The 2021 Alpha Playbook: Will It Be Different This Time?

From Sh*tcoins to Blue Chips: Strategic Trading in New Chains

As my colleague Aurelian ponders the onset of what could be "the greatest bull market in history," it's an opportune moment for us to revisit the capital movements within new blockchain ecosystems, especially as we navigate the highs and lows of a bullish cycle.

Blast from the past! This article was originally published in October 2021.

Let us know in the poll at the end if you think this strategy will still be effective in the next bull run or if we’ll see a new meta!

The inception and growth of new blockchain ecosystems present unique challenges for traders seeking to devise strategies that consistently capture alpha during each stage of ecosystem development.

Two years ago, MoneyWithCarter delved into the expansion patterns of new chains, outlining the strategies that could be leveraged throughout their growth phases.

MoneyWithCarter sought to demystify alpha capturing in new blockchain ecosystems. The money flow, as analyzed, typically goes in the following sequence:

  1. A wave of what the community colloquially terms "sh*tcoins" attracts short-term speculators, fueling early-stage liquidity and attention

  2. The community's attention consolidates around standout projects that are native to the ecosystem, signaling the beginnings of a more discerning investment landscape,

  3. The rise of a native aggregator facilitates more efficient value transfer and marks a maturation point in the ecosystem's lifecycle.

By dissecting the growth trajectories of new chains, we have identified patterns that align closely with MoneyWithCarter’s findings. We expect this theory to pan out in most emerging Layer 1 ecosystems.

The Kickstarter

Fundamental components are essential to foster the development of a blockchain ecosystem. At the outset, a decentralized exchange (DEX) is crucial for facilitating basic market transactions such as buys and sells. Typically, these native DEXs serve as the initial platforms for 'yield farming,' attracting early liquidity providers with incentivization mechanisms.

In many cases, these native DEXs demonstrate superior performance in their early stages compared to established omnichain platforms like SushiSwap. This can be attributed to the higher yield opportunities that often accompany the launch phase of new ecosystems, drawing in liquidity and traders looking for high returns.

Farms and Sh*tcoins

Yield Farms

Yield farming in DeFi involves investors lending assets for returns in interest or transaction fee shares on platforms. It is similar to traditional banking products, offering interest-bearing opportunities in the digital asset space. Here are prevalent trends in yield farming platforms:

  • These platforms often emulate early decentralized exchanges (DEXs) by using attractive yield offerings to draw initial liquidity from investors.

  • Investors are advised to exercise due diligence; many yield farms lack robust economic underpinnings and often distribute speculative tokens as incentives.

  • Such platforms typically offer high Annual Percentage Rates (APRs) to entice investors to buy and stake proprietary tokens, bolstering the farms’ liquidity.

  • It is essential to note that the operational framework of numerous yield farms resembles unsustainable economic models, colloquially known as 'Ponzinomics,' which prioritize short-term gains at the expense of long-term viability.

In navigating the dynamic landscape of yield farming, investors must balance the lure of high yields against the risk profile and sustainability of the underlying platforms.

Sh*tcoins

In the crypto market, there are 'shitcoins' - joke or imitation coins of established cryptos. They quickly lose value due to speculation and lack of utility, making them risky investments.

Despite the inherent risks, a subset of traders is drawn to these speculative assets, enticed by the potential for substantial returns on investment, particularly with coins of low market capitalization.

These coins have a short lifespan; most disappear due to their weaknesses. However, a few projects transform themselves through strategic redirection and development efforts. SushiSwap is an example, going from a fringe project to a recognized DeFi platform.

Outperformers

On emerging blockchains, native protocols often stand a better chance of capturing significant market share than established omnichain giants such as Sushi, Aave, and Beefy. This can be attributed to their early mover advantage and tailored offerings that resonate with the specific needs of the chain's community.

Tokens that build robust communities and demonstrate strong utility are likelier to outperform their peers. Although these tokens may not offer the highest Annual Percentage Yields (APYs), they are generally perceived as more reliable investments. As a result, they tend to secure a larger proportion of Total Value Locked (TVL), indicating the trust and commitment of investors to these platforms.

