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The activity of the DeFi agreement declined in the second half of the second quarter; but overall, most indicators have reached record highs.
Original title: ” Messari DeFi Report for the Second Quarter: DeFi is making great strides towards the global open financial system “
Written by: Ryan Watkins, Roberto Talamas
DeFi is the Tower of Babel of mankind. We have rebuilt money into a language…a computer language that can be used by all cultures in this land. Now, all our talents, greed and ideals can be unified into one system. The growth of DeFi will be unparalleled. The next 1-2 years will be very critical and will affect the next decades or even hundreds of years.
A year ago, Compound launched the COMP liquidity mining program, which completely changed the DeFi industry. With the new mechanism for guiding liquidity in the DeFi protocol, the decentralized financial industry has achieved exponential growth in almost every indicator. In this process, DeFi not only attracted the attention of investors, users and regulators, but also showed the world how to achieve product/market fit.
In the second quarter of 2021, the DeFi market continued this momentum, with most indicators hitting record highs. However, as the digital currency market began to weaken late in the second quarter, DeFi was not immune. In many cases, as speculative activity in the market decreased, the activity of DeFi agreements also declined in the second half of the quarter.
However, is this the whole story?
In this report, we will take you to understand the key performance indicators, market development and key issues that need attention in the next few quarters. 2021 Q2 is another crowded quarter in the development of the DeFi industry. Although asset prices may be low, the fundamentals of DeFi are still developing, which also provides a foundation for the next phase of growth of DeFi.
Decentralized Exchange (DEX)
DEX trading volume continued to explode in the second quarter, reaching US$405 billion in the current quarter-an increase of 117 times year-on-year and an increase of 83% since the first quarter. Only May accounted for more than half of the transaction volume this quarter. This is not surprising, because the digital currency market also peaked in May.
Since May, DEX trading volume has been halved, and June trading volume has fallen to 95 billion U.S. dollars. Despite the decline in this indicator, June still set the third-highest DEX trading volume in history.
Looking at the evolution of the competitive landscape throughout the quarter, we see that the status of PancakeSwap has undergone considerable changes. Although in the short period of April, the “breakfast”-themed DEX subverted Uniswap in number, since then, due to the rise of Uniswap V3 and the Binance smart chain ecosystem after May, there have been many problems. As a result, PancakeSwap’s market share plummeted. By the end of the quarter, Uniswap’s weekly trading volume has accounted for 54% of the total DEX trading volume, which is also the highest level since November 2020.
The rise of Polygon is also eroding the Binance Smart Chain (BSC) market share in decentralized transaction volume. As more and more projects turn to Polygon, with new tokens for revenue farming, the Binance Smart Chain is squeezed out. Out of the market. This situation is a good interpretation of the liquidity “war” that is being carried out between public chains, and shows that when token incentives are the main reason for capital to enter the blockchain ecosystem, once incentives drop or incentives elsewhere are more attractive When the force is exerted, the mobility will shift.
Finally, looking at the entire DEX market, we found that for the first time since October 2020, DEX trading volume accounted for the percentage of centralized exchange (CEX) trading volume to exceed 10%. The data shows that over time, decentralized exchanges are eating up the trading volume of centralized exchanges.
Uniswap V3 becomes a top DEX
In May, Uniswap finally launched the highly anticipated Uniswap V3 protocol. Its biggest feature is to centralize liquidity-allowing liquidity providers (LP) to make markets within a customized price range and create individuals in the process The price curve. The design promises to increase the capital efficiency of liquidity providers by 4,000 times by enabling liquidity providers to provide the same depth of liquidity as V2 within the specified price range, while reducing idle capital. In just a few weeks, Uniswap V3 became the largest DEX in the industry and achieved nearly 28 billion U.S. dollars in trading volume in June.
Uniswap V3 has accounted for more than 40% of all DEX trading volume, and it continues to eat into the DEX market, and there is no sign of slowing down.
