Over the past few months, I’ve been going down the DeFi (decentralized finance) rabbit hole—concluding in participation in the recent @mStable_ auction of the $MTA token. This thread summarizes the notes I’ve taken along the way.
For context, I’ve been an investor all my life, learned about Bitcoin many years ago, but only recently have started taking a more detailed look at how projects work in the Ethereum network. I became interested in DeFi seeing some investor friends I trust making seed investments.
For example, as an early participant in CeFi products like Lending Club, @AaveAave ($LEND) looked promising. And seeing the SEC problems Abra had offering synthetic assets, a decentralized approach like @synthetix_io ($SNX) looked promising.
DeFi applications (dapps) are like centralized finance (CeFi) platforms in function, i.e. exchanges, lending markets, savings accounts, etc. Unlike CeFi, however, DeFi platforms are permissionless, like the Bitcoin network.
For example, whereas my son isn’t old enough to open a bank account, he can deposit USD stablecoins in a DeFi app and earn interest, just like a savings account. And I can exchange tokens on Uniswap without having to upload my passport, and justify where I got my funds.
Using DeFi apps requires “connecting” an Ethereum wallet. There’s a growing number of standards for this, including the well-designed Coinbase Wallet for iOS/Android. But the universal standard is the browser-based Metamask wallet, available for Chrome on OS X.
Every interaction you have with a DeFi platform requires a confirmation in your wallet, which maps to a transaction on the Ethereum network, and therefore has a fee associated with it. The fee is dynamically determined, and can get expensive when the Ethereum network is busy.
As someone with a background in product, I was quickly attracted to the @mStable_ platform, for its focus on UX (compared to something like Curve.fi, which feels like the cockpit of an old airplane.)
Shortly after I’d finished exploring their product, mStable announced plans to auction off 2.6M $MTA governance tokens, of the eventual total supply of 100M coins. So I decided to participate.
The mStable team decided to conduct the $MTA auction on the “Mesa” platform, a decentralized exchange built on the Gnosis protocol.
In the days leading up to the auction start, people would enter publicly-visible bids. You would bid on $MTA with the mStable stablecoin, $mUSD, which you could “mint” in their dapp, using another stablecoin like USDC.
So the process was: (1) Mint some $mUSD using $USDC at mStable, (2) Deposit that $mUSD on Mesa, (3) Make a bid on $MTA using $mUSD, (4) Possibly change your bid as the order book changes, (5) Hope your bid gets executed during the auction.
Few people in the mStable community Discord chat seemed to understand the mechanics of how the auction would be executed, since the Mesa “price solver” is complicated, “blocks” of bids are processed each 5 minutes, and priority is given to large-volume bids.
Speaking of the Discord, the quality of the conversations was very high a week prior to the auction, but devolved dramatically in the final days, as large numbers of speculators appeared who knew nothing about the project, but smelled a profit opportunity.
The notional price declared by mStable was $0.15/$MTA, but two days prior to the sale, the order book already showed a clearing price of $0.50, i.e. there were bids for 2.6M coins at a price of $0.50 or higher.
The clearing price increased dramatically when mStable annnouced an investment from @SBF_Alameda’s FTX research arm. In the interest of token distribution “fairness”, I’m not sure whether the timing of that announcement helped or hurt the cause.
I decided to wait until just prior to the July 18, 14:00h UTC start to place my own bid, and placed a bid of $1.50 about 30 minutes prior to start, given the at-the-time clearing price of $1.20.
The price action around the launch was enough to cause the gas price on the Ethereum network to spike. While it cost me about $0.70 in gas to place my order, it would have cost me $180 to cancel the order once the auction kicked off.
Mesa/Gnosis had some technical hiccups, but the auction eventually executed, and the clearing price ended up at $1.80, meaning my bid didn’t get executed. Shortly thereafter, $MTA started trading on the Balance and Uniswap exchanges (both are DeFi apps), and the price approached $3.00.
Many community members expressed dissatisfication with the fairness of the auction, when it was seen on the network that a very large percentage of the tokens were purchased by a small number of actors (around 10 whales!) My view is indifferent on that.
Post-auction, an alternative to buying $MTA outright on an exchange, is to earn it by providing liquidity to a “pool” at @balancerlabs. You deposit equal parts $mUSD and $USCD, and each week receive your pro-rata share of distributed $MTA tokens (50K per week, I believe).
I still don’t understand the exact purpose of these pools, but do understand that there’s a relationship between the level of interest in staking coins in a pool (and earning $MTA), and the yield offered in the mStable SAVE product (paid in $mUSD).
A word on risk. In addition to all the normal investment risks one has to consider, investment and participation in DeFi platforms exposes you to technical risks, as these platforms operate on Ethereum “Smart Contracts”.
The code in these contracts is public, and as the value of a DeFi platform increases, so does the potential value in attacking it. The funds from many contracts have been drained in the past, due to discovered software bugs and expoits.
So when thinking about things like position sizing, remember that this is still experimental technology, subject to exploits. (Over time, the security of smart contacts has increased, and should continue to increase.)
It’s been a lot of fund learning about this stuff, and I look forward to learning more. I’m bullish on this whole DeFi space, in large part due to the innovation of what’s being built, but also from a user experience perspective.
As the KYC/AML onboarding process at CeFi institutions ever grows in friction and intrusiveness, the ease of permissionlessly interacting with DeFi platforms is refreshing, and is a force towards global financial inclusiveness.