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【Dapp Pocket】DeFi Weekly Report - Week 1 of July: Is Yield Farming a Healthier ICO?

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【Dapp Pocket】DeFi Weekly Report - Week 1 of July: Is Yield Farming a Healthier ICO?

Dear DeFi enthusiasts,

This week, with the adjustment of the mining mechanism of COMP, BAT is no longer the best choice for arbitrageurs. Curve CEO mentioned that Yield Farming is a healthier ICO, and our analysis further explores the advantages of Yield Farming.

Other news this week includes the privacy platform Tornado preparing to establish a DAO and issue tokens, insurance protocol Nexus Mutual launching a new Staking model, and Maker discussing changes to the stablecoin collateral borrowing Dai model. In the expert opinions section, we will share Vitalik Buterin's views on the hot liquidity mining market, Visa's Chief of Crypto Cuy Sheffield's perspective on CBDCs, and Bankless's Ryan Adams' fresh insights on DeFi tokens.

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Last Saturday was the U.S. Independence Day, so interviews were paused for a week. Next week, we will interview mStable founder and CEO James Simpson.

What is DeFi?

DeFi (Decentralized Finance) refers to decentralized financial services. In simple terms, it is financial services operated in a decentralized manner, with distributed management rights, transparent information, and based on blockchain technology, aiming to address issues in traditional finance industries such as slow transaction speeds, high costs, susceptibility to hacking, and potential misuse by governments or organizations. Current DeFi services include lending, synthetic assets, derivative products, and even unique flash loan services.

About the Authors

  • Raizel / Economics major at NCCU, shifted focus to DeFi after being stuck in Bitcoin

  • Thomas / DeFi enthusiast in Boston working in chip design

  • Anderson / Founder of Dapp Pocket, DeFi deposits > bank deposits

Our Perspective | Is Liquidity Mining a Better ICO Model?

Recently, the lending and mining model of Compound has gained popularity. In just a month, various optimal arbitrage models have emerged, from circular lending of USDT, BAT, to the current Dai. This liquidity mining coin issuance model has sparked much debate among industry veterans. From a speculative standpoint, Compound's R. Leshner has openly warned about the risks of high volatility assets in circular lending, and Ethereum's Vitalik has repeatedly emphasized that DeFi arbitrage models cannot exist in the long term. From a coin issuance perspective, Curve's M. Egorov's description of a "healthier ICO model" is intriguing, as we have all witnessed the bursting of the ICO bubble. So, what are the similarities and differences between liquidity mining and ICOs?

First and foremost, both liquidity mining and ICOs are unregulated fundraising methods, lacking investor protection. Their tokens or services rely on smart contracts, which may be vulnerable to contract bugs or hacks. Additionally, liquidity mining may develop high-risk arbitrage channels, such as the recent anomaly of BAT having a 30% higher lending rate, which is clearly irrational. In these aspects, both liquidity mining and ICOs come with risks that investors must be aware of.

What advantages does liquidity mining have over ICOs? We believe there are four key points:

  1. Operational services: Many ICOs fail because the teams did not have a viable plan from the beginning, sometimes even raising funds without any preparation. Liquidity mining models, even if taken a few steps back, have operational services and smart contracts already in place.

  1. Auditable usage: Since liquidity mining models have their services operational, you can assess the quality of the service through on-chain transaction volume, TVL, and other observable data.

  1. Long-term issuance plans: Compound had a comprehensive coin issuance plan in place before liquidity mining started, specifying issuance quantities and extending the issuance schedule to four years, preventing rapid token hoarding-induced bubbles. Speculators always exist, and speculative behavior often marks the beginning of asset bubble formation.

  1. Encouraging user participation and governance: If ICOs give users a chance to gamble and see if a platform is truly valuable, liquidity mining is more like a mechanism that incentivizes users to use platform services, returning value to the users involved in platform development. Under the Compound model, users do not need to speculate on the estimated price of COMP out of thin air, but can determine their investment in liquidity mining based on the platform's past performance. Furthermore, while mining, users also gain the right to govern Compound, and can even participate in planning future coin issuance policies.

Weekly Highlights

Compound's Dai on the platform is 2.7 times the total circulation, what's going on?

