What are the factors behind DeFi’s hot currency circle? It is those star projects that are leading the rapid development of DeFi. One article to understand the story behind them.
After more than two years of dormancy, DeFi broke out in the summer of 2020. From mid-June to the present, only three months have passed, and the various intensive evolutions are dazzling. This is by far the most innovative stage in the history of encryption.
Mining
*In the DeFi field, Synthetix is the initiator of liquid mining.
Synthetix initially offered SNX token incentives to users who provided liquidity for the sUSD pool on Curve. That is to say, on Curve, users who provide liquidity to the sUSD pool can get corresponding SNX rewards according to their proportions. Later, it also cooperates with renbtc and other project parties to conduct joint liquidity mining.
Why does Synthetix engage in liquid mining? Because Synthetix is a synthetic asset generation and transaction protocol, if there is no liquidity, its synthetic assets are meaningless. Therefore, whether it is sUSD, sBTC, sETH, etc., it needs liquidity and needs someone to trade before it can develop.
How to guide liquidity is not enough by relying on its own internal system. It is also a good way to guide it through other DEX platforms. This is an important reason why Synthetix uses the Curve platform to successfully promote its liquidity.
*Bitcoin is the ancestor of mining in the encryption field.
When it comes to mining, Bitcoin is inseparable. Bitcoin is the first token in the crypto field and the first cryptocurrency to introduce a mining mechanism.
Bitcoin introduces a mining mechanism for the security of its network. Mining first solves the problem of accounting rights and token incentives, and second, it solves the problem of security at the same time. This is a very clever game mechanism design. Participating in mining can be rewarded. Mining is also the distribution mechanism of Bitcoin. It has realized its value storage and value circulation through the model of rewards per block and the model of halving every four years, becoming the first success. The encrypted native token has become a true “digital gold”.
Bitcoin mining introduces calculations and also introduces energy. This gives Bitcoin intrinsic value. Today’s DeFi mining is often pledged assets and then get corresponding rewards. Why does DeFi no longer engage in this kind of PoW computing power mining? There are many reasons, but one of them is that the PoW mechanism has helped the entire encryption field complete the most basic accumulation of native assets. Bitcoin is currently worth more than 200 billion U.S. dollars and Ethereum is currently more than 40 billion U.S. dollars. These are the most important The most important and safest assets are all generated through the PoW mechanism, which is equivalent to completing the most important first step in the construction of encrypted assets Lego, which is the process from 0 to 1.
On this basis, PoS took advantage of the trend. Because of these original encrypted assets, many other assets have been derived from the original encrypted assets. Today’s DeFi mostly obtains the distribution of tokens through pledged assets. The reason why this can be done is because Bitcoin and Ethereum have paved the way for today’s situation.
In the English discourse system, mining has become “Yield Farming”, and it has become the sowing and farming of income. In this discourse, funds are regarded as seeds of crops, planted in different lands, and then harvested. Behind it is that no matter whether it is planting seeds or land, it is already ready.
*Compound and Balancer are the promoters of liquid mining.
Although the successful experiment of Synthetix, the accumulation of Bitcoin, and the smart contract platform of Ethereum, the detonation point of the DeFi field stems from the liquidity mining of Compound and Balancer, which is also a natural accumulation of the industry.
Compound started liquidity mining on June 15. After its launch, it broke out instantly. Its locked assets once exceeded 1 billion U.S. dollars. Even when liquid mining blossomed everywhere, its locked assets still exceeded 700 million U.S. dollars.
COMP is the governance token of Compound, an ERC20 token, which allows holders to delegate tokens to others to vote. Any token holder can participate in the governance of Compound. As long as you have 1% of the delegated tokens, you can initiate governance proposals, including adding new assets, changing the interest rate model and other parameters or variables of various agreements. COMP is not only a governance token, but also a token that captures its business value. All borrowers and lenders on Compound have the opportunity to receive COMP token distribution. The total number of tokens allocated for mining is 4,229,949. 50% of the tokens are allocated to the lender, and 50% of the tokens are allocated to the borrower. The higher the price of COMP, the stronger the motivation of users to deposit and borrow money.
