New DeFi protocol development financing structures made possible by Cardano

Since Ethereum was born we have seen teams being funded through ICOs (Initial Coin Offerings). ICOs are like IPOs but instead of investors receiving shares in a company they receive tokens. These tokens are supposed to give the holder some form of utility; perhaps a discount on products/services offered by the company issuing the tokens. More recently, we have been seeing DeFi protocols being launched by teams who issue tokens which gives token holders some utility and a way to vote on how the project changes.

Some of the largest DeFi protocols / projects by market capitalization are listed below and each have their own token.

Uniswap (UNI) – Market Capitalization @ $8.3bn

Aave (AAVE) – Market Capitalization @ $5.3bn

Compound (COMP) – Market Capitalization @ $2.1bn

All three have been financed by VC funds and at some point in time these VC funds acquire an allocation of the token issued which allows them to make a return on their investment. Let’s say I financed the Uniswap team with $1m of initial capital and received a 1% token allocation. I would now have $83m worth of UNI tokens… That is nearly a x100 return on investment!

Now, here is where the game changes for ADA holders…

Cardano has a treasury system where ADA holders can vote on how those funds get deployed. The process behind making proposals and voting on which proposal receives funding has been worked on since 2020 and we call it ‘Project Catalyst’.

What we can do to drive value for ADA holders is to have teams build DeFi protocols that are not using custom tokens like the ones mentioned above (UNI / AAVE / COMP), but instead using ADA. To make this financially viable, the community will need to fund the project. How do we get everyone to contribute capital to fund a project like this? Hmm. Maybe if we had some sort of treasury system we could do this. Oh wait. We do!

Cardano community funded projects that utilise ADA instead of custom tokens would allow maximum value to accrue to ADA holders. How?

  1. Anyone who really wants to push through proposals for the DeFi project needs to hold ADA which increases the markets need to hold ADA. More demand equates to number going up relative to other assets.
  2. The DeFi protocol could utilise token burn methods like AAVE which reduces the effective supply of ADA. Decreasing the supply whilst demand is constant/rising equates to number going up relative to other assets.

Taking this approach could easily double ADAs fundamental valuation over a 1-2 year stretch.

Here is a non DeFi example I tweeted about last year –

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