Summary of ABCDE Investment Partner Lao Bai's Trend Commentary: DeFi's Three Major Areas - DEX, Lending, Stablecoins

ABCDE, a partner at an investment research firm, and a research advisor at Amber Group, Lao Bai, recently published commentary on trends in the three major areas of DeFi. Here is a summary and additional information.

For more trend commentary from Lao Bai, please review.

DEX Trends: ve3,3, Hybrid, UniV3-Fi, TNG

ve3,3

Lao Bai first mentioned the ve3,3 model, driven by DeFi developer Andre Cronje AC on the Fantom public chain's Solidly, as a new type of token issuance mechanism that attempts to combine Uniswap, Curve, and OHM. Lao Bai stated that initially, this mechanism was not very popular, but the fork on OP by Velodrome made the ve3,3 model gain traction.

Lao Bai believes that this emerging competition in alt L1-style public chains and the rise of L2, along with the rewards provided by OP, played a crucial role. Currently, the ve3,3 model can be seen on various chains, such as DEX "Chronos" on Arbitrum, and DEX "Thena" on BSC. They are all based on Solidly with adjustments, similar to how SushiSwap adjusted Uniswap, but the earlier versions did not gain popularity until Velodrome, which outperformed Uniswap on OP.

Lao Bai commented, "Personally, I am not very fond of this model. Firstly, the stitching traces are too heavy, and secondly, it is too complex, making it difficult for many ordinary users to understand, unlike the simplicity of Uniswap."

Note: Stitching refers to the piecing together of various features.

Lao Bai discussed another mechanism with a bribery mechanism, Curve War. Although it is also complex, it is designed for development teams and large holders, with a different positioning from ve3,3. He cautioned that the popularity of Velodrome is highly correlated with the rewards from OP. For instance, large holders such as Synthetix use OP airdrops for bribery. Once the rewards stop, careful observation is required.

Hybrid: Hybrid Exchanges

Lao Bai referred to hybrid as a seam in the user experience. It is divided into two types:

1. CEX+DEX: "Centralized Exchange Experience" + "Self-Custody" DEX Experience

He believes the popularity stems from the general distrust of centralized exchanges after the FTX incident, but people are still accustomed to the smooth experience of CEX, leading to the emergence of new hybrid products. "The basic front end is similar to DYDX and Blur styles, connecting the wallet first, then depositing money, and the fund operation is completely off-chain. Settlement occurs when withdrawing, then back on-chain."

2. AMM+OrderBook: Automated Market Maker + Order Book Hybrid Experience

He explained that this combines the traditional AMM with Orderbook using market makers and LP liquidity providers. Users automatically select the best price for trading from both when trading. This approach helps in cases where there may be a lack of market makers or depth in the long-tail asset order book, and the AMM mechanism can act as a "safety net."

He noted that there are many projects of this type, with Vertex being a representative example, recently launched on Arbitrum, combining the above two hybrid characteristics, offering spot and derivative trading, with a promising team. However, Lao Bai believes the DEX field is already oversaturated with competition, so he has not invested yet.

UniV3-Fi

The "Business Source License" (BSL) of Uniswap v3 has expired, prompting several DeFi protocols to adopt the previously unavailable v3 model.

Lao Bai believes that next, there will be more protocols mimicking Uniswap v3 and various financial applications based on v3. For example, NFT lending Paraspace, options platform Panoptic, and impermanent loss hedging Gammaswap based on the v3 concept.

TNG

Curve's upgraded technology Tricrypto New Generation (TNG) optimizes Gas Fee expenditure, reducing transaction costs and competing with Uniswap. This is conducive to attracting more trading bots and aggregators.

Lao Bai believes that TNG can help Curve enter the retail market, combined with the benefits brought by the upgrade of SNX V3 to Atomic Swaps. The competition between Curve and Uniswap in the mainstream spot market should be a focus in the near future.

Lending Trends: All-Chain, Isolated Pools, No-Oracle No-Liquidation Loans

All-Chain

Lao Bai mentioned that the designs of Compound v3, AAVE v3, and the popularity of Radiant Capital RDNT indicate the trend of "all-chain lending."

Quoting dForce founder Yang Mindao, he explained that the current "all-chain lending" is still in a pseudo-all-chain stage, mostly involving cross-chain lending. True all-chain lending should allow for "any chain to deposit, withdraw, lend, repay, with multiple chains sharing liquidity and a single interest rate curve," which no platform currently achieves.

Isolated Pools

Lao Bai mentioned Euler Finance as an example of "collateral asset isolation," stating that this design is now standard to prevent situations where a single asset compromise could collapse the entire protocol due to oracle manipulation, like XVS or Mango. While it sacrifices some flexibility, it prevents a single mishap from causing a catastrophe.

No-Oracle No-Liquidation Loans

Lao Bai discussed that mainstream coins have mature depth and liquidation mechanisms, but many long-tail assets, referring to small-market assets, are not used on many lending platforms despite having isolated pools due to the high risks of oracle manipulation and liquidation.

He mentioned three different approaches:

1. Timeswap, using a highly complex three-variable XYZ=K AMM. Lao Bai noted that the design is impressive, but few users may understand it.

2. InfinityPools, borrowing V3 LPs, essentially conducting automatic liquidations through V3.

3. Blur's Blend protocol for NFTs, a peer-to-peer protocol. Lao Bai suggested that with some design improvements, it could be used for lending long-tail ERC20 tokens.

Additional information: Understanding how to use and special liquidation mechanisms in one article.

Stablecoin Trends: New Blood, RWA, LSD

New Blood

Lao Bai believes there is little to discuss about the development of stablecoins, as the LUNA/UST incident has signaled the death of algorithmic stablecoins. Recently, Frax also switched to a 100% collateral ratio, further confirming this trend.

However, there are new collateral-backed stablecoins emerging in the market, ensuring they do not break their peg using various technologies. Lao Bai emphasizes that the "use case" is critical.

MakerDAO's Endgame Plan, AAVE's GHO, CRV's crvUSD, SNX V3's sUSD, and Arthur Hayes' BTC reserve stablecoin NUSD are stablecoins Lao Bai has previously discussed as new stablecoins.

RWA

Lao Bai explained that stablecoins backed by real-world assets (RWAs) have a protocol called Ondo Finance offering the stablecoin OMMF, supported by a money market fund and US government bonds, a somewhat fringe entity in the space.

LSD

After the Shanghai upgrade, LSD liquidity staking derivatives have seen a surge in development. Lao Bai believes there will be a stablecoin based on LSDFI, such as "Forking a Liquity, changing the collateral to stETH or a basket of LSD versions of ETH, and then making some adjustments to the interest rates."