Are We Experiencing DeFi Summer 2.0? | Weekly Digest
Welcome to another Crypto Weekly Digest brought to you by VirtualBacon. This week we will be taking a deep dive into the world of DeFi. For those who have been following the crypto market's evolutions, the term "DeFi summer" might evoke images of an epoch where the industry was abuzz with innovation, curiosity, and anticipation. During those days, DeFi was more than a buzzword; it was a revolution promising a financial ecosystem that is more open, accessible, and democratic.
However, in the face of shifting macroeconomic landscapes and increasing regulatory scrutiny, the once vibrant DeFi summer seems like a distant memory. Yet, in recent weeks, the DeFi sector has been showing signs of renewed vigor, sparking conversations around its comeback. Let’s explore why DeFi is regaining popularity and what the future holds for it.
DeFi Summer 2.0
As we look back at the vibrancy of DeFi summer, the focus now is shifting towards the maturation of DeFi protocols into a public good. The cornerstone of DeFi is its proposition as an accessible, neutral, and reliable financial infrastructure that can't be controlled by a single entity or group. This transformation, however, isn't immediate but involves a gradual shift in governance to foster community involvement.
While the "back-end of DeFi" solidifies its robust infrastructure, we're witnessing the dawn of a new wave of DeFi innovation on the "front-end." This nascent space, fueled by Layer-2 solutions and Zero-Knowledge Proofs, is poised to unveil promising use-cases like blockchain-based payments. Bridging the gap between conventional internet payment layers and web3 could lure an influx of mainstream users into the DeFi space.
Building front-end DeFi applications requires skilled designers, product-oriented developers, and visionary leaders, but the potential for real mainstream adoption is an opportunity too vast to ignore. It's an exhilarating time for DeFi, as it expands its horizon to encompass everyday consumer interactions.
Time to Get Bullish on DeFi?
A fresh surge of interest is sparking a revival in DeFi protocols, though their tokens' performance has been a mixed bag. Notable standouts in two-week performance include:
- COMP (+117%)
- Aave (+48.5%)
- ZRX (35.1%)
- MKR (33.6%)
DeFi’s Longevity Advantage
Despite their modest yields, DeFi protocols like Aave, Compound, Maker offer invaluable reliability, earned through surviving financial storms since their inception around 2018 or earlier. Despite encountering several challenges, these platforms effectively weathered both the 2020 Corona crash and the 2022 CeFi downturn. This endurance is reflected in today's top ten protocols by locked assets, eight of which launched before 2021, with four dating back before 2019. DeFi’s proven resilience is a significant reason for its staying power.
Endless Evolution and Forthcoming Enhancements
DeFi protocols have undergone substantial transformation since their birth, with the market only recently recognizing the scope of these enhancements.
Look at Aave and Compound, for example, both have successfully launched their third versions, each choosing distinct paths for their evolution. Aave v3 highlights capital efficiency through easy-Mode, while Compound V3 abandons a pooled-risk model for a single 'base asset' approach, utilizing other cryptocurrencies as collateral. Moreover,
Uniswap V4 is also almost ready to be released, which will bring another major upgrade to the world of DEXs.
Uniswap V4
During the 2018 bear market, the introduction of the automated market maker (AMM) model marked a groundbreaking shift in the DeFi landscape, making on-chain trades possible without intermediaries. Although Bancor was the pioneer in 2017, Uniswap emerged as the reigning AMM, solidifying AMMs' place in DeFi.
Today, Uniswap leads as the top DEX, boasting over $3.85 billion in TVL and nearly $6 billion in weekly trading volume. Uniswap have consistently innovated and enhanced their platform since their inception.
Most recently, Uniswap V4 brings forward "Hooks," contracts that operate at specific stages of a pool action's lifecycle.
https://blockworks.co/news/uniswap-v4-dex-hooks
Uniswap V4's "Hooks" offer dynamic pool adjustment and innovative trading capabilities, enhancing user experience and driving platform innovation.
The shift to a singleton contract substantially reduces costs, making Uniswap more accessible and efficient. Flash accounting lowers gas costs further, optimising transaction handling. Inclusion of native ETH simplifies trading, reducing conversion steps.
Uniswap V4's enhanced developer interfaces promise simpler token management and increased control over settings. These upgrades facilitate more efficient, flexible trading and lower barriers to entry, fostering a more inclusive Ethereum ecosystem.
For liquidity providers, potential earnings increase with dynamic fees, while the introduction of withdrawal fees discourages selling. Uniswap V4's innovations unlock new market strategies, attracting sophisticated traders and potentially boosting overall trading volume.
