Retail investors confront VC, will DeFi be the savior?

Author: Jader

1. Who is actually making money in this round?

Retail investors awaken, "Anti-VC, embrace Meme"

The narrative of this bull market is primarily macro-driven, lacking innovation and breakthroughs. Although the price of Bitcoin has surged from 20,000 to 70,000 (currently fluctuating between 50,000 and 60,000), the altcoin season has yet to arrive, leaving the entire market in despair.

Retail investors have erupted in an "anti-VC" trend, believing that VCs and projects are colluding, driving project FDV to sky-high prices, and then "launching coins at their peak," followed by a waterfall decline, leaving retail investors to pick up the pieces.

To resist "VC coins," many KOLs have begun to vocally reject VC buyouts and embrace more equitable Meme coins (how positions are actually adjusted remains to be seen).

Platforms like Pump.fun for Meme coin issuance have already generated over 57M in revenue, with stablecoins like $Pepe among the top 30 by market cap, alongside others like $pizza, $Wif, etc., all experiencing significant volatility.

The superficial high returns of VCs are forced to sell tokens OTC at a loss, trapped tightly

VCs are actually a vulnerable group as well. Currently, many project teams unlock only 2%-20% during TGE, followed by monthly linear releases over a period of two years. Many VCs find that the projects they invested in during the pre-listing phase can’t sustain their prices post-launch, whether due to outdated narratives or inability to maintain market support, resulting in a significant portion of their unlocked tokens becoming worthless, leading to discounted OTC sales. What appears to be a 100x case on paper at the time of coin launch is only useful for VCs when writing net asset reports; ultimately, they are likely to just break even or incur losses. Interestingly, some profitable institutions hedge their first-level losses by buying Bitcoin or Nvidia through their secondary departments.

The false prosperity of the market requires calm reflection and consolidation

Rather than saying retail investors are "anti-VC," it might be more accurate to say they are "anti-loss," especially those who entered the crypto space during the last bull market's altcoin season. The prolonged wait for this round's altcoin season has left many anxious, as the limited cash they have is waiting to be multiplied through altcoin season.

Quoting a line from a long tweet by Chen Jian: "[I actually think we are in a very distorted false prosperity market right now. On one hand, everyone is resisting VC coins; on the other hand, many VC friends I know are constantly complaining about not making money. Project teams and investors are suffering due to being locked up (I have even seen tokens sold at 10% of their value) and are trying to find ways to sell tokens OTC to find buyers.]" In a market without new narratives, this bull market is entirely driven by the regulatory benefits of Bitcoin spot ETFs.

Retail investors and VCs in Web3 should calmly reflect on their survival strategies.

From the perspective of retail investors, Meme coins provide emotional value, allowing users' emotions to be displayed in numerical form. When calmed down, there is essentially no practical value in Meme coins; they are likely just a few KOLs and market makers manipulating the market, ultimately leading to a mess. If investment returns are ultimately converted into annualized returns, 5-year returns, or 10-year returns, a hundredfold case combined with countless zeroes and contract liquidations may just break even, likely underperforming Bitcoin/Ethereum.

Some older crypto veterans, like seasoned miners, Ethereum believers, and DeFi elites, have positions of 70%-80% composed of "Bitcoin + Ethereum + blue-chip DeFi + tier 2 public chains like Solana," and have consistently earned stable and substantial returns regardless of bull or bear markets, having already profited during this transition phase.

From the perspective of VCs and project teams, there is a need to rethink the pricing logic of valuations.

Issuing coins and going public have many similarities in mechanism, but the stages of the two projects are different. Traditional company IPOs occur when a company is mature and stable, while Web3 projects often issue coins when there are signs of rapid development or potential, leading to extremely high expectations for the future, resulting in inflated valuations without substance or ecosystem, which extends to VCs having the motive to dump their holdings to realize future value. VC sell-offs contradict the growth of project teams; VCs should accompany project teams for long-term growth, benefiting both parties as the coin price rises.

VCs and institutions should have their own insights that lead the market. When a project reaches the stage of issuing coins, they should collectively endure a situation of undervaluation and low liquidity, realizing their insights over time while ensuring the total value of their tokens remains unchanged during sell-offs, maintaining their relationship with project teams, just like a16z still holding onto Uni.

