Interview with DeFiance Capital Founder: A DeFi Rally May Be Coming, and the Bull Market Won't Be Limited to a Single Chain
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Interview with DeFiance Capital Founder: A DeFi Rally May Be Coming, and the Bull Market Won't Be Limited to a Single Chain
Are DeFi tokens truly ready to shine again?
Navigating Web3 tides with focused insightsCompiled & Translated: TechFlow
Guests: Arthur Cheong, Founder and CIO of DeFiance Capital; Jordi Alexander, Founder of Selini Capital and Chief Analyst at Mantle
Host: Laura Shin, Author and Host of Unchained
Podcast Source: Unchained
Original Title: 2 Crypto Investors on Why They Believe DeFi Is Poised for a Bull Run
Air Date: October 16, 2024
Background Information
In recent years, DeFi tokens have faced numerous challenges—could they now be on the brink of a new bull market? In this episode, Arthur Cheong, Founder and Chief Investment Officer of DeFiance Capital, and Jordi Alexander, Founder of Selini Capital and Chief Analyst at Mantle, discuss why they believe DeFi is poised for resurgence. They delve into improvements in DeFi's security and user experience, the impact of Layer 2 solutions on Ethereum, and whether Ethereum or Solana will lead the next bull cycle. They also explore whether the popularity of memecoins might distract from DeFi, and why sustainable tokenomics are crucial when evaluating tokens. Are DeFi tokens truly ready to shine again?
Why Arthur Believes a DeFi Rally Is Coming
DeFi Maturity and Changing Market Conditions
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Arthur believes DeFi is preparing for a bull run based on several observations. He notes that since the "DeFi Summer" five years ago, the industry has evolved significantly, with clearer understanding of what works—and what doesn’t—in DeFi. He compares this evolution to the Gartner Hype Cycle, suggesting DeFi is transitioning from the "Trough of Disillusionment" toward the "Slope of Enlightenment." After extensive experimentation across products and models, effective solutions are emerging.
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Additionally, Arthur highlights shifting macroeconomic conditions as favorable for DeFi. He anticipates declining interest rates over the next six to twelve months, which would substantially reduce the opportunity cost of participating in DeFi and on-chain activities. He maintains that finance remains crypto’s strongest product-market fit, and DeFi will attract increasing capital inflows.
Traditional Finance Meets DeFi
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Jordi agrees with Arthur, emphasizing that DeFi represents the most product-market-fit use case in crypto. He points out that as asset utilization improves, DeFi applications will continue growing. While real-world assets (RWA) are still nascent, there’s significant room for expansion. As regulations become clearer, more institutions will begin conducting secure on-chain transactions.
DeFi’s Response to Low-Interest Environments
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Laura asks whether current macro trends could make DeFi stand out more prominently in a bull market. Arthur responds that DeFi is more sensitive than other sectors to low-interest-rate environments. He explains that DeFi’s high yields will attract investors seeking better returns as traditional rates fall. Over the past two years, many investors favored low-risk strategies, but falling rates will push them toward riskier opportunities in pursuit of higher yields.
Market Lessons and Future Opportunities
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Jordi adds that previous market cycles have taught investors valuable lessons. He observes that low-effort forks of platforms like Uniswap or Aave have gained little traction in this cycle—only innovative, differentiated projects are attracting investor attention. He cites successful examples such as Pendle, which demonstrate market demand for genuine innovation.
How Have DeFi Security and User Experience Evolved?
Improved Security
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Arthur believes DeFi security has improved significantly since 2021. He notes advancements in both security practices and user interface (UI)/user experience (UX). Over the past four to five years, interacting with crypto wallets has become notably smoother. He predicts that within the next two years, the need to manage seed phrases and private keys will diminish dramatically, thanks to wider adoption of smart wallets and embedded wallets, making on-chain interactions far more accessible.
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Arthur also notes that mature DeFi teams now prioritize security more than ever, reducing the likelihood of protocol exploits. He mentions that next-generation smart contract Layer 1 blockchains—such as those using the Move language—are designed with stronger security than Solidity-based systems, showing the industry has learned from past failures.
Better User Experience
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On UX, Arthur emphasizes that DeFi already outperforms centralized exchanges in certain areas—especially lending. He notes that total value locked (TVL) in DeFi lending now stands at $20 billion, exceeding the lending capacity of any single centralized exchange.
Education and Transparency
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Jordi adds that beyond security and UX, education plays a critical role in DeFi’s development. He says that after the Luna collapse, users have become more cautious about the sources of stablecoin yields, and unreliable yield-generating products have lost appeal. Users now scrutinize yield sustainability and ask more informed questions—a sign of a healthier, more mature market.
