Introductory Note: We have included a brief section at the end of this article (and in future DeFi articles) covering the most pressing news and events from the previous week. We will cover topics such as new product launches, important partnerships, and opportunities such as community airdrops or the launch of incentivized participation schemes.
Small and Mid-Cap Lending Platforms
Lending has led the blue chip DeFi projects in total liquidity for some time with Aave and Compound remaining dominant in the sector. Their rise has seen total value locked rise from $100M to $15B+ collateral in less than 24 months. This is driven by a tried and true formula of multi-asset overcollateralized lending, with stablecoin liquidity having the lead in adoption amongst borrowers.
A few months ago Aave flipped Compound in total deposits, fuelled in part by its liquidity mining incentives, and added features like additional collateral options, stable rates, and more. As of June, Aave has also flipped total value borrowed, now dominating lending in both deposits and outstanding borrow.
We can partly attribute Aave’s success to its willingness to innovate and align incentives with users. That said, with tried and true protocols comes difficulty to experiment.
There is limited incentive for markets of Aave or Compound size to experiment with entirely new ideas that could put >$10B in collateral at risk. Instead, we can look to younger projects and starry-eyed communities for new takes on what innovation in the lending market could provide DeFi participants going forward.
In this piece we will explore five young projects with market caps all <$300M, all of which are less than 10 months old, some as young as 3 months old. We will cover:
- Innovation/experimentation – how they differ from Aave and Compound
- Comparatively high risk/high yield farming opportunities among nascent lending projects
Self-Repaying Loans on Alchemix
Alchemix has received lots of attention for its unique future yield scheme. DAI can be deposited as collateral from which users can borrow alUSD. Depositors can borrow up to 50% of their collateral as alUSD. Their debt is automatically payed down by yield from Yearn Finance.
The deposited DAI is sent to the Yearn Finance yvDAI vault to earn yield. Instead of paying interest on their loan, the debt is automatically paid off by yield generated from the DAI deposited in Yearn. Additionally, returns are boosted by yield from the “transmuter” which is a mechanism to backstop the protocol and act as the primary mechanism for pegging the protocol’s synthetic token(s).
It’s important to note that in this setup user collateral can not be liquidated by outside forces since user debt is only decreasing over time as the protocol receives yield from the Yearn yvDAI vault. The obvious risk here is that if the Yearn yvDAI yield trended towards 0% the loan would theoretically never be paid off. Users can still manually repay their debt if rates become underwhelming.
Alchemix currently accounts for over 260M of the DAI currently deposited in Yearn Finance from the Alchemix deposits and 150M alUSD currently sits in the transmuter, converting to DAI and boosting rewards through additional Yearn deposits. Additional TVL in the Alchemix ecosystem exists in liquidity incentives and single-sided reward mechanisms.
alUSD can be used like any other stablecoin in the DeFi ecosystem. Popularly it is used in either the alUSD pool on Curve + Convex or the single-sided alUSD farm on Alchemix. Note that this single-sided farm is slated to be retired. Incentives exist in the alUSD pool on Curve to encourage more liquidity for trading alUSD to other stable pairs.
Farms are additionally set up for incentivizing liquidity in an ETH/ALCX pair to trade the governance token on Sushiswap.
Returns of each farm currently sit as follows:
alUSD3CRV Pool: 30% APR
ETH/ALCX Pool: 170% APR (Note this is the pool 2 farm, meaning the farmer requires exposure to ALCX, the native governance token; this pool has high risk of impermanent loss should the price of ETH and ALCX diverge.)
Single-sided ALCX Pool: 140% APR
Single-sided alUSD Pool: 30% APR (soon to be discontinued)
The ETH/ALCX pool is slated to be migrated to the new Sushiswap Masterchefv2 contract in the coming days. This new contract from the Sushiswap team enables multi-reward liquidity incentives. This means in the case of Alchemix that the pool now rewards stakers in both the governance token ALCX and Sushiswap’s SUSHI token.
As Alchemix matures there are a number of experimental features and advances of the protocol that can be explored. Soon to be released features include alETH and alBTC, adding more forms of collateral to the protocol. Additional collateral is attractive for users who prefer holding these assets over stablecoins. Risk-on collateral has proven successful in Aave and Compound. In Compound, ETH is the largest source of collateral, whilst in Aave, ETH comes in second. It is likely that Alchemix collateral would spike once ETH deposits are enabled. Additional synthetic assets are additionally attractive to token holders who want access to varried sources of borrow through Alchemix.