Before Balancer launched liquid mining, its liquidity was less than 20 million U.S. dollars, and now Balancer has more than 480 million U.S. dollars in liquidity. Balancer’s liquidity token pool has an adjustable weighting factor, and a fairer token distribution can be achieved through weight adjustment.
Mining + fork
*YAM is the initiator of mining + fork.
When AMPL came out, there were some imitators, but none of them caused a sensation in the encryption community. But YAM is different, it stirred up the entire crypto community.
Why is YAM so attractive?
YAM is also a fork of AMPL, but it adds a few new features such as a reserve. An important reason why YAM was able to detonate the community was that it combined the AMPL+YFI mechanism. YAM is a variant of AMPL, but at the same time its issuance mechanism adopts the YFI model. That is, YAM integrates AMPL and YFI what is most capable of detonating the community. Therefore, as soon as it appeared, energy burst out.
*Sushiwap is the promoter of this trend.
In the DeFi field, DEX is the largest position. The previous top three are Uniswap, Balancer, and Curve. In addition, there are more than a dozen DEX with daily trading volume exceeding 10 million US dollars. The trading volume of DEX is getting bigger and bigger, in fact, it has become the future opponent of CEX.
Sushiswap is a project that pushes the fork + mining trend to the highest level. Because Sushiwap not only forked Uniswap, but it also increased the token distribution mechanism for mining, and finally tried to draw salaries from the bottom to take away the liquidity of Uniswap. The thirteen token pools that participated in the early mining of Sushiswap, including USDT, USDC, DAI and other stable currency token pools, as well as mainstream DeFi token pools, are the most liquid pools on Uniswap.
In order to stabilize its liquidity, Uniswap launched the UNI token and launched a four-pool mining plan, including three stablecoin pools and one WBTC pool. Uniswap’s counterattack is very exciting, but Sushiswap still retains 500 million US dollars of liquidity, and the current mining revenue on Sushiswap is almost the same as that of the Uniswap mining pool. Uniswap did not show a comprehensive crushing advantage over sushiswap, and a relatively balanced mining income situation appeared in the DeFi field.
*Fork + liquidity mining has a diminishing effect
Although various fork + liquidity mining projects are emerging in endlessly, if they are simply imitated, they are basically unsustainable. This can be seen from various “food swaps” that imitate Sushiswap, and the end result is often a death spiral.
Mining + fork + micro innovation
With the development of time, there will be more and more micro-innovations in liquid mining. These projects may not be large-scale projects, but because they have minor changes, there may be some new developments in continuous iteration. Pickle began to have some small ideas, showing some different things.
Pickle’s goal is very simple and focused: to make unanchored stablecoins (DAI, USDT, USDC, sUSD) closer to their anchor prices. Pickle pickle is an experimental protocol. In order to achieve the goal of bringing stablecoins closer to its anchor price, it uses liquid mining incentives, capital pools and governance methods.
Recently Pickle has continuously launched aggregate mining of canned cucumbers (pJars), trying to add value to PICKLE tokens, instead of being unable to retain liquidity under the crude mining distribution mechanism like the previous “food swap”. Pickle’s canned cucumbers are similar to YFI’s yVault. There are currently 4 aggregate mining pools, pJar0.69abc and pJar0, with locked assets of more than $70 million. However, since the contract did not participate, participation must be cautious.
In addition to Pickle, Safe’s combination of purchasing insurance and mining is also a new attempt. However, this has also caused some side effects. Since many users purchase insurance for mining, users who normally want to purchase insurance cannot purchase insurance at a certain time. This also shows that the insurance track urgently needs new practitioners.
Fusion of DeFi+NFT
Recently, there is a MEME token. At the time of writing the Blue Fox Notes, its market value was more than 29 million U.S. dollars, with a total of 28,000 MEME tokens. The interesting part of this project is that it combines NFT and DeFi.