THORChain launches multi-chain Chaosnet
After more than two years of development and multiple delays, the cross-chain liquidity protocol THORChain finally went live in the first week of Q2 2021. It is currently being launched in a protected manner. With the development of the network, the community will gradually increase the upper limit of the liquidity pool, prove its safety and solve the bug problem. THORChain currently supports five blockchains, including Bitcoin, Ethereum, Binance Chain, Bitcoin Cash and Litecoin, and plans to connect more blockchains in the coming months. Although the current THORChain trading volume remains sluggish, the liquidity is increasing simultaneously with the increase of the upper limit, which also shows that the market demand for cross-chain liquidity is increasing. We are entering a multi-chain future blockchain. Infrastructure like THORChain can transfer value between blockchains without a trusted third party.
PancakeSwap encounters Waterloo
After the digital currency market plummeted in May, the Binance smart chain ecosystem was also severely hit, and the lock-up volume dropped by more than 50% from its peak in just a few days. Although the lock-up volume on all smart contract platforms has shrunk, the Binance smart chain has suffered even greater losses because most of the value locked in its application is hired capital, and it has almost no purpose other than incentivizing users to speculate. Asset composition. Unlike Ethereum, which is mixed with a large number of stablecoins, Binance Smart Chain’s lock-up volume is highly risky, making it extremely sensitive to market fluctuations. Coupled with a series of hacking and vulnerabilities on the Binance smart chain, hundreds of millions of dollars have been lost. In addition, the speculative activity on the Binance smart chain dried up sharply in June, resulting in a 69% drop in PancakeSwap transaction volume in June. Its market share also declined simultaneously.
The DeFi industry is moving forward, and one of the common themes is the launch of Layer 2 scaling solutions on Ethereum, which aims to expand DeFi performance by several orders of magnitude without compromising security. Among these solutions, the most anticipated launch is Optimistic Rollups, which allows thousands of transactions to be bundled into a Rollup block. The leading solutions are Arbitrum and Optimism, which are expected to be launched in the third quarter.
DEX will benefit from the Ethereum network expansion solution, allowing them to pay more attention to capital efficiency. Uniswap V3 is the best example of this design concept. Although Uniswap V3 is still an automated market maker (AMM), it is now closer to an order book in pursuit of capital efficiency. In addition to the early success of Uniswap V3, the recent rise of Polygon also makes people look forward to the future of Layer 2 solutions.
After experiencing the boom in the first quarter, DeFi lending began to cool in the second quarter. However, the second quarter of 2021 continued the momentum of the previous quarter. From March to May, total borrowing surged from US$25 billion to a peak of US$45 billion (an increase of 81% in just six weeks), mainly because investors tried to capture the high loan yields in the DeFi loan agreement . However, as the market turned for the better, this upward trend suddenly stopped. Under the influence of increased market turmoil, investors flocked to safer assets, causing the amount of loan deposits to plummet, and the total amount of assets locked by major lending platforms increased by only 15% from the previous month.
Unsurprisingly, the number of outstanding loans followed a similar pattern. In the first six weeks of the second quarter, total outstanding loans increased by 62%. In the next 10 days, the total outstanding loan amount was only 4 billion U.S. dollars, only 21% less than the highest point. As of the end of the quarter, total outstanding loans increased by approximately 44% from the previous quarter.
In addition, as the borrowing demand of investors decreases, the yield on supply of all lending platforms has fallen. In three months, the loan interest rate of stable currencies, especially USDC, dropped from an average interest rate of 9.6% to 1.4%, a drop of as much as 85%.
Source of the above image: LoanScan
Aave joins the multi-chain world
At the end of the first quarter of 2021, Aave announced the launch of Polygon, aiming to get rid of the high fee environment of Ethereum. After that, Polygon and Aave teamed up to provide early users with liquidity mining rewards. Facts have proved that the project has achieved great success, causing Aave’s lock-up volume to increase from US$6 billion to US$12 billion in just two weeks.
Driven by the launch of Polygon and a large number of token incentives, Aave’s market share in total outstanding loans soared in April, which put Compound into competition. By the end of May, Aave replaced Compound as the leading lending platform, accounting for more than 37% of the total DeFi lending market.
