- We expect value to flow to those revenue-generating DeFi protocols 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 transaction size and TVL on Optimism and Arbitrum, bringing in around $100,000 to $300,000 in daily revenue per protocol
- dYdX (DYDX) and Uniswap (UNI) will make strides in their token appreciation
- The announcements of crvUSD and GHO mark the potential beginning of a new narrative around protocol-specific stablecoins. Among other features, native stablecoins allow the protocol to generate additional revenue and drive the utility of its governance token. Curve is optimized to provide deep stablecoin liquidity, so it is likely to 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 dominance of Maker, to the DeFi summer led by Synthetix and Compound, to the false hopes of “DeFi 2.0” and “unstable” stablecoins, to now 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) indicator as users are attracted to unsustainably inflationary native token rewards. Users join projects to farm and dump their income. Once the reward slows or stops, users leave. A drop in the token price means that the promised APY becomes unfulfilled.
A project paid 14.7 times its original allocation in the first five months after launch, propelling TVL to an all-time high in 2021. TVL fled as token release rate dropped to double-digit annualized inflation. Monthly rewards fell 99% to $200,000 by the end of the second quarter from a high of $20 million per month.
Source: DeFi Llama, Coingecko. July 31, 2022
PMF can be better measured by what users are willing to pay for a service. Temporary rewards can help reduce customer acquisition costs, but the protocol requires users to stick around after the rewards end.
While few protocols currently bring 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 real fees through ETH staking and seigniorage. Uniswap, dYdX, Convex, Frax, Aave, GMX, Synthetix, Curve, and MakerDAO are all in the top 20 DeFI fees.
Growth stocks rarely, if ever, pay dividends. Early crypto protocols are equally likely to consider accumulating and reinvesting fee income similarly to grow their business. Total fees will continue to be a key metric as far as token holders are entitled to ultimately profit from the successful businesses they support, whether their income is paid out or reinvested.
We believe that the next bull market will be driven by tokens with current or future value appreciation. In this report, we present the latest news and bull case for protocols that we believe are critical to the future of DeFi. All protocols covered have proven Product Market Fit (PMF) and earn real fees from real users.
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 “permissioned listing” bridges that facilitate 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) gives users higher borrowing power within the same asset class, enabling borrowers to get the most out of their collateral
- The isolation mode enables Aave governance to isolate certain newly listed tokens and determine a maximum loan-to-value ratio, thereby limiting the protocol’s exposure to high-risk assets.
- Gas optimization feature reduces fees for 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:
Going forward, all eyes are on Aave’s recently proposed stablecoin: GHO. The vote to issue the GHO stablecoin was passed with overwhelming support on July 31. The stablecoin will allow Aave users to mint GHO with the collateral they provide that continues to earn interest. This could be a huge revenue opportunity for the Aave DAO, with 100% of the borrowing revenue going to the Aave treasury. The most common concerns on the Aave forums include the need for proper vetting of potential facilitators (i.e. those with GHO minting/burning privileges), the importance of a MakerDAO-like peg-stabilizing module (PSM), the controversy surrounding the DAO’s control of interest rates, The importance of supply caps to avoid risks with the Aave protocol and the risks involved in using Chainlink oracles to track GHO prices. The GHO smart contract is currently under audit, and a separate proposal will follow, outlining a strong starting state for GHO.
Maker has made great strides in its real-world asset strategy, deciding to allocate $500 million from the PSM to Treasury and corporate bonds, working with two key institutions:
- Societe Generale Refinances Tokenized Covered Bonds Worth $30M in DAI
- Huntingdon Valley Bank Secures Equivalent Lending Partnership of Up to $1 Billion DAI, Expected to Generate $30M Annual Protocol Revenue
This continues to form two camps to address their governance issues: the camp that achieves decentralization at all costs, and the camp that favors board-style governance structures for efficiency and growth. The Lending Oversight Core Unit governance vote had the highest participation rate of any decision-making in its history, with more than 293,911 MKR tokens, worth about $300 million, participating in the vote. A vote of 60%/38% rejected the implementation, suggesting support for a more decentralized governance structure.
Maker remains one of the leading protocols across DeFi, holding the most TVL of all DeFi protocols 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 usually corresponds to the expansion and contraction of 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 uptick in early July was due to PSM growth, $150 million in DAI has been minted from non-stablecoin collateral since July 27 as the market’s demand for leverage is slowly picking up.
