AMMs take center stage

And Uniswap governance hits a snag

Check out the recording of my talk, “Reputation-based Governance: A Look into DXdao” from Liquidity 2020, which ends tomorrow.


Although Crypto Twitter often seems like the dog from the movie Up, it does enable a diverse set of arguments to surface, and the space is small enough where conversations are not yet siloed, leading to a robust public debate on the topic du jour.

Automated Market Makers (AMMs) were that topic last week, in large part due to the runaway success of Uniswap. Some challenge the very foundation of the efficiency of AMMs, while AMM true believers and focused on how to dethrone Uniswap. I’ve consolidated these into 3 trends/debates below.

AMMs are inefficient and can’t scale

Most of the CT discussion was kickstarted by this thread from FTX CEO Sam Bankman-Friedman, which concluded with, “The past is orderbooks. So, I think, is the future”. His criticisms of AMMs are largely two fold:

  1. Yield farming artificially inflates AMM TVL, volume and usability

  2. Impermanent loss is an intractable problem

Regarding #1, UNI rewards have helped in recent weeks, but Uniswap volume and TVL were growing exponentially before the launch of UNI. New projects listed on Uniswap because it was the quickest and cheapest way to create a liquid market for a new token.

Impermanent loss remains either an unsolved math problem or is in dire need of a rebrand. Paradigm’s Dan Robinson did the best job of dispelling the myth that LPs are getting taken advantage of by arb bots. “Volatility harvesting”, as he puts it, can be a profitable trading strategy.

Former HFTer turned DeFi zealout, Tarun Chitra provides the middle ground in this discussion. Although he agrees with many AMM critics, he concedes that “the demand for passive investing vehicles runs much deeper than those who want rational asset prices are willing to believe”.

Most of the recent AMM criticisms are from traders. They fail to recognize that “AMM Liquidity Provider” is a brand new retail financial product. Much like the perennially underrated index funds, AMMs are more of a consumer product innovation (in simplicity) than a financial breakthrough (of complexity).

Some other great links on this topic:

Can impermanent loss be eliminated?

For those that have turned into true believers, next is the quest for the holy grail of AMM strategy: eliminate impermanent loss (IL).

Mooniswap and DODO are AMMs that use oracles to adjust the price curve to reduce impermanent loss. This cuts into arb profits, but arbitrageurs are key to overall AMM efficiency. Moreover, the oracle price updates will get front-run, as Synthetix learned.

There were two related announcements this week for a single-sided AMM with an elastic token supply. Bancor announced a major v2.1 upgrade, while Andre Cronje teased a “liquidity based inflationary token that can offset IL via liquid governance”.

The Bancor update is already on mainnet and will be the first test of insurance for impermanent loss. The appeal for the LP is to be able to provide liquidity in a single asset, rather than token pairs.

Given the success of AMMs in 2020, it’s surprising that we don’t know more about their efficiency. Much of the discussion is theoretical. More time (and data) will change that. Paradigm’s Charlie Noyes posits three “Open Problems” for AMMs:

  1. What is the expected return of a Uniswap LP?

  2. What is the optimal fee to maximize LP wealth?

  3. Can a Uniswap LP’s optimal growth rate exceed a buy-and-hold portfolio’s?

All this without getting into Balancer and Curve, who have already found product-market-fit in the LP market. Order books may not be going away but AMMs are just getting started.

AMMs – how to diversify into more assets?

AMMs have begun to crack into CEX market share, but spot trading is only a fraction of overall trading volume. AMMs have proved viable for pricing fungible tokens because you can pool liquidity, but it’s not clear it works for assets that are hard to price, like options or any time-based derivative.

Opyn is an options platform that uses a Uniswap pool and handles liquidations separately, while Hegic just launched an options platform that writes puts/calls from a liquidity pool.

UMA, meanwhile, has tried to bootstrap liquidity for its yield dollar in a Balancer pool and provide an easy onramp for those that want to hedge future interest rates. While liquidity has flowed into the Balancer pools, it does not appear to be an efficient pricing mechanism.