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He also notes that events like the Ethereum Merge and the launch of Eigenlayer have deepened user understanding of staking and restaking. This allows users to better leverage their Layer 1 assets, enhancing liquidity and usability, laying the foundation for further DeFi growth.
Can DeFi Activity Be Sustained Long-Term?
The Challenge of Activity and Sustainability
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Laura raises concerns about long-term sustainability despite improvements in DeFi. She observes that many new protocols see sharp drops in activity after launching incentive programs. Users often dump tokens immediately after receiving airdrops instead of continuing to use the chain. This raises questions about whether DeFi activity can be sustained organically.
Different Protocols, Different Outcomes
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Arthur argues that sustainability must be assessed on a per-protocol basis. He points out that established protocols like Uniswap and Lido maintain strong revenue even without incentives, indicating some projects have achieved sustainable usage. Newer protocols, meanwhile, rely on incentives to capture market share.
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He adds that incentive-driven behavior isn’t unique to DeFi—it’s common across Layer 1 ecosystems. Many new protocols deploy aggressive incentive models early on to attract users and build initial network effects.
Market Reaction and User Behavior
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Jordi agrees that the market now recognizes many incentive-based projects lack long-term viability. He notes that recently launched incentivized projects often face immediate sell-offs, revealing that participants are mostly professional investors—not retail users. These large holders ("whales") can identify overvalued tokens and exit strategically.
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While agreeing with Laura that DeFi still lacks broad user adoption, he remains optimistic about its future, especially as UX improves. Jordi believes protocols offering superior user experiences will gain lasting traction.
Layer 2 Solutions: Helping or Hurting Ethereum?
The Impact of Layer 2s
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Laura brings up growing debate over whether Layer 2s act parasitically on Ethereum. Beyond affecting ETH’s native asset dynamics, Layer 2s may fragment liquidity. This prompts her to question how Layer 2s affect DeFi and base-layer chains overall.
Jordi’s Perspective
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Jordi shares his view that Layer 2s are generally not parasitic. He argues that reduced fees on Layer 1 aren’t the main driver of ETH’s price. While Layer 2s may reduce direct engagement with Ethereum, they don’t necessarily threaten its broader ecosystem.
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He acknowledges that users on non-Ethereum chains may forget their transactions ultimately settle on Ethereum, leading to weaker association with ETH. Additionally, poor composability among Layer 2s makes them feel fragmented rather than unified, undermining user confidence.
Arthur’s Counterpoint
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Arthur disagrees, arguing that current Layer 2s *are* parasitic because they capture fees that would otherwise flow to Ethereum. Most fees paid on Layer 2s go to sequencers—typically operated by the Layer 2 teams themselves—with limited decentralization.
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Arthur says Layer 2 incentives are misaligned with Ethereum’s long-term health. Most Layer 2 teams focus on their own token’s success rather than Ethereum’s value. As Layer 2 token valuations decline, these teams may prioritize self-interest over Ethereum’s ecosystem.
The Potential of UniChain
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Laura mentions the recently announced UniChain and asks if it could address these issues. Arthur suggests that as the largest DeFi app, UniChain’s success could pull even more activity onto itself, capturing value internally rather than returning it to Ethereum.
Will Ethereum or Solana Lead the Next Bull Market?
Laura’s Question
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Laura notes that Ryan Berkmans recently said Ethereum will benefit long-term from market recovery. However, she observes many see this relationship as parasitic. She asks: Will DeFi revival happen solely on Ethereum, or will it be shared between Ethereum and Solana—or might Solana actually lead the next bull run?
Jordi’s View
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Jordi believes the bull market won’t be confined to a single chain. Projects choose chains based on liquidity and user base. Ethereum dominated during the bear market, while Solana attracted users through cultural momentum and speed—especially in the memecoin space.
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He adds that while DeFi matters on Solana, if Ethereum improves cross-chain composability and UX, it will remain the primary hub for capital—particularly for stablecoins and large users. Both chains have distinct trajectories.
Arthur’s Take
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Arthur expects the bull market to be broad-based, but believes Solana and Base may achieve outsized success. He highlights Solana’s ecosystem strength and ability to onboard new users, particularly through memecoins. For example, Solana Labs’ new phone sold out quickly because people knew the airdrop value would exceed the device cost.
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He also praises Coinbase for driving the “onchain summer” narrative and Base’s successful user migration. Base reached hundreds of millions in TVL rapidly, showing how Coinbase’s resources and focus could propel Base to greater success.
Jordi’s Addendum
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Jordi agrees that Coinbase has successfully drawn users to on-chain activity. Other major exchanges are also educating users on on-chain services. Despite Base lacking an ecosystem token, Coinbase’s achievements are undeniable.
