Caffeinated Contribution

Head Start

The entrepreneurial lifestyle resists definition.

Business owners paint with strokes of curiosity, determination, and innovation. When people build with creative ambition, experience is valuable, but the symphony of desire and attitude plays an equally important role. It takes heart to start and resilience to keep building. Executing early moves, managing focus, collecting feedback, building a team, and maintaining sales is such an art form.

The best part about an entrepreneurial lifestyle is that it’s accessible to everyone. This can be seen as students explore projects that look like work to others, but feel like play to them. It’s intrapreneurs fueling positive change in existing companies. It’s startup founders achieving product-market fit with new ideas and others who build on existing momentum by acquiring an established business.

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This caffeinated contribution was written by Sheldon Ohringer. Sheldon has led large sales teams, is an active investor, a board member, and is now building Cocoon Growth to help others buy their first business.

Starting a business is one way to explore the entrepreneurial lifestyle, but buying an existing business is also an interesting way to write your own story. While there may be a cost for the head start, acquiring an existing business presents an interesting side door to the entrepreneurial lifestyle.

As you consider a business to buy, avoid future headaches by understanding industry requirements such as licenses, permits, zoning, and environmental requirements. As you work with existing ownership to determine a purchase price, a valuation based on capitalized earnings, excess earnings, cash flow, and tangible assets are all methods to guide fair negotiations. In the end, the right price is one that delights the seller and has the buyer excited.

As details come together, partner with legal and accounting experts who focus on mergers and acquisitions to document the transaction. A letter of intent, confidentiality agreement, contracts, leasing documents, financial statements, tax returns, and sales agreements are all important documents to talk with your M&A team about. Many transactions include a vesting schedule as well, so stay in-tune with these details to avoid unwanted surprises.

There are a variety of strategic ways to acquire a business, but once the transition takes place, new owners are given keys to a kingdom that hails an established team, customer base, and operating procedures. As we see in the Exit section of the Results chapter in YDNTB, there will be challenges during these transitory times, but in the end, virtuous leaders listen to keep the culture balanced. All the good that comes with a business is important to maintain, but an honest audit of negative aspects are important too. Intentional candor with areas to improve allows new owners to build on past success, while charting a renewed vision for lasting prosperity.

By Ben McDougal, ago

Interested Introductions

Early in my career, leaving a networking event with a pocket full of business cards felt like a success. After collecting piles of business cards, why did these relics from past interactions feel more like rubble? I learned it was because they were more proof of a transaction, than a signal of true connection. That changed as I stopped trying to be interesting and instead, became interested.

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“You can make more friends in two months by becoming interested in other people than you can in two years by trying to get other people interested in you.” -Dale Carnegie

When meeting people, it doesn’t matter what I’m working on, what I’ve done, or how interesting I appear to be. A first encounter is about focusing on who I’m with. It’s about making mental links between them and others I enjoy connecting. It’s about conjuring inverse charisma, leaning into playforce principles, and genuine storytelling. Along this path of being interested, deeper conversations have sparked emotion in more first encounters.

These emotions strengthen your memory, which makes it easier to stay in tune, even as your network expands. In fact, the brain is neurologically programmed to remember experiences that evoke emotion. These experiences are easier to remember because they activate the amygdala and hippocampus simultaneously. The emotion-focused amygdala increases the hippocampus’ ability to store memories. This means the stronger emotion(s) you have, the stronger your memory will be of that experience. If your first conversation with someone sparks emotion, your memory of meeting them will be improved.

For me, excitement is usually the emotion I feel in a first conversation. As I learn about who I’m meeting, the opportunity to connect them is fascinating. Excitement helps me store the memory of who I’m meeting while connecting stored memories of others I’ve met. The emotions that come with being interested vs. interesting, makes each experience more memorable and suddenly, no business cards are required.

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This caffeinated contribution was written by Nick O’Brien. Nick is a community builder, engagement strategist, and co-founder of Milwaukee Founders Community. His purpose in life is to connect people to people, people to place, and people to potential.

Even as we get interested in connected dots, it can be hard to avoid the common tendencies of others, which can decrease the likelihood of true connection. After years of intentionally observing the ways people approach meeting someone new, I’ve noticed a few trends based on different types of people. Introverts are more careful with what they say. They’ll share experiences, perspectives, and opinions, but typically not without being asked. Extroverts are more likely to stand out, as they share their experiences, perspectives, and ideas more openly. While there’s a complex conversation required to further understand extraversion, introversion, and ambiversion, let’s zoom in on how introverts and extroverts encounter those first moments of impact.

