DeFi 2019 Data Observation: Lending Market Efficiency Improves, DEX Shows Differentiated Development

Editor's Note: This article comes fromTokenGazer（ID：TokenGazerOfficial）, reprinted by Odaily with authorization.

overview

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What is DeFi

overview

• If the Ethereum ecology in 2019 needs to be described by a keyword, I believe that DeFi should not be too suspenseful as this keyword. According to data from loanscan.io, the total amount of DeFi-related mortgage lending business funds on the Ethereum platform increased by 253% in 2019 compared to 2018. Some people think that DeFi is the best prospect and future of the digital economy, while some people think that DeFi is still full of risks and cannot be accepted by supervision in the foreseeable future. We use data analysis to try to analyze what happened in the DeFi world in 2019, what behavior patterns and business logic users have on the DeFi platform, and the predictable development of DeFi within the existing technical architecture, regulatory framework and legal system. What will happen in the future.

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• What is DeFi

• DeFi itself does not have a strict definition. In 2018, it was gradually proposed as a collection of decentralized finance concepts and began to gain attention. Under this concept, all "decentralized" trading and lending platforms belong to the category of DeFi . The core of the DeFi concept is to use the transparent and verifiable features of the decentralized platform to realize various traditional financial infrastructures. In the past one or two years of development, some DeFi projects have been widely recognized:

• MakerDao – MakerDao is a stablecoin and derivative financial system based on the Ethereum smart contract infrastructure and issued as collateral with digital assets on the chain;

• Uniswap – a decentralized market that supports liquidity with resource pools, and all transactions are completed on the Ethereum chain;

Mortgage

Synthetix – a synthetic asset platform supported by cryptocurrencies, which opens up channels for purchasing fiat currencies, commodities, stocks, indices and other financial derivatives with cryptocurrencies.

Mortgage

According to the data of loanscan.io, as of December 29, 2019, the outstanding loans in the three platforms of Maker SCD, Compound v2, and dYdX totaled 73.27 million US dollars. In addition, there are a large number of tokens in the fund pool of the decentralized lending platform, and the market cannot be ignored. There may be differences in interest rates between different platforms due to differences in supply and demand and mortgage rates. The following examples illustrate some practical applications brought about by different interest rates.

Data source: loanscan.io

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DeFi and CeFi spread trading

As mentioned earlier, centralized platforms usually have higher lending rates than decentralized ones. One possible approach is to borrow some kind of token from a decentralized platform and lend it out on a centralized platform. When users want to lend tokens on a centralized platform, the first consideration is security, followed by the rate of return. BlockFi is a licensed institution in the United States. Users lend coins to BlockFi, and BlockFi then lends tokens to trusted institutions and their partners. This process also requires over-collateralization. Binance Research has also reported on the interest rate differential between BlockFi and decentralized platforms. As shown in the figure below, the lending interest rate of Ethereum on the decentralized platform is very low, but depositing in BlockFi can obtain an annualized return of 4.1%. Therefore, the method of borrowing Ethereum from dYdX and depositing it in BlockFi is feasible, and can earn a 3.68% interest rate difference.

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Carry trades among DeFi

In September of this year, Binance Research published an article analyzing the DeFi spread trading strategy in the Ethereum ecosystem. Among them, the spread trading strategy among DeFi can be summarized as the following three points:

ETH is mortgaged on Maker to generate SAI, and the interest of lending SAI on Compound is higher than the stability fee. With the increase in the stability fee, this rule has long been invalidated.

The central idea of ​​a carry trade is to borrow a certain stablecoin from a platform with a low interest rate and lend it out at a higher interest rate. We put all the borrowing and lending rates of stablecoins together, remove the highest borrowing rate and the lowest lending rate that have no room for arbitrage, and the resulting chart is as follows. It can be seen that the current lowest borrowing rate is DAI on dYdX, with an annualized rate of 2.39%; the highest lending rate is USDC on Compound, with an interest rate of 4.07%. Borrow DAI from dYdX, exchange it for USDC, and then transfer it to Compound for lending, you can earn a maximum interest rate difference of 1.72%. It can also be seen from the figure below that the lending rate of stablecoins has shown a downward trend this year, which is in line with the adjustment direction of the statutory interest rates of major central banks around the world. The interest rates of stablecoins are gradually converging, and the opportunities for spread trading between stablecoins on decentralized platforms are reduced or even disappear, and the market has become more efficient.

