stETH to USDe holders in the form of yiiiiieeeeeelllllddd.

Crypto Perps & Options — ELI5

Options and futures/shorts are pretty similar. Both are agreements to buy or sell an asset at an agreed upon price in the future. With futures, you HAVE to sell the asset on that date, at the price. With an option, you have the option to do so. If you want, you can let the contract expire (you, of course, would lose the amount that you paid for that contract).

Now, crypto doesn’t like constraints, so they use something called perpetual futures (aka perpetual swaps aka perpetuals aka Perps — fml, no wonder this shit seems complicated). Perp contracts are contracts that never expire.

Now, you might ask, what’s the difference between a Perp and the underlying asset? I had to ask myself this too since, in essence, if you have a contract to buy something but you never have to buy it and there’s no expiration date, essentially, you’re just holding the underlying asset, right?

This is kind of true. The difference is that Perps are much more efficient and flexible and thus, they’re the preferred asset of crypto exchanges. So…if you want to trade on margin (in other words, with leverage), you must use Perps.

On a side note, when people say they’re going long or going short, this can mean many different things. The easiest way to “long” or “short” an asset is simply by buying or selling that asset. But usually they don’t mean that. What they probably mean is that they’re using leverage which basically means that they’re borrowing that asset. If they’re shorting the asset, they’re going to borrow it and then sell it. If they’re longing the asset, they’re just going to borrow it and hold on to it.

So Perps aren’t really that special, other than that if you want to be able to use the full spectrum of financial tools, those markets will be built on Perps.

Perps TL;DR:

Very simply, perps are basically just much more efficient representations of underlying assets that are preferred by exchanges for leveraged trading (i.e. going long or short).

What Is A Funding Rate? — ELI5

However, there can be times when there is a slight difference between the price of the perp and the price of the underlying asset.

Why? Mostly because there is a desire to go long with leverage, so degens are lining up to buy the Perp more than they’re lining up to buy the actual asset. F**king crazy degenerates.

So as the market goes up and people want to leverage long (i.e. borrow a lot of the asset), there’s more demand for Perps and the price of a Perp tends to be higher than the price of the actual asset.

This is called a Basis.

The basis is the difference in price between the Perp and the underlying asset. Too high of a basis is really problematic since the whole derivative market is built on assumption that these derivatives are closely linked to the underlying asset.

So…what do they do?

Well, they penalize perp holders. This is called a Funding Rate.

The funding rate can be positive or negative depending on if there is more or less demand for the perp than the underlying asset.

• When would there be more demand for the Perp? When the market is optimistic and people want to go long so there’s more demand to buy the Perp.
• When would there be less demand for the Perp? When the market is pessimistic and people want to go short, meaning they’re borrowing the Perp and selling it, creating downward pressure.

So…

• Positive Funding Rate = Bull Market
• Negative Funding Rate = Bear Market

When there is a positive funding rate, those who have long positions (i.e. hold the Perp) have to pay those who have short positions and vice versa. This basically rewards people trading against the majority and penalizes those with the majority. At the time of writing this article, the BTC funding rate is about .015%. This percentage is generally paid EVERY eight hours.

So…if you wanted to purchase $100,000 in BTC longs, the cost of those longs would be $15 every eight hours. That adds up. That also means that, if you wanted to earn some yield, you could hold BTC shorts and earn that amount.

That leads us back to Ethena:

Where Does Ethena’s Yield Come From?

Since Ethena’s synthetic dollar — USDe — is backed by stETH, the yield, as we said before, is a combination of:

• the native yield from ETH (approx. 4%)

+

• the funding rate for ETH shorts

Right now, that equates to about 60% annual yield.

This yield will obviously fluctuate based off the funding rate which is based off market sentiment.

Is Ethena’s yield sustainable?

Listen to Vitalik speak about this:

“Anything that offers more than a 10% APR is unsustainable at best, and a scam at worst.”

OMG didn’t Vitalik just say this is a scam?!?! It’s Luna all over again!! Call the SEC! Call Batman….fuck, who do we even call?

What he actually said that it’s unsustainable which I would agree with and I think even the Ethena team would agree with.

They are not promising 60% returns. They are saying that they have developed a product which, according to the brief time it’s been around (and historical estimates), is able to maintain stability and pass along a higher yield than the simple ETH yield, all without taking on too much risk (too much is relative obviously).

The 60% yield is a reflection of the current funding rate set by the market. This yield will change along with the market. Flexible yields set by market forces are the definition of sustainable because, well, there’s nothing to sustain! Unsustainable yield are those that are guaranteed at a certain percentage…always…like UST. Unless you’re a POS protocol or the federal government, that doesn’t work (and it doesn’t even really work for the Fed!)

How Does USDe Stay Stable — ELI5?

In other words, Ethena maintains a stable price of USDe, because…if ETH goes down, Ethena makes money with their shorts and this offsets the loss in the value of the collateralized stETH. This, combined with the payouts from the funding rate, is enough to pass along yield to holders of USDe.

If ETH goes up, Ethena loses on their short positions, but the value of the collateral (stETH) goes up and evens itself out.

The Risk With Ethena (IMO)

There’s obviously risk here in terms of protocol risk and the risk of insolvency when it comes to centralized exchanges holding their short positions. This is important to consider, especially when we have fully decentralized stable coins like f(x)USD. However, Ethena is mitigating this risk by not posting their collateral directly with the exchanges, but rather, by using a trusted custodian who delegates the collateral to various exchanges — a more efficient process and a safer one (assuming the custodian is a good one).

However, the biggest risk here comes in the form of a sustained negative funding rate on ETH. Since Ethena needs to hedge with short positions on ETH to maintain a stable USDe price, if there was a prolonged period of negative funding rates, Ethena would begin to bleed money. They do have an insurance fund right now which captures 5% of the funding rate income. This fund is currently at about $15 million.

In the case of prolonged negative funding rates, Ethena would burn through this insurance money and, eventually, would either have to attach that negative funding rate to USDe (essentially, taking collateral away from holders of USDe), or they would collapse.

Now, the nice thing here is that, unless Ethena commits fraud with the collateral, even in the worst case situation, an Ethena collapse means that your USDe is worth its weight in ETH. That’s it.

Realistically, the team has published historical analysis and showed that, with the additional yield provided by stETH, only about 10% of total days had a negative funding rate, which, is totally coverable by the current insurance fund. This accounts even for the massive crashes in 2021.

Also, Arthur Hayes (Arthur Hayes), the inspiration behind the Ethena idea, has said that, long term, USD is an inflationary asset while ETH should be a deflationary asset, which should mean funding rates remain positive.

He said it well. Everything seems to point to these two trends continuing.

Essentially, a bet on Ethena is a bet on a positive funding rate which is a bet on ETH outperforming the USD in the long run.

The other risk I want to discuss is the difficulty in maintaining derivative positions across multiple exchanges and managing those positions in real-time. What if there was a massive price movement? I know some of these positions are managed by automated systems, but…in a black swan event…what if Ethena could not exit their positions fast enough and got liquidated?

