DIALECTIC

For the foreseeable future, the financial use-case of crypto IS the killer app. As such, any layer-1 ecosystem that wants to build a vibrant community must start by supporting robust DeFi primitives that improve capital efficiency. An excellent example of this is GLIF in the Filecoin ecosystem enabled by the new FVM.

2023 will be remembered as the darkest winter imaginable in DeFi, especially in the wake of the Curve attack. However, Q4 observed a considerable uptick in capital inflows as well as yields. This uptik is being driven by improved primitives and the realization that Foundations must actively propagate their DeFi Ecosystems.

Q2-Q4 of 2020 saw what we now refer to as "DeFi Summer" whereby crypto-enabled money markets and automated market makers realized exchanges would pay a percentage of fees for liquidity provision and subsidize the liquidity with the protocol token (i.e implicit ownership).

I proposed the concept of "Keepers" in 2017 with an update in 2019, that the key resource provider for DeFi networks would be liquidity providers/market makers, which were akin to miners in Bitcoin. DeFi Summer or DeFi 1.0 was characterized by protocols bootstrapping liquidity by subsidizing yields with their native token along with some other mechanisms. This model presented a series of problems, most notably that the inflation schedules for most DeFi protocol token subsidies were too aggressive for long-term sustainability. Thusly, many of the darlings of DeFi 1.0 have waned in recent years.

While there have been some false starts in the emergence of "DeFi 2.0", we believe that the ecosystem is now maturing beyond the pitfalls of DeFi Summer as a new generation of capital efficient protocols take over. We observe some important trends on the horizon as exemplified by the GLIF/Filecoin VM cases:

1- On-Chain and Off-Chain Yield Subsidized by L1/L2 Foundations

The strongest most well-organized emerging L1/L2 Foundations are taking an active approach to propagating their DeFi ecosystems. Seeding the DeFi ecosystem is probably the most productive use of capital for many well-capitalized crypto foundations. I commend Protocol Labs for their support of GLIF and other DeFi protocols in their ecosystem. I believe that this will be the defining trend in DeFi for 2024.

2- More elegant token mechanisms in new DeFi protocols increase capital efficiency.

We observe that many teams are taking a longer view to bootstrap liquidity on their network and also using dynamic adjustments to token inflation to preserve sustainability over headline APY. So while we may not see the heady yields of DeFi Summer, we will see more compelling organic yields which we invite as ultimately more healthy for the entire space. In our case study of GLIF we see a more gradual yield-incentivization schedule. GLIF acts somewhat similar to Lido or Jito in their respective ecosystems by increasing capital efficiency since deposited tokens have the ability to be rehypothecated. Prior to the launch of the Filecoin Virtual Machine (FVM)—the Filecoin network was bottlenecked with capital inefficiencies. Storage Providers (the network’s “miners”) didn’t have a permissionless or efficient way to borrow FIL (Filecion’s native token) to use as mining collateral, and the majority of FIL token holders also lacked a way to efficiently evaluate and deploy FIL to storage providers and earn rewards. I believe this is why we've seen such outlier growth from GLIF in recent months.

DeFi is poised to grow substantially over the course of 2024 and protocols that increase on-chain capital efficiency and take an elegant approach to incentivization will be core primitives that drive networks and communities forward. Dialectic is proud to support GLIF as an investor and as an active LP participant. We've been extremely impressed with Jonathan and his team and see GLIF being central to the FVM capital efficiency story for a long time. This team is just getting started. I also commend Protocol Labs for their support of GLIF and note that, again, we see PL leading important innovation and community-building in the space.