Regarding lock-up periods, I have always felt that they are somewhat unreasonable. The essence of lock-ups is to stabilize the market, prevent significant price fluctuations, protect the interests of ordinary investors, and incentivize teams and liquidity providers to participate in the project ecosystem long-term. In traditional finance, there is usually a lock-up period of one month to six months after an IPO or fund raising.

The original intention of Web3 lock-up periods is to prevent institutions from dumping. However, even without institutional dumping, there are still means like launch pads, airdrops, ICOs, and IEOs that allow early access to tokens. The actions of yield farmers and gold mining guilds force the market to accept selling pressure the moment tokens are issued. As a VC investor, if you are bullish enough on a project, you should even link the primary and secondary markets, holding onto your tokens (passively locked) while buying market chips at low prices, rather than rushing to sell your tokens like retail investors, as if they were hot potatoes. Many VCs lack post-investment management, purely investing for financial returns, which is no different from retail investors who have insider information and can acquire chips early. VCs should view projects from a different perspective than retail investors; it has become unreasonable for them to lead the way in running away with retail investors.

Project teams also do not need to rush to spend large amounts of capital on early marketing, market-making, and operations, or to constantly consume capital to cater to the market by creating PMF narratives. Not having a clear understanding of what to do is the easiest way to fail. Instead, they should return to the product itself and explore sustainable business models, like how the DeFi project Compound initially focused on peer-to-pool lending, but in its V3 version and future plans, it emphasizes absolute security over liquidity, reverting peer-to-pool lending back to peer-to-peer lending with single-asset collateral and isolated collateral assets.

It is essential to remember that the cake in the crypto space is limited, and most of the people making money in the circle are shrewd, cold-blooded, and ruthless. Those who genuinely make money usually do not flaunt it online.

2. Is DeFi a remedy or a poison?

So what should retail investors do in such a mixed market? If retail investors view Web3 as a financial product rather than an emotional outlet or a casino, then DeFi might be a good choice. As a financial product, obtaining a 5% APR with relatively low risk is quite easy, for example, by providing liquidity on Aave, not counting the additional returns from leveraging. Slightly increasing the risk to achieve a 10%-20% APR is also very possible. This annualized return might be more stable than retail investors trading year-old meme coins or buying VC coins, especially in the current phase where Bitcoin and Ethereum may not see significant short-term growth.

Since its rise in 2019, DeFi has experienced explosive growth, expanding its applications in blockchain technology from initial lending and stablecoins to insurance, oracles, and covering various aspects of traditional finance. The era of financial empowerment is quietly approaching.

Since the DeFi Summer that began in mid-2020, DeFi has been the most significant innovation, yet this bull market has shown lackluster performance, with little news to report. Aside from the major liquidation of Curve's founder, there have been few extraordinary events.

The traditional project Pendle stands out in this bull market, primarily due to its mechanism of leveraging points, coinciding with the narrative of points in LRT tracks like Eigenlayer, creating a false impression that DeFi is also a golden shovel, leading to overly high expectations. Pendle's original intention should have been for PT to provide users with financial products similar to fixed income or zero-coupon bonds, but everyone's attention was drawn to the highly tempting leverage of points, leaving PT with little demand. Pendle even created its own Points Market, which saw token prices soar.

However, as a large number of LRT pool assets matured, coupled with points becoming a game for large capital whales, retail investors saw minimal interaction returns, leading to Pendle's TVL and token price both halving. One cannot help but lament that Pendle's token price resembles a roller coaster.

According to data from DeFiLlama, the total value locked (TVL) of the yield trading protocol Pendle plummeted by 45% in just one week, from $6.2 billion to $3.5 billion.

This sharp decline occurred in several liquidity markets, including Ethereum. etherFi's eETH, Renzo's ezETH, Puffer's pufETH, Kelp's rsETH, and Swell's rswETH matured on June 27. These markets reached maturity, and users redeemed their main investments, leading to a simultaneous capital run. Pendle's CEO TN Lee explained that a large number of LRT pools matured on June 27, totaling nearly $4 billion, with one individual redeeming $293 million worth of tokens.

