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【Dapp Pocket】DeFi Weekly Report - Fourth Week of June

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【Dapp Pocket】DeFi Weekly Report - Fourth Week of June

Dear DeFi enthusiasts,
This week, Compound has surged with the momentum of "lending is mining," with TVL skyrocketing fivefold, surpassing Maker's long-standing position. Its governance token COMP price has also soared. Discussions and risk warnings on various speculative methods have sparked online, and we also attempt to analyze from different perspectives.
Synthetix, the synthetic asset platform, has announced a new liquidity incentive pool in collaboration with Curve and Ren, including sBTC, renBTC, and WBTC, where liquidity providers will receive rewards from the four major platform coins. Dedicated to combining car loans with DeFi, DMM has launched the governance token DMG's first DEX public offering yesterday (22nd). This week's insights include Vitalik Buterin's warning on the risks of high-yield DeFi projects, Ryan's explanation on why DeFi has not directly boosted ETH prices, and Binance's CZ responding to the news of a Robinhood investor's suicide due to investment losses.
Expert visits are on hold this week, so we bring you a special topic on the highly anticipated Liquidity Pool.

DeFi (Decentralized Finance) refers to decentralized financial services. Simply put, it operates financial services in a decentralized manner with distributed management, transparent information, and blockchain-based operations to address issues in traditional finance such as slow transaction speeds, high costs, vulnerability to hacking, and potential misuse by governments or organizations. Current DeFi services include lending, synthetic assets, derivative products, and even unique flash loan services.

Our Perspective | COMP: What to Watch For

After Compound officially launched its lending and mining, within just a week, the platform's TVL increased fivefold, and the price of COMP tripled. Various ROI calculations are constantly being refreshed, and strategies like borrowing from Compound to mine COMP are emerging. This FOMO sentiment has indeed attracted many external participants to join and expand the DeFi ecosystem, but it also inevitably brings to mind the tragedy of FCoin, which launched "trade-to-mine" and later collapsed due to poor internal operations.

We are still optimistic about COMP's model. Firstly, COMP's issuance rules are written in smart contracts with a limited supply and an issuance period extended to four years. The fixed and lengthy issuance process allows investors to more easily anticipate future value trends when making decisions, resulting in fewer emotional operations. Compared to FCoin's unlimited initial issuance, many problems should be avoided. Additionally, even before COMP was issued, Compound had around $100 million in TVL (Total Value Locked) and many users and applications built on top of it (like PoolTogether, Dharma), so its fundamentals should be quite solid. With Compound's growth, the governance rights held by COMP should also become more valuable.

So, does investing in Compound at this stage mean there are no risks? Of course not. As Vitalik Buterin said, any abnormally high returns are either short-term arbitrage opportunities or have hidden risks. The mining rule of COMP distributes a fixed amount of COMP to lenders and borrowers in each block, so some users borrow first and then cycle their coins into Compound to earn the most COMP. This phenomenon seems to be appearing for the first time, so we are not sure if there will be systemic risks. Additionally, if the borrowed amount is too high and the loan grows with interest to the point where your collateral is insufficient, your assets may be liquidated by the system. Moreover, as more funds pour into smart contracts, it will inevitably attract more hackers to try to attack the contracts. Although Compound's contracts have been audited, everyone attempting to use new technology should still be cautious.

Finally, Compound founder Leshner also mentioned on Twitter: "Yield farming" with high price volatility assets is very dangerous. Please be cautious.

Weekly Highlights

Compound's Total Value Locked Surpasses MakerDAO, Driving DeFi Value to Historic Highs

According to DeBank data, the total value locked in the cryptocurrency lending protocol Compound has surpassed MakerDAO, which had long held the top spot, making it the decentralized financial protocol with the highest locked total value. As of now, Compound's total value locked has exceeded $550 million, while MakerDAO stands at $456 million. Additionally, Compound's total borrowing amount is $313 million, compared to MakerDAO's $123 million, further widening the gap between the two. Moreover, the total value of assets locked in various DeFi ecosystems has exceeded $1.24 billion in mid-February, now surpassing $1.5 billion, reaching a historical high.

COMP Speculation Overdone? Ethereum Founder: If Long-Term Arbitrage Opportunities Exist, There Must Be Risks

As of now, the total locked value in DeFi has reached a historical high of over $1.5 billion. Given the market frenzy over the COMP token, Ethereum founder Vitalik Buterin shared his views on the systemic risks of DeFi in several tweets. He believes that we are overly emphasizing these high-interest DeFi projects, with interest rates far exceeding what traditional finance can offer. If it is not a short-term arbitrage opportunity, then there are undisclosed risks.

Synthetix, Curve, and Ren Collaborate to Create New Liquidity Incentive Pool for Ethereum-Based BTC

Synthetic asset platform Synthetix has announced a new liquidity incentive pool in collaboration with Curve and Ren, providing liquidity rewards for Ethereum-based BTC (BTC-anchored tokens). The goal is to create the most liquid Ethereum-based BTC pool, offering the lowest slippage for traders to exchange between sBTC, renBTC, and WBTC. This pool will provide various token incentives to liquidity providers, including SNX, REN, CRV, and BAL. Liquidity providers can earn these rewards by contributing sBTC, renBTC, or WBTC to the BTC Curve liquidity pool.