According to Dai Stats data, the total circulating Dai in the market is approximately 148 million. However, the Dai total locked assets displayed on the Compound website are as high as 401 million Dai. This situation is closely related to Compound's liquidity mining. Many people maximize mining profits by simultaneously participating in 'lending' and 'borrowing'.

But since Compound's governance proposal 011 changed the distribution of COMP for lending mining based on the 'asset size' of the borrowing market. As Dai's borrowing and lending rates were around 4% at the time, and it was the largest currency in terms of locked assets on Compound, users shifted their operations to Dai.

Curve CEO: Incentive mechanism of liquidity mining is a 'healthy ICO alternative'

Curve Finance CEO Michael Egorov expressed in the first episode of the "Beyond Consensus" series that the hype around DeFi liquidity mining is not surprising at all. Even before developing Curve, he believed that incentivizing users to help the protocol is the most valuable application for tokens, which is a healthier alternative to ICOs. It must be noted that Synthetix was the first to pioneer these incentive mechanisms in the DeFi world, and has since been emulated by many projects.

Tornado Cash plans to launch Tornado Fund in mid-July, may issue tokens

Ethereum mixing service Tornado Cash is collaborating with OpenLaw (The project behind The LAO) to create the Tornado Fund, set to launch in mid-July, to invest in Tornado Cash engineers developing Tornado Cash v3, and help it evolve into a fully decentralized Ethereum privacy protection technology. Tornado Cash currently does not have a token, and may introduce protocol-level tokens in v3 for governance of the Tornado Cash network. If v3 includes a token mechanism, the Tornado Fund will evolve into a fully decentralized DAO.

Ethereum mutual insurance Nexus Mutual introduces new Staking collateral system

Ethereum mutual insurance Nexus Mutual announced the launch of a new Staking system, allowing platform users to stake on contracts they deem secure and receive corresponding rewards. Stakers no longer need to wait in line for rewards as in the old system, as rewards are proportionally distributed in each specific smart contract. Nexus Mutual stated that this Staking system allows the same NXM (Nexus Mutual's native token) deposit to be staked in multiple contracts simultaneously to maximize potential returns.

Maker community prepares to launch new proposal to mitigate stablecoin collateral de-pegging risks

The Maker community is initiating a proposal called Peg Stabilization Module (PSM), which is currently under pre-proposal discussion. The PSM model is very similar to using stablecoins as collateral for Dai, for example, if a user wants to collateralize USDC to borrow Dai, the PSM adaptor will directly generate Dai at a 1:1 ratio within the debt ceiling to lend out; if a user wants to exchange Dai for USDC, the PSM adaptor will exchange USDC at a 1:1 ratio if there is sufficient USDC in stock, and burn Dai. The proposal believes this model will make Dai more liquid and stable.

Other highlights:

Three Data Indicators

This week's data is collected from 2020/06/30 to 07/05, with price snapshots taken around 5:00 PM. TVL refers to Total Value Locked, indicating how much value is locked in the platform. Data source: DeFi Pulse.

Lending Platform Scale

DEX Scale

Four Industry Insights

Vitalik Buterin: Long-term DeFi returns won't surpass traditional finance

In response to the current hot trend of Yield Farming, Ethereum founder Vitalik Buterin reminded users on Twitter that these trends are not sustainable in the long term. He mentioned that many flashy products are short-term, whereas the most valuable aspects of DeFi are somewhat mundane: providing everyone in the world access to cryptocurrencies and offering interest rates equivalent to inflation.

Ryan Sean Adams: DeFi tokens are like S&P500 index funds

Bankless advocate Ryan Sean Adams recently made an interesting tweet. He mentioned that KNC is Kyber's token, which can be seen as a financial asset built on Ethereum with ETH as the payment unit. If we were to compare it to the stock market, AAPL Apple stock is a financial asset built in the U.S. with USD as the payment unit. Therefore: Ethereum is the U.S., ETH is the USD, and DeFi tokens are like the S&P500.

Cuy Sheffield: Central Bank Digital Currencies (CBDCs) will lead the next generation of payment models

Cuy Sheffield, Visa's Crypto Head, expressed his views on CBDCs in a recent tweet. He stated that CBDCs will be one of the most important trends in future currency and payment systems, regardless of individual opinions, as global interests lie within them.