Key Takeaways:
Compilation of the original text: Kyle
Key Takeaways:
We expect value to flow to those DeFi protocols that generate revenue for the rest of the year
With the launch of Fraxlend and fraxETH, Frax has the potential to gain more market share. The agreement has generated $36.3 million to date
Synthetix and GMX continue to dominate perpetual deal size and TVL on Optimism and Arbitrum, bringing in ~$100,000-$300,000 in daily revenue per protocol
dYdX (DYDX) and Uniswap (UNI) set to make strides in their token appreciation
The announcement of crvUSD and GHO marks the potential start of a new narrative around protocol-specific stablecoins. Among other functions, native stablecoins allow protocols to generate additional revenue and drive the utility of their governance tokens. Curve is optimized to provide deep stablecoin liquidity, so it could well be a battleground for this narrative
Our Q2 final report focuses on the evolution of DeFi assets during the bear market and explores the future of major protocols.
From the reign of Maker, to the DeFi summer led by Synthetix and Compound, to the false hopes of "DeFi 2.0" and "unstable" stablecoins, and now to the revival of OGs primitives, DeFi has been a long struggle. During that time, TVL was used as the best measure of success.
TVL loses its usefulness as a Product Market Fit (PMF) metric as users are attracted to unsustainable inflationary native token rewards. Users join projects to farm and dump their earnings. Once the rewards slow or stop, users leave. A drop in token price means the promised APY becomes unattainable.
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Source: DeFi Llama, Coingecko. July 31, 2022
PMF can be better measured by what users are willing to pay for the service. Temporary rewards can help reduce customer acquisition costs, but the protocol requires users to stay after the reward ends.
While few protocols currently deliver real value to protocol vaults or token holders, users pay to borrow and trade tokens, bribe liquidity pools, and invest outside of DeFi. Users also earn actual fees through ETH staking and seigniorage. Uniswap, dYdX, Convex, Frax, Aave, GMX, Synthetix, Curve, and MakerDAO are all in the top 20 for DeFI fees.
Growth stocks rarely, if ever, pay dividends. Early crypto protocols are also likely to consider similarly accumulating and reinvesting fee income to grow their businesses. Total fees will continue to be a key metric in terms of token holders' right to ultimately profit from the successful ventures they support, whether their earnings are paid out or reinvested.
borrow money
borrow money
Aave
Aave launched its V3 product on 6 different chains by the end of Q1 2022, bringing some key new features to the market:
Portals are a "permissioned listing" bridge that facilitates cross-chain transactions, allowing assets to flow seamlessly between Aave V3 marketplaces deployed across different chains. They help solve the liquidity fragmentation problem
Efficient mode (e-mode) allows users to obtain higher borrowing capacity in the same asset class, enabling borrowers to obtain the maximum return from collateral
Segregated mode enables Aave governance to segregate certain newly-listed tokens and determine a maximum loan-to-value ratio, limiting the protocol's exposure to high-risk assets.
Gas optimization feature reduces fees on all transactions by 20-25%
L2-specific features enhance the user experience of Ethereum scaling solutions
Aave V3 now sees more DAUs than Aave V2:
Looking ahead, all eyes are on Aave's recently proposed stablecoin: GHO. The vote to issue the GHO stablecoin passed with overwhelming support on July 31. The stablecoin will allow Aave users to mint GHO with the collateral they provide which continues to earn interest. This could be a huge revenue opportunity for Aave DAO, with 100% of borrowing revenue going to the Aave treasury. The most common concerns on the Aave forums include the need to properly vet potential facilitators (i.e. people with GHO minting/burning privileges), the importance of a MakerDAO-like pegged stability module (PSM), the controversy surrounding DAOs controlling interest rates, The importance of supply caps to avoid the risks of the Aave protocol, and the risks involved in using Chainlink oracles to track GHO prices. The GHO smart contract is currently undergoing an audit, followed by a separate proposal outlining a strong starting state for GHO.
