It’s time to be honest about DeFi

Good lord, what a week. FTX, one of the world’s largest cryptocurrency exchanges, blew up in spectacular fashion. 💥

There’s a million news articles about what happened, and details are still pouring out. But I’m gonna use this opportunity to express some honest thoughts on the current state of Decentralized Finance (DeFi), while weaving this in to some of the concepts from traditional collecting & investing.

Let’s go 👇

The FTX blowup

So, what the hell happened?

At a high level:

  1. Clients deposited money into their FTX accounts, which they thought were safe
  2. FTX took that client money and lent it out. Exactly where all the money went is still TBD. But FTX basically took part in unregulated fractional reserve banking
  3. The money got vaporized
  4. Clients tried to pull money out of their accounts, but FTX no longer had the money to cash out the chips
  5. FTX went bankrupt, screwing over a million clients

Basically, FTX ran the casino and used house money to place speculative bets in what is now the biggest crypto scam of all time.

For fans of The Office who prefer their explainers in meme form, here’s a good one:

Keep in mind this all happened within 48 hours.

Oh, and then a day later, they were (allegedly) “hacked” for $600m.

This beautiful 💩 show is a very big deal. FTX was supposed to be a pillar of strength in the crypto ecosystem. It had backing from major athletes and celebrities. Founder Sam Bankman-Fried positioned himself as the adult in the room and quickly became Washington DC’s unofficial crypto “buddy.”

FTX’s collapse is causing even crypto’s most hardcore perma-bulls to question DeFi’s resilience and purpose. It will likely scare off institutional interest in crypto for years to come.

But times like this create introspection. It’s a relief, honestly. A chance for us all to be honest about what is and isn’t working out.

This week I sat on a panel discussing exactly this topic. In this issue, I’ll share my favorite parts of the discussion, and say a few spicy things I didn’t say during the panel.

Sunrise Startup Festival 🌅

This week I was in Sydney for Blackbird’s Sunrise Festival. As Australia’s largest VC firm, Blackbird recently closed an enormous AUD $1B Fund — Australia’s largest venture fund to date.

I’ll be honest, I usually dislike conferences, but this one was terrific. Guest speakers included the lovely Melanie Perkins, CEO and co-founder of Canva, Flavia Tata Nardini, CEO and co-founder of Fleet Space Technologies, and too many more great ones to list.

The panel I was on was entitled: Looks rare: The web3 battle between price and value.

The idea is that collecting and trading are as old as time, but have taken on a distinctly different meaning in the world of DeFi. How do we determine the value of intangible assets? Is beauty in the eye of the beholder? Are web3 collectors seeking status, riches, belonging, or all of the above?

The panel was run & moderated by the always stellar Lauren Capelin from Amazon AWS Startups, and also included:

The ongoing FTX saga provided an even more fitting backdrop to our discussion.

Here are some of my favorite questions, answers, and moments from our chat.

Trading is ancient, real-time price discovery is new

While the trading and collecting mechanisms are new (as are many of the assets being collected), the behaviors are as old as time.

So what’s different this time around with DeFi?

I think one thing that’s different now is the transparency and real-time nature of these marketplaces. While equity markets have been liquid and pretty transparent for decades, it wasn’t that long ago that people bought houses without actually knowing what they were worth.

There was no Zillow or Trulia. House values were assessed once per decade for tax purposes, and finding out what homes in your neighborhood were valued at meant a trip to City Hall.

Now we have companies that are tokenizing real estate — bringing a whole new level of transparency and real-time price discovery to property markets. And this is just one asset class. We’re riding on an information superhighway, and blockchain technology removes the speed limit.

But let’s be honest about the downsides.

  • All this immediate access to real-time information is causing serious FOMO and other negative externalities.
  • When everyone sees prices rising in real time, they’re more likely to misunderstand (or completely ignore) the fundamental value.
  • This creates a hyped-up price inflation loop that justifies the actions of early speculators, and turns everyone involved into mindless “line go up!” zombies.

It’s nobody’s fault; this is just how we’re wired! But these forces are not something we understand from birth. You have to actively fight against the urge to hop on trains to nowhere — especially when people you know and trust all seem to be catching a free ride.