Bridging the gap between cryptocurrency and traditional banking-Compound Treasury
At the end of the quarter, Compound Labs partnered with Fireblocks and Circle to launch Compound Treasury, a product designed for non-crypto companies and financial institutions that want to enter the crypto interest rate market. This product allows organizations to access the USDC-based USDC available on Compound. Products without worrying about the complexities related to encryption, such as private key management and the conversion of encryption to fiat currency, and guarantee a fixed interest rate of 4% per year on deposits-compared to the average savings account in the United States, this can be said to be an astronomical digital.
Lay the foundation for lending in a multi-chain world-Compound Gateway
As the future of multi-chain becomes more and more obvious, existing lending agreements have begun to explore solutions that adapt to this new mode of operation. As a way to embrace this emerging paradigm, Compound has launched Compound Gateway, a Substrate-based blockchain designed to serve as the infrastructure for the cross-chain interest rate market. Similar to THORChain’s THORFi lending function (to be launched later this year), Gateway’s goal is to allow users to use the native assets of a blockchain (such as Ethereum) as collateral for other blockchains (such as Solana).
In short, Gateway uses a connector contract called Startport as its core mechanism to connect and transfer value between different blockchains, thereby achieving blockchain interoperability. Starports acts as a contract on a peer-to-peer ledger (such as an Ethereum smart contract) and can lock assets until released by the gateway validator node.
Source of the above image: Compound
The new field of DeFi-fixed income market
Although the fixed income field is still an emerging niche market in DeFi, it has a huge scale in the traditional financial industry. In this context, fixed-income products refer to any tool that generates stable and predictable cash flows, such as corporate bonds, treasury bills, and fixed-income mutual funds. The concept of fixed interest rates is a relatively new and undeveloped area in DeFi, where variable interest rates provided by agreements such as Aave and Compound will become the norm.
As of now, the fixed income field can be roughly divided into three different categories:
Securitization and spin-off
Interest rate swap
In the second quarter of 2021, the total issuance of stablecoins exceeded US$107 billion, an increase of 70% since the first quarter and a year-on-year increase of 803%.
There are many reasons why stablecoins are widely adopted:
Stablecoins are easily accepted as payment because you only need an address on the public blockchain
Stablecoins run on the global public infrastructure and run 24/7/365, which makes them very usable and reliable
Compared with existing payment solutions that require KYC and often restrict access, stablecoins provide users with greater autonomy, privacy, and interoperability
Stablecoins are programmable, allowing developers to use them to easily build and deploy applications with global distribution and instant capital access
In this quarter, the trading volume of stablecoins reached US$1.7 trillion, an increase of 1,090% year-on-year and an increase of 59% since the first quarter, which is impressive!
The biggest winners in the quarter were USDC, BUSD and DAI, and their shares increased to 23%, 9%, and 5%, respectively. Although USDT is still king, its dominance is gradually fading over time.
Finally, let’s take a look at the decentralized stable currency market. In fact, decentralized stablecoins continued to win shares from centralized stablecoins in the second quarter. Decentralized stablecoins have accounted for about 10% of the total supply of stablecoins, setting a record high.
Due to the rise of Terra’s UST, DAI’s market share fell to a large extent in the first quarter, but it still leads the market with a market share of 61%. In the second quarter, DAI recovered some share, while Terra stagnated.
USDC rises and becomes the stable currency of choice for DeFi
Perhaps no stablecoin has a better quarterly performance than Circle’s USDC. Circle has not only completed a financing of US$440 million, but also plans to go public through SPAC at a valuation of US$4.5 billion, and has made considerable progress in the thriving DeFi ecosystem of Ethereum. It is expected that USDC will soon surpass USDT and become the main stable currency on Ethereum.
More than 50% of USDC supply is now in smart contracts-equivalent to approximately $12.5 billion. Although this percentage is not as high as DAI, if calculated in US dollars, USDC is still in the leading position.