MakerDAO
Maker has made strides in its real-world asset strategy, deciding to allocate $500 million from PSM to short-term treasuries and corporate bonds, and partnering with two key institutions:
Societe Generale refinances $30 million in DAI in tokenized covered bonds
Huntingdon Valley Bank secures up to $1B in DAI for peer-to-peer lending partnership, expected to generate $30M in annual protocol revenue
This continues to form two camps to address their governance issues: the camp that wants to decentralize at all costs, and the camp that supports board-style governance structures for efficiency and growth. The Lending Oversight Core Unit governance vote had the highest participation rate of any decision in its history, with more than 293,911 MKR tokens participating in the vote, worth approximately $300 million. The vote was 60%/38% to reject the implementation, implying support for a more decentralized governance structure.
Maker remains one of the leading protocols across DeFi, maintaining the most TVL of any DeFi protocol at around $8.5 billion. As a lending platform, Maker is at its best when the cryptocurrency market is in high demand for leverage. This typically corresponds to expansions and contractions in the DAI supply. While the supply of DAI fell by 27% in the first half of the year, it has been expanding since then. While much of the early-July uptick was due to PSM growth, $150 million in DAI has been minted from non-stablecoin collateral since July 27 as demand for leverage is slowly picking up.
Maker will also continue to make RWA a priority going into H2 and the protocol's long-term vision. They believe creating a "Maker Standard" for onboarding real-world collateral into DeFi will give Maker a head start in terms of RWA market share and create a playbook for other DeFi protocols to start joining themselves. Teej, a member of the Real World Finance Core Unit, believes RWA could represent 10% of total collateral and a 10x surplus after securing funding from SME lending platform Monetalis Clydesdale and Swiss bank Backed Finance, which wants to tokenize short-term bond ETFs buffer, compared to currently 2% of total collateral and 2x surplus buffer. The rising RWA offers a very solid income stream along with Maker's flagship crypto lending product.
Derivatives trading platform
dYdX
dYdX is a decentralized exchange for trading perpetual futures. During the second quarter, dYdX improved its user experience and feature set. New assets listed include TRX, XTZ, ICP, CELO, RUNE, LUNA, NEAR, and ETC, with governance proposals passed to add 15 more. The quick listing of tokens has pushed dYdX into a supported asset set that rivals any perpetual futures exchange. Implemented new order types and higher maximum position sizes, giving larger funds and traders the tools they need to migrate to dYdX. Transaction fees were reduced across the board and completely removed on August 1st for users with monthly transaction volumes below $100,000. Additionally, they have launched their own iOS app to provide a seamless mobile trading experience.
dYdX has a complete roadmap. By the end of 2022, dYdX plans to migrate from layer 2 ZK-Rollup to its own sovereign PoS chain built using the Cosmos SDK. Order book storage, matching, and validator sets will be decentralized, increasing the protocol's censorship resistance. DYDX tokens will have a new appreciation mechanism as a PoS token where transaction fees are distributed to stakers. There are some clear challenges ahead, but dYdX, well positioned as the leader in the on-chain derivatives narrative, appears to be gaining momentum.
GMX
GMX, a spot and perpetual exchange that supports Arbitrum and Avalanche's low swap fees and zero price impact trading, continued to gain adoption throughout Q2 despite the overall market downturn. Trading is backed by a multi-asset pool (GLP) that earns LP fees through swap, market making, and leveraged trading. It has become the largest dApp on Arbitrum with around $300M TVL and continues to gain traction on Avalanche with just under $100M TVL. Some highlights from the past quarter include:
A record influx of 7,273 new users on June 28, likely driven by the Arbitrum Odyssey event (which has been postponed)
Break through 63k unique users
Has now generated over $50 million in transaction fees for LPs
Historical trader P&L or fractional LP revenue is now $36M
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Source: https://stats.gmx.io
Investors expect GMX to add some significant new features in the second half of 2022, in addition to UI polish and platform reliability. Synthetics is expected to launch in the coming months, which will provide even more options for traders using the product. After this launch, the GMX team will start deploying on other chains and X4: an AMM designed to give pool creators and projects more flexibility in how their pools function. In a standard AMM, pool creators have very few customization options. The GMX team believes they can outperform existing AMMs in this regard and gain significant market share. Some interesting features include dynamic fees for pools, allowing traders to access custom price curves for various tokens, pools with yield tokens, or aggregated trades via other AMMs such as Uniswap V3. GMX's plans are ambitious, they want to build an AMM that will be a platform that other projects utilize and even build upon.
