Entering the Wild West of Defi for the first time is similar to picking up the first book in an epic saga, like Game of Thrones. Many start their Defi journey on YouTube, throwing a few coins into a large market cap farming token or FOMOing into a meme coin that has recently gone up 100X in value. The passion of the fellow investors in these projects is intoxicating, a 24/7 party with all the excitement and drama. We all want to believe we purchase tokens based on fundamentals, but sometimes all a token fundamentally needs or has is the ability to create continuous hype.
Eventually we realize that by the time a token is on YouTube we’ve already missed the train. We need to get on Telegram and Discord. If we had any qualms of unfaithfulness about not putting every last cent into our first token, those feelings are quickly replaced when we enter Telegram.
There are literally thousands of tokens fighting for the billions and billions of dollars flowing into Defi. Just like in GoT, where the lifespan of a fixture character can end on any page, in Defi no token is immortal. Small cap “gems” explode from $10,000 to $100,0000,000 market caps in a matter of days. Billion dollar behemoths fall, sometimes within days after a bit of bad news, or within seconds of the dreaded rugpull.
In general, Defi has been a tale of two tokens so far - the Yield Farm and the reflection meme coin. In either case developers create a pairing of ETH or BNB to their token and this pairing allows the token to be bought and sold on the network (either ETH or BSC) freely. Other networks exist of course, but the Ethereum and Binance networks have the most traffic at the moment. In the Yield Farm, the contract “mints” or generates new tokens based on the code and how much you invest. Invest more, and you get more tokens. APRs of new Yield Farms can be 3000%+. Unfortunately all the new coins being farmed by thousands of investors quickly inflate the circulating supply. Token prices = Market Cap / Circulating Supply. The greater the supply the lower the price, so teams must constantly fight against inflation in a never ending and often fruitless battle.
The reflection / meme token redistributes tokens to holders by taxing purchases and sales of the token. If I buy $100 of Old Yeller Token and it has a 10% reflection, then I receive $90 of Old Yeller in my wallet and the other holders receive an even distribution of the remaining $10, based in part on how many tokens they hold. Like in Yield Farms, the big IF here is IF the token price is increasing reflection is a dream come true. If the token price is decreasing, then your 7 billion Old Yeller tokens eventually won’t buy you a movie ticket.
Enter the latest innovation in Defi. Tokens like Moonshield have recently realized that earning BNB or Ethereum is a much better value proposition than only earning native tokens. Native tokens, like Moonshield can rise and fall rapidly, whereas the price of BNB for example, is relatively stable and generally moves upward with the bull market. With each transaction the Moonshield contract adds liquidity (stabilizing the price), sends tokens to holders via reflection, and increases the amount of BNB in a pool shared by all holders. On a weekly basis the Moonshield holder can claim a share of this BNB based on how much of the total supply of MSHLD they own. Own 1% of the MSHLD supply? You can claim 1% of the BNB pool each week. At around $650 per BNB that can be a significant incentive to buy more, creating a positive feedback loop.
It’s innovations like this that show how early we all are in the Defi story. The first book of the saga has not closed.