The State Of The Internet — The Rise Of Memecoins

Let’s talk about the hottest term in DeFi — really in Crypto overall — that has many shaking their head as well: Liquid Governance.

Now, what the heck is that?

Let’s begin by looking at one of the first big DeFi projects: MakerDAO.

Maker was the first project to fear a governance attack from rogue token accumulation. In the migration to multi-collateral Dai, it lowered its governance delay to 0, which meant that an attacker with $41m in MKR could coopt governance and drain all the collateral, according to security researcher Micah Zoltu. Maker later increased the Governance Security Module (GSM) to a 24 hour delay, so there would be time to insulate the system from the attack.

The source of the vulnerability to this attack is obvious: MKR is a freely traded token that also contains governance rights. An attacker does not have to infiltrate the system, just accumulate MKR and acquire the governance power it entails.

Fears of 51% attacks with from a bunch of Chinese miners collaborating are a thing of the past; hostile governance pools are the Boogeyman of 2020.

This comes from what Liquid Governance is: that control of the system can be transferred, and inevitably, traded on the open market. Time locks help protect against flashloan attacks and locking up tokens for governance keeps short-term speculators out, but optimizing an ideal governance system is like nailing pudding to the wall.

This brings us to the two hottest projects in the crypto space right now: Curve.Finance (CRV) and yEarn.Finance (YFI)

Just to bring back fond memories of 2017, both of these launched liquidity mining incentives and on-chain governance systems within the last 8 weeks. You have to love that new incentive smell.

What’s interesting is that they were both crucial to each other’s success. Curve has $1.1bn in deposits and $734m of those are from yEarn’s Y pool, which offers efficient trading between yEarn’s interest-optimized version of Dai, USDT, USDC, and TUSD. Meanwhile, the YFI token was distributed through the same Curve pool.

Curve Finance proposed that CRV holders who lock up their tokens in a voting escrow can multiply their rewards by up to 2.5x, starting Aug. 28.

Token holders of yEarn Finance, which holds roughly $2.5M worth of CRV from its early liquidity provider rewards, decided to take advantage of the new incentive, locking the entirety of their CRV treasury for 4 years (the max duration).

But Curve’s core team locked up their own tokens too, overpowering yEarn’s and every other token holder in the voting escrow. They’re effectively holding a supermajority of the DAO’s governance power at the time of writing.

This standoff has been interesting, even if a bit silly, to watch.

But, even with such a massive Liquid Governance battle, it seems a non-sequitur that Yearn’s YFI token has gone from ~$3,000 each to nearly $~39,000 each (!) in the last 30 days, a gain of 950%.

What in the Satoshi is going on here?

Well, we have to remember that DeFi started off imitating aspects of the regular financial world that we all know work: such as saving, borrowing and hedging risk. All this required liquidity and each successive project got very creative about enticing users to stake their crypto assets.

Before this summer, DeFi had been humming along, quietly tacking on value until this June when lending platform Compound Finance began decentralizing and distributing a token that allowed voting rights on code changes (a governance token).

This created a new way to make money in crypto called yield farming.

Then Yearn.Finance came along and dropped a smart-contract-governed robo-adviser for yield atop a lot of these projects — one that put users in control. This was the genesis of Yearn’s token: YFI. It is the governance token for Yearn.Finance, a site that performs a variety of functions, but the important part is that Yearn, and YFI, help to move user assets in and out of different liquidity pools in order to find the best yields.

Robo-advising meets liquid governance.

DeFi’s new breed has introduced all sorts of inventive yield-minting mechanisms that consistently get retail investors excited – at least for long enough that someone makes money.

The last ingredient for pure “rocket fuel” is to add two new conventions that DeFi is starting to perfect: Automated Market Makers (AMMs) and Constant Function Market Makers (CFMMs).

We’ve previously covered both, but, in essence, what AMMs / CFMMs provide is liquidity in electronic markets, such as protocols like Uniswap, or with

When you put Liquid Governance (such as Compound’s governance), automated Yield Farming with Optimized Liquidity Pool management (like Yearn.Finance’s robo-advisor), and “stable coins” that have rebasing mechanisms (like Ampleforth), you get the potential to turn dreams into memes.

This is where we get the new breed of Memecoins from. YAM, Spaghetti, Based, Wifey, SushiSwap, and Tendies all represent this new generation of crypto.

Feeling nauseous yet?

If it wasn’t already clear, there is a massive amount of speculation and shaky logic supporting this Tower Of Babel, and I wouldn’t be surprised if we see a correction or outright crash of this latest foray into Magic Internet Money economics.

Still, it is fun to see such wild imagination on display, and we will see where this leads.