1. DeFi market pomp: Expansion to different public chains and Layer 2, resulting in DEX, lending, staking, derivatives, bridges and other application scenarios, and new DAPPs continue to appear to optimize user experience.
2. DEX, Staking, and lending are the DeFi scenarios with the clearest demands and models. When any new ecology emerges, these three types of DeFi protocols are always deployed first.
3. The new ecological DeFi may contain some opportunities, such as DeFi projects on Alternative L1 and Layer2.
4. TVL, user volume, transaction volume, protocol revenue, MV, FDV, MV/TVL, P/S (market-to-sales ratio), P/E (price-earnings ratio), and innovation can be used to evaluate DeFi protocols.
At this stage of the development of the crypto market, DeFi is the most prominent track.
Since the DeFi Summer in June 2020, DeFi has expanded into a huge, rich, complex, and interoperable ecosystem. Trading, lending, staking, stablecoins, bridges, derivatives, insurance and other sub-segments are constantly being born with new protocols, and the locked-up volume (TVL) continues to grow.
According to data from DeFiLlama and Coingecko, DeFi has been deployed to more than 140 chains, with more than 3,000 protocols, and the lock-up value is around $60 billion. The number of DeFi tokens exceeds 400, with a total market capitalization of more than $40 billion.
Vitalik once said at the EthCC conference that the Ethereum community cannot be limited to DeFi, and non-financial applications are equally important. But in fact, DeFi has become an important foundation for the development of non-financial applications.
DeFi and NFT, chain games, Web3, DeSoc (decentralized social networking) and other sectors will intersect.For example, the holder of BAYC will not be satisfied with only holding and showing the blue-chip NFT that he/she bought at a high price. He/she may borrow USDC by mortgaging BAYC to obtain liquidity. In the SocialFi field, fan tokens can earn interest through staking. At the current stage of the development of the chain game sector, it has become the norm for the chain game guild to lend game assets to players.
DeFi can be said to have penetrated into every link on the chain. Applications that cannot participate in DeFi Lego are lifeless. DeFi is a very important base layer for the crypto market. At present, DeFi is also the most real on-chain demand scenario. Its asset circulation, lending, and staking models have also been fully verified.
Bibi News has researched the entire DeFi ecosystem and the data of the top DeFi protocols. This research report will elaborate on the current situation, characteristics, representative projects, capture of DeFi value, challenges and opportunities of the DeFi market.
TVL Top50 DeFi Protocol, Source: Beep News
The start of DeFi
It all started with DeFi Summer in June 2020. At that time, Compound launched the governance token COMP to provide COMP rewards for borrowers on the platform. Later, DeFi protocols followed suit and launched Yield Farming, Liquidity Farming, and Staking Farming farming methods.
For a time, users, funds, and interaction volume on the DeFi chain were quickly ignited. It is reported that in a year or so, the on-chain lock-up (TVL) of the DeFi ecosystem has increased by nearly 140 times, the total amount of loans has increased by more than 170 times, the number of users has increased by nearly 140 times, and the transaction volume has increased by more than 1,000 times. volume increased nearly 10 times.
The highest point of DeFi TVL exceeded $180B, an increase of more than 140 times. Source: DeFiLlama
Up to now, Yield Farming, Liquidity Farming, and Staking Farming have become standard in DeFi protocols.Farming helps DAPP to start cold, attract users, transaction volume, and lock-up volume in a short period of time, and consolidate the “brand image” of DAPP.
But if you think about it, farming is actually a form of DAPP subsidy. When all DeFi protocols use tokens and fees to subsidize users, user loyalty will be very dependent on farming income. After the platform subsidy is eroded (for example, the token price is diluted by mining, selling and withdrawal), the transaction volume, the liquidity and depth of the pool will quickly dry up. The agreement does not achieve long-term development.
The real value and core of DeFi lies in no access, decentralization, low friction, and composability, which should be the original driving force for DeFi to continue to attract users and funds. This is why we are optimistic about the development of DeFi/DeCeFi (the fusion of DeFi and CeFi).