When two introverts meet, they typically stay on the surface. The hidden intent here is to not stand out, especially if what they say or do is going to make them seem less interesting. While this reserved approach to a first interaction might lead to an easy, free-flowing conversation, it’s not conducive to getting below the surface where unique experiences, perspectives, and insights can be exchanged. This play-it-safe approach actually decreases the chances they’ll remember each other, because very little emotion was initiated.

As two extroverts exchange a first impression, they both dive right in. With an intent of being interesting to the other person, they soon begin to subtly one-up each other to earn attention. Both extroverts may be energized, but the emotions of this memory are built on comparisons to the other person. Instead of potential progress between peers who feel intrigued by what’s possible, confident people are left dwelling on their own shortcomings.

When introverts and extroverts cross paths, it’s natural for an extrovert to dominate the conversation. Unsurprisingly, both personality types are typically comfortable during these interactions. The introvert feels good because they are less worried about standing out when all they have to do is listen to what the extrovert is saying. The extrovert shares a lot about what makes them interesting, which makes them feel comfortable too. As a result the introvert learns a lot about the extrovert, but true connection is a two-way street. Without the extrovert learning about the introvert, the exchange was transactional. The introvert may have experienced emotion to help them remember the extrovert, but it’s unlikely that the extrovert feels much connection when they did all the talking.

No matter the environment, when you want to meet new people, it’s about maintaining an interest in perpetual learning. With practice, you’ll become more knowledgeable and better at recalling what you know about who you know.

What you know about who you know can become a super power when it comes to making introductions. A good introduction can be boiled down to a compelling story that includes 5 elements – exposition, rising action, climax, falling action, and resolution. The goal is for the introduction to be concise, aligned, and engaging enough to not only have sticking power, but also generate immediate action as a result of the conversations you help curate.

  1. Exposition – Name the Story
    Simple and important. The name of who you’re introducing becomes the title of this story and creates a new mental folder for the information you’re about to share. Many struggle to remember names, which correlates with why we struggle to remember what we’ve learned about people. As you evoke emotion with your introductions, you’ll find yourself remembering the names and related details of more people. One common go-to are the emotions of having fun. People do business with people they like and most people like to have fun. Including a fun fact about people is an easy way to support memorable introductions while strengthening your memory of those you’re introducing.
  2. Rising Action – Build a Connection
    Be quick to explain why they’ll want to keep listening. This is when you briefly explain how people spend their time and/or what they care about. Remember, what someone consistently cares about is rarely found in a company logo or professional title. As you evoke intrigue in this rising action, customize the story with knowledge of the audience and attempt to align both parties with shared potential. By personalizing introductions, we increase the enjoyment of each interaction and welcome more emotional variety that deepens the memory. Another trick that adds early trust layers, is to mention someone else both parties respect, who may find this intro especially interesting.
  3. Climax – Share in Celebration
    Now’s the time to celebrate! This takes the initial connection to the next level by inviting awareness around a recent milestone for the person you’re introducing. Ideally, the milestone is related to something you’ve already shared about the person, and is also something the audience is familiar with. This can be tricky if you don’t know people well, but get creative with small wins to always have this option. Large or small, professional or personal, a shared celebration prompts complimentary emotions. If possible, highlight a milestone that others have also experienced themselves, which can add even more collective emotion.
  4. Falling Action – Align our Focus
    After sharing a name, why this introduction is interesting, and sharing a moment of celebration, your audience is eager to learn how else they can engage. You’ve just highlighted someone’s win, which creates room to shift the shared focus toward what may be next. This is often a milestone someone is trying to reach, an obstacle they are trying to overcome, or a current project they’re passionate about. If you don’t know much about who you’re introducing, pick something less specific and more general based on the environment. The quick ideas you weave in here are all about inviting feedback, experiential wisdom, and interesting insights into the conversation.
  5. Resolution – Invite fresh Action
    The stars of this story feel less pressure to act interesting, because you’ve done it for them. Now finish your 15-20 second story and encourage a longer sequel! To do this, mention (types of) people who may be able to connect more dots. Ideally, someone who the other person can easily make an introduction to. Either way, like with the previous elements of this introduction, it doesn’t matter who you list as potential connections. If the suggestions are genuine, a sense of being in the right place at the right time, inspires emotions that come with action.