MakerDAO's Future: Fostering an Unbiased World Currency
Since 2014, MakerDAO has aimed to develop an impartial worldwide financial structure. They first introduced the Dai stablecoin, tied to the US Dollar, which later expanded to encompass various other assets. MakerDAO operates as a decentralized autonomous organization (DAO) on the Ethereum blockchain, facilitating participative governance.
The Dai stablecoin, powered by the Maker Protocol, is a USD-pegged cryptocurrency, providing stable value for trade and purchases devoid of traditional cryptocurrency volatility.
DAI is a collateral-backed digital currency, often supported by assets like ETH. Various methods exist for DAI collateralization, with smart contracts and fiat currencies as popular options.
In an ambitious move, Maker is prepared to let DAI's dollar peg float, slowly altering its price over time according to a Target Rate. The plan anticipates regulatory pressure on real-world asset collateral, favoring resilience over maintaining the USD peg.
DAI's versatility allows it to function as a stablecoin, collateral for loans on the Maker platform, a speculative asset, and a method of payment for goods and services. As part of the Endgame Plan, Maker aims to diversify collateral, including decentralized assets and real-world assets.
https://blockworks.co/news/makerdao-endgame-update
The DAO structure is reengineered to incorporate smaller subDAO units for streamlined governance. Moreover, Maker has initiated the Aave fork Spark protocol with Dai as its core. With DAI, holders can enjoy a 3.49% yield through the Dai Savings Rate (DSR), aligning with Maker's mission to transform Dai into an unbiased world currency.
https://thedefiant.io/makerdao-founder-proposes-dedicated-blockchain-and-new-dai-and-mkr-tokens
Other potential catalysts should be coming in the coming months, including:
- Redenomination of MKR at a ratio of 1,200-to-1 to make it more attractive for retail investors.
- Reorganize MakerDAO into a series of specialized subDAOs or “metaDAOs”, and allow new Maker token holders to farm subDAO tokens
- Launch a new governance token and a new stablecoin to be farmed and paired with MKR and DAI
- Launch on an Ethereum-secured Appchain
Liquid Staking (LSD) and its Influence in DeFi
Let’s turn our attention towards Liquid Staking and its ensuing derivatives. To simplify the concept, think of Proof-of-Stake (PoS) chains that employ staking as their consensus model. These chains urge the staking of more coins, thereby promising staking incentives for security enhancement.
Nonetheless, the staking rewards may not always suffice. To tackle this issue, liquid staking comes into play to amplify the capital efficiency of staking. For instance, when you stake a token, say XYZ, you receive staked ZYX in return, which can be manipulated as a conventional token across diverse protocols.
Liquid Staking Derivatives which are financial tools representing staked tokens within a DeFi protocol, emerged as a significant trend in 2023, especially with the Ethereum's Shapella upgrade.
LSDs have bridged the liquidity gap for stakers by allowing the use of their staked tokens in other DApps while they awaited the Shapella upgrade. The successful completion of Shapella unlocked staked ETH, enhancing staking's appeal and propelling the popularity of LSD protocols to new heights.
The expansion of Liquid Staking in the last year is one of the standout narratives in the DeFi landscape. A year prior, Liquid Staking Derivatives (LSDs) held $9.1b in total value locked (TVL) against DEXes' $32.0b. Fast-forward to the start of 2023, LSDs reported a TVL of $8.7b compared to DEXes' $14.8b.
However,as of today, LSDs command a TVL of $20.8b, surpassing the DEXes' $15.3b, thereby illustrating the escalating influence of Liquid Staking in the realm of DeFi.
That sums up the concept of Liquid Staking. Given the significant growth and adoption of this model, it's unsurprising that leading liquid staking platforms such as Rocket Pool and Lido Finance have ben strong performers.
Exploring LSDfi: An Overview of the Leading Protocols
Liquid Staking Derivative Finance, or LSDfi, denotes DeFi protocols utilizing Liquid Staking Derivatives like stETH or rETH.
LSDfi protocols typically use LSDs for:
- Collateralizing stablecoins
- Minting synthetic ETH
- Tokenizing LSD yields
- Optimizing LSD yields
- Upfront yield procurement by locking LSDs.
Now let’s have a look at the current leading LSDfi protocols.
Pendle
Pendle Finance separates the yield aspect from yield-bearing assets. The worth of these assets is divided into the base asset and the yield from that asset. Utilizing Pendle, you have the ability to invest in the core asset at a reduced price or opt to invest exclusively in the yield, which allows you to rake in an elevated APR.
Lybra Finance
Lybra Finance LSD functions as a stablecoin that carries interest, with backing from LSDs. You can deposit either ETH or stETH to create eUSD. Once minted, this eUSD begins to generate yield, even when just held in your wallet.