Taking traditional financial scenarios as an example, we need to provide ID cards, bank accounts and other information to open a stock account. The trading of stocks is also time-limited, not 24h*365 days. In cross-border transfer scenarios, it generally takes 3-5 days to complete the transfer, and multiple third-party institutions may be involved in the process.
By contrast, anyone can create a crypto wallet account without providing any information. After creating an account, save the private key/mnemonic phrase, the account is completely under your control and cannot be frozen by a third party.
After you deposit encrypted assets into this account, by connecting the wallet, you can participate in any DeFi application, such as trading tokens on Uniswap, and you can participate 24h*365 days. Even when the Ethereum network is congested, it does not take 3-5 days for the circulation of assets on the chain. Generally, it takes about 10 minutes to know whether the transaction is successful.
Instead of using banking services and paying service fees, you can make markets (provide trading pair liquidity) for DEXs such as Uniswap, in order to get a portion of the DEX’s fee income. Your market-making certificate LP Token on Curve can also be used as collateral to lend other tokens on platforms like MakerDAO.
Therefore, anyone can participate in DeFi. The flow of DeFi funds has very little friction, and the capital efficiency of DeFi has been greatly improved. It is for these reasons that DeFi will be a market that cannot be ignored.
DeFi experienced rapid development from June 2020 to May 2022, and the DeFi track once reached its heyday. At that time, everyone was talking about DeFi, and those with stablecoins were thinking about which safe and high APR pool to rush to. The collapse of the liquidity pool by giant whales was a topic that LPs often discussed.
Today, although market attention, TVL, users, and transaction volume are attracted and distracted by new topics such as new public chains and NFTs, and market confidence has also been hit by price declines, we still think the DeFi market is showing some pomp. DeFi has solidified as a regular tool for crypto natives.
At present, DeFi has developed into a huge self-operating financial system. DeFi is a key industry on Ethereum, BNB Chain, Avalanche, Solana, Tron, and Layer2, providing lock-up value of $34.1B, $5.25B, $1.84B, $1.4B, $5.7B, and $5.1B for these chains/layers, respectively.
According to incomplete statistics from Bibi News, the number of DeFi users has exceeded at least 4.87 million. According to recent data, every 24 hours, more than $2 billion is traded on DEXs alone. The value of stablecoins circulating in the market has exceeded 100 billion US dollars. Among the top-grossing protocols according to Token Terminal, the DeFi category occupies the majority.
DAPP protocol revenue, source: Token Terminal
More than 140 chains have bred unique applications in the segments of lending, staking, DEX, bridges, income aggregators, derivatives, and insurance.
The DeFi protocol at the head of each chain, from: DeFiLlama
In terms of horizontal development, DeFi has expanded to different public chains and Layer 2. In terms of vertical development, DeFi has derived different application scenarios, which can be combined with each other. Even within the same application scenario, we see new applications emerging constantly, optimizing the user experience, such as reducing transaction slippage and gas fees, and bringing more innovations.
DEX is the most important category in the DeFi track. Currently, it is mainly divided into two modes: AMM and order book. In the TVL Top50 DeFi protocol according to the statistics of Bibi News, DEX is mainly AMM type, and order book type mainly appears in derivative DEX.
In addition, PancakeSwap, Sushi, and VVS Finance (the forked version of Uniswap on Cronos) have derived a limit order model that allows users to set the transaction price within a certain range.
The integration of DEX with NFT will become a trend. On the one hand, there is a head DEX such as Uniswap that integrates SudoSwap. On the other hand, companies like PancakeSwap have placed NFT marketplaces similar to OpenSea in DEXs.
In addition, many DEXs are no longer satisfied with only providing swap functions. They also put cross-chain bridges, lending, staking, asset management (financial management optimization) and other functions in the interface. DEXs like Curve are known for encouraging the lock-up of the governance token CRV, and veToken’s gameplay is being emulated by more and more protocols.