That’s it! We’ve set the stage for a memorable, emotion-based conversation by including relevant information that makes any personality type feel significance. This introduces equitable, level-setting hooks for a conversation to flourish without you as a constant conduit between them. When the beauty of this method sets a virtuous tone between the people you introduced, be quick to graduate gracefully from the group. This selflessness is rewarded as connectors become connected and more people are invited to lead together.

As these unique interactions are personified by emotion, mutual memories lay a foundation for true connection. When true connections show up, follow up, and keep adding diversity through a positive-sum mindset, the exponential value of a community can be realized.

By Ben McDougal, ago

Organizational Shift

DAOs are a revolutionary way for connected humans to organize, coordinate, and pool resources without the need for centralized authorities or intermediaries.

These community-led groups transparently establish operating agreements and manage a shared treasury. By leveraging smart contracts, all decisions made by a DAO (“Decentralized Autonomous Organization”) are recorded on an immutable blockchain and governance tokens are used for gathering consensus.

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This caffeinated contribution was written by Alex Myers. This certified futurist is a DAO Agility Coach at Aragon, a web3 platform for building DAOs on open-source infrastructure with governance plugins. Alex is also a web3dsm organizer who believes the more we teach, the more we learn.

There are over 11,000 DAO’s in operation, encompassing $11B+ in treasuries, varying widely in size, scope, and AUM (“assets under management”). All of DeFi utilizes DAOs to govern their treasuries, yet many are simply small groups of like-minded individuals who want to quickly gather, pool capital, and make decisions. 

DAOs, like companies, come in many forms. Venture funds, investment groups, grant committees, philanthropy, media, and more. Here are the world’s largest DAOs and here are different types of DAOs.

Besides a wallet and owning cryptocurrency, no technical skills are required to create a DAO. Several no-code operating systems (Aragon, Tally, Colony, DAOHaus, and others) enable anyone to create a DAO in minutes by simply selecting governance capabilities, funding options, and voting requirements. Given many DAO operating systems are open-source, custom smart contracts and powerful plugins can add tailored functionality without additional cost as well.

To join a DAO, new members go through an onboarding process. Once confirmed, members can be given a digit asset, such as an NFT, to verify the details of their participation. Members are then granted access to a communication tool (like Discord, Telegram, or Slack) to collaborate with other members as decisions are made on which projects to pursue.

DAOs are different from traditional companies in that there is no hierarchy and decision-making is done through pre-set protocols and smart contracts. This decentralizes power and allows for more operational versatility. Members can work from anywhere and focus on work management rather than people management. Contributors can work in multiple DAOs and choose to remain anonymous or more identifiable within the group.

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Cheers to this web3 series brewing on the future of how we connect, communicate, and collaborate online!

As hype cycles and funding began to deteriorate in 2022, due to (mostly) macroeconomic forces, DAOs realized that community over performance was unsustainable. Today, sustainable DAOs utilize battle-hardened methodologies like Agile and KPIs to enhance coordination and productivity, while still maintaining a sense of community.

While all DAOs use crypto-assets to establish themselves, the size and scale of a DAO can impact its operations. Larger DAOs require more planning and coordination around governance optimization, commonly breaking into smaller, goal-oriented teams to define their own budget proposals, objectives, and success metrics. Since treasuries are often much more significant, DAOs members expect historical performance and analytics before voting to allocate funding.

DAOs are built on open, borderless, neutral, and censorship-resistant blockchains. This distribution is paradigm-shifting and a big reason for DAO growth. However, such dispersion also exposes DAOs to legal ambiguity. Since DAOs aren’t beholden to country-specific laws backed by traditional business structures (LLC’s, S-corps, C-corps, etc.), they must consider incorporation to minimize liability for members. Smaller DAOs with reduced financial capital are not as complex and more nimble, which allows them to define budgets, proposals, and goals with less effort.

Depending on the size, composition, ongoing activity, and how a treasury is funded (seed funding, ICOs, airdrops, grants, etc.), taxation and regulatory compliance is another presiding element for DAOs. This is especially true if a DAO is generating revenue by charging fees and distributing them back to token holders, as they could be redefined as securities and create taxable events. In short, the larger a DAO becomes, the more professional legal support, financial strategy, administrative attention, and overall leadership is required.