Maker will also continue to prioritize RWA into H2 and the long-term vision for the protocol. They believe in creating a “Maker Standard” for adding real-world collateral to DeFi, which would give Maker a lead in RWA market share and create a playbook for other DeFi protocols to start adding themselves. Teej, a member of the Real World Finance Core Unit, believes that RWA could account for 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, which is currently 2% of total collateral and 2x surplus buffer. The increasing RWA, along with Maker’s flagship crypto lending product, provides a very reliable income stream.
Derivatives Trading Platform
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, and with the adoption of governance proposals, 15 more will be added. The rapid listing of the token pushes dYdX into a supported asset set that can compete with any perpetual futures exchange. Implemented new order types and higher maximum position sizes, giving large funds and traders the tools they need to migrate to dYdX. Transaction fees were reduced across the board, and were completely eliminated on August 1 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 full 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. The DYDX token will have a new value-added mechanism as a PoS token with transaction fees distributed to stakers. There are some obvious challenges ahead, but dYdX, fully positioned as the leader in the on-chain derivatives narrative, appears to be gaining momentum.
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 the second quarter 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 $300 million in TVL and continues to gain traction on Avalanche with less than $100 million in TVL. Some highlights from the last quarter include:
- Record influx of 7,273 new users on June 28, likely driven by Arbitrum Odyssey event (which has been delayed)
- Reached 63k unique users
- Has now generated over $50 million in transaction fees for LPs
- Historical trader P&L or partial LP income is now $36 million
- Average of about 1,000 DAUs compared to 150 last year
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 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 their pool functionality. In a standard AMM, pool creators have few customization options. The GMX team believes that they can outperform existing AMMs in this area and gain significant market share. Some interesting features include dynamic fees for pools, custom price curves that allow traders to access various tokens, pools with yield tokens, or aggregate trades via other AMMs such as Uniswap V3. GMX’s plans are ambitious, they want to build an AMM that will be a platform for other projects to leverage and even build upon.
Q2 saw the rise of atomic swap on Synthetix, allowing instant execution and no slippage for transactions involving synths. Atomic swap has a daily trading volume of up to $350 million at a better price than direct pair trading. Atomic swap remains Synthetix’s main source of revenue as the third quarter begins.
While 1 inch has been the main source of demand for atomic swap, they still miss 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 its router, 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 also used for Optimism. We expect atomic swap to continue to be widely used for routing order execution in the third quarter.
The Synthetix ecosystem has also seen huge growth in Optimism, mainly thanks to Kwenta’s perpetual futures daily trading volume of over $80 million. Perpetual trading on Kwenta will be upgraded to V2, with significantly lower fees and more markets in the second half of the 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.
Since our most recent research report, Synthetix has made several key advances in the vision and implementation of the upgrade. Synthetix intends to launch “Liquidity-as-a-Service”, allowing anyone creating new derivatives to add liquidity as quickly as possible by connecting directly to synth, leveraging existing routing and deep liquidity. This also includes a new proposal that would enable the protocol to take ETH delta neutral positions to allow the supply of sUSD and other synths to expand to fully meet demand. Voting escrow for SNX will result in higher token inflation and fee income for those who lock up SNX for longer. There are also some more significant V3-related SIPs that are more technical in nature, which may indicate that V3 is very close to code auditing and release.
Frax has further integrated into the Curve ecosystem with several new mechanics and introduced some upcoming products 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 to Lock CRV: Curve passed a proposal to allow Frax to vote to lock its CRV tokens for veCRV, giving Frax greater governance over Curve.
- Fraxswap: Frax has launched a new DEX that enables users to time-weighted purchases of various assets over a period of time to reduce price impact. This primitive may be useful for protocols seeking to manage their treasury.
- $20M in 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 matching 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 in fraxETH will benefit veFXS holders in some way.
In the second half of the year, Frax’s FXS token is likely to 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 Frax Base Pools, the supply of FRAX has increased by about $100 million. Currently, Frax’s vault contains $36.3 million in accrued profits. Fraxlend and Fraxswap open up the possibility of more revenue from the protocol, which will benefit FXS holders in the long term.