Lending in Cream Finance and Under Collateralized Loans in the Iron Bank
Cream is the oldest protocol on our list, having launched last August. The protocol has slowly found its place in the ecosystem, partnering with Yearn as the Yearn ecosystem’s preferred lending protocol. Due to the maturation of Aave and Compound, normal lending behavior is to find the best possible rates and deepest liquidity in those markets. Cream’s wide array of assets allows it to be the commonly used third option that is utilized as necessary for niche borrowers.
Cream currently supports 78 assets of varying size and volatility, however notably smaller in market size than competitors. Large depositors can easily inflate the size of collateral pools to reduce lending APYs, and similarly, can withdraw in bulk and inflate the interest rates. The end result is that interest rates available at Cream are typically higher and more volatile than the larger lending markets.
Note that Cream has a relatively low number of users (~9,000) alongside its $1B in TVL, however such low user number is actually not unique among DeFi protocols. Comparatively, Aave only boasts about 40,000 total users (unique addresses) having ever interacted with the protocol.
Cream’s largest innovation of late is its focus on protocol-to-protocol lending, potentially making excessive attention paid to user numbers less relevant. Instead, depositors and borrowers of both credibility and size are given far more weight. Cream sets credit limits on zero-collateral borrowers on a whitelist of addresses. These include trusted protocols like Yearn and Alpha Finance. This is an important innovation because it allows protocols to borrow assets without wasting their own liquidity as collateral. As such, the Iron Bank product currently boasts $770M in collateral.
Savvy yield farmers can bounce their assets around a number of high yielding markets. Here are some sample APYs in pools with healthy liquidity in the iron bank and Cream lending:
DAI, USDC: ~6% base APY in Iron Bank, ~10% in C.R.E.A.M
wBTC: ~7% base APY in Iron Bank, 1.4% in C.R.E.A.M
As time goes on, protocols which mimic features of the Iron Bank’s zero to undercollateralized credit approach have been released. Ideas in tying credit to bank accounts (Teller), through identity to social media accounts (unannounced), and through purely governance driven votes (TrueFi) on sizable lines of credit are being explored and implemented to some success.
Multi-Asset Lending Pools in Rari Capital’s Fuse
Rari Capital received increased interest of late due to its recent $15M smart contract exploit through an integration mistake with Alpha Finance. $15M of ETH was taken. In the wake of exploits we can make a judgement as investors as to the quality of response to turmoil. Those protocols which respond effectively to turmoil often gain increased trust and solidarity with their communities. Those who don’t respond effectively often do not recover from the stress put upon the team and protocol from lost trust. The jury is still out on Rari’s response.
Peak supply on Rari’s Fuse capped in May at about $50M, falling to $26M amidst the exploit and subsequent market decline. Supply has since rebounded to $37M.
Despite the turmoil, Rari Capital has shown some resiliency thanks to its experimentation and pace of innovation. Their unique lending pools allow any combination of assets to be created. This creates a unique market structure unlike Aave and Compound where all collateral options are interfaced with all borrow options in isolated pools. In Fuse these individual pools are set up to isolate assets. This allows isolated risk and return, contrary to Aave/Compound where any added asset creates more or less risk for every lender/borrow in the platform. By isolating pools of assets, the assets in each pool share risk only within that pool, separate from the rest of the platform.
The nascent size and elevated risk of these markets enables increased yields for the prudent yield farmer. Interest rates act the same as in Aave/Compound where utilization curves govern interest rates. While lenders of size currently may not find this attractive, smaller farmers whose positions do not represent a sizable liquidity impact can enter and exit these markets profitably without impacting yields. And fortunately these entrants and exits only effect its individual pool.
It’s not uncommon for niche assets to see high utilization in Fuse. Here are some sample rates from Rari Capital’s largest Fuse pool (pool #3). Keep in mind the liquidity is usually extremely thin and bouncing around lending pools is usually not appropriate for lenders of size:
ALCX: 25% supply rate APY
USDC: 23% supply rate APY
DAI: 12% supply rate APY
Interest Free, Collateral Efficient Lending on Liquity
Liquity builds upon much of the innovation of MakerDAO, making unique and experimental changes. Similar to MakerDAO, Liquity manages issuance of a stablecoin backed by ETH and what they’ve dubbed “troves” that function similarly to Maker’s CDP.
