Stablecoin DEX wars & Defining DeFi 2.0

Plus Odds & Ends and Thoughts & Prognostications

Chart of the Week: Uniswap’s 0.01% fee grabs stablecoin marketshare

Dune chart crafted by Alex Kroeger (aka DeFiCorgi) to track the DEX marketshare of the trade volume for the biggest stablecoin pair (USDT-USDC), using 1inch’s flow as a proxy. The huge jump in marketshare for Uni v3 is due to do Uniswap governance voting in a 0.01% fee tier last week to specifically target stablecoins. A surprisingly strong result from Uniswap governance, which has struggled to reach quorum in the past.

MakerDAO, meanwhile, is trying to be the primary venue for stablecoin trades with DAI, offering 0% fees on swaps between USDC-DAI and USDP-DAI.

Ironically, DeFi is following CeFi’s lead; Coinbase lowered its stablecoin trading fees in June to 0% for maker volumes and 0.01% for take volumes. The rapid growth of stablecoins and the number of well-heeled players has made them the first market segment to see fees compress. It won’t be the last.

Tweet of the Week: What is DeFi 2.0?

Parsec founder with an interesting definition of what DeFi 2.0 is: any dapp or protocol who’s token outpaces its base chain currency. DeFi blue chips from the good ole’ days have lagged behind ETH price since the Spring with most of the CT’s mindshare and investor speculation going to a swath of new projects that build on top of the existing DeFi primitives. Bankless hosted a podcast last week with folks from the major DeFi 2.0 darlings (Tokemak, OlympusDAO, Rari, Tracer & Alchemix), which provides great context on the innovation (and added risk) in this next generation of DeFi protocols.

OlympusDAO may be the trendiest DeFi 2.0 project. Combined, the plethora of OlympusDAO forks almost have as large of a market cap as the original. To dive deeper, check out Dose of DeFi’s August article on OlympusDAO and OHM from Denis.

Odds & Ends

  • Augur plans to decentralize, using governance system built by DXdao* Link

  • Delphi Digital: 5 charts showing competitive dynamics in DeFi Link

  • Themis is a new fair ordering consensus protocol Link

  • The latest on crypto in the infrastructure bill that was signed into law Link

  • Maple Finance launches permissioned on-chain loan to Alameda Link

  • Maker Wormhole aims to make Dai easily transferrable across L2s Link

  • Fei and Rari teams propose token merger Link

Thoughts & prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn, which has been dripping with Autumn vibes the last week. Off next week for Thanksgiving.

Dose of DeFi is written by Chris Powers, with help from Denis Suslov and Financial Content Lab. I spend most of my time contributing to DXdao* and benefit financially from it and its products’ success. All content is for informational purposes and is not intended as investment advice.

The CRV governance wars, plus MEV comes for liquidity providers

Along with this week's Odds & Ends and Thoughts & Prognostications

Tweet of the Week: Emergencies, bribes and rugs

Tweet from Curve Finance early this morning that it was cutting off CRV rewards to a pool with USDM, a stablecoin from the project Mochi that is backed by NFTs and other long-tail assets. The allegations against Mochi have come from all corners (and former business partners), but the actions of the “emergency DAO” highlight how CRV governance has become the main source of drama in DeFi. The friction comes from the design of Curve’s governance system, which exists to distribute CRV rewards to whichever pool gets the most votes. Yearn and Convex have played this game with the most intensity, using their role as a yield aggregator to also aggregate votes that direct more rewards to their pools of choice.

Convex had been working with Mochi to make USDM more liquid, but Mochi was taking advantage of that liquidity to trade to Dai, purchase more CVX and increase rewards further - creating fears of a rug pull on USDM and ultimately attracting the ire of Tetranode, who threatened to “smash [their] pool”.

New stablecoins continue to pop up and almost all use Curve to build liquidity and help maintain a $1.00 peg. This makes Curve (and CRV holders) somewhat of a rainmaker in the stablecoin market. It’s unclear how long that will last, however, with Uniswap v3 offering the capital efficiency (without the CRV rewards), while Saddle Finance, which is built on the same math as Curve, just raised another $7.5m from Polychain and others.

The USDM/Mochi episode will raise questions about Curve governance, the role of the Emergency DAO and if they should still be considering getting rid of their permissioned list of contracts that can interact directly with Curve.

Chart of the week: Another MEV opportunity

Liberal with the usage of “chart” here, but great digging from Chainsight Analytica. It’s also a front-running attack, but instead of placing a trade before/after, a user sees an upcoming trade and then deposits liquidity to capture the fees. As some point out, this means that the traders get a better price. The losers are unsophisticated, passive liquidity providers who’s fees are getting crowded out by drive-by liquidity.

