We invest where the next paradigm begins.

Bitcoin is the world's most secure and decentralized monetary network, yet its liquidity remains largely trapped and underutilized. With over $1.91 trillion in BTC sitting idle, Bitcoin’s role has been reduced to digital gold—a store of value that lacks native programmability and integration within the broader blockchain economy. Despite Bitcoin’s vast liquidity, less than 1% is used in DeFi through scaling solutions or custodial derivatives, such as wBTC, highlighting the inefficiencies and barriers preventing Bitcoin from being fully integrated into decentralized finance and broader blockchain applications.

Trump’s recent victory has sparked a DeFi renaissance, positioning Ethereum, which holds 63% of global DeFi TVL, to capitalize on this momentum. Ethereum may have found the catalyst it has long awaited, putting it in an ideal position to benefit from the regime change. Since the U.S. presidential results were announced, the Ethereum ecosystem has consistently outperformed expectations.

At Mechanism Capital, I come across countless investment opportunities in the incipient decentralized finance (DeFi) industry. When I do, I usually share the same reaction with my team: “it’s another perp market” or “it’s just a uniswap fork”. Despite this abundance of market infrastructure, our reactions to this pattern likely stem from the observation that there are not many useful crypto assets to be traded. It’s like having the most luxurious, expansive supermarket imaginable with the most sophisticated automation tech and an incredibly optimized customer experience, yet it has only a meager selection of customers and products. After months of dismissing this observation, I finally began to investigate the reason behind this phenomenon. I realized that this is not a fleeting trend, it is an unavoidable evolution of markets and the optimal way of distributing economic power to individuals. We are now in the dawn of a million markets, and it is a revolution.

Too many founders are in a trance and the broken premise goes something like this: “For years, gamers have been pouring hard-earned money into games with nothing in return. Thanks to crypto, players can earn NFTs and tokens that have real value. Anyone can and will be entitled to earn for having fun because they’re helping the game to succeed!”  

Blockchain gaming is seeing a hurricane of action; while Steam bans crypto gaming, big game studios are exploring it and “Play to Earn (P2E)” is on every VC’s lips.

What is the size of the market for NFTs? This question is a hard one to answer, since NFTs can represent so many vastly different types of assets. Ownership of bonds and real estate can be represented as NFTs, as can art, in-game items, and music. The image below is a broad taxonomy of the different types of NFTs.

Fundamentally, having liquidity for a token is important so far as it allows new investors to easily buy into a project and inactive ones to exit. Any less will not derail a strong project and any more is just in vain.  This piece will be confronting the complexities of pool 2s and walking through how projects can think about engineering liquidity for their native token.

Yield Guild Games (YGG) is a decentralized autonomous organization (DAO) composed of tens of thousands of gamers (and rising) who utilize non-fungible tokens (NFTs) in play-to-earn games to generate real cash flow. The DAO aims to create the largest virtual world economy by investing in play-to-earn games plus their in-game assets, sponsoring millions of play-to-earn gamers, and building tools that will enhance the future of gaming in the Metaverse. YGG optimizes its community-owned assets for maximum utility and shares profits from those assets with its token holders. Participants in the DAO will be owners and managers of the entire ecosystem of the YGG Network. 

PleasrDAO is an exclusive collective of DeFi leaders, early NFT collectors and digital artists who have built a formidable yet benevolent reputation for acquiring culturally significant pieces with a charitable twist. 

Let’s begin with a metaphor. Imagine that we are back in middle school math class. Our teacher, cruel as only middle school math teachers can be, hands us a list of one hundred long division problems, each with very large numbers. The assignment, we are told, is to solve as many problems as possible. But there is a catch. We must write both the final solutions and every computational step on a single piece of paper. Just minutes in, and with a sinking feeling in our stomachs, we come to grips with the sheer absurdity of the task. It’s simply impossible to squeeze more than a handful of fully worked-out solutions onto the page.

Of the many new trends to emerge in crypto over the past year, Liquidity Mining is doubtless among the most consequential. In 2019, Synthetix became the first large-scale crypto protocol to successfully launch a Liquidity Mining program. But Compound’s June 2020 release of COMP and its accompanying Liquidity Mining program was the true catalyst. In the subsequent months, countless other crypto protocols—from titans like Uniswap and Balancer to microcaps and forks—have utilized some variant of Liquidity Mining. More than just a network-bootstrapping mechanism, Liquidity Mining has quickly become an integral part of token distribution strategies.

In 2014, two academic papers were published: one by Ferdinando Ametrano called “Hayek Money: The Cryptocurrency Price Stability Solution,” and another by Robert Sams titled “A Note on Cryptocurrency Stabilisation: Seigniorage Shares.”

It would be an understatement to say that YFI has taken the crypto world by storm since its July launch. Notwithstanding some strongly-worded warnings from its creator (“YFI has 0 value” and “I test in prod”), the price of YFI has exploded, peaking at nearly $44,000 per token and a market cap of roughly $1.3 billion.

Born and raised through the digital revolution and educated in online forums, we are children of the internet. We have never met each other in meat space, only in the metaverse. We connected through various online crypto communities and are bound together by a shared vision of a future that is revolutionized by programmable value, fueled by permissionless innovation, and governed by popular sovereignty. 

Building network effects is hard. In crypto, it’s especially hard because you’re either competing against strong incumbents (exchanges, payment systems) or working with a niche market (dApps). An upstart network faces the conundrum: a small network has limited utility to prospective users, but increasing network size & utility is dependent on attracting new users.

Decentralized Finance (DeFi) applications have made notable headway in the last few years, with decentralized exchanges, margin trading, and money market platforms attracting significant volumes. Options protocols are one of the latest additions to DeFi. Those being built include Opyn, Hegic, OhMyDeFi, and Primitive Finance.

The holy grail of DeFi has always been the integration of Bitcoin. In the much larger CeFi market, Bitcoin and USDT dominate the volume — From spot exchange, to borrow/lending, to derivatives trading. While Ether as a collateral base has allowed DeFi to achieve impressive credit market growth, incorporating Bitcoin would unlock a market an order of magnitude larger.