· Recap of the Last 2 Weeks
· Hot Trend: DeFi Derivatives
· Ribbon Products: Vaults, Treasury, Lend, Aevo
· Ribbon Fundamentals
This week’s newsletter is going to focus on a running theme, which is finding sections of the crypto market that I believe will have the best chance at giving us gigantic returns during the next bull market.
For a quick summary, watch the video below:
The reason I’m doing this now is because during bear markets, a lot of people get discouraged and stop paying attention to new developments.
However, that’s the last thing you do in crypto. I’d argue that bear markets are the best time to learn, because we don’t have all the noise distracting us from the actual value in the market.
That’s also the case for crypto developers, who are the ones making it all happen. Without all the senseless hype and pressure to rush their projects, they can focus on making quality, innovative products that will shape the future of crypto.
There are so many niches in the crypto market that it’s impossible to follow all of it, but what I do know is that a lot of what’s out there right now is junk and/or vaporware.
But if you keep digging, there are a few gems in the mix that provide real-world use cases and will be a major part of improving how we interact with data and money (at the very least).
Recap of the Trends We’ve Looked At
To give a quick recap of the past two articles — which you can read here and here — I highlighted two trends that I think will be far less relevant in the next bull market, as well as two trends that could produce major winners.
The two trends that will fade into obscurity are liquidity farming and “ETH killers.”
Liquidity farming is when projects try to pull as many users into their app as possible by offering huge rewards in the form of tokens.
This is bad for two reasons: It's very inflationary — which means the tokens are rapidly devalued — and it attracts short-term users who put their “mercenary capital” to work with whoever is offering the highest yields.
These users aren’t interested in the actual app — just the rewards. When things go south, they disappear, leaving the app with no real users.
The term “ETH killers” is used to describe the hordes of blockchains that popped up in 2017 and 2021 to try to displace Ethereum (ETH) by offering faster and cheaper transactions.
I believe that 99% of these aren’t going to survive, and after two bull markets that deceived investors (as well as Ethereum successfully scaling its platform), I don’t think there’s room for another hype cycle in this area.
The two trends that I believe will produce major winners are real yield and protocol-owned liquidity (POL).
Real yield is a phrase used to describe crypto apps like GMX and Manifold Finance that pay users a percentage of “revenue,” which is typically transaction fees. As the user base grows, users are rewarded by receiving those fees, and the interest rates draw more people to the platform, creating a flywheel effect of adoption.
It also tends to avoid the “mercenary capital” issue that was so prevalent in the 2021 market.
POL is used by projects that allow investors to directly fund the project’s treasury, selling them discounted tokens in return. The treasury is then managed in a way that can differ from project to project, but the overall goal is to provide income for the treasury itself — which is passed onto stakers and potentially other users of the app. This is a different way to generate “real yield” as well.
This Week’s Trend: DeFi Derivatives
This week, I want to highlight another area of the crypto market that’s primed to surge during the next bull market: derivative products.
This ties into what I was talking about last week with how poorly a lot of projects have managed (or failed to manage) their treasuries. Most treasuries only include the token of the project itself.
The best example is Uniswap, which owns over 422 million UNI tokens. At the height of the bull market, this gave it a massive stash of money exceeding $15 billion, but now it’s barely over $2.5 billion.
The smart DAOs will learn from this and hold investments that are much more stable, giving them a more reliable nest egg of money to fund their projects going forward.
While a lot of people associate options with major risk, decentralized finance (DeFi) has produced an impressive variety of apps that create relatively safe option strategies for users to invest in. The most prominent player in this promising field so far is Ribbon Finance.
Ribbon Vaults
Ribbon Finance has been around since early 2021 and was the pioneer of “option vaults,” which has become a growing piece of the current DeFi puzzle throughout 2022.
The way that it works is simple: You deposit your crypto into a vault, and an automated strategy trades it accordingly.
Over the past year and a half, Ribbon has done a great job of expanding these vaults. It now offers covered calls, put selling, and a more recent addition called “Ribbon Earn,” which we’ll get into a little later.
Ribbon’s home screen shows a list of vaults to choose from with varying strategies:
The top left differentiates between put selling and covered call strategies, and for those options traders out there, it even tells you the strike price of the options it’s trading.
It also has a limit to the amount of money that users can deposit, because they don’t want to distort prices with their trading. If they put too much money toward an options order, it can result in unfavorable price movements.
Of course, the part that everyone’s the most interested in is the annual percentage yield (APY). That’s the annualized yield that the strategy is expected to generate. Although, on a weekly basis, it can vary wildly.
Of course, there’s no guarantee that those APYs will play out as expected, but an interest rate well into the double-digits in this type of market is nothing to be upset about!
Without getting too technical on what these strategies mean, they aim to hedge against big moves in the market in either direction while providing income.
In a way, it’s like selling insurance, where you collect the premium up front and ideally don’t have to pay anything out, resulting in income over time.
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Ribbon Earn: Second-Generation Vaults
One of the recent product launches from Ribbon is its Earn service, which is another way to generate yield.
Earn has some similarities to the first-generation vaults, as well as some differences. But the underlying goal is the same: earn a solid, consistent return without taking on a lot of risk.
The other important similarity is that it’s fully automated. You deposit the money, and the code takes it from there.
There are three parts to the yield generated by Earn:
· First, it earns interest by lending out your deposit to large, accredited market making firms like Wintermute and Genesis.
· It sets a minimum yield to pass along to investors (e.g. 4%).
· Everything that it earns in addition to that 4% is invested in option strategies to capture intraweek price moves in ETH.