The above analysis does not discuss all the opportunity costs of holding the original tokens, such as directly lending the original tokens can also obtain a part of the income. When this is factored in, there are fewer opportunities for carry trades. Future opportunities may be more concentrated on Ethereum, because the interest rate of lending Ethereum directly on the decentralized platform is basically negligible. In addition, the lending rate of centralized institutions is higher than that of decentralized institutions, but this also sacrifices some security.

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Decentralized exchange DEX

We selected 9 major DEXs for observation, and the figure above shows the changes in transaction volume (in ETH) since the release of each DEX. We saw that EtherDelta initially dominated due to launching before other DEXs, but then IDEX took more market share. We can see that the market share of EtherDelta has declined sharply, and the current transaction volume is very low.

The trading volume of DEX in 2019 is shown in the figure below. The trading volume and market share of IDEX have declined, and Uniswap, Kyber and Tokenlon have seen better growth instead. In addition, Oasis and RadarRelay occupy more market share.

Next, we mainly analyze the dominant DEX Uniswap, Kyber, IDEX, Oasis, Tokenlon and RadarRelay to explore the development status of DEX in 2019 and the future development trend.

In addition to changes in the time dimension, we also observed differences in the main trading tokens on the above-mentioned DEX. The figure above shows the trading shares of the main trading tokens in each DEX in their respective markets in the past three months. Oasis supports fewer tokens for trading, while IDEX, Tokenlon, and RadarRelay have relatively large trading volumes except for major currencies. Both have small trading volume and poor liquidity; in contrast, Uniswap and Kyber, as exchanges with large trading volume, have more tokens with relatively better liquidity on their exchanges. In order to more intuitively analyze the liquidity sources of each token on DEX, and to observe the differences among DEXs in terms of token trading volume, we have drawn the following figure.

It can be seen that there are four tokens that only have a single source of liquidity, they are sETH, sUSD, QNT, and XCD. The source of liquidity for QNT and XCD is only IDEX. Both sETH and sUSD are synthetic assets of the synthetic asset project Synthetix, and their liquidity mainly comes from Uniswap. In addition, USDT, as the stablecoin with the largest market value, only has good liquidity in Tokenlon and Kyber. There are reasons for USDT itself, which we will explain in detail in the chapter on stablecoins. We see that the trading volume of USDT in Tokenlon is much larger than that of Kyber, which is its main trading stablecoin, while the main trading stablecoin in Kyber is USDC. Considering that the main users of Tokenlon are Chinese users, and Kyber users are mainly For overseas users, this data reflects the differences in transactions between Chinese and foreign users.

Through comparison, we can conclude that Uniswap provides the most liquidity for DeFi among several DEXs, and is the engine of DeFi-related token liquidity; while Kyber is mainly for BAT, LINK, USDC and other more widely used tokens. Tokens provide liquidity; Tokenlon is the exchange with the best liquidity for USDT. In 2020, with the development of DeFi, Uniswap's market share may further increase, and the continued inflow of USDT to Ethereum may empower Tokenlon.

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synthetic assets

Some say cryptocurrencies are the best performing asset class of 2019. Among cryptocurrencies, the Synthetix project's SNX is undoubtedly one of the top performers. According to CoinMarketCap data, as of December 29, SNX has risen by 2872% in 2019. And one year after the revision of inflation rules in March this year, SNX’s inflation rate was 75%.

Since the beginning of this year, SNX's mortgage volume has shown an upward trend. On the one hand, SNX has high inflation and the supply is constantly increasing; on the other hand, the good performance of SNX price also attracts users to mortgage tokens to obtain additional inflation and transaction fees. Currently, 85.18% of the supply of SNX is used for lock-up mortgages.

The success of Synthetix lies in its innovation. It has created a traditional financial derivatives market and indirectly opened up a way for common virtual currencies to purchase traditional financial products. A variety of synthetic assets can be generated by mortgaging SNX, collectively referred to as Synths, and the process of creating Synths generates "debts" at the same time. The types of synthetic assets are shown in the figure below, and any two Synths can be directly exchanged in synthetix.exchange. Since mortgagors cannot directly trade on the Synthetix exchange, each trader's counterparty is the exchange itself, so the total amount of debt in the exchange will change with the price of each synthetic asset. The price of the synthetic asset is provided by the oracle machine, and all the owners share the debt in the system according to the mortgage ratio. So everyone's debt is variable, as long as the synthetic assets held are performing better than the average, they can benefit from it; otherwise, they need to repay more debt. For example, a cryptocurrency holder who is bullish on gold can mortgage SNX to generate sXAU. If the price of gold performs better than the average level of synthetic assets during this period, the investor can obtain returns that exceed the average performance.