There are also some DeFi protocols that specifically serve DEXs. Arrakis Finance manages Uniswap V3’s LP Token to optimize LP returns. Convex is committed to promoting Curve staking and providing users with better revenue solutions.
Due to the clear requirements and patterns of DEX, they are often the earliest applications deployed on Alternative L1 and Layer2. New DEXs in the new ecosystem are worthy of attention, such as LiquidSwap on Aptos, VVS Finance on Cronos, DefiChain DEX on DefiChain (for BTC DeFi), Ref Finance on Near, etc.
In addition, head DEXs also tend to expand with multi-chain deployments, such as Curve, Uniswap, and Sushi.
Changes in the past year: According to data from OKLink, the TVL of DEX has dropped from $48 billion to $25 billion in the past year, and TVL has shrunk by about half. DEX has indeed cooled down due to some black swan events and the overall market downturn, but we I prefer to call this period the consolidation period.
24-hour trading volume on the DEX market fell from $3.4 billion to $2 billion. The activity of the DEX protocol has also undergone a rotation during the year. At present, the transaction volume of MCDEX is relatively high, and in Q4 of 2021, PancakeSwap contributed about 20% of the market transaction volume.
Head DAPP: Uniswap, Curve
Uniswap is recognized as the first application in the DEX ecosystem. Although the AMM model was not originally proposed by Uniswap, AMM has been carried forward through Uniswap. At present, on Uniswap Twitter, there is a lot of information about Uniswap, AMM activities, team members and so on. The integration of NFT should be the next important direction of Uniswap. Scott (the founder of the original NFT aggregation platform Genie), the team’s NFT product leader, said: Uniswap will be the interface for all NFT liquidity.
Curve focuses on stable currency and anchored asset exchange. This precise positioning and innovation is worth learning from other protocols. Because the price of the assets that make up the trading pair is relatively stable, this positioning can well alleviate the impermanent loss and transaction slippage problems of DEX.
Multi-asset pools are currently supported on Curve. Curve is also actively cooperating with the project side. The project side has opened a pool in Curve, and many project side will provide market-making rewards. In this way, the project token can obtain better transaction depth, and Curve can capture more Much liquidity.
Multi-asset pools on Curve, and market-making rewards provided by the project side
Lending is the second largest DeFi track after DEX.
The number of protocols and TVLs of each DeFi track, source: DeFiLlama
Observing the loan agreements in TVL Top50 DeFi projects, it can be found that the mortgage assets and loan assets accepted by mainstream loan agreements such as MakerDAO, Aave, and Compound are relatively conservative, and mainly use various stable coins, BTC, and ETH to reduce liquidation. risk.
The restriction on the scope of assets limits the development of the protocol itself, so some leading lending protocols are making some expansion attempts. For example, Aave said it will launch the native stablecoin GHO, a stablecoin with a mechanism similar to Dai, and the wider usage scenarios of stablecoins can achieve some degree of expansion.
Reaching out to institutional users is another attempt by lending protocols. Compound launched Compound Treasury to provide institutional customers with financial products with stable income. Institutional customers put funds into Compound Treasury and receive 4% APY, and the funds will enter the Compound protocol, which is equivalent to connecting institutional funds with the retail lending market.
In fact, Aave also launched the institutional lending platform Aave Pro in July 2021, emphasizing features and functions such as KYC. The combination of DeFi’s openness, decentralization, composability and CeFi will become a trend pursued by many DeFi protocols.
Changes in the past year: In the past year, the total amount of borrowings in the decentralized lending market has dropped from $28.4 billion to $16.2 billion, and the total amount of deposits has dropped from $78.2 billion to $40.3 billion. The cooling of the market has also affected the lending market. At this stage, MakerDAO and Aave have been at the top. Compound once occupied 20-30% of the market, and now this proportion is less than 10%.
