A glance at the development of DeFi asset management, oracle and derivatives in the first half of the year
asset Management
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asset Management
"The growth of the DeFi market has given room for the development of asset management projects, but the development of such projects is still in the early stages, and overall they are relatively niche
The DeFi market ushered in huge growth in the first half of 2020, but the lending and trading markets have long been fragmented among various projects. Wallets and asset management tools can connect and integrate different lending and trading platforms. With the development of the DeFi industry, the necessity of such projects has emerged. At the same time, the influx of funds into DeFi has created market demand for strategic investment management, and asset management protocols have also been developed.
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Asset management categories in the DeFi industry mainly include wallets, asset management protocols, and asset management tools. TokenInsight Research defines DeFi wallets as non-custodial wallets based on smart contracts; asset management protocols provide artificial or intelligent asset management strategies to help users manage assets locked on their platforms; asset management tools help manage users locked in different DeFi The assets on the platform are usually accessed in the wallet.
TokenInsight Research selected several mainstream DeFi wallets in the market, including Argent, Mykey, and Dharma, for statistics. 2019 is the first year that DeFi wallets are promoted to individual users. As can be seen from the figure below, in 2019 and the first half of 2020, the growth rate of mainstream DeFi wallet users is much higher than that of all wallets in the industry.
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Comparison of wallet and DeFi wallet user growth rates, source: Statista; TokenInsight
At the same time, because the DeFi wallet is more targeted in use, the functional design of the wallet focuses on the interaction with DeFi, allowing users to easily access DeFi applications and carry out lending activities through the wallet. Its future is closely related to the overall development of the DeFi industry. As can be seen from the figure below, the number of users of the top DeFi wallets [1] Argent and Mykey is relatively consistent with the total number of DeFi addresses. At the same time, during the two strong rises of DeFi TVL on 2/1-2/15 and 6/15-6/22, the user growth rates of Argent and Mykey both increased.
[1] The selection of top projects is based on the number of users, the balance of contract accounts and the influence of projects in the DeFi ecosystem
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Among them, the growth rate of Argent users surged to 3% on February 4, and then dropped to a stable level, increasing the user growth rate of about 0.4% at the end of January to 0.75%; The user growth rate of around 10% rose to 1.6% on June 19.
Mykey officially supported Ethereum on January 15, leading to a surge in user numbers. After digesting the impact, the growth rate of Mykey users remained at around 1.5% before February. In early February, the growth of DeFi TVL drove the growth of Mykey users, making the growth rate gradually climb to 2.9% on the 12th; similarly, the growth rate of Mykey users on June 15 suddenly increased from 0.23% the previous day to 0.59%.
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In addition, DeFi wallets are still relatively niche in the current market. Even the leading platform Argent has not yet exceeded 30,000 actual users. As of June 29, the balance of the Argent contract account was $4,772,496, and the lock-up value of leading lending projects had reached more than $600 million. InstaDApp, which is also an asset management project, benefited from liquidity mining, and its total lock-up value[2] reached 123 million US dollars, which is 25.7 times that of Argent and 112.2 times that of Mykey.
[2] As a third-party asset management tool, InstaDApp does not require users to store assets directly. Here, the total lock-up value is the value of assets locked on other platforms through it
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"Liquidity mining brings temporary traffic to DeFi wallets; and helps InstaDApp rise and establish its market position
The liquidity mining launched by Compound in June detonated the DeFi market, resulting in a good growth in the number of DeFi wallet users and the number of transactions. It can be seen from the figure below that the number of transactions of Argent and Mykey surged on June 15, from 479 and 109 to 596 and 388 respectively. The number of Argent transactions exceeded 1,000 in the next few days. However, due to factors such as market positioning and audience, the upsurge of liquidity mining has not brought breakthrough qualitative changes to the development of DeFi wallets. The number of Argent daily transactions returned to the level before the launch of liquidity mining at the end of June.
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Different from the temporary impact of liquidity mining on DeFi wallets, since the market positioning of asset management tools such as InstaDApp is more inclined to face professional users, it is more compatible with the diversification of liquidity mining participation methods. In this wave of liquidity mining, InstaDApp seized the opportunity and launched 4x leverage, which attracted many participants and established its leading market position.