As DeFi matures and becomes more complex, another layer of best-execution products - both centralized and decentralized - will likely emerge to protect everyday users from the dangers of the Dark Forest.

Odds and Ends

  • MakerDAO implements no fee swaps between Dai, USDC & USDP Link

  • bZx post-mortem after $55m hack on Polygon, BSC Link

  • Gnosis proposes acquiring xDai, rebranding as Gnosis Chain Link

  • Congressional hearing next week on “Demystifying Digital Assets” Link

  • CoinDesk: $ENS soars after airdrop Link

  • Matter Labs raises $50m, led by a16z, for Layer 2 zkSync Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn, living the domesticated life. Congrats Jake!

Dose of DeFi is written by Chris Powers, with help from Denis Suslov and Financial Content Lab. I spend most of my time contributing to DXdao* and benefit financially from it and its products’ success. All content is for informational purposes and is not intended as investment advice.

The politics of stablecoin legislation in the US Congress

Can Republicans and Democrats find common ground on stablecoins?

We’ve been talking about stablecoins here at Dose of DeFi for some time. In 2020, we looked at their role in promoting dollarization across the world, and then made an ill-fated attempt to only refer to them as “crypto dollars” to increase their meme potential. Then earlier this year, as the stablecoin market exploded and new stablecoin designs proliferated, we looked at how more capital-efficient stablecoins could unlock entirely new credit-creation methods, and explored the viability of non-USD stable assets. Stablecoins’ potential has long been abundantly clear – at least to us.

The only lingering doubt has surrounded political will in the US; specifically, over the implementation of legislation to address unanswered regulatory questions. The lackluster pace of response here won’t surprise anyone – there’s barely enough consensus in Washington to agree on a new post-office location these days. 

But in August, amidst a flurry of negative attention on the the crypto industry from Elizabeth Warren and SEC Chair Gary Gensler, we speculated that the growing bipartisan consensus around a crypto provision in the US infrastructure bill may be a harbinger of good political fortune to come:

All of these moving parts point toward what is unlikely of all in DC: legislation. The capital is marred in gridlock, but the growing interest in cryptocurrency from across the political spectrum and the regulatory landscape make new legislation before the 2022 midterms a legitimate possibility.

And with the long-awaited release of the Treasury’s report on stablecoins on Monday – and the political response from key congressional stakeholders and the crypto industry – it seems that political winds are blowing even stronger towards legislation to regulate stablecoins. 

The White House stakes out its position

The report outlined the stablecoin landscape, risks to consumers and the financial system, and was clear on its core recommendation:

Congress [should] act promptly to enact legislation to ensure that payment stablecoins and payment stablecoin arrangements are subject to a federal prudential framework on a consistent and comprehensive basis.

The report was written by the ‘President’s Working Group on Financial Markets, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency’. But ostensibly, the report is the official stablecoin stance of the Biden Administration, which is led by US Treasury Secretary Janet Yellen. 

Three sets of policy concerns with stablecoins were identified in the report:

  1. Systemic risk to the financial system

  2. Wallet provider/stablecoin issuer intermingling

  3. Centralization into a single stablecoin.

The systemic risk argument is driving the Fed’s interest in stablecoins. But it’s notable that the other two concerns are anti-competitive. This comes from the huge unspoken undercurrent of the report: FaceMeta’s attempt to launch its Libra/Diem stablecoin (indeed, many of the major congressional leaders needed to enact stablecoin legislation have spoken adamantly against the social media giant’s proposed expansion into financial services). 

The report talks briefly about enforcement and monitoring current stablecoin use, but its ultimate goal is to create legislation that governs stablecoins, instead of relying on existing securities and banking laws. As a result, the report’s scope is relatively limited. The recommendations target stablecoins that are backed by “reserve assets” and not those that are considered “synthetic” or “algorithmic”. This means focusing on the largest stablecoins that rely on real dollars in the traditional financial system and less on the smaller, more exotic stablecoins.

All this does beg the question as to whether such regulation would only entrench the existing stablecoin issuers and prevent smaller ones from competing. This is a legitimate concern, as enforcement of the report’s recommendations would raise barriers to entry. It’s probably worth the trade off, because official regulatory approval would greatly expand the size of the stablecoin market and on-chain assets. Plus, most innovation in stablecoins will likely come from new, more capital-efficient designs that are on-chain. 

Industry advocates and skeptics agree: Legislation is needed

The question of whether the report strikes the right balance between consumer protection and encouraging innovation has been answered, by the surprisingly broad support for its recommendations from both industry participants and skeptics. 

