Crypto
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DeFi Sector Updates
- Established protocols are realizing that in order to drive application usage and customer experiences, they must look to build vertically themselves. This is important for competitive reasons, as owning and defining the customer relationship provides pricing power, and for customer acquisition reasons, as the approachability and usability of cryptocurrency is perhaps a larger barrier to adoption than financial efficiency at this point.
- Uniswap recently released an early version of its mobile wallet which is a vertical move to craft the end-user crypto experience in an approachable, friendly way that appeals to a wider set of users. Uniswap’s major barrier to growth, outside of U.S. policy opacity, is getting more users comfortable with using on-chain protocols, not squeezing more efficiency out of its DEX. The mobile app is a step in that direction.
- Synthetix is another example of recent vertical moves by established DeFi protocols. It has shepherded the build-out of a number of protocols namely options protocols, Lyra, and perpetual exchange Kwenta which are both built on Ethereum Layer-2s (L2) and sit on top of Synthetix. By taking it upon themselves to help nurture these protocols, Synthetix is able to drive the usage of its main underlying liquidity protocol.
- Protocols invest in vertical expansions to both accelerate adoption and to capture the value.
- As Ethereum’s L2s continue to gain momentum, there has been an accelerated adoption of native protocols of these ecosystems. For example, GMX and Radiant on Arbitrum are two of the fastest-growing protocols in terms of both fundamentals and price appreciation this year. Looking at user retention metrics, it’s apparent these protocols have gained above-market traction compared to imported protocols like Uniswap or Aave.
- One of the main drivers of this trend has been the wealth effect that new protocols can create. They can issue new tokens and distribute them to users, which can generate positive sentiment among users. However, while this strategy can be effective in the early stages of growth, its sustainability has proven questionable. Therefore, new native protocols must look to expand their moats through traditional competitive angles, rather than relying solely on positive sentiment created by wealth effects.
- To combat this, protocols, mainly MakerDAO, have diversified collateral into off-chain assets (also referred to real-world assets) like treasuries and bonds that have deep liquidity and uncorrelated yield sources. Maker currently has over $600 million of off-chain debt assets and just approved another $750 million debt ceiling expansion following the $2 billion USDC inflow from the recent depeg event.
- Outside of Maker, other protocols like Ondo Finance are also trying to bring trusted off-chain collateral assets on-chain to further mature the collateral mix as well as to cater to more traditional investing audiences. As crypto continues to mature, the expansion of off-chain assets is expected to continue to be a growth driver for the sector.
- Euler $200 million Exploit — Euler was the third largest money market protocol in DeFi with over $500 million in TVL before the exploit left the protocol, after user withdrawals, with only $10 million in TVL. The exploiter used a flash loan and the protocol’s donation mechanism to create an over-leveraged position that, when liquidated in the same block, artificially allowed the exploiter to withdraw $200 million divided into DAI, USDC, WBTC, and stETH.
- On-chain DEX volumes logged record days during the USDC depeg with over $25 billion in aggregate volume. While this was a one-off event, the trend of DEX volumes increasing relative to CEX volumes has been persistent since mid-January.
- Looking at 30-day volumes, Arbitrum is now twice as large as the next largest emerging ecosystem, Polygon, and nearly seven times as large as Optimism, the third largest ecosystem by DEX volume.