Just today, Yield Protocol announced a beta launch on Ethereum mainnet. Rather than try and build liquidity on Uniswap or Balancer, Yield Protocol aims to introduce fixed-rate lending through an entirely new AMM that is optimized for maturing products.

Tweet of the Week: The value of Uniswap governance

This tweet from crypto lawyer Gabriel Shapiro was in response to the failure of the first Uniswap governance proposal to reach quorum. The proposal - led by ‘Univalent’ was to lower the quorum needed to pass votes, but it failed to reach quorum itself. Rekt has an excellent run down of the days leading up to the vote.

Chart of the week: BTC on Ethereum

Nothing new here to frequent readers. I think Bitcoin is still an untapped market for DeFi, but the growth is still something to marvel at. WBTC now has 0.5% of all BTC in its custody, primarily backing loans in MakerDAO or farming UNI. Completely unrelated, this chart is part of an awesome new data dashboard section on The Block. Check it out and let them know that all the cool kids use ‘DeFi’, not ‘Open Finance’.

Odds and Ends

  • Coindesk: DeFi audit firms swamped by ‘overwhelming demand’ Link

  • Forbes big write up on leading DeFi VC Paradigm Link

  • DXdao* is sponsoring gas fees on prediction market Omen Link

  • Nexus Mutual plans major upgrades to protocol Link

  • 0x Developer and Governance update October 2020 Link

  • Perpetual Protocol plans to launch on xDai Link

  • Gauntlet Finance launches risk scores for DeFi Link

  • Trading View announces support for Uniswap markets Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn. Super heavy Paradigm edition. AMM > CFMM, memes are not about accuracy

Dose of DeFi is written by Chris Powers. Opinions expressed are my own. I spend most of my time contributing to DXdao*. All content is for informational purposes and is not intended as investment advice.

DEX Rising

A competitive look into the last 6 months of decentralized exchanges

Note: I’m speaking at Liquidity 2020 this Sunday night 10pm ET on “Reputation-based Governance systems in DeFi”. Free to attend. Get ticket here.


In September, Uniswap overtook Coinbase with a staggering $15.4bn in monthly volume - a 100x increase since April. Uniswap has risen to the top of a crowded DEX field and now commands a healthy 60%+ marketshare.

Decentralized exchanges (DEXs) are no longer a fun experiment. Ethereum DEXs were responsible for $1.2bn of fees in the past 30 days, according to Token Terminal. New entrants are clamoring for a slice of the market; most offering higher throughput or more capital efficiency for liquidity providers.

The last 6 months offer insight into how the market will develop. Some observations below.

Uniswap and Curve emerge as industry leaders

Obviously, the biggest story is the runaway success of Uniswap. The launch of UNI helped, but Uniswap’s volume and liquidity were already growing. Curve, meanwhile, is the only other DEX that increased market share over the last 6 months. It already offers a product that beats most centralized options and competes favorably with Uniswap because it utilizes an algorithm specialized for stable assets.

The decline of order-book DEXs

Traditional order-book DEXs worked as a proof of concept on Ethereum 1.0, but it’s not clear they are competitive. dYdX, Maker’s Oasis, IDEX and 0x all saw significant market declines as traders preferred the ease of AMMs. L2 Scaling solutions should address speed, tx cost and privacy concerns. dYdX launched a BTC-USDC perpetual contract with 10x leverage, but it hasn’t caught on and users seem to prefer an unbundled margin trading experience. It has partnered with Starkware on Layer 2, while IDEX plans to roll out IDEX 2.0 next week.

0x struggled for most of the summer but has rebounded over the last month, posting a 7% market share over the last week, thanks to the success of its aggregator Matcha and Tokenlon, a relayer integrated with imToken. It’s not clear what’s in store for Oasis.

