Weekly Wisdom #7

You aren’t any old DeFi wanderer.

You seek the ultimate knowledge. You don’t blindly trust shillers or follow the crowd; you research, analyse and make informed decisions based on facts and data. Retrospection, education, you aren’t talking the talk; you’re walking the walk. You understand there's no such secret sauce or cheat code. You simply put in the work.

You simply seek out the wise

Where does our search for wisdom take us this week?

• Uncovering the AirDrop model

• Exploring the Eigenlayer

• How to approach this market environmentSubscribe now

Uncovering the Airdrop model

We begin. Welcome to the lands of analytics. Dashboard and data roam supreme. Endless heat and vast chasms of queries, a realm in which Inhabitants are subservient to the database. Welcome wanderer, welcome to Dune.

Dune Analytics is one of my favourite web3 applications. It provides everyday users with the tools to analyse and visualise blockchain data, for free! How does it work? It essentially decodes the blockchain data into SQL tables (a simple programming language) that allow anyone to query the blockchain, build a dashboard and analyse data. It’s super cool!

Not only do they provide this incredible tool for free, but they also provide a weekly newsletter breaking down a dashboard every week. This week, the newsletter took a deep dive into the data behind the Uniswap Airdrop. Let’s get into it.

Hype and heat. Airdrops have been one of the industry’s hottest models. There is no denying the marketing prowess of such a model; quite simply, who doesn’t like free money?! But, just like the greater financial markets, are they truly effective for the protocol and, as a user, are you making the most of them? I highly recommend you go read the full article, but we will break down some of the key takeaways from the article. First off, what is the reason for a protocol/ecosystem issuing an Airdrop?

1. Reward loyal users.

2. Marketing - build hype, gain attention, increase adoption

3. Decentralize the platform by distributing governance rights to the community.

Reward Loyal users

So, does an airdrop reward loyal users? Or do users simply jump in to obtain the airdrop and then leave? According to the data from the Dune dashboard, since the UniSwap airdrop on September 17th, 2020, only 7% of wallets that received the airdrop are still holding $UNI…

Of the remaining 7%, most users sold a majority of the airdrop with only 1% of wallets actually increasing their UNI position. Clearly, the majority of UNI airdrop receivers were looking for quick returns and not offering loyalty.

But would you expect any different? This is finance after all. If someone gives you free assets, would you hold on to them for two years? The important question to ask is, what option would have been the most profitable?

Using data to make more informed decisions

So, when did most airdrop holders sell?

• Over 75% of wallets dumped the token within the first 7 days.

• Over 80% within the first 30 days.

• Over 85% within the first 90 days.

• Over 93% have sold all their $UNI today.

Most Uniswap users cashed out in the first week or month when $UNI traded at $2-$4, returning the users $584 - $1168. Not bad for a free airdrop! However, in early 2021 when UNI surged to a peak of $41, the average airdrop would have been worth $12,000!  Even after a huge pullback, UNI is still trading at $5.44.

What’s the takeaway here? Perhaps, as tempting as it may be, selling an airdrop instantly may be a recipe for losing out on substantial potential gains. Obviously, this is completely dependent on the protocol. Uniswap is a DeFI giant. Everything discussed is relative. Most users don’t hold on to the airdrop for sustained periods of time, but do they still use the protocol?

Looking at the data, clearly not! Obviously, 2 years is an age in crypto, but if you’re a protocol wishing to increase the users actively using your protocol, perhaps an airdrop isn’t the best route…

Finally, what about governance? Often touted as one of the key use cases for such a model, decentralising governance is an important goal for protocols. Is the airdrop an effective model to do so?

Not at all. 98% of airdrop users didn’t participate in a single governance vote. Pretty poor numbers! Although an extremely effective model for marketing and generating hype, airdrops fail to deliver on some of the core metric protocols that utilise the model.

For you as a user, perhaps the next time you receive one, you will analyse whether unloading it as soon as possible is the most rewarding route. Interestingly enough, I ran a poll last night which returned some surprising data:

50% said they sold within the first week, but 40% of airdrop receivers of the poll stated they have held on to their airdrops! Perhaps many have learnt some lessons from this analysis. It’s not always the best idea to sell straight away!

Interested in learning more about Dune? Check out this thread offers some great resources to begin your data analytics journey.

The EigenLayer

We now traverse through the very fabric of the mesh that binds us. Interwoven and collective. We explore an exciting new layer. This is the realm of trust. Welcome to the Eigen.

The Eigen Layer is a general-purpose marketplace for decentralized trust on Ethereum. Say what now?!

There are multiple layers of trust on a blockchain. The EigenLayer separates these layers into multiple different components so that each layer can be reused for a specific purpose.

Let’s analyse this great resource from EigenLayer founder, Sreeam Kannan. He explains the use case for this really intriguing network.

Sreeram explains that there are 3 core features of trust in a network.

1. Economic trust

2. Decentralization trust

3. ETH validator commitments.

The EigenLayer is a platform that allows builders to mix and match these separate use cases of trust to create specific trust models.

Economic trust

One of the core utilities of the EigenLayer is allowing the user to restake ETH on a separate layer. This allows for the repurposing of economic security, without users incurring any new capital costs. Similar to other economic trust models, in order to ensure validators act in the network’s best interest, unethical behaviour must be penalized. Just like on the Ethereum, ETH staked on the EigenLayer will be slashed programmatically.

So, what opportunities does this open?

LightClientBridges: Projects can run light clients to other chains off-chain and make state claims on Ethereum.

Oracles: Highly trust-specific oracle creation. Projects could build an ETH-staked oracle which is slashed based on a more expensive trusted input (for example, soliciting inputs from highly trusted sources or individuals).

