Regulated stablecoins and Yearn's resurgence

Plus Odds & Ends and Thoughts & Prognostications

Tweet of the Week: Begging for regulation

Currency blogger JP Koning highlighting a blog post from Paxos comparing itself to USDC and USDT, on the heels of Circle’s announcement that only 61% of the reserves backing USDC are “cash or cash equivalents”. Paxos argues that the three stablecoins that it powers, PAX, BUSD and GUSD, are truly regulated, because they report to the New York State Department of Financial Services. The circulating supply of these three stablecoins combined ($12.6bn) is far less than USDC ($27bn) and USDT ($110bn) but growth opportunities in the stablecoin space are likely to come in the barbell format; the best opportunities will come at the extremes - either stablecoins become very regulated or very decentralized. For more, check out Dose of DeFi’s recent piece, “Stablecoins, central bank digital currencies and the new era of credit creation

Chart of the Week: Yearn is back on top

A repeat from last week, but Messari’s Q2’21 DeFi Report has so much good info. This chart shows the yield aggregator competitive landscape, which Yearn pretty much invented. Yearn’s initial success set off a wave of copy cats that used token incentives to attract liquidity providers, which helped bring Yearn’s marketshare to under 20% in January. Yearn’s TVL grew consistently through 2021 thanks to the launch of their v2 vaults and are now the undisputed industry leader with almost 70% of the market share. Many question whether aggregators can build a moat to protect against new challengers, but there may be a Lindy effect the longer it remains the #1 yield aggregator.

Interestingly, of the three big DeFi industries (yield aggregators, DEXs and lending), only lending has a market leader with less than 50% of marketshare.

Odds and Ends

  • New Sushi deal would get rid of 30% discount in strategic sale to VCs Link

  • Sushi ONSEN rewards are now live on xDai Link

  • Reddit chooses Arbitrum to scale Community Points Link

  • Decrypt: Vitalik Buterin urges Ethereum to 'Move Beyond DeFi' Link

  • Element Finance, a fixed APR stablecoin, launches on Ethereum Link

  • Maker Foundation announces plans to dissolve Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn in the doldrums of summer.

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.

Sushi's strategic sale to VCs, DeFi volumes decline

Plus DXdao celebrates 2 years of on-chain governance!

Happy 2 year anniversary to DXdao governance!

DXdao launched in the summer of 2019 after a staking period that distributed voting power to 399 Ethereum addresses; it is a 100% on-chain organization.

DXdao was the first DAO to control its own website as well as the first one to launch its own fundraiser. It governs three DeFi products (Omen, Swapr, Mesa) with more on the way, paying more than 15 contributors on-chain every month.

Check out the 2 year anniversary article to read more about its history and future.

Tweet of the Week: Sushi’s strategic investors

The Sushiswap community is debating a potential sale of up to $60m of Sushi tokens from the treasury to 21 VCs as strategic investors. This follows Index, Alchemix, Lido and other DeFi projects that engaged in “treasury diversification” aka, selling your tokens to raise dollars and bring in outside stakeholders. This is a normal process in the startup world, but this debate is happening in public forums, so thorny details like the 30% discount that’s being offered to the strategic investors (with 18 month lockup), are out in the open.

Sushi was one of the first projects with no VC money before launch and therefore no VCs in their token distribution. The 21 strategic investors, which include most of the prominent DeFi funds, argue that the institutional support they bring from capital to hiring justify the discount.

We’ll see. I agree with Messari’s Mason Nystrom:

It's a testament to the power of crypto networks that world-renowned VCs like @lightspeedvp now have to approach the community for a fundraising round.

Chart of the Week: Q2 highs and lows

A lot of stories in this chart of DEX volumes over the last year. The explosion of volume and liquidity during DeFi summer last year, Sushiswap and the launch of UNI are only a blip on this chart from Messari’s excellent Q1’21 DeFi Review (Messari Pro required). Volumes and yields continue to decline into July, shifting DeFi away from hyper growth mode. After months of fundraises and protocol upgrades, there is less organic energy and growth in DeFi; most DeFi product opportunities will flow downstream of secular infrastructure trends (Layer 2, EIP-1559 and MEV).

