For the most part, DeFi has figured out trading and lending.
Yes, there are a myriad of design improvements to increase the capital efficiency of decentralized exchanges and lending protocols, but they have surely left the “proof of concept” stage.
Trading and lending are the building blocks of a financial system, but in the traditional finance world, only a fraction is driven by individual investors. Instead, investors go through intermediaries like mutual funds, hedge funds or other asset managers. DeFi is now seeing on-chain money managers emerge, thanks to investor preferences for yield optimization and capital efficiency.
As soon as tokens could be traded on-chain, funds popped up to manage assets, but these were all off-chain, where the vast majority of crypto fund management still occurs.
Melon and Set Protocol were arguably the first DeFi asset management products. Melon was started by Mona El Isa, a Goldman Sachs vet. It was designed for professional fund managers, but that market has not emerged yet.
Set Protocol was integral to the early DeFi movement. “Sets” are baskets of assets that automatically rebalance to predefined thresholds. The BTCETH50 Set keeps a 50/50 ratio of BTC and ETH even as the price changes.
Set found some traction but did not have a breakout product until it launched the DeFi Pulse Index Set in September. Its market cap is $14.5m; performance has struggled as DeFi tokens plummet. Still, it’s arguably the best place for an investor to get broad exposure to DeFi - the FTX DeFi Perp has $2m of open interest.
Several yield optimizers, like Staked’s RAY and Yearn.Finance itself, emerged at the beginning of 2020 to take advantage of interest rate differences among DeFi lending protocols. They had moderate success but it was only after COMP and the yield farming explosion did Yearn breakout.
Yearn then launched vaults, where investors can deposit assets into an automated investing strategy. It is similar to Set’s original design but the strategies are more complex and targeted a specific asset. As I said before, this is a genuine innovation and looks very similar to a professional money manager, except that it’s transparent and on-chain.
Yearn is likely the prototype for the DeFi money manager and several other projects are already offering similar asset management-like services.
Harvest, Rari Capital and APY.Finance all have a similar strategy of aggregating assets and optimizing yields. Harvest has some additional assets and strategies, but is not too different than Yearn. It has $350m of deposits, but suffered an attack/exploit last month.
Rari and APY.finance are the next evolution of yield optimizers, abstracting away the strategy selection and introducing risk scores to give investors more information. Rari has three pool options: an ETH pool none too different than a Yearn vault, a “Stable Pool” that’s considered low-risk and a “Yield Pool” that’s considered high risk. Across the three pools, it has $59m in assets.
APY.Finance, which raised $3.6m last month and is launching their token through a Balancer LBP on Thursday, assigns each of its strategies a score and uses that to offer a single, risk-adjusted yield-optimized pool.
It’s no secret, that DeFi is powered by bots that liquidate margin positions underwater. DeFi Saver is a product build on top of Maker, Compound and Aave that aims to save users from liquidation by automatically selling some of the collateral and paying back the loan to raise the collateralization ratio.
Liquidations come with a nice fee, ranging from 8-13% for a one-time transaction. Of course, it’s hard to know when liquidations will occur. Two recently launched projects are trying to bring liquidation opportunities to regular investors.
KeeperDAO, which raised a seven figure sum from Polychain and Three Arrows and counts Ren CEO Taiyang Zhang and Amber Group’s Tiantian Kullander as team members, pools five assets to “liquidating a position in Compound or dYdX, taking over a Maker CDP, rebalancing a SET basket, or taking advantage of arbitrage between Kyber and Uniswap”.
B. Protocol is the newest entrant, launching last week. It also has a liquidity pool that can liquidate undercollateralized positions, but its real foe is MEV (Miner Extraction Value). Increasingly, liquidations are turning into gas wars. B. Protocol aims to sit on top of Maker, like DeFi Saver, but instead of recollateralizing, B. Protocol shares liquidation “proceeds with the platform users in return for getting a priority in the liquidation process”.
B. Protocol made a bit of splash last week when it executed a flash loan on a proposal to give it direct access to Maker’s oracle.
Tweet of the Week: CRV yields shifting
An astute observation from Farmer Max. Locked CRV tokens can vote for “gauge weights”, which are used to determine the amount of CRV rewards each pool gets. The five largest pools for CRV rewards are stablecoin pools. While enthusiasm for BTC is soaring, synthetic BTC in DeFi, specifically WBTC, has better options than Curve for yield. Over the last month, WBTC has been fleeing Curve for greener pastures. The top 3 pools of WBTC are the Uniswap ETH/WBTC pool, Compound and MakerDAO. Just 8% of WBTC is in Curve, while almost 70% of renBTC’s circulating supply is in Curve.
Odds and Ends
DeFi dollar raises $1.2m from Divergence, Standard, Accomplice, others Link
Decrypt: Thailand’s Siam Commercial Bank delves into DeFi Link
Reflexer Labs release Proto RAI, a demo of forthcoming RAI Index Link
DXdao* launches Mesa on xDai Link
a16z Crypto adds former NYSE official Link
Opium Protocol raises $3.25m, aiming to bring CDS to DeFi Link
Thoughts and prognostications
DeFi Citadels: How DeFi Protocols Create and Capture Value [Ryan Watkins/Messari]
A general-purpose bridge for Ethereum Layer 2’s [Nick Johnson/ENS]
Sushiswap farming analysis [Akshay Ramasubramanian/Nansen]
Coverage on Ethereum scaling [Our Network]
That’s it! Feedback appreciated. Just hit reply. Written in Brooklyn. Shorter version, but the election is consuming everything. If you haven’t, vote!
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.