The hype surrounding decentralized finance is usually credited with triggering a wider market rally in July, as new protocols started releasing tokens that have been instantly posting good points of many occasions their preliminary worth. Regardless of simple worth progress, nonetheless, it’s not instantly clear if the sector as an entire has grown, as dependable metrics to measure the basic efficiency of DeFi protocols are extremely arduous to come back by.
The initiatives lend themselves to pretty rigorous evaluation strategies, as they’ll usually have well-defined revenues and bills. However the rise of liquidity mining, or yield farming, is throwing the metrics off stability in some methods. Protocols reward their customers with their very own governance tokens, primarily as a fee for utilizing the platform. A frenzied motion to maximise the yield for these tokens distorted the prevailing DeFi success metric, the Complete Worth Locked, or TVL.
A transparent instance of that is the Compound protocol the place the worth of Dai provided to it surpasses its whole quantity of tokens by nearly thrice — $1.1 billion vs. $380 million in existence as of writing. This is because of Compound customers getting into leveraged positions on Dai — one thing that usually doesn’t occur with stablecoins. Whereas this led the neighborhood to debate the deserves of TVL, another related measurements have been distorted as nicely.
Evaluating a DeFi lending undertaking
Valuation metrics will change barely based mostly on the kind of undertaking. Within the case of lending protocols like Compound and Aave, TVL represents the supply-side liquidity of the undertaking or the whole sum of all deposits presently held by them. It’s value noting that TVL solely takes the on-chain reserves into consideration. Based on DeFi Pulse, there are solely round 220 million Dai locked in Compound, not 1.1 billion.
DAI locked in Compound. Supply: Defipulse.com
Nevertheless, lending suppliers are typically evaluated based mostly on guide worth, or how a lot is being borrowed. Since that’s what generates income, it’s thought of a way more direct measurement of the protocol’s financials.
As a result of distribution of the community’s coin, COMP, nonetheless, all tokens besides Tether (USDT) and 0x (ZRX) have unfavorable efficient curiosity when borrowing, in response to Compound’s dashboard, that means that customers are paid to take action. The Compound protocol is presently offloading that value to the consumers and holders of COMP via dilution.
Although it could be tough to filter out how a lot liquidity there’s solely to take a position on COMP yields, this is probably not obligatory. The aim of evaluating the financial institution’s or lending protocol’s income is to gauge how a lot of that worth will be captured via the inventory or token, however for the reason that token is getting used to subsidize the price of borrowing, the worth is being successfully extracted from its holders. This may be seen via COMP’s token worth. Since its launch, it has continued to fall in worth because of the dilution and promoting stress from newly mined tokens.
COMP token worth chart. Supply: TradingView
Because of this phenomenon, an analysis technique for Compound may simply ignore, and even subtract, the a part of the guide worth that’s extracting worth from token holders. Even within the former case, Compound’s guide worth would simply be $25 million out of a claimed $1 billion — the whole sum of the USDT and ZRX being borrowed.
Although clearly not all property are there only for the yield, Cointelegraph beforehand reported that solely $30 million value of Dai was being borrowed simply earlier than it turned the go-to forex for liquidity mining. Andre Cronje, the founding father of the yEarn protocol, instructed Cointelegraph that the market has not been taking these nuances into consideration: “Now we have this bizarre TVL equals analysis mentality, which I don’t perceive in any respect, the place if the TVL is $100M, then the market cap — circulating, not absolutely diluted — must be $100M.” Though he finds it “fully insane” to disregard income, he continued his thought train:
“So, if circulating market cap equals TVL, what’s one of the best ways to extend that? Enhance TVL. How do you enhance TVL? Reward with tokens. Token worth goes up due to TVL hypothesis, and repeat the loop.”
Results on different protocols
Compound began the yield farming development, nevertheless it was not the one protocol that noticed sizable will increase in exercise. Decentralized exchanges like Uniswap, Balancer and Curve have seen their buying and selling volumes bounce dramatically since June. Quantity on Curve, a DEX targeted on swapping stablecoins with each other, jumped as yield farming started in June.
Month-to-month quantity throughout decentralized exchanges. Supply: DuneAnalytics
Uniswap has a extra various providing, and most of its quantity includes Ether (ETH) to stablecoin pairs, particularly Ampleforth — which noticed a strong boom-and-bust cycle happen. It has additionally taken in quite a lot of the quantity for brand new tokens like YFI, usually being the primary place the place they have been listed.
MakerDAO noticed its TVL nearly triple from $500 million. Nearly all of that’s because of the Ether worth rally, although it grew by way of ETH and Bitcoin (BTC) as nicely. As Cointelegraph beforehand reported, the neighborhood determined to extend the whole quantity of Dai that might be minted in an effort to return its worth to $1.