Kyber and Bancor fall because of high gas costs

Kyber and Bancor were precursors to Uniswap and pioneered the on-chain liquidity model. Their architectures are not fine-tuned for a 100 GWEI world and have lost out to Uniswap. Both projects are looking to turn things around. Kyber founder Loi Luu explained their approach in a blog post last week, focusing on lower gas costs and targeting professional market makers. Bancor, meanwhile, unveiled an ambitious overhaul today. Bancor v2.1 features “single-sided exposure & impermanent loss protection to AMM pools via elastic BNT supply.”

Balancer and Synthetix face identity crises

SNX, Synthetix’s token, has had a very good 6 months - up over 600%, but that has not been because of more volume on the Synthetix Exchange. Is Synthetix a decentralized exchange or a synthetic issuance platform? Balancer’s launch and liquidity mining campaign drove deposits and trade volume followed. Over the last 6 weeks, however, volume has plummeted. Balancer pools are more appealing to liquidity providers of volatile assets because of higher fees and flexible asset ratios, but it does not have consistent retail flow. It’s a secondary liquidity layer to Uniswap that arb bots can access when the price on Uniswap strays far enough to justify the higher trade fees. Both Balancer and Synthetix need to figure out how to attract more flow.

New entrants to the DEX game

Sushiswap and Swerve are forks of Uniswap and Curve that launched with a token to reward liquidity providers. Initially, this was translated into strong trade volume, but volume numbers have come back down to earth, particularly for Swerve. The token incentives are clearly a sugar high, but it’s not a bad way into a market.

DODO is DeFi’s latest darling, lining up a slew of heavy hitters in their token offering. It claims to be a '“proactive market maker” and promises to minimize impermanent loss by using an oracle to adjust the pricing curve. DODO was able to quickly realize significant volume with $325m+ traded over the last month.

Sources for Charts: Dune Analytics DEX Metrics, DeBank, Dose of DeFi

Tweet of the Week: EVM - The Security Standard?

Former Bitcoin Core developer Jeff Garzik on how the heavy usage of the Ethereum Virtual Machine (EVM) gives EVM-compatible chains a security advantage over newer, but potentially faster, Layer 1 or Layer 2 chains. Solidity and the EVM have oft been described as “developer unfriendly” and new blockchains highlight WASM, C/C++ or Rust compatibility as a core feature to expand the developer market and capability of blockchain dapps. Garzik argues, “Investors routinely underestimate the value of iterative evolution - trial-and-error over time - sunk into software, tooling, auditing software libraries & the 1,000 other elements of a software ecosystem.” Most interestingly, we can begin to see this play out now as xDai has emerged as a scaling solution, in large part because it is EVM compatible.

Odds and Ends

  • DXdao* month in review Link

  • Curve vulnerability report Link

  • The rise and fall of Blue Kirby Link

  • Bank for International Settlements research on CBDCs Link

  • Aave raises $25m from Blockchain Capital, Blockchain.com, others Link

  • DeFi Pulse and Set Labs launch $INDEX to govern financial indices Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn. Lots of charts, but no chart of the week.

Dose of DeFi is written by Chris Powers. Opinions expressed are my own. I spend most of my time contributing to DXdao*. All content is for informational purposes and is not intended as investment advice.

DeFi after High Yields

And how on-chain treasuries could be the next big thing

More often than not, “high yield” is preceded by “unsustainable”, because by their very nature, high yields imply an investment risk that the high returns are supposed to compensate for.

In the case of DeFi’s farming craze, yields came from subsidies to lure new deposits, and yields were high because subsidies (or rewards) were front-loaded for early users and because the value of rewards increased from speculators buying the farmed tokens.

As the DeFi summer ends, there seems to be no fall harvest to follow. Enthusiasm has declined and yields have compressed. What’s next?

YFI is the poster child for the yield farming movement. Of course, it launched with no pre-mine, so all YFI in existence was farmed from the yearn.finance protocol. More importantly though, yearn is yield-optimization protocol for assets deposited in yearn’s ‘vaults’, which are managed by YFI holders.

Initially, the vaults just rebalanced stablecoins across lending protocols with the highest returns, but after the launch of COMP, deposited assets were able to earn more than just a simple yield. Soon, yearn’s vaults employed new strategies that harvested farmed assets and sold them to offer and passed this back in the form of a higher APY.