In addition, the cooling of the market is also manifested in yields. Lending APY based on stablecoins USDC and Dai have experienced a decline in the past year. ETH-based lending APY may have risen due to the impact of the merger event.
Lending APY, source: linen.app/interest-rates/
Head DAPP: Aave, Compound
Staking is widely used, and it is a feature commonly deployed by DeFi protocols. In this research report, Bibi News also includes revenue aggregation, optimization, and asset management into this category. Such protocols tend to generate better revenue for users and the protocol itself.
There are some protocols in the market that purely do staking, wealth management, and income aggregation/optimization, such as Lido, Convex, Yearn Finance, Rocket Pool, Arrakis Finance, Aura (optimizing income for Balancer LP and BAL stakers), Beefy, Marinade Finance (Solana) liquid staking platform on the Internet).
This type of agreement has also been recognized by the market because of its clear requirements and models. They attract users with simple token pledge operations, pledge income, liquidity release, etc., and have better TVL performance. However, because the revenue aggregation/optimization platform is based on DeFi protocols such as DEX, lending, and Staking, once these DeFi protocols have security problems, the revenue aggregation/optimization platform will also be affected.
Staking is often built into DEXs and lending protocols as additional features. For example, Curve encourages users to stake the governance token CRV as veCRV. Curve provides veCRV holders with governance voting rights and more distribution of protocol revenue/transaction fees in exchange for long-term CRV lock-up.
There are many protocols that follow this practice and applaud the price performance brought about by the flywheel effect. veToken may have a downward spiral risk.
Head DAPP: Lido, Rocket Pool, Yearn Finance, Convex, Arrakis Finance
Stablecoins are an indispensable component of the DeFi ecosystem and even the entire crypto market.Because of its price stability, stablecoins are widely used in scenarios such as lending, staking, and risk hedging.
Decentralized stablecoins are often generated through collateral (and in many cases over-collateralization).Mortgage rates vary by mortgage asset.
For example, through MakerDAO’s oasis.app, you can mortgage ETH at a 170% mortgage rate, and lend/generate stablecoin Dai. You can use these Dais for DeFi scenarios such as lending and staking. If you stake wBTC, the stake rate is 175%.
When you return the loaned Dai and pay the stability fee (the stability fee also varies depending on the mortgage assets, ETH is 0.5%, wBTC is 0.75%), and after the protocol destroys the Dai, you can get back the mortgaged ETH.
When the price of the mortgaged asset falls and the value of the mortgaged asset/loaned asset reaches or falls short of the mortgage rate, the mortgaged asset will be liquidated. For stable currency protocols such as MakerDAO, the liquidation and auction mechanisms of collateral assets are very important, which will determine whether the protocol can cope with price black swans.
Relative to overcollateralized stablecoins, algorithmic stablecoins appear to have been falsified by the market so far.
Changes in the past year: In the past year, the circulating value of stablecoins has not decreased as much as the data indicators of DEX and lending protocols. On the contrary, perhaps because of the existence of market demand, the circulation of stablecoins has increased slightly. Dai and FRAX have been occupying a large market share of decentralized stablecoins.
Head Decentralized Stablecoin: Dai
Derivatives are considered to be the most potential track for DeFi. However, due to the limited assets supported, the limited liquidity and depth of derivatives, and the high risk of leveraged trading, the adoption of decentralized derivatives platforms is not high . There are not many users of the derivatives platforms, and there are not many funds on these platforms.
Decentralized derivatives platforms can be divided into three categories: one provides leveraged trading of encrypted assets, one provides options trading, and the last provides casting and trading of synthetic assets.The TVL Top50 DeFi protocols according to Bibi News are dominated by the first and third types of derivatives platforms.
Head DAPP: Synthetix, dYdX, GMX
Synthetix supports the minting of synthetic assets by staking the governance token SNX with a high collateral rate. Synthetic assets can be understood as mirror assets that anchor other asset prices, such as sUSD and sEUR (synthetic assets do not hold positions in anchored assets, nor do they have attributes other than anchored asset prices). Synthetic assets can primarily be used for speculation based on the price of the asset being pegged.
