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Compound Collaboration, Month #11
Every month I put aside some money into a portfolio aimed at long-term bets over the next 20 years. I will be gifting this portfolio to my future kids someday- in the hopes of using it as an educational tool alongside the memos I write to teach them about the world and to have a shared activity to work on together as they grow up.
It is one of the main reasons why I invest.
Here is the performance so far from the first ten months:
Month #1 August 2020: $ARKK +47%
This month's addition to the portfolio: Ethereum $ETH.X
Why?
Ethereum serves as the base layer protocol for the first real product-market fit in crypto: Decentralized Finance (DeFi).
Educational piece: The long-term promise of a more decentralized and equitable internet is an idea I want to talk about with my kids someday.
Investment points:
- With over $53 billion in total value locked (TVL), user engagement is unmistakable, and the growth continues to be extraordinary – up over 6x since the start of 2020.
- Of the top 100 DeFi projects, 99 of them have been built on top of Ethereum, per DeFi Pulse.
- Ethereum should act as a 'value layer' of Web3. Web3 is a potential next iteration of the internet, and is based on the idea that you should be able to own your data.
Short term catalysts:
- EIP-1559: an Ethereum Improvement Proposal that improves the bid process for block space and changes the mechanics of gas fees. A substantial portion of gas fees will be “burned” instead of going directly to miners, thereby reducing the overall supply of ETH. Less supply means the value of existing ETH should go up. EIP 1559 is set to go live on July 14th.
- Layer 2 scaling solutions Arbitrum and Optimism go live later this summer.
- The transition to a Proof-of-Stake consensus mechanism seems close – most likely by the end of this year. This will dramatically improve the energy efficiency of the Ethereum blockchain, thereby making the ecosystem far more environmentally sustainable. Additionally, it will enable “stakers” to earn yield, somewhat akin to a stock dividend.
Risks:
- DeFi remains very early and the long-term winners are still very uncertain.
- Execution risk for the implementation of EIP-1559 and Proof-Of-Stake
Part of my bet on Ethereum is that institutional allocations to Ethereum will grow meaningfully because it fits more closely with how investors are used to evaluating investments.
Bitcoin may be a superior digital analog to gold, but most investors don’t own gold. When talking to my older brother about crypto, he dismissed Bitcoin, but was immediately interested in utility of Ethereum.
It will be interesting to check back in in 2041 and see how Ethereum evolved over the last 20 years.
See you then.
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