As can be seen from the figure below, the number of InstaDApp contract addresses continued to grow after June 15; in contrast, Zapper and Zerion did not benefit from liquidity mining, and the total number of contract addresses remained below 200. The number of contract addresses at the thousand-level level is far apart.
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InstaDApp, Zapper, Zerion contract addresses, source: TokenInsight
Asset management agreement projects sprouted in 2019 and started relatively late. Currently, there are only a small number of such projects on the market. The mainstream asset management agreement projects on the market include Set Protocol, Melon and Betoken. Among them, Set Protocol and Melon have relatively high assets under management and occupy most of the market. However, Betoken's asset management amount in 2020 has fallen off a cliff compared to 2019, and it is currently only $5,333.
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Set Protocol and Melon assets under management and percentage of DeFi TVL, source: TokenInsight
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It is also worth noting that while the asset management amount is expanding, the proportion of the total asset management amount of Set Protocol and Melon in DeFi TVL also increased from 0.31% to 0.99% in the first half of 2020. It shows that it not only follows the rise of the DeFi industry as a whole, but also has development potential and market demand in the industry, and has room for future imagination.
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However, the current industry structure also shows that the top projects with a user base are stronger. The asset management amount of Set Protocol was about 10 times that of Melon at the beginning of the year. It once soared to more than 60 times in May, and then dropped to about 15 times. The competition among leading projects and the occupation of the market will create barriers for new players to enter the market. New projects need to find new market breakthroughs or be innovative in order to break through the competition.
However, the characteristics of asset management projects determine their necessity in the DeFi industry. In the future, with the development of the DeFi lending and trading market, users' demand for integrated multi-platform wallets and asset management tools will become stronger. TokenInsight Research predicts that more asset management tools for different levels will appear on the market. At the same time, the top asset management agreement projects are developing well and will further consolidate their market position in the future. New players need to use their imagination to enter the market.
infrastructure
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1. Infrastructure overview
The infrastructure in the DeFi industry mainly includes oracles and privacy projects. The oracle machine obtains off-chain data for smart contracts on the chain, which is an indispensable part of the DeFi industry; privacy projects can anonymize on-chain transaction activities to meet user information privacy needs. Incidents such as the Synthetix oracle attack in the second half of 2019 and the flash loan attack in the first half of 2020 have shown that the stable development of the DeFi industry is inseparable from the existence of safe, reliable oracle machines that can be used on a large scale. Infrastructure is the cornerstone of the DeFi industry.
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Decentralized oracle projects started relatively early among infrastructure projects. At present, the leading projects Chainlink and Band Protocol have been widely used; privacy projects were born in response to the development of the industry, and generally started in 2019. Currently, the mainstream Projects include Tornado, AZTEC Protocol, and Incognito.
"Chainlink still occupies the leading position in the oracle field, and the projects are generally actively developing. The overall structure of the industry has not changed significantly in the first half of 2020
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Comparison of oracle projects, source: various projects; TokenInsight; data as of 2020/7/14
The role of oracles is indispensable in the DeFi ecosystem, but the number of players in the decentralized oracle market is currently small, and various existing projects are still in the stage of continuous improvement in terms of technology and price accuracy. The oracle project that will emerge in 2020 is Nest Protocol. The project development is in the early stage. As of the end of June, the market value is $4,291,056, which is still far behind Chainlink and other projects. In addition, Coinbase launched the price oracle Coinbase Oracle in April. The attention of new projects in the community and the layout of exchanges in the field of oracle machines show that the industry attaches great importance to the reliability of oracle machines.
As can be seen from the figure below, the market value of oracle projects increased in the first half of 2020. The market value of Band Protocol grew strongly before June, surpassing Chainlink at one point; but it fell back immediately after entering June. In contrast, Chainlink's market value growth is more in line with the growth trend of the entire DeFi industry, showing that Chainlink is at a more mature stage of development. The growth of Tellor is relatively stable, and it is in a relatively weak position compared with Chainlink and Band Protocol.