Synthetix
The second quarter saw the rise of atomic swap on Synthetix, allowing instant execution and no slippage for transactions involving synths. Atomic swap, which is more favorable than direct pair trading, has a daily trading volume of up to 350 million US dollars. As the third quarter begins, atomic swap remains Synthetix's main source of revenue.
Although 1 inch has been the main source of demand for atomic swap, they still missed a transaction routing route: users can swap from USDC -> sUSD -> sETH, and vice versa, but the last step of sETH -> ETH must be Do it manually. 1 inch will soon be adding a final step to their routers, which means we can expect more routing through synths and therefore more revenue for SNX stakers. Additionally, other aggregators have started implementing atomic swap, including OpenOcean which already uses synths to route from ETH -> USDT. With Curve announcing their OP grant proposal, we can expect to see atomic swap being used for Optimism as well. We expect atomic swap to continue to be widely used for routing order execution in Q3.
The Synthetix ecosystem has also seen huge growth in Optimism, driven by Kwenta's perpetual futures daily trading volume of over $80 million. Perpetual transactions on Kwenta will be upgraded to V2 with significantly lower fees and more markets in the second half of this year. V2 also includes mobile UI support, cross margin trading, limit orders, stop losses and the launch of KWENTA tokens (and possible airdrops for traders). SIP-254 also proposes to allocate 20% of SNX inflation to reward perpetual traders on the platform, further incentivizing traders to use Kwenta as their platform of choice.
stable currency
stable currency
Frax
Frax further integrates into the Curve ecosystem with several new mechanisms and introduces some products that will be launched in the near future:
Frax Base Pool: A new stablecoin pool that can be paired with Curve to drive more FRAX demand and encourage capital efficiency for partners.
Frax whitelisted for locking CRV: Curve passed a proposal to allow Frax to vote to lock its CRV tokens for veCRV, giving Frax greater governance power over Curve.
Fraxswap: Frax has launched a new DEX that enables users to buy various assets time-weighted over a period of time to reduce price impact. This primitive may be useful for protocols seeking to manage their treasury.
$20 million FXS buyback: Frax is currently using accrued revenue to buy back FXS tokens on the open market. The FXS will be destroyed or distributed to veFXS holders. $2 million in FXS has been purchased.
Fraxlend: Frax plans to launch a new lending dApp that will support permissionless lending pairings and custom debt structures, paving the way for real-world asset lending, bonds, and undercollateralized lending.
FraxETH: Frax revealed that it is running two validators on the beacon chain. Frax plans to create an ETH-collateralized derivative (fraxETH) to back its funds and create new ETH products. We can assume that all gains on fraxETH will somehow benefit veFXS holders.
In the second half of the year, Frax’s FXS token could see a surge in new product launches. After nearly halving earlier this year, FRAX supply is slowly rebounding, ultimately bringing more value to FXS. Since the launch of the Frax Base Pools, the supply of FRAX has increased by approximately $100 million. Currently, Frax's coffers contain $36.3 million in accrued profits. Fraxlend and Fraxswap open up the possibility of more income from the protocol, which will benefit FXS holders in the long run.
decentralized exchange
decentralized exchange
Curves and Convexes
Both Curve and Convex felt the pain of the bear market in the second quarter. Last quarter we saw:
Over $1.3 billion in UST was deposited into Curve, resulting in a 76% contraction in the TVL of both Curve and Convex.
The introduction of Frax Base Pools and FIP-95 approval deepens the connection between Frax, Curve and Convex. Based on the current cvxCRV price, Frax will swap up to 95% of CRV rewards to cvxCRV through the Curve pool, or deposit CRV directly into Convex, thereby stabilizing the cvxCRV peg.
Convex unlocked a record 27.5 million vlCVX on June 30th. While traders were heavily shorting CVX during the event, most of CVX immediately relocked and created a temporary short squeeze. Most notably, Terra Wallet re-locked its CVX, opening the door for new Terra ecosystem stablecoins.
Curve is launching a native stablecoin (crvUSD) that founder Michael Egorov says will be overcollateralized and have a revolutionary liquidation mechanism. The white paper has not yet been released, so we can only speculate on its design and implications.