Users, after being continuously manipulated by the project team regarding points, finally grew weary.

3. Innovations in DeFi this round

Although Pendle's TVL halved after the LRT craze, it actually provided a new design perspective, creating a new asset class.

Similar to Deribit, which originally had no options in the crypto space, Deribit created an options system and platform, capturing about 90% of the BTC and ETH options market, becoming a giant alongside mainstream exchanges.

Pendle incorporates interest rate swaps from the financial derivatives market. PT allows users to obtain stable returns, while YT offers users a higher ceiling, enabling users to adjust according to their needs.

In traditional finance, an interest rate swap is a financial derivative that involves two parties exchanging a series of interest payments, typically swapping a floating rate payment for a fixed rate payment. Traditional companies generally engage in interest rate swaps between two entities. Here are a few examples:

1. Interest rate swaps allow companies and financial institutions to manage and hedge interest rate risk. For example, a company can use an interest rate swap to convert its floating rate loan into a fixed rate loan, thus avoiding the uncertainty brought by interest rate fluctuations.

2. Cost savings: Through interest rate swaps, companies can leverage their credit standing to obtain more favorable loan terms. For instance, a company with a good credit rating can borrow at a fixed rate and then swap it for a floating rate loan, thus achieving lower financing costs.

3. Asset-liability management: Financial institutions can use interest rate swaps to match the interest characteristics of their assets and liabilities, optimizing their balance sheets. For example, banks can use interest rate swaps to convert their long-term fixed-rate assets into floating-rate assets to better match their floating-rate liabilities (which is Pendle's prototype).

One issue with Pendle is that users show little interest in PT, which resembles zero-coupon securities or fixed income; this is not Pendle's problem but rather a cultural issue within Web3, where volatility is not favored. However, this does not prevent future considerations that bonuses, points, and memes could all become part of an interest rate trading platform, incentivizing Pendle for new projects.

Ethena can also be seen as a surprise in this bull market, introducing "options strategies" into DeFi. Ethena is a type of structured note that holds a long position in stETH (thus indirectly holding a long position in ETH) while shorting ETH through perpetual contracts on major centralized exchanges to hedge the risk of the long position. This hedging strategy keeps Ethena's price (in USD) relatively stable.

For users, this means that when the price of ETH rises, they can earn from three aspects: staking rewards from stETH, gains from the rising price of ETH, and fee income from shorting through perpetual contracts. Meanwhile, the generated USDe can be used to participate in various other trades. However, when the price of ETH falls, overall returns may decrease or even turn negative. To address this, the Ethena team purchased insurance for extreme situations, yet there remains risk during significant ETH downturns—shorting fee costs may surge, and there may not be enough counterparties, leading to a death spiral.

The interest rate separation + interest rate swap market is a very appealing trading market, and I am continuously looking for new projects related to interest rate separation or swaps. In this process, I came across a very interesting innovative project called Doubler.

A few days ago, Doubler's airdrop event began, and many strategies and interaction methods have already been proposed. Here, we won't elaborate further but will focus on discussing the product itself.

Doubler's design philosophy is somewhat similar to Pendle's, breaking assets into large and small proportions, with the large proportion designed for low-risk, low-return play (Pendle's PT is like zero-coupon bonds or fixed income products), while the small proportion is designed for high-risk, high-return play (YT is like a natural contract). The existence of the large proportion helps to share the risk of the small proportion. Ultimately, it achieves the effect of "contract returns, spot risks." The core idea is that each pool consists of a group of people banding together to buy at the bottom, lowering the average asset price, warming together, waiting for a rebound, and then seeking suitable profit-sharing methods based on different situations for each version.

Doubler Lite is an asset yield separation protocol that acquires external returns through a generalized Martingale strategy and allocates the protocol's profits and losses based on the tokenization of yield rights. Doubler Lite aims to provide risk hedging and yield optimization for assets through innovative solutions, offering alternative trading assets based on yield rights for secondary traders.

The Martingale strategy reduces average costs by continuously buying low-cost assets during price declines, which is a measure for pool users to collectively bear risks and profit when prices rebound.