Odds and Ends

  • Dune dashboard to track # of users per DeFi project Link

  • MakerDAO 5% short of executive vote threshold 10 days after submission Link

  • Hop Protocol launches cross-chain bridge with USDC as first asset Link

  • Clipper, a retail-oriented DEX raises $21m led by Polychain Link

  • Uniswap launches alpha version on Optimism Link

  • Shapeshift is decentralizing Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn in a nice hot summer.

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.

Stablecoins, central banks and the new era of credit creation

And how DeFi will sit alongside Central Bank Digital Currencies

To state the obvious, money creation drives fluctuations in financial markets. Just look at the market attention Federal Chairman Jay Powell creates following every Fed meeting, as an example.

Let’s take another step back into the economics of it all. It’s true that central banks have the ability to print money, but banks have the ability to create money (by extending credit). It’s therefore not money creation that is the lifeblood of an economy – it’s credit creation. In other words, the extension of loans; connecting those who need money now to those who don’t and are seeking yield.

The rapid growth of stablecoins on Ethereum and other chains has encouraged many financial authorities to draw up plans for a “Central Bank Digital Currency” (CBDC). While no CBDC has yet gained serious traction, the key question has shifted from “why” to “how” (and “when”).

While the political will is forming in central banks around the world, policy makers are struggling to grasp the monetary implications of a digital currency. What would it mean for credit extension in a world of CBDCs if everyone ends up holding an account with the central bank? What money-like instruments would investors then hold?

The answer could well lie in stablecoins. Their increasing variety in DeFi and developments in supporting financial activity will equate to a new model of money and credit creation – one where DeFi has a critical central role. 

China tries to get ahead

ECB President Christine Lagarde has made some smart comments about a digital Euro, but for now almost all eyes are on China and the U.S.

China’s Digital Currency Electronic Payment (DCEP) has passed the research phase and has already been rolled out in a few pilot cities. But two key questions remain:

  1. Will the DCEP be freely convertible with other currencies?

  2. Is the DCEP a material upgrade from the existing digital payment infrastructure, around WeChat and Alipay?

China has not followed through on promises to open its capital account, so it’s hard to imagine a digital RMB accessible around the world. And realistically, it's not going to be able to compete as a global currency if it’s not freely convertible.

While the payment infrastructure of the U.S. seems stuck in the 1970s, China has already made the leap to a digital-payments world. Perhaps the increased use of DCEP will unleash a new wave of financial products with smart contracts and programmable assets. For now though, DCEP seems to have been embraced primarily by state-owned banks and financial regulators in Beijing. From this perspective, it looks like the DCEP is more of a political move to wrestle power away from Tencent/Alibaba.

Americans look for a middle ground

Initially, the U.S. was less enthusiastic about a digital dollar, but China’s progress has fostered political support from a fear of being left behind. This culminated in an announcement from Jay Powell in May, of an upcoming Fed research report on digital currencies expected to be released this summer.

Unlike China, there are privacy concerns across the political spectrum in the U.S., so the digital dollar may have some type of anonymity built in for smaller transactions, similar to cash. 

No one knows what Fedcoin would look like in practice. Yet the key feature of any digital currency is some type of digital wallet that can hold, send or receive payments. These functions are primarily served by banks now, but would there be a need for Bank of America if anyone can have an account with the Fed?

Fed Governor Lael Brainard noted in a speech last month at Consensus:

Some research indicates that the introduction of a CBDC might raise the risk of a flight out of deposits at weak banks in favor of CBDC holdings at moments of financial stress. Other research indicates that the increase in competition could result in more attractive terms on transactions accounts and an overall increase in banking system deposits. Banks play a critical role in credit intermediation and monetary policy transmission, as well as in payments. Thus, the design of any CBDC would need to include safeguards to protect against disintermediation of banks and to preserve monetary policy transmission more broadly.