Comparison of the market value of Chainlink, Band Protocol, Tellor and DeFi TVL, sources: CoinMarketCap; DeFiPulse; TokenInsight
TokenInsight Research has analyzed the number of on-chain transactions of Chainlink, Band Protocol and Tellor since 2020, and found that there is a certain correlation between the fluctuation of project chain transactions and the fluctuation of project market value. Trading is also more active. At the same time, it can be seen from the figure below that the positive changes in the number of transactions on Chainlink and Band Protocol in 2020 are much greater than the negative changes, showing the positive development of the transaction activity on the top project chains; and entering June After that, the range of changes in the number of transactions on the two chains narrowed, indicating that the activity of the project on the chain gradually entered a stable development during this period. The number of transactions on Tellor’s chain fluctuated less, and the activity on the chain remained stable in the first half of 2020.
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Change rate of transactions on Chainlink and Band Protocol, source: Etherscan; TokenInsight
In activities such as transaction transfers on Ethereum, user addresses and transaction amounts are completely disclosed. In response to the demand for anonymous transactions, privacy projects emerged in the market. Privacy projects can hide the contract address or transaction amount of both parties to the transaction, but in order to ensure the validity of the transaction, the existence of the transaction is allowed to be verified. Privacy projects have room for imagination, and the recent incident of USDC address freezing has aroused the market's thinking about privacy protocols.
At present, privacy projects on the market generally use zero-knowledge proofs and specific classifications under zero-knowledge proofs to solve privacy problems. The earliest widespread use of zero-knowledge proofs and non-interactive zero-knowledge proofs (zkSnarks) in the blockchain industry comes from the implementation of the ZCash project. Projects such as ZCash have launched their own Tokens to solve privacy issues; and DeFi privacy projects use their imagination on this basis to solve the privacy issues of existing Tokens.
Technical solutions of privacy projects, source: various projects; TokenInsight
Therefore, from a technical perspective, the solutions to privacy projects are similar. However, due to differentiated competition, each project targets different hidden information.
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Due to the fact that there are few privacy projects on the market and data information is relatively scarce, it is impossible to conduct a comprehensive market analysis. However, the development trend of such projects can still be glimpsed from the performance of representative projects. In addition, it should be noted that the mechanisms adopted by each project are different: Tornado adopts the fund pool mode, requiring users to deposit assets into the fund pool; while Incognito directly processes transactions through the shield mode.
As can be seen from the figure below, in the first half of 2020, both Tornado and Incognito have developed well. The balance of Tornado’s fund pool has increased from US$350,000 at the beginning of the year to more than US$4 million, with a growth rate of 1077%, especially in February; Incognito’s growth is also obvious. Since the mainnet launch in November 2019, as of the end of June , Incognito has processed a transaction amount of 7.53 million US dollars, and its growth rate is the strongest from March to June, with a growth rate of 528%.
Tornado fund pool balance and Incognito total transaction amount, source: Incognito; TokenInsight
summary
The infrastructure field has sufficient market space, but players in this field need to have excellent technical level as support. The safety and reliability of the oracle machine will be the key points of the market in the future. The industry structure is not expected to undergo major changes in the short term, but the exploration of the performance improvement of the oracle machine will continue, and the exchange will also promote the layout in this area ; At the same time, privacy projects have clear pain points, and the emergence of privacy issues in the industry has boosted the development of such projects, and there is plenty of room for follow-up imagination.
Derivatives
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Derivatives1 Introduction。
The transaction category is an indispensable and important participant in the DeFi ecosystem, and the transaction category can be further divided into DEX (decentralized exchange) and derivatives. This report aims to introduce the status of the derivatives industry, and the DEX industry research report can be read
"Research Report on DeFi Industry in the First Half of 2020 - Part1 DEX"
Derivatives can be divided into asset-based derivatives and event-based derivatives according to the underlying assets. The underlying assets of asset-based derivatives are assets, such as synthetic assets and options; the underlying assets of event-based derivatives are certain events or subjective judgments, such as forecasts for tomorrow’s weather, betting guesses by the President of the United States, etc. The research objects of this report are synthetic assets, insurance, and forecasting in derivatives.