Yearn’s crop of choice was CRV, which launched in mid-August and was an easy source of yield for any crypto dollar deposit. The CRV launch was hotly anticipated but the launch also came with significant CRV inflation, leading to a sky-high valuation that has steadily declined as more and more farmed CRV hits the market.

A high CRV price = high yields for yearn’s vaults = high YFI price, but this did not last.

(Excellent thread on YFI by Spartan Group’sJason Choi)

It’s no surprise that CRV has tanked with constant sell pressure from yearn, meaning Dogetoshi’s prayers went unanswered:

Yearn proponents would argue that these specific strategies have lost their shelf-life. YFI does not stand for Yield Farming Index, but then, what is the innovation?

Programmatic, on-chain liquidity pools

Originally, Andre built yearn “for himself” to optimize between lending protocols, but he quickly realized that gas costs would eat up small differences in yield. A larger pool of capital would reduce transaction costs. In short, capital efficiency scales with size.

At its core, YFI is a protocol for directing on-chain capital pools. Anyone can deposit an asset into a vault, which executes a transparent on-chain investment strategy.

This is a genuine innovation. Set Protocol is arguably the first project to offer automated investment strategies, but Yearn’s strategies have been more complex, focused on a single asset and allow for easy redemptions (with a fee).

CRV mining rewards will dwindle, but that shouldn’t materially affect YFI’s ability to attract capital and redirect it on-chain to money-making opportunities. YFI holders just need to build and create the most profitable strategies – and keep pumping the marketing machine.

Stickier Assets

YFI vaults benefit from shared gas costs but since the strategies are on-chain, it is highly forkable. YFI’s moat – outside of Andrew - comes from its ability to attract capital in large amounts; depositors benefit from increasing returns to larger pools of capital.

Presumably, it would be easier if a protocol had funds of its own to invest, rather than relying on external investors.

Yam Finance is hoping to do precisely this. The food coin was known for its rapid rise and fall, which was attributed to the innovative launch strategy and the governance module’s failure, but Yam’s real innovation comes from its on-chain treasury.

Yam is a rebasing currency (like Ampleforth) and on a positive rebase, meaning the price of Yam is above its target, 10% of the excess YAM is used to purchase yUSD and then deposited in the Yam treasury.

Yam’s treasury has already grown to just under $3m in the two weeks since Yam v3 replanting and the first rebase. At the moment, this is meant to provide a floor to the price of Yam, beause Yam governance could vote to liquidate the treasury and return to Yam holders.

Yam intends to be very active with the treasury. Yam founder Trent Elmore laid out in a forum post:

  • Yield-bearing strategies. Currently the treasury employs a yield bearing strategy by utilizing yUSD. This allows for sustainable growth with limited downside, as it’s based in stablecoins. In the future, we could employ additional yield bearing strategies, utilizing aggregators or base protocols.

  • Strategic Investments. While stablecoin yield generation is great for sustainability and downside protection, in the event of a DeFi boom it is likely going to underperform many protocol’s native assets. Allocating a portion of the treasury to a DeFi index (potentially the new DeFi Pulse Tokenset Index) could be an effective way to ensure the treasury grows with DeFi.

  • Financial Protocols. This has always been the most exciting direction for the Yam treasury to me. Building financial protocols that Yam can help enable and seed liquidity to is probably the most impactful direction it can take, but also the most difficult and resource intensive.

Mutual funds might be a more accurate way to describe Yearn vaults, whereas Yam’s approach is more akin to a hedge fund – give us money and we’ll decide something to do with it.

Yam has just begun a more active treasury management. There is currently a proposal to buy $250k worth of DeFi Pulse Index Tokenset and a forum discussion on deploying the treasury to farm UNI.

Note: DXdao is working on something similar for its on-chain treasury. If you have any ideas, get in touch.