And of course, this all works in reverse on the downside. If TradFi markets rise like an escalator and fall like an elevator, DeFi markets rise like an elevator and slams back to earth like the god damned Chicxulub asteroid. The deflation loops are tremendously powerful, and create panic-selling and FOHO (Fear Of Holding On? is that a phrase? Well, it is now!)

Look, information is fundamentally a good thing! But we live in a very noisy world. It’s easy to join the chorus. It’s a lot tougher to understand our flaws, synthesize information, and create your own signal.

Even brilliant individuals often have no idea what they are doing. They may be intelligent as hell, but that’s still different from having wisdom.

Something may seem wise now, but can only be proven wise over time.

Wisdom = Intelligence + Time.

Value is fundamentally driven by time

At Alts, we often think about the concept of something being “vintage.” But what does vintage actually mean?

I think to be considered vintage, something has to

  1. Be from the past, and
  2. Represent the best of its kind

For me, condition 1 is really the key here. There are loads of factors that play into value. But for something to become vintage, it needs to stand the test of time.

I think you can extend this metaphor to DeFi. It’s a cliche, but we really are in the playful, messy, early days here. For digital collectibles to show their true value, they too will need to stand the test of time.*

How much time? Like everything else in the world of valuations, I think it all depends on supply. Most antique dealers consider an item vintage if it’s at least 40 years old, but scotch whiskey starts to get very valuable in just half that time.

Plenty of suburban sprawl real estate from the 1950s is falling apart and becoming worthless. But California bungalows are worth millions because they’re built in areas (artificially) constrained by supply.

This 1,400-year-old ginkgo tree is extremely valuable — priceless, really. There’s nothing else like it.

Many in the sphere have called FTX a “Lehman moment” for crypto. I’ve been joining the chorus, parroting this line myself over the past few days.

But let’s be honest.

I’m starting to think this framing is false.


  • First of all, no taxpayer bailouts are coming for FTX account holders. (Not that Lehman itself got a bailout). But you get the point. No money’s getting printed to save anyone from this mess.
  • Second, the FTX situation is on a much smaller scale. FTX lost about $10 billion. Lehman lost $619 billion.

But the real reason this isn’t a Lehman moment is because, until it crashed, Lehman had stood the test of time. Lehman Bros was founded in 1847 — it lasted one hundred and sixty-one years! It was one of America’s oldest and most respected financial institutions.

Yes, when FTX collapsed, $10 billion of value was lost. But I’d argue that, on some level, FTX’s value was never real to begin with. It was a 3.5 year-old company with no board of directors and a made-up token that evaporated like a fart in the wind.

Its value was never real, because it never stood the test of time.

*Note: When buying a collectible, you (usually) need to think about how well it will physically age. Will it decay? Will it oxidize or fade? Etc. In this regard, digital collectibles are actually a special class, because they are essentially ageless. 99% of digital art NFTs may be worthless, but at least the form factor is invincible.

Digital tribalism

We’ve written previously about the idea of investing through memes and tribalism. Nothing has illustrated this concept for me quite like the Gamestop short squeeze of 2021.

To me, $GME was not an aberration, but rather the beginning of something much bigger. It ushered in the concept of community-based investing into the digital age. Of “voting” as a group. Of the wisdom of the crowd, not the individual. (Basically, the exact opposite of everything I espoused above!)

Voting is more than just elections. Every personal choice you make is a vote; it stands for something. You vote every time you put on your clothes, use a shampoo, or decide where to eat.

Our digital identities are no different. As we continue to interact online, we’ve begun to form digital tribes (often decentralized tribes) based on shared values. They’re a way to signal to the world who we are and what we stand for. You don’t need an NFT or digital asset to display allegiance to a tribe, but it’s certainly one way to do it.

For example, my Twitter PFP is from an NFT collection called Drop Bears. It’s not the world’s most valuable NFT collection. They’re not on any Top 10 list, and won’t ever be. I bought it for cheap and could not care less about the current floor price.

No — I bought into this because it represented two things I love and care about: 1) Australia, and 2) Cute, fuzzy koala bears. Drop Bears has donated tens of thousands of dollars to support koala rescue in the wake of the 2020 bushfires.

NFT artwork is ultimately just another signaling device — a way to show who you are, what you stand for, and what you value. That’s a tribe I can get behind.