As we consider the future of work, DAOs have the potential to revolutionize the way organizations are structured and operated. DAOs re-imagine human coordination to be more equitable and transparent. With exponentially improving blockchain technology, alongside network effects, joining and contributing to DAOs will become a self-sustaining cycle of growth. As the world digitizes and becomes more decentralized, DAOs are poised to become a powerful force for change, disrupting traditional institutions and fostering a new era of innovation.

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You’re now ahead of the curve! Welcome to Web3 is a shareable reference and follow the Web3 tag for more reflections flavored in futurism.

By Ben McDougal, ago

Non-Fungible Fabric

Ownership is a fundamental principle of web3. NFTs (“non-fungible tokens”) are digital assets supported by smart contracts that connect to a blockchain. Each NFT is unique, which allows code to autonomously apply, track, and transfer digital signatures and verifiable ownership.

With cryptocurrency supporting the economy of web3, NFTs can be thought of as property within this space. Leveraging the immutable nature of a blockchain, NFTs allow anyone to instantly verify authenticity or trace provenance through the history of ownership.

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This caffeinated contribution was written by Will Schneller. This artist turned founder, graduated from Iowa State University and is now an Entrepreneur-in-Residence at Drake University. As a curious creator, volunteer organizer for web3dsm, and owner of Totality – #14, Will has been exploring web3, AI, and how community brings it all together.

The hype of Beeple’s $69M NFT sale led to an explosion of interest in 2021, but the first NFT-like implementation can be traced back to Bitcoin’s Colored Coins Project proposed, in-part, by Ethereum co-founder Vitalik Butrin. Within this 2013 project, the process of making something distinct, like a fungible Bitcoin, was scrutinized by adding metadata into a coin. Smart contracts that include trackable metadata has become a critical component of NFTs. The most common standard for representing ownership of non-fungible tokens, is ERC-721, which has been battle-tested with the most recognizable NFT collections and is continually being refined.

There are two main misconceptions with NFTs. The first is that an NFT is only digital art. This overlooks one of the most powerful attributes of NFTs — flexibility. NFTs are web3 primitives that can represent nearly anything. They allow us to weave together a future that removes the barriers between the physical and digital worlds. The second is that an NFT is only a URL. While some NFTs use generative algorithms to write an image or other types of data directly to a blockchain, most NFTs reduce computational costs (which translates into higher gas fees) by innovating around the theory of ordinals or hosting larger elements of the asset on a decentralized storage system. The token itself goes beyond simply being a pointer and acts as an immutable record of ownership on a decentralized ledger. In an environment where code is law, the entire network recognizes and enforces your ownership via consensus.

Each NFT has no exact equivalent, but they can still evolve. How a token is organized within a collection, where it’s created, who collectively governs the network, and what future states may unfold, gives each NFT its own life cycle.

Before creation, NFTs are often organized into collections, regardless of how many tokens are minted. A blend of “token” and “economics”, tokenomics determine issuance, supply, and any mechanisms that will either reduce supply or incentivize holding. Since NFTs are immutable, a collection’s tokenomics should be carefully considered. Testnets allow for experimentation in the development stage, which aids in NFT development. While coding smart contracts directly into a blockchain is the most powerful, cost efficient, and flexible way to create NFTs, platforms like OpenSea, Thirdweb, Crossmint, and Manifold aspire to make NFT management more accessible.

To begin life on a blockchain, an NFT first needs to be minted. During this creation process, smart contract functions are executed. This assigns token IDs from the collection and may perform metadata randomization before broadcasting the ownership record over the blockchain. Mints can be public, or limited to allow lists. To reduce the potential for scams, allow lists (also called “whitelists”) collect, prioritize, and manage interest using wallet addresses from potential NFT buyers. The release of NFTs within a collection can be done all at once, scheduled over time, or perpetually open. Highly anticipated collections can cause congestion on a network, creating gas wars in which buyers can push their transactions to the front of the queue by paying higher fees.