Chart of the Week: Maker’s Diversification

One chart from a long post from Token Terminal on MakerDAO. Of course, revenue dropped to 0 after Black Thursday, when Maker slashed stability fees to 0. Fees have started to inch back up, and Maker is diversifying its fee source. Most fees come from USDC vaults, which now backs more Dai than ETH ($356m vs $345m). The bright spot is WBTC, which was added to the platform in the spring. It has a higher stability fee (4%) compared to ETH and now backs $74m Dai. Although its TVL as grown to nearly $2bn, Dai has struggled to maintain its peg and many felt that Maker missed the opportunity of the DeFi summer. Messari has another piece on Maker’s climb to $2bn.

Tweet of the Week: MEV is coming

More great MEV content. I just love that meme. In all seriousness, Layer 2 scaling solutions have been a hot topic lately (and last week’s Dose). In a way, MEV is extracted to the external validators securing the Layer 2, but that presents its own problems of rent-extraction. The thread goes into all the ways miners can benefit. Most worryingly, it appears miners are not extracting MEV because they don’t know about it. Also check out Vitalik’s post, “A rollup-centric Ethereum roadmap”.

Odds and Ends

  • Metamask exceeds 1 million monthly active users Link

  • Galaxy Digital becomes a shareholder in ParaFi to co-invest in DeFi Link

  • DeFi Alliance - What Bitmex Means for DeFi (Wed 11am ET) Link

  • ZeroSwap: an AMM model Layer-2 Dex based on zk-Rollup Link

  • Top 93 markets on Uniswap surpassed Coinbase in 24 hr volume Link

  • DeFi tokens and ETH shrink their summer highs Link

  • Curve competitor Shell Protocol launches first stablecoin pool Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn. Congrats to Sam.

Dose of DeFi is written by Chris Powers. Opinions expressed are my own. I spend most of my time contributing to DXdao. All content is for informational purposes and is not intended as investment advice.

DeFi on Layer 2

Low gas activities and crypto dollars by CEX/DEX volume

Gas costs remain the most popular water cooler talk for the DeFi enthusiast. It’s easy to connect to a fellow farmer by commiserating over 300 gwei prices or discussing gas prices by time of day.

Gas prices will be high as long as there is significant economic value to be captured by transacting on Ethereum, and it’s hard to imagine any short-term scenario where Ethereum block space doesn’t remain valuable.

Frustration with high gas prices has been a boon to Ethereum’s scaling efforts, and while ETH2.0 may be “around the corner”, almost every DeFi project is exploring some scaling solution at this point. The Layer 2/sidechain landscape is wide open; each solution comes with a set of tradeoffs around security, EVM compatibility and speed.

Composability is DeFi’s favorite buzz word but it only exists in base-layer Ethereum, where a single transaction can call several contracts simultaneously. Developers will need to find a way to limit this disruption to the end user, but the need to scale is paramount.

Scaling DEXs

Trades are not the most expensive transactions on Ethereum but they may be the most frequent. Market makers must submit and cancel orders as prices change, which is costly on Ethereum. The first generation of DEXs (0x, IDEX, dYdX) tried to solve this by off-chain order submission and cancellation.

Given their scalability needs, DEXs are much further than other DeFi apps in the move to Layer 2. In January, I examined the scaling solutions for IDEX (Optimized Optimistic Rollup), Loopring (ZK Rollup) and 0x/Diversifi (ZK STARKS). The post (mostly) holds up and gives a (somewhat) easy-to-understand technical explanation of each of the options. Have a read.

In general, orderbook DEXs have unique needs compared to the rest of DeFi. Composability is not terribly important and design is optimized for high-frequency traders. Orderbook DEXes could even have their own roll up. There are withdrawal costs and time delays coming in and out of L2, but the experience will hopefully be better than centralized exchanges.

Loopring is the most viable option right now ($19m locked up), because it comes with the security properties of Ethereum. The challenge for it and other DEX rollups is how to encourage other complimentary economic behavior in the rollup.

xDai: So hot right now

xDai has been around since 2018 and could perhaps more accurately be described as a sidechain, because it relies on a limited validator set for security. Its STAKE token is used to secure the network through a Proof of Autonomy consensus, which is like Proof of Authority but for DAOs. Getting assets from Ethereum onto xDai requires a trusted bridge. If a bridge is compromised, any assets that passed through could be stolen.