Jeremy Allaire, the CEO of Circle, (which issues the second-largest stablecoin, USDC), tweeted that the report is “huge progress in the acceptance of stablecoins and provides a path for their adoption as core infrastructure for financial and economic activity in the coming decade.” And even on the other end of the spectrum, crypto’s favorite villain (and author of the Rashida Talib-sponsored STABLE Act), Rohan Grey, said the report’s suggestions are “pretty strongly a win” for the proponents of the STABLE Act.

This kumbaya moment between seemingly opposite sides of the political spectrum underscores how desperate all sides have long been to see the regulation the industry is missing fall into place. 

The DeFi carveout, and the ‘federal safety net’

It’s clear that stablecoins issued and freely traded on public blockchains are here to stay. The report’s authors understand that stablecoins will be how millions of Americans access financial services in the future. And so legislation should be crafted with an aim of bringing stablecoins into the existing regulations that manage financial stability and – more importantly – also extends deposit insurance to cover stablecoins.

With FDIC-backing, stablecoins would have a seemingly unstoppable advantage over bank deposits. This would then come with additional regulatory oversight, but the major stablecoin issuers have all been more than willing to bend the knee if it gives them clarity – and access to Wall Street and retail investors. It’s unclear if all of the major stablecoin issuers are ‘insured depository institutions’, or whether they can use a pass-through license. Paxos would likely be the biggest winner, considering how long they’ve been focused on getting licenses for products/services that don’t require approval (yet).

The report also has a notable DeFi carveout. Or more accurately, it looks like regulations will target DeFi institutions offering crypto financial services, although the language suggests non-custodial DeFi protocols will be exempt:

Congress should require custodial wallet providers to be subject to appropriate federal oversight. Such oversight should include authority to restrict these service providers from lending customer stablecoins, and to require compliance with appropriate risk-management, liquidity, and capital requirements.

So regulation looks set to target BlockFi and Celsius, but not Compound or Metamask. At least, that’s our understanding.

A unique political moment

In recent years, American politics has vacillated between stagnation and disarray. The separation of powers has created veto points throughout the system that all too often lead to no action. Deeply ingrained partisanship creates a culture where all public issues get immediately slotted onto Team Red or Team Blue, preventing compromise on even the most basic political issues.

With this backdrop, it’s unsurprising that many industry observers are skeptical of the realization of stablecoin legislation. Yet such cynicism assumes that those in Washington are actively trying to get nothing done, versus the reality, which is that every single issue these days is a political lightning rod. 

But crypto cuts across party lines like no other issue. Most importantly, it’s a new issue, so it doesn’t have any political baggage, which means politicians are free to stake out positions independent of the next election cycle.

The major political players

For any bill to become a law in the current political environment, there are four stakeholders that need to be onboard: Senate Democrats, Senate Republicans, House Democrats and the White House. Treasury’s report suggests that the Biden administration wants to push a consensus choice, so it’s likely to spend its energy balancing the wants and desires of the first three. 

As a refresher, before a bill is brought to the floor, it will go through a committee that will craft the legislation. For both the House and the Senate, this is the Banking Committee. Democrats control both houses, but in the Senate, they need Republican votes to reach the 60-vote threshold.

The breakdown of the political ‘Guess Who’ game of legalising possible legislation goes something like this: 

  • Chair of the Senate Banking committee, Sherrod Brown: his support will be pivotal. Brown doesn’t seem terribly concerned with crypto or stablecoins (although he is concerned about monopoly power), and will likely serve as a happy warrior for the White House. He released a supportive statement after the report’s release.

  • Pat Toomey: The ranking Republican on the Senate Banking committee. Any stablecoin bill would likely need his support – which it seems it would have. He argues for a regulatory framework that prioritizes innovation and ensures the US technology and financial sectors remain supreme – particularly as they relate to China. Retiring at the end of 2022, he seems eager to leave a legacy. He jumped on the crypto bandwagon during the infrastructure bill debate, and likely sees this as one of the few opportunities for him in a paralyzed Senate. He is key to making this legislation bipartisan.

  • Also on the Senate Banking Committee, Elizabeth Warren will be the most vocal critic and continue her ‘shadowy super coder’ argument. She has strong progressive backing and may use the bulpit to promote a – politically successful – anti-big tech argument.

  • Meanwhile, Freshmen Republican Senator Cynthia Lummis – who also sits on the Banking committee – is eager to make a name for herself and has fully embraced Bitcoin and crypto. She’ll be an ally for industry players during committee hearings. 

  • In the House, Maxine Waters chairs the Banking committee. Like Brown, she doesn’t seem to have strong political feelings about crypto. In regards to stablecoins, she has one focus: keep FaceMeta out of it. With her recent hearing efforts against the social media company, it’s safe to say that Waters may be the person most responsible for the scaling back of its crypto ambitions.