TokenInsight Research selected DeFi Pulse derivatives as a typical representative of derivatives in the DeFi industry, including 7 projects: Synthetix, Nexus Mutual, Erasure, MCDEX, Opyn, Augur, and Veil. Among them, MCDEX newly joined DeFi Pulse in early July this year, and TokenInsight Research classified it as a DEX, so this report does not include MCDEX.
The chart below shows the historical trend of total value locked (TVL) of DeFi, lending, and derivatives from August 2, 2017 to June 30, 2020. It can be seen from the figure that the development of derivatives is later than that of lending, and the volume is relatively smaller. At the end of June, the TVL of derivatives as a whole was below US$300 million, while the loan had reached US$1.2 billion.
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Total lock-up value of DeFi, lending and derivatives, source: DeFi Pulse; TokenInsight
From the historical trend of TVL, it can be seen that the overall development of derivatives began in 2018, improved slightly in 2019 and ushered in an explosion in the second half of the year. After entering 2020, TVL has fluctuated greatly.
Among them, the historical trend of derivatives TVL showed two big rises and two big drops, and the time points of the big rises were November 17-December 1, 2019, and June 16-June 27, 2020; The time of the sharp drop is: January 2, 2020-January 13, 2020 and March 12, 2020.
" Lending and derivatives compete for TVL market share
Although there were four major fluctuations in the TVL of derivatives, these fluctuations had different impacts on the TVL market share of derivatives. Among them, the sharp rise in November 2019 caused derivatives to squeeze the TVL share of loans, while the remaining few rises and falls had little impact, as shown in the TVL share trend chart below.
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It can be seen from the figure above that the TVL of the entire DeFi market is mainly occupied by lending and derivatives, and the total TVL market share of the two has remained stable after entering 2019. At the same time, from the distribution of the shares of the two in the orange box, it can be seen that the two are robbing each other's market share.
TokenInsight Research further analyzed the daily change rate of the TVL market share of lending and derivatives to prove that lending and derivatives compete for TVL market share. The data range in the figure below is from May 2, 2019 to June 30, 2020. The figure shows that when the TVL share of loans increases compared with the previous day, the TVL share of derivatives decreases. In addition, since the sum of the changes in the TVL market shares of the two is almost 0, it shows that the changes in the market shares of the two are in opposite directions and equal in magnitude.
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Market share change ratio of total locked value (TVL) of lending and derivatives, source: DeFi Pulse; TokenInsight
In the above figure, the market share competition between lending and derivatives was weak before November 2019, and the competition was obviously fierce after that. Among them, the most drastic ones (that is, the change in market share from the previous day was close to or exceeded 2%) were the first four times because of the two sharp rises and two sharp falls of the derivatives mentioned above[3].
[3] Why the TVL market share of derivatives has risen and fallen sharply and why it has formed an obvious mutual competition with lending still needs further exploration.
Among the above-mentioned total 426 days of data, the sum of changes in the TVL market share of lending and derivatives (red line) is mostly lower than 0.05%, and only 17 days exceed 0.05%, indicating that the total share of TVL of lending and derivatives has been at the same level for a long time. In addition, most of the changes in the total share of TVL occurred in the past two months. TokenInsight Research believes that this is due to the fluctuations caused by the boom in liquidity mining, and the competition between the two fields reflects from another perspective that the DeFi industry is currently highly active.
The 6 projects in the Defi Pulse derivatives category include 1 synthetic asset category (Synthetix), 2 insurance categories (Nexus Mutual, Opyn), and 3 forecasting categories (Erasure, Augur, Veil). The total lock-up value of the six projects has obvious differences, and the faults are serious. Among them, Synthetix's share exceeds 250 million US dollars at most, and the remaining 5 TVLs are all below 5 million US dollars.
As shown in the figure below, among the three projects that belong to the same prediction type, the TVL of Augur in 2018 can reach an average of 2 million US dollars, but after entering 2020, it will continue to drop to the level of 400,000 US dollars. Projects with similar trends are Veil (dropped from $70,000 to $30,000); Erasure, unlike these two, has been rising in TVL in 2020 and is currently around $2.5 million.