This is a possibility. However, I do want to say that, according to estimates in official Ethena documents, even in the 2021 crash, this would not have happened.

All in all, I’m comfortable with this risk. I don’t think USDe is being oversold. I think this is a novel idea with a unique approach, with recognized and stated risk. Do your own research and understand the product you are purchasing. This is a novel and innovative protocol and who the f knows what will happen. However, the team is humble and honest and the economics appear sound.

Ethena Risk TL;DR:

Other than protocol risk and exchange insolvency, the main risk with Ethena is that there is a prolonged period of negative funding rates which would make it too expensive for them to hold their short positions and ultimately, reduce their USDe stable coin back into volatile ETH. This would be unprecedented as, even with all the historical volatility, Ethena’s economics should have worked.

There is also the potential where Ethena mismanages their short positions and loses their collateral (your and my collateral). However, they are transparent with their holdings and it’s up to you whether you think they’re professional enough to NOT DO THIS.

The Difference Between UST and USDe

If the difference is not clear to you yet, let me explain it to you:

The key differences we need to explore are:

1. How they both maintain(ed) stability?
2. From whence comes their yield?

Stability Mechanism:

UST maintained stability without any collateralization, by guaranteeing that people could always exchange $1 worth of UST for $1 worth of LUNA. They speculated that LUNA would always have value because they were building LUNA to be valuable!!

USDe maintains stability with 100% collateralization with stETH and then uses short positions to hedge against ETH volatility, passing back the profits from the short positions to account for any loss in the value of the stETH collateral.

Very simply put, one is not like the other. One was backed by nothing, while one has 100% collateral. One has a logical system in place with the use of established financial instruments to maintain its price while the other had no system in place other than…“arbitrage will save the day!”

Yield Generation:

UST promised 20% return on UST deposits and generated that yield by loaning out the UST to other borrowers for more than 20%. UST guaranteed their yield.

USDe generates its yield by combining the native yield from ETH + the money earned from the funding rate on ETH perps (which will be in Ethena’s favor as long as the market is generally bullish on ETH). USDe makes no guarantee about the yield and says that it surely will fluctuate, perhaps a lot.

The Bottom Line

I went into this project pretty blindly because people asked for this article, without any established opinion.

Overall, I think this is a very interesting protocol and I respect what they’re doing.

I think the key thing is not to think of this as a stable coin, but as a synthetic dollar. A synthetic dollar’s value will fluctuate a little bit and has its own yield associated with the asset. I think that someone who is interested in maintaining total stability of their assets should use USDC or USDT (although, they’re also not without risks). Someone who wants their stable coin pegged to ETH, with ETH native yield, should use fETH. Someone who wants a totally decentralized, DAO-backed, approach to their stable coin should use f(x)USD.

But someone who is interested in holding what will be a very stable asset with a yield that is reliably sourced (and higher than ETH’s native yield), backed by a VC-rich team, should hold USDe. I could see this becoming one of the preferred on-chain stable asset, providing transparency and sound economics in a way that other stables can’t and providing the accountability and regulatory certainty that more decentralized stables cannot.

All in all, I think this product is what it is. I don’t think it’s promising more than it can deliver. I don’t think it’s risk free. But I think that, provided you understand how this works, get in there.

Airdrop Farming Recommendation

If you want to be a guinea pig and airdrop farming degen, if you purchase USDe and stake it with Ethena right now (until April 1), you can farm their airdrop. I don’t love this whole airdrop farming thing, but I am a sucker for free(ish) money, especially with protocols that aren’t scams. You can’t mint USDe right now, but you can swap for it and stake it.

You can check it out here.

If you are bullish on crypto and don’t have a bunch of cash lying around but still want to obtain USDe to farm the airdrop. What I did is:

1. Deposit ETH on AAVE
2. Borrow a stable coin — crvUSD was the one I used since it had the lowest rate and can be used to Ethena to swap for USDe.
3. Swap crvUSD for USDe on Ethena.
4. Do something with your USDe to get points (shards…dance monkey dance!!

This whole thing is rather gas expensive since it’s all done on ETH mainnet. This will probably cost around $60 total with all the token approvals and executions. Consider this before attempting.

I think there is an option to use Injective to farm. I don’t think you can get as many points, but it would be infinitely cheaper.

As always, none of this is financial advice. I am not telling you to buy or sell anything, just sharing my underlying research and conclusions.

I do hold a portfolio of cryptocurrencies. I was not paid by anyone to write this article. I did it on my own with time that earned me zero dollars. I do hold some USDe right now, but only for airdrop farming purposes.

If you would like to support this writing, please, leave me a comment (I love your feedback), pledge on Substack for when/if this newsletter ever goes paid-mode (you won’t be charged, only if/ever we make this paid):

…or you can buy me a cup of coffee or send some ERC20 tokens my way!

ERC-20 Address: 0x4F9960B2A808e8083C2D12420Aba4496D10e6D37

Buy Me A Coffee ☕️

I’m writing this because I’ve spent my last two weeks eating carrots at the bottom of this rabbit hole. I told @DefiBetaTesta a few weeks ago to tell me if he found anything he thought was game-changing. Fast forward a bit and I get this…

So here we now are today and both BetaTesta and I have emerged, bleary eyed and generally a bit shaken, from our weeks in the rabbit hole.

An Intro To f(x) Protocol

Where should we begin? It’s a bit hard to decide how to frame f(x) Protocol. Is it a stable coin project? Or maybe we should focus more on the functionality it enables within the ETH ecosystem?

Let’s first talk about what it is and how it works. Then we’ll explore the implications.

Very briefly:

1. f(x) Protocol potentially unlocks a game-changing stable coin alternative f(x)USD and we need to understand all of the stables that came before to properly compare.
2. f(x) Protocol offers a set of powerful possibilities within the ETH ecosystem, including:
3. A way to gain native-ETH yield without exposing yourself to the volatility — like a crypto savings account if you will.
4. An easy to use way to get exposure to leveraged ETH
5. They have $45 million in TLV right now.

Before we go on, I highly recommend you read this article first, since it’s really important to have a strong understanding of the ecosystem so that you can understand why what f(x) Protocol is doing is unique:

What You Should Know About Stable Coins

f(x) Protocol ELI5

f(x) Protocol’s uses collateral like many other DeFi protocols. Right now, f(x) Protocol uses stETH as their collateral — staked ETH — but they will allow other LSTs in the future (LST stands for Liquid Staking Token which, essentially, is the token that represents a deposit in an ETH staking protocol like Rocket Pool or Lido).

The advantage of stETH is that it allows the protocol to capture the native yield of ETH. As you’ll see, they put it to good use.

Isn’t stETH More Risky?

You might say, “but isn’t it more risky to use stETH, since now we have to also trust the Lido Protocol?” This is fair and there is additional protocol risk involved. However, I’ll make the same point I heard the f(x) Protocol team make in an interview. At this point, there is so much ETH deposited in Lido, that a failure of the Lido protocol may very well result in a failure of the entire ETH ecosystem. In other words, it’s not really that by not using stETH, f(x) Protocol could protect themselves from Lido. They would just be forfeiting the native yield.

