Small and medium-sized lending platforms
Lending has led total liquidity in “blue chip” DeFi programs for some time, with Aave and Compound still dominating the space. In less than 24 months, the total value of their collateral has increased from $100 million to more than $15 billion. This was driven by a tried and true multi-asset over-collateralization formula, with stable bitcoin liquidity spearheading the adoption among borrowers.
A few months ago, driven in part by liquidity mining incentives, Aave surpassed Compound in total deposits and added additional collateral options, stabilized rates, and other features. As of June, Aave overtook in total loans and now dominates in deposits and loans outstanding.
We can attribute Aave’s success in part to their strong willingness to innovate, and their combination of incentives with users. It is difficult to experiment with tried and true protocols.
It’s hard for a marketplace the size of Aave or Compound to experiment with brand new ideas that could put $10 billion in collateral at risk. Instead, we can look to nascent programs and optimistic communities for new perspectives on innovation in the lending market for DeFi participants.
In this article, we will explore five nascent projects, all with market capitalizations of less than $300 million, that have been in existence for less than 10 months, and some for as little as three months. We will present :
Innovation/Experimentation – how they differ from Aave and Compound
Emerging loan projects with higher risk, and more liquidity mining opportunities
Alchemix’s self-repaying loans
Alchemix has received a lot of attention for its unique future income scenario. DAI can be deposited as collateral, from which users can borrow alUSD. depositors can borrow up to 50% of their collateral in the form of alUSD. Their debt is automatically repaid by the proceeds of Yearn Finance.
Deposited DAI is sent to the Yearn Finance yvDAI vault to earn income. Instead of paying interest on their loans, the debt is automatically repaid through the proceeds generated by the DAI deposited with Yearn. In addition, the proceeds of the “transmuter” enhance the return, which is a mechanism to support the agreement and serves as the main mechanism for the synthetic tokens linked to the agreement.
It is important to note that in this setup, user collateral cannot be liquidated by external forces, as user debt only decreases over time, and the protocol also receives proceeds from the Yearn yvDAI vault. The obvious risk here is that if Yearn yvDAI’s yield tends to 0%, then the loan will, in theory, never be repaid. If the interest rate is not high, the user can still repay the debt manually.
Alchemix currently has over 260 million DAI from Alchemix deposits deposited into Yearn Finance, with 150 million alUSD in converters that convert to DAI and add rewards through additional Yearn deposits. additional TVL in the Alchemix ecosystem exists in liquidity incentives and in the unilateral reward mechanism.
alUSD can be used just like any other stablecoin in the DeFi ecosystem. It is typically used in the alUSD pool on Curve + Convex or in the unilateral alUSD “farm” on Alchemix. Note that this unilateral “farm” will be eliminated. alUSD pools on Curve have incentives to encourage more liquidity to trade alUSD to other stablecoin pairs.
In addition, to incentivize liquidity in the ETH/ALCX pair, a “farm” has been created to trade governance tokens on Sushiswap.
The current revenue per “farm” is as follows: alUSD3CRV pool: 30% APRETH/ALCX pool: 170% APR (note that this is a pool 2 farm, meaning that the “farmer” needs ALCX, the native governance) tokens; this pool has a high risk of temporary losses if the price of ETH and ALCX deviate.) Unilateral ALCX pool: 140% APR Unilateral alUSD pool: 30% APR (soon to be discontinued)
The ETH/ALCX pool will be migrated to the new Sushiswap Masterchefv2 contract in the coming days. This new contract from the Sushiswap team makes multi-reward liquidity incentives possible. This means that in the case of Alchemix, the pool now rewards equity holders in the governance token ALCX and Sushiswap’s SUSHI token.
As Alchemix matures, there is room to explore many more experimental features and protocol advancements. Upcoming feature releases include alETH and alBTC, adding more forms of collateral to the protocol. The additional collateral is attractive to users who prefer to hold these assets over stablecoins. Risk collateral has proven to be successful in Aave and Compound. In Compound, ETH is the largest source of collateral, while in Aave, ETH ranks second. Once ETH deposits are allowed, Alchemix’s collateral could spike. Additional synthetic assets are additionally attractive to token holders looking to access various sources of borrowing through Alchemix.
Cream Finance Loans and Iron Bank Mortgages
Cream is the oldest protocol on our list, launching in August of last year. The protocol has slowly found its place in the ecosystem, partnering with Yearn as the preferred lending protocol for the Yearn ecosystem. Due to the maturity of Aave and Compound, normal lending practices find their best possible rates and maximum liquidity in these markets. cream’s wide range of assets makes it the third most common option used by niche borrowers when necessary.