DAI continues to achieve incredible growth while increasing centralization risks
MakerDAO ushered in an incredible quarter, DAI supply increased by 76%, and revenue increased by 136%. As of the end of the second quarter, DAI supply reached an impressive $5 billion, and MakerDAO generated $43 million in revenue this quarter.
The rise of non-anchored stablecoins
When Bitcoin was born, it inspired people to imagine the potential of non-sovereign digital currencies. But as Bitcoin began to trade, it was soon discovered that it was not stable enough, and it certainly could not be used as a currency in the short term. At some point in the future, once Bitcoin becomes a large enough asset scale and establishes sufficient liquidity, it will eventually become less volatile. However, considering that Bitcoin is a fixed supply asset and cannot adjust its supply relative to demand, it may end up being as volatile as gold.
In order to bridge the gap between the present and the future, the digital currency industry has created a stable currency pegged to the US dollar, which not only solves the volatility problem, but also promotes the popularization and adoption of many blockchain applications. However, the problem with these stablecoins linked to the U.S. dollar is that they have dollarized Ethereum, and the U.S. dollar is controlled by the Federal Reserve, which in turn restricts Ethereum from building a non-sovereign currency system. In addition, stablecoins expose Ethereum to systemic regulatory risks because it relies on stablecoins that are pegged to the U.S. dollar on the gray market (although this risk is decreasing as the market share of USDC and USDT increases).
Fortunately, the digital currency industry has noticed related issues and has recently launched a number of projects aimed at creating stable currencies that are not linked to legal currencies. These projects are called “non-pegged stablecoins”, and they provide more opportunities for Ethereum’s monetary system to achieve stability while eliminating the dependence on legal tender. In this process, “non-anchored stablecoins” will not only liberate Ethereum’s monetary system from the influence of the central bank’s legal tender, but will also introduce stablecoins suitable for the entire Ethereum economy.
However, for now, non-anchored stablecoins seem to be a remote experiment with no clear use cases.
Unsurprisingly, as the liquidity of the DeFi protocol soared this quarter, the total lock-up value of the revenue aggregator that injected liquidity into DeFi also rose, and the asset management devil fell after reaching a peak of $9.5 billion at the end of the second quarter. 2%.
In the revenue aggregator market, the second quarter is worth paying attention to Yearn’s comeback and rise, and its market share soared from 29% to 69% this quarter.
Yearn market dominance is growing
The most noteworthy thing in the asset management field in the second quarter is the recovery of Year and the growing market dominance. As Year’s incentive adjustment problem was resolved in the first quarter, the current market focus has shifted to Year’s new V2 vault. Yearn V2 has achieved great success, increasing Yearn’s assets under management from USD 540 million at the beginning of the year to USD 4.1 billion at the end of the second quarter.
Yearn’s revenue also grew like AUM. Revenue in the second quarter was $18.5 million, an increase of 236% from the first quarter.
The transaction volume of decentralized derivatives continued to grow substantially in the second quarter of 2021. Although it was still only a small part of the volume of decentralized spot transactions, the transaction volume of perpetual swap contracts reached nearly 20 billion U.S. dollars this quarter, which is higher than that in 2020. Increased by 3,000% in the fourth quarter and 155% in the first quarter of 2021. Despite the current expansion barriers, decentralized derivative protocols have begun to attract more DeFi users’ attention.
Due to the current poor performance of the entire digital currency market, investors’ “appetite” for risky assets and leverage has disappeared amid increasing market uncertainty. Unsurprisingly, the volume of derivatives trading in June declined as expected. But even so, compared with the level at the beginning of 2021, the transaction volume is still on a steady upward trend.
DeFi’s next stop
Obviously, in the second quarter of 2021, DeFi activities were negatively affected by the decline in market sentiment and asset prices, but compared with the beginning of the year, the scale of the industry continued to expand. In the next few months, with the emergence of Layer 2 scaling solutions, more organizations will inevitably begin to get involved in the DeFi protocol, and the DeFi ecosystem will become more and more mature, providing users with higher security. DeFi may usher in a moment of further growth.
DeFi will continue to advance, each step towards a new and open global financial system.
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