While it lacks strong security properties, it does have two key advantages:

  1. Fully EVM Compatible - Any existing contract can be deployed to the xDai chain with little to no code changes. For teams struggling with gas prices now, xDai is the quickest way to relief.

  2. Metamask Integration - blockchain wallets are a tough business, especially true for Web3 wallets that need a native browser integration. I’d guess (with no evidence) that 90% of DeFi users at least have a Metmask Browser plugin.

Ameen Soleimani has a longer post espousing the benefits of xDai. He and the MetaCartel gang are big supporters. Gnosis announced a big partnership last week with xDai and there is a long list of projects planning to launch on xDai.

So far, xDai has $2.6m locked.

Optimism

The big news in Layer 2 land last week was the Optimism Test Net announcement. Synthetix unveiled a L2 demo for its popular Mintr App the same day. Optimism is seen by many as the ultimate scaling solution, because it comes with Ethereum’s security properties and the Optimism Virtual Machine (OVM) is EVM-compatible. Optimism is also backed by some heavy hitters in the industry and friends with others.

Expectations were high, but the testnet shows there is still a ways to go:

Fraud proofs come from the OVM’s ZK Snark construction and is the core component of its security profile. This test net feels like the test before the test net and indicates that we’re at least 6 months away from any real liquidity on Optimistic Ethereum. Uniswap founder Hayden Adams is a fan, but is Uniswap v3’s schedule tied to Optimistic Ethereum’s?

Siloed Liquidity

Ethereum’s high gas prices have created a pressing market need for scalability, but the market to meet this need is surprisingly fragmented. Some options exist now, but they are limited in what they can do, while others offer the technical capabilities without the security properties, and new options are not yet ready for prime time. This means a DeFi landscape that is still anchored to Ethereum, but pushes expensive transactions to specialized L2/sidechain, which have composability within the rollup/sidechain, but cumbersome withdrawal and interaction with other scaling solutions.

There are likely other Ethereum L2 options to emerge and the ZK and rollup revolution may have just begun, but other base layer chains, most notably NEAR, Solana, Cosmos and Polkadot, could position themselves as akin to “Ethereum Sidechains”. They will need to focus on their bridge-to-Ethereum but splintering liquidity is a positive development for ETH killers.

The real question is how do these L2/sidechains interoperate? Of course, cross-shard communication eventually solves this, but in the mean time, their security properties will not be consistent for easy transfers. Will centralized companies facilitate easy transfers? Connext’s Spacefold is working on cross-chain interoperability for EVM compatible chains.


Tweet of the Week: Low(er) Gas

Hasu searching for fall cleaning suggestions or transactions that may be put off or delayed because of their high costs and lack of an immediate economic reward. I’m not sure if gas is “low”, but it does seem to come down a bit from the summer highs. Prices are around 100-150 gwei during peak usage and 60-90 gwei during off hours. Some suggestions to Hasu: layer 2 account creation (Loopring), buy gas token CHI and approve tokens to trade on Uniswap, Curve and other DEXs.

Chart of the Week: Cryptodollar DEX/CEX volume

https://cdn.substack.com/image/fetch/f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F5fc181e6-e0f6-4cb6-a8cf-83ee4c423921_1211x753.png

Crypto dollar (not stablecoin) volume broken down by decentralized/centralized exchanges from a Dapp Radar post on stablecoins in the DeFiant. I suspect the CEX numbers are all inflated from inaccurate CEX self-reporting and wash trading, so squint and add a bit more pink for each pie. There are still some takeaways: USDT’s recent surge into DeFi is just pennies compared to its centralized liquidity. USDC has a sizable chunk in DEX land; it did $35m on Curve and $27m on Uniswap in the past 24hrs. Dai, meanwhile, has more liquidity at centralized exchanges than you might expect. It typically trades $3m + on Binance and ~$2m on Coinbase plus some other centralized exchanges. Dai CEX volume has increased, but DeFi volume has just grown faster. Curve and Uniswap each trade $20m+ of Dai a day.

