I touched on what forms the basis of my investment theory in crypto in my last article, Forget about Fiat to Cash out in Crypto. In this article, I explained how your portfolio can guarantee gains if you focus on expanding it faster than the overall expansion rate of crypto.
I don't want you to confuse this idea with just being a degen and apeing into every 4-digit APR yield farm you see. That's not what I mean. Well, that is what I mean, actually, because that is my basic strategy. I get into the highest APR yield farms possible sans bullshit and crap farms. But you have to know how to cut out the scams and shit projects so you know just how degenerate to get.
I'm going to use OHM and Pegaxy as my examples of bad expansion. Believe it or not, this supposedly super-complex defi protocol and this overhyped play 2 earn game have exactly the same tokenomics. The more I really get deep into the degen world, the more I see the same idea wrapped up in different paper. There really aren't that many ways to make money in this world. All of these "financial experiments" that seem so complicated at first are actually very simple. Just a whole lot of simple ideas with $50 words on whitepapers.
First, the similarity between OHM and Pegaxy.
Although these two projects seem to address two different audiences and have two different agendas, they utilize the same process to drive adoption — both OHM and Pegaxy rely on holders accepting active and consistent expansion of the unit of value. What OHM and Pegaxy hope is that as the units expand, they are distributed into the hands of more people as the price of said unit retains or gains value. Sad to say, but that value is notated in USD.
OHM automates the expansion of its unit, the token OHM. Pegaxy attempts to obfuscate its expansion policy by introducing a psuedo proof-of-work time sink in order to produce expansion of its unit, the Pega horse. But everyone knows that the name of the game in Pegaxy is getting more horses, so this proof-of-work expansion may as well be classified as automatic. It is automatic for investors, because the game is set up for the scholars to perform the time sink, just like as in Axie Infinity.
It is very important to note that my Expansion Theory does not mean just collecting units of account from projects like these as they very easily expand into your wallet. They will eventually dump and leave you in a bad position. Here's why.
Just getting more tokens or units in your wallet does not correspond to more value. As I stated in the "Forget about..." article, people too often mistake the "price" of a token listed on Coingecko as an actual price. It represents only one trade — the last trade involving that token within a liquidity pool. The "price" does not tell you how deep that pool is (although there is some very valuable information about the pools at the bottom of every Coingecko page that you should check out before investing in any token. Pay special attention to the 2% depth listings. You want the numbers below those columns as big as possible).
Think of it this way. You're an apple seller. You have 1 apple to sell. You are in front of an apple buyer who buys apples at $0.50/apple. You can easily sell one apple for $0.50, because there are no other apples around.
Now let's say someone plants a magic apple tree behind you. This magic tree doesn't take a season to grow apples — they just grow and grow and grow. Almost like it's just some fake digital token that can just appear out of nowhere! Other apple sellers see this tree and begin to pick the apples off. They set up booths and begin selling apples right beside you. But the next seller sells his for $0.49 to undercut you. And the next sells for $0.48 to undercut him. And the more the apples fall, the lower the price goes.
But there's only one buyer — you. You might think that more apples means a deeper liquidity pool, but actually, it's the opposite. The more apples that appear, the shallower the liquidity pool becomes. Why? Your money, which is capped, is spread thinner among the sellers, with an uncapped supply of apples. In crypto, you would see something like this:
Deep LP — 5 apples/$0.50
Shallow LP — 500 apples/$0.50
If you divide the number of apples by the money available to buy apples, the shallow LP creates a much lower ratio of apples to money. So the value of each apple drops.
And when you're producing units at the rate OHM was in its heydey (60,000%-80,000% APY), the price drops QUICKLY. Same with Pegaxy, with horses being bred at a rate of hundreds per day.
So expansion by itself means nothing except price dilution and resource depletion on the buy-side. And this is what you see in most crypto charts. You know, the chart that looks like the side view of a playground slide?
There's really only one way to make expansion-based projects successful. The rate of expansion may not outpace the rate of innovation.
You can define the rate of innovation as the rate of utility, but that's not really true. Hype is innovation because projects come up with new ways to market themselves to hold attention. Partnership announcements, news of future utility, all that counts. We are hardly in an efficient market, and crypto investors are still overall stupid. Fundies matter to an extent, but the entire space is in alpha now. Everything is an experiment. Actually delivering on shit is less important than people thinking you can deliver on shit.
As long as the rate of innovation surpasses the rate of expansion, you will usually have new buyers as the supply increases. This is why OHM was able to last so long before its big crash. Whether you actually believed in the project or not, OHM absolutely was becoming integrated into new protocols at a very fast rate. Those new OHM that were being created moved into those protocols and had a reason to exist. They were held in liq pools and traded for bonds.
Pegaxy has yet to deliver innovation that matches its current rate of Pega expansion, so its tokens are experiencing huge drops. People want to say it's because of the liq pool only being around $2 million, but this is only part of the problem. Liq pools are not the only way to incentivize people to hold tokens. Pegaxy has a bunch of stuff on the horizon, but not enough people believe the team to hold until delivery. If they did, the project would have had a longer window before failure.
So when you are processing my Expansion Theory, be sure not to just expand for expansion's sake. Be especially careful if you are dealing with protocols with inflationary token mechanics. The rate of innovation is what you are looking for as a counter to this. We'll talk more about it later as I think of details that deserve more ink.