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Changes in TVL of each derivative project, source: DeFi Pulse; TokenInsight
Although the insurance project Nexus Mutual experienced a halved TVL in the market crash on March 12, 2020, it recovered or even exceeded the original level in the second quarter of 2020 with US$4 million. It is currently the second largest TVL in the derivatives market big project. Opyn has continued to rise in 2020 and is currently fluctuating around $2 million.
3. Comparison of derivatives projects and existing problems
TokenInsight Research sorts out the basic information of each derivative product project as shown in the table below, and the data selection time is June 30. Sythetix is an established project with a relatively long history of establishment in DeFi, and its TVL ranks third among all projects on DeFi Pulse. Although Augur’s TVL is less than $500,000, the market value of its token REP exceeded the market value of Synthetix’s token SNX on the same day. Opyn is a newly launched project this year, and it performed well in the second quarter of this year.
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Basic information statistics of various derivatives projects, source: DeFi Pulse; TokenInsight
In addition to the derivatives projects included in DeFi Pulse in the table above, there are other derivatives projects on the market, such as Gnosis, Hegic, ACO, Primitive, Opium, Pods, FinNexus, etc. The overall derivatives market is still in the experimental stage, and there are many unproven projects.
" Lack of liquidity in the secondary market and difficulty in option pricing hinder the development of the derivatives market
At present, decentralized option products encounter great obstacles in the secondary market circulation. When users enter the derivatives market and create option products on the platform, it is difficult or even impossible to resell the options in the secondary market. For example, the option products of the Hegic project, although they are customizable, cannot be circulated in the secondary market after they are created. In addition, the option products on the Opyn platform exist in the form of ERC-20, and can be circulated in the secondary market after being created; however, the secondary market of DeFi options is not mature yet, and the liquidity still needs to be further developed.
Synthetix doesn't have to worry about product pricing. Its derivatives are synthetic assets, which are quite different from option products. There is a one-to-one mapping relationship between synthetic asset prices and underlying assets, and underlying asset prices are directly obtained through oracles. However, due to the high friction in the secondary market, although the price of synthetic assets is determined by tracking the underlying assets, there may be a gap between the price of synthetic assets and the underlying assets, and Synthetix needs to use Uniswap to balance and eliminate the price difference.
The figure below shows the amount of assets in the liquidity pool formed by Uniswap for the synthetic asset sETH and the underlying asset ETH. According to Uniswap's price generation mechanism (constant product), the price of synthetic assets (sETH) denominated in underlying assets (ETH) can be obtained, and the ideal price of sETH should be sETH=1ETH.
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Based on the above points, TokenInsight believes that there are reasons for the derivatives market to remain an oligopoly dominated by Synthetix for a long time, mainly due to the lack of liquidity in the secondary market and pricing methods that restrict the overall development of the derivatives market. However, new projects continue to emerge in this market, which can bring new ideas and technologies to the industry.
future outlook
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future outlook
Needless to say, DeFi is still in its early stages of development. But we also see that all roles in the DeFi ecosystem are working together to grow together, constantly creating innovative solutions to improve the smoothness of user experience, and striving to achieve an integrated decentralized financial ecosystem with rich liquidity .
Being an open, permissionless and connected financial ecosystem will give us huge rewards as we work hard to learn, build and practice the concept of "Money Lego". However, it should be noted that there are also many risks in the DeFi industry. Whether it is a logic error in the smart contract or a design flaw in the system mechanism, for users who want to explore the DeFi world, before following the trend, they need to be aware of oracle attacks, illegal pre-transactions, re-entry attacks, liquidity risks, etc. Potential problem factors such as at least basic understanding and awareness.
While constantly absorbing nutrition and learning from corresponding players in traditional industries, DeFi has also demonstrated its own strong industry innovation capabilities. Therefore, TokenInsight Research believes that the future development, value proposition, growth potential and innovative ideas of the DeFi industry will push the digital asset market to the next level. We predict that at some point in the future, the proof-of-stake mechanism and centralized and decentralized finance will merge with each other to form a huge digital asset financial ecosystem. In the not-too-distant future, exquisite derivative products and tools will add a new layer of charm to the financial ecology that is young but has already taken shape, and inspire various financial applications to achieve unlimited imagination.