Odds and Ends

  • Synthetix retires dashboard, unveils new Synthetix Stats Link

  • Blocknative launches an Ethereum mempool explorer Link

  • DXdao* introduces Rails, an L2 payment app built on Loopring Link

  • Aave announces governance on mainnet, LEND migration to AAVE Link

  • Uniswap passes $2bn in TVL Link

  • Gauntlet announces automated governance platform for DeFi Link

  • tBTC relaunches on mainnet Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn. No Kucoin or $EMN and I’m not cool enough to write about NFTs (yet).

Dose of DeFi is written by Chris Powers. Opinions expressed are my own. I spend most of my time contributing to DXdao*. All content is for informational purposes and is not intended as investment advice.

UNI and the Summer of DeFi

Plus community piggybacking becomes a thing

In the US, Memorial Day is the unofficial start of summer and Labor Day the unofficial end. According to the sun and the earth’s tilt, however, summer starts on the solstice on June 20 and ends tomorrow on September 22.

There should be no confusion for the DeFi Summer of 2020; it kicked off with the launch of COMP on June 15 and ended with the surprise launch of UNI, a governance token for Uniswap, last Wednesday.

It has been a dizzying summer. To recap, the last three months has seen the launch of COMP, BAL, bZrx, MTA, YFI, CRV, YAM and of course, YFII, Swerve, Sushi – all with liquidity mining campaigns.

Broadly speaking, there are three ways to look at these launch strategies:

  • Platform usage incentives

  • Whether it is an existing product, fork or community piggyback

  • Importance of Governance distribution.

DeFi Summer 2020

Platform Usage Incentives

At its core, yield farming is a way to distribute tokens to encourage more usage of a product or platform. Synthetix was the first to offer token rewards for on-chain activity. It gave SNX to any address that supplied liquidity to the sETH/ETH Uniswap pool.

Compound took this model but distributed tokens based protocol usage, while simultaneously launching COMP. It has adjusted its liquidity mining parameters several time, and still provides a consistent subsidy for borrowing/lending.

Balancer had a similar concept but BAL rewards starting accruing several weeks before the launch of BAL (just as things started to heat up). Balancer has just under $500m deposited in its pools. Its liquidity mining campaign distributed rewards based on trade fees and Balancer’s flexibility is farmer friendly.

Curve was closer to Compound in that it had an existing protocol with assets, but unlike Compound, CRV was given retroactively to liquidity providers since the launch of Curve. This made LPs happy, but Curve has run into other problems.

Curve may have hoped to get the reception that Uniswap received when it retroactively rewarded early Uniswap users with free UNI. Anyone that interacted with the protocol – including addresses with only failed transactions – received 400 UNI and liquidity providers going back to v1 were rewarded commensurate with liquidity supplied. This dividend created good will in the community.

Uniswap’s usage incentives are unique in two ways. 1. Reward traders, rather just liquidity providers 2. Their incentivized pools are targeted and strategic to Uniswap’s future.

Forks and Community Piggybacks

COMP, BAL, UNI, YFI and CRV were distributed to liquidity providers because deposits enhanced the capability of the underlying platforms they govern. Many other launches, meanwhile, distributed new tokens to those who just staked tokens. These are not used for borrowing/lending of exchanging assets, but simply a proof-of-asset to a new community trying to get off the ground.

Essentially, a new project piggybacks off of another community by offering free money for staking its token.

YAM is perhaps the best example of piggybacking (yes, I’m going to make it stick). YAM was a surprise launch, a modified version of rebasing currency AMPL along with community governance (a fork of Compound). Bolted on top this was a token distribution scheme that used the Synthetix staking contracts. Anyone who staked one of 8 tokens would receive YAMs in 1000% APYs.

It was a fun game, particularly for the communities of the 8 tokens it selected. Free money will make enthusiastic supporters out of these communities. This boost gives the project momentum and broader positioning in the Twittersphere.