DeFi Currency Market Protocol DMM Launches Public Offering of Governance Token DMG on June 22

DeFi currency market protocol DMM launched the first decentralized exchange (DEX) public offering (IDO) of its governance token DMG on June 22. The governance token will be sold on two decentralized exchanges, defimoneymarket and mesa.eth. DMM has previously outlined its distribution plan for the governance token DMG: 1. Total DMG supply is 250 million tokens 2. 30% of governance tokens will be sold in various forms in the future 3. 30% of tokens will be reserved for incentivizing ecosystem developers, partners, and integration with other protocols 4. An additional 40% will be used for ongoing development of the DMM Foundation and other corporate purposes.

Update on 6/23: According to DMM's official Twitter, there have been scams impersonating the DMM Foundation, please be cautious.

Reddit Seeks Ethereum Scaling Solution to Support its ERC-20 Token Projects

Social media platform Reddit has announced a collaboration with the Ethereum Foundation to bring Reddit Points (ERC-20 tokens) onto the Ethereum mainnet. They are posting to solicit Ethereum scalability solutions from developers to help scale their cryptocurrency points reward system, Community Points, with the goal of finding a solution that can support thousands of Reddit Points users and eventually expand to all users (4.3 billion monthly).

Others include:

Data Indicators

This week's data is from 06/16 to 06/22, with price captured at 7:00 PM as a guideline. TVL refers to Total Value Locked, indicating how much value is locked in the platform. Source: DeFi Pulse.

Lending Platform Scale

DEX Scale

Industry Insights

Vitalik Buterin: We Overemphasize Fancy High-Yield DeFi Projects

Regarding the recent significant rise in DeFi driven by COMP, Ethereum founder Vitalik Buterin shared his views. He believes people tend to overly emphasize high-yield fancy DeFi projects, but if the return rates are much higher than traditional finance, it will undoubtedly indicate either a temporary arbitrage opportunity or undisclosed risks.

Ryan Sean Adams: Seven Reasons Why Ethereum Did Not Experience a Sharp Rise

Regarding the recent hype around DeFi in the past week or two not causing a surge in Ethereum's price, Mythos founder Ryan Sean Adams analyzed possible reasons on Twitter. These reasons include: fundamentals not priced in, waiting for Staking, maintaining patience, lack of value accrual mechanism, Wall Street uncertainty, Ethereum not yet delivered, and DeFi not being ICO.

CZ: Responsible Trading is Important and Encourages Others to Follow Suit

Binance founder CZ Zhao expressed regret over the incident of a young person committing suicide after seeing a balance of -730,000 on the Robinhood page. He pointed out that Binance may be the first exchange with responsible trading warnings, providing reminders to users when they are addicted or engage in improper trading. He believes this is an important service and welcomes others in the industry to follow suit.

Special Feature | Introduction to Liquidity Pools

What is a Liquidity Pool?

Cryptocurrency exchanges typically operate with two mechanisms behind them. One is P2P matching (like 0x Protocol), where the system matches buyers and sellers with similar prices in the platform. This mechanism is more stable when there are enough buyers and sellers on the platform because their prices will be closer to the average market price. Liquidity Pools, on the other hand, aggregate funds into a pool (e.g., ETH-USDT), defining a market-making algorithm in the pool. Users looking to buy USDT with ETH can trade in this pool without needing buyers and sellers, providing stable liquidity. Since Liquidity Pools are automated market makers executed by an algorithm on smart contracts, they are also known as Automated Market Makers or AMMs.

Types of Liquidity Pools

Based on the number of currencies in the pool: pools with two currencies like ETH-USDT, Uniswap is a platform specializing in these types of pools and is the most widely used; and pools with more than two currencies (e.g., USDC-DAI-ETH, platforms like Balancer). There are also pools specializing in the same type of currency, such as wBTC-sBTC-renBTC, where the prices of coins in these pools move in the same direction, and Curve offers these types of pools.

Uses of Liquidity Pools

For the market, Liquidity Pools allow idle funds to provide liquidity, the automated market-making mechanism enhances market efficiency, and generally provides stable liquidity.

For regular users, they can buy coins at reasonable prices at any time. Additionally, different pools may have price differences at the same time, allowing frequent traders to find arbitrage opportunities in Liquidity Pools.

For Liquidity Providers, anyone can inject funds into the pool to provide liquidity and earn transaction fees.

Revenue for Liquidity Providers

The primary source of revenue for Liquidity Providers (LP) is through transaction fees, where trading volume and pool depth directly affect the amount of fees earned. Additionally, LPs will receive a factor influenced by price fluctuations during the liquidity provision and withdrawal period, termed Impermanent Loss. Apart from transaction fee revenue, LP profits are also related to currency price trends. Currently, Uniswap's fee rate is 0.3%, and Curve's is 0.04%. However, Curve integrates its pools with lending protocols like Compound, so LPs also receive interest income.

References

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