I don’t have all my money in NFTs. But I’m going hard on The Office memes today.

Web3 needs abstraction, not onboarding

Alright, let’s get spicy 🌶️

One of my favorite questions from the panel was: Are you bullish on the future of web3?

And my answer was yes — in the long run, absolutely. I think the technology is unique enough (and ultimately marginally useful enough) to stand the test of time. Timeframe aside, I believe it has enough gravity to keep its orbit.

But let’s be honest.

Nobody, and I mean nobody outside of a relatively small proportion of VERY early adopters cares a lick about this shit. Web3 is not a foregone conclusion. It’s not an inevitability, and it’s not “obviously the future.”

When people talk about “onboarding a billion users” onto web3, they need to understand this fact. Web3 just isn’t important to most people’s lives, and probably never will be.

This isn’t a UX problem, and it’s not an onboarding problem. It’s an abstraction problem.

Web3 is absurdly difficult to understand. It has all the technical complexity of database science, combined with the obtuse social mores of a modern cult. Explaining web3 to your parents or even most of your friends is comical. Normal people will never, ever get it. And they don’t see enough benefit to care.

So is this all doomed to fail? If not, then what’s the answer?

The answer is abstraction. The goal should be to bury all the noise, all the gobbledygook, all the complexity underground; to let only the most tangible benefits bubble to the surface.

The perfect example of a company doing this is Reddit.

Last month, Reddit introduced something called Collectible Avatars. These are digital, limited-edition collectibles based on the social platform’s mascot, Snoo. They were designed by independent artists from popular creative communities (like r/Comics) that users could buy with normie dollars. Prices ranged from $10 to $100.

Buyers of these avatars are actually buying NFTs, but Reddit has hidden away all the confusing crap. In doing so, Reddit brought millions of people into web3 without them even realizing it.

Web3 is a behind-the-scenes technology that people mistake for consumer tech. It’s not the bathroom renovation, it’s the plumbing.

For web3 to have any chance of mainstream adoption, companies will need to follow Reddit’s lead. They’ll need to abstract away nearly all the unintelligible junk, so all that’s left is the underlying technology.

At that point, the technology will either speak for itself (i.e., it solves a problem better than the incumbent technology) or it won’t. But nobody wants to have to read a manual to use money. Abstraction is the only chance this stuff has at mainstream adoption.

Closing thoughts

Alright, let’s finish with some rapid-fire thoughts.

  • The know-it-alls know nothing. Except for this guy. And this guy.
  • If you’ve made even one dollar from crypto, you are a better trader than Sam Bankman-Fried and his team of infants.
  • Remember that crypto and NFTs are independent markets. So far, NFTs actually seem to be somewhat shielded from the carnage.
  • Crypto now faces massive reputational risk. Mainstream companies (i.e., the ones with all the real money in the world) don’t want to associate with an industry that’s become synonymous with scamming. The trough of web3 disillusionment is inevitable. But it will eventually come back.
  • Regulation is a good thing, because it enables confidence. A “Glass-Steagall for crypto” would have prevented this. Enron ultimately had a positive legacy. Trading of commodities is now ubiquitous and its alumni shaped energy markets for decades.
  • Don’t get too hung up on this stuff. It doesn’t really matter. All the world’s crypto holdings are only a third of the market cap of Apple.
  • Crypto is a shared fiction, but that’s what humans do. We build shared fictions and beliefs. Some of them are useful, others don’t last long. We’ll continue to create them forever.
  • The principles of crypto are very attractive. It is both the future and kind of a scam. It is both depressingly vapid, yet authentic. In order for crypto to go mainstream, it will need to provide something more than speculation.
  • None of this ever ends.

This stuff is ugly and messy. But you know what? So is humanity.

As easy as it is to wish this all away, we’d be wise to continue to give it our attention, and always strive to give it our brutal honesty.

Frankly, it’s the only path through the muck. 👣



Stefan von Imhof

Stefan von Imhof

As the CEO of Alts, Stefan lives and breathes alternative asset analysis and valuations. His alternative investing newsletter has grown into — the world's largest alt investing community, with over 200,000 investors. His favorite alternative investments are holiday rentals, cash-flowing websites, and especially his collection of 300 vinyl records. Originally from Boston and Santa Barbara, CA, he now lives with his wife in Australia.

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