Editorial
Congratulations on making it through one of the longest weeks for crypto in quite some time. Between a number of exploits, regulators in the rafters, and billions of dollars worth of dog-themed antics, there was an absolute firehose of noise this week. But amidst it all shone one tweet above the rest, like a beacon on a hill.
Stani’s tweet came in response to a user who had come across a beta interface for the Aave website that mandated they provide KYC/AML documentation before proceeding. It suggests that institutional adoption of smart contract-based financial applications is nearer than many had expected. For those of us who had waited nearly a decade for Bitcoin to get a passing glance by traditional financial institutions, this alpha leak proved to be a resounding validation of the work put in by DeFi builders over the past few years.
So, what are some of the implications?
The sharks smell blood: When fund managers and investment committees are making money one way, the best (only?) way to catch their attention is by offering a way to make more money on a risk-adjusted basis. A capital market like Ethereum-based DeFi, with tens of billions in liquidity alongside retail users with little to no edge, presents such an opportunity. Moreover, the friction associated with expanding an investing entity’s mandate requires that considerable thought and high expectations go into such decisions. The outsized yields accessible in DeFi through smart contract cost efficiencies, its capacity for rehypothecation, and the norms surrounding platform token distribution presumably are what make it such a compelling target.
The old rules still apply: As evidenced by the tweet Stani was responding to, the barbarians at the gate will be bringing their compliance departments with them. Despite what has transpired across Ethereum to date, we still do not live in a post-Bank Secrecy Act world, nor can we assume that OFAC will simply turn a blind eye to the world’s fastest developing economy, albeit digital. My personal view is that base settlement layers like Ethereum, and backend financial protocols like AAVE or BarnBridge, can remain deregulated so long as regulators feel that they can rely on exchanges, incorporated fintechs, and layer two validator sets as chokepoints for enforcement. I say this assuming that the induced demand brought on by scaling solutions over the coming year will counterintuitively result in mainnet transactions becoming out of reach for at least 90% of users. Even if that’s not the case, precedents set by Circle, Tether, and Uniswap paint a clear picture of a semi-regulated future.
The gray area is brightening: Institutional investors bear the burden / privilege of a fiduciary duty to the limited partners providing them with capital. This implies that any move into DeFi platforms and assets should be vetted not only by internal compliance teams, but also by general counsels tasked with regulatory risk assessments. As I alluded to in a previous edition of BarnBurner regarding the Gemini listing of $BOND, these types of assessments tend to be done via industry consensus in lieu of any substantive regulator guidance. Given the increasing degree of crossover between crypto industry participants and the agencies that are supposed to regulate them, as well as the increasing amount of investor money at stake in the system, “banning DeFi” is probably not on the table. That’s not to say that regulatory agencies won’t look to make their mark after having been hamstrung throughout the Trump administration, or that FATF won’t come in swinging next month. But ultimately, you don’t regulate that which you want to ban.
The flood is nigh: With the stage set, dry powder can begin to move into DeFi capital markets at an accelerating pace. Total value locked (TVL) in DeFi grew 80x over the past year, but that was in large part due to asset price appreciation. The entrance of institutional players will mark a seismic shift for DeFi TVL with fresh capital being redirected all along the risk curve; negative yielding sovereign debt, venture capital earmarked for fintechs, zombie corporate debt - it’s all liable to get sucked into the black hole of DeFi. We haven’t even begun to see the latent demand layer two solutions will unlock at global scale across some of the world’s most inefficient financial systems, either.
All of this is to say, we find ourselves closer to the day where DeFi simply becomes Fi. It won’t be a straight line, but the momentum is only increasing with each passing day. And remember - those institutions? They’re not much different than you or I.
Enjoy the weekend,
- Max
Governance
We’re entering the last 24 hours of the ongoing SnapShot vote to gauge community support for the proposed subsidization of the upcoming C.R.E.A.M. Finance and AAVE v2 SMART Yield integrations. I’m proud to say it’s our biggest governance turnout to date, with nearly 97% of some 180,000 $BOND having signaled in support of the plan.
The allocated subsidies will be voted in on-chain following each integration’s deployment. Our integration with C.R.E.A.M. Finance will be deploying next week, as we needed to bootstrap our own Kovan testnet set up this past week. AAVE v2 will then follow shortly thereafter.
Two tangential items I want to highlight as well relate to how we’re thinking about treasury management. The first is that this the first upcoming DAO vote will establish the metaprotocol governance multi-sig by providing BOND for staking on Bancor. While this multi-sig will be maintained by the core team for the time being, its actions will be determined via community voting as we’ve been doing, and ultimately will be handed over to some future state of decentralized governance. If there are specific protocols you believe it would behoove the BarnBridge DAO to accumulate governance say in, feel free to voice your thoughts on the community forum. The second item is that we’ve held multiple discussions with the SyndicateDAO team who are pushing the frontier on this topic of DAO treasury management. I’ll continue to keep the community posted as to how those conversations evolve.
Key Metrics
It’s been all quiet on the front this week as most metrics remained relatively static. What’s important to note, however, is that we’re seeing a market-wide releveraging cycle underway following April’s blowout post-Coinbase’s direct listing.
With far more liquidity in SMART Yield than we had just a month ago, the fixed rated being offered to senior tranche depositors can be locked in with minimal slippage for far larger amounts of USDC.
And of course, there will be quite a bit to look forward to with AAVE and C.R.E.A.M.
On SMART Yield
On the Uniswap BOND/USDC Pool and the BarnBridge DAO
Disclaimer: BarnBurner is not an official BarnBridge publication and is not meant to reflect the shared views of its core team or BOND token holders. BarnBurner is an educational weekly newsletter meant to share updates on technical and governance-related happenings that occur within the BarnBridge ecosystem. The content herein is not financial advice and readers should not base any investment decisions off of it.
Thanks to Zach Owens for his branding work, and 0xBoxer for their dashboards 🤝