Superfast settlement: Projects could run a super fast settlement chain on top of Ethereum which gives fast economic finality, which settles eventually on Ethereum.

Decentralization trust

There is already a large decentralized trust network in Ethereum. The Eigen Layer makes it possible to extract and utilise decentralized trust separately from Ethereum.

Essentially, the technology unlocks the possibility of rented decentralized security. For example, projects/ecosystems could recruit home stakers / rocket pool nodes to form a decentralized quorum on the Eigen Layer.

Services could now utilise specific oracles to ensure certain conditions are met. Such as recruiting only nodes that are deemed to be maximally decentralised. This unlocks an intriguing proposition. Nodes deemed most decentralized will likely be valued higher by services and would be rewarded with additional fees. What does this lead to?

The net APR of decentralized nodes may increase relative to centralized validators. Networks built on decentralised node operators may become far more lucrative for stakers, e.g Rocket Pool!

ETH validator commitments

Sreeram explains that ETH validators who restake enable a whole suite of powerful new features.

MEV Management: Ethereum block proposers could order blocks according to different rules. For example, selling portions of blocks in MEV market or agreeing to include threshold-encrypted transactions.

Event-driven actions: For example, third-party keepers agreeing to activate some event-driven transactions (collateral refuelling for example).

The EigenLayer certainly has my interests piqued. There are a lot of potentialities and opportunities. I think it opens up an interesting new (and profitable) avenue of exploration for Decentralized node operators such as Rocket pool. I will be following closely.

How to approach this market environment

Every financial market is interwoven. For our next venture, we merge into a parallel dimension. This is the dominion of the traditional and sphere of the powerful; let us descend into the vast marble of macro.

Many people are echoing a stance that the FED is nearing a climatic pivot to quell leverage-infused markets. But, Lee Robinson, the founder, and chief investment officer of Altana Wealth, strongly disagrees. This was a great interview and was full of intellectual insight.

Let’s break down why Lee disagrees with this stance, as well as a few of his top picks for investments.

This is a great market for investors

Lee opens with the following statement; “The best investors sit in cash for long periods”.

Those who do can predatorily pick things off when huge opportunities come. From an investor's point of view, Lee believes this is a great market. To quote Warren Buffet, “Investing is the art of moving money from the impatient to the impatient”.

Most people spend their time going all in on a dip to find that it isn’t really the dip. Lee says it is far wiser to average in over prolonged periods. Trading is very tough but investing is simple; “if you are patient, you can make money relatively easy as an investor”.

Let’s break down some data. The image above shows the rate of growth of global financial assets. The key takeaway is the increase in the Non-Bank Financial investment sector. This sector includes asset management firms, pensions and insurance companies. The takeaway? There is so much leverage, debt and asset inflation that QE doesn’t have a viable exit. QE is NOT a long-term solution. Lee believes that at some point, there will be an existential crisis of debt. And due to the vast amount of leverage and debt, any recession could morph into a crisis. Lee doesn’t believe that will anytime soon but believes it’s something to keep in mind.

What about a Pivot?

When it comes to the FED, Lee believes that people overlook a very important point. People have pinned their hopes on a pivot with the view that sustained interest rates will incur far too much debt for governments. The treasury simply can’t sustain these prolonged high-interest rates. This is factually correct, but it misses a crucial point; This doesn’t mean that rates can’t be raised even higher for a shorter duration of time. This mindset is echoed in Powell’s comment in August:

Lee believes that the FED won’t pivot in Feb/March. Powel is telling the markets he is not going to quell inflation with multiple efforts, they need to ensure that inflation falls in one go. Rates can’t stay high forever but they can go very high for a short period of time.

So, what does this mean for equity markets? Lee gives an example; Imagine you fell into a coma in March 2020 when rates were 2%, and the S&P was trading at 2300. You wake up today, and rates are now 4.5%. What would you expect the S&P to be trading at?

Logic would tell you that with rates over double, money would flow out of risk, and the S&P would be trading far below 2300. Right? But the S&P now sits just under 4000! Lee believes there is certainly space to fall further.

So, what is a good investment in the current market conditions?

Lee sees 3 good investments for the current inflationary markets.

1. Venezuelan Bonds

2. Carbon

3. Uranium

Venezuelan Bonds

Venezuela has more oil, gas, and gold than the US and Canada put together. However, because of 15 years of sanctions, the bonds are trading at cents on the dollar. This isn’t due to just country sanctions; the Trump administration placed sanctions on all Americans to buy any dollar-denominated bonds in Venezuela. Comparing the Risk/Reward ratio, Lee believes this is now a gift to all non-Americans.

Carbon

By next year, everyone has to report carbon. No matter the country. To encourage less usage, governments want the price of carbon to increase. They can control this via permit cuts and specific management techniques. Lee says there are two points to realise.

1. The carbon offset market is trading at an 85-90% discount to the carbon market.

2. Everyone is going to be forced to buy carbon. If 0.1 % of the investment industry has to buy carbon, the market is going to rocket.

Lee says it is a complex market to enter but it has huge potential upsides.

Uranium

Every country is beginning to realise the importance of nuclear energy. Putin has weaponized the energy sector, and Lee (and many others) believe it’s evident that Uranium will become a pivotal commodity for every country going forward.

Closing thoughts

As an investor, you should look for asymmetry. If the potential of the upside far outweighs the risk to the downside, you should be excited. Lee believes it is getting close to that stage now. Make calculated decisions based on asymmetrical bets. This fully translates to the crypto markets too. The space is ripe with opportunity. You just have to be patient.You just have to be wise.