Example: User A buys 1 ETH at $3000 and deposits it into the pool. When ETH drops to $2000, User B buys 2 ETH and deposits them. At this point, the pool has 3 ETH, with a total value of $7000 and an average cost of $2333. When the ETH price rises above $2334, the pool starts to profit.

Similar to Pendle, in Doubler Lite, for each asset deposited into the pool, the protocol separates the ownership of costs and the ownership of yields into cost Tokens and yield Tokens. The token representing cost ownership is the C Token, priced in USD, while the E Token representing yield is the 10x Token. This reminds us of Pendle's PT and YT.

The points of contention between the two are also similar, with Pendle's YT and Doubler's E Token + 10x Token. The pool shares profits, and risk-averse users share profits with risk-loving users under certain concessions to seek higher returns.

However, unlike Pendle, Doubler's underlying assets allow users to share costs, binding user actions. Unlike the starting point of the Martingale strategy, one can feel that Doubler hopes everyone can make money together, standing on the same front line, whether they are retail investors or whales, PoS or PoW, risk lovers or risk-averse, all participating together to share risks and profits, rather than completely handing over the power of profit distribution to the project team. However, the product is still in its early stages, and as long as the project has various strategies for arbitrage, there will inevitably be large profits allocated to a few individuals rather than distributed fairly. I believe that in the future, more products will develop towards fair distribution and labor-based distribution.

Compared to high-risk, high-volatility futures products, Doubler resembles an options product; if used well, it can enjoy "spot risks, contract returns."

Currently, with Ethereum pools issued on Arb, under the multiple buffs of Ethereum spot ETFs + the US elections + interest rate cuts, I believe it is a worthwhile opportunity for many bullish Ethereum users to participate, holding E tokens and waiting for Ethereum to surge, also providing a relatively safe leverage opportunity for retail investors with smaller capital.

Of course, every DeFi project also faces unavoidable risks.

Like Pendle and Ethena, Doubler is a highly cyclical product. In bear markets, everyone bears the burden together, and in bull markets, everyone profits together. If a long-term bull market arrives, the product may become somewhat redundant. Just like Pendle, which benefited from the points craze, saw its TVL and token price halve after the LRT matured.

The cyclical issue may allow for meme pools as "neutral assets + long-tail assets" in bull markets, while focusing on mainstream assets in bear markets.

The optimal DeFi products may still need to be simple yet effective, like Uniswap's LP where users adjust ranges themselves, Compound and Aave with cTokens and aTokens for yield generation—one sees an increase in c value, and the other sees an increase in a quantity—while Lido and Rocket Pool are even more straightforward. These are easy-to-understand products with very simple user operations. Pendle became popular mainly due to the additional yield brought by YT; after the LRT staking matured, its TVL halved, and users were indifferent to the value of PT.

Doubler, as a product divided into three parts (C, E, 10x), is still overly complex. To truly attract users, it must either offer sufficiently stable and high yields or extremely high yields.

It still appears to be a complex product, which is a common issue with many DeFi derivatives. While innovating, it inevitably increases the difficulty of use and gameplay, and each increase in difficulty means a reduction in reachable users. For example, 1inch, as an aggregator, is a positive example that aggregates and simplifies complex lending and swaps, providing users with a better experience. Ethena can also be referenced as an embedded protocol that develops towards fair profit-sharing, allowing users not to worry about underlying logic.

4. Summary and Future Outlook

I suddenly thought of Blast, where the returns for interactive users and the returns for large whales doing substantial staking have inverted. Those who purely do staking without interaction have little return. Although criticized harshly by many big shots, it makes one yearn for a return to an early era where users of different capital sizes had their own ways to make money, a flourishing time.

CZ once said, "Decentralization is not a goal; it's a means to an end. The end goal is more freedom, more choices, more resilience, and more ways to achieve fairness and equality."

I feel that DeFi is one of the few fields that steadfastly adheres to the concept of decentralization, bringing more freedom to users, making it a very bullish sector. More new financial assets generated through DeFi may just be the beginning of the next multi-billion dollar sector.