Brainard continues:

Consumers and businesses don't generally consider whether the money they are using is a liability of the central bank, as with cash, or of a commercial bank, as with bank deposits.

The introduction and uptake of CBDCs leads to a completely different banking model and a new, more direct monetary policy. Among bankers, there is nervous concern they will lose their deposit base to a digital wallet. With open access to base-level interest rates, yield would be earned entirely from returns through credit extension.

Bankers are right to worry about their deposit base, but are there other methods of “credit intermediation and monetary policy transmission” than traditional physical banks?

A DeFi model

In the future, CBDCs will be wrapped in stablecoins that offer more yield opportunities along with higher risk, similar to how investors deposit USDC in MakerDAO’s peg stability module (PSM) to mint Dai because it tends to have higher yields than USDC. 

Moving further up the risk ladder, Dai also has the Dai Savings Rate (DSR), which pays a yield to any Dai locked in the smart contract; funds can be deposited/withdrawn every block. Compound has a secondary lending market for Dai, where depositors earn interest from Dai borrowers, plus it passes along yield from the DSR by automatically depositing Dai that is not lent out in the DSR. Dai depositors get a token (cDai) that represents a claim on their deposited Dai with interest accruing from the DSR and Dai borrowers on Compound.

Other stablecoin projects are focusing on capital efficiency, aiming to achieve $1 value with as little collateral as possible. These are risky experiments, but that risk can be compensated for with a higher yield. The growing number of stablecoins has created an interconnected ecosystem. New stablecoins benefit from Curve pools with other stablecoins to bootstrap liquidity, while stablecoins like alUSD are built on top of Dai’s future yield.

While there will never be any physical banks in DeFi, loans will still be extended and not all will be to overcollateralized borrowers. Instead, “banks” that issue loans to risky borrowers will live on top of DeFi lending protocols. You are already starting to see this with Aave’s credit delegation, where uncollateralized loans can be issued. These banks will deposit a CBDC or a wrapped version (or any asset) as collateral in Compound, Maker or Aave and charge a small fee on top of the protocol’s interest rates based on the creditworthiness of the borrower. 

The interactions between these stablecoins, especially how collateral is moved and rebalanced, preview a new credit market, one where money creation may still be the purview of central banks, while credit creation is driven by DeFi.

Leading vs. following

In the current dialogue on digital currencies, a condescending tone of “the adults are here now” is being taken by some mainstream media outlets towards the cryptocurrency space. Something along the lines of: “great work on the blockchain thing, but we’ll take it from here.” In reality, they fail to recognize where the innovation in blockchain and cryptocurrencies lies. 

And in discussions on CBDCs you hear “payments” often yet “smart contracts” almost never. Fast payments may have been exciting in the past, but when it comes to digital money and DeFi, things are now moving several steps ahead. 

It’s hard to speculate without any specifics from the leading central banks, but regardless of what CBDCs will look like, none will undo the role of, and need for public blockchains. Any central bank that successfully launches a CBDC will have introduced their entire country to digital currency and digital wallets, doing the hard, last-mile work for public blockchains. 

DeFi, meanwhile, will continue to be attractive in the age of CBDCs because it offers greater yield opportunities and more productive use of assets. CBDCs will enable fast payments, but can Uniswap run on the same network as CBDCs? 

The most likely scenario is one where CBDC infrastructure and DeFi will sit side by side; countries may even use Ethereum to issue and manage their CBDC. 

And as a result, in the digital money world, central banks will still print money but DeFi will be how credit is created.

Odds and Ends

  • Link

  • Yield, a fixed-rate lending protocol, raises $10m, led by Paradigm Link

  • Compound Treasury launches, targeting businesses & institutions Link

  • Perpetual Protocol launches v2 Link

  • Open source DeFi liquidation bot from fall 2020 Link

  • Opyn now offers partially collateralized options Link

Thoughts and Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in a previously hot, but now rainy, Brooklyn. It’s been a busy June! Excited to watch all the MEV content this weekend…

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.