Earn is a good step in Ribbon’s journey to create a wide variety of products. Whereas its vaults are exposed to volatility risk, Earn splits the risk between volatility and credit risk. But even if the volatility wipes out the gains from its option strategy, the user is still making money from the institutional borrowers.
The credit risk in this strategy means it’s crucial that the parties it lends to have the money to pay it back, especially after the whole 3AC debacle over the summer.
To vet its customers, Ribbon uses a credit score method created by Credora, an emerging player in the institutional DeFi credit space that oversees over $3.5 billion in loans.
Ribbon Earn just launched on August 24, and its strategy went live on September 2. It originally set a limit to how much investors could deposit at $5 million — which was impressively hit in the first 48 hours!
Now, in just over seven weeks, it’s already attracted over $11 million worth of capital, which is nothing to complain about considering the market conditions.
Ribbon Treasury
While these option vaults are great for crypto users in general, Ribbon has acknowledged the need for DAO treasuries to be better-managed. Its solution to this problem is a service called Ribbon Treasury, which launched earlier this year.
With Ribbon Treasury, other DeFi projects can invest their treasuries in customizable private vaults. Ribbon communicates directly with treasury managers to figure out a strategy that works for them, and then it writes up a program that carries that strategy out.
So far, it’s had four major partnerships with Perpetual Protocol, Balancer, Abracadabra, and BadgerDAO to manage their assets with custom vaults. These four projects alone have already allocated millions of dollars to Ribbon Treasury, and according to one Ribbon team member, as of August 28, they’d already made around half a million dollars in profits!
Ribbon Lend
As I stated before, the real building is done during bear markets — and Ribbon is no exception. In fact, on September 14, it launched yet another project: Ribbon Lend. As the name suggests, this allows users to directly lend money out to borrowers vetted and rated by Credora.
So far, there are two choices for users to lend to: Wintermute and Folkvang. Both have great ratings. Folkvang is rated AA — which is the highest on the scale — and Wintermute has an A rating, which is second-highest.
Lend has been a huge success already, as users have already deposited over $18 million in less than a month. You can see why in the following image. The rates are hard to beat in DeFi, as well as yielding double-digit interest:
Aevo
Ribbon recently made waves on crypto Twitter by teasing its biggest development yet: Aevo. Once it’s launched later this year, Aevo will likely be the largest decentralized options exchange in crypto.
While vaults are great for people who want passive income, Aevo opens the door for a much wider audience by letting people trade options as they would on a typical options exchange.
Once Aevo is live, that’s where Ribbon will do its trading. That alone is a huge deal, as it’ll give Aevo a huge “customer” right off the bat. Within a year and a half from launching its first options vault, Ribbon exceeded $10 billion in total option trading volume.
Ribbon was a game-changer in DeFi with its vaults products. And now, many other apps have popped up offering their own types of vaults. This is one of the fastest-growing sectors in DeFi, and as it continues to expand, we’ll see more players use Aevo to do their trading due to good, consistent liquidity.
That most likely means more fees for Ribbon, which would mean more money going to RBN stakers.
Ribbon’s Fundamentals
If we look at Ribbon’s total value locked (TVL), which is the amount of money that’s been deposited into the app, we’ll see that it’s held up reasonably well during the bear market. And it’s still second-highest in the DeFi options space:
The only project ahead of it is Opyn, which is actually the platform that Ribbon uses to carry out the majority of its trading strategies — that is, until Aevo is launched.
Taking a broader view of the market, the TVL of options apps by comparison is still incredibly small. And given the potential use cases of these products, it tells me that the upside potential here is enormous:
Ribbon was a bit of a surprise earlier this year. Its TVL actually grew in the first several months, while most other apps saw money flow out. In fact, Ribbon surpassed $300 million in TVL in April.
However, like everything else in the crypto market, its TVL plummeted in May and June, and it hasn’t yet recovered.
In the next bull market, I expect to see several of the decentralized options projects reach $1 billion or more in TVL, including Ribbon. That may sound like a big jump from $70 million, but keep in mind that a lot of the TVL is designated in different tokens, so they’ll benefit from revived adoption, as well as prices going up.
The biggest weakness for Ribbon so far has been its token issuance. In order to attract money to its platform, it’s offered huge rewards that are paid out in its RBN token.
The total supply of RBN will eventually be 1 billion tokens. But as you can see in this chart, the issuance over the past few months has been insane:
Overall, the amount of RBN in circulation has jumped from 52 million to 539 million since May 8. That’s been terrible for token holders, but the silver lining is that over half the total tokens are now in circulation.
During the same time period, you can see that despite the token price crashing, Ribbon’s market cap has actually gone up:
Inflation is an issue with a lot of DeFi protocols, but a lot of the future rewards paid out by Ribbon will actually be in ETH. The reason for that is because Ribbon, like GMX, is now paying platform fees out in ETH to people who stake their RBN tokens.
Overall, Ribbon Finance has a market cap of $146 million, which ranks at No. 192 in the total crypto market.
Expanding on that, its fully-diluted market cap (FDV), which measures the market cap if the full 1 billion tokens were in circulation, is about $278 million. That’s still relatively low, and I believe that Ribbon’s hard work will pay off in the next bull market.
With a future as bright as Ribbon’s, we could see a FDV of at least $5 billion in the next bull market, putting its coin at $5, or a little over 31X its lows so far during this bear market.
Thank you! FYI I have no experience buying defi products, but I'd like to learn. I love learning about new investments and especially in the crypto space. I still am learning how to use coinbase, but i need to get more comfortable with it if I'm going to do anything with crypto besides just invest.
Hey Ian! So are you suggesting that we should use ribbon? The info is great but is it a recommendation, understanding it’s our choice.