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He adds that UniChain might experiment with tokenomics to incentivize community growth—an interesting development to watch.
Should the Ethereum Foundation Do More to Support DeFi?
Laura’s Question
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Laura raises the question of whether Ethereum founder Vitalik Buterin truly supports DeFi. She references Kane Warwick’s concern that the Ethereum Foundation hasn’t been proactive enough. Vitalik once responded with an image expressing support for DeFi. Laura asks: Do you think the Ethereum Foundation and Vitalik support or oppose DeFi? And if they’re indifferent, what could they do to better support DeFi’s growth?
Arthur’s View
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Arthur believes the Foundation isn’t opposed to DeFi, but simply uninterested in its use cases. They assume DeFi is already successful enough and doesn’t need help. He argues this is a flawed strategy, as other Layer 1s exploit this gap to gain market share. He notes that DeFi liquidity on Ethereum has fragmented, making it harder to build robust DeFi applications on Ethereum.
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Arthur adds that the Foundation often fails to communicate effectively with DeFi developers when changing technical roadmaps, causing delayed responses from the DeFi community. For instance, a recent proposal on minimum viable issuance could impact DeFi operations, yet the Foundation appears dismissive of developer feedback.
Jordi’s Perspective
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Jordi agrees, saying Ethereum should aim to be a financial hub, not just a cultural one. The ecosystem needs infrastructure and investment to support high-quality applications. He sees DeFi as one of Ethereum’s greatest successes and deserving of greater emphasis.
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Jordi also notes that while Ethereum is mature, developers still benefit from Foundation support. Developers should be self-sufficient, but earlier communication from the Foundation on technical changes could prevent unnecessary friction.
Arthur’s Addendum
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Arthur stresses that DeFi is the most active segment on Ethereum and deserves priority. While the Foundation doesn’t need to abandon other initiatives, its stance on supporting DeFi should be more proactive.
Laura’s Summary
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Laura concludes that even if the Ethereum Foundation seems lukewarm toward DeFi, it won’t hinder DeFi’s performance in the next bull market. Arthur and Jordi agree that DeFi’s revival isn’t exclusive to Ethereum—Solana, Base, and others will play key roles. Overall, DeFi’s outlook remains positive.
What Social Phenomenon Do Memecoins Reflect?
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Laura poses a question about why memecoins have performed so strongly in this cycle. She notes that while memecoins and DeFi seem opposed, memecoins have become the “darlings” of this market phase. She asks: What do you think explains memecoins’ rise to prominence?
Jordi’s View
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Jordi believes memecoin popularity reflects a backlash against traditional venture capital (VC) coins. Many VC-backed projects have underperformed, eroding trust. He adds that society is experiencing a peak of discontent—many people hope speculation can change their lives. Memecoins serve as a form of “lottery-like” escapism, drawing in those chasing quick wealth.
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He describes this as a form of “nihilistic” philosophy, reflecting dissatisfaction with reality and a craving for speculative excitement.
Arthur’s Perspective
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Arthur adds that memecoins and DeFi are somewhat oppositional. DeFi projects typically have clear value-capture mechanisms, whereas memecoins lack them. He sees memecoins as stress tests for DeFi and base layers, revealing market animal spirits. He likens this to stock markets—exchanges should support all types of trading, including memecoins.
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Arthur also notes that memecoins as an asset class have existed for a while and now occupy a legitimate space in the market. Even if their value capture is less defined than DeFi’s, they still have a reason to exist.
Jordi’s Addendum
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Jordi believes memecoins may evolve into two use cases: speculative tools akin to online casinos, or financial assets for online communities. He doubts they’ll reach the massive market caps envisioned by figures like Morad unless broader participation emerges.
Why Token Unlocks Could Make or Break a Project
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Laura raises a question about the relationship between memecoins and DeFi, asking how DeFi’s future might be shaped by memecoins’ current strength. Will new users enter DeFi, will memecoins compete with DeFi, or will interest in memecoins eventually fade?
Jordi’s View
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Jordi believes memecoin popularity could boost overall market activity. Some protocols are thriving due to memecoin trading, even if memecoins themselves aren’t as mature as certain DeFi projects. He notes that while memecoins share similar unlock mechanics with DeFi, their liquidity and lock-up structures are looser, leading to greater price volatility.
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He warns that continuous unlocks can create downward pressure on asset value, frustrating retail investors. While memecoins may keep rising, when the market cools and liquidity dries up, sentiment could shift sharply.
Arthur’s Perspective
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Arthur adds that memecoins are here to stay and could positively influence DeFi adoption. On Solana, many memecoins that originated on platforms like PancakeSwap now drive active liquidity pools, supporting DeFi activity.