Algo Stablecoin death spiral; Swapr Beta launch

Plus Odds & Ends and Thoughts & Prognostications

The DXdao* community is excited to announce the launch of Swapr Beta, which is now live at Swapr.eth on Ethereum and xDai (and soon Arbitrum…)

Swapr Beta’s most exciting feature is the do-it-yourself farming platform where anyone can launch a liquidity mining campaign for any pair with any reward token. Swapr also has eco-routing, which ensures users always get the best price available - even if it’s not on Swapr.

Check out the announcement for more info or try it yourself.

Tweet of the Week: Another algo stablecoin fails

A tweet that’s “the sign of the times” with Bloomberg editor and unofficial chief of finance twitter, Joe Weisenthal opining on that latest algo stablecoin (IRON) to collapse. The story is getting more attention in the broader media ecosystem because Marc Cuban was one of the investors who got hosed and will surely be picked up as one of the “horror stories of stablecoins” by drive-by pundits.

Within the DeFi echo chamber, discussion is mostly on whether algorithmic stablecoins are a perpetual motion machine that can never be achieved or a noble pursuit of capital efficiency. What’s clear is the interest in stablecoins is increasing from every angle, whether it’s DeFi degens, central banks or payments companies.

Odds and Ends

  • StarkNet Planets Alpha launches on Ropstein Link

  • UMA launches Range Tokens as convertible debt option for DAOs Link

  • List of protocols with on-chain liquidation opportunities Link

  • DODO announces plans to launch on Solana Link

  • The Block: Antonio Juliano on dYdX’s $65m Series B Link

  • Impossible Finance V2 Swap launches, aiming for new gas-efficient AMMs Link

  • Curve Moves to Block Rewards for Alchemix Pools Link

  • Pendle launches on main net, trying to make tokenized yields Link

Thoughts and prognostications

That’s it! Feedback appreciated. Just hit reply. Written in a lively Brooklyn on the rise.

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.

Curve v2 takes on Uniswap, BTC on Ethereum grows

Plus Odds & Ends and Thoughts & Prognostications from the last week

Tweet of the Week: Curve v2’s best explainer

Curve founder Michael Ergorov released a whitepaper for a new AMM model that many are now calling “Curve v2”. The whitepaper is heavy on math but the tweet above has the quickest explainer. Uniswap v3’s capital efficiency improvements also come from a concentrated liquidity in a particular price range. Curve v2 is similar but whereas in Uniswap users need to readjust their price ranges when asset prices change, Curve v2 uses an internal oracle to automatically adjust the range where liquidity is provided. Uniswap’s Hayden Adams argues that it’s better for other projects (like Harvest Finance) to build price range rebalancing products, rather than build it into the underlying protocol. Coindesk has a nice article explaining it in more detail.

Chart of the Week: Lots of BTC on Ethereum

Lots of Bitcoiners in Miami this past weekend and a lot of Bitcoin on Ethereum as demonstrated from this great chart from Delphi Digital using data from this Dune dashboard curated by Elias Simos. The growth of BTC on Ethereum has been the most consistent trend over the last year. Perhaps the only surprising thing is how WBTC has captured almost the entire market. hBTC from Huobi has creeped up over the last few months, while renBTC has dropped off a cliff and sBTC and tBTC have failed to take off. Elsewhere in DeFi BTC land, there was some controversy over a new Bitcoin-based DeFi project Sovryn over their TVL metrics.

Odds & Ends

  • DXdao* Month in Review Link

  • DEX revenue declines from market peak, lending revenue remains stable Link

  • Alchemix Farm Migration Post Mortem and alETH Update Link

  • Blockchain Valley Ventures: DeFi Projects Beat VCs, Market for Returns Link

  • OlympusDAO and Frax team up for joint liquidity campaign Link

  • Tornado Cash to launch on Binance Smart Chain Link

  • Impossible Finance raises $7m as incubator focused on BSC Link

Thoughts & Prognostications

That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn on a beautiful Summer day.

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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