  • We don’t expect the House to do much of the bill writing. Like the infrastructure bill, the most important decisions will likely be made in the Senate with the Democratic-led house making changes at the end. House Banking Committee member Alexandria Ocasio-Cortez may use the congressional hearings to make large political points about the monetary system.

  • The big wildcard in the stablecoin legislation arena is Senate Majority Leader Chuck Schumer, who’s eager to get things done and show that Democrats can govern. He’s also the senior Senator from New York, and has long been a supporter of the financial services industry there. 

Congressional committees make for surprisingly good TV. And if political momentum does build, the House and Senate Banking committees feature members will use it as an opportunity to build their personal brand – and maybe even influence the legislation.

There doesn’t seem to be much opposition to the Treasury’s report from Wall Street. But as one of many constituencies that have the potential to derail a bill’s momentum, it could all still be to play for. 

Odds and Ends

  • Aave v3 plans to be a protocol that connects lending markets across chains Link

  • Ethereum Name Service launches $ENS token Link

  • Notional launches v2 of fixed-rate lending platform Link

  • MakerDAO governance splits over personnel change Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn, where it’s full-blown fall. I'm just a bill. Yes, I'm only a bill. And I'm sitting here on Capitol Hill...

Dose of DeFi is written by Chris Powers, with help from Denis Suslov and Financial Content Lab. I spend most of my time contributing to DXdao* and benefit financially from it and its products’ success. All content is for informational purposes and is not intended as investment advice.

Multichain governance - How can DAOs live across chains

Lisbon post-lude,

Lots of good food and great conversations amidst absolutely beautiful weather in Lisbon. I gave a talk at the DAOist on the state of multichain governance, examining how Aave, MakerDAO, the Gnosis Guild Bridge Module and DXdao approach governing on multiple chains. You can watch a video of the talk or follow the slides below.

- Chris

FYI, Odds and Ends and Thoughts and Prognostications for this week at the bottom

Odds and Ends

  • Across is a new L2→L1 fast exit bridge, built on UMA protocol Link

  • Summary of key links & Twitter threads on CREAM exploit Link

  • SupChina: Can DeFi defy China’s crypto controls? Link

  • Former Yearn/PoolTogether developer running for U.S. Congress Link

  • Bloomberg: SEC aims to reinIn stablecoins as U.S. Weighs New Rules Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn, after a fun time in Lisbon, but traveling with a 2 month old is a lot of work!

Dose of DeFi is written by Chris Powers, with help from Denis Suslov and Financial Content Lab. I spend most of my time contributing to DXdao* and benefit financially from it and its products’ success. All content is for informational purposes and is not intended as investment advice.

Assets bridged from Ethereum, stablecoins are not like Paypal

Plus Odds & Ends and Thoughts and Prognostications

Lisbon prelude!

I’ll be in Lisbon starting next week and would be great to get together if any of you are in town. I will be at Liscon, the DAOist amongst others.

Holler at me if you want to meet up!

Chart of the week: Assets leaving Ethereum

A chart of data collected by Elias Simos on his excellent “Bridge Away (L1 Ethereum)” Dune dashboard. Bridge away is better than saying they are leaving; the token’s core contract still lives on Ethereum. As multichain activity heats up, bridge balances will be the easiest way to gauge activity.

No big surprises in the data above. It does demonstrate an opportunity for USDC and USDT to issue their stablecoins natively on more networks (maybe for Dai too?). Outside of Matic, SNX has the largest percentage of its token supply bridged away from L1, almost all of which is in Optimism where it was the first project to launch.

Also, if you didn’t get a chance, check out last week’s Multichaining in a Maturing DeFi World for more.

Tweet of the week: Paypal is different

Currency blogger JP Koning points out why Paypal has not attracted the same regulatory ire as stablecoins have despite their similarities. The distinction also highlights why stablecoins are such a powerful concept regardless of how they’re regulated. And that regulation appears to be impending. This week, USDC-issuer Circle Financial revealed it received an “investigative subpoena” from the SEC’s Enforcement Division in July.

Odds and Ends

  • Undercollateralized stablecoin Fei announces v2 Link

  • Flashbots Protect launches, targeting everyday users Link

  • Bug in Compound proposal results in loss of $90m of COMP Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn, admiring the feeling of fall.

Dose of DeFi is written by Chris Powers, with help from Denis Suslov and Financial Content Lab. I spend most of my time contributing to DXdao* and benefit financially from it and its products’ success. All content is for informational purposes and is not intended as investment advice.

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