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He believes overlap between memecoin and DeFi investors will grow. Traders who profit from memecoins may seek out higher-growth DeFi opportunities. Memecoins and DeFi can be complementary: while retail attention stays on memecoins, institutional investors may pay closer attention to DeFi due to increased on-chain activity driven by memecoins.
Are Cryptocurrency Tokens Overvalued or Undervalued?
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Laura notes strange valuation patterns in the market due to capital allocation inefficiencies. She asks Jordi and Arthur what key challenges they see in token valuation.
Jordi’s View
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Jordi says current discussions on token valuation rely heavily on relative comparisons—e.g., comparing one chain’s value to another. He argues this isn’t a solid framework, as it can lead to misallocated capital. He calls for better, systematic, and intuitive valuation models, citing articles from private equity investors advocating for standardized frameworks.
Arthur’s Perspective
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Arthur adds that while many have attempted to build crypto valuation frameworks, none have gained widespread acceptance. Bitcoin’s uniqueness means its valuation relies more on relative comparisons than cash flow analysis. As the largest crypto asset, Bitcoin sets the tone for how other assets are valued.
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He also notes that as naive retail investors (“the greater fools”) decrease in number, valuations are becoming more realistic. He sees this as positive—the era of meaningless sky-high valuations is ending, leading to more rational pricing.
Jordi’s Dissent
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Jordi disagrees, arguing the market is still early and influenced by irrational “foolish” money. Even though Bitcoin valuation methods have grown more complex, he sees plenty of irrational capital flows persisting.
Arthur’s Clarification
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Arthur further clarifies that professional investors usually have relatively clear approaches to valuing assets, especially in DeFi. Where they differ is in expectations about future growth and whether an asset carries monetary premium—not in valuation methodology itself.
Laura’s Summary
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Laura concludes that given the diverse purposes and missions of each asset, a one-size-fits-all valuation framework may not be appropriate. She believes investors must understand each asset’s unique characteristics and tokenomics to properly assess its value.
Does Liquidity Venture Capital Offer a Strategic Advantage?
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Laura brings up a question aboutliquidity venture investing, referencing an article by Arthur on “liquidity venture capital,” asking how this approach compares to others and its advantages in crypto.
Arthur’s Explanation
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Arthur defines liquidity venture capital as investing in highly liquid crypto assets, particularly altcoins (excluding Bitcoin and Ethereum). He believes this offers the best risk-adjusted returns in the crypto market.
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He explains that the advantage lies in achieving potentially high returns while maintaining flexibility to manage risk. In traditional finance, investors face a trade-off between liquidity and return: high returns from startups require long lock-ups (5–10 years), while liquid investments rarely deliver 50x or 100x gains.
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In crypto, Arthur believes investors can have both. Over the past two cycles, many crypto assets delivered 20x, 50x, or even 200x returns in public markets. He remains confident this will continue.
Bitcoin and DeFi: Untapped Potential?
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Laura raises a question about integrating Bitcoin withDecentralized Finance (DeFi). She notes that over the past year, Bitcoin has increasingly entered DeFi—through Bitcoin Layer 2s, Bitcoinstaking, and new developments around WBTC linked to Justin Sun. She asks what impact broader Bitcoin integration into DeFi could have.
Jordi’s View
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Jordi expresses optimism about Bitcoin’s potential in DeFi. He says Bitcoin has proven itself as a strong asset, suggesting much untapped potential. While many Western Bitcoin maximalists hold a purist view—unwilling to move their BTC—more people in Asia want to actively participate in on-chain activities. This mindset shift could drive Bitcoin’s DeFi adoption.
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He acknowledges WBTC has issues, but projects like Maker’s CVBTC and Mantle’s FBTC are working to unlock Bitcoin’s potential. He believes projects building strong ecosystems will succeed—especially Mantle, which focuses not just on the asset but on apps and ecosystem partnerships.
Arthur’s Perspective
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Arthur agrees with Jordi, saying that bringing more Bitcoin into DeFi—whether via Bitcoin Layer 2s or smart contract platforms like Solana and Ethereum—would be highly beneficial. It’s unclear which method will dominate, but he trusts the market will find the most effective path.
User Experience Challenges
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Laura shares that despite her interest in crypto, she often feels confused when using it.
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Jordi stresses the importance of user experience, noting that better UX lowers barriers to entry. He observes that more projects are focusing on culture and UX—not just technology.
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Jordi and Arthur both express optimism about Bitcoin’s role in DeFi, believing that as more Bitcoin enters DeFi ecosystems, new opportunities will emerge. Superior user experience and ecosystem integration will be key drivers. As the market matures, effectively combining Bitcoin with DeFi will be a trend worth watching.
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