Synthetix also supports trading between synthetic assets. Unlike AMM, etc., the swap between synthetic assets does not require a counterparty, but is calculated by smart contracts. There is no problem of insufficient liquidity. The exchange rate is captured by the oracle machine to avoid impermanent losses and transaction slippage. point.
Synthetix provides a better synthetic asset minting and trading model. dYdX and GMX represent decentralized leveraged trading platforms. The decentralization of GMX is stronger. Leveraged traders and liquidity providers are counterparties to each other. The platform provides rewards to LPs and motivates market making, which is similar to the operation mechanism of AMM.
dYdX once attracted much attention due to its protocol revenue and token performance, which was mainly due to the fact that dYdX migrated to StarkEx, the second layer network of Ethereum, and the network performance improved. Currently dYdX is in the stage of building its own application chain to the Cosmos ecosystem, with a view to increasing platform adoption by further increasing network throughput.
Among the TVL Top50 DeFi protocols, there are only 2 cross-chain bridges, namely Stargate and Synapse.
Head DAPP: Stargate
Stargate is favored by many people. Most cross-chain bridges implement cross-chain by mapping assets.From the A chain to the B chain, the assets on the A chain are locked, and the mapping token is generated on the B chain.
Stargate is different. This cross-chain bridge is based on LayerZero. LayerZero is an information transmission layer, which can be understood as a public chain. It can connect smart contracts of different chains and synchronize the state of multiple chains to achieve unified liquidity. Stargate is LayerZero’s first ecological application.
Insurance is also a track that DeFi has not fully tapped. As more and more security incidents occur, the importance of decentralized insurance protocols will be highlighted.
There are 2 insurance projects in TVL Top50 DeFi protocols, namely Armor and Nexus Mutual, of which Nexus Mutual is a more frequently mentioned decentralized insurance protocol.
Nexus Mutual provides various types of DeFi insurance, including Yield Tokens (farming token insurance), DeFi protocol insurance (in case of smart contract vulnerabilities being attacked), and hot wallet insurance.You can purchase 30 days or more of insurance for farming tokens, DeFi protocols, etc. by paying ETH and NXM. Once your claim has been voted on, you will receive an equal amount.
In Nexus Mutual, NXM holders are both profit takers and risk takers. After you stake NXM to become a claims assessor, you have the right to vote on claim events. If the compensation proposal is passed, part of the funds you pledge will be used for compensation, otherwise you will receive NXM income.
Head DAPP: Nexus Mutual
Overall, the DeFi market has the following characteristics:
1. Ethereum DeFi dominates, the number of DeFi DAPPs on Ethereum exceeds 1/6 of the entire market, and the locked-up volume accounts for 58%. Followed by BNB Chain, Fantom, Avalanche and other ecosystems.
2. DEX, Staking, and lending are the DeFi scenarios with the clearest demands and models. When any new Alternative L1 and L2 appear, these three types of DeFi protocols are always deployed first.
3. The new ecological DeFi may contain some opportunities, such as new public chains, DeFi projects on Layer 2, such as VVS Finance on Cronos, DefiChain, Benqi on Avalanche, Marinade Finance on Solana, and Ref Finance on Near. The underlying tokens of these new ecosystems are also worthy of attention.
4. Decentralized derivatives and insurance tracks still have great potential to be tapped.
Value capture in DeFi
Generally, we can use TVL (total lock-up value), user volume, transaction volume, revenue, MV (market value), FDV (fully diluted valuation), MV/TVL, P/S (market-to-sales ratio), P/E ( price-earnings ratio) and other dimensions to measure DeFi.
TVL is the most commonly used metric for evaluating DeFi protocols. Although traditional finance advocates capital flow and transactions, considering that DeFi is in the early stage of development, TVL is a data that can illustrate the scale of DeFi protocols.