Once minted, NFTs can be exchanged in many ways. They can be bought and sold using cryptocurrency on marketplaces like OpenSea, Blur, SuperRare, or Foundation. Marketplaces provide key infrastructure which, in addition to facilitating trade, aids in collection discovery. They can also be transferred via an airdrop, which is when NFTs are gifted into a digital wallet. Airdrops provide a creative way to share assets with each other, with senders usually paying any gas fee.

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Pay close attention when using your wallet to complete signature requests. Signing a malicious smart contract can grant token approvals for all assets in a wallet. One common hack is packaged in NFT airdrops. If you receive an unknown NFT in your wallet, do not interact, transfer, or sell it as these actions can activate unwanted access. There are many stories of epic heists, so do your research and stay vigilant.

Once acquired, you’ll receive the NFT at your wallet address. Despite the token appearing in a wallet, it’s not really in your wallet; your wallet is like a web browser for the blockchain. Using a wallet address, you can see NFTs you own, and due to the transparent nature of public blockchains, you can also see other people’s collections.

While creator compensation and basic commerce has been the most publicized aspects of NFTs, with over $40B in transaction volume in 2021 alone, there are also ways to extend the life cycle of NFTs. Concepts like “burning”, and “staking” create extensions to what an NFT can become. When an NFT is burned, it’s sent to a null address for which nobody has the private key. Burned tokens are effectively removed from circulation and reduce the initial collection’s supply. This action can support the tokenomics of a project, while also adding depth to ownership within an NFT collection. Another concept is staking, or the act of locking an NFT in a specialized contract that prohibits transactions. Staking also reduces the circulating supply, but does not permanently reduce the size of the collection, as an owner can reclaim the token. Staking is often used as a way to incentivize holding for long periods of time and often yields rewards.

Alright, we’ve covered what an NFT is and how they work. Let’s pour into some current applications of NFTs, such as digital art, curating collectables, celebrating ownership within video games, administering membership benefits, managing events, enhancing security, and even raising financial capital for a new business.

To date, digital art has emerged as the most common use of NFTs. Artists can now monetize their work, push creative boundaries, and even earn royalties on secondary sales. Platform take rates have thankfully plummeted, which further extends the runway for artists to stay creative. Art buyers also appreciate fewer intermediaries, verifiable provenance, and new ways to connect with the creator. Along with access to art, NFTs can also help identify authenticity alongside the dynamic rise of machine learning and generative AI.

Collectables are also being enhanced with NFTs. Sports memorabilia, trading cards, toys, clothing, accessories, or classic cars can now be supplemented with digital assets that go further than a linked QR code. NFTs can add discoverability, more ways to socially trade with fellow collectors, and have enabled creative ways to digitally interact with physical items. For example, imagine buying a fresh pair of shoes that come with an NFT. Whether you decide to wear this prized possession IRL or not, using the connected NFT, your upgraded character can now rock these collectable kicks in your favorite video game. This is just an example, but the convergence of online status and identity makes NFTs a prime way to create communities where people feel a sense of belonging.

Speaking of gaming, NFTs provide a natural fit for gamers to celebrate ownership and authority in video games. Currently, in-game items, whether consumable or cosmetic, are effectively rented by the players. If a game developer shuts down the servers, these treasured items would vanish. In a web3 world, NFTs would support more lasting ownership. A few early examples are blockchain-based games like Cryptokitties and Axie Infinity, but consider when in-game items in Minecraft, Fortnite, or Call of Duty, are NFTs that can be transferred between players and different games. Web3 is inherently permissionless and interoperable, so innovative tools and conventions need to be created to foster these harmonious initiatives. While there’s more to be done, we are seeing more trust-minimizing technologies championed by industry leaders like Yuga Labs and Polygon, who are focused on unlocking such compatibility at a fundamental level.

Beyond entertainment, NFTs offer a decentralized method to managing memberships and associated benefits. A few examples include NFTs that grant access to events with commemorative NFTs, such as POAPs, serving as artifacts to mark the moment. Like a ticket, NFT ownership can also grant access to communication platforms like Discord, decentralized autonomous organizations (“DAOs”), and commercial copyright licenses, enabling token holders to create products or services with built-in network effects. Founders can build real-time brand equity in a crowdsourced startup and established corporations like Starbucks, Lowe’s, and Reddit are inventing new ways to add value, enhance security, and deepen brand loyalty using NFTs.