LP tokens and CRV can serve as initial collateral for crvUSD, according to developers closely associated with the protocol. The specific assets backing the stablecoin are critical to its success, so Curve will likely whitelist accepted collateral through a process similar to the one it introduced with the new metric. Convex currently holds 53.9% of Curve's voting rights, so the approved LP tokens are likely to be Convex LP tokens, not Curve LP tokens, and the agreement between the two parties is mutually beneficial. Convex is also able to whitelist cvxCRV, and additional utilities will help harden the cvxCRV/CRV hook and increase the number of CRVs permanently locked in Convex. If CRV must first be voted locked into veCRV to qualify as collateral, Convex still has a strong position of over $360 million in veCRV in its vaults. Convex can use their veCRV to mint crvUSD and start farming their own CRV. CRV generated by the new revenue stream can be permanently locked into cvxCRV and paid to Convex LP and vlCVX lockers, thereby increasing Convex's value proposition while benefiting the Curve ecosystem by reducing supply.
While LP token collateral creates demand for asset deposits and increases Curve TVL, CRV and veCRV collateral removes CRV from circulation, which is necessary for Curve's sustainable development. The total amount of CRV locked throughout the year has grown steadily to 41%, and the current average lock-up time is 3.6 years. In addition, CRV releases decreased by 15.9% per year, with the next decrease occurring on 14 August. Increased demand for locked CRV and reduced CRV supply create an environment for bullish CRV for the remainder of 2022.
The announcement of crvUSD and Aave’s GHO stablecoin marks the potential start of a new narrative around protocol-specific stablecoins. Among other functions, native stablecoins allow protocols to generate additional revenue and drive the utility of their governance tokens. For example, Frax generates seigniorage revenue by mining FRAX, and Aave allows stAAVE holders to pay a lower interest rate on borrowed GHO. If this trend continues, there will be many stablecoins vying for liquidity, and Curve is likely to be the battleground as it is optimized to provide deep stablecoin liquidity. The bribe market built around Curve and Convex enables other protocols to effectively rent liquidity for their pools by leveraging CRV releases. The new pool will drive increased TVL and swap, benefiting the Curve ecosystem. Additionally, other protocols can pair native stablecoins with the Frax base pool (USDC and FRAX) metapool on Curve to generate FXS and CRV rewards for LPs. FraxBP has the ability to become the de facto foundation pool for stablecoin liquidity, further solidifying the flywheel.
Uniswap
Uniswap's march into NFT has just begun, and there will definitely be more news in the second half of the year. In June, Uniswap Labs acquired NFT aggregation platform Genie. The integration will allow Uniswap to facilitate trading of all digital assets, not just ERC20. Uniswap plans to integrate with sudoswap, allowing traders to provide instant liquidity to their NFTs.
With two new deployments added in Q2, this AMM is now deployed on seven chains, including Gnosis, Moonbeam, Optimism, Polygon, and Arbitrum. Uniswap has maintained its position as the DEX market leader, with an average monthly trading volume of more than $47 billion in the second quarter. Uniswap V3 has completed more than $1 trillion in transaction volume since its launch. For a short period of time, Uniswap has the highest total fees of any platform, surpassing Ethereum and Bitcoin.
UNI Governance is preparing to test the fee switch feature. On July 21, a governance proposal to gauge UNI holders' sentiment regarding implementing the fee switch was passed. While the exact details are yet to be confirmed, a trial may soon take place that takes a percentage of the V3 LP's swap fees and transfers them back to a vault controlled by the UNI DAO. This is big news for UNI's added value. We'll be publishing an in-depth look at the trial this week.
Sushi (Sushiswap)
Sushi has been busy delivering new products. They deployed a cross-chain AMM using Stargate for bridging, issued MEV protected transactions using SushiGuard, and launched MISO 2.0. Miso is an initial dex offering (IDO) platform that makes it easy for anyone to raise funds for new tokens. The exchange now operates on nine chains, and users can trade with one click. Sushi launched a limit order feature and passed a proposal to restructure the DAO organization to help combat micro-governance.
final thoughts
final thoughts
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