SushiSwap actually started as a fork of YAM. Instead of staking regular tokens, SushiSwap got users to stake Uniswap LP tokens in order to farm the newly launched SUSHI. Initially, the “hundreds of millions of dollars of assets locked up in SushiSwap” were only staked to farm SUHI, with the underlying tokens still in Uniswap.

Then, of course, Chef Nomi, SBF and company actually forked Uniswap and migrated over a good chunk of the liquidity and are now paying SUSHI rewards to SushiSwap LPs. In just a month since launch, SushiSwap has $240k in 24 hr on-chain fees, ahead of Compound and Balancer and only behind Uniswap, according to Token Terminal.

CREAM and YFII (now DFI.Money) were also successful forks of Compound and YFI respectively. Cream has been more aggressive about listing assets while DFI.Money is concentrated on the Chinese community. Total market cap of forks from the DeFi Summer: $332m.

Governance importance

All of these tokens have been launched under the “governance” banner, which is either a clever legal trick or due to the rise of decentralized coordination around an on-chain treasury or smart contract admin, but there were varying degrees to as how important governance was to their distribution strategy.

YFI has the highest circulating market cap of any token launch in the DeFi Summer, in part because all the YFI ever to exist has been distributed, whereas there are still years of reward distributions and investor/team lockups for other protocols. To borrow from a prior Dose:

More important than the subsidy for Yearn.finance products, YFI yield farming subsidized the creation of a governance community. Many of the most eager DeFi farmers participated early, instantly creating a small army of token holders financial invested in the long-term success of the platform and willing to shill the project endlessly on Twitter.

The lack of a sale or pre-mine for YFI underscores point #3 above: token distribution is the most important thing for a token launch. Typically, this was done to the team, investors and then in a crowd sale or ICO to disseminate widely, but moving forward, projects should use token launches to pick their token holders, because they will ultimately determine a project’s governance and long-term success.

YFI governance was selected entirely during its distribution. COMP and BZRX come with governance rights, but the development path and primary stakeholders did not change during the token launch. These projects did succeed in moving governance of their protocol to token holders on-chain.

Other projects, most notably Uniswap and Balancer, have limited governance capabilities. Their primary role is the management of the liquidity mining campaigns and could be closer to loyalty tokens. Of course, this is kind of by design. Both protocols have no upgradeability.

UNI token holders can turn on the protocol fee, but that’s it. It’s no secret that the Uniswap team is working on a V3. It’s not clear what role UNI token holders will have in V3 or their role in migrating liquidity.

As this DeFi summer draws to an end, will this be the Eternal September?

Tweet of the Week: Money Lego Yield Farm

Interesting proposal from Staked’s Cole Kennelly about adding the WETH-WBTC and WETH-USDT to MakerDAO as collateral. Maker had previously considered the DAI-ETH pair as collateral but as so far not added any LP tokens. Of course, WBTC and ETH are already accepted collateral, so the risk would hinge on the liquidation capability. It could open up a significant new market for collateral for Maker in its quest to meet increased demand for Dai.

Chart of the Week: UNI volume

A mashup of the CoinGecko UNI page, which shows a staggering $1bn in 24hr trading volume for UNI. This may be a little inflated but not by much. The volumes on Binance and elsewhere show how far DeFi needs to go to tap into the larger institutional market. Regardless, it’s impressive for UNI to reach these volumes less than a week after its launch.

Odds and Ends:

  • DEXs rake in the retail volume while institutions stay on the sidelines Link

  • Yield farming aggregator APY.Finance raises $3.6M in seed funding Link

  • NFT market heats up Link

  • Gnosis partners with xDai, plans Layer 2 migration Link

  • DEX aggregator Paradex raises $2.7m in seed funding Link

  • Algorithmic credit risk & lending protocol Teller announces launch Link

Thoughts and Prognostications:

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn at the equinox. I need a haircut.

Dose of DeFi is written by Chris Powers. Opinions expressed are my own. I spend most of my time contributing to DXdao. All content is for informational purposes and is not intended as investment advice.

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