Decentralized ‘Gen2’ finance tokens are moving forwards while the wider DeFi sector is gasping for breath.
When some of the brand-name decentralised finance (DeFi) tokens sputter, new ventures have arisen that are receiving heavy bids on the basis of ambitious yield-farming schemes, generous airdrops, and major technological advances.
It’s a set of outlier projects pushing forward on both price and fundamentals that has led one crypto analyst, eGirl Capital’s mewny, to brand them as DeFi’s “Gen 2.”
feels like theres a gen 1 and gen 2 of defi tokens now
the former is stagnant and the latter is pamping
has nothing to do with fundamentals. its all psychological
— 🌚 mewny 🌝 (@mewn21) March 6, 2021
In an interview, Mewny labelled eGirl Capital as “an org that takes itself as a really serious joke,” saying that Gen 2 tokens have gathered interest due to their well-cultivated societies and smart token delivery models—both of which contribute to a “recursive” price-and-sentiment circle.
“I think in terms of market interest it’s more about seeking novelty and narrative at this stage in the cycle. Fundamental analysis will be more important when the market cools off and utility is the only backstop to valuations. Hot narratives tend to trend around grassroots projects that have carved out a category for themselves in the market,” they said.
While investors might be eager to ape into these fast-rising new tokens, it’s worth asking what the projects are doing, whether they’re sustainable, and if not how much farther they have to run.
Pumpamentals or fundamentals?
The Gen 2 phenomenon is reminiscent of last year’s “DeFi Season,” complete with “DeFi Stimulus Check” airdrops, fat-growing APYs, and rising token prices—as well as a hack of hacks, heists, and rugpulls.
However, Mewny says that there is a population of investors emerging from that time who are constantly searching for technological advancement rather than shooting stars.
“There are less quick “me too” projects in defi. An investor may think that those projects never attracted much liquidity in the first place but they overestimate the wisdom of the market if that’s the case. They did and do pull liquidity, especially from participants who felt priced out or late to the first movers.This has given the floor to legitimate projects that have not stopped building despite the market’s shift in focus. ”
One such Gen 2 increaser of liquidity is Inverse Finance. Following the announcement of the yield farm software for the upcoming synthetic stablecoin protocol, the Inverse Finance DAO narrowly voted to allow the INV governance token tradable. As a result, the once valueless 80 INV token airdrop is now valued at over $100,000, perhaps the most profitable airdrop in Defi’s history.
Another Gen 2 star is Alchemix—one of the first investments revealed by eGirl Capital. The Alchemix protocol also focuses on the synthetic stablecoin, but issues the stablecoin from collateral stored in the Yearn.Finance yield-bearing vaults. The outcome is a token loan that pays for itself—a modern concept that eGirl feels could become a normal.
“EGirl believes that selling yield-bearing interest would be an effective primitive in DeFi. Quantifying and evaluating potential yields unlocks a lot of available value that can be reinvested in the market,” they added.
The wider markets appears to agree with eGirl’s thesis, as Alchemix recently announced that the protocol has eclipsed half a billion in total value locked:
It is our one week anniversary today, and wow!
That was fast! 500 MILLION TVL!
Farms: 322.85m pic.twitter.com/FQsezs6s9q
— Alchemix (@AlchemixFi) March 6, 2021
In the other hand, the governance tokens for many of the big names in DeFi, such as Aave and Yearn.Finance, are in red on a 30-day basis. But even with flagship names stalling out, DeFi’s close-watched aggregate TVL number is rising over the month, rising from $8.4 billion to $56.8 billion per DeFi Llama—progress made in part on the basis of Gen 2 ventures.
However, the relatively wrinkled, desiccated DeFi dinosaurs may still have some traces of life left in them. Multiple major ventures have substantial upgrades in the works, including Uniswap’s version 3, Sushiswap’s Bentobox loan platform, liquidity mining proposals under Aave’s governance framework, and Balancer’s version 2.
These findings could suggest that the “Gen 2” phenomenon of DeFi is merely a transient, intra-sectoral rotation, and that the “majors” are soon to roar again. It will be a predictable leap from the standpoint of Mewny, who says that “any defied protocol requires at least 1 bear market to justify its technical soundness.”
What’s more, according to mewny, some signs of market irrationality around both the Gen 2 tokens and the larger DeFi space—such as triple and even quad-digit farm yields—may be gone sooner rather than later.
“I don’t think it’s sustainable for any project in regular market conditions. We are not in regular conditions at the moment. Speculators have propped up potentially unsustainable DeFi protocols for a while now.”
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