Since Synthetix requires a mortgage rate of 750% (Note: In the traditional financial field, the mortgage-pledge rate = collateral guarantee principal balance ÷ collateral valuation × 100%, so the mortgage rate in the traditional financial field should be less than 100%; but Synthetix The mortgage rate given in the official project data = collateral valuation ÷ collateral guarantee principal balance × 100%, contrary to the traditional financial field, the project official data shall prevail here), resulting in a limited scale of synthetic assets Synths. Although Synthetix intends to increase the collateral rights of double ETH on the basis of staking SNX in the future, this approach will also introduce other risks. And compared with other projects, the mortgage rate is still too high. The price of Synths is determined by the quotation of the oracle machine. We look forward to the cooperation between Synthetix and Chainlink to provide more accurate quotations, so as to reduce risks and increase the mortgage rate of SNX and the scale of synthetic assets.

Normally, depositing ERC20 tokens and ETH into Uniswap's fund pool is to earn transaction fees. The fee ratio of each token in Uniswap is the same, so the rate of return on deposit fees is proportional to the turnover rate (trading volume/fund pool balance). Each trading pair in Uniswap contains an ERC20 token and Ethereum, and the two are equivalent, and the return rate of each token in the fund pool is proportional to the transaction volume/Ethereum balance. sETH/ETH is the most liquid pair on Uniswap, while MKR/ETH is the most traded pair. It can be seen from the figure below that depositing MKR in Uniswap’s fund pool gets a fee income much higher than the market average, while depositing sETH’s income is lower than the average. Calculate the average value of Volume/Balance from December 1st to December 22nd, and the handling fee earned by depositing MKR of the same value is about 10 times that of sETH. Therefore, it can be inferred that the large deposits of sETH and ETH in Uniswap are not for handling fees, but are only a by-product of providing liquidity for Synthetix synthetic assets, and have not been effectively utilized.

Since sETH and sUSD account for 87% of the total Synths, their respective proportions are basically the same. Hedging against collateralized liabilities is easier when there is a concentration of collateralized assets in the system. When generating synthetic assets, sETH and sUSD each account for half, which can basically hedge the risk of rising debt.

For now, although Synthetix provides a channel to mortgage cryptocurrencies to purchase traditional financial derivatives, the actual synthetic assets generated are still concentrated in sUSD and sETH, which is not significantly different from other projects. Moreover, the mortgage rate is high, and the actual utilization rate of assets is low. The main purpose of investors mortgaging SNX is still to obtain inflationary SNX tokens. Synthetix has already had a successful start. To achieve further development, on the one hand, it can reduce the mortgage rate and increase the scale of synthetic assets; on the other hand, it can encourage users to choose more types of synthetic assets, especially its unique financial derivatives, increasing the diversity of synthetic assets. Widen the gap with other projects.

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stable currency

In 2019, stablecoins began to show significant growth in April, and continued until the end of July, with the market value increasing from US$2.6 billion to US$4.7 billion; in the second half of the year, encrypted assets experienced a long-term downward trend. The growth trend failed to continue, but the stablecoin market capitalization did not decline, slowly growing to $4.9 billion by the end of the year.

DAI is a stablecoin generated by users mortgaging ETH or BAT through the MakerDAO protocol. It was upgraded in November. The name of the upgraded stablecoin is still DAI, and the original stablecoin DAI was renamed SAI. The figure above shows the upgrade from SAI to DAI since the upgrade. It can be seen that more than half of SAI has been upgraded to DAI since the upgrade for more than a month.

Another important change in stablecoins is that the ERC20 version of USDT issued on Ethereum has increased significantly, exceeding the USDT issued on Bitcoin through the Omni protocol. In addition, the number of daily transfers and on-chain activity of the ERC20 version of USDT have greatly exceeded that of USDT issued based on the Omni protocol, and the gap continues to widen. However, the ERC20 version of USDT does not fully follow the ERC20 standard. The transferFrom in the contract has no return value, which leads to the fact that the transaction result cannot be confirmed in real time. Developers need to define an interface template for USDT separately, which is not friendly to developers and limits its use in Developments in DeFi - As we showed in the DEX section, USDT does not have a lot of trading volume on decentralized exchanges compared to other stablecoins, and only Tokenlon and Kyber are supported on major decentralized exchanges USDT transactions.

