The price of ETH has climbed from a recent low of $80 to a two year high of $450 in just a few months. Sentiment is through the roof and Ethereum’s blockchain has never been more active. Newly launched cryptocurrencies are seeing 1,000% capital growth and previously inactive projects are suddenly repositioning themselves as “DeFi” brands in an attempt to ride the coattails of what is shaping up to be another great bull market.

The rebranding of projects and overnight riches bear all the hallmarks of a frothy bubble in the making and one which could eclipse the 2017 mania thanks to some well designed economic incentives (colloquially referred to as “ponzinomics” or “pumpamentals”). The question is, are we about to repeat what was seen in 2017/18?

A lot has changed in the two short years since Ethereum and other cryptocurrencies crashed in spectacular fashion. While Bitcoin remains as it was, Ethereum has seen an incredible evolution. Decentralized exchange, which was little more than a concept in 2017, now accounts for ~$700 million of daily trading volume while lending and borrowing platforms have billions of dollars in deposits. This is a far cry from the ecosystem of 2017, which – looking back from today’s perspective – had barely any utility to offer.

When entering the Ethereum ecosystem today, users aren’t simply joining to invest in the next great ICO. They’re doing one of a myriad of things; it might be moving Bitcoin onto Ethereum in order to borrow against it; retaining their long exposure to BTC while generating extra capital for further investing. Or it might be depositing in Compound to earn a variable interest rate, borrowing against their deposit and earning COMP governance tokens in the process (see “yield farming“). All of this is decentralized – no identity requirements, fully self-custodied and accessible to anyone.

This is where the bubble of 2020/21 is far removed from what we saw two years ago. In 2017, the price of ETH climbed to over $1200 as users clambered to invest in the next “Initial Coin Offering” (ICO). ICOs raised hundreds of millions of dollars for little more than an idea or concept, very rarely would these products exist and rarer still if they had any users. The ETH raised in these ICOs was then dumped on the market over the following 18 months as funds were liquidated to pay bills, escape volatility or simply shut up shop.

This time it is very different. Rather than launching ICOs for a product that doesn’t yet exist, existing products with significant usage are offering rewards to users in the form of governance tokens. These governance tokens then grant the holder protocol voting rights as well as access to future cash flows and the potential for capital growth. Dozens of products are now decentralizing their products in this way, handing governance decisions to stakeholders and reducing their regulatory risk in the process.

This process is being seen from the likes of perpetual futures exchange, MCDEX, as well as Automated Market Makers (AMMs) like Balancer, Curve and now Mooniswap. But these campaigns have paled in comparison to the yield aggregator, yearn.finance, which saw the price of its supply-capped governance token (YFI) skyrocket from zero to over $16,000 in a matter of weeks.

Its with this type of overnight success that the mania begins to build. Following YFI we saw the launch of multiple YFI forks beginning with, confusingly, YFII. After the YFI forks, the community went wild for YAM (literally a reference to sweet potatoes), which attempted to capitalize on a combination of different token mechanics including the extraordinarily volatile supply adjustments of Ampleforth. YAM failed spectacularly when – at the 11th hour – a system-breaking bug was discovered that ended up locking $750,000 in the token’s treasury and disabling the coin’s ability to expand its supply (one of its many “pumpamentals”). YAM, which saw $500 million deployed in its contracts, was followed by SHRIMP, HAM, CREAM, BASED and many many others.

We were serious about this being an experiment and the code being unaudited. Please exercise some caution.

— Yam Finance (@YamFinance) August 11, 2020

This is the spectrum of the bubble that we are in today. For every YFI there are a thousand HAMs, just as for every ZRX or BNT in 2017, there were a thousand KINs, DCNs and VIAs.

We are at the very early stages of the next hype cycle but this time there are no ICOs to dump their funds at the top. Instead, funds will move between protocols in search of yields and leverage. When the bubble eventually does burst, these funds will find their way into Ethereum-based stablecoins or even ETH itself, continuing to generate yield while remaining in the ecosystem without ever touching traditional finance rails again.

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