Whereas at face worth, the expansion of Dai could also be thought of a hit story, the Maker neighborhood determined to place rates of interest for nearly all liquid property to zero, foregoing any income from the expansion. On the similar time, Compound has been the first recipient of recent Dai, with locked worth having risen from about $140 million to $210 million since late July, over 55% of all Dai.
Is the expansion actual?
The liquidity mining growth had an undeniably constructive influence on some common metrics, particularly the customer volumes for DeFi platform web sites and the variety of customers interacting with the protocols. Information from SimilarWeb reveals that visitors to Compound has quadrupled since June to about 480,000, whereas for Uniswap it has greater than doubled to 1.1 million, and Balancer established a robust presence in two months with 270,000 month-to-month visits.
Moreover, DeFi trade aggregator 1inch.trade nearly tripled its visitors within the final two months. Protocols with a weaker relation to yield farming benefited as nicely, with MakerDAO and Aave posting extra modest however nonetheless important progress.
Associated: Compound’s COMP Token Takes DeFi by Storm, Now Has to Maintain Prime Spot
When it comes to consumer quantity, Compound noticed the variety of month-to-month common distinctive wallets utilizing it quadruple to 20,000 in June, although that quantity has since been lowering. Additionally value noting is that greater than 80% of current exercise has been from simply 30 wallets, in response to DappRadar knowledge.
Consumer exercise on Compound. Supply: DappRadar
The general variety of DeFi customers, in response to a DuneAnalytics visualization, elevated by about 50% from June 1 to Aug. 1. That is in distinction to the earlier two-month interval from April 1 to Could 31, which noticed a 30% progress.
Nearly all of new customers are coming from decentralized exchanges, with Uniswap having doubled its whole consumer base since June to 150,000. Nevertheless, this metric reveals all of the customers who’ve interacted with the protocols, not solely those that are energetic at any given second.
Complete DeFi customers. Supply: DuneAnalytics
What’s going to stay?
In abstract, the DeFi progress within the final two months is multi-faceted. Whereas the liquidity mining hype and subsequent worth good points have seemingly contributed to attracting further consideration, basic metrics turned extremely distorted because of the hypothesis.
Decentralized exchanges seem to have benefited essentially the most from the hype, each by way of new customers and volumes, however that seems to be an acceleration of an already constructive development. Whether or not the expansion will stick stays an necessary query. Kain Warwick, a co-founder of Synthetix — a crypto-backed asset issuer — instructed Cointelegraph:
“It’s at all times potential that individuals will farm the yield after which discover a recent subject, so bootstrapping liquidity shouldn’t be a assure that your protocol will retain customers. […] However bootstrapping liquidity with some kind of incentive is a good way to draw newcomers as a result of when you’ve got something resembling product-market match, then there’s more likely to be some stickiness.”
Cronje was considerably extra unfavorable, utilizing a farming analogy to explain what may occur, saying: “All of the yield chasers simply working in to farm yield after which leaving,” which is a unfavorable factor in response to him, appearing like a swarm of locusts, including: “However after they’ve ruined the crops, generally, a stronger crop can develop, and a few locusts stay, and so they find yourself being symbiotic as an alternative of the preliminary parasitic.”
Cronje believes that the preliminary results of yield farming are unsustainable, making a false notion amongst newcomers that 1,000% yields are the norm. As soon as that’s not the case, customers shall be left with a nasty style of their mouths, he argues: “Proper now, it’s overhyped; quickly, will probably be hated; and what stays after that, I believe, shall be fairly cool.”
Distributing tokens in a brand new method
Warwick described the aim of liquidity mining as incentivizing early participation with partial possession. Cronje was way more skeptical, saying: “All liquidity mining presently is, is getting paid for propped up TVL.” Nonetheless, he ran a liquidity mining program himself, although he careworn that it was only a method of distributing tokens.
“My purpose was to get an energetic and engaged neighborhood. And I believe yEarn managed to perform that,” Cronje concluded. In contrast, yEarn forks like YFFI and YFII have been “pure liquidity mines, and all that occurred was folks offered,” he stated. The worth of YFII has collapsed by 90% since its excessive on July 30.
Warwick famous that “there presumably is a greater strategy to distribute possession whereas bootstrapping progress,” although he doesn’t know the way. He nonetheless finds it preferable to preliminary coin choices, as customers solely must quickly commit their liquidity: “They’re clearly taking up some platform threat, nevertheless it’s preferable nonetheless to dropping their capital by utilizing it to purchase tokens.” However whereas the dangers for the liquidity miners could also be low, the instance of YFII clearly reveals that the results of dilution and speculative demand can flip catastrophic for the consumers of those tokens.