Currently, we see that MakerDAO, the supplier of DAI, is stimulating the supply of DAI through lower interest rates. According to past data, MakerDAO's interest rate adjustment mechanism has a more effective regulation on the supply of DAI, so in 2020 we are expected to see an increase in the circulation of DAI. In addition, as mentioned above, the USDC circulation is also currently showing an upward trend. As the main stable coins in the DeFi ecosystem, the increase in the market value of DAI and USDC will promote the further development of the DeFi ecosystem.

Bitcoin is the asset with the largest market value and the best liquidity among cryptocurrencies. Other public chains have made some attempts to capture its liquidity, such as WBTC, imBTC on Ethereum, and RBTC on RSK.

The above table counts the circulation and number of holders of the main BTC cross-chain assets WBTC and imBTC in the current DeFi ecosystem. Through comparison, it can be seen that although the online period is relatively short, the circulation of imBTC has exceeded one-third of that of WBTC. The user base of imBTC issuer imToken and the annualized interest rate of imBTC have boosted its growth. We expect imBTC to continue to grow rapidly in 2020.

WBTC and imBTC allow BTC to circulate in the Ethereum network in the form of ERC20 and participate in the activities of various DApps in the ecosystem. The DeFi ecosystem still mainly uses ETH as the underlying asset at present, and the introduction of cross-chain BTC is expected to greatly increase the scale of DeFi in the future.

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The decentralized exchange dYdX has added margin trading to the trading function. Borrowers have lower costs because there are no centralized intermediaries. Comparing dYdX and the centralized exchange Binance’s margin trading loan interest, borrowing ETH on dYdX only needs an annualized interest rate of 0.42%, while the annual interest rate on Binance is 3.65%; dYdX’s annual interest rate on borrowing USDC is 3.44%. Binance is at 7.30%. For the same token, the borrowing rate for margin trading on the decentralized exchange is significantly lower than that on the centralized exchange Binance.

Decentralized exchanges rely on the underlying public chain, and the supported assets will be relatively limited. dYdX only supports three tokens: ETH, USDC, and DAI. Binance supports more types of tokens, but the lending rate and margin trading borrowing rate are quite different. For example, the current interest rate for lending BTC on Binance is 0.25%, the borrowing rate is 3.65%, and the borrowing rate is 14.6 times the lending rate. For BNB, the borrowing rate is 260 times the lending rate. Since the decentralized exchange dYdX does not have a centralized intermediary agency, the interest rate is adjusted in real time, and the gap between the lending rate and the borrowing rate is also smaller.

In terms of ease of use, decentralized exchanges are also actively improving. Generally speaking, if you want to conduct margin trading on a decentralized exchange, you need several steps: borrow tokens on a certain platform; transfer tokens to the exchange; place an order on the exchange. dYdX simplifies all the intermediate steps. In the case of sufficient margin, the smart contract can automatically execute the process of borrowing currency and transferring it to other decentralized exchanges, which can already achieve the same convenience as centralized exchanges.

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At the same time, we observed that MakerDAO, as the largest decentralized lending application, affects the interest rate of the entire pledged lending market. This is because DAI is still the most important asset in the mortgage lending market. Although USDC, the second largest asset, is currently affected by its similar functions and the lending rate is also affected to a certain extent, it still has a certain degree of independence. This shows that the purposes of the two are not completely consistent, and USDC loans may be more used for leveraged transactions on centralized exchanges.

outlook

In the observation of DEX, we think it is worth noting that Uniswap, as an important component of DeFi, is playing an increasingly important role. Among all DEXs, Uniswap provides the most liquidity for DeFi, and is the engine for the liquidity of DeFi-related tokens. Among them, the liquidity of Synthetix synthetic assets is almost completely provided by Uniswap; while Kyber is mainly for BAT, LINK, USDC, etc. More widely used tokens provide liquidity; Tokenlon is the exchange with the best liquidity for USDT.

The star project Synthetix in DeFi in 2019 has experienced rapid growth in terms of market value and business scale, and has attracted widespread attention. We believe that although Synthetix's innovation still has great potential risks, the high growth and high returns it brings will stimulate more innovators to explore in this field.

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outlook

Growth in the size of the lending market. In the current decentralized lending, there is no credible credit score, only over-collateralization can be used, and the loan scale is limited. If an identity/reputation system is introduced, it will make possible a reduction in collateral requirements. In addition, due to the different underlying public chains, the supported assets are also limited. If an efficient and safe method can be found to introduce Bitcoin as collateral, the size of the lending market may grow exponentially.