Some key changes from MakerDAO to Liquity:
- Governance token -> Zero Governance
- Varying collateral, dependence on USDC -> ETH-only collateral
- Interest controlled issuance -> Redemption controlled issuance
- MKR burns to inc value -> Single-sided LQTY staking to earn rewards
Liquity achieves interest free lending and stability by charging algorithmically priced one-time borrow and redemption fees and liquidating troves under 110% collateralization. In contrast, MakerDAO uses interest rates to encourage/discourage borrowers. By charging borrow and redemption fees on Liquity, lenders and stakers are incentivized by this potential profit and borrowers can calculate their fees up front without worrying about fluctuating interest rates. Notice how during times of increased deposits and repayments revenue goes up. LUSD is paid at time of borrow while ETH is paid during redemption.
Borrowers open troves that act similar to MakerDAO’s CDPs. Trove numbers plummeted due to liquidation events in the recent market crash, however have since rebounded.
LUSD issued from troves at a minimum collateralization of 110% can be deposited to the stability pool, earning ~36% APR in LQTY token rewards. LQTY can earn up to 134% APR at present staking LQTY for rewards from redemptions.
Note that the LQTY staking reward rate of 134% APR is a highly variable 7-day rate. In periods of high redemption this reward can be very high, during other periods it can be much lower.
Appreciating Protocol Risks
We note that while elevated returns are attractive across all the protocols mentioned, increased risks are associated. Yield farmers holding newly minted governance tokens of failing projects can expect those high returns to become meaningless, while those projects with longevity are more likely to hold their value.
Additionally, as more tokens are minted, high inflation in token supply is prone to reducing price over time as more supply is in circulation. Farmers should do their best to understand if their returns are lagging, at pace, or outpacing token inflation. If rates seem too good to be true then one of two things are almost certainly true: a.) you are early and have truly found alpha or b.) there is heightened risk. As an example, here is the emission schedule of ALCX:
Emission schedules can vary widely project to project. At present the supply of ALCX inflates by about 43% monthly. If the holder has exposure to ALCX in their strategy their goal may be to outpace that inflation. If they believe in the long-term value of the governance token that may be less pressing to their strategy. Liquity’s supply follows 32,000,000 * (1–0.5^year) annual inflation schedule. This means at present about 16M LQTY is emitted each year. This 12 month period will mark inflation of about 3.3x from current circulating supply. Rari’s governance token plays less of a role in the ecosystem. It was emitted as 12.5% to the team and the rest to protocol users over a 60-day period. Emission schedules vary widely and it’s worth understanding how any token you hold is being revalued over time.
Depending on your risk tolerance, your chosen strategy will fit in next to the inflation of the token. The ideal scenario is keeping risk at a minimum while outpacing inflation the best you can. Additionally, you hope a large enough number of buyers/holders see some value prop to holding the token. High inflation without sellers can create a strong market, high inflation with high turnover results in price charts with negative slopes. Token properties like protocol revenue and other value accrual mechanisms to the token holder incentivize token purchases and holding a farmed token for its utility past governance.
Understand that liquidity mining usually involves rewards in the form of governance tokens whose value is often tied to nothing. And even those tokens which reward holders with protocol revenues typically have slim revenue so slim rewards. Drawdowns in these tokens are usually severe and prolonged as farmers are quick to farm and sell their rewards. Purchasing these tokens purely for exposure without farming often carries significant dilution risk from token inflation. We see instances in DeFi where token inflation can exceed 100,000% annually. One should do their best to understand the inflation schedule and any other associated risks.
New lending protocols continue to be released over the past year with varying levels of experimentation and innovation. They boast nascent markets with highly incentivized rewards, elevated risk, and plenty of room for pivoting with small user-bases and tight-knit, highly engaged communities. The larger a protocol and market size grows, the less malleable and easily changed it becomes. Some of the best returns often come from being actively involved in the communities of nascent projects and getting a pulse on the quality of both team and community.
This is our new weekly segment that briefly discusses some of the most important developments of the prior and upcoming week.
With token prices remaining volatile we get a glimpse at what projects have long-term resilience. Great builders often ignore short-term token prices and continue their commitment to development and community building in all conditions.
- Layer 2 season is nearly here.
Arbitrum released its developer beta this week, zkSync launched its testnet, and we’re expecting more news out of the Optimism team in July. Projects from Sushiswap to USDC and others have already announced they’ll be launching on Arbitrum soon.
- Dev funding platform Gitcoin airdropped its governance token GTC and Ribbon Finance airdropped its governance token RBN.
As many have pointed out, any project in crypto without a clear source of revenue for the team and its investors is likely to launch a token eventually.
- Alchemix is set to launch the first use-case of Sushiswap’s new multi-incentive yield contract MasterChefV2.
