DeFi's Risks and Opportunities: How Can Outdated Blue Chips Regain Market Attention?

Original Title: "DeFi Track Stagnation, Can Outdated Blue Chips Come Up with New Tricks?"

Original Source: "Plain Language Blockchain"

The encryption industry is never short of narratives, especially with the recent rounds of Shanghai upgrade, BRC20, meme, and even the repeated halving narratives, each hype triggering new market attention.

Before all the narratives, the "DeFi Summer" that started in 2020 is now rarely mentioned. As a key milestone event in the rotating narrative of the crypto world, three years have passed and there are now some noteworthy new changes in the DeFi narrative.

Lost Narrative of DeFi

Since the "DeFi Summer" in 2020, the entire DeFi track has made significant progress, and the market has spawned many sub-fields such as decentralized trading, lending, derivatives, fixed income, algorithmic stablecoins, asset synthesis, and aggregators.

However, since reaching its historical peak on May 19, 2021, the traditional DeFi blue chips such as UNI, LINK, SUSHI, and SNX have shown signs of decline. Whether it is the old DeFi leaders such as Uniswap and Synthetix, or the new "DeFi 2.0" rookies such as OHM, it seems that they cannot escape the embarrassing situation of gradually being forgotten by the market hotspots.

Especially in the development of the cryptocurrency world in the past year 2022, after the successive prosperity of narratives such as NFT, DAO, Metaverse, and Web3, DeFi has been forgotten by the vast majority of market participants and has become a disfavored market narrative.

At the root of the problem, aside from the branding and stickiness of a few leading products, the services offered by the vast majority of products are largely similar, and most are only barely sustained through their own token incentive programs:

When there is a substantial liquidity incentive, the asset scale (TVL) of DeFi new platforms will indeed expand rapidly, but this is unsustainable because the funds themselves are not truly "locked". Once new high-yield opportunities emerge, or the incentives of the original protocol cannot be maintained after a certain TVL scale, the funds will quickly move flexibly.

This is also the reason why the secondary market prices of DeFi products, especially their Tokens, have been volatile since 2020 - relying solely on Token incentives to retain users in the short term is not sustainable in the long run.

Old DeFi Blossoms Anew

However, temporarily ignoring the lackluster performance of vertically-oriented DeFi protocol tokens in the secondary market, there are still some interesting variables happening within the DeFi track. Among them, Curve, MakerDAO and other top blue-chip projects are showing the most obvious movements, and the most direct signal is that the boundary between DeFi giants is becoming blurred.

MakerDAO Enters the Borrowing Market with Spark Protocol

First of all, MakerDAO, which started with stablecoins, is starting to lay out the lending track. It launched the Spark Protocol, a lending protocol based on the Aave V3 smart contract, at the beginning of this month. The product is open to all DeFi users and has lending functions for ETH, stETH, DAI, and sDAI, with DAI as the center.

Spark Lend supports MakerDAO's PSM and DSR, and USDC holders can also directly convert USDC to DAI through PSM on the Spark Protocol official website homepage, and earn deposit interest through DSR.

In addition, another function of Spark Lend in the encryption industry is to guide the future launch of MakerDAO's liquidity collateralized derivative product EtherDAI. The overall mechanism will be similar to Frax Finance, and MKR or DAI will also be provided for liquidity block production at launch.

Aave Layout GHO Stablecoin

Interestingly, Aave, which uses borrowing as its basic strategy, coincides with MakerDAO and plans to launch a decentralized, collateral-backed, and USD-pegged Aave DAO native stablecoin GHO.

It is similar in logic to DAI - a stablecoin that is minted using aTokens as collateral. The only difference is that since all collateral is productive capital, it generates a certain amount of interest (aTokens), which depends on the demand for borrowing.

Last month, Aave founder and CEO Stani Kulechov released an update on the progress of stablecoin GHO, stating that the GHO code has been made public and has completed an audit. Currently, GHO has been released on the Goerli testnet and is undergoing a bug bounty program.

Actually, this is also a great comparative test group: as the two major DeFi blue chips that penetrate each other's business, MakerDAO and Aave's stablecoins are similar in mechanism design, and their borrowing mechanisms are also based on the Aave V3 smart contract. The only difference is that one enters the borrowing market based on the stablecoin's own token minting rights, while the other builds stablecoin usage based on the borrowing scenario as an extended foundation.

Who can ultimately come out on top can to some extent prove whether it is easier to penetrate the lending field based on native stablecoins or to expand the use cases of stablecoins based on lending protocols.

Of course, both parties are currently in the testing phase, and the actual results remain to be observed in the later stage.

Curve launches crvUSD

In addition, Curve, which focuses on large asset exchange, has recently launched its stablecoin crvUSD. The UI has been deployed and officially launched, and it currently supports sfrxETH, an Ethereum liquidity collateral product under Frax Finance, for collateral casting. It will further support stETH in the future.

However, the total amount of crvUSD is currently relatively small. Nevertheless, thanks to Curve's natural liquidity incentive advantage, crvUSD can be said to have been born with a silver spoon in its mouth.

突飞猛进的 frxETH

Rapidly advancing frxETH

In fact, MakerDAO, Aave, and Curve, which were mentioned earlier, are all laying out the big cake of liquidity mining outside of their respective new tracks - the lending protocols of MakerDAO and Aave can directly expand the LSDfi business.

However, among all the DeFi blue chips currently, Frax Finance has the deepest layout in the LSD field, which can be seen from the growth data of frxETH:

On October 21, 2022, Frax Finance launched its Ethereum liquidity staking product, frxETH. As of today, after approximately 200 days, frxETH has grown from 0 to nearly 220,000 tokens, with a value of approximately $400 million.

According to DefiLlama data, the current amount of frxETH staked is only surpassed by Lido, Coinbase, and Rocket Pool, with a growth rate of over 40% in the past 30 days. The growth rate after the Shanghai upgrade is even more impressive.

In a sense, Frax Finance's year-long quest for change is a typical example of our observation of DeFi blue chips breaking through:

In 2022, the changes in algorithmic stablecoins caused Frax Finance to face a crisis. At a critical moment, Frax chose to increase its reserves to completely eliminate its algorithmic stability (becoming a fully collateralized stablecoin) while maintaining its existing stablecoin layout.

At the same time, further expanding the new narrative, especially accurately hitting the LSD trend - the Convex governance token CVX, which was originally accumulated for the purpose of forming a 4 pool with UST, has also been put to new use, giving Frax the opportunity to use the huge exchange rate impact to reward emissions on Curve, thereby creating the possibility of higher returns (around 6%).

This is also the key to frxETH's rapid entry into the LSD market and its quick establishment in the market.

Summary

Actually, the prosperity of most DeFi projects in 2020 and the challenges they have encountered since 2021 were destined from the beginning - generous liquidity incentives are not sustainable.

Therefore, the current boundary-less attempts of DeFi blue chips are a microcosm of many DeFi protocols trying to start self-redemption from different channels. Whether they can successfully achieve their breakthroughs or give birth to new narratives remains unknown, but it is worth paying attention to.

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