But how does this happen?
The ETH staking returns from depositors are exchanged for eUSD and then disseminated back to the holders of eUSD.
Origin Defi
Origin DeFi enhances the yield of liquid staked ETH. Users can deposit stETH, rETH, or frxETH to create OETH. This minted OETH begins to generate returns via a mix of providing liquidity, staking, and earning reward tokens.
Gravita Protocol
Gravita Protocol offers the ability to lend GRAI against your liquid staked ETH with a capped fee of 0.5% and no interest. Interestingly, Gravita still permits you to accumulate staking rewards on your pledged collateral.
Flashstake
Flashstake permits you to access ETH yield immediately by securing your ETH, rETH, or stETH for a maximum of 90 days. You can retrieve your initial deposit by refunding part of your upfront yield. Considering the significant volatility of crypto yields, this approach also enables you to guarantee a stable yield today.
New LSDFi platforms are sprouting up daily. To fully exploit this narrative, you need to conduct your own investigations.
The best way to do to this is to check DefiLlama's Token Usage page. It helps track protocols with substantial deposits of stETH, rETH, and other LSDs. Stay informed and capitalize on opportunities before they skyrocket.
Binance Launchpad Pushing New DeFi Projects
Binance Launchpad has historically been the industry trend setters when it comes to narratives. There are not many new projects launching on this platform, but when they do, they typically come in waves of similar projects within a trending narrative.
Examples of Binance Launchpad Projects in the last 4 years
2019 - Layer-1 BLockchain Narrative
2020: DeFi Summer Narrative
2021: Play-to-earn and Gaming Narrative
2023: New DeFi Narrative?
In the past 4 months, Binance has launched 3 DeFi projects on its launchpad.
Radiant Capital: Omnichain Lending protocol
Maverick: AMM DEX with high capital efficiency
Pendle: The leading LSD-fi protocol to trade Ethereum staking yield and gain higher rewards
Do not underestimate the power of Binance. They are the one true narrative setter in the Crypto industry. This trend gives me a lot of confidence to be looking into the DeFi sector right now.
Binance Research Highlighting LSDfi Sector
In past month, Binance Research has published 2 highlight pieces on Liquid Staking and LSDfi.
https://research.binance.com/en/analysis/data-insights-liquid-staking-and-lsdfi-heat-up
https://research.binance.com/en/analysis/data-insights-liquid-staking-and-lsdfi-heat-up
With liquid staking witnessing explosive growth in the DeFi scene lately, there's a massive, mostly untapped potential for LSD-focused financial products, and moves like these will only start to unravel the true potential of these products.
Despite some recent setbacks, it's evident that Binance remains on the hunt for novel opportunities and promising protocols to back. Currently, Liquid Staking and its related DeFi products tops their interest list, signaling promising prospects for those engaged in this field and the entire DeFi arena.
Wrapping It Up: A Definite Momentum in DeFi
As we draw this newsletter to a close, we must acknowledge the mounting anticipation surrounding the DeFi space. After a somewhat dormant period, the sector is undoubtedly regaining its excitement, pulsating with fresh developments each week. There's an exhilarating sense of vitality as we observe its constant evolution and the relentless innovation within its precincts. The momentum is indeed palpable, with protocols rich in untapped potential signaling a world of possibilities.
As we continue our journey, it's fascinating to speculate which path DeFi might tread next, and how its popularity may surge in the time to come. The enthusiasm is building, the stakes are high, and the potential for transformative change is immense. Stay tuned!
Weekly Bullets
Crypto Macro
🟠South Korea Passes Crypto Bill for User Protection.
🟠Nasdaq Refiles for Blackrock Spot Bitcoin ETF.
🟠Proposal for Hong Kong to Issue aHong Kong Dollar Stablecoin to Compete with USDT/USDC.
🟠Denmark's Financial Regulator DirectsSaxo Bank to Divest Its Crypto Assets
🟠Circle Considers Issuing Stablecoin in Japan.
🟠Circle Stealthily Introduces 'Wallet-as-a-Service' Developer Platform.
🟠Beijing Set to Debut NewDigital Yuan Application Scenarios.
Project Updates
🟠AzukiDao Governance Contract Exploited.
🟠PepesGamev1.5 Update.
🟠Binance to Halt Transfers of Multiple Tokens Associated with MultiChain after May Incident.
🟠MakerDao’sSpark Protocol going Multichain.
🟠Uniswap V4 Anticipated to Launch Post-Ethereum's Cancun Upgrade and Security Audit.
🟠Shiba Inu Layer 2Shibarium Goes Live in August.
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End
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