Fraxlend will mark a milestone for the protocol as a complete suite of decentralized banking services software including AMMs, lending platforms and stablecoins. The protocol plans to launch fraxETH collateral on day one, which will enable users to borrow FRAX against their pledged ETH collateral. Fraxswap has added two new liquidity pairs, FRAX/SYN and FRAX/OHM, which can bring more trading volume to AMM. Frax’s synergy with Curve and Convex offers attractive benefits for players looking to gain exposure to its suite of products.
Curve and Convex
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 Curve and Convex’s TVL.
- The introduction of Frax Base Pools and the approval of FIP-95 deepens the connection between Frax, Curve and Convex. Based on the current cvxCRV price, Frax will stabilize the cvxCRV peg by exchanging up to 95% of the CRV reward for cvxCRV via the Curve pool, or depositing CRV directly into Convex.
- Convex unlocked a record 27.5 million vlCVX on June 30. While traders were heavily shorting CVX during the activity, most of the CVX relocked immediately and created a temporary short squeeze. Most notably, Terra Wallet re-locked its CVX, opening the door to a new Terra ecosystem stablecoin.
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 been released, so we can only speculate on its design and meaning.
Developers closely associated with the protocol say that LP tokens and CRV can serve as initial collateral for crvUSD. The specific asset backing a stablecoin is critical to its success, so Curve may whitelist accepted collateral through a process similar to how it introduced new metrics. 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 is mutually beneficial. Convex is also able to whitelist cvxCRV, and additional utilities will help strengthen cvxCRV/CRV hooks and increase the number of CRVs permanently locked in Convex. Convex still has a strong position of over $360 million in veCRV in its coffers if CRV must first be voted locked as veCRV in order to be eligible collateral. Convex can use its veCRV to mint crvUSD and start farming its own CRV. The CRV generated by the new revenue stream can be permanently locked as cvxCRV and paid to Convex LP and vlCVX lockers, 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 to be sustainable. The total amount of locked CRV has steadily increased to 41% throughout the year, and the current average locked time is 3.6 years. In addition, CRV releases decreased by 15.9% annually, with the next decrease occurring on August 14. Increased demand for locked CRV and reduced CRV supply creates the environment for a bullish CRV for the remainder of 2022.
The announcement of crvUSD and Aave’s GHO stablecoin marks the potential beginning of a new narrative around protocol-specific stablecoins. Among other features, native stablecoins allow the protocol to generate additional revenue and drive the utility of its governance token. 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 a 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 an increase in 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 underlying pool of stablecoin liquidity, further underpinning the flywheel.
Uniswap’s entry into NFT has just begun, and there will definitely be more news in the second half of the year. In June, Uniswap Labs acquired Genie, an NFT aggregation platform. This integration will enable Uniswap to facilitate trading of all digital assets, not just ERC20. Uniswap plans to integrate with sudoswap, allowing traders to provide immediate liquidity to their NFTs.
With two new deployments added in Q2, the 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 over $47 billion in the second quarter. Uniswap V3 has completed over $1 trillion in transaction volume since its launch. In 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 the sentiment of UNI holders regarding the implementation of fee switches was passed. While the specifics are yet to be determined, a trial may soon take place to take a percentage of V3 LP’s swap fees and re-transfer it to a vault controlled by the UNI DAO. This is big news for UNI’s appreciation. We’ll be releasing an in-depth look at the trial this week.
Sushi has been busy delivering new products. They deployed a cross-chain AMM bridged using Stargate, released 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, allowing users to trade with one click. Sushi introduced a limit order feature and passed a proposal to restructure the DAO organization to help combat micro-governance.
Sushi is looking for a new leader (“Chef”) and hiring for a number of positions. With a new chef and a better mechanism for paying contributors, Sushi is expected to bypass the leadership disputes they’ve seen in the past. Like Uniswap, Sushi has a lot of development in the NFT marketplace Shoyu, including rare tools, better UI, offers, sweeping features, gas efficiency, and social features.
Developers of active DeFi protocols continue to release code updates despite adverse market conditions. We’ve listed some of the market’s favorite protocols and their corresponding upside catalysts that could lead to positive results in the future. Currently, DeFi on Ethereum continues to dominate the space. For investors, looking for revenue-generating products and tokens with added value could be a good strategy for the rest of the year.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/defi-outlook-an-overview-of-the-second-quarter-progress-of-mainstream-defi-protocols/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.