Initially intended for Tuesday, the release has been pushed back 24-48 hours for logistical reasons. Stakers are set to receive both ALCX and SUSHI as rewards. This marks a new era for Sushiswap’s famed Onsen rewards program.
- alchemist launched mistX, a gasless trading platform.
mistX uses flashbots to remove the hassle of setting gas prices or using ETH to pay gas fees, instead subtracting the cost of bundling/bribes from the value of the trade, failed trades also pay nothing.
- Pods released their options trading demo product on Polygon.
Options have struggled to gain traction in DeFi to date with expensive products, jurisdiction restrictions, and struggling liquidity. Pods is a highly anticipated options protocol which has been released as a demo with a $200k cap on TVL.
Nothing will ‘stop’ Bitcoin in El Salvador, says President after IMF, World Bank criticism
President Bukele said nothing can stop Bitcoin from seeing widespread adoption in El Salvador, and he sees no scenario in which it can be stopped.
“I don’t see anything stopping it. Everything about the humans can be stopped. But I just don’t see how. It’s law, the government is working 24/7 in going to effect in 80 days,” he said in a recent podcast.
Earlier this month, the Central American nation passed a bill to recognize Bitcoin as legal tender formally. However, as much as crypto advocates celebrated the news, the response from both the IMF and World Bank has been less encouraging.
Their reaction has led to hearsay that international pressure will stop the El Salvadorian Bitcoin bill from happening.
How the IMF and World Bank reacted
El Salvador made history on June 8 by passing the Bitcoin law. This gives Bitcoin the same legal status as the country’s official currency, the U.S dollar.
In an immediate response, the IMF raised concerns that this would interfere with ongoing negotiations for a $1 billion loan.
Top El Salvadorian officials replied by saying the U.S. dollar would continue to be legal tender. In contrast, Bitcoin transactions would be by choice and tied to the dollar exchange rate.
Weeks later, as El Salvador reached out for the technical implementation of its plans, the World Bank gave a resounding denial.
A World Bank spokesperson said they could not help due to the “environmental and transparency shortcomings” of Bitcoin.
“While the government did approach us for assistance on bitcoin, this is not something the World Bank can support given the environmental and transparency shortcomings.”
Can Bitcoin in El Salvador be stopped?
Despite the snubs from the IMF and World Bank, President Bukele is determined to press on regardless.
In an interview with the What Bitcoin Did YouTube channel, President Bukele addressed whether the Bitcoin law can be stopped, and in his mind, it can’t.
Speaking on the democratic process involved with passing the law, President Bukele pointed out that more than a supermajority approved the bill.
“Our Congress has 84 seats, you only need 43 to change monetary policy, which is half plus one. That’s the majority, right? When we have supermajority here, you need two-thirds, which would be 56 out of 84. We got 63 votes.
With that, plans are in place to build the Bitcoin infrastructure in El Salvador, including renewable energy mining and legislation to encourage the country’s development as a hub for crypto developers and companies.
President Bukele added that the plans include things to “protect the decision,” but gave no specifics on what that means.
“Remember Bitcoin works by itself, so it’s not like it depends on what we do. But of course, the things that we are doing, will, you know, it will protect the decision, and guarantee that there will be more benefits for the people.”
Short of an invasion by hostile forces, it looks as though the Bitcoin bill will be happening in El Salvador.
Commenting directly on the IMF and World Bank snubs, President Bukele said it makes no sense and that he has no intention of getting into a fight with them. He added that it’s their choice, but it still doesn’t change El Salvador’s plans with Bitcoin.
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Are The Tables Turning? Litecoin Transactions Compared To Bitcoin Are 75% And Growing
Data compiled by @MASTERBTCLTC shows the number of Litecoin transactions is just under 75% of that of the number of Bitcoin transactions.
“Litecoin transactions are 75% of the total bitcoin transactions.
When will litecoin transactions flip bitcoin transactions?
Sometime in 2021 I predict.
227k BTC vs 168k LTC transactions.”
More significantly, @MASTERBTCLTC suggests this could be the start of an uptrend leading to a flippening in transaction count sometime this year.
Source: @MASTERBTCLTC on Twitter.com
Considering wider factors, including the environmental argument against proof-of-work tokens, what can we deduce from this trend?
The Difference Between Litecoin and Bitcoin
Even though Litecoin is a Bitcoin fork, it differs in terms of its hashing algorithm, supply, and block transaction times.
Litecoin has a 2.5 minute block confirmation time versus 10 minutes for Bitcoin. This focus on speed and low transaction fees make it more suitable for microtransactions and point of sale payments.