If we accept that our world is becoming increasingly digitized, there’s a natural fit for NFTs to enhance products, services, and verifiable value. In the neon future, it’s not crazy to think NFTs may soon power simple assets like concert tickets, but also critical belongings such as birth certificates, college diplomas, real estate titles, and more. As web3 matures, the challenges of digital money, property, ownership, and commerce may introduce new barriers, but mainstream adoption into more advanced economic constructs can seamlessly reshape today’s barriers into tomorrow’s non-fungible future.

By Ben McDougal, ago

Mechanized Money

What enables us to have truly programmable money? After your Welcome to Web3, let’s keep curiosity fed with hot sips on crypto and how decentralized finance (“DeFi”) galvanizes web3!

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This caffeinated contribution is by Scott Herren, a blockchain developer building at the forefront of web3.

Blockchains

As we dive into web3, we must grok the traditional finance world. One of the primary challenges that bitcoin and blockchains seek to solve is the double spend problem. Double spending occurs when digital tender/fiat/currency is sent to multiple parties simultaneously or after a sender’s balance has elapsed. (There’s a ton more to learn about consensus and the Byzantine Generals’ problem, but we’ll leave that for another cup.) This, effectively, creates money from thin air and is what banks and the central banking system have helped prevent for the last few centuries. This power can be abused, so bitcoin looked to democratize the process of approving transactions by folks called miners.

The Bitcoin network went live in 2009. Initial traction was modest, but the “unspent transaction output” (UTXO) model for tracking transactions and balances proved to be groundbreaking. Bitcoins are “fractured” from their initial whole. These fractions are used as currency, which makes accounting inclusive, verifiable, and very transparent.

Blockchain technologies have evolved toward mainstream adoption, but cryptography has been studied since the 1980s. Bitcoin was first to crack the code, but different blockchains and more on-chain layers are being combined in powerful ways. Today, there are four main types of blockchain networks: public blockchains, private blockchains, consortium blockchains, and hybrid blockchains. It’s impossible to count private blockchains, consortium blockchains, and hybrid blockchains, but there are hundreds of public blockchain that are permissionless, meaning they are fully decentralized and anyone with an internet connection can equitably access the blockchain as an authorized node. Bitcoin and Ethereum are the two largest, with 10% of the global population owning some form of over 2,000 different cryptocurrencies.

Within each blockchain, layers provide infrastructure for web3 developers. Hardware, data, network, consensus, and application layers make blockchain technologies more usable, with each layer offering unique functionality.

The last ingredient in the blockchain recipe is hashing, which gives blockchains verifiability. With hashing algorithms, miners are assembling a historical ledger where any tampering of previous transactions will disrupt current calculations. With verifiable ledgers storing only valid transactions, the next cool thing we can do is automate value.

Smart Contracts

Smart contracts allow us to program, exchange, and intermediate value using the storage mechanisms first introduced by Bitcoin.In 2014, Ethereum introduced a new programming language called Solidity, which allows smart contracts to store value and other data. Gas is paid in Ether, the native token of Ethereum, for transactions that interact with smart contracts. Computationally intensity and network activity determine gas fees at any given time. These primitives have helped developers explore a vast array of mechanisms for coordinating value. Some have been successful while many others have taught us valuable lessons about this antifragile system.

One of the earliest successful smart contracts of Ethereum, The DAO, had a catastrophic contract bug (flaw in the programming) which we now refer to as a Reentrancy Attack. The DAO had coded a “shared bank account” where stakeholders could deposit Ether into the contract and receive a proportional share of tokens back. The goal was to collectively fund projects via token-weighted voting. While tokenomics and technical improvements have addressed many of the early missteps,  the major mechanisms are still widely used in token governance today.

Tokens & Standards

As the Ethereum Improvement Proposal (“EIP”) process matured in 2017, smart contracts began conforming to implementation standards. ERC-20 was the twentieth iteration, which included a request for comment offering a fungible token standard. To support an endless variety of projects, this token standard became the default for initial coin offerings (ICOs) that were sourcing funds to solve blockchain challenges. The power of this mechanism led to many overly ambitious projects that damaged trust with unfulfilled promises, but some of the powerhouses of today were launched during the ICO bubble.

Some other notable token standards are ERC-721, the non-fungible token,, and ERC-1155, the semi-fungible token. The adoption of these standards across the ecosystem allows for tight composability and interoperability across protocols. These “money legos” act like building blocks for DeFi, but before we get to decentralized finance, let’s first cash in on the most prolific tokens within our global economy: stablecoins.