…

To read the rest of this post, you can find it for free here:

Why f(x) Protocol Is The Most Interesting DeFi Protocol You Haven't Heard Of

A Deep Dive Into the History of Stable (and Unstable) Stables

This article was originally published on my Substack so all of the links will link you there. But you can read the entire article here as well! Please consider clapping for this article or commenting, if you liked it.

Why Should You Read This Article?

Truthfully, I don’t know. I don’t know why anyone reads anything I write. Maybe it’s my humor that, for a moment, lets you forget about the bills and the grind and the existential terror and just slow down and enjoy a piece of writing for a second? Or maybe it’s my pervasive (and edgy) use of run-on sentences and complete disregard for English grammatical norms? Yeah…that must be it.

But real talk, I think you should read this because I haven’t found an article like this before. This really could be three different articles, but the problem is that stable coins touch on so many areas. To really understand the implications of them you have to understand how the DeFi markets supporting them work. If you understand this and have a large enough perspective on the innovations in the space, then you can identifying exciting protocols as they emerge. So this is a timeline of stables and a deepdive into their underlying protocols (or at least as deep as I could given the limitations of time and the sheer quantity of protocols to explore).

I also published an article about f(x) Protocol, one of those exciting protocols (at least imo). This article is really necessary to understand what they’re doing and why it’s special.

Even if you don’t care about f(x) Protocol or new DeFi protocols, hopefully this article will earn a coveted space in that bookmark file you have for articles that you read once and intend to read again but probably never will.

TLDR: Read this article because you’ll be able to stand on the edge of stable coin innovation and brag to your friends and say, yeah, I get it.

The Handy Dandy Index

1. Understanding Stable Coins

• Comparison of the Different Types of Stable Coins
• Tokens that use some sort of off-chain collateral.
• Tokens that don’t have any sort of collateralization –
• Tokens that use on-chain collateral

2. A (really) Deep Dive Into The History of Stable Coins:

• BitUSD
• NuBits
• USDT — Tether
• DAI — MakerDAO
• USDC
• USDP — Paxos’ stable
• GUSD — Gemini’s Stable
• TrueUSD
• AMPL — Ampleforth
• FRAX
• FEI
• UST — LUNA
• crvUSD — Curve Stable Coin
• GHO — Aave Stable Coin
• USDe — Ethena Stable Coin

3. Stable Coin Takeaways

• The Problems With Fiat-Backed Tokens
• The Problems With Algorithmic Stable Coins
• The Problems With Collateralized Tokens

4. The Importance of Native Yield for Stable Coin Protocols

5. Realizations I had While Writing These Articles That Might Be Helpful To You

6. The Perfect Stable Coin: A Thought Experiment

7. Final Thoughts

Understanding Stable Coins

There’s a lot of offerings right now. In fact, it feels like every other week you have some new protocol unleashing a stable coin upon us — Aave, Curve, etc.

In some ways, this shows that stable coins might not be one-size-fits-all. As you’ll see below, different design considerations provide different benefit/risk tradeoffs.

What is interesting is how the internal economics of stable coins become what we would call a feature. Usually, these coins are backed by some kind of debt market. I mean, the whole treasury bond and banking market in the U.S. is how they ensure dollar stability. So the value backing the stable coin isn’t only as idle collateral, but often as functional protocols offering access to various financial features.

I like thinking about it like this because protocols really have two potential value offerings:

1. As a stable stable coin
2. As a DeFi protocol offering lending, leverage, etc.

Let’s dive into what has turned out to be a very extensive review of stable coins from dawn until today.

Comparison of the Different Types of Stable Coins:

No, we’re not running a review site comparing horse stables. You’ll have to go elsewhere for that.

Among the different stable coins in past and present, we can break them down into three different approaches. You might have read this breakdown elsewhere. It’s not very original.

1. Tokens that use some sort of off-chain collateral.

These stables rely on centralized escrows that manage some sort of off-chain collateral like gold, dollars, or some other centralized currency.

Examples of off-chain collateral backed tokens:

1. USDC — uses dollars
2. USDT — dollars
3. BUSD — dollars
4. PMGT — gold
5. GUSD — dollars
6. USDP — dollars

2. Tokens that don’t have any sort of collateralization –

These try to rely on some sort of internal economic system to maintain stability. Yeah…we know that doesn’t sound very good. These have been called: Seigniorage-style tokens. As you’ll see in our deeper analysis below, it’s not that they have “no” collateral, but rather, they’re collateralized with a token that the protocol can mint at will.

At the heart of them is a lot of truth though. They understand that price fluctuation is just a factor of supply and demand fluctuations. So they try to implement mechanisms to control supply and demand to stabilize price.

Examples of seigniorage-style tokens:

1. UST
2. BitUSD
3. NuBits

3. Tokens that use on-chain collateral

This is where the money is…literally.

1. DAI
2. f(x)USD
3. FRAX
4. crvUSD
5. LUSD
6. GHO
7. eUSD

We’ll dive more into how these work. But first, let’s all take a moment of silence for some stable coins that are no longer with us:

Some of these will be explored more in depth

1. Acala USD — dead because of a bug in the iBTC/aUSD liquidity pool which allowed for a huge amount of minting without adequate collateral
2. UST — the LUNA debacle. Read more below as this is one we focus on.
3. BeanStalk — an uncollateralized token in which an attacker found a vulnerability in their system and withdrew $180 million. It is in fact still operational. I have serious concerns about their economics.
4. TITAN — very similar to UST/LUNA. IRON/TITAN collapsed in 2021.
5. bitUSD — one of the first stable coins. It was an uncollateralized stable tied to Bitshares that collapsed in 2018. Read more below.
6. Basis Cash — apparently, this was a test project for Do Kwon and some of the Terra team. It collapsed in 2021. Apparently, Kwon wanted to test whether he could successfully develop a stable coin that would eventually collapse before he tried it on the big stage.
7. NuBits — NuBits/NuShares was one of the first, along with bitUSD. It eventually collapsed for a similar reason as all the other algorithmic coins.

Brief Rant Time:

Ok, skip this is if you want, but can I just say that after reading stacks of stable coin content, there’s nothing that makes me more noxious than hearing people say one of the following things:

“Although it may be complicated under the hood, it’s very simple for the consumer. Just like the average Bitcoin consumer doesn’t know how elliptical curves work…”

• Reading this by a team whose product literally burned later. Just because it’s complicated doesn’t mean it works…

“The price is maintained at $1 because everyone trusts that it’s $1, so if it goes above $1 than people will sell, and if it goes below $1, people will buy it…

• This feels to me like such a fundamentally backwards way of looking at it. YES, that is an aspect of stable currencies, but I would argue that arbitrage is a result of historically trustworthy currencies, and not the other way around. At least not for the first 20ish years…

Just please, look out for yourself out there…

A Timeline of Stable Coins:

I am putting this on a timeline because I think it’s useful to understand how stable protocols built off each other.