TVL means how much funds users are willing to lock into a DeFi protocol, trusting it to some extent, in exchange for whatever utility it provides (e.g. earning yields, lending assets). Since TVL only represents the overall size of the locked assets, the degree of dispersion of users participating in the locked position needs to be considered at the same time, in order to rule out the situation where a few giant whales with related interests raise TVL.
The degree of use of the protocol can be said to be the fundamental indicator for measuring the value of the DeFi protocol. When more users use DeFi, such as trading, lending, staking, insurance, etc., there will be huge transaction volume and transaction volume on the protocol, especially when this phenomenon occurs in non-agricultural situations, this DeFi protocol is used. Proved to be very charming.
Revenue refers to the fees that the DeFi protocol levies on users who use its functions. For Uniswap, revenue is the user’s transaction fee. For Compound, revenue is the interest paid by borrowers on the platform. For Lido, revenue is Total staking revenue.
Some DeFi protocols will distribute revenue to ecological participants, such as holders of governance tokens, which is the protocol revenue of the DeFi protocol, which is equivalent to the protocol ecology capturing the value brought by the protocol interaction.
For Curve, it will distribute a portion of user transaction fees to CRV holders. For Aave, AAVE holders can get a part of the interest paid by borrower.
Revenue provides DeFi protocols with funding for operations and improvements, and is an important indicator of whether DeFi protocols can continue to grow. The protocol revenue allows DAPP to capture the value of the protocol and return it to the ecosystem. This tends to provide upward momentum for the governance tokens of DeFi protocols.
The comparison between MV and FDV can be used to assess whether there are still a large number of tokens that have not yet entered circulation, which may lead to greater selling pressure.
MV/TVL, P/S, and P/E are often used to measure whether the market value/price of DeFi protocols is overvalued and whether there is a large upward potential. The first two indicators are calculated by dividing MV (or FDV) by TVL and revenue respectively, and the calculation method of P/E is by dividing FDV by agreement revenue. When these three indicators are low, it may mean that the MV is undervalued.
Various indicator data of some DeFi protocols, source: Token Terminal
In addition, the innovation and team of the DeFi protocol itself are also very important factors.Innovation is mainly measured by the track (problem to be solved), positioning, and solution (feasibility, simplicity, innovation) that the protocol cuts into.
Curve is positioned to provide swap services for stablecoins and linked assets, the single-currency liquidity and multi-currency pools proposed by some DeFi protocols, and the synthetic asset trading model proposed by Synthetix (no counterparty is required, and the exchange price is calculated), etc. It is very good example of.
By evaluating the above dimensions and focusing on innovation, we can find some high-quality and even exciting DeFi protocols, and becoming a participant in these ecosystems may help us capture the dividends of DeFi development. Opportunities are also buried in potential tracks such as decentralized derivatives, as well as new public chains and Layer2 DeFi ecosystems.
Opportunities and Challenges
Recall, in real life, where do your assets mainly go? I believe that many people’s answers will be bank deposits, stock investments, crypto investments, real estate, and so on. If these activities are translated to the on-chain world, they are actually scenarios such as staking and DEX.
At present, the total locked value of DeFi is about $60 billion, which is still a baby compared to the $1 trillion market value of the crypto market. Although DeFi has experienced a summer, we believe that its market and potential are still huge.
At present, although the DeFi market has blossomed, there are obvious homogenization problems between DeFi protocols. This market needs more innovations, such as the research and integration of NFT AMMs, such as the development of the decentralized derivatives market. They may constitute the driving force for the second round of DeFi rise.
Note: This article is not intended as investment advice
“The first anniversary of the outbreak of liquidity farming, see how DeFi grows” by Pan Zhixiong
“Comprehensive Evaluation of Different DeFi Protocols with 12 Metrics” by Metaverse Way
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/10-big-data-indicators-perspective-50-defi-head-protocols/
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