Cream currently supports 78 assets of varying sizes and volatility, but its market size is significantly smaller than its competitors. Large depositors can easily expand the size of their collateral pools to reduce loan APYs and, similarly, withdraw large amounts of funds, thereby driving up interest rates. The end result is that Cream’s rates are typically higher and more volatile than those of the larger loan market.
It is worth noting that Cream has a relatively small number of subscribers (about 9,000) in addition to the $1 billion TVL, but it is not alone in having such a small number of subscribers in the DeFi protocol. By comparison, Aave has only about 40,000 users (unique addresses) who have ever interacted with the protocol.
Data source: Dune Analytics
Cream’s biggest recent innovation is its focus on agreement-to-agreement lending, which can make an undue focus on the number of users less important. Instead, greater weight is given to both depositors and borrowers, both in terms of reputation and size. cream sets credit limits for zero-collateral borrowers on its address whitelist. These include trusted agreements such as Yearn and Alpha Finance. This is an important innovation because it allows agreements to borrow assets without wasting their own liquidity as collateral. As a result, Iron Bank products currently claim to have $770 million in collateral.
Savvy high-yield “farmers” can invest in many high-yield markets. Here are some sample APYs with healthy liquidity in Iron Bank and Cream Finance:
DAI, USDC: Iron Bank base APY of about 6% and CREAM of about 10%
wBTC: Iron Bank base APY is about 7% and CREAM is about 1.4%
Over time, agreements with features similar to Iron Bank’s zero-collateralized to under-collateralized lending model have been released. The idea of bundling credit with bank accounts (Teller), identity with social media accounts (not announced), and pure governance-driven voting (TrueFi) is being explored and implemented with some success.
Multi-Asset Loan Pooling in Rari Capital’s Fuse
Rari Capital has been gaining more and more traction lately due to the $15 million smart contract loophole it received as a result of a botched integration with Alpha Finance. $15 million in ETH was taken. As investors, we can make judgments about the quality of our reactions to market turmoil. Those protocols that respond effectively to market turmoil tend to increase the trust and unity of their communities. Those that fail to respond effectively tend to fail to recover from the pressures placed on their teams, and from protocols that lose trust. As for Rari’s response, the jury is still out.
Supply of Rari’s Fuse peaked at around $50 million in May, falling to $26 million in the subsequent market downturn. Since then, supply has rebounded to $37 million.
Despite the market turmoil, Rari Capital has shown resilience due to its experimentation and innovation. Their unique lending pool allows for the creation of any portfolio of assets. Unlike Aave and Compound, this actually creates a unique market structure where all collateral options interact with all borrowing options in segregated pools. In Fuse, these separate pools are set up as segregated assets. This allows for independent risk and reward, as opposed to Aave/Compound where any addition of assets in these creates risk for each lender/borrowing on the platform to a greater or lesser extent. By segregating the asset pools, the assets in each pool share risk only within that pool, separate from the rest of the platform.
The nascent size and high risk of these markets allow prudent mining “farmers” to increase their returns. The role of interest rates is the same as in Aave/Compound, where the utilization curve determines interest rates. While larger lenders may not currently find this attractive, “small farmers” whose positions have little impact on liquidity can profitably enter and exit these markets without impacting yields. Fortunately, these entries and exits only affect their individual pools.
It is not uncommon to see highly utilized niche assets in Fuse. Here are some sampling rates from Rari Capital’s largest Fuse pool (Pool 3) Liquidity is typically very thin and bounces around the loan pool, which is generally not appropriate for larger lenders.
ALCX: 25% supply rate APY
USDC: 23% supply rate APY
DAI: 12% availability APY
Non-interest bearing, collateralized valid loans on Liquity
Liquity builds heavily on the innovations of MakerDAO, which in turn makes unique and experimental changes. Similar to MakerDAO, Liquity manages stablecoin offerings backed by ETH, which they call “treasuries” and functions similarly to Maker’s CDP.
Some of the key changes from MakerDAO to Liquity:
Governance Token -> Zero Governance
Different collateral, depending on USDC -> ETH – as long as the collateral
Interest controlled issuance -> Redemption controlled issuance
MKR burns to company value -> unilateral LQTY pledge for rewards
Liquity enables interest-free lending and protects its stability by charging algorithmically priced one-time borrowing and redemption fees and liquidating treasury under 110% collateral. In contrast, MakerDAO uses interest rates to encourage/discourage borrowers. By charging Liquity borrowing and redemption fees, lenders and mortgagees are incentivized by this potential profit, and borrowers can calculate their fees up front without worrying about fluctuating interest rates. It is important to note how income increases when deposits and repayments increase. LUSD is paid at the time of borrowing and ETH is paid at the time of redemption.