BitUSD

Launched in 2014

How Did BITUSD Work?

BitUSD was the first stable coin, emerging in 2014. It relied on overcollateralization (approx. 200%) with the use of Bitshares as collateral. Simply put, you could mint bitUSD by locking bitshares up as collateral. The system relied on two things:

1. An assumption that bitshares would be worth something
2. Arbitrage and other actors would help maintain a $1 price on bitUSD

If the collateral dropped below 200%, the user would have to commit more collateral (as bitshares) or lose some of their bitUSD. They were also always able to trade 1 bitUSD for $1 of bitshares, which they believed would always ensure that if bitUSD ever dropped too much, people would buy bitUSD to trade it in for $1 of bitshares. Naive much?

This whole thing lasted until 2018 when it collapsed.

The real issue was that they had mechanisms to protect against the falling value of bitshares (collateral), but not the falling price of bitUSD. They made the classical assumption that, why would a $1 stable coin trade at any price other than $1?

Read on from BitShares founder, Dan Larimer:

“The market peg works on the premise that all market participants buy and sell based on what they think market participants will be buying and selling in the future. The only rational choice is to assume that it’s going to trade based on the peg in the future. If you don’t believe that, then you have to decide on which way it’s going to go, up or down. And if you don’t have a way of saying you abstain from the market. If you don’t think it works you sell the shares and get out, as the system’s going to fail in the first place. So its a self reinforcing market peg, that causes the asset to always have the purchasing power of the dollar.”

It’s a little hard for me to identify exactly what happened. There doesn’t seem to be so much info regarding the actual decoupling event. This leads me to point out that we really should have some sort of record keeping for this point in on-chain history.

What I could piece together though was that there was a black swan event that created a cascade of liquidation that wrecked bitshares’ price. This happened at the beginning of 2018 when the whole crypto market ate shit. It drove the price down so swiftly, that it depegged bitUSD (how exactly that happened, I don’t know. Write to me if you were there). The system had no mechanism in place to help bitUSD regain its peg since people could only trade 1 bitUSD for $1 worth of bitshares. But there was no demand for bitshares at that moment and no one was able to get $1 worth of bitshares for 1 bitUSD.

TLDR: What Happened to bitUSD?

Ultimately, I think the lessons are that:

1. Your stable coin is not worth $1 just because you say it is and expecting market forces like arbitrage to protect its value is, at best, naive, and at worst, fraudulent.
2. Securing a stable coin with on-chain collateral made up of a highly volatile, unproven asset (that you control), is really dangerous. Bitshares was not reliable enough to serve as good collateral.
3. There was also a serious problem in that there was no reliable price oracle providing data for pricing the exchange at $1. There was no ChainLink back then.

All in all, the biggest problem with this was that there wasn’t any real mechanism to stabilize the currency at $1, other than the expectation that everyone believes it will be $1. Sound familiar? *cough* UST *cough*…

NuBits

Launched in 2014

How Did Nubits Work?

NuBits worked similarly as bitUSD. Anyone who held NuShares (the governance token) could vote to approve the minting of new NuBits which were then sold to increase supply. They could also decrease supply by allowing for a mechanism they called “Parking,” which was essentially an on-chain bond — incentivized through yield. Holders were paid a yield for locking their NuBits, thus choking supply and hopefully stabilizing the price.

As just an example of how sketchy this all feels, take a look at this article that was published at the time, explaining how NuBits works:

I mean…who the fuck writes this bullshit? How many ways can we say something while saying nothing?

Next, we have the classic line from their whitepaper. Heard this one before?

What ultimately did them in was the great bitcoin bull run of 2016, which my grandaddy tells me was truly a spectacle to behold. Too many people sold their NuBits to chase gold in a digital land and there wasn’t a meaningful mechanism to contract the supply to balance out the falling demand.

I will say that I have read conflicting reports from a different industry report that said NuBits was collateralized with bitcoin. I have found no other evidence of that and my report went off of what I read on the NuBits website.

TLDR: What Happened To NuBits?

The lessons here are very, very similar to BitUSD, so see above.

I will add that:

1. NuBits had a very poor mechanism for decreasing demand. The bull market exposed this weakness. Ultimately, stable coins need to be able to weather both bull and bear markets. During bear markets, they will have to deal with collapsing collateral prices and skyrocketing demand while in bull season, they will have to contract supply because of falling demand. Parking was a poor approach to this as it’s unlikely that they could offer attractive enough yields to entice people away from rising assets like BTC.

USDT — Tether

Launched in 2015

How Does USDT/Tether Work?

Tether was the first USD-backed stable coin. It’s had a bit of a rocky road since. Back in 2017, I was pretty damn sure USDT was going to implode at any second, but here it is, limping along more than the Simpsons on Season 35.

My real concern was because there was very little transparency and a lack of audits to validate their dollar reserve holdings.

Fast forward seven years and it looks like Tether probably does have the reserves to back up USDT, and the audits show it. The issue though, as highlighted in the S&P Report is that there is not a lot of transparency when it comes to who acts as the custodians of their reserves. There is also not 100% transparency into the total holdings of Tether. While they can prove 104% overcollateralization, according to reports 15% of those holdings are assets with higher volatility — and there is not enough transparency into what exactly those holdings are.

Buuuut, we have reached the oldest, still-surviving stable. 🍻

USDT TLDR:

Dollar backed crypto with decent auditing transparency, but questions regarding who is holding their assets and exactly what assets they’re holding.

MakerDAO — DAI

Established in 2015. Launched in 2017.

How Does DAI Work?

Previous community members of Bitshares went on to establish MakerDAO and the DAI stable coin system. MakerDAO was the first stable collateralized with on-chain assets.

The protocol works by incentivizing people to lockup collateral. This is really a key design feature we’ll highlight later. If you want on-chain collateral with which to secure your stable, you need to offer incentives for people to give it to you.

MakerDAO realized that they could get people to give them collateral if they looked at it like a loan. If you deposited crypto in MakerDAO, you could then borrow in DAI. They required a certain level of over-collateralization to account for asset volatility. There of course is a fee to borrow, kind of like the interest on a loan, and this interest can be manipulated to either increase demand for DAI loans or decrease them. But viola! it’s not really so complicated when you think of it like this.

DAI can also be deposited and locked which entitles the holder to yield derived from the Maker protocol revenues. We’ll explore this more in the section called “Let’s Talk About Treasury Yields.”

Today, MakerDAO has become kind of like a Novo bank and there’s some definite concerns.

First off, let’s take a look at MakerDAO’s collateral list.

Just to give you a sense, there are:

• $6.56 billion in on-chain assets, primarily ETH, liquid staking tokens, and WBTC
• $384 million of that number above is in stable coins
• $7.92 billion in off-chain assets like treasury bonds, loans

Some of these off-chain assets come from agreements with corporate entities to take USDC from the Peg-Stability Module (PSM) and convert it into treasury bonds and the like. The PSM allows for people to directly convert one DAI for one USDC, which means that MakerDAO has a lot of USDC sitting around.