However, the fundamental difference between the two lies in Litecoin’s use of the newer Scrypt Proof-of-Work (PoW) algorithm over Bitcoin’s SHA-256.
Cryptocurrency mining can happen using a CPU, GPU, or ASIC miner. ASIC miners can generate more hashes (tries) per second to match the target data string and “win” the block. Therefore ASIC miners have a distinct advantage over other mining methods.
But Scrypt was chosen by Litecoin developers because it is less responsive to ASIC mining. Although Scrypt ASIC miners have since come onto the market, a significant portion of Litecoin mining still occurs using CPUs and GPUs. This makes mining Litecoin more accessible for everyday people.
What’s Behind This Trend?
Much has been said about the environmental damage caused by Bitcoin mining in recent weeks. Although Litecoin and Bitcoin employ computationally intensive proof-of-work algorithms, Litecoin’s Scrypt model relies more heavily on memory than out and out processing power.
The upshot to this reduces the advantage of ASICs and increases network participation and energy efficiency. Hence some would argue that Litecoin is a greener token.
Research compiled by TRG Datacenters showed that Litecoin consumed 18.522 kilowatt-hours per transaction. Unsurprisingly, Bitcoin came bottom of the list, consuming 707 kilowatt-hours per transaction.
Interestingly, Dogecoin, which also uses a Scrypt algorithm, consumed just 0.12 kilowatt-hours per transaction.
At the present time, it’s too speculative to state that crypto users are increasingly turning to Litecoin for green reasons.
But at the same time, the three months of data compiled by @MASTERBTCLTC shows a definite downtrend, of lower highs, in usage for Bitcoin.
Taken in conjunction with Litecoin’s rising transaction count this week, this may suggest users increasingly see Bitcoin primarily as a store of value, rather than a coin to make payment transactions with.
Source: LTCUSD on TradingView.com
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Old Doge, New Tricks: Is This Still The Year Of The Doge?
It is safe to say that Doge has had an interesting year in 2021. The coin that everyone thought was down and out came back to be one of the top-gaining coins of the current bull market. Sure, the price increase had everything to do with Elon Musk shilling it on Twitter. But Dogecoin has had a tremendous run regardless.
The price of the coin remained flat for the better part of three years. Trading at under a cent. To everyone, Doge had seen its end. There were barely any talks about Doge in the market at all. With people focusing their attention on better-known coins like Bitcoin and Ethereum. That was until billionaire Elon Musk turned his attention on Doge.
The Rise Of Doge
Back in January, a tweet from Musk that simply said Doge went viral. Mere minutes later, the price of the coin had gone up. With the price increase, came investors FOMO-ing into the market.
Related Reading | By The Numbers: DOGE Achieves The Impossible, New ATH with BTC Pair
Amidst the frenzy, there were speculations that this was simply a pump and dump scheme that would burst as soon as it started. But that would not be the case.
With every tweet about Doge from Musk, the coin price just went up. People faithfully followed the billionaire’s tweeting patterns to buy and sell the coin. Soon, a coin that was trading at less than a cent a couple of days before was trading at 80 cents. More than 10,000 percent gains from its low.
Debates were started about the legality of the shilling. But it didn’t seem that Elon had broken any laws.
Dogecoin recovers after crash | Source: DOGEUSD on TradingView.com
Investments in meme coins are made based on the social media buzz behind that coin. And what better buzz than the one created by one of the richest men on the planet.
Subsequent Crash And Recovery
Over the past five months, Doge has had its ups and downs. Mostly following the price of bitcoin as altcoins are wont to do. But it is no secret that the buzz has started to die down.
With a lot of investors buying at the top or near the top, the subsequent crash has left a lot of investors in losses. The “Dogefather,” as Musk is fondly called, seems to have abandoned the coin.
There has not been a tweet from Musk regarding Doge since April. And without him, the coin has been in a continuous downtrend. Investors in the coin have suffered massive losses in the market.
Related Reading | Down But Not Out, Dogecoin Stages 50% Recovery From Tuesday’s Low
People are calling for the “Dogefather” to help save the coin. But it would seem help is not forthcoming.
The coin crashed to 16 cents. A price point the coin had not been in since April. But the coin made a great recovery. Going up 40% in one day. A lot of Doge enthusiasts are still holding out hope that coin will replicate the massive run in January.
Despite people believing the bubble would burst on Doge and it would come crashing down, the coin has held its own in the market. Currently trading at 24 cents as at the time of this writing.
Featured image from FullyCrypto, chart from TradingView.com
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