Meme is also a mining project, but it is not mining token revenue. Instead, earn a limited edition of NFT through pledged assets. In short, Meme is a decentralized NFT mining protocol.
Currently Meme has two mining pools, one is to deposit ETH/MEME LP tokens on Uniswap to mine NFT on LP Genesis. One is to deposit MEME tokens to mine NFT on Genesis.
In the Genesis Pool, after each MEME token is deposited in the Genesis Pool, one MEME coin can earn 1 pineapple point per day, up to 5 points. When there are enough pineapple points, it can be exchanged for NFT.
In the Genesis LP pool, users staking MEME/ETH LP tokens on Uniswap can also earn pineapple points. The amount of pineapple points earned depends on the amount of pledged users, and up to 5 pineapple points can be earned every day.
After users earn enough pineapple points, they can choose their favorite NFT for redemption.
The scalability of Meme is that it can be a platform for generating various NFTs. At present, its NFT mainly focuses on some Memes in the encryption field, such as the founder of Ethereum, the founder of YFI, and the founder of Chinalink. In the future, it can continue to expand to more areas of NFT, resulting in more mining and more NFT transactions.
As long as the NFT field can continue, it has a chance to survive. Of course, if the NFT market cools, it will also be affected. Relatively speaking, this is a market that is more affected by speculation.
In addition, Aavegotchi is also a project that combines NFT+DeFi. It generates NFT collectibles by staking defi assets. The attributes of its NFT depend on its value and rarity in the Aavegotchi universe, such as different mortgage rights, characteristics, and wearable equipment. Today’s Aavegotchi is like a crypto cat or Axie infinity with DeFi collateral. This gives NFT not only collection value, but also intrinsic value of underlying assets.
Each Aavegotchi NFT manages an escrow contract address, which holds the ERC20 collateral supported by Aave, which is also called atoken. Atoken is generated through Aave’s lending pool and can generate income. The atoken in the Aavegotchi hosting address will increase over time.
Basic advantages of the underlying protocol
Forking and mining are techniques in themselves, not Tao. Due to the composability of DeFi, the underlying protocol that was previously constructed becomes the basis of the new protocol, which will further strengthen the advantages of the underlying protocol.
As we saw, Uniswap not only survived the attack of Sushiswap, but also promoted its growth. One of the reasons is that it has become a Lego block for other mining projects to gain liquidity. In addition to DEX, there are loan agreements, synthetic asset agreements, etc., which will gradually benefit from the development of DeFi. Just like Nexus Mutual also benefited from the aggregation protocol and the recent mining wave.
Therefore, the underlying protocol is the basic Lego building blocks. They have not been replaced, but have been continuously enhanced with forks + mining + aggregation.
Possibility of aggregator
In the Internet age, aggregators capture most of the value. Google aggregates the content of various websites, Facebook aggregates social relationships and content, Amazon aggregates goods and transactions, Airbnb aggregates guest rooms…These technology giants have subverted traditional industries and built a near-monopoly.
Why do these technology giants form a near-monopoly position? As more and more users, content, and products are aggregated, the cost will not increase, but will only be diluted, and a network effect will be formed on this basis. This is a huge moat, and the result is a winner takes all. Will there be a convergence effect similar to the Internet era in the DeFi field? Don’t know yet, but DeFi aggregators have already demonstrated energy.
*The aggregator is a cold revenue machine.
The aggregator takes advantage of the composability and permissionlessness of DeFi, and is constantly looking for better revenue strategies to help users increase revenue. Among them, one of the most typical cases is YFI’s yvaut, which is an aggregator that improves mining revenue.
*The aggregator is the distribution center of DeFi funds.
Whether it’s liquid mining, staking, lending, or DEX’s AMM, it’s essentially all about depositing tokens in a storage pool and earning income. This means that whoever has higher returns is likely to siphon more tokens. At present, tokens are attracted by lending, DEX, derivative agreements and aggregators, and finally various tokens themselves are staking. These agreements seem to be in different fields, but in essence, they have a certain degree of competition. The underlying protocol is the basis for generating revenue, and the aggregator is responsible for the optimization of revenue, and eventually equilibrium will be reached. From the perspective of user operation, the aggregator is more in line with its interests, more flexible, and more profitable.