There is also a Surplus Fund holding approximately $50 million worth of DAI.

One of the issues with DAI is that the collateral is not fungible across all vaults, meaning, if the collateral in one vault crashed, it would impact DAI everywhere. That’s why they have the Surplus Fund. The real question though — is it enough?

I’ll talk more about some of the implications of all of this below, but one of the biggest things is — why do we trust DAI more than USDC? At what point does our decentralized collateral stable become just another dollar-pegged token? And there was significant scare around DAI when USDC depegged because of Silvergate and Silicon Valley Bank (SVB). If I’m hedging against the dollar than I don’t want to use a stable coin that would be caught up in the cascade of collapse.

A good point made by iBetaTesta was that diversification may not be the best thing for stable tokens. If even a little bit of collateral is lost, that could spell disaster for a protocol. It seems to me that we would want to be 100% collateralized with the MOST SECURE ASSET we can find. Not 50% with the most secure and 50% with the second most secure because…diversity is good…

DAI TLDR:

People deposit crypto as collateral and then take their loan in DAI. DAI is overcollateralized, but a large amount of the collateral is now held as USDC, so it doesn’t really protect you from the risks of using centralized fiat. Regardless, it does have a strong track record and is widely used across DeFi. But I don’t love it.

USDC

Launched in 2018

How Does USDC Work?

USDC works the same way as USDT. It’s maintained by a consortium which includes Circle and Coinbase.

Their reserves are secured by U.S. financial institutions and regularly audited, although they don’t indicate directly where ALL of the funds are held. The S&P Report highlights a couple concerns here:

1. Even though USDC says this won’t happen, there’s not sufficient legal clarity or precedents to guarantee that the USDC reserves would not be fair-game in a bankruptcy case.
2. Only Circle partners or Type A users like exchanges can go directly to circle to exchange USDC for dollars. Not sure this matters so much, but just know where you are in the pecking order if there ever was a bank run.

And, let’s talk about the elephant in the room…

In March of 2023, USDC almost depegged (13% below the dollar) because they’d stored $3.3 billion with Silver Valley Bank. Coinbase paused redemptions. The peg was restored when good ole Uncle Sam promised that he’d foot the bill for another bank debacle. We’ll talk about this more, but do we really trust this? I mean, it’s not really reasonable to expect the custodian to store tens of billions of dollars in amounts that would be insured by the FDIC.

Just for fun, look at these numbers:

$28,847,880,902 market cap for USDC

Divided by $250,000 which is the maximum amount a deposit is secured by the FDIC

= 115,391

That’s 115,391 banks that Circle would need to deposit into in order for their funds to be secured. Ha. There’s only 4,700 FDIC banks in America. Soooooo…either USDC needs to diversify into land soon, or Uncle Sam is making promises to them that he’s not making to everyone else. Last year, it was reported that USDC even ditched their treasuries because of the U.S. Debt concerns — basically the same concerns that sunk SVB and Silvergate. I’m not sure if this is true, since, today, as you can see below, they do hold most of their debt as treasuries

Regardless of whether that report was true, the fact that USDC needed to get bailed out after the collapse of SVB and Silvergate speaks to a pretty unprecedented situation. When in history has an organization held $28 billion dollars and not been able to diversify into almost any other asset?

Today — looking at the BlackRock balance sheet, it appears that 59% of their holdings are in government repurchase agreements and 41% are held as government treasuries.

USDC TLDR:

Dollar backed stable. More transparency into reserves than Tether, but still almost imploded with Silvergate and SVB went insolvent. Has a serious problem in where to put their money because there literally aren’t enough FDIC insured institutions in America to hold their dollars and it’s not like Treasury Bonds can be fully trusted.

Paxos USD (USDP)

Launched in 2018

How Does USDP Work?

For reference, BinanceUSD (BUSD) is a white-labeled version of Pax Dollar.

Here folks, to our left, we have another boring fiat-backed token grazing in the fields of centralized exchanges. Really though, this stable is owned by Paxos and they publishes a monthly audit of reserves. The S&P Report likes this one, just like it likes USDC.

Paxos solves the issue of FDIC insurance by holding bonds. As of Oct. 2023, only 28% of the reserves were held in such accounts. The additional reserves are largely held as U.S. Treasury Bonds.

USDP TLDR:

All of the concerns I wrote about with USDC. No real red flags here in the sense that I don’t think there’s any actual fraud happening. Just real risks regarding bank insolvency.

Gemini Dollar (GUSD)

Launched in 2018

How does GUSD Work?

Same old, same old. This stable coin is a dollar-pegged, dollar reserve stable managed by Gemini.

Nothing really to note here. No real concerns different from USDC were noted in the S&P 500 Report.

GUSD TLDR:

See USDP and USDC TLDR.

TrueUSD

Launched in 2018

Oh True USD, founded by Justin Sun, which may I add, I trust less than the FDA. Can someone explain to me how Tron has a $12 BILLION MARKETCAP and the “insights’’ section on their website literally has three articles, all from 2020 or before, with headlines such as: “Chinese Crypto Pioneer Pays $4.57 Million for Lunch With Warren Buffett,” and “TRON Founder Justin Sun Graduates Hupan University, Forges Ahead.” 🤨

At the time of writing, they have had a miraculous repeg after losing their peg for two months. I wonder how much ETH had to be sold to regain it?

How Does TrueUSD Work?

TrueUSD has realtime reserve updates. Their reserves are held around the world, all denoted in USD. The S&P Report indicates several concerns:

1. The reserves could be vulnerable to foreign government instability as they are held at institutions in Switzerland, Hong Kong, and the Bahamas.
2. It’s not 100% clear that all the reserves being reported are legally bound as collateral. It’s possible that the parent company could use them (maybe).
3. Not much information available regarding Sun’s holdings and business dealings.

To quote:

“TUSD is not regulated, which we see as a weakness. In addition, there is no publicly available information regarding the segregation of its assets from Techteryx. While the attestation report on TUSD reserves states that Techteryx and its agents are not entitled to these assets and that there are no liens, claims, or security interest in the assets, we have not seen any legal opinion to back this statement.”

Yeah…I’d say that’s concerning.

TrueUSD TLDR:

Already depegging. Serious concerns around who is behind TrueUSD and where they’re storing their money.

Ampleforth (AMPL)

Launched in 2019

How Does Ampleforth Work?

Ampleforth is pretty cool. It aims to track the purchasing power of the dollar in 2019. They automatically rebalance the tokens held by each holder to rebalance the price. In other words, if the price goes above the purchasing power of the dollar in 2019, the tokens you hold are automatically decreased, and vice versa.

Since they use a 24h adjusted price feed, they are much less vulnerable to an oracle attack. The price of AMPL has remained within 20% of the $1 target 70% of the time. It’s not perfect, but it’s a pretty sweet mechanism. And honestly, I respect it. Maybe we don’t need a 100% stable asset?

