In 2020, decentralized finance was Ethereum's trend of the year – and with that honor came a thousand new terms and even more memes. But more importantly, the success of DeFi proved an essential quality of Ethereum this year: that real high-volume apps are possible on the still-nascent network.
New protocols shipped, new tokens were issued and the total value locked (TVL) in decentralized finance protocols surged. Ethereum’s culture evolved. People began speaking of degens, short for degenerate gamblers, as thousands of pseudonymous, money-hungry token-holders blindly sought yield in sometimes questionable assets.
Given how meme-driven this craze was, it was not long before it spread through the whole of Crypto Twitter. Prominent Ethereum accounts tweeted about their favorite degen opportunities and walked back statements after these unaudited projects were inevitably hacked. There was plenty of action to be had though it was hardly fulfilling or sustainable.
As autumn turned to winter, degen finance had run its course. We look back at the period as a pinnacle of debauchery and greed, but the story is more complicated. The growth of degen finance has created a massive increase in TVL in many novel open financial protocols, some with staying power, and has led to the rise of what I call regenerative finance.
Regenerative finance is a cultural preference for the funding of community and the public good over (or in parallel to) projects that are expected to produce a return for the funder. In the startup world, GiveFirst means trying to help anyone – especially entrepreneurs – with no expectation of getting anything back. Regenerative finance is Web 3.0’s answer to Silicon Valley’s GiveFirst.
And it could only have come after this summer’s DeFi degeneracy. Here is what the rise of regenerative finance in the Ethereum community summer 2020 looked like:
- In August, YFI, one of the most prominent yield farming projects, announced plans to direct a percentage of rewards towards Ethereum development for everyone.
- It was announced that Yam Finance directed 1% of its future treasury to Gitcoin Grants’ public goods funding.
- In total, over 20 funds, projects, or community members, directed over $2 million to the Gitcoin Grants Multisig in the summer/autumn of 2020. All of this money is slated for public goods funding.
Public goods are an important class of goods in economics – these are goods that are consumed by anybody and everybody. In our physical world roads, bridges, clean air and clean water are public goods. Open-source software is the foundation of our digital infrastructure and the equivalent of a public good in the digital world.
In the blockchain world, open-source software is what powers the infrastructure upon which many tokens are built. Without foundational projects like ETH 2.0 clients, common privacy tools, white hat hackers or other tools by OSS developers, the cryptocurrency technology that is the foundation of your bags would not be secure.
Over the past three years, I have been working on a project called Gitcoin Grants. Think of Gitcoin Grants as Ethereum’s largest crowdfunding platform – a crypto-enabled Patreon that is focused on financing the infrastructure of the new open financial internet. In the past 18 months over $4.5 million in funding has been distributed to public goods on Gitcoin Grants, culminating with $1 million given in the first two weeks of December.
One interesting evolution of regen finance is a recognition of how the foundations of a secure, reliable, transparent and open financial ecosystem relies on more than just funding the coders. Coincenter, a non-profit dedicated to educating policy makers about public blockchains, raised over $300,000 from 335 contributors. After all, everyone in the cryptocurrency ecosystem derives good from policymakers being educated about our technologies.
Regen finance is democratic, not technocratic. It is the community using peer-to-peer (P2P) money to fund what the community needs funded. As opposed to the legacy world where billionaire philanthropists get to decide what is worthy of funding, open systems should be funded by the crowd. Over 5,000 cryptocurrency users contributed to the latest Gitcoin Grants Round.
Here is a preference map of the 26,000 crowdfunding contributions during Gitcoin Grants Round 8.
Readers may note that there is no center to this mesh network of funders. This is what decentralized funding looks like – a P2P network of many funding the many. Each one of those contributions was a little vote (and a little donation) to support the future of open source networks.
Gitcoin Grants are powered by Quadratic Funding, a novel mechanism for funding public goods originally proposed in an academic paper by Glen Weyl, Vitalik Buterin and Zoe Hitzeg. Just as the internet of information brought us new ways to browse information, the internet of finance will provide novel mechanisms to finance projects. Quadratic Funding is just one such example.
Regenerative finance funds the work that secures your bags and keeps your funds SAFU, but the true wealth is in the culture of regen finance. It’s a culture that thrives on overcoming cynicism, embracing longer term thinking and mutual trust.
How beautiful that this culture of regen finance could spring in the wake of this summer’s wave of DeGen Finance, since they are so dissimilar!
- Degen finance is about leveraging the open financial system, with a high time preference, for near-term personal gain.
- Regen finance is about leveraging the open financial system, with a low time preference, for everyone’s gain.
As distinct as yin and yang, yet ultimately reliant. As the ecosystem continues to ebb and flow between the bull and bear markets, so, too, will regen finance ebb and flow with the irrational exuberance of degen finance. Over the long arc, the end result will be a stronger digital economy for everyone.