Stablecoins

Stablecoins peg their value off another asset, generally something stable like the US Dollar or gold. Stablecoins can also derive value by being fiat-backed, collateral-backed, and algorithmic. 

Fiat-backed stablecoins are backed by fiat money in an auditable bank account. Fiat money is a government-issued currency not backed by a commodity such as gold. Popular examples are Circle’s USDC, Gemini’s GUSD, and Tether. While fiat stablecoins are quite easy to scale they also have trade-offs with their decentralization properties. The blocklists of these stablecoins are growing as more projects comply with jurisdictional requirements.

Collateral-backed stablecoins are backed by assets that are locked on-chain and transparently auditable at any time. The largest of these, Dai, is mostly backed by Ether. When done right, these types of stablecoins have great decentralization properties, but are much more difficult to scale and can have liquidity issues from a market squeeze.

The final type of stablecoin is algorithmically balanced with a system known as “seigniorage shares”. It’s important to mention “algo-stablcoins”, as implementations have not been successful to-date, so you may want to avoid these types of stablecoins until technology can unequivocally support the ideology. Alright, with tokens and places to store value, let’s look at innovating within traditional financial exchanges.

Lending & Exchanges

After the rush of late 2017, the buidl market set in. Organizations committed to building, have delivered on overcollateralized lending and borrowing on-chain. Lenders can lock their collateral to earn from borrowers, but borrowers need to be lenders of another token and ensure their loans remain sufficiently overcollateralized. Lending and borrowing rely on asset prices to determine liquidation thresholds, but if these can be manipulated, then the system is vulnerable. The Oracle Problem is one that doesn’t often get surfaced, but is becoming more crucial as the value of attacks increases.

Early experiments around what order books looked like on-chain were clunky. Each bid, update, acceptance, or cancellation required another transaction and gas. This changed in 2018, when Uniswap used the Ethereum blockchain to provide a simple interface to swap tokens. Uniswap flipped the concept of traditional order books on its head. Instead of creating offers to buy or sell, a market maker can provide two tokens in a pool and the protocol holds the ratio of the tokens in the pool equal. These pools are called automated market makers (AMMs) and the pools leverage the equation  k=x*y, generally referred to as the constant product market maker (CPMM). You’ll see AMMs often, with the CPMM formula occasionally cited. This supports a very simple token swap without accepting a costly series of orders. Being a non-custodial, decentralized exchange you also never give up control of your tokens until the swap actually occurs.

As crypto is managed, liquidity incentives were initially implemented by Yearn Finance, a protocol that automates the lending process to earn yields from on-chain assets that could be held or traded on the market. Many incentives came from token inflation that hadn’t found value loops and proved to be unsustainable. Since 2020, years of rapid experimentation has revealed innovations that are continuing to push DeFi forward.

DeFi’s Destiny

This magical dark forest can be treacherous, but system level engineering takes time and it’s liberating to build with so many intrepids learning together. As we complete this download, here are a few interesting use cases to keep us thinking about what’s possible beyond traditional finance.

  • Instead of getting paid every two weeks or each month, smart contracts can create payment streams. Instant access to financial capital furnishes more financial freedom, while still maintaining refill or cancellation options. Along with incoming compensation, outgoing subscription fees and self-repaying loans are also use cases where automation can further optimize financial control.
  • Also known as no-loss lotteries, prize-linked savings accounts, are not uncommon in the traditional finance world. Local municipalities and credit unions have generally handled them. Pooling capital and lending it to others is also used in smaller communities to help with small, low-cost loans. With an end-to-end process, smart contracts enable little to no overhead, which makes nearly all of the earnings available to participants.
  • The most magical of our new tools! Flash loans allow for borrowing a near-infinite amount of a token, given the loan is paid back within the same transaction. This visualization of a flash loan transaction will add clarity, but in short, if there are transactions that require more capital and can be facilitated within one block, they have been democratized to anyone with access to a scripting language and a relaying node.

DeFi provides composable tools for traditional and innovative finance primitives. Being able to mechanize your money and the value it delivers within a network is super powerful. When web3 concepts hook into the financial primitives of crypto, the global economy can leverage faster, more equitable, and safer peer-to-peer commerce.

By Ben McDougal, ago