But also, I’m not really sure who would want to hold an asset that has stability with 20% volatility…

AMPL TLDR:

Pretty cool stable that uses a smart contract to automatically reduce and raise the supply of AMPL to adjust for price fluctuations. However, they don’t really hold a strong peg, fluctuating between 20% under and 20% over their $1 peg.

Some Others We Won’t Talk About

In here there were some other tokens — like Facebook’s Libra — that…well…we just don’t want to have to even talk about them.

FRAX

Launched in 2020

How Does Frax Work?

In the beginning, Frax combined collateralization and algorithmic design properties. Previously, to mint a FRAX, you had to deposit 85% collateral of USDC (and other stables) and 15% FXS (the governance token). This ratio was changeable depending on the fluctuations of FRAX. If there is less market trust in FRAX, more USDC would be required, and vice versa. They also have engaged in the Curve Wars — by holding a substantial amount of veCRV — in order to drive liquidity to their stable coin pools. They also hold a substantial amount of Convex’s token: CVX.

As of recently, the Frax team has recognized that they aren’t fully comfortable with their token being undercollateralized, even though there hasn’t been any issues as of yet. They wisely said, and I’m paraphrasing: that the kind of metrics needed to secure $1 billion in value is not the same as necessary to secure $1 trillion in value.

So, now, they’re making a move to be fully collateralized by moving protocol revenues into the collateralization fund.

FRAX also operates AMOs — Algorithmic Market Operations — which automate the movement of FRAX token in and out of various DeFi protocols. This basically automates the process of ensuring liquidity across DeFi, hopefully preventing liquidity crunches. The AMO also deploys treasury funds — such as those held in USDC — across DeFi to earn yield and distributes those to veFXS holders (veFXS is the governance token that has been locked up for 4 years. I.e. Lock up 1 FXS for 4 years, get 1 veFXS).

Frax is currently in the process of developing and implementing a more decentralized governance model.

The S&P Report does not particularly like Frax, citing smart contract risk, questions regarding regulation, and the lack of a guaranteed peg as their main concerns.

FRAX TLDR:

FRAX is slightly undercollateralized but will soon be overcollateralized. They demonstrated success using their hybrid model — maintaining good supply/demand adjustments across liquidity pools with their AMO.

Honestly, I like FRAX, mostly because of the ingenuity of the team, and the way they really get DeFi. They’re buying a bunch of treasury bonds too, offering that yield to FRAX stakers. They also hold a lot of USDC. Feels a lot like DAI here.

FEI

Founded in 2021

How Does FEI Work?

I hesitate to even discuss this one considering its chart looks like how my heart beat would look like if I ever met Alexandra Daddario.

But sometimes it’s helpful to look at what not to do. The project has also been abandoned by the core developer team at this point, in part due to the $80 million protocol hack in April of 2023.

How Does Fei Work?

FEI offered a novel approach called direct incentives. Essentially, through automated smart contracts, the protocol manipulates trading pairs of the token on exchanges. Supply and demand, baby. They can withdraw and burn tokens and they can flood tokens into the market. This obviously didn’t work, but I kind of like the idea. Also, it’s cool to see the token largely working, albeit with only a $14 million market cap, without any centralized control.

FEI TLDR:

FEI controls supply and demand by manipulating liquidity pools — kind of like FRAX’s AMO. But a protocol hack caused the project to be abandoned. It’s still operational, but not maintaining a tight peg.

UST — LUNA

Ohhhh yes, everyone’s favorite crypto! You either watched UST crash to zero with horror, seeing your money evaporate, or you watched it with that subtle sense of “I told you so.”

It’s questionable whether LUNA was an algorithmic stable coin or a collateralized one, which really highlights how difficult it can be to distinguish between the two. UST was collateralized with LUNA, the Proof-Of-Stake token for the Luna blockchain. $1 in UST could always be traded for $1 in Luna and vice-versa. Obviously, in some regards we could have considered this as collateralized: collateralized by LUNA. However, we get ourselves into a loop here, because, in many ways, the demand for LUNA was a result of demand for UST. This is especially true when you consider the 19.5% APR offered on UST by Anchor, which was clearly unsustainable.

Terra hoped that demand for LUNA would be similar to market demand for ETH. It begs the question whether UST is so different from an ETH collateralized stable coin and truthfully, I don’t think so. However, issuing a multi-billion dollar on a platform whose only real value is the stable coin itself is much much different than issuing the stable-coin on an established protocol hosting 100s of billions of $$$ in collateral with hundreds of projects offering usable protocols. Also, the critical difference is that more LUNA could be minted at will to back UST, meaning a mass exchange of UST to LUNA could potentially hyperinflate LUNA (which happened). That’s obviously not the case with ETH. A good point here is that it’s not a good sign when the developer of the stable coin has the issuance power over the collateral. This, as the youth would say, is highly sus (I’m all about trying to work more slang into my articles to appeal them to the youth…subscribers are subscribers).

The Terra team did recognize the risk of this and acquired over $3 billion in BTC to help balance out the reserves. We know what happened at this point onwards, but just in case you were part of some monastic order during that period, some traders took advantage of the limited liquidity in the 3Pool — a stable-coin liquidity pool on Curve. Within a couple hours, two trades swapped almost $200 million in UST for USDC. This forced the Terra team to withdraw about $100 mil in UST to try to rebalance the pool which further limited liquidity.

The Terra team continued over the next few days to flood the pools with UST, selling off their reserve BTC. They did manage temporarily to repeg UST, but it was short lived. Without more reserves to deploy, they were high and dry.

This liquidity crunch depegged UST. As its price crashed, more and more people began trading UST for Luna which hyperinflated Luna away. It’s not so unsimilar to what happened with bitUSD/Bitshares.

TLDR: What Went Wrong With UST/Terra?

1. All of the monetary market operations were being conducted manually. They couldn’t react fast enough.
2. The team is responsible for maintaining liquidity in pools through manual operations.
3. They were paying 19.5% on UST. This was not native yield, but earned through lending. We’ll discuss this more later.
4. It had dog-shit backing it

All in all, it was a colossal and extremely costly failure. Let’s at least learn from it.

Curve Stable Coin: crvUSD

Launched in May of 2023

How Does crvUSD Work?

crvUSD works very similarly to MakerDAO where users deposit collateral and then take a loan out in crvUSD. It seems logical that most debt markets would issue such a token of their own and, indeed, it seems like that is happening. Just check out Aave’s GHO.

What Curve’s crvUSD does well is it innovatively does something called soft liquidation — called LLAMMA.

With normal debt positions, there is a set liquidation range. If you fall below that range, you get liquidated, usually with a pretty heavy penalty. The penalty is a result of needing to liquidate large amounts at once (think massive slippage). LLAMA gradually converts collateral into crvUSD as the collateral price drops, and then can un-liquidate as the price climbs again. I like it when a protocol deploys their own stable because they need it — i.e. it unlocks a novel mechanism — rather than just because they can.