Data source: Dune Analytics
Borrowers have opened up a “treasure trove” of CDPs similar to MakerDAO. During the recent market crash, the number of “treasure troves” dropped significantly due to liquidation events, but have since rebounded.
A minimum of 110% collateralized LUSD issued from the “treasury” can be deposited into the stabilization pool to earn approximately 36% APR in LQTY token rewards. lQTY can currently earn up to 134% APR by pledging LQTY.
Please note that the APR 134% LQTY pledge bonus rate is a highly variable 7-day rate. During high redemption periods, the reward may be very high, while during other periods, the reward may be much lower.
We note that high rewards are attractive in all of the mentioned scenarios, but the risk increases as well. Mining “farmers” holding new governance tokens from failed projects can expect those high rewards to become meaningless, while those with longevity are more likely to maintain their value.
In addition, as more tokens are minted, it will be easier to lower the token price over time due to the high inflation of the token supply. “Farmers” should do their best to find out if their returns are lagging, keeping up with or exceeding token inflation. If interest rates seem too good to be true, then two things are almost certainly true: a.) you found alpha early on, and b.) there is higher risk. For example, here is the issuance schedule for ALCX:
Data source: ALCX documentation
Release schedules vary by program. The current supply of ALCX is expanding by approximately 43% per month. If holders have an exposure to ALCX in their strategy, they may be aiming to outpace inflation. If they believe in the long term value of the governance token, then it may be less urgent for their strategy.Liquity supply follows a 32,000,000 * (1-0.5 ^ year) annual inflation schedule. This means that approximately 16 million LQTY are currently released annually. this 12 month inflation would be about 3.3 times the current circulating supply. rari’s governance tokens play a smaller role in the ecosystem. 12.5% of them are sent to the team and the rest to the protocol users within 60 days. Release schedules vary widely, and it is necessary to understand how any tokens you hold are revalued over time.
Depending on the user’s risk tolerance, their chosen strategy will be commensurate with the inflation of the token. The ideal situation is to keep risk to a minimum while doing your best to keep up with inflation. In addition, when the user wants enough buyers/holders to see some value support for holding the token. High inflation without sellers can create a strong market, and high inflation with high turnover leads to price charts with a negative slope. Token attributes such as agreed gains and other value accrual mechanisms for token holders can encourage the purchase of tokens and hold mining tokens for their past governance utility.
Liquidity mining typically involves rewards offered in the form of governance tokens whose value is often unrelated to anything else. Even those tokens for which the protocol revenue rewards the holder, the revenue is usually so small that the rewards are modest. The attrition of these tokens is usually severe and long term, as the “farmers” will mine and sell their rewards quickly. These tokens are purchased purely to sell, not to mine, which usually poses a significant dilution risk due to token inflation. We can see examples in DeFi of token inflation exceeding 100,000% per year. One should do their best to understand the inflation schedule and any other associated risks.
Over the past year, new lending protocols have been released and experimented with and innovated to varying degrees. They revitalize emerging markets with highly incentivized rewards, higher risk, offer ample space that can be accessed through a small user base and tight integration, and a highly engaged community. The larger the protocol and market size, the less likely it is to change. Some of the best returns typically come from communities that are actively engaged in fledgling projects, as well as understanding the quality of the team and community.
As token prices continue to fluctuate, we can see which projects are resilient over the long term. Great builders often ignore short-term token prices and continue to deliver on their commitment to development and community building in any case.
Layer2 season is just around the corner. Arbitrum released a developer beta this week, zkSync released a beta network, and we look forward to more news from the Optimism team in July. Projects from Sushiswap to USDC and a few others have announced they will be launching on Arbitrum soon.
Development funding platform Gitcoin airdropped its governance token GTC, and Ribbon Finance airdropped its governance token RBN. as many have pointed out, any crypto project that does not provide a clear revenue stream for the team and its investors is likely to eventually launch a token.
Alchemx will launch the first use case of Sushiswap’s new multi-incentive revenue contract MasterChefV2. The launch was initially planned for Tuesday, but was delayed by 24-48 hours for logistical reasons. Pledgers will receive both ALCX and SUSHI as incentives. This marks a new era for Sushiswap’s famous Onsen rewards program.
Alchemist launches mistX, a gas-free trading platform. mistX uses flashbots to eliminate the hassle of setting a gas price or paying for gas using ETH, instead of subtracting the cost of the bundle/bribe from the value of the transaction, and no fees are paid for failed transactions.
Pods has released their options trading demo product on Polygon. Options have so far struggled to gain traction in DeFi due to expensive products, jurisdictional restrictions and liquidity difficulties. pods is a highly anticipated options protocol released as a demo version on TVL with a $200,000 cap.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/defi-revealed-experimental-lending-platform/
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