However, a common challenge such tokens face is the need for deep liquidity, particularly in their early stages. This shortfall often gives rise to numerous arbitrage opportunities within the liquidity pools, as price discrepancies between tokens can be significant and frequent.

Yield Aggregators

Yield farming is highly variable, making it difficult to find the best returns manually. Yield aggregators automate this process by shifting funds to different DeFi platforms for optimal yields. They enhance liquidity efficiency by depositing assets into rewarding yield pools and balancing out yields across pools to reduce arbitrage opportunities.

These platforms contribute to the surge in Total Value Locked (TVL) within the ecosystem by simplifying the yield farming process, making it more accessible and less time-consuming for participants. While yield aggregators may enter the DeFi stage after other protocols have been established, their function is critical to the sector's operational fluidity. They may not be the pioneers, but they are undoubtedly indispensable cogs in the DeFi machine.

Real World Example: Fantom

Fantom's journey reflects the volatile nature of emerging blockchain ecosystems. Its TVL peaked at $7 billion but fell to $50 million, highlighting the risks. Now, Fantom stands at a crucial juncture for a transformative future.

The network's evolution is underscored by the development of Sonic, its advanced mainnet upgrade, signaling a strategic pivot from ephemeral, speculative practices to establishing a foundation for sustainable innovation:

  • Fantom's initial growth was fueled by native decentralized exchanges (DEXs) such as SpookySwap and SpiritSwap. These platforms catalyzed the ecosystem with competitive yield farming options, a typical initial phase for burgeoning blockchains.

  • The shift from an environment rife with short-lived "altcoins" to one fostering projects with long-term prospects is a pivotal transition for Fantom. This shift mirrors the maturation process depicted in MoneyWithCarter's analytical framework, signifying a more discerning and development-focused ecosystem.

  • The introduction of Sonic brings a new era for Fantom, with improved performance, enhanced security, and potential for more decentralized applications (dApps). These advancements will boost TVL and strengthen Fantom's position in the competitive DeFi landscape.

  • As the network infrastructure evolves, natural gravitation towards more robust projects is expected, building a resilient ecosystem that can better withstand speculative fluctuations.

  • Crucially, the transition to Sonic is poised to catalyze the growth of native yield aggregators, streamlining the yield farming process and enhancing its attractiveness to a broader audience.

In the broader narrative of blockchain evolution, Fantom's current phase is an archetype for emerging platforms' transition—from high volatility and speculation to stability and sustained growth.

As we anticipate the advent of what may be "the greatest bull market in history," Fantom's transformation provides a tangible blueprint for how burgeoning ecosystems might mature, stabilize, and eventually flourish in the unfolding era of blockchain technology.

Wrapping Up — What to expect going forward

The Alpha

  • This strategy relies on early presence in DEXs of emerging chains. DEXs are vital for DeFi and offer opportunities for yield farming through liquidity provision.

  • Focusing on protocols specializing in lending, perpetual, and synthetic assets. The strongest ones are expected to surpass competitors and gain market share from established "blue chips." They offer superior ROI or more attractive farming APYs.

  • Engaging early with native yield aggregators is a critical move in this playbook. These aggregators are crucial for a well-functioning DeFi ecosystem, allowing for efficient yield generation.

These protocols are the infrastructure for various applications across all chains, from finance to gaming. While this overview focuses on ecosystem money flow, we acknowledge auxiliary platforms like launchpads. Our current focus is on the core protocols that form the bedrock of DeFi despite the additional growth opportunities offered by these platforms.

Do you think this strategy will apply during the next bull market?

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Crypto is a fast paced and volatile industry. Narratives and metas change constantly. The same playbook from the last season may not apply in whatever next leg up the market takes.

That’s why it’s important to keep your ear to the ground and monitor the evolving landscape.

Yield farming, native alt-chain DEXs, NFTs, will any of it revive or stay relegated to last season’s playbook?

Stay tuned for when we write the 2024 Alpha Playbook!

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