One note with Curve is that, yeah, I know it’s a joke that they make it look like Windows98, but eventually, the joke gets old and it just looks like Windows98. I really think, at this point, their UI/UX is limiting their growth.

crvUSD TLDR:

Backed by a basket of collateral, you can deposit either WBTC, WstETH, ETH, or some other ETH LSDs to withdraw crvUSD. They have a novel approach to reducing the risk of liquidity.

AAVE — GHO

Launched in July of 2023

How Does GHO Work?

I don’t know if you’re tired of reading these coin analyses but I sure as hell am tired of writing them. The last one we’ll look at is GHO, a stable launched by Aave in July of 2023.

GHO is pegged to the USD, although they use a basket of tokens as collateral.

Fees earned through GHO lending do not go to liquidity providers but rather go to the DAO. These funds are then distributed to those holders who stake the GHO as native yield. Your GHO stake can be used to cover protocol losses in case of an emergency. That’s the risk you take.

I truly don’t see any major differences between GHO and say crvUSD. However, GHO can be minted by depositing on Aave, which gives the protocol more control over their loan currency.

Also, it hasn’t really been successful maintaining its peg. I think this speaks to why protocols like DAI implemented their 1:1 redemption for USDC policy.

GHO TLDR:

Collateralized similar to crvUSD. Deposit one of their approved currencies, overcollateralized your position, and you can withdraw in GHO. I don’t see anything particularly special here or concerning. They haven’t had amazing success maintaining a tight peg, although I don’t think this indicates a larger risk of total collapse, more just that it’s very hard to have a tight peg to $1 unless you offer redemptions like DAI.

Ethena — USDe

Launched, beginning of 2024. You can read my full review here.

How Does USDe Work?

Ethena focuses on establishing a decentralized stable coin uncoupled from the legacy banking industry. They also cite the need to provide non-Americans with a dollar-denominated, yield-generating savings instrument.

They hold ETH and hold ETH-shorts to create a zero volatility ETH-based stable coin that does not have to be overcollateralized.

I think they share a lot of similarities with f(x) Protocol (read further on). The real difference between the two is that while f(x) Protocol allows other customers to purchase the ETH volatility in the form of xETH which represents leveraged ETH positions, Ethena simply holds short positions on their balance sheet. Fundamentally, it’s the same idea. Both base their stable in ETH and benefit from the ETH yield. The fact that it does not need to be overcollateralized makes it extremely capital efficient.

It is also much more centralized than f(x) protocol which, Ethena argues, is not a problem. They say that the market already has its decentralized currency — Bitcoin — and that the stable coin just needs to be stable, capital efficient, and decoupled from the TradFi banking industry.

I’ll be curious to see how this one grows. I kind of want to find something to hate about it, but I can’t.

Stable Coin Takeaways

Hopefully you got some sleep between reading the massive stable coin article and this one. I, of course, did not have that luxury. So with bloodshot eyes and a kink in my neck, we get to the part I like most: why does this all matters?

To summarize what we’ve covered, we’ve really got fiat-backed stable coins and we have non-fiat backed stables. Fiat backed coins are really a simple matter and if you like them, you like them. They’re reliable and guaranteed 1:1 redemptions do a lot for a good night’s sleep. But let’s just quickly run down the problems with them:

The Problems With Fiat-Backed Stable Coins:

1. You have to rely on a centralized entity — this includes the custodian of the peg
2. The custodians can be legally ordered to freeze assets
3. You are exposed to inflationary risks and any risks associated with the U.S. Dollar (or whatever fiat they’re using) — this is true not only for backed stables but any stable that is pegged to the USD, even if it’s not collateralized with USD.
4. You are exposed to the potential of fraud
5. Assuming that the reserves are held at banks, it’s very hard to find enough banks to store your money so as to insure it all with FDIC. Do you trust the U.S. Government’s unofficial agreement to bail them out like they did with Silvergate?
6. You don’t have native yield — (see section below for more)

The Problems With Algorithmic Stable Coins:

I mean, I feel like this is so obvious I don’t even need to write it. They don’t really work and I sure as hell wouldn’t trust them. I mean, I barely trust the U.S. Dollar or as I like to call it the Great American Algorithmic Stable.

Eventually, all algorithmic stables seem to bet on the same process: if we can convince enough people that our economics are sound — basically by having a governance token — arbitrage will keep us stable. This just proves wrong time and again. What I do respect is Ampleforth. I think that when it comes to Algorithmic stables, perhaps they’ll work as long as we don’t expect them to always be stable. If we can allow for like 15% fluctuations, then they can be fine alternatives. But truthfully, in what economic world are we ok holding an asset like that?

The Problem With Collateralized Tokens:

So if you’re with me until now, either a fiat-backed token works for you or you have your doubts and want a token that uses on-chain collateral.

Our models for on-chain collateral are really DAI, crvUSD, GHO, and FRAX.

Even collateralized tokens have trouble maintaining their peg (see GHO). This is why DAI implemented their 1:1 exchange with USDC.

1. Less Capital Efficient — If we don’t collateralize our stable coin, we end up with a much more capital-efficient model. By capital-efficient we mean that we would be helping make it rain. If I only require 50% collateralization, I’m essentially doubling the money supply in the economy. The dollar is by far the most capital-efficient currency out there because, well, it is basically 0% collateralized. The issue with this is…well obvious. Just look at Terra Luna, BitUSD, Nubits, or the dollar for that matter. Really, the dollar is the only non-collateralized model we would ever trust, because, well, they’re backed by nuclear bombs. Without nuclear bombs, global trade deals, and a too-big-to-fail narrative, uncollateralized stable coins become so capital-efficient that they eventually go to zero. Eventually…always. Even Frax has come to recognize this, which is why they’re transitioning to being fully collateralized.
2. A pegged $1 stable coin is not protected from inflation, even if it’s not backed by a dollar — Just realize, that even if your token is not backed by dollars, if it’s pegged to a dollar, your purchasing power will be corroded by inflation.

All in all, I am really surprised by how, nearly all of the stables in the market, are tied to dollars one way or another. Either they hold USD as a peg reserve, or they hold USDC or Treasury Bonds. I understand the inclination to do this. However, in the end, I think I would rather hold USDC than DAI. At least with USDC, you’re legally guaranteed a 1:1 redemption (unless it all goes to shit that is).

The Importance of Native Yield for Stable Coin Protocols

A point we want to make is that native yield is important. If it doesn’t have native yield, people get all fancy trying to generate yield. I mean, what kind of person can sit on a treasury of tens of millions in assets and get no yield? Not even the buddha could have taken that temptation. So…they end up lending it out to a bunch of off-chain, centralized entities that really shouldn’t be trusted and they end up collapsing along with the rest of them. Just look at Anchor and UST.

The most obvious native yield is from Proof-of-Stake protocols like Ethereum or Solana. I think this is also the most secure because, well, if the yield collapses, the token also collapses. There is no more risk added by the yield which is really the key here.

So, what about protocol yield? For example, what about with GHO and with DAI where you are entitled to protocol yield by staking your token? First I just want to say that I don’t really have a problem with these protocols doing this. They pay you proceeds from the protocol and, in exchange, they can take your money in an emergency.