Of course, the aggregator also has a higher risk, because the aggregator involves more protocols. Once one of the protocols is at risk, the high-yield gains outweigh the losses. In the early days, aggregators were more suitable for users with higher risk appetites.
*The aggregator is the entrance to the DeFi experience upgrade.
DeFi is in a very niche stage, and the important reason is that the current threshold for users is very high. For most users, in order to use DeFi, they need to face the wallet registration, wallet key management, wallet and protocol interaction, and later involve various more complicated things such as lending, trading, mining, and synthetic assets. Interaction, various arbitrage strategies, and mining strategies are too difficult for ordinary users.
These operations may be nothing to the core players, but for large-scale ordinary users, it is a very headache. If you want ordinary users to participate in DeFi, these are the problems to be solved.
Not only is the threshold of user experience high, but the DeFi project is developing very fast, even the core users of DeFi can’t keep up with this rhythm, let alone ordinary users. For example, in recent liquid mining projects, fresh “fruits and vegetables” are coming out every day, and ordinary users have no way to start, and they don’t know how to choose.
Not only is the use threshold high, the selection threshold is high, but the cost threshold is also high. During the peak period of mining, the cost of hundreds of dollars at every turn is unbearable for ordinary users.
Finally, for ordinary users, what is even more terrifying is that they do not know the potential risks, which may cause significant losses.
All in all, the DeFi field is currently on the eve of its gushing development. It is necessary to have a DeFi aggregator that can be used by ordinary users and experienced users. It can give users directions and make it more convenient for users to participate in DeFi without worrying about complexity. Operation, high cost, selection, safety and many other issues.
DeFi and public chain dispute
*ETH 2.0 will further strengthen its advantages
With the arrival of ETH2.0, the congestion problem on Ethereum will be alleviated to a certain extent, which will further consolidate its advantages due to its inherent ecological advantages.
*Polka, Cosmos, Solana and other public chains have begun to develop their own DeFi ecology and will also develop their own small ecology.
At present, there are more than a dozen DeFi projects on Polkadot, and there are about 200 overall ecological projects. The ecological infrastructure has been initially completed. Cosmos is also under development, and some DeFi transaction projects and stablecoin projects are also under development. Solana also began to build DEX, such as Serum. If it can prove itself, then there are many opportunities for expansion in the future. In addition, various other public chains will also develop their own DeFi and realize cross-chain asset circulation on this basis.
Therefore, the future cross-chain asset field will also produce some good projects.
*Forming a multi-chain coexistence ecology centered on Ethereum
Ultimately, with the development of cross-chain assets, the DeFi ecosystem of Ethereum will continue to strengthen, and other public chains will have the opportunity to gain a certain market size. Since the overall DeFi market is still small, these public chains have the opportunity to develop DeFi together. In the future, it is more likely to form a DeFi ecosystem with multiple chains coexisting around Ethereum.
Layer 2 development
DeFi exposes Ethereum’s shortcomings in terms of high fees and low throughput, but it is not a bad thing. On the one hand, it fully illustrates the existence and scale of demand. If there is no congestion, it is a bad thing. On the other hand, it will also encourage the backbone of the entire encryption field to work hard to find solutions. For layer 2 you can refer to the previous article “Ethereum Layer 2 Track” by Blue Fox Notes.
These include state channels, side chains, Plasma, Optimistic Rollups, Validium, Zk Rollups, etc. These programs have been balanced at different levels. Some have made certain compromises on security, some have made certain compromises on availability, and some have made certain compromises on throughput. But they all promoted the development of Layer 2 to varying degrees. Nowadays, there are more and more projects adopting Layer 2. In the future, we may see many DeFi projects based on Layer 2.