The question I want to explore is whether this throws off the economics of the system.

If ever demand for a token is driven by a fundamentally unsustainable model, that’s a huge red flag. That’s essentially a pyramid scheme. UST is a great example of that. You cannot promise 19.5% yields forever. It’s not sustainable. What happens then to the demand for the token when that goes away? Is there more demand for the token outside of that unsustainable yield, or is it totally just people chasing air? In other words, if the yield is only sustainable as long as more and more people deposit, that’s a no go.

Native yield on ETH is great because it isn’t going anywhere. It is sustainable so we can trust that any demand for ETH yield is sustainable demand.

But what about with DAI?

I would say that DAI is a tier below what I would call native yield. I will call it protocol-native-yield. Protocol-native-yield is somewhat less sustainable because it requires the protocol to continue to be profitable. However, unlike with a pyramid scheme, DAI’s yield does not depend on more people depositing DAI. So while some demand for DAI might be a result of the yield, I don’t think it is fundamentally unsustainable. The only downside is that it is not as consistent or reliable as platform PoS yield.

TLDR:

There is a big incentive to generate yield on treasury funds. Yield has to come from somewhere. Native yield from PoS is the most secure. Lending out those funds to others to generate yield is the least secure. Offering protocol revenue as yield is a decently secure model. Just know where that yield is coming from, whether it’s sustainable, and what would happen to the price of the underlying token if that yield disappeared.

Realizations I had While Writing These Articles That Might Be Helpful To You

1. When it comes down to it, a big part of the economics of a stable is a tight control of the supply of that token. This is true whether we are talking collateralized tokens or uncollateralized tokens.
2. A huge reserve — like Terra’s $3 billion BTC reserve — are often just a distraction. You’re either have at least 100% collateral or you don’t.
3. Liquidity across pools is important. With DAI, ultimately, the network is as weak as its weakest debt market.
4. Diversification may not be a good thing. Would you rather have 100% of the collateral in the most trustworthy asset, or 50% in the most trustworthy asset and 50% in the second most trustworthy asset — especially considering a 50% failure is still total implosion.
5. It’s a CRAZY new question how these fiat-backed tokens are storing their dollars? I mean — there’s only 4000ish FDIC insured banks in America. USDC itself would require 115,391 such institutions to have proper insurance. There’s never been such a situation before. I think everyone is simply betting on the government to extend that insurance — like they did in 2023. I’m not sure I like that.
6. Overcollateralization and liquidation plans are how stables address volatility.

The Perfect Stable Coin: A Thought Experiment

I want to run a little thought experiment.

Maybe you read through the analysis of each stable coin or maybe you just skipped ahead to here or maybe you were one of those boomers who learned to speed read in school. Regardless, here’s what we would design if we were designing the next stable coin.

First, we have to consider whether we want to collateralize our token or rely on debt to make it run. If we don’t collateralize our token, essentially we’re running a debt market, right? If I let you take a $1 stable coin for any amount of money under $1, than I am essentially lending you money.

So no uncollateralized stable coins. The next question we have to answer is, what type of collateralization? Back it with the dollar or back it with a token that is backed by the dollar? I mean…if you’re into that kind of thing. And by that I mean, are you into aligning your protocol and digital wealth with the very thing that this whole system is trying to offer an alternative to, than by all means. Go grab yourself some of that delicious dollar-backed-stable-coin at your local exchange. It’s always only $1, but your $1 dollar is now worth .95 cents in goods since I started writing this article.

I don’t mean to disparage the whole dollar-backed stable coin idea. I mean, it works, right? It works as well as the U.S. Dollar works. There’s a purpose for it. Buuuut, it clearly cannot serve all of our needs.

So no dollar. The other criteria is that we would really like for it to have native-yield for reasons discussed above — specifically, that if it doesn’t have native yield, risky loans and questionable collateral management strategies become much more likely.

That leaves us with a handful of choices — ETH, SOL — really any token with proof of stake or proof of something that generates yield for its stakers. Bitcoin isn’t a bad collateral choice other than the fact that it doesn’t have native yield.

Which token you choose really depends on which ecosystem you want to bet on. In the end, the difference between 100% collateralization and 0% collateralization really depends on whether the asset is worth anything. 100% collateralization with SOL is worthless if Solana becomes worthless. Now, this would lead us down a very different rabbit hole, but personally, we wouldn’t want to bet on any ecosystem other than Ethereum right now. I get that this could fail. Bitcoin could fail. Everything could fail. We could be pricing things in corndogs by next summer, but ETH is by far our favorite on-chain, native yield generating asset.

Another point is that, if our stable coin is to be used by on-chain entities like DAOs, crypto-hodlers, DeFi protocols, etc. — then collateralizing the stable coin with the token used by those organizations seems fair. I mean, it’s kind of like trying to invest for a doomsday situation. If everything is destroyed, it doesn’t matter what you chose.

The final issue is volatility. Our on-chain, native-yield asset is volatile AF (as the youth would say). This is where the real fun comes in.

Dealing with volatility is where the ingenuity and additional functionality really come into play. It’s pretty amazing honestly how the creative approaches to mitigating the risks associated with volatility actually unlock a whole range of new functionality.

Generally, we require overcollateralization AND a peg to the USD. The problem is that even pegging it to the USD without collateralizing it with USDs, exposes holders to inflation. I would love to see a model where we could peg the stable to some other price outside of a centralized fiat?

So to summarize, we are looking for a stable with native yield, collateralized by on-chain assets, and not priced in dollars. Do you see the potential of such a token?

Final Thoughts

What I see in the market is a growing recognition that — despite having numerous different projects — we actually don’t have many stable protocol variations. We basically have fiat-backed tokens (USDC, USDT, GUSD, etc) and we have wrapped fiat-backed tokens (FRAX, DAI). At the reserve level, everyone is holding treasuries for their native yield and stability.

The new area of innovation is finding ways to unlock crypto-native yield, like ETH staking rewards, offering that to users, and finding a way to balance out the volatility. The two projects I see doing this right now are Ethena and f(x) Protocol. Ethena — if it works — has the advantage of it being a much more capital efficient model. They are centralized and backed by VCs. f(x) Protocol is bootstrapped. They aren’t only a stable coin but are offering ETH-pegged low volatility and liquidation proof leverage to their customers. We’ll be publishing an article breaking down f(x) Protocol soon. Subscribe for free so you don’t miss it.

This is where we leave you. From here on out, you don’t need us. You now have a solid understanding of the stable coin ecosystem, but perhaps even more importantly, you understand the foundational problems every stable coin must answer and you understand what design techniques have been tried. Now, it becomes about either you building a solution yourself, or identifying early projects that are building one.

If you’re building one, hit us up. We’d like to hear about it. If you want to see what we’ve found, follow us.

As always, none of this is financial advice. I am not telling you to buy or sell anything, just sharing my underlying research and conclusions.

I do hold a portfolio of cryptocurrencies. I was not paid by anyone to write this article. I did it on my own with time that earned me zero dollars.

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